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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-Q
 


(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission File Number: 2-93277-D

MEDIZONE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Nevada
87-0412648
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

4000 Bridgeway, Suite 401, Sausalito, California  94965
(Address of principal executive offices, Zip Code)

(415) 331-0303
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No þ

As of April 30, 2015, the registrant had 351,334,068 shares of common stock issued and outstanding.
 
 
MEDIZONE INTERNATIONAL, INC.
FORM 10-Q

TABLE OF CONTENTS
March 31, 2015

   
Page No.
Part I — Financial Information
 
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
7
     
Item 2.
12
     
Item 3.
14
     
Item 4.
14
     
Part II — Other Information
 
     
Item 1.
15
     
Item 2.
15
     
Item 3.
15
     
Item 4.
15
     
Item 5.
15
     
Item 6.
15
     
16


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
 
   
March 31,
   
December 31,
 
   
2015
   
2014 (1)
 
ASSETS
           
             
Current Assets:
           
Cash
 
$
33,003
   
$
140,496
 
Inventory
   
265,234
     
265,234
 
Prepaid expenses
   
68,749
     
60,705
 
Total Current Assets
   
366,986
     
466,435
 
Property and equipment, net
   
726
     
830
 
Other Assets:
               
Trademark and patents, net
   
203,690
     
208,073
 
Lease deposit
   
4,272
     
4,272
 
Total Other Assets
   
207,962
     
212,345
 
Total Assets
 
$
575,674
   
$
679,610
 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
                 
Current Liabilities:
               
Accounts payable
 
$
445,033
   
$
470,147
 
Accounts payable – related parties
   
228,109
     
233,109
 
Accrued expenses
   
524,002
     
516,434
 
Accrued expenses – related parties
   
1,978,591
     
1,928,659
 
Customer deposits
   
30,000
     
30,000
 
Other payables
   
224,852
     
224,852
 
Notes payable
   
305,950
     
298,241
 
Total Current Liabilities
   
3,736,537
     
3,701,442
 
Stockholders’ Deficit:
               
Preferred stock, $0.00001 par value: 50,000,000 shares authorized;
    no shares issued or outstanding
   
-
     
-
 
Common stock, $0.001 par value; 395,000,000 shares authorized;
    349,334,068 and 346,034,068 shares outstanding, respectively
   
349,334
     
346,034
 
Additional paid-in capital
   
30,301,585
     
30,052,656
 
Accumulated other comprehensive loss
   
(39,867
)
   
(58,098
)
Accumulated deficit
   
(33,771,915
)
   
(33,362,424
)
Total Stockholders’ Deficit
   
(3,160,863
)
   
(3,021,832
)
Total Liabilities and Stockholders’ Deficit
 
$
575,674
   
$
679,610
 
 
(1) The condensed consolidated balance sheet as of December 31, 2014 has been prepared using information from the audited consolidated balance sheet as of that date.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
 
   
For the Three Months Ended March 31,
 
   
2015
   
2014
 
             
Revenues
 
$
 -
   
$
 -
 
Operating Expenses:
               
Cost of revenues
   
 -
     
 -
 
General and administrative
   
312,832
     
289,531
 
Research and development
   
77,233
     
87,071
 
Depreciation and amortization
   
13,030
     
11,905
 
Total Operating Expenses
   
403,095
     
388,507
 
Loss from Operations
   
(403,095
)
   
(388,507
)
Interest expense
   
(6,396
)
   
(6,376
)
Net Loss
   
(409,491
)
   
(394,883
)
Other comprehensive gain on foreign
  currency translation
   
18,231
     
514
 
Total Comprehensive Loss
 
$
(391,260
)
 
$
(394,369
)
Basic and Diluted Net Loss per Common Share
 
$
(0.00
)
 
$
(0.00
)
                 
Weighted Average Number of Common Shares Outstanding
   
347,259,624
     
324,076,274
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
   
For the Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
Cash Flows from Operating Activities:
           
Net loss
 
$
(409,491
)
 
$
(394,883
)
Adjustments to reconcile net loss to net cash
 used in operating activities:
               
Depreciation and amortization
   
13,030
     
11,905
 
Stock-based compensation expense
   
81,229
     
28,427
 
Changes in operating assets and liabilities:
               
Prepaid expenses
   
22,954
     
14,162
 
Accounts payable and accounts payable – related parties
   
(30,112
)
   
(18,894
)
Accrued expenses and accrued expenses – related parties
   
57,500
     
       3,914
 
Net Cash Used in Operating Activities
   
(264,890
)
   
(355,369
)
                 
Cash Flows from Investing Activities:
               
Cost of registering patents
   
 (8,543
)
   
 (10,860
)
Net Cash Used in Investing Activities
   
(8,543
)
   
(10,860
)
                 
Cash Flows from Financing Activities:
               
Principal payments on notes payable
   
(23,291
)
   
(20,965
)
Issuance of common stock for cash
   
171,000
     
1,049,250
 
Net Cash Provided by Financing Activities
   
147,709
     
1,028,285
 
Effect of Foreign Currency Exchange Rates
   
18,231
 
   
514
 
                 
Net (decrease) increase in cash
   
(107,493)
     
662,570
 
Cash as of beginning of the period
   
140,496
     
81,856
 
Cash as of end of the period
 
$
33,003
   
$
744,426
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
   
For the Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid for interest
 
$
482
   
$
462
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
               
Financing of insurance policies
 
$
31,000
   
$
27,169
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 1     BASIS OF PRESENTATION

The financial information of Medizone International, Inc., a Nevada corporation (the “Company”) included herein is unaudited and has been prepared consistent with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all information and notes required by US GAAP for complete financial statements. These notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2014. In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.

NOTE 2     CANADIAN FOUNDATION FOR GLOBAL HEALTH

In late 2008, the Company assisted in the formation of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada. The Company helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with the Company for research purposes that is best positioned to attract the finest scientific, medical and academic professionals possible to work on projects deemed to be of social benefit; and (2) to provide a means for the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’s technology to as many in need as possible.

Accounting standards require a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity. In addition, a legal entity may be considered to be a VIE, if it does not have sufficient equity at risk to finance its own activities without relying on financial support from other parties. If the legal entity is a VIE, then the reporting entity determined to be the primary beneficiary of the VIE must consolidate its financial statements with those of the VIE. The Company determined that CFGH met the requirements of a VIE effective upon the first advance to CFGH on February 12, 2009. Accordingly, the financial statements of CFGH have been consolidated with those of the Company for all periods presented.

NOTE 3     BASIC AND DILUTED NET LOSS PER COMMON SHARE

The computations of basic and diluted net loss per common share are based on the weighted average number of common shares outstanding during the periods as follows:
 
   
For the Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
             
Numerator: Net loss
 
$
(409,491
)
 
$
     (394,883
)
Denominator: Weighted average number of common shares outstanding
   
347,259,624
     
324,076,274
 
Basic and diluted net loss per common share
 
$
(0.00
 
$
(0.00
)
 
Common stock equivalents, consisting of options, have not been included in the calculation as their effect is antidilutive for the periods presented.

NOTE 4     GOING CONCERN

The Company’s consolidated financial statements are prepared using US GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant losses from its inception through March 31, 2015, which have resulted in an accumulated deficit of $33,771,915 as of March 31, 2015.  The Company does not have funds sufficient to cover its operating costs for the next 12 months, has a working capital deficit of $3,369,551, and has relied exclusively on debt and equity financing.  Accordingly, there is substantial doubt about its ability to continue as a going concern.

 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 4    GOING CONCERN (continued)

Continuation of the Company as a going concern is dependent upon future revenues, obtaining additional capital and ultimately, upon the Company’s attaining profitable operations.  The Company will require substantial additional funds to complete the continued development of its products and product manufacturing, and to fund expected additional losses, until revenues are sufficient to cover the Company’s operating expenses.  If the Company is unsuccessful in obtaining the necessary additional funding, it will be forced to substantially reduce or cease operations.

The Company believes that it will need approximately $1,500,000 over the next 12 months for continued production manufacturing and related activities, research, development, and marketing activities, as well as for general corporate purposes.  

During 2014, the Company raised a total of $1,604,250 through the sale of 23,978,572 shares of common stock at prices ranging from $0.05 to $0.085 per share, which funds have been used to keep the Company current in its public reporting obligations and to pay certain other corporate obligations including the costs of development for its hospital disinfection system.  During the three months ended March 31, 2015, the Company raised a total of $171,000 through the sale of 3,300,000 shares of common stock at prices ranging from $0.05 to $0.07 per share.  The Company believes it will be able to raise additional funds from some of the same investors who have purchased shares from 2009 to 2015, although there can be no assurance that these investors will purchase additional shares.  

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 this uncertainty.
 
NOTE 5     COMMITMENTS AND CONTINGENCIES
 
The Company is subject to certain claims and lawsuits arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters, will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

Litigation
Rakas vs. Medizone International, Inc. - A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement.  In September 2001, the parties agreed to settle the matter for $25,000.  The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002.  On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties.  The Company has been unable to post the required bond amount as of the date of this report.  Therefore, the Company has recorded, as part of accounts payable, the original default judgment in the amount of $143,000, plus fees totaling $21,308, as of March 31, 2015 and December 31, 2014.  The Company intends to contest the judgment if and when it is able to in the future.

Other Payables
As of March 31, 2015 and December 31, 2014, the Company has $224,852 of past due payables for which the Company has not received invoices or demands for over 10 years.  Although management of the Company does not believe that the amounts will be required to be paid, the amounts are recorded as other payables until such time as the Company is certain that no liability exists and until the statute of limitations has expired.

Operating Leases
The Company operates a certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which provides a primary research and development platform.  The lease term is month-to-month with a monthly lease payment of $1,375 Canadian dollars (“CD”) plus the applicable goods and services tax (“GST”).  Leases for a second laboratory space for full scale room testing and a storage unit are on a month-to-month basis with a monthly lease payment of CD$1,375 and CD$475, respectively, plus the applicable GST.  
 
The Company has a corporate office lease with monthly payments of approximately $2,300 through December 31, 2015.


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 6     COMMON STOCK OPTIONS

In May 2012, the Company granted options for the purchase of 1,000,000 shares of common stock to a consultant for distribution channel related services to be performed.  Options totaling 550,000 shares have vested as of March 31, 2015 and the remaining options will vest on the date certified by the Company as the date that certain other milestones are achieved.  The options have an exercise price of $0.17 per share, and are exercisable for up to five years. The Company recognized no expense in connection with these options during the three months ended March 31, 2015. The Company will measure and begin recognizing the remaining expense, when the achievement of the required milestones becomes probable.

In August 2013, the Company granted options for the purchase of 250,000 shares of common stock to a consultant, of which 50,000 were immediately vested.  These options are exercisable at $0.10 per share for five years from the date of grant and are fully vested as of March 31, 2015.  The Company recognized expense of $17,660 during the three months ended March 31, 2015, as milestones were achieved for the remaining 200,000 options.

On February 26, 2014, the Company granted to a new director options for the purchase of 2,000,000 shares of common stock, with an exercise price of $0.1095 per share.  Of these options, 1,000,000 vested on February 26, 2015 and the remaining 1,000,000 options will vest upon the successful achievement of certain milestones.  Unvested options vest immediately in the event of a change in control of the Company.  The options are exercisable for five years. The Company recognized $16,017 of expense in connection with these options during the three months ended March 31, 2015. Also, the Company will measure and begin recognizing the remaining expense when the achievement of the required milestones becomes probable.

On February 26, 2014, the Company granted options to six consultants and service providers for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.1095 per share.  Options for 200,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested on January 9, 2015.  The options are exercisable for five years. The grant date fair value of these options was $24,023. The Company recognized expense of $800 in connection with these options during the three months ended March 31, 2015.

On April 30, 2014, the Company granted options for the purchase of a total of 1,350,000 shares of common stock for services rendered, as follows:  250,000 shares to each of four directors of the Company, 100,000 shares to each of two consultants, and 75,000 shares each to a consultant and an employee of the Company.  All options vested upon grant, have an exercise price of $0.163 per share, and are exercisable for up to five years.  The total value of these options at the date of grant was $193,234, which the Company recognized as expense during the three months ended June 30, 2014.

On May 6, 2014, the Company granted options to a consultant for the purchase of 100,000 shares of common stock at an exercise price of $0.19 per share.  Options for 50,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested during the three months ended March 31, 2015 when certain milestones were achieved.  The options are exercisable for five years. The Company recognized expense of $8,342 in connection with these options during the three months ended March 31, 2015.

On August 15, 2014, the Company granted options to a consultant for the purchase of 75,000 shares of common stock at an exercise price of $0.13 per share.  The shares will vest when certain required milestones are achieved.  The options are exercisable for five years.  The Company will measure and begin recognizing expense when the achievement of the required milestones becomes probable.

On August 15, 2014, the Company granted options for services rendered to a director of the Company for the purchase of 1,000,000 shares of common stock at an exercise price of $0.13 per share.  These options vested immediately upon grant and the Company recognized expense of $114,069, which was the grant date fair value of these options.

On October 7, 2014, the Company granted to a new board member options for the purchase of 1,000,000 shares of common stock, with an exercise price of $0.16 per share.  These options will vest on October 7, 2015.  Unvested options vest immediately in the event of a change in control of the Company.  The options are exercisable for five years. The grant date fair value of the options was $140,178.  The Company recognized $35,044 of expense in connection with these options during the three months ended March 31, 2015 and will continue to recognize expense over the remaining vesting period. 

 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 6     COMMON STOCK OPTIONS (continued)

On December 4, 2014, the Company granted options to four consultants for the purchase of 140,000 shares of common stock at an exercise price of $0.11 per share.  The shares will vest when certain required milestones are achieved.  The options are exercisable for five years. Of the 140,000 options, 35,000 options vested during the three months ended March 31, 2015 and $3,365 was recognized as expense. The Company will measure and recognize additional expense on the remaining options when achievement of required milestones becomes probable.

The Company estimates the fair value of each stock option award by using the Black-Scholes option-pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes option-pricing model is zero. Expense of $81,229 and $28,427 related to stock options was recorded for the three months ended March 31, 2015 and 2014, respectively.  Excluding options whose performance condition is not yet deemed probable, as of March 31, 2015, the Company had unvested outstanding options with related unrecognized expense of $70,089.  The Company will recognize this expense as these options vest over their remaining useful lives, which range from 47 to 55 months.

The Company estimated the fair value of the stock options described in the above paragraphs at the date of the grant or date of re-measurement, based on the following weighted average assumptions:
 
Risk-free interest rate
   
1.50% to 1.69
%
Expected life
 
5 years
 
Expected volatility
   
135.74% to 136.34
%
Dividend yield
   
0.00
%
 
A summary of the status of the Company’s outstanding options as of March 31, 2015 and changes during the three months then ended, is presented below:

   
Shares
   
Weighted Average Exercise Price
 
Outstanding, beginning of the period
   
18,565,000
   
$
0.180
 
Granted
   
  -
     
     -
 
Expired/Canceled
   
(250,000
   
0.190
 
Exercised
   
-
     
     -
 
Outstanding, end of the period
   
18,315,000
     
 0.180
 
Exercisable
   
15,685,000
     
 0.190
 

NOTE 7     STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS

During February and March 2015, the Company sold an aggregate of 3,000,000 restricted shares of common stock to 7 accredited investors for cash proceeds totaling $150,000, or $0.05 per share.

During February 2015, the Company sold 300,000 restricted shares of common stock to an accredited investor for cash proceeds totaling $21,000, or $0.07 per share.

During January, February and March 2014, the Company sold an aggregate of 9,000,000 restricted shares of common stock to 5 accredited investors for cash proceeds totaling $450,000, or $0.05 per share.

During March 2014, the Company sold an aggregate of 7,050,000 restricted shares of common stock to 16 accredited investors for cash proceeds totaling $599,250, or $0.085 per share.

NOTE 8     ACCOUNTS PAYABLE – RELATED PARTIES
 
As of March 31, 2015 and December 31, 2014, the Company owed $228,109 and $233,109, respectively, to certain consultants for services.  These consultants are stockholders of the Company and are related parties.

 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 9     RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP.  The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods therein.  Early adoption is not permitted.  The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related footnote disclosures.  The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  The Company is currently assessing the impact, if any, of implementing this guidance on its financial reporting.
 
NOTE 10     SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and has determined it appropriate to disclose the following event.
 
During April 2015, the Company sold an aggregate of 2,000,000 restricted shares of common stock to an accredited investor for cash proceeds of $100,000, or $0.05 per share.


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Introduction
 
Medizone International, Inc. (a Nevada corporation) and subsidiaries (collectively, “Medizone,” the “Company,” “we,” “us,” or “our”) is engaged in conducting research into the use of ozone in the disinfection of surgical and other medical treatment facilities and in other applications.  During 2012, we began to sell our patented ozone disinfection system, AsepticSure®.  Our current work is in the field of hospital disinfection, rather than human therapies.  We cannot predict when or if we will generate sufficient cash flows from operating activities to fund continuing or planned operations.  If we fail to obtain additional funding, we will be forced to suspend or permanently cease operations, and may need to seek protection under U.S. bankruptcy laws.

Recent Developments
 
As reported previously, beginning in June 2013, our AsepticSure® room disinfection system was used at Belleville General Hospital site of Quinte Health Care in Canada to treat an outbreak of MRSA, experiencing immediate elimination of all traces of MRSA from the 14-bed hospital ward, based on cultures of 120 surfaces of the treated rooms conducted before and after the treatment.  In addition to full room disinfection, all support equipment associated with each contaminated room was also disinfected using AsepticSure®.  The hospital staff confirmed as of March 31, 2015, that the ward had not experienced any new cases of MRSA involving any of the rooms treated using our system.

On March 31, 2015, we were issued U.S. Patent No. 8,992,829, “Sports Equipment and Facility Disinfection” related to the use of AsepticSure® in connection with the process for treating sports equipment and sports facility rooms to inactivate “superbug” bacteria such as MRSA, VRE and P.aeroginosa.

In April 2015, we sold 2,000,000 shares of our common stock to an accredited investor for gross proceeds of $100,000.  The funds from this offering will be used for operations.

Results of Operations
 
Three Months Ended March 31, 2015 and 2014
 
During the quarter ended March 31, 2015, we continued our primary focus on the expansion of our distribution channels, obtaining approval from the U.S. Environmental Protection Agency (“EPA”), and the development of a computer control feature for the AsepticSure® system.

For the quarter ended March 31, 2015 and 2014, we had no revenues or associated cost of goods sold.

For the quarter ended March 31, 2015, we had a net loss of $409,491, compared with a net loss of $394,883 for the quarter ended March 31, 2014.  Our primary expenses are payroll and consulting fees, research and development costs, office expenses, interest expense and stock-based compensation expense recorded as a result of options granted to directors, employees and consultants.  The increase for the three months ended March 31, 2015 compared to the prior year was due to higher stock-based compensation expense for options previously granted.
 
For the quarters ended March 31, 2015 and 2014, we incurred $312,832 and $289,531, respectively, in general and administrative expenses. The majority of these expenses were payroll, consulting fees and professional fees. The increase for the three months ended March 31, 2015 over the comparable period in the prior year was due to higher stock-based compensation expense for options granted to directors and consultants.
 
For the quarters ended March 31, 2015 and 2014, we incurred $77,233 and $87,071, respectively, in research and development expenses.  Research and development expenses include consulting fees, interface development costs, prototypes, and research stage ozone generator and instrument development.  The decrease for the three months ended March 31, 2015 over the comparable period in the prior year was due to higher stock-based compensation expense for options granted to a consultant and an employee in 2014.
 
Principal amounts owed on notes payable totaled $305,950 and $298,241 as of March 31, 2015 and December 31, 2014, respectively.  Interest expense on these obligations for the quarters ended March 31, 2015 and 2014, was $6,396 and $6,376, respectively. The interest rates on this debt range from 4.63% to 10.00% per annum.
 
 
Liquidity and Capital Resources
 
As of March 31, 2015, our working capital deficiency was $3,369,551, compared to a working capital deficiency of $3,235,007 as of December 31, 2014. We have incurred significant losses from inception through March 31, 2015, which have resulted in an accumulated deficit of $33,771,915.  The stockholders’ deficit as of March 31, 2015 was $3,160,863, compared to $3,021,832 as of December 31, 2014.  This change is due to proceeds from the sale of restricted shares of common stock being less than the net loss for the three months ended March 31, 2015.
 
We will continue to require additional financing to fund operations and to continue to test and market our hospital and medical disinfection system.  We believe we will need approximately $1,500,000 over the next 12 months for continued production manufacturing and related activities, research, development, and marketing activities, as well as for general corporate purposes.  
 
During the quarter ended March 31, 2015, we generated cash of $171,000 through the sale of 3,300,000 shares of common stock to 8 accredited investors at prices ranging from $0.05 per share to $0.07 per share.  We anticipate that we will be able to raise additional funds, as needed, from certain of the accredited investors who have purchased shares during previous years, although we have no agreements at this time with any of these investors to purchase our securities, and there can be no assurance that these investors will purchase additional shares.

Going Concern

Our unaudited condensed consolidated financial statements included in this report have been prepared on the assumption that we will continue as a going concern. There is substantial doubt that we will be able to continue as a going concern.  Through the date of this report on Form 10-Q, it has been necessary to rely upon financing from the sale of our equity securities to sustain operations as indicated above. Additional financing will be required if we are to continue as a going concern. If additional financing is not obtained in the near future, we 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 us. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing stockholders.
 
Forward-Looking Statements and Risks
 
The statements contained in this report on Form 10-Q that are not historical are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements discuss our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue and expense levels in the future and the sufficiency of existing assets to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in our Annual Report on Form 10-K for the year ended December 31, 2014.
 
We believe that many of the risks previously discussed in our SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:

·  
Rigorous government scrutiny and regulation of our products and planned products;
·  
Potential effects of adverse publicity regarding ozone and related technologies or industries;
·  
Failure to sustain or manage growth including the failure to continue to develop new products; and
·  
The potential inability to obtain needed financing or to obtain funding on terms favorable to us.
 
Critical Accounting Policies and Estimates
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of such statements requires our management 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, we evaluate these estimates, including those related to intangible assets, expenses, and income taxes. We base our 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 values of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
 

We recognize revenue when a contractual arrangement exists, product is shipped, payment from the customer is reasonably assured, and the price is fixed or determinable.  We record customer deposits that have not yet been earned as unearned revenue. Revenue is recognized only when title and risk of loss passes to the customer.
 
Our inventory consists of our AsepticSure® product and is valued on a specific identification basis.  We purchase our inventory as a finished product from unrelated manufacturing companies. We write off 100% of the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. No inventory was obsolete or excessive as of March 31, 2015.

We record compensation expense in connection with the granting of stock options and their vesting periods based on their fair values. We estimate the fair values of stock option awards issued to employees at the grant date by using the Black-Scholes option-pricing model. For stock options issued to consultants and other non-employees, we estimate the related expense using the Black-Scholes option-pricing model. For stock options with a service condition, the expense is measured at the grant date and expensed over the vesting period. For stock options with a performance condition, the expense is measured when it is probable that the performance condition will be met, subsequently re-measured at each reporting date, and trued up upon the final completion of the performance condition.

Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP.  The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods therein.  Early adoption is not permitted.  We are currently assessing the impact, if any, of implementing this guidance on the Company’s consolidated financial position, results of operations and liquidity.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related footnote disclosures.  The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  We are currently assessing the impact, if any, of implementing this guidance will have on the Company’s financial reporting.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
None.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

Our Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 15d-15(e)) as of March 31, 2015 (the end of the period covered by this quarterly report on Form 10-Q). Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed by our management in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
PART II – OTHER INFORMATION

Item 1.  Legal Proceedings
 
There were no material developments during the three months ended March 31, 2015 relative to the legal matters previously disclosed by the Company.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
During the three months ended March 31, 2015, we sold an aggregate of 3,300,000 restricted shares of common stock to 8 accredited investors for cash proceeds totaling $171,000 at prices ranging from $0.05 to $0.07 per share, as follows:
 
·  
On March 4, 2015, we sold 500,000 shares of common stock to an accredited investor for cash proceeds totaling $25,000, or $0.05 per share.
 
 
·  
On February 27, 2015, we sold an aggregate of 2,500,000 shares of common stock to 6 accredited investors for cash proceeds totaling $125,000, or $0.05 per share.
 
 
·  
On February 3, 2015, we sold 300,000 shares of common stock to an accredited investor for cash proceeds totaling $21,000, or $0.07 per share.
 
The purchasers of the shares in these private placements included existing stockholders not otherwise affiliated with the Company.  There were no underwriters or public solicitation involved in the offer or sale of these securities. The proceeds are being used for general operating expenses and the continuing development of the AsepticSure® hospital disinfection system. The offer and sale of these securities was made without registration under the Securities Act of 1933, in reliance upon exemptions from registration, including, without limitation, the exemption provided under Section 4(a)(2) of the Securities Act for private and limited offers and sales of securities made solely to accredited investors.
 
Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures

Not applicable.
 
Item 5.  Other Information
 
Not applicable.

Item 6.  Exhibits
 
Exhibit 31.1   
   
Exhibit 31.2     
   
Exhibit 32.1 
   
Exhibit 32.2 
   
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MEDIZONE INTERNATIONAL, INC.
(Registrant)


/s/ Edwin G. Marshall                                       
Edwin G. Marshall, Chairman and Chief Executive
Officer (Principal Executive Officer)


/s/ Thomas (Tommy) E. Auger                        
Thomas (Tommy) E. Auger, Chief Financial Officer
(Principal Financial and Accounting Officer)


April 30, 2015
 
 
 
 
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