UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
FORM 10-Q
 
(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20152016

or

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

For the transition period from __________ to ____________

Commission File Number: 2-93277-D

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

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

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

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

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

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

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

As of November 13, 2015,July 31, 2016, the registrant had 359,434,068369,934,068 shares of common stock issued and outstanding.
 
 
MEDIZONE INTERNATIONAL, INC.
FORM 10-Q

TABLE OF CONTENTS
SeptemberJune 30, 20152016

  Page No.
Part I — Financial Information 
   
Item 1.
3
   
 3
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and NineSix Months Ended September 30,June 30,2016 and 2015 and 2014
4
   
 5
   
 76
   
Item 2.1311
   
Item 3.1614
   
Item 4.1615
   
Part II — Other Information 
   
Item 1.1716
   
Item 2.1716
Item 3.16
Item 4.16
Item 5.16
   
Item 6.1716
   
1817
 
 
PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIESAFFILIATE
Condensed Consolidated Balance Sheets (Unaudited)
 
  June 30,  December 31, 
  2016  2015 (1) 
ASSETS      
       
Current Assets:      
Cash $49,288  $745,078 
Inventory  323,118   277,823 
Prepaid expenses  34,619   31,986 
Total Current Assets  407,025   1,054,887 
Property and equipment, net  208   415 
Other Assets:        
Trademark and patents, net  159,045   176,086 
Lease deposit  4,272   4,272 
Total Other Assets  163,317   180,358 
Total Assets $570,550  $1,235,660 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT 
         
Current Liabilities:        
Accounts payable $433,826  $491,044 
Accounts payable – related parties  228,109   233,109 
Accrued expenses  600,362   554,834 
Accrued expenses – related parties  1,928,659   1,928,659 
Customer deposits  118,500   - 
Other payables  224,852   224,852 
Notes payable  292,124   297,396 
Total Current Liabilities  3,826,432   3,729,894 
Notes payable, net of current portion  75,000   75,000 
Total liabilities  3,901,432   3,804,894 
Stockholders’ Deficit:        
Preferred stock, $0.00001 par value: 50,000,000 shares authorized;
    no shares issued or outstanding
  -   - 
Common stock, $0.001 par value: 395,000,000 shares authorized;
    369,934,068 and 369,434,068 shares outstanding, respectively
  369,934   369,434 
Additional paid-in capital  32,544,146   32,496,646 
Accumulated other comprehensive loss  (38,454)  (36,968)
Accumulated deficit  (36,206,508)  (35,398,346)
Total Stockholders’ Deficit  (3,330,882)  (2,569,234)
Total Liabilities and Stockholders’ Deficit $570,550  $1,235,660 
  September 30,  December 31, 
  2015  2014 (1) 
ASSETS      
       
Current Assets:      
Cash
 
$
120,200
  
$
140,496
 
Inventory
  
198,623
   
265,234
 
Prepaid expenses
  
102,831
   
60,705
 
Total Current Assets
  
421,654
   
466,435
 
Property and equipment, net
  
518
   
830
 
Other Assets:
        
Trademark and patents, net
  
186,578
   
208,073
 
Lease deposit
  
4,272
   
4,272
 
Total Other Assets
  
190,850
   
212,345
 
Total Assets
 
$
613,022
  
$
679,610
 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
         
Current Liabilities:
        
Accounts payable
 
$
469,468
  
$
470,147
 
Accounts payable – related parties
  
233,109
   
233,109
 
Accrued expenses
  
541,520
   
516,434
 
Accrued expenses – related parties
  
1,928,659
   
1,928,659
 
Customer deposits
  
30,000
   
30,000
 
Other payables
  
224,852
   
224,852
 
Notes payable
  
382,689
   
298,241
 
Total Current Liabilities
  
3,810,297
   
3,701,442
 
Stockholders’ Deficit:
        
Preferred stock, $0.00001 par value: 50,000,000 shares authorized;
    no shares issued or outstanding
  
-
   
-
 
Common stock, $0.001 par value; 395,000,000 shares authorized;
    359,434,068 and 346,034,068 shares outstanding, respectively
  
359,434
   
346,034
 
Additional paid-in capital
  
31,437,346
   
30,052,656
 
Accumulated other comprehensive loss
  
(39,487
)
  
(58,098
)
Accumulated deficit
  
(34,954,568
)
  
(33,362,424
)
Total Stockholders’ Deficit
  
(3,197,275
)
  
(3,021,832
)
Total Liabilities and Stockholders’ Deficit
 
$
613,022
  
$
679,610
 
__________ 
 
(1) The condensed consolidated balance sheet information as of December 31, 2014 has been prepared using information from the audited consolidated balance sheet as of that date.

The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
  
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
  2015  2014  2015  2014 
             
Revenues
 
$
167,000
  
$
 -
  
$
167,000
  
$
 -
 
Operating Expenses:
                
Cost of revenues
  
88,411
   
-
   
88,411
   
 -
 
General and administrative
  
800,185
   
429,900
   
1,401,199
   
1,164,435
 
Research and development
  
56,263
   
96,660
   
210,336
   
313,153
 
Depreciation and amortization
  
13,457
   
12,391
   
39,760
   
36,473
 
Total Operating Expenses
  
958,316
   
538,951
   
1,739,706
   
1,514,061
 
Loss from Operations
  
(791,316
)
  
(538,951
)
  
(1,572,706
)
  
(1,514,061
)
Interest expense
  
(6,820
)
  
(6,192
)
  
(19,438
)
  
(18,651
)
Net Loss
  
(798,136
)
  
(545,143
)
  
(1,592,144
)
  
(1,532,712
)
Other comprehensive gain (loss) on foreign
  currency translation
  
(1,051
)
  
(6,290
)   
18,611
   
(3,872
)
Total Comprehensive Loss
 
$
(799,187
)
 
$
(551,433
)
 
$
(1,573,533
)
 
$
(1,536,584
)
Basic and Diluted Net Loss per Common Share
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.00
)
                 
Weighted Average Number of Common Shares Outstanding
  
358,036,242
   
338,259,689
   
352,368,867
   
333,532,440
 
(1)  The condensed consolidated balance sheet as of December 31, 2015 has been prepared using information from the audited consolidated balance sheet as of that date.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIESAFFILIATE
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
  2016  2015  2016  2015 
             
Revenues $-  $-  $-  $- 
Operating Expenses:                
Cost of revenues  -   -   -   - 
General and administrative  216,182   288,182   495,246   601,014 
Research and development  82,075   76,840   268,036   154,073 
Depreciation and amortization  13,988   13,273   27,814   26,303 
Total Operating Expenses  312,245   378,295   791,096   781,390 
Loss from Operations  (312,245)  (378,295)  (791,096)  (781,390)
Interest expense  (8,539)  (6,222)  (17,130)  (12,618)
Interest income  11   -   64   - 
Net Loss  (320,773)  (384,517)  (808,162)  (794,008)
Other comprehensive (loss) gain on foreign currency translation  (2,381)  1,431   (1,486)  19,662 
Total Comprehensive Loss $(323,154) $(383,086) $(809,648) $(774,346)
Basic and Diluted Net Loss per Common Share $(0.00) $(0.00) $(0.00) $(0.00)
                 
Weighted Average Number of Common Shares Outstanding  369,934,068   351,692,310   369,920,332   349,488,212 
The accompanying notes are an integral part of these condensed consolidated financial statements. 
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
  For the Six Months Ended 
  June 30, 
  2016  2015 
Cash Flows from Operating Activities:      
Net loss $(808,162) $(794,008)
Adjustments to reconcile net loss to net cash
 used in operating activities:
        
Depreciation and amortization  27,814   26,303 
Stock-based compensation expense  48,000   126,369 
Changes in operating assets and liabilities:        
Prepaid expenses  28,867   42,077 
Inventory  (45,295)  - 
Accounts payable and accounts payable – related parties  (62,218)  66,423 
Accrued expenses and accrued expenses – related parties  45,527   40,037 
Customer deposits  118,500   - 
Net Cash Used in Operating Activities  (646,967)  (492,799)
         
Cash Flows from Investing Activities:        
Cost of registering patents  (10,565)  (12,932)
Net Cash Used in Investing Activities  (10,565)  (12,932)
         
Cash Flows from Financing Activities:        
Principal payments on notes payable  (36,772)  (37,274)
Issuance of common stock for cash  -   546,000 
Net Cash (Used in) Provided by Financing Activities  (36,772)  508,726 
Effect of Foreign Currency Exchange Rates  (1,486)  19,662 
         
Net (decrease) increase in cash  (695,790)  22,657 
Cash as of beginning of the period  745,078   140,496 
Cash as of end of the period $49,288  $163,153 
  For the Nine Months Ended 
  September 30, 
  2015  2014 
Cash Flows from Operating Activities:      
Net loss
 
$
(1,592,144
)
 
$
(1,532,712
)
Adjustments to reconcile net loss to net cash
 used in operating activities:
        
Depreciation and amortization
  
39,760
   
36,473
 
Stock-based compensation expense
  
722,090
   
394,520
 
Changes in operating assets and liabilities:
        
Prepaid expenses
  
7,838
   
7,921
 
Inventory
  
        66,611
   
        -
 
Accounts payable and accounts payable – related parties
  
(677
)
  
(15,257
)
Accrued expenses and accrued expenses – related parties
  
25,086
   
(11,659
) 
Net Cash Used in Operating Activities
  
(731,436
)
  
(1,120,714
)
         
Cash Flows from Investing Activities:
        
Purchase of patents
  
(17,955
)   
(29,246
) 
Net Cash Used in Investing Activities
  
(17,955
)
  
(29,246
)
         
Cash Flows from Financing Activities:
        
Principal payments on notes payable
  
(40,516
)
  
(51,841
)
Issuance of notes payable
  
75,000
   
-
 
Issuance of common stock
  
676,000
   
1,222,250
 
Net Cash Provided by Financing Activities
  
710,484
   
1,170,409
 
Effect of Foreign Currency Exchange Rates
  
18,611
 
  
(3,872
)
         
Net increase (decrease) in cash
  
(20,296
)   
16,577
 
Cash as of beginning of the period
  
140,496
   
81,856
 
Cash as of end of the period
 
$
120,200
  
$
98,433
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:      
Cash paid for interest $3,568  $725 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:        
Financing of insurance policies $31,500  $37,392 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIESAFFILIATE
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
  For the Nine Months Ended 
  September 30, 
  2015  2014 
SUPPLEMENTAL CASH FLOW INFORMATION:      
Cash paid for interest
 
$
1,006
  
$
909
 
NON-CASH FINANCING ACTIVITIES:
        
Financing of insurance policies
 
$
49,964
  
$
65,214
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 1     BASIS OF PRESENTATION

The financial information of Medizone International, Inc. and subsidiaries (collectively, the Company), a Nevada corporation (the “Company”) included herein is unaudited and has been prepared consistent with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all information and notes required by US GAAP for complete financial statements. These notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.2015. In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are necessary in the opinion of management necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and ninesix months ended SeptemberJune 30, 20152016 are not necessarily indicative of the results to be expected for the full year.year ending December 31, 2016.

NOTE 2     CANADIAN FOUNDATION FOR GLOBAL HEALTH

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

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

NOTE 3     BASIC AND DILUTED NET LOSS PER COMMON SHARE

The computations of basic and diluted net loss per common share are based on the weighted average number of common shares outstanding during the periods as follows:

  For the Three Months Ended 
  June 30, 
  2016  2015 
       
Numerator: Net loss $(320,773) $(384,517)
Denominator: Weighted average number of common shares outstanding  369,934,068   351,692,310 
Basic and diluted net loss per common share $(0.00) $(0.00)
  For the Three Months Ended 
  September 30, 
  2015  2014 
       
Numerator: Net loss
 
$
(798,136
)
 
$
(545,143
)
Denominator: Weighted average number of common shares outstanding
  
358,036,242
   
338,259,689
 
Basic and diluted net loss per common share
 
$
(0.00
) 
 
$
(0.00
)

For the Nine Months Ended  For the Six Months Ended 
September 30,  June 30, 
 2015 2014  2016  2015 
           
Numerator: Net loss
 
$
(1,592,144
)
 
$
(1,532,712
)
 $(808,162) $(794,008)
Denominator: Weighted average number of common shares outstanding
 
352,368,867
 
333,532,440
   369,920,332   349,488,212 
Basic and diluted net loss per common share
 
$
(0.00
) 
 
$
(0.00
)
 $(0.00) $(0.00)
 
Common stock equivalents, consisting of options to purchase 20,865,000 shares, have not been included in the calculation as their effect is antidilutive for the periods presented.

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

NOTE 4     GOING CONCERN

The Company’s consolidated financial statements are prepared using US GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant losses from its inception through SeptemberJune 30, 2015,2016, which have resulted in an accumulated deficit of $34,954,568$36,206,508 as of SeptemberJune 30, 2015.2016.  The Company does not have funds sufficient to cover its operating costs for the next 12 months, has negative equity, and has a working capital deficit of $3,388,643, and$3,419,407 as of June 30, 2016. The Company has relied exclusively on debt and equity financing.financing to sustain its operations.  Accordingly, there is substantial doubt about itsthe Company’s ability to continue as a going concern.

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

The Company believes that it will need approximately $1,500,000 over the next 12 months for continued production manufacturing and related activities, research, development, and marketing activities, as well as for general corporate purposes. 
During 2014, the Company raised a total of $1,604,250No cash was generated through the sale of 23,978,572 shares of common stock at prices ranging from $0.05 to $0.085 per share, which funds have been used to keepfor the Company current in its public reporting obligations and to pay certain other corporate obligations including the costs of development for its hospital disinfection system.  During the nine monthsquarter ended SeptemberJune 30, 2015, the Company raised a total of $676,000 through the sale of 13,400,000 shares of common stock at prices ranging from $0.05 to $0.07 per share.  The Company believes it will be able to raise additional funds from some of the same investors who have purchased shares from 2009 to 2015, although there can be no assurance that these investors will purchase additional shares.2016.   

The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplish the plan described in the preceding paragraphs and eventually attain profitable operations.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
 
NOTE 5     COMMITMENTS AND CONTINGENCIES
 
The Company is subject to certain claims and lawsuits arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

Litigation
Rakas vs. Medizone International, Inc. - A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement.  In September 2001, the parties agreed to settle the matter for $25,000.  The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002.  On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties.  The Company has been unable to post the required bond amount as of the date of this report.  Therefore, the Company has recorded, as part of accounts payable, the original default judgment in the amount of $143,000, plus fees totaling $21,308, as of SeptemberJune 30, 20152016 and December 31, 2014.2015.  The Company intends to contest the judgment if and when it is able to in the future.

Other Payables
As of SeptemberJune 30, 20152016 and December 31, 2014,2015, the Company has $224,852 of past due payables for which the Company has not received invoicesstatements or demands for payment for over 10 years.  Although management of the Company does not believe that the amounts will be required to be paid, the amounts are recorded as other payables until such time as the Company is certain that no liability exists and until the statute of limitations has expired.

8
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 5     COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases
The Company operates a certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which provides a primary research and development platform.  The lease term is month-to-month with a monthly lease payment of $1,375$1,537 Canadian dollars (“CD”) plus the applicable goods and services tax (“GST”).  Leases for a second laboratory space for full scale room testing and a storage unit are on a month-to-month basis with monthly lease payments of CD$1,3751,537 and CD$475, respectively, plus the applicable GST.  

The Company has a corporatenon-cancelable lease for office leasespace located in California, with monthly payments of approximately $2,300$2,400 through December 31, 2015.2016.

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

NOTE 6     COMMON STOCK OPTIONS
In May 2012, the Company granted options for the purchase of 1,000,000 shares of common stock to a consultant for distribution channel related services to be performed.  Options totaling 550,000 shares have vested as of September 30, 2015 and the remaining options will vest on the date certified by the Company as the date that certain other milestones are achieved.  The options have an exercise price of $0.17 per share, and are exercisable for up to five years.  The Company recognized no expense in connection with these options during the nine months ended September 30, 2015 and 2014.  The Company will measure and begin recognizing the remaining expense, when the achievement of the required milestones becomes probable.

In August 2013, the Company granted options for the purchase of 250,000 shares of common stock to a consultant.consultant, of which 50,000 were immediately vested.  These options are exercisable at $0.10 per share for five years from the date of grant with 50,000 options vesting immediately and are fully vested asthe other 200,000 options vesting upon the achievement of September 30,certain milestones, which were met in 2015.  The Company recognized expense of $17,660$17,659 during the ninesix months ended SeptemberJune 30, 2015, as the required milestones were achieved.achieved for the remaining 200,000 options.

On February 26, 2014, the Company granted to a new director options for the purchase of 2,000,000 shares of common stock, with an exercise price of $0.1095 per share.  Of these options, 1,000,000 vested on February 26, 2015 and the remaining 1,000,000 options will vest upon the successful achievement of certain milestones.  Unvested options vest immediately in the event of a change in control of the Company.  The options are exercisable for five years. The grantyears from the date fair value of the options was $192,184.grant. The Company recognized $16,017 and $56,053 of expense in connection with these options during the ninesix months ended September 30, 2015 and 2014, respectively, and are fully vested as of SeptemberJune 30, 2015. Also, theThe Company will recognize anmeasure and begin recognizing the remaining expense totaling $96,092 when the achievement of the required milestones becomes probable.

On February 26, 2014, the Company granted options to six consultants and service providers for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.1095 per share.  Options for 200,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested on January 9, 2015.  The options are exercisable for five years.years from the date of grant. The grant date fair value of these options was $24,023. The Company recognized expense of $800 and $22,822in connection with these options during the ninesix months ended SeptemberJune 30, 2015 and 2014, respectively.  The options were fully vested on January 9, 2015.
On April 30, 2014, the Company granted options for the purchase of a total of 1,350,000 shares of common stock for services rendered, as follows:  250,000 shares to each of four directors of the Company, 100,000 shares to each of two consultants, and 75,000 shares each to a consultant and an employee of the Company.  All options vested upon grant, have an exercise price of $0.163 per share, and are exercisable for up to five years.  The total value of these options at the date of grant was $193,234, which the Company recognized as an expense during the nine months ended September 30, 2014.

On May 6, 2014, the Company granted options to a consultant for the purchase of 100,000 shares of common stock at an exercise price of $0.19 per share.  Options for 50,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested during the ninesix months ended SeptemberJune 30, 2015.2015, when certain milestones were achieved.  The options are exercisable for five years.  The grantyears from the date fair value of these options was $16,684.grant. The Company recognized expense of $8,342 eachin connection with these options during the ninesix months ended SeptemberJune 30, 2015 and 2014.2015.

On August 15, 2014, the Company granted options to a consultant for the purchase of 75,000 shares of common stock at an exercise price of $0.13 per share.  The shares will vest when certain required milestones are achieved.  The options are exercisable for five years.  The grantyears from the date fair value of these options was $8,555.grant.  The Company will recognize anmeasure and begin recognizing expense when the achievement of the required milestones becomes probable.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 6     COMMON STOCK OPTIONS (continued)
On August 15, 2014, the Company granted options for services rendered to a director of the Company for the purchase of 1,000,000 shares of common stock at an exercise price of $0.13 per share.  These options vested immediately upon grant.  The Company recognized expense of $114,069 during the nine months ended September 30, 2014, which was the grant date fair value of these options.
On October 7, 2014, the Company granted to a new board member options for the purchase of 1,000,000 shares of common stock, with an exercise price of $0.16 per share.  These options were fully vested on October 7, 2015.  Unvested options vest immediately in the event of a change in control of the Company.  The options are exercisable for five years from the date of grant.years.  The grant date fair value of the options was $140,178.  The Company recognized $105,133$70,088 of expense in connection with these options during the ninesix months ended SeptemberJune 30, 2015.2015 respectively.

On December 4, 2014, the Company granted options to four consultants for the purchase of a total of 140,000 shares of common stock at an exercise price of $0.11 per share.  These options have vested as of September 30, 2015.  The options have an exercise price of $0.11 per share,are fully vested and are exercisable for up to five years from the date of grant.  The Company recognized $13,462expense of expense in connection with these options$13,461 during the ninesix months ended SeptemberJune 30, 2015.

In August 2015, the Company granted options for the purchase of a total of 7,150,000 shares of common stock for services rendered, as follows: 6,000,000 shares total to five directors of the Company, 650,000 shares total to four consultants, and 500,000 shares to an employee of the Company. All options vested upon grant, have an exercise price of $0.088 per share, and are exercisable for up to five years.years from the date of grant.  The totalaggregate fair value of these options at the date of grant was $541,686,$541,687, which the Company recognized as an expense during the nine monthsyear ended September 30,December 31, 2015.

In August 2015, the Company granted options to a consultant for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.085 per share. These options vested upon grant and are exercisable for up to five years. The totalaggregate fair value of these options at the date of grant was $18,943,$18,991, which the Company recognized as an expense during the nine monthsyear ended September 30,December 31, 2015.

TheOn May 19, 2016, the Company estimatedgranted options to an employee for the purchase of 150,000 shares of common stock at an exercise price of $0.05 per share.  The fair value of the stockthese options described in the above paragraphs aton the date of grant was $6,461. The shares will vest at the grant, based onearlier of 18 months of service or when certain milestones are achieved, and are exercisable for five years from the following weighted average assumptions:
date of grant.  The Company is recognizing the expense ratably over the 18-months service period. The Company did not recognize expense during the 6 months ended June 30, 2016 as it was not material to the fair presentation of the consolidated financial statements. 
8
Risk-free interest rate
1.52% to 1.60
%
Expected life
5 years
Expected volatility
131.33% to 136.34
%
Dividend yield
0.00
%
A summary of the status of the Company’s outstanding options as of September 30, 2015 and for the nine months then ended, is presented below:
  Shares  Weighted Average Exercise Price 
Outstanding, beginning of the period
  
18,565,000
  
$
0.180
 
Granted
  
  7,400,000
   
0.088
 
Expired/Canceled
  
(5,000,000
) 
  
0.207
 
Exercised
  
-
   
  -
 
Outstanding, end of the period
  
20,965,000
   
0.221
 
Exercisable
  
18,440,000
   
0.240
 
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 6     COMMON STOCK OPTIONS (continued)

The Company estimates the fair value of each stock option award by using the Black-Scholes option-pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes option-pricing model is zero. Expense of $722,090$0 and $394,520$126,369 related to stock options was recorded for the ninesix months ended SeptemberJune 30, 2016 and 2015, and 2014, respectively.  Excluding options whose performance condition is not yet deemed probable, as of June 30, 2016, the Company had unvested outstanding options with related unrecognized expense of $112,147.  The Company will recognize this expense over the service period or when the achievement of the required milestones becomes probable.

The Company estimated the fair value of the stock options described in the above paragraphs as these options vest over their remaining useful lives, which range from 2 to 47 months.of the date of the grant or date of re-measurement, based on the following weighted-average assumptions:
 
Risk-free interest rate1.50% to 1.69%
Expected life5 years
Expected volatility130.31% to 136.34%
Dividend yield0.00%
 
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIESA summary of the status of the Company’s outstanding options as of June 30, 2016 and changes during the six months then ended, is presented below:
Notes to the Condensed Consolidated Financial Statements (Unaudited)
  Shares  
Weighted Average
Exercise Price
 
Outstanding, beginning of the period  20,965,000  $0.145 
Granted  150,000   - 
Expired/Canceled  (250,000)  0.002 
Exercised  -   - 
Outstanding, end of the period  20,865,000   0.143 
Exercisable  19,640,000   0.145 

NOTE 7     STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS

During August 2015,January 2016, the Company sold an aggregate of 2,600,000issued 500,000 restricted shares of common stock to five accredited investors for cash proceeds totaling $130,000,a consultant. The fair value of the shares on the date of grant was $48,000, or $0.05$0.096 per share.  The Company recorded compensation expense of $48,000 in connection with the issuance of the shares.

During April, May, and June 2015 the Company sold an aggregate of 7,500,000 restricted shares of common stock to eight accredited investors for cash proceeds totaling $375,000, or $0.05 per share.

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

During February 2015, the Company sold 300,000 restricted shares of common stock to an accredited investor for cash proceeds totaling $21,000, or $0.07 per share.
During January, February and March 2014, the Company sold an aggregate of 9,000,000 restricted shares of common stock to five accredited investors for cash proceeds totaling $450,000, or $0.05 per share.
During March 2014, the Company sold an aggregate of 7,050,000 restricted shares of common stock to 16 accredited investors for cash proceeds totaling $599,250, or $0.085 per share.
During September 2014, the Company sold an aggregate of 2,471,429 restricted shares of common stock to five accredited investors for cash proceeds totaling $173,000, or $0.07 per share.

NOTE 8     ACCOUNTS PAYABLE – RELATED PARTIES
 
As of SeptemberJune 30, 20152016 and December 31, 2014,2015, the Company had accounts payable ofowed $228,109 and $233,109, owedrespectively, to certain consultants for services rendered in prior years.services.  These consultants are stockholders of the Company.Company and are related parties.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 9     RECENT ACCOUNTING PRONOUNCEMENTPRONOUNCEMENTS
 
In April 2015,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.”  To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.  For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption of the ASU is permitted for financial statements that have not been previously issued.  The Company is assessing the impact, if any, of implementing this guidance on its financial reporting, as well as the impact of early adoption of the ASU.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP.  The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein.  EarlyEarlier adoption is not permitted.permitted only as of annual reporting periods beginning after December 15, 2016.  The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going ConcernConcern..  This standard  ASU No. 2014-15 sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related disclosures in the notes to the financial statements.  The standardASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  The Company does not expectis assessing the implementationimpact, if any, of implementing this guidance on the Company’s financial statement presentation.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), simplifying the presentation of deferred income taxes on the balance sheet by requiring companies to haveclassify everything as either a materialnon-current asset or non-current liability. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  The Company is assessing the impact, if any, of implementing this guidance on the Company’s financial statement presentation.

In February 2016, the FASB released ASU No. 2016-02, Leases (Topic 842), to bring transparency to lessee balance sheets. ASU No. 2016-02 will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 will apply to both types of leases; capital (or finance) leases and operating leases. Previously, US GAAP has required only capital leases to be recognized on lessee balance sheets. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is assessing the impact of ASU No. 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share- Based Payment Accounting. ASU No. 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU No. 2016-09 is effective for years ending after December 31, 2016, and the Company is assessing the impact of ASU No. 2016-09 on its consolidated financial statements. 

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.  To simplify presentation of debt issuance costs, the amendments in ASU No. 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU No. 2015-03.  ASU 2015-03 was effective for the Company for the quarter ended March 31, 2016 and there was no impact on its financial reporting.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 10     NOTES PAYABLE
During September 2015, the Company entered into two notes payable with an unrelated third party which total $75,000. The notes are unsecured, have maturity dates in September 2018, bear interest of 12.0% per annum, with interest only payments due July 5 and January 5 each year through maturity. The holder may convert up to 20 percent of the then outstanding principal of the notes into conversion shares at $0.10 per share, at any time prior to the payment in full of the outstanding principle balance of the notes.  The Company has the right to prepay these notes without premium or penalty at any time.
NOTE 1110     SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and no such eventsnoted none that require accounting or disclosure in the accompanying financial statements.

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

Recent Developments
 
On July 18, 2015,In June 2016, we received notification fromadditional patent protection for the AsepticSure ® system by the European Union Patent and Trademark Office (EU) for our patent application Bio-Terrorism Counter Measures Using Ozone and Hydrogen Peroxide.  This EU patent grant expands on the previously awarded bio-terrorism patent protection in the U.S. and Canada.  With this EU patent, we secure patent protection in the United States Environmental Protection Agency (“EPA”) regarding “Report of Analysis for Compliance with PR Notice 11-03” acknowledging that our submissionKingdom, Germany, and France.
As of June 24, 2015 was found30, 2016, we were preparing to ship our first three units under our agreement with our South American distributor GYD S.A.  The units sold to the distributor are Generation II AsepticSure® systems that were converted to Generation III systems, as such the negotiated price is not reflective of standard pricing.  In connection with this order the distributor paid an initial deposit of $118,500 on June 13, 2016.  We shipped two of the three units in July 2016, at which time we received another payment of approximately $79,000.  The remaining $39,500 is expected to be received when the third unit is shipped in full compliance with the standardsAugust 2016.

Results of submission of data contained in the referenced PR Notice 11-03.  The EPA has up to five months to complete its review of our application to register our AsepticSure® Oxidative Catalyst for use with our disinfection system in hospitals, clinics, the food industry, recreation/exercise/sporting facilities venues,Operations
Three Months Ended June 30, 2016 and hotels. There is no assurance that our application will be accepted or that additional changes or modifications will not be required in order to obtain registration. However, we view this development to be significant and will continue to work with the EPA and our professional advisors to obtain the requested registration.2015
 
During the quarter ended SeptemberJune 30, 2015, we sold two AsepticSure systems to a purchaser in Jeddah, Saudi Arabia.  The purchaser, Al-Hidaya International Medical Services Company (Al-Hidaya), has also signed a non-binding letter of intent to become the Company’s exclusive distributor of the system in the Kingdom of Saudi Arabia, subject to the completion and execution of a binding distribution agreement.  Pursuant to the letter of intent, Al-Hidaya sponsored the travel of a Medizone team to Saudi Arabia led by Dr. Michael E. Shannon, our President and Director of Medical Affairs, to introduce the system to interested medical and government representatives in Saudi Arabia and to provide initial training to Al-Hidaya personnel.  Once an agreement has been executed, we expect Al-Hidaya to introduce a service model to the medical community throughout Saudi Arabia.  In addition, the distribution agreement will provide that if Al-Hidaya is successful in establishing sales of the system and related services in Saudi Arabia, we will consider granting future distribution rights to Al-Hidaya for other countries in the Middle East on a country-by-country basis.  A subsequent Al-Hidaya-sponsored trip by a senior Medizone technician to continue the training of Al-Hidaya technicians took place in October 2015.  Al-Hidaya worked with Saudi regulatory authorities through system demonstrations both in-hospital and in Al-Hidaya offices in these two training sessions.  Al-Hidaya has represented that it is in regular and frequent contact with the Saudi regulatory authorities and that it believes it will soon obtain full regulatory approval to import additional AsepticSure systems and operate them providing disinfection services.  Following Saudi regulatory approval, it is anticipated the formal contract for future distribution and service rights will be finalized and executed.  The distribution agreement will include additional system orders for production.  Al-Hidaya has established office, supply and training space to support AsepticSure activities and has hired service technicians in preparation for a broader launch following receipt of regulatory approval.  As of the date of this report, final Saudi regulatory approval is pending and the final distribution agreement with the proposed distributor had not been signed.
Subsequent to the quarter ended September 30, 2015, during the week of October 26-30, 2015, Dr. Shannon and other Medizone staff, with additional support from our Canadian distributor Wood-Wyant Canada, and at the request of Alberta Health Services (“AHS”), which represents 304 hospitals in the Province of Alberta, provided demonstrations of AsepticSure at two hospitals in the Province.  AHS had requested this be a thorough demonstration providing the opportunity for a complete evaluation of our system.  Until the completion of this evaluation period, it is our understanding that AHS has no immediate plans or intentions to make a procurement decision.
Results of Operations
Three Months Ended September 30, 2015 and 2014
During the quarter ended September 30, 2015,2016, we continued our primary focus on the expansion of our distribution channels, the continuedobtaining approval from the EPAU.S. Environmental Protection Agency (“EPA”), and the continued development of a computer control feature for the AsepticSure® system.

For the quarters ended June 30, 2016 and 2015, we had no revenues or associated cost of revenues.

For the quarter ended SeptemberJune 30, 2015, we had revenue of $167,000 and associated cost of goods sold of $88,411 from the sale of two AsepticSure systems in Saudi Arabia, compared to no revenues or costs of goods sold for the quarter ended September 30, 2014.
For the quarter ended September 30, 2015,2016, we had a net loss of $798,136,$320,733, compared with a net loss of $545,143$384,517 for the quarter ended SeptemberJune 30, 2014.2015.  Our primary expenses are payroll and consulting fees, research and development costs, office expenses, and interest expense and stock-based compensation expense recorded as a result of options granted to directors, an employee and consultants.expense.  The increase in net lossdecrease for the quarter ended SeptemberJune 30, 20152016 compared to the prior year quarter was primarily due to higherreduced general and administrative expenses from less stock-based compensation expense for options previously granted, during the quarter.offset slightly by increased research and development expenses.
��
For the quarters ended SeptemberJune 30, 20152016 and 2014,2015, we incurred $800,185$216,182 and $429,900,$288,182, respectively, in general and administrative expenses. The majority of these expenses comprisewere payroll, and consulting fees and professional fees. The increase in general and administrative expensesdecrease for the quarter ended SeptemberJune 30, 20152016 over the comparable period in the prior year was due to higherless stock-based compensation expense for options previously granted to directors consultants and an employee.consultants.
 
For the quarters ended SeptemberJune 30, 20152016 and 2014,2015, we incurred $56,263$82,075 and $96,660,$76,840, respectively, in research and development expenses.  Research and development expenses include consultantconsulting fees, interface development costs, prototypes, and research stage ozone generator and instrument development.  The decreaseincrease for the quarter ended SeptemberJune 30, 20152016 over the comparable period in the prior year was due to increased consulting costs which were partially offset by lower stock-based compensation expense forfrom options that were granted to a consultant and an employee.
employee in 2015.
 
Principal amounts owed on notes payable totaled $382,689$292,124 and $298,241$297,396 as of SeptemberJune 30, 20152016 and December 31, 2014,2015, respectively.  Interest expense on these obligations for the quarters ended SeptemberJune 30, 2016 and 2015, was $8,539 and 2014, was $6,820 and $6,192,$6,222, respectively. The interest rates on this debt range from 4.63% to 12.00%10.00% per annum.


Six Months Ended SeptemberJune 30, 20152016 and 20142015

For the ninesix months ended SeptemberJune 30, 2015, we had revenue of $167,000 and associated cost of goods sold of $88,411 from the sale of two units in Saudi Arabia, compared to no revenues or cost of goods sold for the same period in the prior year.
For the nine months ended September 30, 2015,2016, we had a net loss of $1,592,144,$808,162, compared with a net loss of $1,532,712$794,008 for the ninesix months ended SeptemberJune 30, 2014.2015. Our primary expenses are payroll, consulting fees, research and development costs, and office expenses, together with interest expense and additional expense recorded as a result of options granted to directors, employees and consultants.  The slight increase in net loss for the ninesix months ended SeptemberJune 30, 2015,2016, compared to the same period in 2014,2015, was due to higheran increase in research and development costs from consulting and stock-based compensation expense for options granted to directors, employees and consultants.  This was partially offset by reduced research and the proceeds from the sale of the two AsepticSure systems.

For the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, we incurred $1,401,199$495,246 and $1,164,435,$601,014, respectively, in general and administrative expenses. The majorityprimary reason for the decrease for the six months ended June 30, 2016, compared to the same period in 2015, was from the decreased option expense.  The number of theseoption grants and vesting for directors, employees and consultants resulting in compensation expense in 2016 was lower than in 2015.  Our primary expenses compriseare payroll, consulting fees, and professional fees.  The increase for the nine months ended September 30, 2015, compared to the same period in 2014, was due primarily to higher stock-based compensation for options granted to directors, employees and consultants. The remaining general and administrative expenses include rent, office expenses and travel expenses.

For the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, we incurred $210,336$268,036 and $313,153,$154,073, respectively, in research and development expenses as a result of prototype development costs,expenses, consulting, and other research activities. The decreaseprimary reason for the nineincrease for the six months ended SeptemberJune 30, 2015,2016, compared to the same period in 2014,2015, was primarily due to lowerincreased development software, supplies, and consulting expenses including stock-based compensation for the grant of optionsexpense related to consultants and an employee as well as the result of less research and development and prototype development costs.  Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.restricted common shares issued in January 2016.

Interest expense on the notes payable during the ninesix months ended SeptemberJune 30, 2016 and 2015, was $17,130 and 2014, was $19,438 and $18,651,$12,618, respectively. The applicable interest rates on this debt range from 4.63% to 12.00%10.00% per annum.
 
Liquidity and Capital Resources
 
As of SeptemberJune 30, 2015,2016, our working capital deficiency was $3,388,643,$3,419,407, compared to a working capital deficiency of $3,235,007$2,675,007 as of December 31, 2014.2015. As of June 30, 2016, we had approximately $49,000 of available cash and as of July 31, 2016 we had approximately $16,000 of available cash.   We have incurred significant losses from inception through SeptemberJune 30, 2015,2016, which have resulted in an accumulated deficit of $34,954,568.$36,206,508.  The stockholders’ deficit as of SeptemberJune 30, 20152016 was $3,197,275,$3,330,882, compared to $3,021,832$2,596,234 as of December 31, 2014.2015.  This change is due to the net loss for the nine months ended September 30, 2015 offset byproceeds from the sale of restricted shares of common stock.stock being less than the net loss for the six months ended June 30, 2016.
 
We will continue to require additional financing to fund operations and to undertake our new business planscontinue to further the on-going testing,test and to market our hospital and medical disinfection system.  We believe we will need approximately $1,500,000 over the next 12 months for continued production manufacturing and related activities, research, development, and marketing activities, as well as for general corporate purposes.  
 
14
During the ninesix months ended SeptemberJune 30, 2015, we generated cash of $676,000$546,000 through the sale of 13,400,00010,800,000 shares of common stock to 2015 accredited investors at prices ranging from $0.05 per share to $0.07 per share.  No cash was generated through the sale of shares of common stock for the quarter ended June 30, 2016.  We anticipate that we will be able to raise additional funds, as needed, from certain of the accredited investors who have purchased shares during previous years, although we have no agreements at this time with any of these investors to purchase our securities, and there can be no assurance that these investors will purchase additional shares.

Going Concern

Our unaudited condensed interim consolidated financial statements included in this report have been prepared onwith the assumption that we will continue as a going concern. There is substantial doubt that we will be able to continue as a going concern.  Through the date of this report on Form 10-Q, it has been necessary to relywe have relied upon financing from the sale of our equity securities to sustain operations as indicated above.operations. Additional financing will be required if we are to continue as a going concern. If additional financing is not obtained in the near future,term, we will be required to curtail or discontinue operations, or seek protection under the U.S. bankruptcy laws. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to us. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing stockholders.


Forward-Looking Statements and Risks
 
The statements contained in this report on Form 10-Q that are not historical are "forward-looking statements"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements discuss our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases that include “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue and expense levels in the future and the sufficiency of existing assetsliquidity to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
 
We believe that many of the risks previously discussed in our SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:

·Rigorous government scrutiny and regulation of our products and planned products;
·Potential effects of adverse publicity regarding ozone and related technologies or industries;
·Failure to sustain or manage growth including the failure to continue to develop new products; and
·The potential inability to obtain needed financing or to obtain funding on terms favorable to us.
 
Critical Accounting Policies and Estimates
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of such statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate these estimates, including those related to intangible assets, expenses, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

We recognize revenue when a contractual arrangement exists, product is shipped, payment from the customer is reasonably assured, and the price is fixed or determinable.  We record customer deposits that have not yet been earned as unearned revenue. Revenue is recognized only when title and risk of loss passes to the customer.
 
Our inventory consists of our AsepticSure® product and is valued on a specific identification basis.  We purchase our inventory as a finished product from unrelated manufacturing companies. We write off 100% of the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. No inventory was obsolete or excessive as of SeptemberJune 30, 2015.2016.

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


Recent Accounting Pronouncements
 
In April 2015,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.”  To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.  For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption of the ASU is permitted for financial statements that have not been previously issued.  We are assessing the impact, if any, of implementing this guidance on our financial reporting, as well as the impact of early adoption of the ASU.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP.  The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein.  EarlyEarlier adoption is not permitted.  We arepermitted only as of annual reporting periods beginning after December 15, 2016.  The Company is assessing the impact, if any, of implementing this guidance on the Company’sits consolidated financial position, results of operations and liquidity.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going ConcernConcern..  This standard  ASU No. 2014-15 sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related disclosures in the notes to the financial statements.  The standardASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  We do not expectThe Company is assessing the implementationimpact, if any, of implementing this guidance to have a material impact on the Company’s financial reporting.statement presentation.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), simplifying the presentation of deferred income taxes on the balance sheet by requiring companies to classify everything as either a non-current asset or non-current liability. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  The Company is assessing the impact, if any, of implementing this guidance on the Company’s financial statement presentation.

In February 2016, the FASB released ASU No. 2016-02, Leases (Topic 842), to bring transparency to lessee balance sheets. ASU No. 2016-02 will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 will apply to both types of leases; capital (or finance) leases and operating leases. Previously, US GAAP has required only capital leases to be recognized on lessee balance sheets. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is assessing the impact of ASU No. 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share- Based Payment Accounting. ASU No. 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU No. 2016-09 is effective for years ending after December 31, 2016, and the Company is assessing the impact of ASU No. 2016-09 on its consolidated financial statements. 

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.  To simplify presentation of debt issuance costs, the amendments in ASU No. 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU No. 2015-03.  ASU 2015-03 was effective for the Company for the quarter ended March 31, 2016 and there was no impact on its financial reporting.

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


Item 4.  Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these disclosure controls and procedures, management recognizesrecognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As of September 30, 2015,the end of the period covered by this report, our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act).  Based on this evaluation, the ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2015.2016.

Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings
 
There were no material developments during the nine monthsquarter ended SeptemberJune 30, 20152016 relative to the legal matters previously disclosed by the Company.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
DuringWe did not sell any securities during the quarter ended SeptemberJune 30, 2015, we sold an aggregate of 2,600,000 restricted shares of common stock to five accredited investors for cash proceeds totaling $130,000 at a price of $0.05 per share, as follows:
·On August 31, 2015, we sold 900,000 shares of common stock to two accredited investors for cash proceeds of $45,000.
2016
 
·On August 17, 2015, we sold 1,000,000 shares of common stock to an accredited investor for cash proceeds of $50,000.
Item 3.  Defaults Upon Senior Securities.

None.
Item 4.  Mine Safety Disclosures

Not applicable.
 
·On August 5, 2015, we sold 500,000 shares of common stock to an accredited investor for cash proceeds of $25,000.
Item 5.  Other Information
 
·On August 3, 2015, we sold 200,000 shares of common stock to an accredited investor for cash proceeds of $10,000.
Effective April 30, 2016, our Chief Financial Officer, Thomas Auger, resigned to pursue other interests.  Effective April 30, 2016, we entered into an employment agreement with our new Chief Financial Officer, Boyd G. Evans.  We filed a Current Report on Form 8-K on May 6, 2016 to report this change.  The purchasers of the shares in these private placements included a director of the Company as well as existing stockholders not otherwise affiliated with the Company.  There were no underwriters or public solicitation involved in the offer or sale of these securities. The proceeds are being used for general operating expensesCurrent Report includes biographical and the continuing development of the AsepticSure® hospital disinfection system. The offer and sale of these securities was made without registration under the Securities Act of 1933, in reliance upon exemptions from registration, including, without limitation, the exemption provided under Section 4(a)(2) of the Securities Act for private and limited offers and sales of securities made solely to accredited investors.business background information regarding Mr. Evans. 
 
Item 6.  Exhibits
 
Exhibit 31.1   
  
Exhibit 31.2     
  
Exhibit 32.1 
  
Exhibit 32.2 
  
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
SIGNATURES

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

MEDIZONE INTERNATIONAL, INC.
(Registrant)


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


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


November 13, 2015August 15, 2016
 
 
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