UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
 

FORM 10-Q
 

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

For the quarterly period ended March 31, 20162017

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,350 E. Michigan Ave., Suite 401, Sausalito, California  94965#500, Kalamazoo, MI 49007
(Address of principal executive offices, Zip Code)

(415) 331-0303(269) 202-5020
(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 ☑   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 ☑   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, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth 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 ☑
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☑

As of May 13, 2016,12, 2017, the registrant had 369,934,068397,934,068 shares of common stock issued and outstanding.

MEDIZONE INTERNATIONAL, INC.
FORM 10-Q

TABLE OF CONTENTS
March 31, 20162017

  Page No.
Part I — Financial Information 
   
Item 1.
Financial Statements (Unaudited)
1
   
 
Condensed Consolidated Balance Sheets:Sheets as of March 31, 20162017 and December 31, 20152016 (Unaudited)
13
   
 
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016 and 2015(Unaudited)
24
   
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 and 2015(Unaudited)
35
   
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
56
   
Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
1012
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
1315
   
Item 4.
Controls and Procedures
1315
   
Part II — Other Information 
   
Item 1.
Legal Proceedings
1416
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
1416
   
Item 3.
Defaults Upon Senior Securities
1416
   
Item 4.
Mine Safety Disclosures
1416
   
Item 5.
Other Information
1416
   
Item 6.
Exhibits
1416
   
Signatures
1517



PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Condensed Consolidated Balance Sheets (Unaudited)

ASSETS
ASSETS
 
 March 31,  December 31,   
 2016  
2015 (1)
  March 31, 2017  December 31, 2016 
ASSETS      
      
Current Assets:      
Current assets:      
Cash $288,680  $745,078  $22,574  $398,290 
Inventory  294,706   277,823   240,806   109,573 
Prepaid expenses  43,122   31,986   91,738   81,666 
Total Current Assets  626,508   1,054,887 
Property and equipment, net  311   415 
Other Assets:        
Total current assets  355,118   589,529 
Other assets:        
Trademark and patents, net  168,633   176,086   142,971   151,444 
Lease deposit  4,272   4,272   6,938   4,272 
Total Other Assets  172,905   180,358 
Total Assets $799,724  $1,235,660 
Total other assets  149,909   155,716 
Total assets $505,027  $745,245 
                
LIABILITIES AND STOCKHOLDERS’ DEFICITLIABILITIES AND STOCKHOLDERS’ DEFICIT 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
                
Current Liabilities:        
Current liabilities:        
Accounts payable $474,718  $491,044  $539,484  $459,654 
Accounts payable – related parties  228,109   233,109 
Accrued expenses  570,107   554,834   605,614   592,621 
Accrued expenses – related parties  1,928,659   1,928,659   557,297   538,887 
Other payables  224,852   224,852   224,852   224,852 
Notes payable  306,007   297,396   307,838   297,332 
Notes payable – related parties  1,594,690   1,617,881 
Warrant liability  882,581   985,163 
Total current liabilities  3,732,452   3,729,894   4,712,356   4,716,390 
Notes payable, net of current portion  75,000   75,000   75,000   75,000 
Total liabilities  3,807,452   3,804,894   4,787,356   4,791,390 
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 
Commitments and contingencies (Note 7)        
        
Stockholders’ deficit:        
Preferred stock, $0.00001 par value:
50,000,000 authorized; no shares outstanding
  -   - 
Common stock, $0.001 par value:
500,000,000 authorized; 395,934,068 and 393,934,068 shares issued and outstanding, respectively
  395,934   393,934 
Additional paid-in capital  32,544,146   32,496,646   34,426,358   33,680,146 
Accumulated other comprehensive loss  (36,073)  (36,968)  (50,220)  (48,043)
Accumulated deficit  (35,885,735)  (35,398,346)  (39,054,401)  (38,072,182)
Total Stockholders’ Deficit  (3,007,728)  (2,569,234)
Total Liabilities and Stockholders’ Deficit $799,724  $1,235,660 
Total stockholders’ deficit  (4,282,329)  (4,046,145)
Total liabilities and stockholders’ deficit $505,027  $745,245 
(1) The condensed consolidated balance sheet as of December 31, 2015
(1)  The condensed consolidated balance sheet as of December 31, 2016 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., SUBSIDIARY AND AFFILIATE
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
 
  For the Three Months Ended March 31, 
  2016  2015 
       
Revenues $-  $- 
Operating Expenses:        
Cost of revenues  -   - 
General and administrative  279,064   312,832 
Research and development  185,961   77,233 
Depreciation and amortization  13,826   13,030 
Total Operating Expenses  478,851   403,095 
Loss from Operations  (478,851)  (403,095)
Interest expense  (8,591)  (6,396)
Interest income  53   - 
Net Loss  (487,389)  (409,491)
Other comprehensive gain on foreign
  currency translation
  895   18,231 
Total Comprehensive Loss $(486,494) $(391,260)
Basic and Diluted Net Loss per Common Share $(0.00) $(0.00)
         
Weighted Average Number of Common Shares Outstanding  369,906,595   347,259,624 
  For the Three Months Ended March 31, 
  2017  2016 
Revenues $-  $- 
Operating expenses:        
  Cost of revenues  -   - 
  General and administrative  977,262   279,064 
  Research and development  84,536   185,961 
  Depreciation and amortization  14,403   13,826 
      Total operating expenses  1,076,201   478,851 
   Loss from operations  (1,076,201)  (478,851)
Other income (expense):        
Gain on measurement of warrant liability  102,582   - 
Interest expense  (8,615)  (8,591)
Interest income  15   53 
     Total other income (expense)  93,982   (8,538)
      Net loss  (982,219)  (487,389)
Other comprehensive loss:        
  Gain (loss) on foreign currency translation  (2,177)  895 
      Total comprehensive loss $(984,396) $(486,494)
Basic and diluted net loss per common share $(0.00) $(0.00)
Weighted average number of common shares outstanding  394,356,290   369,906,595 
 

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

MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Condensed Consolidated Statements of Cash Flows (Unaudited)
  
For the Three Months Ended
March 31,
 
  2017  2016 
Cash flows from operating activities:      
Net loss $(982,219) $(487,389)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
        
Depreciation and amortization  14,403   13,826 
Stock-based compensation  688,212   48,000 
Change in warrant liability  (102,582)  - 
Changes in operating assets and liabilities:        
Inventory  (131,233)  (16,883)
Prepaid expenses  13,512   20,364 
Accounts payable  79,830   (21,326)
Accrued expenses and accrued expenses – related parties  31,403   15,273 
Net cash used in operating activities  (388,674)  (428,135)
         
Cash flows from investing activities:        
Cost of registering patents  (5,930)  (6,269)
Net cash used in investing activities  (5,930)  (6,269)
         
Cash flows from financing activities:        
Principal payments on notes payable and notes payable – related parties  (38,935)  (22,889)
Issuance of common stock for cash  60,000   - 
Net cash provided by (used in) financing activities  21,065   (22,889)
Effects of foreign currency exchanges rates on cash  (2,177)  895 
Net decrease in cash  (375,716)  (456,398) 
Cash as of beginning of the period  398,290   745,078 
Cash as of end of the period $22,574  $288,680 
         
Supplemental cash flow information:        
   Cash paid for interest $606  $3,318 
Supplemental disclosure of non-cash financing activities:        
  Financing of insurance premiums $26,250  $31,500 

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


MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Condensed Consolidated Statements of Cash Flows (Unaudited)
  For the Three Months Ended 
  March 31, 
  2016  2015 
Cash Flows from Operating Activities:      
Net loss $(487,389) $(409,491)
Adjustments to reconcile net loss to net cash
 used in operating activities:
        
Depreciation and amortization  13,826   13,030 
Stock-based compensation expense  48,000   81,229 
Changes in operating assets and liabilities:        
Prepaid expenses  20,364   22,954 
Inventory  (16,883)  - 
Accounts payable and accounts payable – related parties  (21,326)  (30,112)
Accrued expenses and accrued expenses – related parties  15,273   57,500 
Net Cash Used in Operating Activities  (428,135)  (264,890)
         
Cash Flows from Investing Activities:        
Cost of registering patents  (6,269)  (8,543)
Net Cash Used in Investing Activities  (6,269)  (8,543)
         
Cash Flows from Financing Activities:        
Principal payments on notes payable  (22,889)  (23,291)
Issuance of common stock for cash  -   171,000 
Net Cash (Used in) Provided by Financing Activities  (22,889)  147,709 
Effect of Foreign Currency Exchange Rates  895   18,231 
         
Net decrease in cash  (456,398)  (107,493)
Cash as of beginning of the period  745,078   140,496 
Cash as of end of the period $288,680  $33,003 
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) (Continued)
 For the Three Months Ended 
 March 31, 
 2016 2015 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:    
Cash paid for interest $3,318  $482 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:        
Financing of insurance policies $31,500  $31,000 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

NOTE 1     BASIS OF PRESENTATION

The financial information of Medizone International, Inc., a Nevada corporation (the(“Medizone), the Canadian Foundation of Global Health (“CFGH) based in Ottawa, Canada, considered to be a variable interest entity (“VIE”) as described below, and Medizone Canada, Inc. a wholly owned subsidiary, (collectively, 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 reportAnnual Report on Form 10-K for the year ended December 31, 2015.2016. 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 months ended March 31, 20162017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.2017.

NOTE 2     CANADIAN FOUNDATION FOR GLOBAL HEALTH

In late 2008, the CompanyMedizone assisted in the formation of the Canadian Foundation for Global Health (“CFGH”),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 CompanyMedizone to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’sMedizone’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 CompanyMedizone determined that CFGH met the requirements of a VIE effective upon the first advance to CFGH on February 12, 2009. After eliminations, the operations and equity of the non-controlling interest is not material to the consolidated financial statements. Accordingly, the financial statements of CFGH have been consolidated with those of the CompanyMedizone 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  For the Three Months Ended 
March 31,  March 31, 
2016 2015  2017  2016 
          
Numerator: Net loss $(487,389) $(409,491) $(982,219) $(487,389)
Denominator: Weighted average number of common shares outstanding  369,906,595   347,259,624   394,356,290   369,906,595 
Basic and diluted net loss per common share $(0.00) $(0.00) $(0.00) $(0.00)

Common stock equivalents, consisting of options to purchase 20,715,00021,565,000 shares and warrants to purchase up to $1,000,000 of common stock, with the number of shares determined based on a 20-day average stock price prior to the date of exercise, have not been included in the calculation as their effect is antidilutive for the periods presented.

NOTE 4     GOING CONCERN

The Company’s condensed consolidated financial statements are prepared in accordance withusing US GAAP which assumes an entity is a going concern and contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant recurring losses from its inception through March 31, 2016,2017, which have resulted in an accumulated deficit of $35,885,735 as

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

NOTE 4     GOING CONCERN (continued)

$39,054,401 of March 31, 2016.2017.  The Company does not have funds sufficient to cover its operating costs for the next 12 months, has negative equity, andminimal cash, has a working capital deficit of $3,105,943$4,357,238, and a total stockholders’ deficit of $4,282,329 as of March 31, 2016.2017. The Company has relied almost exclusively on debt and equity financing to sustain its operations.  Accordingly, there is a substantial doubt about the Company’s ability to continue as a going concern.

5
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 4    GOING CONCERN (continued)

Continuation of the Company as a going concern is dependent upon future revenues, obtaining additional capital and ultimately, upon the Company’s attaining profitable operations.  The Company will require substantial additional funds to complete the development ofcontinue to develop its products, manufacture 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 most likely be forced to substantially reduce or cease its operations.

The Company believes that it will need approximately $1,500,000 overduring the next 12 months for continued productionproduct manufacturing, and related activities, research, development and marketing activities, as well as for limited general corporate purposes.  No

During the three months ended March 31, 2017, the Company raised cash was generatedproceeds of $60,000 through the sale of 1,000,000 shares of common stock for the quarter ended March 31, 2016.  to its Chairman and Interim CEO at a price of $0.06 per share as part of a private offering.

The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplishaccomplishing the plan described in the preceding paragraphs and eventually attainattaining profitable operations.  The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

NOTE 5     INVENTORY

In December 2016, the Company terminated a Distribution and License Agreement with a distributor due to lack of market development by the distributor. In connection with the termination, the Company negotiated the return of five disinfection units on or before January 17, 2017 paying the distributor $25,000 per unit. The units have been upgraded to the current technology to support the ongoing expansion of the Company’s commercial strategy

NOTE 6     WARRANT LIABILITY

The Company accounts for its common stock warrants under ASC 480, Distinguishing Liabilities from Equity. Any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, which requires or may require the issuer to settle the obligation by transferring assets, is classified as a liability. This liability is to be remeasured at fair value at each reporting period, with the changes in fair value recognized as gain (loss) on remeasurement of warranty liability. The fair value of the warrants to purchase common stock is estimated using the Black-Scholes valuation model. The significant assumptions used in estimating the fair value of warrant liabilities include the exercise price, volatility of the stock underlying the warrant, risk-free interest rate, estimated fair value of the stock underlying the warrant and the estimated life of the warrant.
In October 2016, the Company issued warrants to purchase from the Company up to $1,000,000 in common stock with the number of shares determined based on a 40% discount to the 20-day average stock price prior to the date of exercise. The warrants are exercisable between January 31, 2017 and January 30, 2018, at which point the outstanding warrants expire. Since the exercise price of the warrant is yet to be determined, the Company recorded a common stock warrant liability of $937,951 on the warrant’s issuance date and remeasured it at fair value on December 31, 2016 at $985,163. The warrant liability is remeasured at fair value at each quarter end until the warrant liability expires.

The estimate was calculated using the following inputs:
Input March 31, 2017 
Risk-free interest rate  103%
Expected life10 months 
Expected volatility  102.89%
Dividend yield  0.00%
Stock price $0.10 


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

NOTE 6     WARRANT LIABILITY (continued)

As of March 31, 2017, the Company recorded a decrease in the warrant liability of $102,582 which resulted from the fluctuation in the Company’s stock price at the end of the year. The warrant liability was $882,581 as of March 31, 2017.

NOTE 57              COMMITMENTS AND CONTINGENCIES

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

Litigation

Rakas vs. Medizone International, Inc. - A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement.  In September 2001, the parties agreed to settle the matter for $25,000.  The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002.  On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties.  The Company has been unable to post the required bond amount as of the date of this report.  Therefore, the Company has recorded as part of accounts payable, the original default judgment in the amount of $143,000, plus fees totaling $21,308, as of March 31, 20162017 and December 31, 2015.2016, in accounts payable.  The Company intends to contest the judgment if and when it is able to do so in the future.

Related Party Agreements

In July 2016, the Company converted $228,109 of accounts payable – related parties, and $1,389,772 of accrued expenses – related parties into three promissory notes payable – related parties aggregating to $1,617,881. The amounts converted represent accrued expenses and accrued wages prior to 2009 owed to certain officers and executives of the Company.

On February 28, 2017, the Company entered into separation and release agreements (Separation Agreements) with its former Chairman and CEO, Edwin Marshall, and its former Director of Operations, Dr. Jill Marshall. The Separation Agreements include principal payment schedules for the promissory notes issued to these individuals and modify the terms of common stock option awards granted to them under the Company’s 2014 Equity Incentive Plan by increasing the exercise period of the grants from three months to three years following termination. The Company is currently in default with the terms of the agreements.

On March 1, 2017, the Company entered into an employment agreement with its new chairman and interim CEO, David Esposito, which states the terms of his employment and compensation. Mr. Esposito’s compensation consists of: 1) an annual base salary of $225,000, 2) a potential target bonus of up to 50% of base salary based on performance goals determined by the Board of Directors of the Company (“Board”), 3) equity awards, and 4) standard employee benefits, including vacation. Mr. Esposito’s employment agreement has an initial term of three years, but can be terminated by either party for any reason with 60 days’ notice.

Other Payables

As of March 31, 20162017, and December 31, 2015,2016, the Company hashad $224,852 of past due payables for which the Company has not received invoicesstatements or demands for payment for over 1019 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 applicable statute of limitations has expired.

Operating Leases

The Company operates a certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which provides a primary research and development platform.  The lease term is on a month-to-month basisJune 30, 2016 through June 29, 2018 with a monthly lease payment of $1,375$3,550 Canadian dollars (“CD”) plus the applicable goods and services tax (“GST”).   Leases for a second laboratory space for full scale room testing and a storage unit are on a month-to-month basis with a monthly lease payment of CD$1,375 and CD$475, respectively, plus the applicable GST.  
The Company has a non-cancelable lease for office space located in California, with monthly payments of approximately $500 through December 31, 2016.

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

NOTE 6     COMMON STOCK OPTIONS

In August 2013, the Company granted options for the purchase of 250,000 shares of common stock to a consultant, of which 50,000 were immediately vested.  These options are exercisable at $0.10 per share for five years from the date of grant with 50,000 options vesting immediately and the other 200,000 options vesting upon the achievement of certain milestones, which were met in 2015.  The Company recognized expense of $17,659 during the three months ended March 31, 2015, as milestones were achieved for the remaining 200,000 options.

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

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

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

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

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.  The options are exercisable for five years. The grant date fair value of the options was $140,178.  The Company recognized $35,044 of expense in connection with these options during the three months ended March 31, 2015. 

On December 4, 2014, the Company granted options to four consultants for the purchase of 140,000 shares of common stock at an exercise price of $0.11 per share.  The shares will vest when certain required milestones are achieved.  The options are exercisable for five years. Of the 140,000 options, 35,000 options vested during the three months ended March 31, 2015 and $3,367 was recognized as expense. The Company will measure and recognize additional expense on the remaining options when the achievement of required milestones becomes probable.

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. The total value of these options at the date of grant was $541,687, which the Company recognized as an expense during the year ended 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 total value of these options at the date of grant was $18,991, which the Company recognized as an expense during the year ended December 31, 2015.

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

The Company has a lease arrangement for office space in Kalamazoo, Michigan.  Monthly payments are approximately $1,000 and the lease expires in February of 2018. The Company had a month-to-month lease for office space located in California, with monthly payments of approximately $2,556. In February 2017, the Company gave 60-days’ notice that the lease would be terminated as of April 30, 2017. The Company does not have any leases in California as of April 30, 2017.

NOTE 6     COMMON STOCK OPTIONS (continued)8     EQUITY TRANSACTIONS

Recapitzalization

On December 15, 2016, the Company’s stockholders approved the Board’s recommendation to increase the number of shares of common stock authorized from 395,000,000 to 500,000,000 shares in order to provide the Company with sufficient authorized shares to accomplish its objectives. The Company filed an amendment to modify its Articles of Incorporation with the State of Nevada on January 4, 2017, which was approved by the State on January 24, 2017.

Common Stock Issuances

During January 2016, the Company issued 500,000 restricted shares of common stock to a consultant. The fair value of the shares on the date of grant was $48,000, or $0.96 per share. The Company recorded compensation expense of $48,000 in connection with the issuance of the shares.

During March 2017, the Company sold 1,000,000 restricted shares of common stock at a price of $0.06 per share to an investor, who is also a board member and executive officer, for net proceeds of $60,000 as part of a private offering.  The market price of the Company’s common stock on the date of the transaction was $0.10 per share.

Common Stock Options and Awards

The Company recognizes stock-based compensation expense for grants of stock option awards, stock awards, restricted stock units and restricted stock under the Company’s Incentive Plan to employees and nonemployee members of the Company’s Board of Directors. In addition, the Company grants stock options to nonemployee consultants from time to time in exchange for services performed for the Company.

The Company’s 2016 Equity Incentive Award Plan (the “2016 Plan”) was approved on December 15, 2016 by the stockholders. The 2016 Plan replaces the Company’s 2008 Equity Incentive Plan (the “2008 Plan”), 2009 Incentive Stock Plan (the “2009 Plan”), 2012 Equity Incentive Award Plan (the “2012 Plan”), and the 2014 Equity Incentive Plan ( the “2014 Plan” and, together with the 2008, 2009, and 2012 Plans, the “Prior Plans”). Options and awards previously granted under the Prior Plans that have not yet expired by their terms will remain outstanding until their expiration dates. The Company will no longer make any grants or awards under the Prior Plans. The 2016 Plan replaces all previous plans and reserves a total of 10,000,000 shares of common stock for awards granted under the 2016 Plan. As of March 31, 2017, 5,900,000 options have been granted, 1,000,000 shares have been awarded with an additional 1,000,000 shares to be awarded upon achievement of certain performance milestones under the 2016 Plan. 2,100,000 options are available for future grant.

The Company estimates the fair value of each stock option award by using the Black-Scholes option-pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because the Company does not pay dividends, the dividend rate variable used in the Black-Scholes option-pricing model is zero. Expense of $0 and $81,229 related to stock options was recorded for

For the three months ended March 31, 2017 and 2016, the Company recorded stock-based compensation of $688,212 and 2015, respectively.  Excluding$0, respectively, of which $434,688, relates to options whosegranted to employees, directors and consultants for the quarter ending March 31, 2017. Upon the appointment of its new Chairman and CEO, the Company incurred a one-time charge of $89,064 relating to the modification of vesting relating to 750,000 options issued in 2014 and a one-time charge of $150,000 pertaining to a stock award of 1,000,000 shares of common stock. The Company also recorded a one-time charge of $14,460 of stock-based compensation expense for the modification relating to the extension of exercisability from three weeks to three years upon retirement related to Mr. Marshall’s and Dr. Marshalls stock options. Mr. Esposito is also eligible to receive an additional 1,000,000 shares of common stock upon certain performance condition ismilestones being met. No expense has yet been recorded in conjunction with this award as the milestones have not yet deemed probable,been met as of March 31, 2016,2017.

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

NOTE 8     EQUITY TRANSACTIONS (continued)

Common Stock Options and Awards (continued)

As of March 31, 2017, the Company had 425,000 unvested outstanding options with related unrecognized expense of $104,647.$44,629. 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 at the date of the grant, or date of re-measurement, based on the following weighted average assumptions:

Risk-free interest rate1.52%1.43% to 1.601.99%
Expected life5 years 
Expected volatility 131.33%98.38% to 136.34101.86%
Dividend yield  0.00%

A summary of the status of the Company’s outstanding options as of March 31, 20162017 and changes during the three months then ended, is presented below:

 Shares  Weighted Average Exercise Price  Number of Shares  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value 
Outstanding, beginning of the period  20,965,000  $0.145 
            
As of December 31, 2016  20,715,000  $0.143   2.08  $261,220 
Granted  -   -   5,900,000   0.102         
Expired/Canceled  (250,000)  0.002 
Expired and canceled  (5,050,000)  0.230         
Exercised  -   -   -   -         
Outstanding, end of the period  20,715,000   0.143 
As of March 31, 2017  21,565,000   0.111   4.42  $91,695 
Exercisable  19,640,000   0.145   21,140,000   0.111   4.43   91,695 

NOTE 7     STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTSThe intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

During JanuaryWarrants

In October 2016, the Company issued 500,000warrants to purchase up to $1,000,000 in common stock with the number of shares determined based on a 20-day average stock price prior to the date of exercise with the exercise prices discounted 40%. The warrants are exercisable between January 31, 2017 and January 30, 2018, at which point the outstanding warrants expire (see Note 6).

NOTE 9     RELATED PARTY TRANSACTIONS

During March 2017, the Company sold 1,000,000 restricted shares of common stock to its Chairman and CEO at a consultant.$0.06 per share, for net proceeds of $60,000 as part of a private placement financing. The fair valueprivate offering price was discounted 40% to the market price of the shares oncommon stock as of the date of grant was $48,000, or $0.096 per share.  The Company recorded compensation expense of $48,000 in connection with the issuanceterms of the shares.offering were approved by the Company’s Board (see Note 4).

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

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

NOTE 8     ACCOUNTS PAYABLE – RELATED PARTIES
As of March 31, 2016 and December 31, 2015, the Company owed $228,109 and $233,109, respectively, to certain consultants for services.  These consultants are stockholders of the Company and are related parties.

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

NOTE 910     RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP.  The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual reporting periods beginning after December 15, 2016,2017, and

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

NOTE 10     RECENT ACCOUNTING PRONOUNCEMENTS (continued)

interim periods therein.  EarlyEarlier adoption is not permitted.permitted only as of annual reporting periods beginning after December 15, 2016.  The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related disclosures in the financial statements.  ASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  The Company is currently assessing the impact, if any, of implementing this guidance on the Company’s financial statement presentation.
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 in the quarter ended March 31, 2016 and there was no impact on its financial reporting.

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 and interim reporting periods beginning after December 15, 2016 and interim periods within annual periods ending after December 15, 2016.was adopted by the Company in the quarter ended March 31, 2017. The Company is currently assessing the impact, if any,effect of implementing this guidance onwas immaterial to the Company’s consolidated results of operations, financial statement presentation.position and cash flows.

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;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 currently assessing the impact of ASU No. 2016-02 may have on its consolidatedfuture financial statements.position, results of operations and liquidity.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows, and forfeitures. ASU No. 2016-09 is effective for years ending after December 31, 2016, and was adopted by the Company in the quarter ended March 31, 2017. The effect of this guidance was immaterial to the Company’s consolidated results of operations, financial position and cash flows.

In October 2016, the FASB issued ASU No. 2016-17, Interests held Through Related Parties That are Under Common Control. ASU No. 2016-17 clarifies the consolidation process for the primary beneficiary of a Variable Interest Entity (VIE) should that related party have indirect interests under common control with the reporting entity. ASU No. 2016-17 is effective for years ending after December 31, 2016 and was adopted by the Company in the quarter ended March 31, 2017.  The effect of this guidance was immaterial to the Company’s consolidated results of operations, financial position and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. ASU No. 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted for interim periods after January 1, 2017. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of ASU No. 2016-09 on its consolidatedoperations, financial statements.position and cash flows.

NOTE 1011     SUBSEQUENT EVENTS

In April 2017, the Company sold 2,000,000 restricted shares of common stock in a private placement to two accredited investors, including the Company’s Chairman and Interim CEO, for net proceeds of $120,000 as part of a private placement financing. The price of the common stock in the private placement was set at a 40% discount to the market price of the Company’s common stock immediately prior to the date the terms of the offering were approved by the Board.
On April 6, 2017, the U.S. Food and Drug Administration (“FDA”) notified the Company that it believes that AsepticSure®, the Company’s disinfectant system, should be classified as a medical device under Section 201(h) of the Food, Drug, and Cosmetic Act of 1938, as amended (“FDCA”).  The FDA representatives recommended that the Company consider whether it is appropriate for the Company to submit a premarket notification to the FDA or to seek pre-market approval of AsepticSure and invited Company representatives to schedule follow up meetings in the near future to discuss the best approach for introduction of the AsepticSure technology into the U.S. market. The Company has evaluated subsequent events throughis working with legal and regulatory advisors on a response to the filing dateFDA to establish the most efficient route to gain regulatory approval of this Quarterly Report on Form 10-Q and noted none that require accounting or disclosureAsepticSure as a medical device under the FDCA.  In the interim, the Company will not market AsepticSure in the accompanying financial statements.U.S. under its EPA clearance until it has obtained 510(k) clearance or an approval from the FDA.

Item 2.  Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Medizone International, Inc. (a, a Nevada corporation)corporation (collectively with our variable interest entity Canadian Foundation for Global Health or CFGH, and affiliate (collectively,our subsidiary Medizone Canada, Inc., “Medizone,” the “Company,” “we,” “us,” or “our”) areis engaged in conducting research into the use of ozone in the disinfection of surgical and other medical treatment facilities and in other applications.  During 2012, we began to sell our patented ozone disinfection system, AsepticSure®.  Our current workThe Company is currently focused 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 existingcontinuing 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 February 28, 2017, our Chairman and CEO, Edwin Marshall, retired from all of his positions with the Company. Jill Marshall, our Director or Operations, also retired on February 28, 2017. On March 1, 2017, the Board of Directors appointed David Esposito as our Chairman and Interim CEO.

In January 2016, we finalized an agreement withMarch 2017, the Company sold 1,000,000 shares of common stock in a consultantprivate placement (the “Private Offering”) for gross proceeds of $60,000 to obtainits Chairman and Interim CEO. The purchase price of the know-how necessaryrestricted shares was $0.06 per share.  The terms of the Private Offering included a purchase price at a discount of 40% to source the ultra violet (UV) ozone-generating bulbs andmarket price of the manufacturing expertise usedcommon stock on the date the offering terms were approved by the Board of Directors.  The participation of insiders of the Company in the constructionPrivate Offering was approved by the disinterested members of new generatorsthe Board of Directors.

On April 3, 2017, the Board of Directors appointed Dwayne Montgomery as a director and Chair of the Audit Committee.

On April 6, 2017, the U.S. Food and Drug Administration (“FDA”) notified the Company that areit believes that AsepticSure®, the Company’s disinfectant system, should be classified as a key componentmedical device under Section 201(h) of the Food, Drug, and Cosmetic Act of 1938, as amended (“FDCA”).  The FDA representatives recommended that the Company consider whether it is appropriate for the Company to submit a premarket notification to the efficiencyFDA or to seek pre-market approval of our Generation III AsepticSure® system.  As consideration,AsepticSure and invited Company representatives to schedule follow up meetings in the near future to discuss the best approach for introduction of the AsepticSure technology into the U.S. market. The Company does not agree with the FDA’s position; however, the Company is working with legal and regulatory advisors on a response to the FDA to establish the most efficient route to gain regulatory approval of AsepticSure as a medical device under the FDCA. In the interim, the Company will not market AsepticSure in the U.S. under the EPA clearance until it has obtained 510(k) clearance or an appropriate approval from the FDA. This decision does not affect Company activities in markets outside the United States.

Between April and May 2017, we issued 500,000sold 2,000,000 shares of common sharesstock at $0.096$0.06 per share to this consultanttwo accredited investors, including our Chairman and obtained access to the engineer of the generator design and supplier of the bulbs. In February 2016, we terminated the portion of the agreement with respect to future payments to the consultant. During the first quarter of 2016, Medizone entered into an agreement with the bulb supplier for manufacturing of the new generator design.  The technology of the design is unique to our AsepticSure® Generation III system and Medizone is the only customer for this product.  We believe that this agreement positions Medizone to have significantly increased production capabilities to address increases in demand during the second half of 2016, should it arise.
While our intention is to expand distribution in North America first, following final regulatory approvalCEO, in the U.S., we are also in the early stagesPrivate Offering for gross proceeds of preparation to work with potential corporate distribution partners in Europe and Asia.  In Chile, Peru, Columbia and Brazil, our distribution partner GYD S.A. is actively seeking regulatory approvals on a country by country basis in order to begin distribution activities in South America.  In the U.S., we have experienced increasing levels of interest from hospital administrators and infectious disease experts in both the private and government hospital sectors.  We expect to sell devices directly to hospitals as a result of this interest, which will help us penetrate the U.S. market more quickly than if we are required to establish other distribution channels.  As of the filing date of this quarterly report, the Company is more optimistic as to pending commercial success than at any other time in its recent history.$120,000.

Results of Operations

Three Months Ended March 31, 20162017 and 20152016

During the quarter ended March 31, 2016,2017, we continued our primary focus on: (1) expanding distribution channels; (2) seeking approval fromof identifying strategic and financial partners while we expand our commercial operations in key markets around the U.S. Environmental Protection Agency (“EPA”); and (3) improving hardware and software features of the wireless computer control interface that operates the AsepticSure® system.

For the quarters ended March 31, 2016 and 2015, we had no revenues or associated cost of revenues.world.

For the quarter ended March 31, 2016,2017, we incurredhad a net loss of $487,389,$982,219, compared with a net loss of $409,491$487,389 for the quarter ended March 31, 2015.2016.  Our primary expenses are payroll and consulting fees, research and development costs, stock-based compensation expense, office expenses, and interest expense.  The increase in net loss for the quarter ended March 31, 20162017 compared to the comparablecorresponding quarter of the prior year2016 was primarily due primarily to greaterstock-based compensation expense related to stock option grants and stock awards to our employees, directors and consultants, offset by a decrease in research and development expenses.expenses as we advance towards commercialization of our AsepticSure product.

For the quarters ended March 31, 20162017 and 2015,2016, we incurred $279,064$977,262 and $312,832,$279,064, respectively, in general and administrative expenses. General and administrativeThe majority of these expenses consist primarily ofwere payroll, expense, consulting fees and professional fees. The decrease in expenseincrease for the quarter ended March 31, 20162017, compared to the same periodcorresponding quarter of the prior year2016 was primarily due to higher stock-based compensation expense resulting from options grantedof $688,212 related to stock option grants and stock awards to our employees, directors and consultants during the quarter ended March 31, 2015.consultants.

For the quarters ended March 31, 20162017 and 2015,2016, we incurred $185,961$84,536 and $77,233,$185,961, respectively, in research and development expenses.  Research and development expenses consist primarily ofinclude consulting fees, interface development costs, prototypes, and research stage ozone generator and instrument development expenses.development.  The increase in expensedecrease for the quarter ended March 31, 2016 over2017 compared to the comparablecorresponding quarter of the prior year2016 was primarily due to the completion of a significant portion of our research and development work in 2016 in preparation for supporting an increaseexpansion of our commercial strategy in development software, supplies, and consulting expenses including $48,000 of stock-based compensation expense related to the 500,000 restricted commons shares issued in January 2016.2017.

Principal balancesamounts owed on notes payable totaled $381,007$307,838 and $372,396$297,332 as of March 31, 20162017 and December 31, 2015,2016, respectively. Principal amounts owed on notes payable, net of current portion totaled $75,000 as of March 31, 2017 and December 31, 2016. Interest expense on these obligations for the quarters ended March 31, 2017 and 2016, was $8,615 and 2015, was $8,591, and $6,396, respectively. The annual interest rates on this debt rangenotes payable from 4.63%4.88% to 12.00%.

Liquidity and Capital Resources

As of March 31, 2016,2017, our working capital deficitdeficiency was $3,105,943,$4,357,238, compared to a working capital deficitdeficiency of $2,675,007$4,126,861 as of December 31, 2015. 2016. As of March 31, 2017, we had approximately $22,574 of available cash. In March 2017, the Company issued an aggregate of 1,000,000 common shares at $0.06 per share for proceeds of $60,000.

We have incurred significant losses from inception through March 31, 2016,2017, which have resulted in an accumulated deficit of $35,885,735.$39,054,401.  The stockholders’ deficit as of March 31, 20162017 was $3,007,728,$4,282,329, compared to $2,569,234$4,046,145 as of December 31, 2015.  2016.  This change is due to proceeds from the sale of restricted shares of common stock being less than the net loss for the three months ended March 31, 2017.

We will continue to require additional financing to fund operations and to continue to test and market our hospital and medical disinfection system.  We believe we will needrequire funding of approximately $1,500,000 over the next 12 months, forbased on current operations, for: (1) continued production manufacturing and related activities,activities; (2) research, development, and marketing activities, as well as foractivities; and (3) limited general corporate purposes.  

During the quarter ended March 31, 2015, we generated cash of $171,000 through the sale of 3,300,000 shares of common stock to eight 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 March 31, 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 on Form 10-Q have been prepared with 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, we have relied almost exclusively upon financing from the sale of our equity securities to sustain operations. Additional financing will be required if we are to continue as a going concern. If additional financing is not obtained in the near 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 liquidity 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, 2015.2016.

We believe that many of the risks previously discussed in our previously issued 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 recorded using thevalued on a specific identification cost 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. Management has determined that noNo inventory was considered obsolete or excessive as of March 31, 2016.2017.

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 with a service condition, the expense is measured at the grant date and expensed over the vesting period. For stock options with a performance condition, the expense is measured when it is probable that the performance condition will be met, subsequently re-measured at each reporting date, and trued up upon the final completion of the performance condition.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP.  The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual reporting periods beginning after December 15, 2016,2017, and interim periods therein.  EarlyEarlier adoption is not permitted.permitted only as of annual reporting periods beginning after December 15, 2016.  We are currently assessing the impact, if any, of implementing this guidance on ourits consolidated financial position, results of operations and liquidity.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related note disclosures.  The standard is for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  We are currently assessing the impact, if any, of implementing this guidance will have on the Company.
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 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.  The ASU is effective for the Company’s financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  This includes the quarter ended March 31, 2016.  We have determined that the adoption of this ASU had no material impact on the Company’s financial reporting.

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 and interim reporting periodsperiod beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016.  We are currently assessingwe adopted this standard in the impact, if any,quarter ended March 31, 2017. The effect of implementing this guidance onwas immaterial to the Company’s consolidated results of operations, financial statement presentation.position and cash flows.
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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;leases; capital (or finance) leases and sheets. ASU No. 2016-02 is operating leases. Previously, US GAAP has required only capital leases to be recognized on lessee balance on lease 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. We are currently assessing the impact ofthat ASU No. 2016-02 may have on its consolidatedthe Company’s future financial statements.position, results of operations and liquidity.

In March 2016, the FASB issued ASU No. 2016-09, Compensation –- Stock Compensation: Improvements to Employee Share-Based Payment Accounting.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, 2016.2016, and was adopted in the quarter ended March 31, 2017.  The impact of this guidance was immaterial to the Company’s results of operations, financial position and cash flows.

In October 2016, the FASB issued ASU No. 2016-17, Interests held Through Related Parties That are Under Common Control. ASU No. 2016-17 clarifies the consolidation process for the primary beneficiary of a Variable Interest Entity (VIE) should that related party have indirect interests under common control with a reporting entity. ASU No. 2016-17 is effective for years ending after December 31, 2016, and was adopted by the Company in the quarter ended March 31, 2017. The effect of this guidance was immaterial to the Company’s results of operations, financial position and cash flows.

In January 2017, the FASB issued ASU No 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. ASU No. 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill charge. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted for interim periods after January 1, 2017. We are currently assessing the potential impact this ASU will have on the Company’s consolidated results of ASU No. 2016-09 on its consolidatedoperations, financial statements.position and cash flows.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

None.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and proceduresThere have been no material changes to information from that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported withinpresented for the time periods that are specified inyear ended December 31, 2016.

Our management, with the SEC’s rules and forms and that such information is accumulated and communicated to management, includingparticipation of our Principal Executive Officer and Principal Financial Officer as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these disclosure controls and procedures, management recognized 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 the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officerhas evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) under the Exchange Act).  Based on thisupon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2017, our disclosure controls and procedures were effective as of March 31, 2016.effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controlscontrol over financial reporting that occurred(as such term is defined in Rules 13a-15 (f) and 15d- 15 (f) under the Exchange Act) during the most recent fiscal quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.


PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

There were no material developments during the three monthsquarter ended March 31, 20162017 relative to the legal matters previously disclosed by the Company.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

We did not sell anyIn March 2017, the Company awarded its newly appointed Chairman and Interim CEO 1,000,000 restricted shares of common stock as part of an employment agreement. The shares had a fair market value of $150,000 on the date of issuance.

Additionally, in March 2017, the Company issued an aggregate of 1,000,000 common shares at $0.06, per share as part of a private placement for gross proceeds of $60,000 The shares were issued without registration under the Securities Act of 1933, as amended (the Securities Act), in reliance upon exemptions from registration for securities duringsold in transactions under Section 4(a)(2) of the quarter ended March 31, 2016.Securities Act and regulations promulgated thereunder.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

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 Current Report includes biographical and business background information regarding Mr. Evans.None.

Item 6.  Exhibits

Exhibit 31.1   
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
Exhibit 31.2     
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
Exhibit 32.1 
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
Exhibit 32.2 
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL 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. MarshallDavid A. Esposito                                      
Edwin G. Marshall,David A. Esposito, Chairman and Interim Chief Executive
Officer (Principal Executive Officer)


/s/ Boyd G. EvansStephanie L. Sorensen                             
Boyd G. Evans,Stephanie L. Sorensen, Chief Financial Officer
(Principal Financial and Accounting Officer)

May 12, 2017

May 13, 2016

 
 
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