Item 1.
Business
General
Medizone International, Inc. ("Medizone" or the "Company"), is dedicated to (i) seeking regulatory approval of a precise mixture of ozone and oxygen, and its process of inactivating lipid-enveloped viruses for the intended purpose of decontaminating blood and blood products and assisting in the treatment of certain diseases; (ii) developing or acquiring the related technology and equipment for the medical application of its products, including a drug production and delivery system; and, (iii) applying its novel technology to the problem of nosocomial infections world-wide. Beginning in 2008, the Company’s management also has worked to position the Company to pursue an initiative in the field of hospital sterilization.
Corporate Redirection
Early in 2008, the Company's management and board of directors began to consider other applications of the Company's core technologies and new technologies with lower development costs with the objective of bringing the Company a revenue stream to offset the ongoing expense of funding further development of the drug and treatment protocols for diseases such as Hepatitis C and HIV/AIDS.
Management has worked to position the Company in such a way as to pursue an initiative in the field of hospital sterilization. This change in focus is based, in part, on a review of published data on hospital-derived infections, an area of rapidly growing concern in the medical community. Management believes that there is an opportunity to build on the Company's experience with ozone technologies and its bio-oxidative qualities in pursuing this initiative. The Company will shift its near term efforts towards one of its founding tenets, namely that under the right conditions, ozone can be extremely effective at sterilizing virtually all biological fluids (blood, serum, and plasma and its fractionates) as well as all biologically contaminated equipment and spaces.
This decision has been effected by the growing realization that Medizone's unique ozone generating technologies could play a vital role in addressing what public health officials and surgeons world-wide are beginning to recognize as "the silent epidemic" (American Academy of Orthopedic Surgeons, May 2008, copy on file with the Company (“AAOS Study”)), a reference to MRSA (methicillin-resistant staphylococcus aureus) infection. This is a strain of Staphylococcus aureus bacteria (“staph”) that is resistant to the broad-spectrum antibiotics commonly used to treat it. MRSA can be fatal. According to the AAOS Study, "the number of hospital admissions for MRSA has exploded in the past decade. By 2005, admissions were triple the number in 2000 and 10-fold higher than in 1995. In 2005, in the United States alone, 368,600 hospital admissions for MRSA - including 94,000 invasive infections - resulted in 18,650 deaths. The number of MRSA fatalities in 2005 surpassed the number of fatalities from hurricane Katrina and AIDS combined and is substantially higher than fatalities at the peak of the U. S. polio epidemic." Indeed, biological contamination of medical treatment areas such as hospitals and chronic care facilities has recently been identified by several world renowned public health institutions, including the Centers for Disease Control or “CDC” (CDC Report 17 Oct, 2007, copy on file with the Company), as one of the greatest threats to public health and safety in the industrial world. This concern was reflected in an article recently published in the journal Science (18 July 2008, Vol 321 pp 356-361, copy on file with the Company) which estimated that hospital-based infections in 2006 accounted for almost 100,000 deaths in the US alone.
In response to this situation, the Company is currently developing a highly portable, low-cost, ozone-based technology specifically for the purpose of decontaminating and sterilizing hospital surgical suites, emergency rooms, and intensive care units. Since this technology is not considered a medical treatment or a diagnostic, its development pathway is not subject to a stringent and expensive regulatory review process. The development pathway will be based on independent peer-reviewed science and engineering excellence. The Company expects independent trials targeted to prove significant reductions in the major causative agents of hospital derived infections will begin by spring 2009, followed by hospital beta testing of the prototype design. Completion of these projects will be dependent upon the Company obtaining the necessary funding, for which there is no assurance.
In addition to the hospital sterilization initiative, the Company is developing an ozone-destruct unit which is used following sterilization of the treated infrastructure to reverse the ozone gas (O3) in the space, and turn it back into O2 in a short period of time. The Company has targeted initially the treatment of a typically sized surgical suite including sterilization followed by ozone destruct to habitable standards in two hours or less. This short turn-around period is considered of great importance relative to commercialization of the technology.
At present, the Company is early in the patent research stage of this development program. While the Company cannot guarantee that patents will be available for this technology, the Company will make every effort to research any possibilities, and management believes some protections are likely. An application for registration of a trademark has been filed for the system with the United States Patent and Trademark Office for the mark AsepticSure™. The mark is used to describe a portable decontamination and sterilization system for hospitals, government buildings, schools and other functionally critical environments that might currently require, or need to be prepared for countermeasures capability from contamination by infectious biological agents such as C difficile, E coli, Pseudomonas aeruginous, MRSA and VRE (Vanocomycin-resistant Enterococci - another drug-resistant bacteria).
Research and Development
We do not own laboratories or other clinical research or testing facilities. All research and development activities to date have been conducted under contract by outside laboratories and clinicians. The Company expects to conduct research activity for the AsepticSure™ system through a recently established not-for-profit entity, the Canadian Foundation for Global Health, as discussed below.
Canadian Foundation for Global Health (CFGH)
In September 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.
The CFGH is specifically not authorized to contract for research or other services on behalf of the Company without prior approval. All intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on the Company’s behalf or at its request, by CFGH or parties contracted by CFGH with the Company’s prior approval, are the sole and exclusive property of the Company.
The Canadian Foundation for Global Health is registered as a not-for-profit corporation under Canadian Federal Charter. CFGH maintains offices at 170 Lauier Avenue West in Ottawa, Canada. Dr. Michael E. Shannon M.A., M.Sc., M.D. is President of the CFGH and maintains offices at the CFGH in Ottawa. Dr. Shannon is also a member of the Company’s board of directors and is the Company’s Director of Medical Affairs. Mr. Brad Goble, President of TDVGlobal, Inc., is also a board member of the CFGH and serves as the Secretary-Treasurer for the organization. According to its website, TDVGlobal, Inc. “is a strategic management consulting company” focusing on the public sector. It is based in Ottawa, Ontario, Canada. Other members of the CFGH board are Edwin G. Marshall (our CEO and Chairman), Daniel D. Hoyt, a director of the Company, and Jill C. Marshall NMD, Mr. Marshall’s wife and a former corporate officer of the Company.
Government Regulation
The manufacturing and marketing of the AsepticSure™ system is subject to the standards of Good Manufacturing Practices. The Company does not anticipate any difficulty or unreasonable expense in meeting these standards. The Company does not believe any approvals or certifications will be required for the use of the system in the hospital sterilization initiative.
For the foreseeable future, the Company has suspended its efforts to seek FDA approval of the Company’s precise mixture of ozone and oxygen (the “Drug”), which previously was part of the Company’s principal focus. In the
future, should the Company obtain substantial additional funding or generate revenues sufficient to support a return to its viral disease treatment program, and should the Company choose to do so, it may resume the testing, manufacturing and marketing of the Drug and related drug delivery technology (the “Medizone Technology”), as well as its related research and development activities, all of which are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. At this time, because the Company believes that complying with these regulations would involve a considerable amount of time, expense and uncertainty, the Company intends to direct the Company’s development efforts to the launch of the AsepticSure™ system. The Company believes the AsepticSure™ system, because it does not fall under the FDA description of a drug, medical device or treatment, will provide a much more cost-effective path for the Company to gain revenue in a reasonable period of time and at greatly reduced cost when compared to the development of a drug, medical device or treatment protocol.
Technology Development
In 1998, the Company entered into an agreement with Biozone Corporation (“Biozone”) under which Biozone was granted worldwide manufacturing rights for Medizone Ozone Generating Equipment in exchange for exclusive worldwide marketing rights for Biozone manufactured equipment intended for scientific research and medical applications, to be marketed under the Medizone label. The Company agreed that Biozone could retain the right to market its other industrial applications, such as water treatment plants. The original Biozone agreement has now expired.
In 2008, the Company entered into a new agreement with Biozone. The new agreement is for a term of five years (expiring in October 2013). Under the new agreement, Biozone is developing, along with the Company, equipment for specialized laboratory trials, a prototype AsepticSure™ system for hospital beta-testing and ozone destruct technology. The new agreement also covers initial product manufacturing by Biozone exclusively for the Company. Under this new agreement, the Company retains the right to outsource additional manufacturing capacity.
Patents
The Company owns two patents, both related to its original ozone technologies, as follows:
·
United States equipment patent (U.S. Patent No. 5,052,382) entitled “Apparatus for the Controlled Generation and Administration of Ozone” (“Patent No. 1”); and
·
United States patent (U.S. Patent No. 6073627) entitled “External Application of Ozone/Oxygen For Pathogenic Conditions, a process patent for the treatment of external afflictions.” This patent also describes equipment evolutions and treatment envelope design for external medical applications (“Patent No. 2”).
On November 2, 2001, the Company filed U.S. Provisional Patent Application serial no. 10/002943, for “Method and Apparatus for Ozone Decontamination of Biological Liquids.” This application deals with protocols for biological liquid decontamination as well as the devices for conducting decontamination.
The Company also owned a process patent (U.S. Patent No. 4,632,980) entitled “Ozone Decontamination of Blood and Blood Products,” covering a procedure for ozone decontamination of blood and blood products through the treatment of blood and blood components. That patent expired in February 2003. Many of the claims and primary aspects of the technology covered by this patent are assumed by or incorporated in Patents 1 and 2 described above.
Other Regulation
In addition to regulations enforced by the FDA, the Company’s business activities may also become subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company’s research and development may involve the controlled use of hazardous materials, chemicals, and various radioactive compounds. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any accident, the Company could be held liable for any damages that result and any such liability could exceed its resources.
Should the Company elect to resume a course directed at human disease treatment in the future, the demands are formidable. The Drug, the Medizone Technology and related products are regulated by the FDA under the FDC Act and related regulations. The FDA exercises broad and extensive authority in regulating the development, production, importation, distribution and promotion of “new drug” products and “investigational devices” under the FDC Act and regulations.
Because ozone generation for purposes of interfacing with blood and blood products is regarded as a new drug delivery, the Company is precluded from selling or distributing the Drug or the Medizone Technology until after FDA approval has been granted. To obtain FDA approval, the Company would be required to submit medical and scientific evidence sufficient to demonstrate that the Drug and the Medizone Technology have been successfully used in pre clinical studies followed by well controlled clinical studies using human volunteer subjects. The FDA will not grant a New Drug Application (NDA) unless it contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its recommended and proposed medical uses. Historically, the FDA has had a bias against treating humans with ozone, citing issues of safety. Accordingly, the Company does not expect to reopen its activities in this area in the foreseeable future unless significant funding became available specifically targeted for that purpose. Until an NDA has been granted, the Company may not distribute ozone generating devices in the United States, except to researchers who agree to follow FDA guidelines, and provided the devices are labeled as “Investigational Devices.”
Because ozone has been used to treat humans in Europe for at least 30 years, the European Union (the “EU”) and other regions of the world outside of North America are more accepting than the United States of human clinical trials of ozone therapies. The Company believes it could pursue foreign Phase I human toxicity trials, as well as early stage phase II efficacy trials in these regions of the world should funding be obtained for that purpose. These trials cannot be undertaken until such time as the Company obtains sufficient financing, of which there can be no assurance.
Should the Company pursue future trials in Canada and other countries if funding allowed, due to recent harmonization of regulatory requirements between Health Canada and the FDA under the North American Free Trade Agreement, the Company believes trials successfully completed in Canada would be acceptable to both the FDA and the regulatory agencies of the European Union.
Medizone’s Pre-clinical Studies: The Drug and the Medizone Technology
In connection with its development of the Drug and related treatment technologies, between 1988 and 2000, the Company sponsored and was the primary beneficiary of research to determine whether the use of ozone, either alone or with other modalities, is efficacious in the treatment of certain diseases, and establish additional scientific evidence that ozone, through the use of the patents or applications of scientific methodologies of a similar nature, can decontaminate blood or lipid enveloped viruses and thereby significantly diminish the degree of transfusion related disease.
These pre-clinical projects included the following:
·
Studies to test ozone’s ability to inactivate HIV, conducted at the State University of New York Health Science Center at Syracuse;
·
A pilot animal study of the potential toxicity of ozone, conducted by the Arnold & Marie Schwartz College of Pharmacy and Health Science at Long Island University; and
·
Studies investigating the effects of ozone/oxygen admixtures on human peripheral blood, including whole blood, serum and plasma, conducted by the Blood Bank of Mt. Sinai Medical Center, New York City.
In 1990, the Canadian Blood Forces Program (under the aegis of the Canadian Department of Defense and Agriculture and the Canadian Red Cross) requested that the Company add the Medizone Technology to the other proprietary technology being investigated as an experimental arm of an ozone-based blood sterilization investigative program. The program was an attempt to develop an effective technology for sterilizing whole blood and blood products. This program, which was to study the Medizone Technology as it relates to the inactivation of Simian Immunodeficiency Virus (“SIV”), included a live primate model. The program continued until 1994, completing
two out of the three proposed stages, when the funding of the Canadian Blood Forces Program was discontinued. The Company learned in late 1997 that the program suffered difficulties with the ozone/bioserum interface that was used in the study, which resulted in an inconsistent, difficult to accurately measure, dosage of ozone. As a result, from a regulatory perspective, the study yielded results that could not be used due to the inability to specifically identify dosage. From a practical standpoint, the Company views this study of the Drug as a success, in that the treated simians never became ill through the entire course of the trial period, while the control group all died within a 14-day period.
Anecdotal Studies
Beginning in 1998 and concluding in 2000, the Company obtained patient data for 40 participants in a developmental human pilot trial investigating ozone treatment of Hepatitis C. This trial was conducted independently by a former board member of the Company at his private clinic in Tijuana, Mexico, during the course of his normal medical practice. The trial was not conducted as a blind study as required by the FDA and the results have value only as anecdotal information. The Company believes that the information reported from the studies corresponds with the success reported in similar anecdotal studies conducted in Europe (primarily in Germany).
The clinic voluntarily provided the data from the study to the Company, and the Company has not independently verified its accuracy. Patients were treated with major autohemotherapy, a blood therapy treatment protocol, on an outpatient basis. The average treatment period was 30 days. The clinic reported viral load testing (detection of the levels of the virus present), as well as standardized SGOT and SGPT tests of liver enzyme levels before the start of the treatment, immediately following treatment, and six months after treatment without any further medical intervention during the post-treatment period. No adverse side effects were observed or reported in any of the participants. According to the study results, SGOT and SGPT scores returned to normal ranges and viral load reductions averaged 5 log or 99.999% reduction. If accurate, these data indicate that in the six-month post-treatment follow up testing, 38 of the 40 patients tested at inactive viral levels for Hepatitis C virus. Two of the patients reportedly had increased viral levels at the end of the treatment test period (6-month’s post treatment); however, even those patients enjoyed significantly reduced viral load levels when compared to pre-treatment test results. As indicated above, because these trials were not conducted as a blind study as required by the FDA, we regard the results only as anecdotal information. Further studies are needed to verify the effectiveness of the science.
Status of Research Activity
The Company entered into a research agreement in 2001 with a multinational research partner interested in the possibility of viral deactivation of serum products by using ozone. Serum products are used to make a media base that is then used in the manufacture of vaccines for humans and animals. Under the terms of the agreement, if the research proved successful, the Company would enter into a license agreement for the use of the technology in the viral deactivation of commercial vats of serum product. That trial progressed satisfactorily through the first stages, but was interrupted while product development of the gas-serum interface system was finalized. The new interface development has been completed to a prototype stage. The Company believes this new interface device will provide a stable and measurable platform for drug delivery in future trials should they occur and also provide future income as a disposable to be used with each treatment should approvals be obtained from regulatory agencies following further research. Medizone does not presently intend to re-enter this market. Should dedicated research funds for this application (viral deactivation of serum products) become available in the future, the Company would consider resuming this research.
With its new corporate direction, the Company has suspended further research and approval of the Drug. Presently, the Company’s focus is entirely on the development and testing of its AsepticSure™ portable decontamination and sterilization system. During the first six to nine months of 2009, the Company expects to commence a trial to be conducted at a major university for independent verification of the Company’s technology in the de-activation of infectious biological agents. If the trial is successful and funding continues to be available to the Company, the next step in the development program is hospital beta testing of the prototype AsepticSure™ system.
International Activities
Medizone Canada Limited
The Company presently owns all of the issued and outstanding stock of MCL Medizone Canada, Ltd., a Canadian corporation (“MedCan”). MedCan was a participant in the Canadian Blood Forces Program’s SIV Study described above. The Canadian government requires that a Canadian entity must perform research accepted under the auspices of Health Canada. MedCan is not currently engaged in any business activity. The Company has established the Canadian Foundation for Global Health to satisfy the Canadian government requirements relative to research that may be conducted on behalf of the Company.
Medizone New Zealand Limited
On June 22, 1995, the Company entered into a series of contracts that resulted in the formation of a joint venture incorporated in New Zealand known as Medizone New Zealand Limited (“MNZ”). MNZ is owned equally by Medizone and Solwin Investments Limited (“Solwin”), a New Zealand corporation, which is an affiliate of Richard G. Solomon, one of the Company’s directors. MNZ is a research and development stage company formed to obtain regulatory approval for the distribution of the Company’s patented technology in New Zealand, Australia, South East Asia and the South Pacific Islands.
Under these agreements, the Company purchased 100% of MNZ from Mr. Solomon and sold 50% of MNZ to Solwin for $150,000. The Company also loaned $50,000 to MNZ on a demand basis, which was repaid on October 2, 1995. On October 26, 1995, the Company loaned MNZ $50,000 on a demand basis, which has not been repaid as of the date of this report. The Company also entered into a Licensing Agreement (the “Licensing Agreement”) and a Managing Agent Agreement (the “Managing Agent Agreement”) with MNZ.
Under the Licensing Agreement, the Company granted an exclusive license to MNZ under certain patents and the right to use the Medizone trademark in New Zealand. MNZ has agreed to apply for corresponding patent protection for these patents in New Zealand and to use its best effort to exploit the rights granted in the Licensing Agreement. The Licensing Agreement will terminate on the expiration date of the last patent obtained in New Zealand, or, if no patents are obtained, on June 22, 2010. The Company will receive a guaranteed minimum royalty, in an amount to be agreed to by the parties, commencing in the third year after all necessary regulatory approvals requisite to the license, use or distribution of our proprietary technology have been obtained in New Zealand. If the Company is unable to agree with MNZ upon the amount of the guaranteed minimum royalty, the Company may terminate the Licensing Agreement. Commencing on the first sale to a user by MNZ, the Company is to receive a sales royalty on MNZ’s gross annual sales under the Licensing Agreement.
Under the Managing Agent Agreement, MNZ will act as the Company’s agent to find licensees of the Medizone Technology in Australia, New Zealand, the South Pacific Islands and Southeast Asia (including the Philippines, Indonesia and Vietnam). The Company will divide Licensing fees with MNZ on a sliding scale as set forth below:
Medizone
MNZ
Initial license
50%
50%
Subsequent license fees up to $500,000
50%
50%
Subsequent license fees between $500,000 and $750,000
75%
25%
Subsequent license fees in excess of $750,000
85%
15%
The Company will also divide any net royalties paid to it under any license entered into pursuant to the Managing Agent Agreement, with MNZ receiving 10% of the net royalties under those licenses.
The Managing Agent Agreement expires on the termination or expiration of the last of the licenses obtained under the agreement, subject to earlier termination by the Company under certain circumstances. The Company has had informal discussions with the management of MNZ about acquiring the rights of MNZ in the future. Negotiations have not yet progressed to a formal stage, due to the lack of funding to finalize such a purchase. It is envisioned that should a purchase of the rights of MNZ be completed by the Company, it would be in the form of a stock issuance or stock issuance with some additional cash. The completion of this transaction would again establish global marketing rights for the Company for its products.
Competition
The market for hospital sterilization in which the Company intends to do business is extremely competitive. The Company is aware of one company, for example, that has commenced research into the use of ozone as a sterilization product for the food industry that might eventually compete with it in the sterilization market for hospitals and other medical infrastructure. Other companies, foundations, research laboratories or institutions may also be conducting similar investigations into the use of ozone for this application of which the Company is not aware. Unless patent protection is obtainable, the Company should expect significant competition once it has proven the science.
Employees
As of December 31, 2008, the Company had four employees (of which three are full-time employees) and a number of outside consultants and experts engaged in product development, government relations and science. The Company’s principal executive office is located in Stinson Beach, California in space provided by the Company’s Chief Executive Officer. The Company’s Chief Financial Officer maintains an office in Salt Lake City, Utah. The Company’s Director of Medical Affairs maintains an office in Ottawa, Canada at the Canadian Foundation for Global Health. This arrangement is proving cost effective and efficient given the Company’s limited resources, allowing a greater percentage of investment funds to be directed toward product development and research.
Item 2.
Item 2.
Properties
The principal executive offices of the Company are located at 144 Buena Vista Ave., Stinson Beach, California. The Company’s Director of Medical Affairs, Dr. Michael E. Shannon maintains an office in Ottawa, Canada located at the Canadian Foundation for Global Health. The executive offices of the Company are currently sufficient to meet its needs until the Company begins to have revenues from operations.
Item 3.
Item 3.
Legal Proceedings
Rakas vs. Medizone International, Inc. A former consultant brought this action in the Supreme Court of New York, Westchester County (Index No. 08798/00) claiming the Company had failed to pay consulting fees under a consulting agreement. The Company denies that it owes any fees to the consultant. In September 2001, the parties agreed to settle the matter for $25,000. The Company’s lack of funds prevented it from consummating 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 not been in a position to post the bond as of the date of this report and there is no assurance that it will be able to do so in the near term unless additional financing is made available. Therefore, at December 31, 2008, the entire amount of the judgment, plus fees of $21,308, has been accrued pending additional settlement discussions.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.
Part II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s common stock is traded on the Pink Sheets under the symbol “MZEI”. The following table sets forth the range of high and low bid prices of the Company’s common stock as reported on the Pink Sheets for the
periods indicated. These prices reflect inter-dealer prices without retail markup, markdown or commission, are not necessarily representative of actual transactions, or of the value of our securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community.
Fiscal Year 2007
High
Low
First Quarter Ended March 31
$0.02
$0.01
Second Quarter Ended June 30
$0.01
$0.01
Third Quarter Ended September 30
$0.03
$0.01
Fourth Quarter Ended December 31
$0.03
$0.02
Fiscal Year 2008
High
Low
First Quarter Ended March 31
$0.03
$0.01
Second Quarter Ended June 30
$0.05
$0.02
Third Quarter Ended September 30
$0.06
$0.03
Fourth Quarter Ended December 31
$0.04
$0.01
Holders
As of December 31, 2008, there were approximately 3,500 holders of record of the common stock and 199,926,128 shares of common stock outstanding.
Dividend Policy
The Company has not historically declared or paid any cash dividends on shares of its common stock and plans to retain its future earnings, if any, to fund the development and growth of its business.
Transfer Agent and Registrar
The transfer agent and registrar for the Company’s common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 11219.
Issuer Purchases of Equity Securities
During the three months ended December 31, 2008, the Company did not purchase any of its equity securities.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2008, the Company issued 1,000,000 shares of common stock to an outside consultant, valued at $30,000 or $0.03 per share, the market value of the shares on the date that the shares were approved to be issued. Of the $30,000 consulting expense, $10,000 was recognized for the period ended December 31, 2008, with the remaining $20,000 recorded as deferred consulting fees, to be recognized monthly over the remaining term of the agreement. The Company also issued 3,333,333 shares of common stock for cash proceeds received during December 2008 totaling $100,000, or $0.03 per share.
These issuances and sales of shares were made without registration under the Securities Act of 1933, as amended, in reliance upon exemptions from registration, including, without limitation, the exemption provided under Regulation D and Rule 506 under the Securities Act for private and limited offers and sales of securities made to accredited investors.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
The Company was incorporated in January 1986. The Company is a development stage company primarily engaged in research into the medical uses of ozone. The Company has not generated, and cannot predict when or if it will generate, revenues or sufficient cash flow to fund continuing or planned operations.
In the year ended December 31, 2008, the Company had a net loss of $707,542, compared with a net loss in 2007 of $552,449. The primary expense of the Company is payroll and consulting fees, together with interest expense and additional expense recorded as a result of the extension of certain stock purchase warrants outstanding.
In 2007, the Company had no research and development expense. In 2008, however, the Company incurred $43,333 in research and development costs, as a result of prototype development costs and other research activities. Since inception, the Company has spent a total of $2,729,121 for research and development related to its ozone technology and related apparatus. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.
General and administrative expenses in 2008 were $550,289 compared to $486,101 in the year ended December 31, 2007. These expenses include consulting fees, professional fees, payroll, insurance costs and travel expenses. The Company’s lack of cash has prevented it from paying all accrued salary and other expenses during the last eight years.
Principal amounts owed on notes payable totaled $280,491 at December 31, 2008 and 2007. Interest expense on these obligations totaled $23,656 and $23,656 in 2008 and 2007, respectively. The applicable interest rates on this debt ranged from 8% to 10% percent per annum.
Liquidity and Capital Resources
At December 31, 2008, the Company’s working capital deficiency was $3,394,071, compared to a working capital deficiency of $3,640,452 at December 31, 2007. The stockholders’ deficit at December 31, 2008 was $3,615,326 compared to $3,865,304 at December 31, 2007.
As a development stage company, the Company has had no revenues. The Company continues to require additional financing to fund its operations. The Company will also require financing to fund the research necessary to undertake its new business plans which contemplates testing and then marketing a system for hospital and medical sterilization. The Company’s only source of financing to date has been the periodic sale of its common stock. During 2008, the Company generated cash of $295,582 through financing activities, primarily through common stock purchases of $279,000. An additional $200,000 was raised by the Company through the sale of its common stock subsequent to December 31, 2008.
Given current negative cash flows, it will be difficult for the Company to continue as a going concern without an influx of significant capital. While the Company has continued to aggressively pursue potential financing opportunities, those efforts have to date produced only minimal results. In addition, previously anticipated and announced financing commitments have failed to be fulfilled in a significant manner.
The Company’s audited financial statements included in this annual report on Form 10-K have been prepared on the assumption that the Company will continue as a going concern. Through the date of this report, it has been necessary to rely upon financing from the sale of the Company’s equity securities to sustain operations as indicated above. Additional financing will be required if the Company is to continue as a going concern. If additional financing is not obtained in the near future, the Company will be required to curtail or discontinue operations, or seek protection under the bankruptcy laws. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to the Company. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing shareholders.
Critical Accounting Policies
The Company has identified the policies below as critical to its business operations and the understanding of its results of operations.
The preparation of this annual report on Form 10-K requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, the Company evaluates these estimates, including those related to bad debts, intangible assets, warranty obligations, product liability, revenue, and income taxes. The Company bases its estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
The Company accounts for equity securities issued for services rendered at the fair value of the securities on the date of issuance.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Company’s financial statements are included commencing at page and form a part of this report.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
During the two most recent fiscal years and the subsequent interim period, there have been no disagreements on financial disclosures or accounting matters and no resignation by or dismissal of the independent public accountants engaged by the Company.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
The registrant’s management evaluated, with the participation of its principal executive and principal financial officers, or persons performing similar functions, the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of its fiscal year ended December 31, 2008. After evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, the Company’s Chief Executive Officer and its Chief Financial Officer have concluded that its disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for the preparation and integrity of the Company’s published consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates made by management. Management also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements.
Management is responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of the Company’s financial statements. The system includes but is not limited to:
·
a documented organizational structure and division of responsibility;
·
established policies and procedures to foster a strong ethical climate which is communicated throughout the Company;
·
regular reviews of our financial statements by qualified individuals; and
·
the careful selection, training and development of Company employees and personnel.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based upon these criteria, we believe that, as of December 31, 2008, our system of internal control over financial reporting was effective.
Edwin G. Marshall
Chairman of the Board and Chief Executive Officer
Steve M. Hanni
Chief Financial Officer
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect its internal controls over financial reporting.
Item 9B.
Item 9B. Other Information
None.
Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following table contains information concerning the Company’s directors and executive officers as of December 31, 2008.
Name
Age
Position
Edwin G. Marshall
Chairman of the Board, Chief Executive Officer
Richard G. Solomon
Director
Daniel Hoyt
Director
Michael E. Shannon
Director
Steve M. Hanni
Chief Financial Officer
Edwin G. Marshall became Chairman of the Board in June 1997 and Chief Executive Officer in April 1998 and has been with the Company full time since June 1997. Mr. Marshall attended Santa Rosa Junior College and the
College of Marin, studying fire science and business administration. From 1964 to 1978, Mr. Marshall worked in the fire service in a city with a major chemical industrial complex, leaving with the rank of Captain. A private investor since 1973, he went to work in the real estate business in 1978. From 1978 until 1995, Mr. Marshall pursued various business pursuits, including managing his personal investments.
Richard Garrett Solomon is a Director of the Company and also serves as an Executive Officer of Medizone New Zealand Limited. Mr. Solomon has been one of the Company’s shareholders since 1992. In 1995, Mr. Solomon joined with the Company to form Medizone New Zealand as a 50/50-owned joint venture. Between January 1996 and February 1997, Mr. Solomon was one of the Company’s directors. He was reappointed to the Board of Directors in May 2000. Mr. Solomon received a Bachelor of Commerce degree (University of Otago), and a Diploma of Business and Industrial Administration (University of Auckland). He is an Associate Chartered Accountant. Mr. Solomon’s career has been in business and investment. For 20 years he developed and operated a private hospital operating company, Haven Care Hospitals Limited. He was a long-standing board member and president of the New Zealand Hospitals Association and he was instrumental in the establishment of the New Zealand Council of Healthcare Standards, Inc., now known as Quality Health New Zealand.
Daniel Hoyt became a director in January 2002. Mr. Hoyt is a graduate of the University of Indiana, where he received a Bachelor of Science degree in Business Administration. Over the past 25 years, he has become a recognized leader in the life insurance industry, working as a career agent for American United Life Insurance Company. Mr. Hoyt’s clients have ranged from large public companies to small private businesses. In recent years he has spent most of his time in public speaking and relationship building in the insurance industry. His previous work experience includes seven years with Merrill Lynch as well as serving as the Chief Executive for the Chamber of Commerce in three Indiana communities. Mr. Hoyt currently serves as the Chairman of the Board of Biological Systems, Inc., a privately held corporation involved with bio-cleansing remediation systems for animal fats and oil-based materials.
Dr. Michael E. Shannon M.A., M.Sc., M.D., became a director on August 18, 2008, and assumed responsibility as Director of Medical Affairs. Dr. Shannon received his medical degree from Queen’s University in Canada, which included advanced training in surgery and sports medicine. He also holds post-graduate degrees in neurochemistry and physiology. He has been actively engaged in applied medical research within these areas for over 27 years. He served in the Canadian Forces for 31 years retiring at the rank of Commodore (Brigadier General equivalent) as Deputy Surgeon General for Canada. During the first Gulf War, Dr. Shannon served as the senior medical liaison officer for all of the Canadian forces. In 1996 he assumed responsibilities within Health Canada for re-organizing the Canadian blood system. Working with both the provincial and federal governments he oversaw the development of a new corporate entity dedicated exclusively to the management of blood services in Canada. He was then appointed Director General for the Laboratory Centre for Disease Control, a position he held for three years. In December 2000, Dr. Shannon left the Canadian federal government to pursue a new career in industry. In that capacity he simultaneously directed a phase III clinical trial in Canada, the United States and Great Britain for an artificial blood substitute product. Following completion of that work, he was asked to accept a special assignment with the Canadian Federal Government Auditor General’s office. His assignment being to conduct a cost benefit analysis of all government sponsored pharmacare programs and make recommendations directly to the Parliament of Canada. His assignment and presentation to Parliament was completed in November 2004. Dr. Shannon then served on a special assignment to the Canadian Public Health Agency (Center for Disease Control equivalent in the United States) as Senior Medical Advisor. His responsibility was to direct the rebuilding of the Emergency Medical Response Capacity for Canada. In this regard and under his direction, the largest emergency medical response exercise in the history of the country, involving the overnight construction of a mobile hospital, hundreds of doctors and thousands of patients, was successfully held in Toronto in December of 2007. Dr. Shannon has been actively engaged in medical bio-oxidative (O3 based), research since 1987 and was directly responsible for the first human clinical trial to have ever been approved in North America which examined the efficacy of O3 delivered via minor autohemotherapy in the treatment of AIDS. He was also responsible for several primate studies utilizing O3 involving scientists from various departments within the Canadian Federal Government, as well as senior investigators from the Company and Cornell University. Dr. Shannon has served as the Senior Medical Advisor to the Company since 2002. In August of 2008, he accepted a position on the Board of Directors of the Company and assumed responsibility for medical affairs. In October 2008, he was additionally appointed the President of the Canadian Foundation for Global Health.
Steve M. Hanni became Chief Financial Officer in April 2002. Mr. Hanni is a Certified Public Accountant, licensed in Utah and Nevada. He graduated from Weber State University with both a Bachelor and Masters degree in accounting. He is a member of the Utah Association of Certified Public Accountants and the American Institute of Certified Public Accountants. He also has served on the Practice Advisory Council and other committees for the Utah Association of Certified Public Accountants. Mr. Hanni has taught auditing at Westminster College and accounting at Weber State University. Since 2001, Mr. Hanni has been engaged in public practice with the firm of Stayner, Bates & Jensen, PC, Certified Public Accountants, in Salt Lake City, Utah. Mr. Hanni was previously a partner with the firm of HJ & Associates, LLC, a public accounting firm that acts as our independent public accountant in connection with the audit of our annual reports and the review of our quarterly financial reports.
Corporate Governance
The Board of Directors is elected by and is accountable to the shareholders of the Company. The Board establishes policy and provides strategic direction, oversight, and control of the Company. The Board met three times during the year ended December 31, 2008. All directors attended 100% of the meetings of the Board with one exception in which a director was unavailable and authorized the Chairman by proxy to vote on his behalf. The Board has no separate audit, compensation, nominating or other committees.
Code of Ethics
The Company has adopted a formal, written code of conduct within the specific guidelines as promulgated by the Securities and Exchange Commission. This document can be found on the Company’s website at http://www.medizoneint.com. The Company’s Code of Ethics applies to its named executive officers, as well as all other employees. The Company has communicated the high level of ethical conduct expected from all of its employees, including its officers. Shareholders may request a free copy of the Company’s Code of Ethics from:
Medizone International, Inc.
Attention: Investor Relations
144 Buena Vista
P.O. Box 742
Stinson Beach, California 94970
(415) 868-0300
The Company will disclose any changes or amendments to or waivers from its Code of Ethics applicable to its named executive officers by posting such changes or waivers to its website.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who beneficially own more than 10% of a registered class of its equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and shareholders owning more than 10% of the shares are required by regulation of the Securities and Exchange Commission to furnish the Company with copies of all forms filed by them under Section 16(a). The Company is not aware of any transactions in its common stock by or on behalf of any director, executive officer or 10% shareholder, which would require the filing of any report pursuant to Section 16(a) during the fiscal year ended December 31, 2008, that was not timely filed with the Commission, except for the following reports which are expected to be filed during April 2009, once the necessary filing codes are obtained:
·
Edwin G. Marshall, the Company’s Chairman and CEO, is expected to file a Form 5 during April 2009, reporting the issuance of 2,500,000 shares of common stock issued to Mr. Marshall on May 12, 2008 for services rendered valued at $50,000;
·
Richard G. Solomon, a Company director, is expected to file a Form 5 during April 2009, reporting the issuance of 2,500,000 shares of common stock issued to Mr. Solomon on May 12, 2008 for services rendered valued at $50,000, or $0.02 per share, and 125,000 shares of common stock on May 14, 2008 for cash proceeds previously received totaling $2,500, or $0.02 per share;
·
Daniel Hoyt, a Company director, is expected to file a Form 5 during April 2009, reporting the issuance of 2,500,000 shares of common stock issued to Mr. Hoyt on May 12, 2008 for services rendered valued at $50,000, or $0.02 per share, 5,338,333 shares of common stock on May 12, 2008 for cash proceeds previously received totaling $107,600, or $0.02 per share, and 409,075 shares of common stock on May 12, 2008 in lieu of outstanding debt with the Company totaling $8,181, or $0.02 per share;
·
Dr. Michael E. Shannon, a Company director, is expected to file a Form 5 during April 2009, reporting the issuance of 1,250,000 shares of common stock issued to Mr. Shannon on May 12, 2008 for services rendered valued at $25,000, or $0.02 per share, and
·
Steve M. Hanni, the Company’s CFO, is expected to file a Form 5 during April 2009, reporting the issuance of 1,250,000 shares of common stock issued to Mr. Hanni on May 12, 2008 for services rendered valued at $25,000, or $0.02 per share.
Item 11.
Item 11. Executive Compensation
The following Summary Compensation Table shows compensation paid to our Chief Executive Officer for each of the past three years.
Summary Compensation Table
(1)
Does not include the following amounts accrued and payable to Mr. Marshall’s wife (Dr. Jill Marshall), also an officer until her resignation on July 1, 2004: $37,000 in 2008 (consulting), $26,000 in 2007 (consulting), and $27,000 in 2006 (consulting). Cash payments of salary and consulting fees made to Dr. Marshall in those years were $7,000 in 2008, $0 in 2007, and $1,000 in 2006. A total of $441,583 in salary and fees has been accrued for all periods of her employment by the Company and remains unpaid to Dr. Marshall.
(2)
Of the amount indicated, only $74,590 has been paid to Mr. Marshall. The balance has been accrued due to the lack of funds. Aggregate accrued wages owed Mr. Marshall at December 31, 2008 totaled $1,169,339.
(3)
Of the amount indicated, no amounts have been paid to Mr. Marshall. The amount has been accrued, but has not been paid to Mr. Marshall due to the lack of funds. See note (2).
(4) Of the amount indicated, only $28,000 has been paid to Mr. Marshall. The balance has been accrued due to the lack of funds. See note (2).
(5) During 2007, the board of directors approved the issuance of 2,500,000 shares of common stock to Mr. Marshall, valued at $0.02 per share, or $50,000. The shares, however, were not issued to Mr. Marshall until May 2008.
We do not have any employment agreements with any employee. Our Board of Directors does not have a compensation committee or audit committee. The Board determines matters concerning the compensation of executive officers. When resources allow, we anticipate that directors will be paid an annual fee and a fee for attendance at meetings of the Board and meetings of committees of the Board.
The following table sets forth information regarding outstanding equity awards at December 31, 2008 held by our named executive officers.
Outstanding Equity Awards at Fiscal Year-End Table
Name
Option awards
Stock awards
Number of securities underlying unexercised options
(#) exercisable
Number of securities
underlying
unexercised
options
(#) unexercisable
Equity
incentive
plan awards: Number of
securities
underlying
unexercised
unearned
options
(#)
Option
exercise price
($)
Option expiration date
Number of shares or units of stock that have not vested
(#)
Market value of shares of units of stock that have not vested
($)
Equity
incentive
plan awards: Number of
unearned
shares, units or other rights that have not vested
(#)
Equity
incentive
plan awards: Market or payout value of
unearned
shares, units or other rights that have not vested
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Edwin G. Marshall
n/a
n/a
n/a
n/a
n/a
n/a
Director Compensation
The following table summarizes compensation paid to the Company’s Board of Directors during the most recent completed fiscal year. Directors who are also employees and officers of the Company are not otherwise compensated for their service on the Board of Directors.
Name
Fees earned or paid in cash
($)
Stock awards
($)
Option awards
($)
Non-equity incentive plan
compensation
($)
Nonqualified deferred
compensation earnings
($)
All other compensation
($)
Total
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Richard G. Solomon
$0
$0(1)
$0
$0
$0
$0
$0
Daniel Hoyt
$0
$0(1)
$0
$0
$0
$0
$0
Michael E. Shannon
$0
$0(1)
$0
$0
$0
$0
$0
(1)
During 2007, the board of directors approved the issuance of 2,500,000 shares of common stock to Richard G. Solomon, 2,500,000 shares of common stock to Daniel Hoyt, and 1,250,000 shares of common stock to Michael E. Shannon. Each of the shares was valued at $0.02 per share, or a total of $125,000. The shares, however, were not issued to the directors until May 2008. No compensation was paid to the directors for services in 2008. The Company’s Chief Executive Officer, Ed Marshall is also a director. He received no compensation for his services as a director in 2008.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information regarding outstanding awards and shares reserved for future issuance under our equity compensation plans as of December 31, 2008.
Security Ownership of Certain Beneficial Owners
As of December 31, 2008, the Company was not aware of any beneficial owners of more than five percent of its outstanding common stock other than shareholders who are also officers or directors of the Company whose beneficial holdings of our common stock are described below.
Security Ownership of Management
The following table sets forth information as of December 31, 2008, as to our common stock beneficially owned by our directors, principal executive officer, principal financial officer, principal accounting officer and other executive officers or persons performing similar functions for the Company (collectively the “named executive officers”) and by all directors and named executive officers as a group:
(1)
Title of class
(2)
Name of beneficial owner
(3)
Amount and nature
of beneficial ownership
(4)
Percent
of class
Common Stock
Edwin G. Marshall, Director
and Chief Executive Officer
15,909,241(1)
7.6%
Common Stock
Richard G. Solomon, Director
10,210,001(2)
4.9%
Common Stock
Daniel D. Hoyt, Director
20,164,816(3)
9.6%
Common Stock
Michael E. Shannon, Director
3,680,000
1.8%
Common Stock
Steve M. Hanni,
Chief Financial Officer
1,400,000
*
Common Stock
All Officers and Directors
As a Group (5 persons)(4)
51,364,058
24.5%
* Less than 1%.
(1)
Amount indicated includes (i) 2,270,000 shares owned of record by Jill Marshall, Mr. Marshall’s wife, (ii) 4,936,507 shares owned of record by Sand Dollar, a limited partnership of which Mr. Marshall is the general partner, (iii) 8,629,366 shares owned directly by Mr. Marshall, (iv) 52,868 shares held by Mr. and Mrs. Marshall as joint tenants and (v) 20,500 shares held in street name.
(2)
Amount indicated includes combined holdings of Mr. Solomon individually, members of his immediate family, and Solwin Investments Ltd. Also includes warrants to purchase 165,000 shares of common stock at $0.05 per share, and warrants to purchase 125,000 shares of common stock at $0.02 per share.
(3)
Includes warrants to purchase 8,247,408 shares of common stock at prices ranging from $0.02 to $0.20 per share, and 11,917,408 shares owned of record.
(4)
Based on a total of 210,035,757 shares outstanding. This amount includes currently exercisable warrants for the purchase of 10,109,629 shares and eliminates all duplicate holdings.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
The Company owes accrued and unpaid compensation to its Chairman and CEO as indicated in Item 11, above. The Company also owes accrued and unpaid compensation to its other named officer and former officers. The Company has not entered into any other transactions with related persons during the last two completed fiscal years that resulted in indebtedness or otherwise involved amounts in excess of the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years.
Director Independence
The Company currently has no independent directors as defined by the rules of any securities exchange or inter-dealer quotation system. The Company’s common stock was previously traded on the OTC Bulletin Board and is now quoted on the Pink Sheets. These markets do not impose standards relating to director independence or the makeup of committees with independent directors, or provide definitions of independence.
Item 14.
Item 14. Principal Accounting Fees and Services
Audit Fees
The Company’s independent registered public accounting firm for the past two fiscal years has been HJ Associates & Consultants, LLP (“HJA”). The aggregate fees billed to the Company by HJA for professional services rendered in fiscal years 2008 and 2007 in connection with (i) the audit of the Company’s annual financial statements set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 and (ii) the review of the Company’s quarterly financial statements set forth in its quarterly reports for each of its fiscal quarters in such years, totaled approximately $10,000 and $9,500, respectively.
All Other Fees
The Company did not engage HJA on any other matters not otherwise included in the above categories in either fiscal year 2008 or 2007, other than the review of the Company’s S-8 filing during 2008. Aggregate fees billed to the Company by HJA in connection with this review were $1,440.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)
Documents filed as part of this report:
(1)
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(2)
Financial Statement Schedules [Those that are required are included in the Consolidated Financial Statements or Notes thereto.]
(3)
Exhibits
Number
Description
Agreement and Plan of Reorganization dated March 12, 1986 (1)
3.1
Articles of Incorporation of Company (1)
3.2
Bylaws (1)
3.3
Articles of Amendment to Company’s Articles of Incorporation (2)
10.1
Loan agreement with Messrs. McGrath and Watrous dated as of November 16, 1992 (3)
10.2
Loan Agreements between Medizone and John Kells, George Handel and John Pealer, executed as of June 11, 1993 (and promissory notes) (3)
10.3
Agreement for Sale and Purchase of Shares in Medizone New Zealand Limited between Richard G. Solomon and Medizone International, Inc., dated June 22, 1995 (4)
10.4
Shareholders’ Agreement relating to Medizone New Zealand Limited between and among Solwin Investments Limited, Medizone International, Inc. and Medizone New Zealand Limited, dated June 22, 1995 (4)
10.5
Licensing Agreement between Medizone International, Inc. and MNZ, dated June 22, 1995 (4)
10.6
Managing Agent Agreement between Medizone International, Inc. and Medizone New Zealand Limited, dated June 22, 1995 (4)
10.7
Funding commitment letter from Groundell Trust. (5)
10.8
Letter re: change in certifying accountants (5)
10.9
Letter of Understanding - BioZone Corporation*
Code of Ethics*
31.1
Certification of Chief Executive Officer*
31.2
Certification of Chief Financial Officer*
Certification under Section 906 of Sarbanes-Oxley Act of 2002*
* Filed herewith.
(1)
Incorporated by reference to registration statement on Form S-18 (Registration No. 2-93277-D), effective May 14, 1985.
(2)
Incorporated by reference to annual report on Form 10-K for the period ended December 31, 1986.
(3)
Incorporated by reference to annual report on Form 10-K for the period ended December 31, 1992.
(4)
Incorporated by reference to current report on Form 8-K, dated June 22, 1995.
(5)
Incorporated by reference to annual report on Form 10-KSB for the period ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDIZONE INTERNATIONAL, INC.
By: /s/ Edwin G. Marshall
Edwin G. Marshall
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Steve M. Hanni
Chief Financial Officer
(Principal Accounting and Principal Financial Officer)
Date: March 20, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
No annual report or proxy material has been sent to security holders by the Company and no such report or proxy is expected to be furnished to security holders subsequent to the filing of this report. In the event the Company does subsequently send such an annual report to shareholders or a proxy statement to its shareholders, the Company will furnish copies of such material to the Securities and Exchange Commission when it is sent to security holders.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Medizone International, Inc. and Subsidiaries
(A Development Stage Company)
Stinson Beach, California
We have audited the consolidated balance sheet of Medizone International, Inc. and Subsidiaries (a development stage company) as of December 31, 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years ended December 31, 2008 and from inception on January 31, 1986 through December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medizone International, Inc. and Subsidiaries (a development stage company) as of December 31, 2008, and the consolidated results of their operations and their cash flows for each of the two years ended December 31, 2008 and from inception on January 31, 1986 through December 31, 2008, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assertion about the effectiveness of Medizone International, Inc. and Subsidiaries’ internal controls over financial reporting as of December 31, 2008 included in the accompanying Form 10-K and, accordingly, we do not express an opinion thereon.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 8 to the consolidated financial statements, the Company has incurred significant recurring losses which have resulted in an accumulated deficit and a deficit in stockholders’ equity. This raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/HJ Associates & Consultants, LLP
HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 19, 2009
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a.
Organization
The consolidated financial statements presented are those of Medizone International, Inc. (Medizone-Nevada), and its wholly owned subsidiaries, Medizone International, Inc. (Medizone-Delaware) and Medizone Canada, Ltd. (MedCan). Collectively, they are referred to herein as the “Company”. Medizone-Nevada was incorporated under the name of Madison Funding, Inc. on August 27, 1984 under the laws of the State of Nevada for the purpose of investing in, acquiring, operating and disposing of businesses or assets of any nature. Effective March 26, 1986, Medizone-Nevada issued 37,500,000 shares of its common stock in exchange for the issued and outstanding common stock of Medizone-Delaware.
Medizone-Delaware was incorporated on January 31, 1986 under the state laws of Delaware. Medizone-Delaware was organized to seek regulatory approval for a MEDIZONE(R) drug, a precise mixture of ozone and oxygen for the purpose of inactivating lipid enveloped viruses for the intended purpose of decontaminating blood and blood products and assisting in the treatment of certain diseases. It is also trying to develop or acquire the related technology and equipment for the medical application of the products, including the drug production and delivery system.
At the time of the acquisition of Medizone-Delaware, Medizone-Nevada was essentially inactive, with no operations and minimal assets. Additionally, the exchange of Medizone-Nevada’s common stock for the common stock of Medizone-Delaware resulted in the former stockholders of Medizone-Delaware obtaining control of Medizone-Nevada. Accordingly, Medizone-Delaware became the continuing entity for accounting purposes, and the transaction was accounted for as a recapitalization of Medizone-Delaware with no adjustment to the basis of Medizone-Delaware’s assets acquired or liabilities assumed. For legal purposes, Medizone-Nevada was the surviving entity.
On November 18, 1987, MedCan was incorporated under the laws of the Province of British Columbia. Shortly thereafter, MedCan entered into a license agreement with the Company wherein the Company transferred to MedCan the licenses and rights necessary to permit MedCan to hold substantially the same rights with respect to the medical applications of ozone in Canada as the Company does in the United States. As consideration for the transfer, the Company received 3,000,000 shares of MedCan and, in addition, purchased 1 share for the sum of $1.00. Under a separate agreement among the Company, MedCan and Australian Gold Mines Corporation (AGMC), (which later changed its name to International Blue Sun Resource Corporation), AGMC purchased 130,000 shares of MedCan for $100,000. On December 23, 1988, MedCan was recapitalized in a transaction in which the majority of its shares were exchanged for shares of KPC Investments, (a Utah corporation) (KPC). Following this transaction, the Company owned 25,029,921 shares of KPC, representing 72% of the outstanding shares. KPC then changed its name to Medizone Canada, Ltd. (MCL). MedCan acquired all of the assets of MCL, consisting solely of cash in the amount of approximately $89,000.
In June 1998, the Company sold its interest in MCL for $125,000 cash and debt assumed of $8,417 less fees of $25,000 in a private transaction which resulted in a gain of $108,417 for the year ended December 31, 1998. The Company retained ownership, however, of all of the issued and outstanding stock of MedCan, the Canadian subsidiary.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
b.
Formation of Joint Venture
On June 22, 1995, the Company entered into a series of contracts which resulted in the formation of a joint venture subsidiary incorporated in New Zealand, Medizone New Zealand Limited (MNZ). MNZ, a privately held corporation equally owned by the Company and Solwin Investments Limited (Solwin), a New Zealand corporation, is a research and development stage company whose objective is to obtain regulatory approval for the distribution of the Company’s patented technology in New Zealand, Australia, South East Asia and the South Pacific Islands.
Pursuant to the contracts, the Company purchased 100% of MNZ from Richard G. Solomon (Solomon), a New Zealand citizen, who became a director of the Company in January 1996 and who caused the formation of MNZ on June 22, 1995. Contemporaneously with this transaction, the Company sold 50% of MNZ to Solwin, a corporation owned by Solomon, for $150,000, of which the Company thereupon loaned $50,000 to MNZ on a demand basis (see Note 1(h)).
Contemporaneous with the creation of the above share structure, the Company and MNZ entered into a Licensing Agreement (the Licensing Agreement) and a Managing Agent Agreement (the Managing Agent Agreement).
Pursuant to the Licensing Agreement, the Company granted an exclusive license to MNZ for its process and equipment patents and trademark in New Zealand. MNZ has agreed to apply for corresponding patent protection for the patents in New Zealand and to use its best effort to exploit the rights granted in the agreement. The License Agreement will terminate on the date of the expiration of the last to expire of any patent obtained in New Zealand, or, if no such patents are obtained, on June 22, 2010. The Company is to receive a guaranteed minimum royalty (the Guaranteed Minimum Royalty) in an amount to be agreed to by the Company and MNZ, commencing in the third year after all necessary regulatory approvals requisite to the license, use or distribution of the Company’s proprietary technology have been obtained in New Zealand. If the Company and MNZ are unable to agree upon the amount of the Guaranteed Minimum Royalty, the Company may terminate the license on thirty days notice. Commencing on the first sale to a user by MNZ, the Company will receive a sales royalty in an amount equal to 10% of MNZ’s gross annual sales under the License Agreement.
Pursuant to the Managing Agent Agreement, MNZ will act as the Company’s agent in the finding of other licensees of the Company’s patents and trademark in the following countries: Australia (including Australia and New Zealand), the South Pacific Islands, and South East Asia (including the Philippines, Indonesia and Vietnam). Licensing fees obtained as a result of the Managing Agent Agreement will be divided between the Company and MNZ on a sliding scale as set forth below:
Medizone International, Inc.
Medizone New Zealand Limited
Initial license
50%
50%
Subsequent license fees up to $500,000
50%
50%
Subsequent license fees between $500,000 and $750,000
75%
25%
Subsequent license fees in excess of $750,000
85%
15%
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
b.
Formation of Joint Venture (Continued)
MNZ and the Company will also divide any net royalties paid to the Company pursuant to any license obtained pursuant to the Managing Agent Agreement, with MNZ being paid 10% of the net royalties and the Company receiving 90% of the net royalties.
The principal of MNZ is Richard G. Solomon, who is also a board member of the Company. Discussions have been ongoing regarding the possibility of the Company acquiring the rights currently held by MNZ, although final terms have not yet been agreed to. Should this take place in the future, the Company would then own global rights to all of its future products.
The Managing Agent Agreement will expire on the termination or expiration of the last of the licenses obtained pursuant thereto, subject to earlier termination by the Company upon an occurrence of certain events.
Pursuant to Emerging Issues Task Force Statement No. 89-7, the Company recognized a $100,000 gain on the sale of MNZ to Solwin.
The investment in the joint venture has been recorded under the equity method of accounting as the Company does not have ultimate control of the joint venture. The investment is recorded at $-0- as of December 31, 2008.
c.
Business Activities
The Company’s objective is to gain regulatory approval for the medical uses of ozone to inactivate certain viruses and to assist in the treatment of certain diseases and to develop, promote and distribute ozone-generating equipment and related products for medical applications.
d.
Accounting Methods
The Company’s consolidated financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 year end.
e.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
f.
Basic Loss Per Share
The computations of basic loss per share of common stock are based on the weighted average number of common shares outstanding during the period of the consolidated financial statements as follows:
Common stock equivalents, consisting of warrants and options, have not been included in the calculation as their effect is antidilutive for the periods presented.
g.
Property and Equipment
Property and equipment is recorded at cost. Major additions and improvement are capitalized. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as gain or loss on sale of equipment. Depreciation is computed using the straight-line method over a period of five years.
h.
Provision for Taxes
As part of the process of preparing financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s actual current income tax exposure together with assessing temporary differences resulting from differing treatment of items for income tax and financial accounting purposes. These temporary differences result in deferred tax assets and liabilities, the net amount of which is included in the Company’s consolidated balance sheet. When appropriate, the Company records a valuation allowance to reduce its deferred tax assets to the amount that the Company believes is more likely than not to be realized. Key assumptions used in estimating a valuation allowance include potential future taxable income, projected income tax rates, expiration dates of net operating loss and tax credit carry forwards, and ongoing prudent and feasible tax planning strategies.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
h.
Provision for Taxes (Continued)
At December 31, 2008, the Company had net operating loss carryforwards of approximately $6,633,400 that may be offset against future taxable income and expire in years 2009 through 2029. If substantial changes in the Company’s ownership should occur, there would also be an annual limitation of the amount of the NOL carryforwards which could be utilized. No tax benefit had been reported in the consolidated financial statements as, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized and the carryforwards will expire unused. The tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. If the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to reduce the valuation allowance would increase income in the period such determination was made.
The income tax benefit differs from the amount computed at the federal statutory rates as follows:
Deferred tax assets at December 31, 2008 and 2007 are comprised of the following:
Net operating loss carryforwards
$ 2,587,000
$ 5,005,900
Accrued expenses
1,037,600
1,045,100
Depreciation
(100)
-
Valuation allowance
(3,624,500)
(6,051,000)
$ -
$ -
On January 1, 2007, the Company adopted Financial Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of FIN 48, the Company performed a review of its material tax positions in accordance with and measurement standards established by FIN 48. At the adoption date of January 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized. There has been no significant change in the unrecognized tax benefit during the years ended December 31, 2007 or 2008. The Company also estimates that the unrecognized tax benefit will not change significantly within the next twelve months. As the Company has significant net operating loss carry forwards, even if certain of the Company’s tax positions were disallowed, it is not foreseen that the Company would have to pay any taxes in the near future. Consequently, the Company does not calculate the impact of interest or penalties on amounts that might be disallowed.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
h.
Provision for Taxes (Continued)
The Company files income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax authorities for years before 2002.
i.
Principles of Consolidation
The consolidated financial statements include those of Medizone International, Inc. (Medizone-Nevada) and its wholly owned subsidiaries, Medizone International, Inc. (Medizone-Delaware) and Medizone Canada, Ltd (MedCan).
All material intercompany accounts and transactions have been eliminated.
j.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
k.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred.
l.
Stock Options and Warrants
Prior to 2005, the Company applied Accounting Principles Board (“APB”) 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for all stock option plans. Under APB 25, compensation cost was recognized for stock options and warrants granted to employees when the option/warrant price is less than the market price of the underlying common stock on the date of grant.
FASB Statement 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation (“SFAS No. 148”) requires the Company to provide proforma information regarding net income and net income per share as if compensation costs for the Company’s stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 148. The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that the use of APB Opinion No. 25 be discontinued and that compensation cost related to share-based employee compensation transactions be recognized in the financial statements. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company adopted the revised standard during fiscal year 2005, but had no share-based employee compensation during the year ended December 31, 2005.
During 2008, 2007 and 2006, however, the Company extended the maturity date on various common stock warrants to certain directors and outside consultants (Note 5). Stock based compensation expense for the years ended December 31, 2008 and 2007 was $86,572 and $30,737, respectively.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
m.
Patents
In March 1987, the Company acquired a patent from Immunologics Limited Partnership (Immunologics) in exchange for 1,000,000 shares of the Company’s common stock. In 1988, Immunologics purchased for $25,000, 5,000,000 shares of the Company’s common stock from the former Chairman and Chief Executive Officer of the Company.
The patent covers a procedure for “ozone decontamination of blood and blood products” through the treatment of stored blood and blood components. The Board of Directors assigned a value of approximately $700,000 to the patent based upon the fair market value of the stock on the date of acquisition together with related legal costs. The Company charged the cost of the patent to research and development expense at acquisition because the FDA has not approved the technologies covered by the patent. Additionally, the Company agreed to pay the seller a royalty fee equal to 3% of the net receipts received by the Company in connection with the sale of any product, device or apparatus which embodies the patent. The Company’s management considers the acquisition and retention of the patent to be material in its development and prospects. In 1992, the General Partner of Immunologics became chairman of the Company’s Board of Directors and subsequently resigned from the Company’s Board of Directors in September 1993.
n.
Revenue Recognition Policy
The Company currently has no source of revenues. Revenue recognition policies will be determined when principal operations begin.
o.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141(R) replaces SFAS No. 141, Business Combinations, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The impact SFAS 141(R) will have on the Company’s consolidated financial statements will depend on the nature and size of acquisitions the Company completes after it adopts SFAS 141(R).
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years; early adoption is not permitted. The adoption of SFAS 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
o.
Recent Accounting Pronouncements (Continued)
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how the instruments are accounted for under SFAS No. 133 and its related interpretations, and how the instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the potential impact of the adoption of SFAS No. 161 on its disclosures in the Company's consolidated financial statements.
In May of 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies literature established by the FASB as the source for accounting principles to be applied by entities which prepare financial statements presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. This statement will require no changes in the Company’s financial reporting practices.
In May of 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance - an interpretation of FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how Statement 60 applies to financial guarantee insurance contracts. This statement is effective for fiscal years beginning after December 15, 2008. This statement has no effect on the Company’s financial reporting at this time.
NOTE 2 -
PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2008:
Office equipment
$ 19,249
Computers and software
4,065
Furniture
6,307
29,621
Accumulated depreciation
(26,024)
Net property and equipment
$ 3,597
Depreciation expense for the years ended December 31, 2008 and 2007 was $468 and $0, respectively.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 3 -
ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2008:
Accrued payroll and consulting
$ 1,916,255
Accrued interest
360,335
Accrued payroll taxes
137,601
Other accruals
18,283
Total
$ 2,432,474
NOTE 4 -
COMMITMENTS AND CONTINGENCIES
The Company’s Board of Directors has approved the following salaries for its key officers: 1) $170,000 a year for the Company’s C.E.O. and 2) $60,000 a year for the Company’s Chief Financial Officer.
The Company is also party to litigation matters as follows:
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 the original default judgment in the amount of $143,000, plus fees totaling $21,308, at December 31, 2008. The Company intends to contest the judgment if and when they are able to obtain additional equity financing in the future.
Contingent Liabilities
As of December 31, 2008, the Company has recorded contingent liabilities totaling $224,852 related to certain past due payables in which the Company has not received invoices or demands on for over ten years. Although management of the Company does not believe that the amounts will ever be paid, in order to be conservative, the amounts are being recorded as contingent liabilities until such time as the Company is certain that no liability exists and until the statute of limitations has expired.
NOTE 5 -
ISSUANCE OF COMMON STOCK AND WARRANTS
Unless otherwise stated, all transactions shown below were with unrelated parties and the securities issued were restricted.
Medizone-Nevada initially issued 5,500,000 shares in a private transaction.
On March 26, 1986, Medizone-Nevada issued 37,500,000 shares of common stock, representing 87.2% of the then outstanding shares, to the stockholders of Medizone-Delaware, including two officers and directors, in exchange for all of the shares of Medizone-Delaware. The costs of the transactions were offset against paid-in capital.
In July 1986, the Company issued 50,000 shares of common stock to individuals for services rendered.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 5 -
ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
During the period from August 1986 through October 31, 1986, the final expiration date for exercise, warrants to purchase 7,814,600 shares together with cash totaling $781,460 were received by the Company which then issued 7,814,600 shares of new common stock. In January 1987, an additional 2,600 shares were issued in exchange for warrants and cash of $259.
In March 1987, the Company issued 1,000,000 shares of common stock in exchange for a patent (see Note 1).
In June 1987, the Company issued 950,000 shares to individuals in private transaction for aggregate proceeds of $150,000.
During the period from June 1987 through July 1987, the Company issued 203,167 shares of common stock to various vendors and individuals for services rendered in 1986 and 1987.
On August 26, 1987, an officer of the Company exercised options to purchase 250,000 shares of common stock. In January 1988, two holders exercised their options and acquired an aggregate of 200,000 shares of common stock.
On September 26, 1988, the Company sold, in a private placement, 1,000,000 shares of common stock at $0.08 per share to an individual.
During 1988, the Company issued a total of 35,000 shares of common stock for services.
During 1989, the Company issued 261,889 shares of common stock to various vendors and individuals for services rendered in 1988 and 1989. The Company also issued 5,790,000 shares to individuals in private transactions for aggregate proceeds of $291,500.
Also during 1989, the Company satisfied obligations for notes payable to and accrued interest due to unrelated individuals totaling $377,539 by the issuance of 3,899,532 shares of common stock. The Company issued 250,000 shares of common stock to an officer and 600,000 shares of common stock to three advisors to the Company as additional compensation for work done for the Company. These issuances were ascribed values of $60,650 and $145,539, respectively, by the Company. Also during 1989, two holders exercised their options and acquired an aggregate of 375,000 shares of common stock.
During 1990, the following equity transactions occurred: The Company issued 4,250,000 shares to individuals in private transactions for aggregate proceeds of $179,500; the Company satisfied obligations totaling $125,000 to the former vice president, secretary and treasurer as well as director by issuing 2,272,727 shares of common stock at $0.55 per share; the Company satisfied an outstanding account payable to an unrelated individual totaling $15,000 by the issuance of 150,000 shares of common stock at $0.10 per share; and the Company issued to an employee and four other unrelated persons as compensation or payment a total of 880,000 shares of common stock to which it ascribed a value of $88,000.
During 1991, the following equity transactions occurred: The Company issued 4,366,667 shares to individuals in private transactions for aggregate proceeds of $310,000; the Company issued a total of 425,000 shares of common stock for services and accrued liabilities of which an aggregate of 100,000 shares were issued to two directors; and three holders exercised their options and acquired an aggregate of 450,000 shares of common stock.
During 1992, the following equity transactions occurred: The Company issued 2,702,335 shares to individuals in private transactions for aggregate proceeds of $430,350; the Company issued a total of 401,500 shares of common stock for services and accrued liabilities; holders exercised options and acquired an aggregate of 250,000 shares of common s tock.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 5 -
ISSUANCE OF COMMON STOCK AND WARRANTS
During 1993, the following equity transactions occurred: The Company issued 1,471,666 shares to individuals in private transactions for aggregate proceeds of $271,000; the Company issued a total of 5,347,219 shares of common stock for services. Also, during 1993, a total of $261,915 was received in cash for 2,619,150 shares subscribed as a result of a private placement offering. The offering commenced as of November 26, 1993, with a maximum of $700,000 to be raised in gross proceeds from the sale of up to 7,000,000 shares.
During 1994, the following equity transactions occurred: The Company issued a total of 1,431,590 shares of common stock for services; the Company issued a total of 1,125,834 shares of common stock to certain prior purchasers of common stock in recognition of disparity in purchase in contemporaneous offerings. Also during 1994, a total of $680,040 was received in cash for 6,800,499 shares subscribed as a result of the offering. Subsequent to the offering, an additional $316,860 was received in cash from foreign investors subscribing to 3,168,600 shares of common stock. On December 28, 1994, the Company settled a dispute regarding the validity of notes payable to former management in the amount of $2,033,628 by agreeing to issue 11,250,000 common shares (recorded as shares subscribed) in satisfaction of the total amount of the debt.
Also in 1994, $40,000 of notes payable (a portion of loans totaling $60,000) together with interest was satisfied by issuing 416,500 shares of common stock.
During 1995, the following equity transactions occurred: The Company issued a total of 2,050,000 shares of common stock for services. $911,825 was received from investors subscribing to 9,118,260 shares of common stock. Also, 7,524,860 common shares, previously recorded as shares subscribed, were issued, and 1,242,727 were retired in accordance with the settlement agreement with former management. 200,000 of redeemable shares were converted into common stock. The Company sold shares of its New Zealand subsidiary for aggregate proceeds of $150,000.
During 1996, the Company received stock subscription agreements for the purchase of 7,254,470 shares of its common stock, together with proceeds totaling $725,447 from sales of its securities to non-United States investors, outside of the United States pursuant to Regulation S promulgated under the Securities Act of 1993. Approximately $635,447 of these proceeds were from the sale of the Company’s common stock at a per share price of $0.10 (including $37,500 for 375,000 shares from Richard G. Solomon, at the time a director of the Company). The remaining $90,000 were from the sale of 900,000 units, each unit consisting of one share of the Company’s common stock at a per share price of $0.10 to a director pursuant to the non-public offering exemption from registration under the Securities Act. In May 1996, the Company issued 600,000 shares of its common stock to employees and 250,000 shares of its common stock to its public relations consultant as additional compensation. The Company also issued 565,875 shares of its common stock to various consultants for services rendered.
During 1997, the Company issued 3,089,680 previously subscribed shares of its common stock and also issued 3,746,336 shares of its common stock to various consultants for services rendered. Also in 1997, the Company received $400,000 for subscriptions to acquire 5,714,285 shares of its common stock and warrants to purchase 9,285,715 shares of common stock at $0.07 per share, 25,000,000 shares at $0.20 per share, and 33,333,333 shares at $0.15 per share.
During 1998, the Company issued 5,714,286 previously subscribed shares of its common stock and also issued a total of 4,265,000 shares of its common stock to various individuals for services rendered. Also in 1998, the Company issued 857,142 shares of common stock through exercise of outstanding warrants at $0.07 per share for a total of $60,000, and issued 1,832,377 shares in lieu of outstanding debt of $126,418. The Company also canceled 630,000 shares for services that were never performed.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 5 -
ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
During 1999, the Company issued 25,000 shares of its common stock to an individual for services rendered valued at $1,750. In addition, the Company issued 936,507 shares of its common stock through the exercise of outstanding warrants at $0.07 per share for a total of $65,555.
During 2000, the Company issued 3,142,857 shares of common stock through the exercise of outstanding warrants at $0.07 per share for a total of $220,000. The Company issued common stock for services in two different instances during the year. One issuance was of 350,000 shares of common stock for a total of $61,250. The other issuance was for 300,000 shares of common stock for a total of $85,500. The Company issued common stock for debt in four separate instances. The first one being 2,020,000 shares of common stock issued for a total of $222,200. The second issuance was 95,000 shares of common stock for a total of $14,000. The third issuance was 20,000 shares of common stock for a total of $4,000. The fourth issuance was 100,000 shares of common stock for a total of $55,000. The Company also canceled 2,000,000 shares of common stock pursuant to the settlement agreement with the Company’s former C.F.O. (See Note 4). The Company also recognized an additional expense of $1,743,468 for the extension of warrants below market value.
During 2001, the Company issued a total of 1,422,221 shares of common stock at prices ranging from $0.15 to $0.20 per share for total proceeds of $254,981. Pursuant to these stock issuances, the Company granted warrants to purchase 2,122,221 shares of common stock at exercise prices of $0.15 to $0.20 per share. 25,000,000 warrants previously outstanding also expired during 2001, unexercised.
During 2002, the Company issued a total of 1,250,000 shares of common stock at $0.10 per share for total proceeds of $125,000. The Company also granted the investors warrants to purchase 1,250,000 shares of common stock at $0.10 per share, exercisable over a two-year term. The market price of the common stock was $0.10 per share on the date of the issuance of the shares and grant of the warrants.
Also during the year ended December 31, 2002, the Company issued a total of 677,368 shares of common stock for services rendered and repayment of outstanding debt at $0.10 per share for a total of $67,737. The Company also issued a total of 480,000 shares of common stock, pursuant to an S-8 registration, for services rendered at $0.10 per share for a total of $48,000.
During 2003, the Company issued a total of 865,000 shares of common stock at $0.05 per share for total proceeds of $43,250. The Company also granted the investors warrants to purchase 865,000 shares of common stock at $0.05 per share, exercisable over a two-year term. The market price of the common stock was $0.05 per share on the date of the issuance of the shares and grant of the warrants.
Also during the year ended December 31, 2003, the Company issued 460,000 shares of common stock at $0.05 per share in lieu of a note payable totaling $23,000 and 100,000 shares of common stock to an officer of the Company for services rendered valued at $0.05 per share for a total value of $5,000.
The Company also issued 2,000,000 shares of restricted common stock to an individual pursuant to a “Letter of Understanding / Employment” whereby the individual was issued the shares as an incentive for him to enter into a future employment agreement with the Company once initial funding is obtained. The shares have been valued at $0.02 per share, the market price of the common stock on the date of issuance. The individual was also issued 2,000,000 warrants exercisable at $0.40 per share. The warrants cannot be exercised, however, unless the individual remains employed by the Company for a minimum of three years. The warrants carry a five year term and include a cashless exercise option.
During 2007, the Company’s board of directors approved various stock issuances to the Company’s directors, officers and outside consultants for a total of 11,250,000 shares of common stock, valued at $0.02 per share or $225,000, the market value of the shares on the date that the shares were approved to be issued. These shares were eventually issued during May 2008.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 5 -
ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
During May 2008, the Company issued 8,000,000 shares of common stock for cash proceeds received during March and April 2008 totaling $80,000, or $0.01 per share.
In addition, during May 2008, a total of 5,463,333 shares of restricted common stock were issued for cash proceeds previously received during 2004, 2005 and 2006 (previously recorded as stock deposits) totaling $110,100. An additional 409,075 shares of common stock were issued to a Company director in repayment of a $2,500 loan previously received by the Company in a prior year.
During July and September 2008, the Company issued an additional 3,300,000 shares of common stock for cash proceeds of $99,000, or $0.03 per share.
Effective September 2, 2008, the Company’s board of directors approved the issuance of a total of 1,000,000 restricted shares to be issued to a public relations firm, for public relations and corporate communications services to be rendered valued at $42,000, or $0.042 per share, which represented the market value of the shares on the date that the shares were approved to be issued. The consulting agreement is based on a one-year term, the shares will vest in equal increments, and the consulting expense will be recognized over the same period. $14,000 of the $42,000 consulting expense was recognized during the year ended December 31, 2008, with the remaining $28,000 recorded as deferred consulting fees, to be recognized over the remaining eight month period at $3,500 per month.
Effective September 15, 2008, the Company’s board of directors approved the issuance of a total of 1,000,000 restricted shares to be issued to a strategic management consulting firm for services rendered valued at $40,000, or $0.04 per share, which represented the market value of the shares on the date that the shares were approved to be issued.
Effective September 19, 2008, the Company’s board of directors approved the issuance of a total of 4,000,000 free-trading shares to be issued to two individuals for management consulting services to be rendered valued at $120,000, or $0.03 per share, which represented the market value of the shares on the date that the shares were approved to be issued. The consulting agreements are based on a four-month term, the shares vest in equal increments, and the consulting expense is recognized over the same period. $96,000 of the $120,000 consulting expense was recognized during the year ended December 31, 2008, with the remaining $24,000 recorded as deferred consulting fees, to be recognized during the first quarter of 2009.
Effective November 5, 2008, the Company’s board of directors approved the issuance of 1,000,000 free-trading shares to be issued to an individual for consulting services to be rendered valued at $30,000, or $0.03 per share, which represented the market value of the shares on the date that the shares were approved to be issued. The consulting agreement is based on a six-month term, the shares vest in equal increments, and the consulting expense is recognized over the same period. $10,000 of the $30,000 consulting expense was recognized during the year ended December 31, 2008, with the remaining $20,000 recorded as deferred consulting fees, to be recognized over the remaining four month period at $5,000 per month.
Total deferred consulting fees related to the above mentioned agreements as of December 31, 2008 was $72,000 which will be recognized over the subsequent periods as previously discussed.
During December 2008, the Company issued 3,333,333 shares of common stock for cash proceeds received totaling $100,000, or $0.03 per share. Also during 2008, a director contributed services valued at $16,667.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 5 -
ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
On various dates over the past several years up to and including March 3, 2009, the Board of Directors of the Company agreed to extend the expiration date on certain of the above outstanding warrants to purchase common stock to June 30, 2009. The Company estimates the fair value of each stock award or expiration extension at the grant date or extension date by using the Black-Scholes option pricing model pursuant to FASB Statement 123, “Accounting for Stock-Based Compensation”, 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 warrants. Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero. Under the provisions of SFAS 123, additional expense of $86,572 and $30,737 was recorded for the years ended December 31, 2008 and 2007, respectively, under the Black-Scholes option pricing model for these warrant extensions.
The Company estimated the fair value of the stock warrants at the date of the maturity extension, based on the following weighted average assumptions during 2008:
Risk-free interest rate
1.48% - 2.25%
Expected life
3 to 5 months
Expected volatility
134.09% - 220.08%
Dividend yield
0.00%
A summary of the status of the Company’s outstanding warrants as of December 31, 2008 and changes during the year then ended is presented below:
Shares
Weighted Average Exercise Price
Outstanding, beginning of period
12,484,629
$0.13
Granted (extension of terms)
40,873,516
$0.14
Expired/Canceled
(43,248,516)
$(0.14)
Exercised
-
n/a
Outstanding, end of period
10,109,629
$0.13
Exercisable
10,109,629
$0.13
As of December 31, 2008, the following warrants were outstanding (these warrants were subsequently extended on March 3, 2009 to include a termination date of June 30, 2009):
Warrants
Exercise Price
Termination Dates
1,000,000
$0.20
June 30, 2009
566,666
$0.15
June 30, 2009
555,555
$0.18
June 30, 2009
250,000
$0.55
June 30, 2009
1,250,000
$0.10
June 30, 2009
865,000
$0.05
June 30, 2009
5,539,075
$0.02
June 30, 2009
83,333
$0.03
June 30, 2009
10,109,629
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 6 -
DUE TO SHAREHOLDERS
During various prior years, certain directors have advanced a total of $7,000 to the Company to cover operating expenses. These amounts are non-interest bearing, unsecured and due on demand.
NOTE 7 -
NOTES PAYABLE
Notes payable consisted of the following at December 31, 2008:
Notes payable to ten stockholders, due on demand, plus interest at 10% per annum (in arrears). The Company is obligated to accept the rate at face value plus accrued interest as partial payment for shares the lenders may purchase from the Company upon exercise of the lenders’ option to acquire shares from the Company.
$ 60,815
Notes payable to directors totaling $28,000 and a note payable to a third party in the amount of $9,000, due on April 22, 1995 (principal and accrued interest in arrears as of report date), plus interest at 8% per annum. Each lender has the right to convert any portion of the principal and interest into common stock at a price per share equal to the price per share under the most recent private placement transaction.
37,000
Notes payable to former directors and a family member of a former director, due at various dates in 1995, 1996 and 1997 (principal and accrued interest in arrears as of report date), plus interest at 8% per annum. The Company has the right to repay the loans with restricted stock at $0.10 per share if alternative financings do not occur.
182,676
Total Notes Payable
280,491
Less: Current Portion
(280,491)
Long-Term Notes Payable
$ -
The aggregate principal maturities of notes payable are as follows:
Year Ended December 31,
Amount
$ 280,491
-
-
-
-
2014 and thereafter
-
Total
$ 280,491
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 8 -
GOING CONCERN
The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States of America 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 December 31, 2008, which have resulted in an accumulated deficit of $20,570,240 at December 31, 2008. The Company does not have an established source of funds sufficient to cover its operating costs, has a working capital deficit of approximately $3,394,000, and has relied exclusively 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 obtaining additional capital, obtaining the requisite approvals from the Food and Drug Administration (“FDA”) and/or the European Union for the marketing of ozone-related products and equipment, and ultimately, upon the Company’s attaining profitable operations. The Company will require a substantial amount of additional funds to complete the development of its products, to establish manufacturing facilities, to build a sales and marketing organization, and to fund additional losses, which the Company expects to incur over the next several years.
Until mid-March 2008, the Company held the belief that it was about to be funded by a significant investor, which investor was waiting for a significant transaction to close prior to being able to fund the Company. The Company learned, however, that the significant transaction needed by the investor was being delayed and is not expected to close for a significant period of time.
During 2008, the Company has raised a total of $279,000 through the sale of 14,633,333 restricted shares of common stock at prices ranging from $0.01 to $0.03 per share, which funds have been used to bring the Company current in its reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and to pay certain other corporate obligations including the initial costs of development for its hospital sterilization initiative. An additional $200,000 was raised subsequent to December 31, 2008 through the sale of 6,666,666 restricted shares of common stock, at $0.03 per share. The Company is currently working on possible additional funding sources. If the Company is unsuccessful in finalizing additional funding, it will most likely be forced to cease operations.
Because ozone-generation for the purposes of interfacing with blood and blood products is regarded as a new drug delivery system, the Company is precluded from selling or distributing its drug or the Company’s proprietary technology (the “Medizone Technology”) in the United States until after FDA approval has been granted. In order to obtain FDA approval, the Company will be required to submit a New Drug Application (“NDA”) for review by the FDA and provide medical and scientific evidence sufficient to demonstrate that the drug and the Medizone Technology have been successfully used in pre-clinical studies followed by three phases of well-controlled clinical studies using human volunteer subjects. The FDA will not grant an NDA unless the application contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its recommended and proposed medical uses. Historically, the FDA has held a strong bias against treating humans with ozone, due largely to issues of safety. However, the Company’s hospital sterilization initiative falls outside of the regulatory requirements of the FDA since it is not a drug, therapy or medical device. The initiative will be based on sound engineering and laboratory and hospital trials. Assuming funds become available, the Company currently believes that this technology will be fully tested and ready for manufacture during late 2009.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 8 -
GOING CONCERN (Continued)
In order to initiate the first phase (i.e., Phase I) of human clinical trials required as part of an NDA, an applicant must submit to the FDA an application for an Investigational New Drug Exemption (“IND”), which contains adequate information to satisfy the FDA that human clinical trials can be conducted without exposing the volunteer human subjects to an unreasonable risk of illness or injury. The Company submitted an IND application (assigned to the Company by its former president) to the FDA on October 6, 1985, and requested FDA approval to commence human clinical trials using ozone-oxygen to inactivate HIV. The FDA deemed the IND application to be incomplete, and required the Company to conduct additional animal studies prior to commencing a large animal study and human trials. In September 1994, after not receiving responses to requests for information from the Company, the FDA inactivated the Company’s IND. The Company has no present plans to commence a large animal study, which would require, as a precursor, additional small animal and laboratory work. Accordingly, there can be no assurance that the Company’s IND application will ever be reopened. Until an NDA has been granted to the Company, it may not distribute ozone-generating devices in the United States, except to researchers who agree to follow FDA guidelines, and provided the devices are labeled as “Investigational Devices.”
Because ozone has been used to treat humans in Europe for at least 30 years, the EU is more accepting of human clinical trials of ozone therapies being conducted than is the United States. Accordingly, management believes that the Company should pursue the option of conducting human clinical trials in Europe, using stringent protocols that will meet EU standards, with a view to utilizing the results of such trials in an effort to obtain EU approval, to market the product in Europe and to reopen the Company’s FDA file. The Company estimates that 90% of its potential market is outside the United States.
Recently, the Company is pursuing the development of a novel ozone-based technology which will offer a safe, inexpensive means of disinfecting medical facilities of all bacteria, fungi and viruses known to cause hospital derived infections. Since this technology is not considered a medical treatment or a diagnostic, its developmental pathway will not be subject to regulatory review or the requirement for a lengthy clinical trial process. The Company hopes to commercialize this technology during the fourth quarter of 2009, which if successful, may provide the necessary revenue to fund additional advanced efforts with this technology for bio-terrorism counter measures, as well as other projects that the Company is working on, as previously discussed. The development time table is contingent upon acquiring the required on-going funding for this project, which at the date of this report, has not been fully secured.
The management of the Company intends to seek additional funding which will be utilized to fund additional research and continue operations. The Company recognizes that if it is unable to raise additional capital, it may find it necessary to substantially reduce or cease operations.
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 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 9 -
SUBSEQUENT EVENT
Subsequent to December 31, 2008, the Company raised an additional $200,000 through the sale of 6,666,666 restricted shares of common stock, at $0.03 per share.