The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 BASIS OF PRESENTATION
The financial information of Medizone International, Inc., a Nevada corporation (the “Company”), included herein is unaudited and has been prepared consistent with U.S. 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 condensed 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, 2015. In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are necessary in the opinion of management for a fair presentation of results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.
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.
Accounting standards require 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 VIE’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the VIE. 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 its financial statements with those of the VIE. The Company determined that CFGH met the requirements of a VIE effective upon the first advance to CFGH on February 12, 2009. Accordingly, the financial statements of CFGH have been consolidated with those of 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:
|
For the Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Numerator: Net loss
|
|
$
|
(424,521
|
)
|
|
$
|
(798,136
|
)
|
Denominator: Weighted average number of common shares outstanding
|
|
|
371,151,459
|
|
|
|
358,036,242
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Numerator: Net loss
|
|
$
|
(1,232,683
|
)
|
|
$
|
(1,592,144
|
)
|
Denominator: Weighted average number of common shares outstanding
|
|
|
370,333,703
|
|
|
|
352,368,867
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Common stock equivalents, consisting of options to purchase 20,865,000 shares and warrants to purchase up to $1,000,000 of common stock, with the number of shares determined based on a 20-day average stock price prior to the date of exercise, have not been included in the calculation as their effect is antidilutive for the periods presented.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Continued
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 September 30, 2016, which have resulted in an accumulated deficit of $36,631,029 as of September 30, 2016. The Company believes that it will require funding of approximately $1,500,000 over the next 12 months, based on current operations, for: (1) continued production manufacturing and related activities; (2) research, development, and marketing activities; and (3) general corporate purposes. The Company does not have funds sufficient to cover its operating costs for the next 12 months, has negative equity, and has a working capital deficit of $3,681,172 as of September 30, 2016. The Company has relied almost exclusively on debt and equity financing to sustain its operations. Accordingly, there is substantial doubt about the Company’s 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 and product manufacturing, and to fund expected additional losses, until revenues are sufficient to cover the Company’s operating expenses. If the Company is unsuccessful in obtaining the necessary additional funding, it will be forced to substantially reduce or cease its operations.
During the nine months ended September 30, 2016, the Company raised cash proceeds of $160,000 through the sale of 4,000,000 shares of common stock at a price of $0.04 per share.
In October 2016, the Company issued an aggregate of 20,000,000 common shares at $0.05 per share pursuant to the exercise of warrants, and received cash proceeds of $1,000,000.
The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplish the plan described in the preceding paragraphs, including attaining profitable operations. These condensed 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 this uncertainty.
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, results of operations, or cash flows.
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 recorded the original default judgment in the amount of $143,000, plus fees totaling $21,308, as of September 30, 2016 and December 31, 2015 in accounts payable. The Company intends to contest the judgment if and when it is able to do so in the future.
Employment Agreements
In July 2016, the Company entered into employment agreements (“Employment Agreements”) with two executives. The employment agreements set out the executives’ base annual salary, vacation benefits, and option to elect health insurance coverage.
Promissory Notes
In conjunction with the Company entering into these Employment Agreements, the Company settled in aggregate $1,617,881 in accounts payable and accrued expenses with related parties through the issuance of promissory notes payable (“Promissory Notes”) with three executives for unpaid expenses and wages (see Note 9 –
Notes Payable – Related Parties
).
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Continued
Other Payables
As of September 30, 2016 and December 31, 2015, the Company had $224,852 of past due payables for which the Company has not received statements or demands for payment for over 19 years. Although management of the Company does not believe that the amounts will be required to be paid, the amounts are recorded as other payables until such time as the Company is certain that no liability exists and until the statute of limitations has expired.
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 is month-to-month with a monthly lease payment of $1,537 Canadian dollars (“CD”) plus the applicable goods and services tax (“GST”). Leases for a second laboratory space for full scale room testing and a storage unit are on a month-to-month basis with monthly lease payments of CD$1,537 and CD$475, respectively, plus the applicable GST. The Company has a non-cancelable lease for office space located in California, with monthly payments of approximately $2,400 through December 31, 2016.
NOTE 6 COMMON STOCK OPTIONS
In August 2013, the Company granted options for the purchase of 250,000 shares of common stock to a consultant, of which 50,000 were immediately vested. These options are exercisable at $0.10 per share for five years from the date of grant with 50,000 options vesting immediately and the other 200,000 options vesting upon the achievement of certain milestones, which were met in 2015. The Company recognized expense of $17,659 during the nine months ended September 30, 2015, as milestones were achieved for the remaining 200,000 options.
On February 26, 2014, the Company granted to a new director options for the purchase of 2,000,000 shares of common stock, with an exercise price of $0.1095 per share. Of these options, 1,000,000 vested on February 26, 2015, and the remaining 1,000,000 options will vest upon the successful achievement of certain milestones. Unvested options vest immediately in the event of a change in control of the Company. The options are exercisable for five years from the date of grant. The Company recognized $16,017 of expense in connection with these options during the nine months ended September 30, 2015. The Company will measure and begin recognizing the remaining expense when the achievement of the required milestones becomes probable.
On February 26, 2014, the Company granted options to six consultants and service providers for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.1095 per share. Options for 200,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested January 9, 2015. The options are exercisable for five years from the date of grant. The grant date fair value of these options was $24,023. The Company recognized expense of $800 in connection with these options during the nine months ended September 30, 2015.
On May 6, 2014, the Company granted options to a consultant for the purchase of 100,000 shares of common stock at an exercise price of $0.19 per share. Options for 50,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested during the nine months ended September 30, 2015, when certain milestones were achieved. The options are exercisable for five years from the date of grant. The Company recognized expense of $8,342 in connection with these options during the nine months ended September 30, 2015.
On August 15, 2014, the Company granted options to a consultant for the purchase of 75,000 shares of common stock at an exercise price of $0.13 per share. The shares will vest when certain required milestones are achieved. The options are exercisable for five years from the date of grant. The Company will measure and begin recognizing expense when the achievement of the required milestones becomes probable.
On October 7, 2014, the Company granted to a board member options for the purchase of 1,000,000 shares of common stock, with an exercise price of $0.16 per share. These options were fully vested on October 7, 2015. The options are exercisable for five years. The grant date fair value of the options was $140,178. The Company recognized $105,133 of expense in connection with these options during the nine months ended September 30, 2015.
On December 4, 2014, the Company granted options to four consultants for the purchase of 140,000 shares of common stock at an exercise price of $0.11 per share. The options are fully vested and are exercisable for five years from the date of grant. The Company recognized expense of $13,461 during the nine months ended September 30, 2015.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Continued
In August 2015, the Company granted options for the purchase of a total of 7,150,000 shares of common stock for services rendered, as follows: 6,000,000 shares total to five directors of the Company, 650,000 shares total to four consultants, and 500,000 shares to an employee of the Company. All options vested upon grant, have an exercise price of $0.088 per share, and are exercisable for up to five years from the date of grant. The aggregate fair value of these options at the date of grant was $541,687, which the Company recognized as expense during the nine months ended September 30, 2015.
In August 2015, the Company granted options to a consultant for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.085 per share. These options vested upon grant and are exercisable for up to five years. The aggregate fair value of these options at the date of grant was $18,990, which the Company recognized as expense during the nine months ended September 30, 2015.
On May 19, 2016, the Company granted options to an employee for the purchase of 150,000 shares of common stock at an exercise price of $0.05 per share. The fair value of these options on the date of grant was $6,461. The options were forfeited upon the termination of the employee in October 2016.
The Company estimates the fair value of each stock option 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 used in the Black-Scholes option-pricing model is zero. Expense of $0 and $722,090 related to stock options was recorded for the nine months ended September 30, 2016 and 2015, respectively. Excluding options whose performance condition is not yet deemed probable, as of September 30, 2016, the Company had unvested outstanding options with related unrecognized expense of $104,647. The Company will recognize this expense over the service period or when the achievement of the required milestones becomes probable.
The Company estimated the fair value of the stock options described in the above paragraphs as of the date of the grant or date of re-measurement, based on the following weighted-average assumptions:
Risk-free interest rate
|
|
1.50% to 1.69
|
%
|
Expected life
|
5 years
|
|
Expected volatility
|
|
130.31% to 136.34
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
A summary of the status of the Company’s outstanding options as of September 30, 2016 and changes during the nine months then ended, is presented below:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding, beginning of the period
|
|
|
20,965,000
|
|
|
$
|
0.145
|
|
Granted
|
|
|
150,000
|
|
|
|
-
|
|
Expired/Canceled
|
|
|
(250,000
|
)
|
|
|
0.103
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, end of the period
|
|
|
20,865,000
|
|
|
|
0.142
|
|
Exercisable
|
|
|
19,640,000
|
|
|
|
0.145
|
|
NOTE 7 STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS
In September 2016, the Company sold 4,000,000 shares of common stock to three accredited investors for gross proceeds of $160,000.
During January 2016, the Company issued 500,000 restricted shares of common stock to a consultant. The fair value of the shares on the date of grant was $48,000, or $0.096 per share. The Company recorded compensation expense of $48,000 in connection with the issuance of the shares.
During April, May, and June 2015, the Company sold an aggregate of 7,500,000 restricted shares of common stock to eight accredited investors for cash proceeds totaling $375,000, or $0.05 per share.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Continued
During February and March 2015, the Company sold an aggregate of 3,000,000 restricted shares of common stock to seven accredited investors for cash proceeds totaling $150,000, or $0.05 per share.
During February 2015, the Company sold 300,000 restricted shares of common stock to an accredited investor for cash proceeds totaling $21,000, or $0.07 per share.
NOTE 8 ACCOUNTS PAYABLE – RELATED PARTIES
As of September 30, 2016 and December 31, 2015, the Company owed $0 and $233,109, respectively, to certain consultants for services. These consultants are stockholders of the Company and are related parties.
NOTE 9 NOTES PAYABLE – RELATED PARTIES
In July 2016, the Company settled an aggregate $1,617,881 of accounts payable and accrued expenses for unpaid expenses and wages by issuing Promissory Notes to those related parties, all of which are executives of the Company. The notes become payable upon a trigger event (“Trigger Event”) which is defined as a change in control, death, disability or failure to pay the employee’s base salary as described in their Employment Agreements. Upon a Trigger Event, interest will be calculated at 2% per annum until the balance is paid in full. In the event of default by the Company, the interest rate increases to 5%.
NOTE 10 RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
, which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
ASU No. 2014-15 sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related disclosures in the financial statements. ASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. The Company is assessing the impact, if any, of implementing this guidance on the Company’s financial statement presentation.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740)
, simplifying the presentation of deferred income taxes on the balance sheet by requiring companies to classify everything as either a non-current asset or non-current liability. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. The Company is assessing the impact, if any, of implementing this guidance on the Company’s financial statement presentation.
In February 2016, the FASB released ASU No. 2016-02,
Leases (Topic 842)
, to bring transparency to lessee balance sheets. ASU No. 2016-02 will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 will apply to both types of leases; capital (or finance) leases and operating leases. Previously, US GAAP has required only capital leases to be recognized on lessee balance sheets. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is assessing the impact of ASU No. 2016-02 may have on its future financial position, results of operations and liquidity.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. ASU No. 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows, and forfeitures. ASU No. 2016-09 is effective for years ending after December 31, 2016, and the Company is assessing the impact of ASU No. 2016-09 may have on its future financial position, results of operations and liquidity.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Continued
In October 2016, the FASB issued ASU No. 2016-17,
Interests held Through Related Parties That are Under Common Control
. ASU No. 2016-17 clarifies the consolidation process for the primary beneficiary of a Variable Interest Entity (VIE) should that related party have indirect interests under common control with the reporting entity. ASU No. 2016-17 is effective for years ending after December 31, 2016, and the Company is assessing the impact of ASU No. 2016-17 may have on its consolidated financial statements.
NOTE 11 SUBSEQUENT EVENTS
In October 2016, the Company issued an aggregate of 20,000,000 common shares at $0.05 per share pursuant to the exercise of previously issued and outstanding warrants, and received cash proceeds of $1,000,000. The shares were issued without registration under the Securities Act of 1933, as amended (the Securities Act), in reliance upon exemptions from registration for securities sold in transactions under Section 4(a)(2) of the Securities Act. The warrants were originally issued to these stockholders in connection with the negotiation and execution of a Distribution and License Agreement dated November 2015, which provided exclusive distribution rights to the Company’s proprietary hospital disinfection technology in certain territories in South America (the Distribution Agreement).
In connection with an amendment to the Distribution Agreement, the Company granted warrants for the purchase of up to $1,000,000 of shares of common stock of the Company, exercisable for one year, commencing January 31, 2017 and expiring January 30, 2018
,
with the number of shares to be determined based on a 20-day average stock price prior to the date of exercise with the average stock price discounted by 40%
.