Notes to the Consolidated Financial Statements (Unaudited)
June 30, 2013 and December 31, 2012
NOTE 1 BASIS OF PRESENTATION
The financial information included herein is unaudited and has been prepared consistent with United States generally accepted accounting principles (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these consolidated financial statements do not include all information and notes required by US GAAP for complete financial statements. These notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012. In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to provide a fair presentation for the interim periods. The results of operations for the three and six-month periods ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.
NOTE 2 CANADIAN FOUNDATION FOR GLOBAL HEALTH
In late 2008, the Company assisted in the formation of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada. The Company helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with the Company for research purposes that is best positioned to attract the finest scientific, medical and academic professionals possible to work on projects deemed to be of social benefit; and (2) to provide a means for the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’s technology to as many in need as possible.
US GAAP requires a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity. In addition, a legal entity may be considered to be a VIE, if it does not have sufficient equity at risk to finance its own activities without relying on financial support from other parties. If the legal entity is a VIE, then the reporting entity determined to be the primary beneficiary of the VIE must consolidate it. The Company determined that CFGH meets the requirements of a VIE effective upon the first advance to CFGH on February 12, 2009. Accordingly, the financial condition and operations of CFGH have been consolidated with the Company for all periods presented.
NOTE 3 BASIC AND DILUTED NET LOSS PER COMMON SHARE
The computations of basic and diluted net loss per common share are based on the weighted average number of common shares outstanding during the periods as follows:
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For the Three Months Ended June 30,
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2013
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2012
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Denominator: Weighted average number of common shares outstanding
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Basic and diluted net loss per common share
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For the Six Months Ended June 30,
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2013
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2012
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Denominator: Weighted average number of common shares outstanding
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Basic and diluted net loss per common share
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Common stock equivalents, consisting of options, have not been included in the calculation as their effect is antidilutive for the periods presented.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited)
June 30, 2013 and December 31, 2012
NOTE 4 GOING CONCERN
The Company’s consolidated financial statements are prepared using US GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred significant losses from its inception through June 30, 2013, which have resulted in an accumulated deficit of $30,697,197 as of June 30, 2013. The Company does not have funds sufficient to cover its operating costs for the next 12 months, has a working capital deficit of $2,960,864, and has relied on debt and equity financing. Accordingly, there is substantial doubt about its ability to continue as a going concern.
Continuation of the Company as a going concern is dependent upon future revenues, obtaining additional capital and ultimately, upon the Company’s attaining profitable operations. The Company will require substantial, additional funds to complete the development of its products, perform hospital beta testing and fund additional losses, until future revenues are sufficient to cover the Company’s operating expenses. If the Company is unsuccessful in obtaining additional funding, it may be forced to substantially reduce or cease operations.
The Company believes that it will need approximately $2,000,000 over the next 12 months for continuing research expenses, marketing, and related activities, as well as for general corporate purposes, including expanded manufacturing and sales.
During 2012, the Company raised a total of $1,420,793 through the sale of 16,729,278 shares of common stock at prices ranging from $0.05 to $0.165 per share, which funds have been used to keep the Company current in its obligations and to pay certain other corporate obligations including the initial costs of development for its hospital disinfection system. During the six months ended June 30, 2013, the Company raised a total of $860,250 through the sale of 21,891,412 shares of common stock at prices ranging from $0.03 to $0.055 per share. The Company believes it will be able to raise additional funds from some of the same investors who have purchased shares from 2009 to 2013, although there is no guarantee that these investors will purchase additional shares. However, certain of these investors have orally committed to continue to fund the Company’s projects on a monthly basis.
Continuing as a going concern is dependent on the Company’s ability to successfully accomplish the plan described in the preceding paragraphs and eventually attain profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.
NOTE 5 COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims and lawsuits arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position or results of operations.
Litigation
Rakas vs. Medizone International, Inc
. - A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement. In September 2001, the parties agreed to settle the matter for $25,000. The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002. On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties. The Company has been unable to post the required bond amount as of the date of this report. Therefore, the Company has recorded a liability (included in accounts payable) for the original default judgment of $143,000, plus fees totaling $21,308, as of June 30, 2013 and December 31, 2012. The Company intends to contest the judgment if and when it is able to in the future.
Other Payables
As of June 30, 2013 and December 31, 2012, the Company has recorded other payables totaling $224,852 related to certain past due payables for which the Company has not received invoices or demands for over 10 years. Although management of the Company does not believe that the amounts will be paid, the amounts are being recorded as other payables until such time as the Company is certain that no liability exists and until the statute of limitations has expired.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited)
June 30, 2013 and December 31, 2012
NOTE 5 COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases
The Company operates a certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which provides a primary research and development platform. The lease term expired on June 30, 2012, and is now month-to-month with a monthly lease payment of $1,375 Canadian dollars (“CD”) plus the applicable goods and services tax (“GST”). A lease for a second laboratory space for full scale room testing and a storage space also expired on June 30, 2012, and are now month-to-month with a monthly lease payment of $1,375 CD and $475 CD, respectively, plus the applicable GST.
The Company entered into a new corporate office lease effective January 1, 2012 through December 31, 2012 with monthly payments of $2,100. The lease term was extended for another year, through December 31, 2013, with monthly lease payments increasing from $2,100 to $2,200.
NOTE 6 COMMON STOCK OPTIONS
On August 26, 2009, the Company granted options for the purchase of 1,500,000 shares of common stock to an outside consultant for services rendered, with an exercise price of $0.10 per share, exercisable for up to five years, but including vesting provisions as follows: (i) 500,000 of the options vested immediately on the date of grant, (ii) 500,000 options vested, in September 2012, the date certified by the Company as the date the Company’s hospital disinfection program completed its beta-testing, and (iii) the remaining 500,000 options will vest on the date certified by the Company as the date that the Company’s process has been commercialized and a minimum of 50 units or devices have been sold to third parties by the Company. As of June 30, 2013, 500,000 of the 1,500,000 options granted to this consultant had not yet vested.
In July 2010, the Company granted options for the purchase of 3,500,000 shares of common stock (of which 250,000 were cancelled in 2011) to certain board members and employees of the Company for services rendered. These options are exercisable for five years from the date of grant at $0.20 per share, and vested when the Company achieved commercial sales during the third quarter of 2012.
In September 2010, the Company granted options for the purchase of 250,000 shares of common stock to a consultant in connection with extending his consulting agreement with the Company through September 2011. These options are exercisable at $0.275 per share for five years from the date of grant and vested when the Company achieved commercial sales during the third quarter of 2012.
In February 2012, the Board of Directors approved the 2012 Equity Incentive Award Plan and authorized up to 10,000,000 shares of common stock to be available for awards under the Plan. On February 21, 2012, each of four directors of the Company was awarded stock options for the purchase of 1,000,000 shares of common stock, exercisable at a price of $0.23 per share, which was the fair value of the common stock based on the price of the Company’s common stock reported on the OTC Bulletin Board on the date of grant. In addition, certain officers, consultants and employees of the Company were awarded options for the purchase of an aggregate 1,050,000 shares of common stock at an exercise price of $0.23 per share. The value of these options granted, totaling $1,057,600, was recognized as expense during the six months ended June 30, 2012 as each of the options granted was fully vested on the date of grant.
In May 2012, the Company granted options for the purchase of 1,000,000 shares of common stock to an individual for services. Options for 550,000 shares have vested and the remaining options will vest on the date certified by the Company as the date that the other milestones are achieved. The options have an exercise price of $0.15 per share, and are exercisable for up to five years. The value of these options granted was $153,997 in connection with which the Company recognized $69,300 during the six months ended June 30, 2013. As of June 30, 2013, options for the purchase of 550,000 of the 1,000,000 shares have vested.
In May 2012, the Company granted options for the purchase of 1,000,000 shares of common stock to an individual for medical consulting support services already performed and to be performed in the future. The options have an exercise price of $0.17 per share, and are exercisable for up to five years. The value of the options vested upon grant was $149,460, of which the Company recognized $25,408 during the six months ended June 30, 2013. The remaining options vest as certain milestones are achieved. As of June 30, 2013, options for the purchase of 840,000 of the 1,000,000 shares have vested.
In August 2012, the Company granted options for the purchase of 2,500,000 shares of common stock to three individuals in connection with the purchase of restricted stock, exercisable at a price of $0.05 per share. No expense was recorded for these options as the value associated with these options was recorded as part of the stock transactions. These options held a six-month term and have expired without being exercised.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited)
June 30, 2013 and December 31, 2012
NOTE 6 COMMON STOCK OPTIONS (continued)
The Company estimated the fair value of the stock options described in the above paragraphs at the date of the grant, based on the following weighted average assumptions:
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.77
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%
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145.6
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%
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148.9
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%
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0.00
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%
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A summary of the status of the Company’s outstanding options as of June 30, 2013, and for the six-month period then ended, is presented below:
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Shares
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Weighted Average
Exercise Price
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Outstanding, beginning of the period
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Outstanding, end of the period
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$
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The Company estimates the fair value of each stock award by using the Black-Scholes option-pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes option-pricing model is zero. Expense of $94,707 and $1,157,738 related to stock options was recorded for the six-month period ended June 30, 2013 and 2012, respectively. As of June 30, 2013, the Company had various unvested outstanding options with related unrecognized expense of $141,911. The Company will recognize this expense as these options vest over their remaining lives, which range from 14 to 46 months.
NOTE 7 STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS
During May and June 2013, the Company sold 5,863,636 restricted shares of common stock to 11 accredited investors for cash proceeds totaling $322,500, or $0.055 per share.
During April and May 2013, the Company sold 3,794,444 restricted shares of common stock to six accredited investors for cash proceeds totaling $170,750, or $0.045 per share.
During January, February, and March 2013, the Company sold an aggregate of 12,233,332 restricted shares of common stock to 12 accredited investors for cash proceeds totaling $367,000, or $0.03 per share.
During January and February 2012, the Company sold an aggregate of 6,653,000 restricted shares of common stock to 30 accredited investors for cash proceeds of $665,300, or $0.10 per share.
During January 2012, the Company issued 903,089 shares of common stock to Mammoth Corporation (“Mammoth”) as part of a stock equity line (“Equity Line”) for cash proceeds of $149,010, or $0.165 per share.
During June 2012, the Company issued 500,000 shares of common stock to Mammoth as part of the Equity Line for cash proceeds of $65,625, at a price of $0.131 per share.
During June 2012, the Company sold an aggregate of 1,205,556 restricted shares of common stock to two accredited investors for cash proceeds of $108,500 at a price of $.09 per share.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited)
June 30, 2013 and December 31, 2012
NOTE 7 STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS (continued)
Stock Purchase Agreement
In November 2010, the Company entered into a two-year Stock Purchase Agreement with Mammoth providing for the Equity Line. The Stock Purchase Agreement provided that, upon the terms and subject to the conditions in the Stock Purchase Agreement, Mammoth committed to purchase up to $10,000,000 of shares of common stock over the term of the Stock Purchase Agreement under certain specified conditions and limitations. Mammoth was barred from purchasing any shares of the Company’s common stock which, when aggregated with all other shares of common stock then beneficially owned by Mammoth, would result in the beneficial ownership by Mammoth of more than 4.9% of the then outstanding shares of the Company’s common stock. These maximum share and beneficial ownership limitations could not be waived by the parties.
Under the terms of the Stock Purchase Agreement, the Company had the opportunity for a 24-month period, commencing on the date on which the Securities and Exchange Commission (“SEC”) first declared effective the registration statement filed in connection with the resale of shares issued under the Equity Line, to require Mammoth to purchase up to $10,000,000 in shares of common stock. For each share of common stock purchased under the Stock Purchase Agreement, Mammoth would pay a purchase price equal to 75% of the lowest closing bid price during the five consecutive trading-day period (the “Draw Down Pricing Period”) preceding the date a draw down notice (the “Draw Down Notice”) was delivered by the Company to Mammoth (the “Draw Down Date”) in a manner provided by the Stock Purchase Agreement. The SEC declared the registration statement effective on January 25, 2011. The Stock Purchase Agreement and Equity Line terminated on January 25, 2013.
Wood Wyant Canada
In April 2013, the Company and Wood Wyant Canada (“Wood Wyant”), a subsidiary of Sanimarc Group, announced that Wood Wyant had become a National Hospital Distributor of AsepticSure
®
in Canada. Wood Wyant is national in scope and regional in focus, serving Canada from 16 diverse locations across all 10 provinces, providing both sales and service to the hospital market. The Company delivered an initial order for five systems to Wood Wyant for proceeds totaling $375,000. The Company has six more systems in production.
ADA Innovations
In December 2010, the Company reached a Services Agreement with ADA Innovations (“ADA”) for final development and production manufacturing of portable versions (the “Projects”) of the Company’s AsepticSure
®
disinfection systems. A contract containing the terms of the agreement and detailed development plan was executed by the parties in January 2011 and amended in January 2012. Any and all notes, reports, information, inventions, sketches, plans, concepts, data or other works created by ADA on its behalf under the Services Agreement will be the sole and exclusive property of the Company.
The term of the Services Agreement continues until the completion of the development and design projects contemplated by the Services Agreement, unless terminated earlier by either party in accordance with specific notices as outlined in the Services Agreement. Deliverables include: (1) the pre-production prototype designed and manufactured to our specifications, (2) design and device content compliant with all North America, Europe and United Kingdom regulatory and licensing agency regulations, (3) a soft launch program managed by ADA and the Company, intended to be followed by increased production, and (4) additional outsourced macro-manufacturing capacity as required, supervised by the parties. The Company paid ADA as services were provided and were completed by December 31, 2012. During the three and six-month periods ended June 30, 2012, the Company incurred expenses totaling approximately $115,000 and $157,000, respectively, for services provided under the Services Agreement, which expenses have been included in research and development costs. No expenses under this contract were incurred during the three and six-month periods ended June 30, 2013. ADA’s role as developer of the production AsepticSure
®
system is now complete. ADA remains available to the Company on a limited basis as a consultant.
NOTE 8 ACCOUNTS PAYABLE – RELATED PARTIES
As of June 30, 2013 and December 31, 2012, the Company had payables of $234,534 and $234,572, respectively, owed to certain
consultants for services rendered in prior years. These consultants are stockholders of the Company and therefore have been classified as related parties.
NOTE 9 SUBSEQUENT EVENTS
The Company has evaluated events subsequent to the period ended June 30, 2013 for potential accounting or disclosure in the accompanying financial statements, noting none.