UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual report under section 13 or 15(d) of the Securities Exchange Act
- --- of 1934 for the fiscal year ended December 31, 2000
Transition report under section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 for the transition period ended ______________
Commission File Number: 2-93277-D
MEDIZONE INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Nevada 87-0412648
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144 Buena Vista, P.O. Box 742, Stinson Beach, California 94970
(Address of principal executive offices) (Zip code)
Issuer's telephone number (415) 868-0300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that Medizone was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Yes __ No X
The issuer is in the development stage and had no revenues for its most recent
fiscal year.
The aggregate market value of voting common stock held by non-affiliates of the
issuer was $27,259,536 on April 4, 2001 based on the average bid and asked
prices of such stock as reported in the OTC Electronic Bulletin Board and the
"pink sheets" of the National Daily Quotation Bureau.
On April 4, 2001, Medizone had 154,615,798 shares of common stock, par value
$.001 per share issued and outstanding.
Transitional Small Business Disclosure
Format (Check one):
Yes __ No X
-
1
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 13
Item 6. Management's Discussion and Analysis or Plan of Operation 14
Item 7. Financial Statements 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 14
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management 15
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 16
Signatures 20
Exhibits Index 21
Financial Statements and Schedules F-1
2
PART I
Item 1. Description of Business
General
Medizone International, Inc., a Nevada corporation ("Medizone")
organized in 1986, is a development stage company. To date the principal
business of Medizone has been limited to (i) seeking regulatory approval for its
drug, a precise mixture of ozone and oxygen called MEDIZONE(R) (sometimes
referred to in this report as the "Drug"), 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; and (ii) developing
or acquiring the related technology and equipment for the medical application of
its products, including its drug production and delivery system (the "Medizone
Technology").
The Drug is intended to be used as a therapeutic drug in humans to
inactivate certain viruses, and thereby afford a treatment for certain viral
diseases including Human Immunodeficiency Virus (the AIDS-related virus),
Hepatitis B, Hepatitis C, Epstein-Barr, herpes and cytomegalovirus), and to
decontaminate blood and blood products.
Patents
Medizone owns two key patents. The first is a United States process
patent (U.S. Patent No. 4,632,980) entitled, "Ozone Decontamination of Blood and
Blood Products" ("Patent No. 1"). The second patent is a related United States
equipment patent (U.S. Patent No. 5,052,382) entitled "Approaches for the
Control Generation and Administration of Ozone" ("Patent No. 2").
Patent No. 1, which covers a procedure for ozone decontamination of
blood and blood products through the treatment of blood and blood components, is
Medizone's principal asset. It was purchased together with rights to other
ozone-related inventions from Immunologics Limited Partnership, L.P. ("ILP") in
1987, for 6,000,000 shares of common stock (the "Patent Purchase Agreement").
John M. Kells, the general partner of ILP, was Chairman of Medizone's Board of
Directors from November 1992 through September 1993.
The Patent Purchase Agreement requires Medizone to pay to ILP an annual
royalty equal to 3% of the net receipts (defined as net receipts after all
credits, returns and customary deductions, and exclusive of all taxes) of
Medizone received from the sale of any product, device, or apparatus embodying
Patent No. 1. The method covered by Patent No. 1 is the principal use of ozone
under study by Medizone and is the method incorporated in its regulatory
applications. In June 1990, pursuant to Medizone's request for re-examination of
Patent No. 1, the U.S. Patent Office issued a re-examination certificate,
confirming the patentability of the claims covered by Patent No. 1. This patent
will expire in 2003, subject to extension based upon the length of time required
to bring it to commercial fruition. Medizone has been granted foreign patents
based on Patent No. 1 in Canada, the European Community, Australia, Malaysia,
Hong Kong and Japan. Applications are pending in Singapore. The foreign patents
began to be issued in 1990 and will expire in most cases 17 years after their
respective dates of issuance.
Patent No. 2, which covers apparatus for the controlled generation,
monitoring and dosage of the Drug was developed by a consultant engineer to
Medizone and issued and assigned to Medizone in 1991. Patent No. 2 was developed
to provide the physical means to deploy Patent No. 1. The foreign patent
coverage of Patent No. 2 parallels the coverage of Patent No. 1.
In late 1996, Medizone became aware that a United States patent had
been issued to a Canadian corporation, which Medizone believed infringed on the
Medizone patents. Through its legal counsel, Medizone took steps to protect its
patent rights and Medizone believes that the infringing party has stopped its
infringing activities.
On March 14, 2000, Medizone was granted U.S. Patent No. 09/126,504 for
External Application of Ozone/Oxygen for Pathogenic Conditions. Medizone
believes that this patent will strengthen Medizone's existing patents as it
addresses advanced developments with ozone generating equipment.
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On May 24, 2000, Medizone received recorded assignment of U.S.
Provisional Patent Application no. 60/206,660 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.
Research and Development
Medizone does not own laboratories or other clinical research or
testing facilities. Medizone's research and development activities to date have
been conducted under contract by outside laboratories and clinicians. Gerard V.
Sunnen, MD directs Medizone's research and development activities. Dr. Sunnen is
a member of the Board of Directors and serves as President and Director of
Research of Medizone.
Pre-clinical Studies
Pre-clinical Studies are non-human studies of the Drug and related
equipment. Since 1988, Medizone has both sponsored and been the beneficiary of
research to (i) determine whether the use of ozone, either alone or with other
modalities, is efficacious in the treatment of certain diseases and (ii)
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.
Pre-clinical projects sponsored by Medizone include: (1) studies to
test ozone's ability to inactivate HIV, conducted at the State University of New
York Health Science Center at Syracuse; (2) 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 (3) 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 Medizone 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. Medizone's management 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, Medizone 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.
Governmental Regulation
The Drug, the Medizone Technology and related products are regulated
under the Food, Drug and Cosmetic Act and related regulations (the "FDC Act") by
the Food and Drug Administration (the "FDA"). 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, Medizone is precluded from
selling or distributing the Drug or the Medizone Technology until after FDA
approval has been granted. To obtain FDA approval Medizone will 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.
To initiate Phase I of human clinical studies required as part of a
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 studies can be conducted without exposing the volunteer
human subjects to an unreasonable risk of illness or injury. Medizone submitted
an IND application to the FDA on October 6, 1985, and requested FDA approval to
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commence human clinical trials using ozone-oxygen to inactivate HIV. The FDA
deemed the IND application to be incomplete and required Medizone to conduct
additional animal studies prior to commencing a large animal study followed by
human trials. In September 1994, the FDA inactivated Medizone's IND. Medizone
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 Medizone's IND application will ever be re-opened. Until an
NDA has been granted to Medizone, 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 European Union (the "EU") is more accepting than the United States of
human clinical trials of ozone therapies. Management believes Medizone should
pursue foreign Phase I human toxicity trials, as well as early stage efficacy
trials. The results anticipated from the next planned blind Phase II human
safety and efficacy trials investigating hepatitis C are expected to contribute
to satisfying regulatory requirements in the United States, Canada and other
countries.
It is Medizone's intention to pursue future trials in Canada and other
countries as soon as funding allows. Medizone believes trials successfully
completed in Canada should be acceptable to both the United States FDA and the
regulatory agencies of the European Union, due to recent harmonization of
regulatory requirements between Health Canada and the FDA.
Clinical Studies
Human Pilot Trial - Hepatitis C
Beginning in 1998 and concluding in 2000, Medizone accumulated patient
data for 40 participants in a developmental human pilot trial investigating
ozone treatment of hepatitis C. This trial was conducted during the normal
course of practice by William Hitt, Ph.D., M.D., at his clinic, The William Hitt
Center, in Tijuana, Mexico. Dr. Hitt is a former member of the Medizone board of
directors. While this trial was not conducted as a blind study as required by
the FDA and the results can serve only as anecdotal information, Medizone is
very encouraged by the results.
In this developmental ozone trial, patients were treated using major
autohemotherapy, a blood therapy treatment protocol, on an outpatient basis. The
average treatment period was 30 days. Viral load testing (detecting the levels
of the virus present), as well as standardized SGOT and SGPT tests of liver
enzyme levels were conducted 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. SGOT and SGPT scores returned
to normal ranges and viral load reductions averaged 5 log or 99.9% reduction. In
the six-month post-treatment follow up testing, 38 of the 40 patients tested at
inactive viral levels for hepatitis C virus, indicating the possibility that the
disease had been cleared by the ozone therapy they received. Two of the patients
had increased viral levels at the end of the treatment test period; however,
even those patients enjoyed significantly reduced viral load levels when
compared to pre-treatment test results.
Future Blind Trials - Hepatitis C
Medizone has entered into a research agreement with the national
research center of a foreign country to proceed with a Phase I/II human
hepatitis C trial. The protocols for the proposed testing are designed with the
intention of producing a peer-reviewed, journal-published article on Medizone's
ozone therapy for the hepatitis C virus. The trial will be blind and the data
produced will be shared by the country of origin and laboratories in Canada. We
intend to pursue future research initiatives in Canada in the near future and
this proposed trial is considered a major step toward that objective. There will
be substantial collaborative efforts made to share information with appropriate
regulatory bodies in both countries. We will not be able to pursue this
additional testing without additional financing.
Instrument Development
Medizone has entered into an agreement with Biozone Corporation
("Biozone") under which Biozone was granted worldwide manufacturing rights for
Medizone Ozone Generating Equipment. Medizone has exclusive worldwide marketing
rights for Biozone manufactured equipment intended for scientific research and
medical applications, to be marketed under the Medizone label. Biozone expects
to relocate to Nevada in the future as an integrated part of our proposed
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manufacturing facility to be located in Reno, Nevada. We have agreed with
Biozone that it may retain the right to market its other industrial
applications, such as water treatment plants. Once Medizone has obtained
regulatory approvals for its technology and protocols and is in production mode,
Biozone will phase out its other business to concentrate on its work with
Medizone.
International Activities
Medizone Canada Limited
To maximize research opportunities and the potential market for its
products, Medizone intends to establish subsidiary or affiliated corporations in
other countries. The organization of these subsidiaries may initially require
Medizone to incur significant expenses; thereafter, it is intended that the
subsidiaries would be responsible for organizing research programs and
generating possible sources of financing, from which Medizone would benefit
directly or indirectly. It is anticipated that Medizone would also enter into
license agreements with all subsidiary companies.
In June 1998, Medizone sold its majority interest in Medizone Canada
Limited, a Utah corporation ("MCL") for $125,000 cash in a private transaction.
Medizone retained ownership of 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.
The Canadian government requires that a Canadian Company must perform
research accepted under the auspices of Health Canada. Future research in Canada
will be pursued through MedCan. Future staffing of MedCan will be with Canadian
citizens and MedCan will be operated from Canada. Medizone also intends to
establish a non-profit corporation to be owned by MedCan. The future business of
the non-profit will be to aid the economically underdeveloped third world
countries in the acquisition of Medizone equipment, training of doctors, and
funding of programs for hepatitis and aids, at greatly discounted prices in
those countries.
Medizone New Zealand Limited
On June 22, 1995, Medizone entered into a series of contracts that
resulted in the formation of a joint venture subsidiary incorporated in New
Zealand, 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 ("Solomon"), a director of Medizone. MNZ is a
research and development stage company formed to obtain regulatory approval for
the distribution of Medizone's patented technology in New Zealand, Australia,
South East Asia and the South Pacific Islands.
Under these agreements Medizone purchased 100% of MNZ from Solomon and
sold 50% of MNZ to Solwin for $150,000, of which $50,000 was loaned by Medizone
to MNZ on a demand basis and repaid on October 26, 1995. On October 26, 1995,
Medizone loaned MNZ $50,000 on a demand basis, which has not been repaid as of
the date of this report. Medizone and MNZ also entered into a Licensing
Agreement (the "Licensing Agreement") and a Managing Agent Agreement (the
"Managing Agent Agreement").
Under the Licensing Agreement, Medizone granted an exclusive license to
MNZ for Patent No. 1 and Patent No. 2 and Medizone's 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. Medizone will receive a guaranteed minimum royalty, in an
amount to be agreed to by Medizone and MNZ, commencing in the third year after
all necessary regulatory approvals requisite to the license, use or distribution
of Medizone's proprietary technology have been obtained in New Zealand. If
Medizone and MNZ are unable to agree upon the amount of the guaranteed minimum
royalty, Medizone may terminate the Licensing Agreement. Commencing on the first
sale to a user by MNZ, Medizone will receive a sales royalty of MNZ's gross
annual sales under the Licensing Agreement.
Under the Managing Agent Agreement, MNZ will act as Medizone'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). Licensing fees will be divided between Medizone and MNZ on a sliding
scale as set forth below:
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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%
MNZ and Medizone will also divide any net royalties paid to Medizone
under any license entered into pursuant to the Managing Agent Agreement, with
MNZ receiving 10% and Medizone receiving 90% 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 Medizone under certain circumstances.
Competition
The market in which Medizone intends to do business is extremely
competitive. Medizone is aware of several companies that have commenced research
into the use of ozone as a virucide in the treatment of HIV and other diseases,
or that have announced the intention to do so. Other companies, foundations,
research laboratories or institutions may also be conducting similar
investigations into the use of ozone as a virucide or as a decontaminant for
blood or blood products.
Employees
As of December 31, 2000, Medizone had four full time employees.
Status of Medizone's Research
Medizone has entered into a research agreement 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 proves successful, Medizone will 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 and has since been halted while product development of the gas-serum
interface system progresses to the next stage. The interface development is
nearly complete and we expect that the veterinarian research program will begin
again in the second half of 2001. The next hepatitis C trial is also scheduled
to start as soon as we complete our preparations.
Risk Factors
Medizone's business is in the development stage and is subject to a
number of risks, including, but not limited to the following:
We are a development stage company with significant accumulated
deficits and we can expect our losses to continue for the foreseeable future.
Medizone is in the development stage and has not generated any revenues from
operations. No assurance can be given that its business activities will ever
generate revenues. As indicated in Medizone's financial statements, Medizone has
experienced substantial losses throughout its history. Losses can be expected to
continue for the foreseeable future.
Our net operating losses and our lack of revenues will require that we
finance our operations through the sale of our securities for the foreseeable
future. The sale of equity securities or of securities that are convertible to
our common stock will result in possibly significant dilution to our
shareholders and may adversely affect the trading prices of our common stock.
Medizone has funded its development activities to date primarily from the sale
of its common stock. Medizone will require substantial additional capital, which
will most likely be obtained through sales of its common stock or other
securities, to continue the research program outlined above, pay its
administrative and operating expenses, meet its filing and disclosure
obligations as a public company, and repay certain outstanding indebtedness. No
assurances can be given that Medizone will be able to obtain sufficient
additional capital for it to continue its research program, or that any
additional financing will be sufficient to satisfy Medizone's administrative and
operating expenses for any significant period of time.
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There is no established market for our technology and our technology is
not immediately marketable in the United States until we have complied with
significant governmental regulations and testing. The failure to obtain market
approval in the United States would adversely affect our future business
prospects. Medizone believes that its proprietary technology offers benefits
that are not currently found in existing purification, disinfection and
sterilization systems. To date, Medizone has not brought to market any products
incorporating the technology. Medizone has conducted only preliminary clinical,
engineering and other tests to determine the feasibility of products that could
incorporate the technology, although it believes that the technology may be
incorporated into other products and devices. Medizone has conducted
proof-of-concept tests of the technology, but there can be no assurance that
Medizone will be able to develop or market any products, or that Medizone's
technology may be successfully incorporated into any existing or future
products.
Medizone is at an early stage of development. Medizone has not received
any required governmental approvals for the use or application of the Medizone
Technology in any medical or other clinical product or device, and it has not
yet realized any revenues from the sale or license of any products. Product
revenues may not be realized from the sale or licensing of any products (if they
are identified and developed) for several years, if at all. Many of the products
and applications Medizone is currently evaluating will require significant
research and development efforts prior to any commercial use, and those
additional research and development efforts may include pre-clinical and
clinical testing, as well as a lengthy regulatory approval process. There can be
no assurance Medizone's research and development efforts will be successful,
that Medizone's potential products will prove to be safe and effective in any
required clinical trial or other governmental tests, or that any commercially
successful products will ultimately be developed by Medizone.
Our future funding needs will require significant additional capital,
which is not immediately available to us. If we fail to obtain financing at
levels required to pay for the testing and additional development of our
technology, we could be required to scale back or to even cease operations. The
identification, development and commercialization of Medizone's products and
technology will require a commitment of substantial funds to conduct research
and development activities, including possible pre-clinical and clinical
studies, to create and expand distribution and marketing capabilities and to
acquire and expand manufacturing capacity. Medizone's actual capital
requirements will depend on many factors, including but not limited to, the
costs and timing of Medizone's research and development activities, the number
and type of clinical or other tests Medizone may be required to conduct in
seeking approval of its products from governmental or other agencies, the
success of Medizone's development efforts, the cost and timing of establishing
or expanding Medizone's sales and marketing and/or manufacturing activities, the
extent to which Medizone's products (if any) gain market acceptance, Medizone's
ability to establish and maintain collaborative relationships, competing
technological and market developments, the progress of Medizone's
commercialization efforts and the commercialization efforts of Medizone's
marketing partners, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing and defending patent claims and other intellectual
property rights, developments related to regulatory issues, and other factors.
To satisfy its capital requirements, Medizone may seek to raise funds
through public or private financings, collaborative relationships or other
arrangements. Additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
Medizone to relinquish its rights to certain of its technologies, products or
marketing territories. Medizone's failure to raise capital when needed could
also have a material adverse effect on Medizone's business, financial condition
and results of operations. There can be no assurance that any such financing, if
required, will be available on terms satisfactory to Medizone, if at all.
Our business is subject to substantial government regulation, which
causes us to incur significant expense and which results in substantial delay in
the approval of our products for marketing in the United States and in other
jurisdictions. If we do not receive the required approvals, we will be required
to scale back or limit or even to cease operations. The research, development,
manufacture and marketing of Medizone's products which constitute medical
devices or products will be extensively regulated by a number of governmental
agencies, including the United States Food & Drug Administration. The FDA
requires governmental clearance of all medical devices and drugs before they can
be marketed in the United States. Similar approvals are required from other
regulatory bodies in virtually every foreign country. The regulatory processes
established by these government agencies are lengthy, expensive, and uncertain
and may require extensive and expensive clinical trials. There can be no
assurance that any future products developed by Medizone and which are subject
to the FDA's authority will prove to be safe and effective and meet all of the
applicable regulatory requirements necessary to be marketed. The results
Medizone obtains from its testing activities could be susceptible to varied
interpretations, which could delay, limit or prevent required regulatory
8
approvals. In addition, Medizone may encounter delays or denials of approval
based on a number of factors, including future legislation, administrative
action or changes in FDA policy made during the period of product development
and FDA regulatory review. Medizone may encounter similar delays in foreign
countries. Furthermore, approval may entail ongoing requirements for, among
other things, post-marketing studies. Even if a product developer obtains
regulatory approval, a marketed product, its manufacturer and its manufacturing
facility are subject to on-going regulation and inspections. Discovery of
previously unknown problems with a product, manufacturer or facility could
result in FDA sanctions, restrictions on a product or manufacturer, or an order
to withdraw and/or recall a specific product from the market. There can also be
no assurance that changes in the legal or regulatory framework or other
subsequent developments will not result in limitation, suspension or revocation
of regulatory approvals granted to Medizone. Any such events, were they to
occur, could have a material adverse effect on Medizone's business, financial
condition and results of operations.
Medizone may also be required to comply with FDA regulations for
manufacturing practices, which mandate procedures for extensive control and
documentation of product design, control and validation of the manufacturing
process and overall product quality. Foreign regulatory agencies have similar
manufacturing standards. Any third parties manufacturing Medizone's products or
supplying materials or components for such products may also be subject to these
manufacturing practices and mandatory procedures. If Medizone, its management or
its third party manufacturers fail to comply with applicable regulations
regarding these manufacturing practices, it could be subject to a number of
sanctions, including fines, injunctions, civil penalties, delays, suspensions or
withdrawals of market approval, seizures or recalls of product, operating
restrictions and, in some cases, criminal prosecutions.
Medizone's products may also be subject to regulation, inspection and
licensing by other governmental agencies, including the Environmental Protection
Agency, state agencies similar to the FDA and EPA and the Occupational Health
and Safety Administration. In addition, if Medizone engages in contract
sterilization services, Medizone's products and operations may be subject to the
infection control or other requirements of the Joint Commission on Accreditation
of Health Care Organizations, the Center for Disease Control, the Association
for Advancement of Medical Instrumentation and other federal and state agencies
that have established or maintain testing methods or sterilization process
monitoring.
Although we are currently conducting clinical tests and trials of our
technology, the outcome of such tests and trials is uncertain and cannot be
guaranteed. If our tests and trials are not acceptable to the governing
authorities, we will not obtain the approvals required to market our products in
the United States and other jurisdictions where such trials are required.
Certain of Medizone's products may constitute medical devices within the meaning
of the Food, Drug and Cosmetic Act and, therefore, may be subject to the FDA's
regulations governing medical devices. Products regulated as medical devices may
not be commercially distributed in the United States unless they have been
cleared or approved by the FDA, or unless they are otherwise exempted from the
FDA's regulations. Currently, there are two methods for obtaining FDA approval
or clearance of medical devices. Devices deemed to pose less risk are placed in
class I (general controls) or class II (general and special controls) and
qualify for 510(k) notification, a procedure under ss.510(k) of the FDA Act. In
order for a device to qualify under that procedure, the manufacturer must, among
other things, establish that the product is substantially equivalent in intended
use, safety and effectiveness to another legally marketed class I or class II
device or to a "pre-amendment" class III device for which the FDA has not called
for preliminary market approval or PMA. Medical class III is the class reserved
for devices deemed by the FDA to pose the greatest risk. Manufacturers of class
III devices must file a PMA. PMA applications generally require a much more
complex submission than a 510(k) notification and typically require a showing
that the device is safe and effective based on extensive and costly clinical and
other testing. There can be no assurance that any product developed by Medizone,
which is deemed to be a medical device for FDA Act purposes will qualify for
approval under the 510(k) notification process, or that any such products will
be deemed to be safe and effective if required to be qualified under a PMA.
The time required to obtain FDA approval is uncertain, and frequently
takes several years or more, if approval is ever granted. There can be no
assurance that any future products developed or identified by Medizone alone or
in conjunction with others will prove to be safe and efficacious in any required
clinical trials, or that they will meet the applicable regulatory requirements
necessary for their marketing, including the receipt of a marketing clearance,
should such be required. Further, if regulatory approval is granted that
approval would generally be limited to the uses for which the product has been
demonstrated through clinical studies and other means to be safe and effective.
Furthermore, approval may entail ongoing requirements for, among other things,
post-marketing studies. Even if regulatory approval is obtained a marketed
product, its manufacturer and its manufacturing facilities and pertinent
operations are subject to extensive regulation and periodic inspections. The
9
regulatory requirements pertinent to medical device manufacturing and related
activities are stringently applied and enforced by the FDA and similar
governmental agencies in other countries.
If Medizone is required to conduct clinical or other testing or trials
of its products, any such testing will need to be made in compliance with
regulations promulgated by the FDA under the authority granted it under the FDA
Act. In other countries, governmental agencies similar to the FDA also regulate
the sale of medical devices and products, generally in a manner similar to the
FDA's regulation of those products. Sales of any products to Europe also require
a "CE" mark, which shows that the product has been manufactured in accordance
with required standards. Medizone's sterilization technology has not been
approved for use in connection with or as part of any device, and there can be
no assurance that Medizone will not encounter problems in the conduct of any
clinical trials or tests it is required to complete which will cause the FDA, or
any other regulatory agencies to delay or suspend the tests or otherwise not
approve the sale of Medizone's products. If any of Medizone's products under
development are not shown to be safe and effective in any required clinical
trials, the resulting delays in developing other products or conducting related
pre-clinical testing and clinical trials, as well as the need for financing to
complete any such testing and trials, could have a material adverse effect on
Medizone's business, financial condition and results of operations.
We do not own our manufacturing capability and must rely on third
parties to manufacture the devices required for our technology. This arrangement
results in a certain loss of control over the manufacturing process and may
result in problems relating to quality control and warranty issues. Although we
plan to build or acquire our own manufacturing facility in the future, at this
time we have no manufacturing capability or capacity to produce any products
utilizing its sterilization technology, including any products to be used in any
required clinical or other tests. Medizone initially intends to develop
relationships with other companies to manufacture those components and/or
products, with Medizone being primarily in the role of specification developer
and final assembly manufacturer for selected products only. The two products
currently being developed by Medizone have never been manufactured on a
commercial scale and there can be no assurance that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. Any delay in availability of products may result in a delay in the
submission of products for any required regulatory approval or market
introduction, subsequent sales of such products, which could have a material
adverse effect on Medizone's and business, financial condition, or results of
operations. Medizone's manufacturing processes may be labor intensive and, if
so, significant increases in production volume would likely require changes in
both product and process design in order to facilitate increased automation of
Medizone's then-current production processes. There can be no assurance that any
such changes in products or processes or efforts to automate all or any portion
of Medizone's manufacturing processes would be successful, or that manufacturing
or quality problems will not arise as Medizone initiates production of any
products it might develop.
In addition, some or all of Medizone's potential products, or products
in which Medizone's sterilization technology may be incorporated, may be
required to be manufactured in accordance with current FDA or other governmental
agency manufacturing regulations. If the manufacturing facilities cannot pass a
plant inspection by the FDA, the manufacturer's ability to manufacture the
products will be adversely affected. There can be no assurance Medizone can
successfully acquire manufacturing capacity on a profitable basis, or contract
with another party on terms acceptable to Medizone, if at all.
Our reliance on patented technology may limit the scope of our
protection and may increase the cost of doing business if we are required to
enforce our rights under existing and future patents. Medizone's success will
depend, in large part, on its ability to obtain and enforce patents, maintain
its trade secrets and operate without infringing on the proprietary rights of
others, both in the United States and in other countries. The patent positions
of companies can be uncertain to some extent and involve complex legal and
factual questions, and, therefore, the scope and enforceability of claims
allowed in patents are not systematically predictable with absolute accuracy.
Medizone's license rights depend in part upon the breadth and scope of
protection provided by the patents and the validity of the patents. Any failure
to maintain the issued patents could adversely affect Medizone's business.
Medizone intends to file additional patent applications (both United States and
foreign), when appropriate, relating to its technologies, improvements to its
technologies and for specific products it develops. There can be no assurance
that any issued patents or pending patent applications of Medizone will not be
challenged, invalidated or circumvented. There can also be no assurance that the
rights granted thereunder will provide proprietary protection or competitive
advantages to Medizone.
The commercial success of Medizone will also depend, in part, on
Medizone not infringing patents issued to others and not breaching any
technology licenses upon which Medizone's products and services are based. It is
10
uncertain whether any third party patents will require Medizone to alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents have been issued to others, which contain competitive or conflicting
claims and such claims are ultimately determined to be valid, Medizone may be
required to obtain licenses to those patents or to develop or obtain alternative
technology. If any licenses are required, there can be no assurance Medizone
will be able to obtain any such licenses on commercially favorable terms, if at
all. Medizone's breach of an existing license or its failure to obtain a license
to any technology that it may require in order to commercialize its products may
have a material adverse impact on Medizone's business, results of operations and
financial condition. Further, litigation, which could result in substantial
costs to Medizone, may also be necessary to enforce patents licensed or issued
to Medizone or to determine the scope or validity of third party proprietary
rights. If competitors of Medizone prepare and file patent applications in the
United States that claim technology also claimed by Medizone, Medizone may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to Medizone, even if the eventual outcome is favorable to
Medizone. An adverse outcome could subject Medizone to significant liabilities
to third-parties, require disputed rights to be licensed from third-parties or
require Medizone to cease using such technology.
Medizone also relies on secrecy to protect portions of its technology
for which patent protection has not yet been pursued or which is not believed to
be appropriate or obtainable in addition to any information of a confidential
and proprietary nature relating to Medizone, including but not limited to its
know-how, trade secrets, methods of operation, names and information relating to
Medizone's vendors or suppliers and customer names and addresses. This
technology includes technology that Medizone acquired from two parties in
connection with, but separate from, the patented technology from Biozone, a
portion of which Medizone has acquired and a portion of which it has obtained a
license to use. There can be no assurance that Medizone's undivided ownership
and/or license rights in such technology are enforceable.
Medizone intends to protect this unpatentable and unpatented
proprietary technology and processes, in addition to other confidential and
proprietary information in part, by confidentiality agreements with its
employees, collaborative partners, consultants and certain contractors. There
can be no assurance that these agreements will not be breached, that Medizone
will have adequate remedies for any breach, whether Medizone's trade secrets and
other confidential and proprietary information will not otherwise become known
or be independently discovered or reverse-engineered by competitors.
We face competition in some of our markets from well-funded and
significantly larger companies, some of which enjoy significant name recognition
or market share in the pharmaceutical and related industries. We may not be
successful in our efforts to compete with these companies. There can be no
assurance Medizone's technology will have advantages over those of its
competitors, which will be significant enough to cause users to adopt its use.
The products in which Medizone's technology may be incorporated will compete
with products currently marketed, and competition from such products is expected
to increase.
Most of the companies currently producing products or using techniques
have significantly greater financial resources and expertise in research and
development, marketing, manufacturing, pre-clinical and clinical testing,
obtaining regulatory approvals and marketing than Medizone. Smaller companies
may also prove to be significant competitors, particularly through collaborative
arrangements with large third parties. Academic institutions, governmental
agencies and public and private research organizations also conduct research,
seek patent protection and establish collaborative arrangements for product and
clinical development and marketing. Many of these competitors have products or
techniques approved or in development and operate large, well-funded research
and development programs. Moreover, these companies and institutions may be in
the process of developing technology that could be developed more quickly or
ultimately proved safer or more effective than Medizone's technology.
Medizone faces competition based on product efficacy, safety, the
timing and scope of regulatory approvals, availability of supply, marketing and
sales capability, reimbursement coverage, price and patent position. There can
be no assurance Medizone's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than Medizone.
Our business and our proposed business will subject us to the potential
for product liability claims if people using our technology suffer bodily
injury, including death. Although we intend to insure for this liability, the
claims might in some cases exceed the amount of coverage available to us. The
testing, marketing and sale of medical or clinical products and other products
that may utilize Medizone's technology involve unavoidable risks. The use of any
11
of Medizone's potential products in clinical or other tests or as a result of
the sale of its products, or the use of its technology in products, may expose
Medizone to potential liability resulting from the use of such products. Such
liability may result from claims made directly from consumers or by regulatory
agencies, companies or others selling such products. Medizone currently has no
clinical trial or product liability insurance coverage, although it anticipates
obtaining and maintaining appropriate insurance coverage as clinical or other
development of its product candidates progresses and if and when its products
are ready to be commercialized. There can be no assurance Medizone will be able
to obtain such insurance or, if it obtains such insurance, that such insurance
can be acquired at a reasonable cost or in sufficient amounts to protect
Medizone against such liability. The obligation to pay any product liability
claim in excess of whatever insurance Medizone is able to acquire, or the recall
of any of its products (or the products incorporating Medizone's technology)
could have a material adverse effect on Medizone's business, financial condition
and future prospects.
Our business activities may involve the use and storage of hazardous
substances that are subject to government restrictions and regulation,
increasing our potential liability to third parties and the cost of doing
business in order to comply with applicable regulations. Medizone's research and
development activities, and the application of Medizone's technology, may
involve the controlled use of materials, substances or electro-magnetic
radiation that may, if used or employed improperly, prove hazardous. Medizone
believes, however, that its technology employs such potentially hazardous or
toxic materials and substances in a manner that minimizes their adverse effects.
Further, where such hazards are employed, Medizone intends to utilize
appropriate detection equipment and take appropriate countermeasures in design,
or in the test lab environment.
We have only a limited staff and if we are to succeed in implementing
our business plan we will need to engage and retain trained and qualified staff.
There is no assurance that we will succeed in attracting the personnel needed to
meet our needs. Medizone is dependent on the principal members of its scientific
and management staff. In addition, Medizone anticipates that it will rely upon
consultants and advisors to assist it in formulating its research and
development strategies and operations. Retaining and attracting qualified
personnel, consultants and advisors will be critical to Medizone's success. In
order to pursue its product development and marketing plans, Medizone will be
required to hire additional qualified scientific personnel, as well as personnel
with expertise in clinical testing, governmental regulation, manufacturing and
marketing. Expansion of product development and marketing are also expected to
require the addition of management personnel and the development of additional
expertise by existing management personnel. Medizone faces competition for
qualified individuals from numerous medical and clinical companies, universities
and other research institutions. There can be no assurance Medizone will be able
to attract and retain such individuals on acceptable terms, when needed, and to
the degree required.
Medizone anticipates that any clinical development or other approval
tests in which it participates will be augmented by agreements with universities
and/or medical institutions or other personnel. It is likely that Medizone's
academic collaborators will not be employees of Medizone. As a result, Medizone
will have limited control over their activities and can expect that only limited
amounts of their time will be dedicated to Medizone's activities. Medizone's
academic collaborators may have relationships with other commercial entities,
some of which could compete with Medizone.
It is not possible to predict the impact that future government
regulatory activity might have on our business and the cost of compliance with
future regulatory schemes may adversely affect our results of operations.
Medizone currently anticipates that one or more of its potential products may
constitute medical products. Recently, a series of legislative and regulatory
proposals has been initiated with the aim of changing the United States health
care system. While Medizone cannot predict whether any such legislative or
regulatory proposals will be adopted, or the effect such proposals may have on
its business if they are adopted, the pendency of such proposals could have a
material adverse effect on Medizone's ability to raise capital, and the adoption
of such proposals could have a material adverse effect on Medizone's business,
financial condition and results of operations. Furthermore, Medizone's ability
to develop, identify or commercialize its potential product portfolio (which
includes medical and clinical applications) may be adversely affected to the
extent that such proposals have a material adverse effect on the business,
financial condition and profitability of other companies that are prospective
collaborators for certain of Medizone's proposed products.
You should consider this cautionary warning concerning forward-looking
statements in this report. Certain statements in this report constitute
"forward-looking statements" within the meaning of the rules and regulations
promulgated by the Securities and Exchange Commission. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Medizone, or
12
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include, among other
things, Medizone's unprofitability and the continuing uncertainty of its
profitability, Medizone's ability to develop and introduce new products,
Medizone's lack of sales, marketing and distribution experience and anticipated
dependence on third parties for such matters, the risks associated with
obtaining governmental approval of Medizone's products, the highly competitive
industry in which Medizone intends to operate and the rapid pace of
technological change within those industries, the uncertainty of patent and
proprietary technology protection and Medizone's reliance on such patent and
proprietary technology (including reliance on technology licensed from third
parties), changes in or failure to comply with governmental regulation, the
uncertainty of third party reimbursement for Medizone's products, Medizone's
dependence on key employees, general economic and business conditions and other
factors referenced above.
Item 2. Properties
Medizone's offices are located at 144 Buena Vista Ave., Stinson Beach,
California. The offices are located temporarily in the home of Medizone's CEO,
Edwin Marshall. When financial resources permit, Medizone intends to remain in
the San Francisco Bay Area and lease office space that will allow for additional
staffing. Medizone pays $100 a month for a storage area for Medizone's archives
and pays or reimburses all telephone and related expenses incurred by or for
Medizone.
Item 3. Legal Proceedings
None.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Medizone's shares are traded in the over-the-counter market, with price
quotes listed on the OTC Electronic Bulletin Board under the trading symbol
"MZEI," and in the "pink sheets" published by the National Quotation Bureau.
The following table summarizes data from the National Quotation Bureau,
indicating the high and low bid prices for a share of Medizone's common stock
during each of the four calendar quarters of fiscal 2000 and 1999. These prices
reflect inter-dealer prices without retail markup, markdown or commission, are
not necessarily representative of actual transactions, or of the value of
Medizone's securities, and are, in all likelihood, not based upon any recognized
criteria of securities valuation as used in the investment banking community.
Bid Price
Year Calendar Period High Low
2000 First Quarter $0.80 $0.16
Second Quarter $0.66 $0.27
Third Quarter $0.52 $0.30
Fourth Quarter $0.41 $0.14
1999 First Quarter $0.10 $0.07
Second Quarter $0.17 $0.07
Third Quarter $0.20 $0.13
Fourth Quarter $0.13 $0.08
As of April 4, 2001, there were approximately 3,839 holders of record
of Medizone's common stock, and approximately 4,511 beneficial owners.
Medizone has never paid cash dividends on its common stock. Payment of
cash dividends is subject to the discretion of the Board of Directors and is
dependent upon various factors, including Medizone's earnings, capital needs and
general financial condition. To date Medizone has had no revenues or earnings.
Medizone does not believe that it has any immediate prospect of earnings.
However, Medizone anticipates that in the foreseeable future, it will follow a
policy of retaining earnings, if any, to finance research and development.
13
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
From its inception in January 1986, Medizone has been a development
stage company primarily engaged in research into the medical uses of ozone.
Medizone has not generated, and cannot predict when or if it will generate,
revenues or sufficient cash flow to fund its continuing operations.
Medizone has had no sales. In 1999, Medizone had no revenues. In
January 2000, Medizone received payment of $415,869 under an order of
restitution entered against its former President and CEO, Joseph Latino.
The company spent $170,000 for research and development in 2000,
compared to $75,000 in 1999. Since inception Medizone has spent a total of
$2,577,853 for research and development.
General and administrative expenses were $787,610 in 2000, compared to
$198,308 in 1999. These expenses include professional fees, payroll, insurance
costs and travel expenses.
Notes payable totaled $280,491 in 2000, compared to $280,491 in1999.
Interest expense on these obligations totaled $22,439 in 2000, compared to
$22,439 in 1999.
Liquidity and Capital Resources
At December 31, 2000, Medizone had a working capital deficiency of
$989,548 and a stockholders' deficiency of $974,571 compared to a working
capital deficiency of $1,198,518 and stockholders' deficiency of $1,192,850 in
1999.
Medizone will continue to require additional funding to enable it to
fund research necessary to make the appropriate regulatory application and
continue operations. It is expected that these funds will be generated by the
sale of Medizone's securities.
Recent Developments
Subsequent to the year-end, we funded operations through the sale of
securities as follows.
On February 16, 2001, we sold 500,000 shares of common stock to an
accredited investor at a price of $0.20 per share, or gross proceeds of
$100,000. In connection with this sale, we also issued to the investor warrants
to purchase an additional 1,000,000 shares of stock at $0.20 per share. The
warrants expire in two years.
On March 21, 2001, we sold 200,000 shares of common stock to an accredited
investor at $0.15 per share, or gross proceeds of $30,000. We also granted the
investor warrants to purchase 400,000 shares of stock at $0.15 per share,
exercisable over a two-year term.
14
Part III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The following table contains information concerning the directors and
executive officers of Medizone as of March 30, 2001.
Name Age Position
Edwin G. Marshall 58 Chairman of the Board, CEO
Gerard V. Sunnen 58 Director, President
Richard G. Solomon 58 Director
Jill C. Marshall 49 Chief Operating Officer, Corporate Secretary
Kevin R. Andersen 49 Chief Financial Officer
Edwin G. Marshall became Chairman of the Board & Chief Executive
Officer in April 1998 and has been with Medizone 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 interests in the ownership of a real estate brokerage, a vacuum forming
business in the plastics industry, an industrial computer controls company, and
an automobile and truck dealership. Since 1992 he has concentrated on his own
investments, and since 1997 devoted substantially all of his time to management
responsibilities with Medizone.
Gerard V. Sunnen, M.D. became a Director of Medizone in June 1997,
Director of Research in 1997 and President in 1998. He graduated from Rutgers
University in 1963 and from the medical school of the State University of New
York, Downstate, in 1967. Dr. Sunnen has practiced psychiatric medicine since
his graduation from medical school and has taught clinical psychiatry at New
York University Medical Center since 1977, where he is now an Associate Clinical
Professor of Psychiatry. He is currently a consultant to several organizations
and companies, including the Institute for Behavior Therapy and the Training
Institute for Mental Health Practitioners in New York. He is a member of the
American Psychiatric Association, the American Society of Clinical Hypnosis, the
International Association of Emergency Psychiatry, of which he is Honorary
President, and the World Psychiatric Association, where he is currently Vice
President of the Section for Emergency Psychiatry. He received the Chevalier de
l'Ordre du Merite from the French government in 1990 for his work in assisting
members of the French community in New York. Dr. Sunnen has written and lectured
extensively on psychiatric medicine and medical hypnosis. Dr. Sunnen has also
written on the medical applications of ozone.
Richard Garrett Solomon, Director and Executive Officer of Medizone
New Zealand Limited, a partially owned subsidiary of Medizone. Mr. Solomon first
invested in Medizone in 1992. In 1995, Medizone New Zealand was formed as a
50/50-owned joint venture owned by Mr. Solomon and Medizone. Between January
1996 and February 1997, Mr. Solomon was a director of Medizone. He was
reappointed to the board of directors to replace Dr. William Hitt in May 2000.
Mr. Solomon received a Bachelor of Commerce (University of Otago), Diploma of
Business and Industrial Administration (University of Auckland), and 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.
Jill C. Marshall, NMD has been the Chief Operating Officer, Corporate
Secretary, and Director of Investor Relations of Medizone since April 1998. Dr.
Marshall is the recipient of a Doctor of Naturopathic Medicine degree from The
Southern College of Naturopathic Medicine and a Bachelor of Arts degree from
California State University at Long Beach majoring in Sociology and Health
Education. She brings a successful background in Naturopathic healing, teaching,
sales training and marketing to Medizone with 20 years experience working in
15
corporate environments. Dr. Marshall's previous sales and marketing clients
include: Foundation Health, Plus Financial, Principal Financial Group, Paul
Revere Companies, Discovery Toys, Lotus Development, Pacific Bell, PG&E and Blue
Shield of California. Dr. Marshall is the wife of Ed Marshall, Medizone's CEO.
Kevin R. Andersen, CPA, MS, was appointed Chief Financial Officer in
November 1998. Mr. Andersen is a partner in Andersen, Andersen & Strong L.C.,
Certified Public Accountants, who previously served as Medizone's auditors for
the past four years ended December 31, 1997. Mr. Andersen has a Master of
Science in Taxation (graduating Phi Kappa Phi) from UNLV and a Bachelor of
Science in Accountancy from the University of Utah. His professional experience
includes work as a Senior Tax Manager with the national accountancy firm of
Laventhol & Horwath, working in their Las Vegas office and National Tax
Department in Washington, D.C.
Item 10. Executive Compensation
The following Summary Compensation Table shows compensation paid by the
Company to the Chief Executive Officer of the Company for each of the past 2
years. No officer of the Company was paid more than $100,000 during 1999.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
Name and Principal
Position Year Salary Bonus Options (#)
Edwin G. Marshall 2000 $99,166 (1) $ 0 0
Chairman and CEO 1999 $ 0 (2) $ 0 0
1998 $75,000 (3) $ 0 0
(1) The board of directors established the CEO's compensation package for
year 2000 to be $170,000. However, cash flow did not provide sufficient
funds to pay all of the accrued salary. The company remains indebted to
the CEO for the balance of the compensation payable in 2000.
(2) No cash compensation was paid in 1999. In January 2000, the board of
directors authorized the issuance of 750,000 shares of common stock,
valued at $.175 per share, as payment of compensation for calendar year
1999.
(3) In 1998, the board of directors authorized and caused the issuance of
1,500,000 shares of common stock, valued at $.05 per share, as payment
of compensation for Mr. Marshall's services as CEO. The shares of
common stock issued in 2000 and in 1998 were valued at the closing
price of Medizone's common stock as reported by the OTC Bulletin Board
on the dates of issue.
Employment Contracts and Termination of Employment Arrangements
Medizone has no employment agreements with any employee at this time.
Compensation Committee Interlocks and Insider Participation
Medizone's board of directors does not have a compensation committee.
The board of directors determines matters concerning the compensation of
executive officers.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table contains information as of April 4, 2001, regarding
beneficial stock ownership of (i) all persons known to Medizone to be beneficial
owners of more than 5% of the outstanding common stock; (ii) each director and
each person who served at any time during fiscal year 2000 as CEO of Medizone,
and (iii) officers and directors of Medizone at December 31, 2000 as a group.
Each of the persons in the table below has sole voting and dispositive power as
to all of the shares shown as beneficially owned by them except as otherwise
indicated.
16
Number of Shares Percent of
Name and Address Beneficially Owned Outstanding Shares
Edwin G. Marshall 12,123,373 (1) 7.7%
Chairman of the Board,
Chief Executive Officer
P.O. Box 742
Stinson Beach, CA 94970
Gerard V. Sunnen, MD 3,779,462 2.4%
Board Member
President and Director of Research
200 East 23rd Street
New York, NY 10016
Richard G. Solomon 7,199,001 (2) 4.6%
Board Member, Medizone International
Director, Medizone New Zealand, Ltd.
77 Seaview Road
Remuera, Auckland 1005
New Zealand
Jill C. Marshall, ND 12,123,373 (3) 7.7%
Chief Operating Officer,
Corporate Secretary
P.O. Box 742
Stinson Beach, CA 94970
Kevin Andersen 145,000 (4) *
Chief Financial Officer
8760 Hidden Oak Drive
Salt Lake City, UT 84121
All Officers and Directors 23,246,836 15.0%
as a Group (5 persons):
* Less than 1%.
(1) Amount indicated includes (i) 920,000 shares owned of record by
Jill Marshall, Mr. Marshall's wife and the COO, (ii) 4,936,507 shares owned of
record by Sand Dollar, a limited partnership of which Mr. Marshall is the
general partner, (iii) 6,079,366 shares owned directly by Mr. Marshall, and (iv)
187,500 shares held in street name.
(2) Amount indicated includes combined holdings of Mr. Solomon
individually and of Solwin Investments Ltd.
(3) Amount indicated includes (i) 920,000 shares owned of record, (ii)
4,936,507 shares owned by Sand Dollar, of which her husband is the general
partner, (iii) 6,079,366 shares owned by Ed Marshall, Mrs. Marshall's husband,
and (iv) 187,500 shares held in street name.
(4) All shares held in the name of Mr. Andersen's wife, Debra
Andersen.
(5) Based on a total of 154,615,798 shares outstanding.
17
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 the company's 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%-holder, which would require the filing of any
report pursuant to Section 16(a) during the fiscal year ended December 31, 1999,
that was not timely filed with the Commission.
Item 12. Certain Relationships and Related Transactions
In June 1997, the company issued warrants to The Sand Dollar Solution
to purchase an aggregate of 73,333,333 shares of common stock in connection with
funding arranged or provided by Sand Dollar. Sand Dollar purchased 5,714,286
shares of common stock upon exercise of part of the warrants, at a price of $.07
per share, for a total purchase price of $400,000.
In 1998, Sand Dollar exercised warrants to purchase a total of 857,142
shares of common stock at $.07 per share, or a total of $60,000.
In 1999, Sand Dollar exercised warrants to purchase a total of 936,507
shares of common stock at $.07 per share, or a total of $65,555.
In January 2000, Sand Dollar exercised warrants to purchase 3,142,857
shares of common stock at $.07 per share, or a total of $220,000. In April 2000,
warrants for the purchase of 37,682,540 shares of common stock at prices ranging
from $0.07 per share to $0.15 per share expired. An affiliate of Sand Dollar
continues to hold warrants for the purchase of 25,000,000 shares at $0.20 per
share, which expire on May 31, 2001.
The shares issued upon exercise of the Sand Dollar warrants were not
registered under the Securities Act of 1933 in reliance upon exemptions from
registration, including those created by the safe harbor provisions of
Regulation D under the Act for offerings made solely to accredited investors.
The shares are "restricted shares" as that term is defined under the Act and the
transfer and sale of the shares is therefore subject to the limitations and
restrictions imposed by the federal and state securities laws applicable to
shares issued in private or non-public sales of securities.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
2 Agreement and Plan of Reorganization dated March 12, 1986 (2)
3.1 Articles of Incorporation of Company (2)
3.2 Bylaws (2)
3.3 Articles of Amendment to Company's Articles of Incorporation
(3)
10.1 Patent Agreement, dated February 26, 1987. (3)
10.2 Assignment of Distributor Agreement by Terrence O. McGrath
to Medizone Delaware, dated February 4, 1986, and Distributor
Agreement between Terrence O. McGrath and Dr. J. Hansler
GmbH, dated September 25, 1985 (3)
10.3 Letter confirmation and Protocol, dated June 2, 1986, with
regard to research to be conducted by the State University of
New York at Syracuse (2)
18
10.4 Consulting Agreement between P.J. Watrous & Co., Inc. and
Medizone (2)
10.5 Consulting Agreement between Jeffrey Freed, MD, PC and
Medizone (2)
10.6 Consulting Agreement between Joseph Latino and Medizone (2)
10.7 Consulting Agreement between Susan Golden, RN and Medizone
(2)
10.8 Stock Option of Joseph Latino (2)
10.9 Stock Option of Jeffrey Freed (2)
10.10 Stock Option of Susan Golden (2)
10.11 Stock Option of Hubert Weinberg (2)
10.12 Agreement dated June 16, 1987, between Company and Oliver
Grace (5)
10.13 Agreement dated June 26, 1987, between Company and John Grace
(5)
10.14 Agreement dated June 26, 1987, between Company and Oliver
Grace (5)
10.15 Agreement dated June 30, 1987, by and among Company and
John C. Black, Dr. Gerard V. Sunnen and Dr. Priyakant S.
Doshi (5)
10.16 License Agreement with MCL Medizone Canada Ltd. dated
November 18, 1987 (5)
10.17 Agreement dated October 1988 by and among Immunologics,
Limited Partnership, John M. Kells, Y. C. Zee, David C.
Bolton and Medizone International, Inc. (6)
10.18 Form of Stock Purchase Agreement between Company and
individuals who purchased shares from Company (7)
10.19 Letter agreement between Company and Rebus Oil Co., Ltd.
dated July 28, 1992 (8)
10.20 Letter of understanding between Company and the RMB Group
of Boston dated August 10, 1992 (8)
10.21 Agreement between Company and Rebus Oil Company, Ltd., dated
as of October 20, 1992 (9)
10.22 Letter agreement among Messrs. McGrath, Watrous, Melera,
Chou, Kells, Handel and Pealer, dated as of November 10,
1992 (9)
10.23 Loan agreement with Messrs. McGrath and Watrous dated as of
November 16, 1992 (9)
10.24 Settlement agreement with former consultant dated February
12, 1993 (9)
10.25 Consulting Agreement with Joseph S. Latino dated as of
January 1, 1993 (9)
10.26 Consulting Agreement with Arthur P. Bergeron dated as of
January 1, 1993 (9)
10.27 Employment Agreement with Katherine M. Kalinowski dated as of
January 1, 1993 (9)
10.28 Consulting Agreement with Roger Shelley dated as of January
1, 1993 (9)
10.29 Consulting Agreement with Jeannette Arsenault dated as of
January 1, 1993 (9)
19
10.30 Loan Agreements between Company and John Kells, George
Handel and John Pealer, executed as of June 11, 1993 (and
promissory notes) (9)
10.31 Promissory Note to Joseph S. Latino dated as of October 26,
1993 and Acceptance Form dated as of November 26, 1993 (9)
10.32 Letter Agreement dated March 23, 1993 between Company
and the Italian Scientific Society (10)
10.33 Contract between Company and Capmed USA (10)
10.34 Agreement made as of May 18, 1994, among Medizone
International, Inc., Medizone Canada Ltd., John M. Kells,
George Handel, John Pealer, Joseph S. Latino, Terrence O.
McGrath and Philip J. Watrous (11)
10.35 Agreement made as of January 1, 1995, between Medizone
International, Inc. and Joseph S. Latino (11)
10.36 Agreement made as of January 1, 1995 between Medizone
International, Inc. and Arthur P. Bergeron (11)
10.37 Agreement made as of January 1, 1995 between Medizone
International, Inc. and Giacomo C. DiGiorgio, MD (11)
10.38 Lease Agreement between Medizone International, Inc.
and Benabi Realty, made on September 27, 1991, as extended,
January 17, 1995 (11)
10.39 Agreement for Sale and Purchase of Shares in Medizone New
Zealand Limited between Richard G. Solomon and Medizone
International, Inc., dated June 22, 1995 (12)
10.40 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 (12)
10.41 Licensing Agreement between Medizone International, Inc.
and MNZ, dated June 22, 1995 (12)
10.42 Managing Agent Agreement between Medizone International,
Inc. and Medizone New Zealand Limited, dated June 22, 1995
(12)
10.43 Lease Agreement between Medizone International, Inc. and
Linmar L.P., dated January 17, 1996 (13)
10.44 Agreement between Medizone International, Inc. and
Multiossigen S.r.l., dated as of September 13, 1996 (14)
10.45 Agreement between Medizone International, Inc. and JRH
Biosciences, Inc., dated April 17, 1997 (15)
10.46 Lease Agreement between Medizone International Inc. and
Eagle Overlook, L.C., made on September 23, 1997 (16)
16 Letter re: change in certifying accountants (17)
(1) Incorporated by reference to Medizone's annual report on form 10-K for
the year ended December 31, 1998.
20
(2) Incorporated by reference to Medizone's registration statement
on Form S-18 (Registration No. 2-93277-D), effective May 14, 1985.
(3) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1986.
(4) Incorporated by reference to Medizone's current report on Form 8-K,
filed March 13, 1987.
(5) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1987.
(6) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1988.
(7) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1989.
(8) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1990.
(9) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1992.
(10) Incorporated by reference to Medizone's current annual report on Form
8-K dated September 8, 1993.
(11) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1994.
(12) Incorporated by reference to Medizone's current annual report on Form
8-K, dated June 22, 1995.
(13) Incorporated by reference to Medizone's annual report on Form 10-K
for the period ended December 31, 1995.
(14) Incorporated by reference to Medizone's current report on Form 8-K,
dated October 17, 1996.
(15) Incorporated by reference to Medizone's current report on Form 8-K,
dated May 5, 1997.
(16) Incorporated by reference to Medizone's current report on Form 8-K
dated September 24, 1997.
(b) Reports on Form 8-K.
None.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant 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
Date: April 12, 2001
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities shown
and on the date indicated.
Date: April 12, 2001 /s/ Edwin G. Marshall
------------------------------------------------
Edwin G. Marshall, Chief Executive Officer and
Director
Date: April 12, 2001 /s/ Gerard V. Sunnen
------------------------------------------------
Gerard V. Sunnen, President and Director
Date: April 12, 2001 /s/ Kevin R. Andersen
------------------------------------------------
Kevin R. Andersen, Chief Financial Officer and
Principal Accounting Officer
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
1
C O N T E N T S
Independent Auditors' Report.................................................. 3
Consolidated Balance Sheet.................................................... 4
Consolidated Statements of Operations......................................... 6
Consolidated Statements of Stockholders' Equity (Deficit) .................... 7
Consolidated Statements of Cash Flows.........................................15
Notes to the Consolidated Financial Statements................................17
2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Medizone International, Inc. and Subsidiary
(A Development Stage Company)
Stinson Beach, California
We have audited the accompanying consolidated balance sheet of Medizone
International, Inc. and Subsidiary (a development stage company) as of December
31, 2000, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended December 31, 2000 and 1999
and from inception on January 31, 1986 through December 31, 2000. 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 generally accepted auditing
standards. 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 includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Subsidiary (a development stage company) as of
December 31, 2000, and the consolidated results of their operations and their
cash flows for the years ended December 31, 2000 and 1999 and from inception on
January 31, 1986 through December 31, 2000, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 10 to the
consolidated financial statements, the Company has incurred significant losses
which have resulted in an accumulated deficit and a deficit in stockholders'
equity, raising substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 10. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 8 to the consolidated financial statements, an error was
discovered by management of the Company during the current year regarding the
valuation of several options granted in 1999 which resulted in the
understatement of previously reported amounts in Additional Paid-in Capital and
Accumulated Deficit as of December 31, 1999 and an understatement of the net
loss for the year ended December 31, 1999. An adjustment has been made to the
above mentioned accounts to correct the error.
HJ & Associates, LLC
Salt Lake City, Utah
April 7, 2001
3
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
December 31,
2000
CURRENT ASSETS
Cash and cash equivalents $ 2,368
-----------------
Total Current Assets 2,368
-----------------
PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 14,977
-----------------
OTHER ASSETS
Receivable from affiliate, net (Note 1) -
-----------------
Total Other Assets -
-----------------
TOTAL ASSETS $ 17,345
=================
The accompanying notes are an integral part of these consolidated
financial statements.
4
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
December 31,
2000
CURRENT LIABILITIES
Accounts payable $ 339,774
Accrued expenses (Note 3) 371,651
Notes payable (Note 6) 280,491
-----------------
Total Current Liabilities 991,916
-----------------
Total Liabilities 991,916
-----------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 250,000,000 shares authorized of $0.001 par value,
153,915,798 shares issued and outstanding 153,916
Additional paid-in capital 15,201,661
Deficit accumulated during the development stage (16,330,148)
-----------------
Total Stockholders' Equity (Deficit) (974,571)
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 17,345
=================
The accompanying notes are an integral part of these consolidated
financial statements.
5
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
From
Inception on
January 31,
For the Years Ended 1986 Through
December 31, December 31,
--------------------------------------
2000 1999 2000
------------------ ------------------ ------------------
(Restated)
REVENUE $ - $ - $ 133,349
------------------ ------------------ ------------------
EXPENSES
Cost of sales - - 103,790
Research and development 170,000 75,000 2,577,853
General and administrative 787,610 198,308 12,116,482
Expense on extension of warrants (Notes 5 and 8) 1,743,468 123,389 1,866,857
Bad debt expense - - 48,947
Depreciation and amortization 5,621 1,945 33,019
------------------ ------------------ ------------------
Total Expenses 2,706,699 398,642 16,746,948
------------------ ------------------ ------------------
Loss from Operations (2,706,699) (398,642) (16,613,599)
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE)
Minority interest in loss - - 26,091
Other income - - 19,780
Gain on sale of subsidiary (Note 1) - - 208,417
Interest expense (22,439) (22,439) (865,575)
------------------ ------------------ ------------------
Total Other Income (Expense) (22,439) (22,439) (611,287)
------------------ ------------------ ------------------
LOSS BEFORE EXTRAORDINARY
ITEMS (2,729,138) (421,081) (17,224,886)
------------------ ------------------ ------------------
EXTRAORDINARY ITEMS
Lawsuit settlement (Note 4) 415,000 - 415,000
Debt forgiveness (Note 4) 127,000 61,510 479,738
------------------ ------------------ ------------------
Total Extraordinary Items 542,000 61,510 894,738
------------------ ------------------ ------------------
NET LOSS $ (2,187,138) $ (359,571) $ (16,330,148)
================== ================== ==================
BASIC INCOME (LOSS) PER SHARE
Loss from operations $ (0.01) $ (0.00)
Extraordinary items 0.00 0.00
------------------ ------------------
Basic Income (Loss) Per Share $ (0.01) $ (0.00)
================== ==================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 154,371,805 149,255,666
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
6
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
Deficit
Accumulated
Common Stock Additional During the
-------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, January 31, 1986 (inception) - $ - $ - $ - $ -
Initial capitalization of Medizone -
Nevada at $0.03 per share 5,500,000 5,500 - 150,128 -
Common shares issued in acquisition
of Medizone - Delaware (Note 1) 37,500,000 37,500 - (37,500) -
Common stock issued for services
rendered in July 1986 at $0.10
per share 50,000 50 - 4,950 -
Common stock issued in conversion
of warrants during 1986 at $0.10
per share 7,814,600 7,815 - 773,645 -
Stock issuance costs - - - (105,312) -
Net loss for the year ended
December 31, 1986 - - - - (796,068)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1986 50,864,600 50,865 - 785,911 (796,068)
Common stock issued upon exercise
of warrants in January 1987 at $0.10
per share 2,600 2 - 257 -
Common stock issued for patent in
March 1987 at $0.69 per share 1,000,000 1,000 - 692,750 -
Common stock issued for cash in
June 1987 at an average price of
$0.16 per share 950,000 950 - 149,050 -
Common stock issued for services
in June and July 1987 at an
average price of $0.12 per share 203,167 203 - 24,314 -
Common stock issued through
exercise of options in August 1987
at $1.75 per share 250,000 250 - 437,250 -
Net loss for the year ended
December 31, 1987 - - - - (2,749,400)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1987 53,270,367 $ 53,270 $ - $ 2,089,532 $ (3,545,468)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
7
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1987 53,270,367 $ 53,270 $ - $ 2,089,532 $ (3,545,468)
Common stock issued through exercise
of options in January 1988 at $0.50
per share 200,000 200 - 99,800 -
Common stock issued for cash in
September 1988 at $0.08 per share 1,000,000 1,000 - 79,000 -
Common stock issued for services
at an average price of $0.23
per share 35,000 35 - 7,965 -
Additional capital contributed - - - 174,126 -
Net loss for the year ended
December 31, 1988 - - - - (714,347)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1988 54,505,367 54,505 - 2,450,423 (4,259,815)
Common stock issued for services
at an average price of $0.18 per
share 261,889 262 - 46,363 -
Common stock issued for cash at
an average price of $0.05 per share 5,790,000 5,790 - 285,710 -
Common stock issued for services
and in lieu of outstanding debt at
an average price of $0.12 per share 4,749,532 4,750 - 578,978 -
Common stock issued upon exercise
of options at $0.16 per share 375,000 375 - 59,125 -
Net loss for the year ended
December 31, 1989 - - - - (862,051)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1989 65,681,788 $ 65,682 $ - $ 3,420,599 $ (5,121,866)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
8
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1989 65,681,788 $ 65,682 $ - $ 3,420,599 $ (5,121,866)
Common stock issued for services
at $0.10 per share 880,000 880 - 87,120 -
Common stock issued for cash at an
average price of $0.04 per share 4,250,000 4,250 - 175,250 -
Common stock issued for services
and in lieu of outstanding debt at
an average price of $0.06 per share 2,422,727 2,423 - 137,577 -
Additional capital contributed - - - 100,000 -
Net loss for the year ended
December 31, 1990 - - - - (606,309)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1990 73,234,515 73,235 - 3,920,546 (5,728,175)
Common stock issued for cash at an
average price of $0.07 per share 4,366,667 4,366 - 305,634 -
Common stock issued for services
at an average price of $0.17 per
share 425,000 425 - 72,075 -
Common stock issued through
exercise of options at an average
price of $0.45 per share 450,000 450 - 204,050 -
Additional capital contributed - - - 5,000 -
Net loss for the year ended
December 31, 1991 - - - - (1,220,152)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1991 78,476,182 $ 78,476 $ - $ 4,507,305 $ (6,948,327)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
9
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1991 78,476,182 $ 78,476 $ - $ 4,507,305 $ (6,948,327)
Common stock issued for services
at $0.20 per share 151,500 152 - 30,148 -
Common stock issued in lieu of
debt at $0.15 per share 250,000 250 - 37,250 -
Common stock issued for cash at
an average price of $0.16 per share 2,702,335 2,702 - 427,648 -
Common stock issued through
exercise of options at $0.50
per share 250,000 250 - 124,750 -
Additional capital contributed - - - 81,100 -
Net loss for the year ended
December 31, 1992 - - - - (649,941)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1992 81,830,017 81,830 - 5,208,201 (7,598,268)
Common stock issued for services
at an average price of $0.10
per share 5,347,219 5,347 - 542,859 -
Common stock issued for cash at
an average price of $0.18 per share 1,471,666 1,472 - 269,528 -
Common shares subscribed for
at $0.10 per share - - 2,619 259,296 -
Net loss for the year ended
December 31, 1993 - - - - (1,598,342)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1993 88,648,902 $ 88,649 $ 2,619 $ 6,279,884 $ (9,196,610)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
10
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- -------------- --------------- ---------------
Balance, December 31, 1993 88,648,902 $ 88,649 $ 2,619 $ 6,279,884 $ (9,196,610)
Common stock issued for services
at $0.10 per share 1,431,590 1,431 - 141,727 -
Common shares subscribed for at
$0.10 per share - - 9,552 945,682 -
Common shares subscribed for as
cancellations of indebtedness at
$0.10 per share - - 417 41,234 -
Common shares subscribed for as
cancellation of indebtedness at
$0.18 per share - - 11,250 2,022,379 -
Issuance of subscribed stock 10,384,900 10,385 (10,385) - -
Issuance of shares in recognition
of disparity in purchase price in
offering 1,125,834 1,126 - (1,126) -
Prior period adjustment (Note 8) - - - - 219,422
Net loss for the year ended
December 31, 1994 - - - - (1,126,315)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1994 101,591,226 $ 101,591 $ 13,453 $ 9,429,780 $ (10,103,503)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
11
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
-------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1994 101,591,226 $ 101,591 $ 13,453 $ 9,429,780 (10,103,503)
Redeemable common shares
converted to common stock (Note 9) 200,000 200 - 39,800 -
Common stock issued for services
at $0.10 per share 2,050,000 2,050 - 202,950 -
Issuance of subscribed stock 17,524,860 17,524 (17,524) - -
Cancellation of common shares (1,242,727) (1,242) - (70,563) -
Common shares subscribed for at
$0.10 per share - - 9,118 902,707 -
Prior period adjustment (Note 8) - - - - 71,806
Additional capital contributed - - - 50,000 -
Net loss for the year ended
December 31, 1995 - - - - (1,081,027)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1995 120,123,359 120,123 5,047 10,554,674 (11,112,724)
Common stock issued for cash
at $0.10 per share 100,000 100 - 9,900 -
Common stock issued for services
at $0.10 per share 1,415,875 1,416 - 140,171 -
Issuance of subscribed stock 8,412,379 8,413 (8,413) - -
Common shares subscribed for
at $0.11 per share - - 6,456 718,991 -
Net loss for the year ended
December 31, 1996 - - - - (1,329,395)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1996 130,051,613 $ 130,052 $ 3,090 $ 11,423,736 $ (12,442,119)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
12
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
-------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1996 130,051,613 $ 130,052 $ 3,090 $ 11,423,736 $ (12,442,119)
Issuance of subscribed stock 3,089,680 3,090 (3,090) - -
Common shares subscribed for
at $0.07 per share - - 5,714 394,287 -
Common stock issued for services
at $0.10 per share 3,746,336 3,746 - 370,886 -
Net loss for the year ended
December 31, 1997 - - - - (775,559)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1997 136,887,629 136,888 5,714 12,188,909 (13,217,678)
Common stock issued through
exercise of warrants at $0.07
per share 857,142 857 - 59,143 -
Common stock issued in lieu of
debt at $0.05 per share 864,747 865 - 42,372 -
Issuance of subscribed stock 5,714,286 5,714 (5,714) - -
Cancellation of common shares (630,000) (630) - 630 -
Common stock issued for services
at $0.05 per share 3,465,000 3,465 - 169,786 -
Common stock issued for services
at $0.09 per share 750,000 750 - 63,785 -
Common stock issued in lieu of
debt at $0.09 per share 967,630 967 - 82,214 -
Common stock issued for services
at $0.08 per share 50,000 50 - 3,700 -
Net loss for the year ended
December 31, 1998 - - - - (565,761)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1998 148,926,434 $ 148,926 $ - $ 12,610,539 $ (13,783,439)
--------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated
financial statements.
13
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
Common Stock Additional During the
-------------------------------------------------- Paid-in Development
Shares Amount Subscribed Capital Stage
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1998 148,926,434 $ 148,926 $ - $ 12,610,539 $ (13,783,439)
Common stock issued for services
at $0.07 per share 25,000 25 - 1,725 -
Common stock issued through exercise
of warrants at $0.07 per share 936,507 937 - 64,618 -
Additional expense for extension of
warrants below market value - restated - - - 123,389 -
Net loss for the year ended
December 31, 1999 - restated - - - - (359,571)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1999 149,887,941 149,888 - 12,800,271 (14,143,010)
Common stock issued through
exercise of warrants at $0.07 per share 3,142,857 3,143 - 216,857 -
Common stock issued for debt at
$0.11 per share 2,020,000 2,020 - 220,180 -
Common stock issued for debt at
$0.147 per share 95,000 95 - 13,905 -
Common stock issued for services
at $0.175 per share 350,000 350 - 60,900 -
Common stock issued for debt at
$0.20 per share 20,000 20 - 3,980 -
Common stock issued for debt at
$0.55 per share 100,000 100 - 54,900 -
Cancellation of common stock (2,000,000) (2,000) - 2,000 -
Common stock issued for services
at $0.285 per share 300,000 300 - 85,200 -
Additional expense for extension of
warrants below market value - - - 1,743,468 -
Net loss for the year ended
December 31, 2000 - - - - (2,187,138)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 2000 153,915,798 $ 153,916 $ - $ 15,201,661 $ (16,330,148)
=============== =============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
14
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
From
Inception on
For the Years Ended January 31,
December 31, 1986 Through
--------------------------------- December 31,
2000 1999 2000
--------------- --------------- ---------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,187,138) $ (359,571) $ (16,330,148)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 5,621 1,945 33,019
Stock issued for services 146,750 1,750 3,015,916
Expense for extension of warrants below market value 1,743,468 123,389 1,866,857
Bad debt expense - - 48,947
Minority interest in loss - - (26,091)
Loss on disposal of assets - - 693,752
Gain on settlement of debt (127,000) (61,510) (188,510)
Gain on Court ordered restitution (415,000) - (415,000)
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses
and deposits - - (48,947)
Increase (decrease) in accounts payable 23,604 (13,252) 714,854
Increase (decrease) in accrued expenses 187,606 238,439 774,673
--------------- --------------- ---------------
Net Cash Used by Operating Activities (622,089) (68,810) (9,860,678)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization costs - - (8,904)
Purchase of fixed assets (14,931) - (39,090)
--------------- ---------------- ---------------
Net Cash Used by Investing Activities (14,931) - (47,994)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lawsuit settlement 415,000 - 415,000
Principle payments on notes payable - - (192,774)
Cash received from notes payable - - 1,106,518
Capital contributions - - 421,847
Stock issuance costs - - (105,312)
Increase in minority interest - - 14,470
Issuance of common stock for cash 220,000 65,555 8,251,291
--------------- --------------- ---------------
Net Cash Provided by Financing Activities 635,000 65,555 9,911,040
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (2,020) (3,255) 2,368
CASH AT BEGINNING OF PERIOD 4,388 7,643 -
--------------- --------------- ---------------
CASH AT END OF PERIOD $ 2,368 $ 4,388 $ 2,368
=============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
15
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
From
Inception on
For the Years Ended January 31,
December 31, 1986 Through
--------------------------------- December 31,
2000 1999 2000
--------------- --------------- ---------------
(Restated)
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ - $ - $ 26,483
Income taxes $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Stock issued for services $ 146,750 $ 1,750 $ 3,015,916
Stock issued for conversion of debt $ 295,200 $ - $ 4,071,493
Stock issued for license agreement and patent $ - $ - $ 693,752
The accompanying notes are an integral part of these consolidated
financial statements.
16
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
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, Medizone Canada Ltd. (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.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
17
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
a. Organization (Continued)
In June 1998, the Company sold its interest in MCL for $125,000
cash 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.
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. Soloman (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 $50,000 was thereupon
loaned by the Company to MNZ on a demand basis (see Note 1(i)).
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 shall 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 shall receive a sales
royalty in an amount equal to 10% of MNZ's gross annual sales
under the License Agreement.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
18
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
b. Formation of Joint Venture (Continued)
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: Autralasia
(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 shall be divided between the Company and MNZ on a
sliding scale as set forth below:
Medizone Medizone
International, New Zealand
Inc. 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%
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 Managing Agent Agreement shall 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 Issued 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, 2000.
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.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
19
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
c. Business Activities (Continued)
By letter agreement with the Italian Scientific Society for
Oxygen-Ozone Therapy (ISSOT) in Bergamo, Italy, dated March 23,
1993, the Company entered into a collaborative arrangement to
research and examine the efficacy of ozone therapy and the
Company's technology in the treatment of various blood-related
human diseases. The research is to be conducted by ISSOT in Italy,
under the direction of a research group assembled by the Italian
Ministry of Health.
On May 16, 1994, the Company announced that human trials were to
commence at the University of Naples ("Naples"). However, after
the termination of the Company's former President, the Company's
inquiry into the conduct of its operations during the former
President's tenure, that disclosed that human clinical trials of
the Company's ozone therapy on patients infected with either
Acquired Immunodeficiency Syndrome (AIDS) or Hepatitis B (chronic
active) has not been authorized by Naples or commenced at that
institution. The Company also learned that the Italian Ministry of
Health had not issued approvals for human clinical trials to
commence at certain sites as previously disclosed. While the
ethics committees at certain university hospitals have stated
their approval for the Company to conduct Phase II trials, they
would require the Company to have either completed a large animal
study and Phase I human clinical trials or to have these
requirements waived. The Company has never performed a large
animal study or Phase I human clinical trials and does not possess
the necessary data with respect to its ozone therapy to commence
Phase II study. However, there does exist a broad use and
understanding of ozone therapy throughout Europe and there have
been numerous scientific articles published in European medical
journals describing the use of ozone on humans.
20
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
c. Business Activities (Continued)
The Company has held discussions with an Italian Contract Research
Organization (the ICRO) with a view to having the ICRO act as an
intermediary on behalf of the Company with the Italian Ministry of
Health and prepare a written submission to the Italian Ministry of
Health regarding the data in the public domain on ozone therapy
with a view to having the Italian Ministry of Health accept this
material as proof of safety, toxicity and tolerance of the use of
the Company's ozone technology on humans in lieu of having the
Company perform a large animal study and possibly even Phase I
human clinical trials. The ICRO would also design a research
program and protocols for human clinical trials which would meet
the standards of the European Union (EU) and Food and Drug
Administration (FDA), monitor the clinical terms and collect and
prepare analyses of the data produced by the trials. The Company
will not be able to enter into a formal contract with the ICRO
unless it obtains additional funding. If the Italian Ministry of
Health does not accept the published evidence on the use of ozone
therapy on humans, the Company will be required to perform its own
Phase I human clinical trials and possibly a large animal study.
In late 1997, the Company entered into discussions with Italian
and Belgium clinicians with regard to them performing Phase I
human clinical trials. However, assuming the Italian Ministry of
Health did not grant the Company's request for waiver, no formal
agreements with these clinicians would be signed and the studies
would not begin until the company obtains additional funding. The
Company estimates that it would require an infusion of
approximately $1.5 million to advance the above-described research
initiatives through the completion of a Phase III human clinical
trials and submission of the data for approval to the Italian
Ministry of Health.
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.
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:
21
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
f. Basic Loss Per Share (Continued)
For the Years Ended
December 31,
--------------------------------------
2000 1999
------------------ ------------------
(Restated)
Numerator (net loss) $ (2,187,138) $ (359,571)
Denominator (weighted
average number of
shares outstanding) 154,371,805 149,255,666
Loss per share $ (0.01) $ (0.00)
. 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. Change in Accounting Principle
The Company has adopted the provisions of FASB Statement No. 138
"Accounting for Certain Derivative Instruments and Hedging
Activities, (an amendment of FASB Statement No. 133.)" Because the
Company had adopted the provisions of FASB Statement No. 133,
prior to June 15, 2000, this statement is effective for all fiscal
quarters beginning after June 15, 2000. The adoption of this
principle had no material effect on the Company's consolidated
financial statements.
The Company has adopted the provisions of FASB Statement No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement
No. 125.)" This statement provides accounting and reporting
standard for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on
consistent application of a financial- components approach that
focuses on control. Under that approach, the transfer of financial
assets, the Company recognized the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This statement is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of this
principle had no material effect on the Company's consolidated
financial statements.
22
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
g. Change in Accounting Principle (Continued)
The Company has adopted the provisions of FIN 44 "Accounting for
Certain Transactions Involving Stock Compensation (an
interpretation of APB Opinion No. 25.)" This interpretation is
effective July 1, 2000. FIN 44 clarifies the application of
Opinion No. 25 for only certain issues. It does not address any
issues related to the application of the fair value method in
Statement No. 123. Among other issues, FIN 44 clarifies the
definition of employee for purposes of applying Opinion 25, the
criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and accounting for an exchange of stock compensation awards
in a business combination. The adoption of this principle had no
material effect on the Company's consolidated financial statements
h. 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.
i. Receivable from Affiliate
The Company loaned $50,000 in 1996 to MNZ, the joint venture
company, on a demand basis. MNZ currently has minimal assets and
operations. Management has recorded an allowance for the full
amount of the loan as of December 31, 2000.
j. Provision for Taxes
At December 31, 2000, the Company had net operating loss
carryforwards of $14,300,000 that may be offset against future
taxable income through 2020. If substantial change sin the
Company's ownership should occur, thee 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 financial
statements, because the Company believes there is a 50% or greater
chance the carryforwards will expire unused. The tax benefits of
the loss carryforwards are offset by a valuation allowance of the
same amount.
23
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
j. Provision for Taxes (Continued)
The income tax benefit differs from the amount computed at the
federal statutory rates as follows:
For the Years Ended
December 31,
--------------------------------------
2000 1999
------------------ ------------------
Income tax benefit at statutory rate $ 831,112 $ 136,637
change in valuation allowance (831,112) (136,637)
------------------ ------------------
$ - $ -
================== ==================
Deferred tax assets at December 31, 2000 and 1999 are comprised of
the following:
2000 1999
------------------ ------------------
Net operating loss carryforwards $ 5,434,000 $ 4,602,888
Valuation allowance (5,434,000) (4,602,888)
------------------ ------------------
$ - $ -
================== ==================
k. 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.
l. 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.
m. Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
24
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
n. Stock Options and Warrants
The Company applies 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 is 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, "Accounting for Stock-Based Compensation"
("SFAS No. 123") 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. 123. The Company estimates the
fair value of each stock award at the grant date by using the
Black-Scholes option pricing model.
Under the provisions of SFAS No. 123, the Company's net loss for
the years ended December 31, 2000 and 1999 would have been
unchanged from the reported net loss.
However, under the provisions of SFAS No. 123, the Company
recorded additional expense of $1,743,468 and $123,389 for the
years ended December 31, 2000 and 1999 as a result of warrants
granted to non-employees based upon the Black-Scholes pricing
model. Under the Black-Scholes method, the U.S. Treasury rate was
used as the risk-free interest rate, the expected life of the
warrants was 3 months to one year, the volatility used was based
upon the historical price per share of shares sold, and there were
no expected dividends.
o. 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.
25
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
o. Patents (Continued)
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
technologies covered by the patent have not been approved by the
FDA. 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.
p. Revenue Recognition Policy
The Company currently has no source of revenues. Revenue
recognition policies will be determined when principal operations
begin.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31,
2000:
Office equipment $ 19,249
Furniture and fixtures 6,307
------------------
25,556
Accumulated depreciation (10,579)
------------------
Net property and equipment $ 14,977
===================
Depreciation expense for the years ended December 31, 2000 and
1999 was $5,621 and $1,945, respectively.
NOTE 3 - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2000:
Accrued payroll $ 196,250
Accrued interest 171,484
Accrued payroll taxes 3,917
-------------------
Total $ 371,651
===================
26
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company retains an investor relations firm to act as the
Company's liaison with the brokerage community. The agreement was
originally for a period of one year, but has been extended by the
parties for additional one year periods. It receives a monthly
payment of $2,000, plus expenses. As additional compensation in
1996, it received 250,000 shares of the Company's common stock,
restricted under the federal securities laws.
On December 3, 1999, the Company filed a complaint in the Third
District Court of Salt Lake County, Utah against its former Chief
Financial Officer. Among other things, the compliant filed by the
Company sought a declaration from the Court regarding the
enforceability of the former officer's employment contract, the
right of the Company to terminate his employment and other relief.
A settlement was agreed upon, under the terms of which the Company
agreed to withdraw its compliant with prejudice and the former
officer waived any further claim for wages or other compensation
under his employment agreement. In addition, the former officer
consented to the cancellation of 2,000,000 shares of common stock
issued to him in prior years. On April 6, 2000, the Company
settled this matter by paying its former Chief Financial Officer
$35,000 and the Company received the 2,000,000 shares of common
stock back for cancellation. The Company recognized a $137,000
gain on settlement of debt due to the fact that at the time of
settlement, the Company had accrued $162,000 of debt to the former
Chief Financial Officer.
In January of 2000, the Company received $415,000 from its former
President and Chief Executive Officer who was under an order of
restitution from the State of New York.
In addition, the Board of Directors approved the following
salaries for its key officers during 1999 to commence January 1,
2000: 1) $170,000 a year for the Company's C.E.O., 2) $170,000 a
year for the Company's President and Director of Research, 3)
$36,000 a year for the Company's C.F.O. and 4) $95,000 a year for
the Company's C.O.O. and Corporate Secretary.
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.
27
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
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 transactions 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.
During 1989, the Company 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.
28
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 5 - ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
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 stock.
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.
29
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 5 - ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
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.
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.
30
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 5 - ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)
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
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 was 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.
As of December 31, 2000, the following warrants were outstanding:
Warrants Exercise Price Termination Dates
----------------------- ------------------------- ----------------------------
25,000,000 $ 0.20 May 31, 2001
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 2000:
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 lender may purchase from the Company upon exercise
of the lender's 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 ranging from 8% to 9% 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 directors and a family member of a 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 $ -
=================
31
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 6 - NOTES PAYABLE (Continued)
The aggregate principal maturities of notes payable are as
follows:
Year Ended
December 31, Amount
----------------- -----------------
2001 $ 280,491
2002 -
2003 -
2004 -
2005 -
2006 and thereafter -
-----------------
Total $ 280,491
=================
NOTE 7 - STOCK OPTIONS
All options are exercisable for a period of five years beginning
one year from the date of grant. Compensation expense, measured as
to the excess of the estimated fair value over the exercise price,
was accrued over the service period. If, on the date of exercise,
the estimated fair value of a share of the Company's common stock
exceeded the exercise price, the exercise price was decreased by a
like amount (but not below the par value of $0.001). At the end of
each fiscal period, total accrued compensation was recorded as the
difference between the adjusted exercise price and the fair market
value at the end of the period for all exercisable shares. The
total accrued compensation was adjusted each year for changes in
the fair market value of the Company's stock and for option
exercises and cancellations. The shares issued in connection with
the exercise of the options were restricted shares to be held for
investment purposes only.
In 1995, as part of their employment agreements, the Company's
president and chief executive officer, and vice-president and
chief financial officer and treasurer were granted options to
purchase an aggregate of 4,500,000 shares of the Company's common
stock at an exercise price of $0.20 per share, which vested fully
on January 1, 1998. The fair value of each option grant is
estimated on the grant date using an option-pricing model with the
following weighted-average assumptions used for grants in 1995:
risk-free interest rate of 6%, and expected lives of 3 years of
the options.
In 2000, the Company granted to the Company's attorney 250,000
options to purchase common stock at an exercise price of $0.55 per
share, which vest fully on March 21, 2003. The fair value of each
option grant is estimated on the grant date using the
Black-Scholes option-pricing model with a risk-free interest rate
of 6.5% and an expected life of 3 years. No additional expense was
recorded for the year ended December 31, 2000 under the
Black-Scholes option pricing model for these options.
32
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 7 - STOCK OPTIONS (Continued)
The following is a summary of option transactions:
Weighted
Average
Exercise
Fixed Options Shares Price
------------- ------------ -----------------
Balance - January 1, 1996 4,500,000 $ 0.20
Granted - -
Exercised - -
Forfeited - -
------------ -----------------
Balance - December 31, 1996 4,500,000 0.20
Granted - -
Exercised - -
Forfeited (3,000,000) -
------------ -----------------
Balance, December 31, 1997 1,500,000 0.20
Granted - -
Exercised - -
Forfeited - -
------------ -----------------
Balance, December 31, 1998 1,500,000 0.20
Granted - -
Exercised - -
Forfeited (1,500,000) -
------------ -----------------
Balance, December 31, 1999 - -
Granted 250,000 0.55
Exercised - -
Forfeited - -
------------ -----------------
Balance, December 31, 2000 250,000 $ 0.55
============ =================
NOTE 8 - PRIOR PERIOD ADJUSTMENTS
The Company has restated its financial statements to reflect
adjustments to write off liabilities which were accrued and
expensed in years prior to fiscal 1992. These adjustments
increased previously reported accumulated deficit and reduced
previously reported results of operations (for the period January
31, 1986, date of inception, through December 31, 1994) by
$219,422. During the first quarter of 1995, the Company recorded a
further reduction to accumulated deficit in the amount of $71,806
relating to the cancellation of shares previously issued to former
management.
33
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 8 - PRIOR PERIOD ADJUSTMENTS (Continued)
Subsequent to the original issuance of the December 31, 1999
consolidated financial statements, the Company determined that the
extension of certain stock warrants resulted in an additional
expense to the Company for 1999 of $123,389, pursuant to the
Black-Scholes pricing model. The Company extended the expiration
date on warrants to purchase shares of common stock. Correction of
this error had the following effect on the previously reported net
loss for the year ended December 31, 1999 and has an equal
understatement of retained deficit as of December 31, 1999.
Originally As
Reported Restated Difference
---------------- ---------------- -----------------
Net loss $ (236,182) $ (359,571) $ (123,389) (1)
Additional paid-in capital 12,676,882 12,800,241 123,389 (1)
Loss per share $ (0.00) $ (0.00) $ - (2)
(1) Relates to additional expense for the extension of warrants.
(2) The loss per share was not effected by the corrections of
errors.
NOTE 9 - REDEEMABLE COMMON STOCK
On February 12, 1993, per a settlement agreement, the Company
issued 200,000 shares of restricted common stock to an unrelated
third party. According to the agreement, if the Company files a
registration statement for an offering of its securities, it must
use its best efforts to include such shares in the registration
statement. If all, or any portion of the shares have not been
purchased by the Company or all the shares have not been covered
by an effective registration, then the Company shall be required
to pay, no later than April 13, 1995, an amount equal to the
lesser of $50,000 minus the aggregate purchase price amount
payable under the formula set forth in the agreement, or $25,000.
In September 1995, the Company paid $5,000 and issued 200,000
shares of restricted common stock in full and final settlement of
the agreement.
NOTE 10 - GOING CONCERN
The Company's consolidated financial statements are prepared
using generally accepted accounting principles applicable to a
going concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The
Company has historically incurred significant losses which have
resulted in an accumulated deficit of $16,330,148 at December 31,
2000 which raises substantial doubt about the Company's ability
to continue as a going concern. The accompanying 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.
34
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 10 - GOING CONCERN (Continued)
Continuation of the Company as a going concern is dependent upon
obtaining additional capital, obtaining the requisite approvals
from the FDA and/or the EU 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.
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 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 has 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 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 held a
strong bias against treating humans with ozone, due largely to
issues of safety.
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 had been
granted to the Company, it may not distribute ozone-generating
devices, 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 a trial in an effort to obtain EU
approval, to market the product in Europe and to reopen the
Company's FDA file.
35
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 2000 and 1999
NOTE 10 - GOING CONCERN (Continued)
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.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to December 31, 2000, the following events occurred:
On February 16, 2001, the board of directors accepted a private
stock placement from an accredited investor. The placement was
for 500,000 shares of the Company's restricted stock placed at
$0.20 per share ($100,000.00). The board of directors granted
warrants to purchase an additional 1,000,000 shares of stock at
$0.20 per share in the same action. The warrants have a two year
expiration.
On March 21, 2001, the board of directors accepted a private
stock placement from an accredited investor. The placement was
for 200,000 shares of the Company's restricted stock place at
$0.15 per share ($30,000.00). The board of directors granted
warrants to purchase an additional 400,000 shares of stock at
$0.15 per share in the same action. The warrants have a two year
expiration.
On April 9, 2001, the board of directors accepted a private stock
placement from an accredited investor. The placement was for
166,666 shares of the Company's restricted stock placed at $0.15
per share ($25,000.00). The board of directors granted warrants
to purchase an additional 166,666 shares of stock at $0.15 per
share in the same action. The warrants have a two year
expiration.
36