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 SeptemberJune 30, 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 November 10, 2016,August 8, 2017, the registrant had 393,934,068399,934,068 shares of common stock issued and outstanding.


MEDIZONE INTERNATIONAL, INC.
FORM 10-Q
TABLE OF CONTENTS
SeptemberJune 30, 20162017
 
  Page No.
Part I — Financial Information 
   
Item 1. 
   
 3
   
 4
   
 5
   
 6
   
Item 2.12
   
Item 3.16
   
Item 4.16
   
Part II — Other Information 
   
Item 1.17
   
Item 2.17
   
Item 3.17
   
Item 4.17
   
Item 5.17
   
Item 6.1817
   
1918




 
PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

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

ASSETS
ASSETS
 
 September 30,  December 31,   
 2016  
2015 (1)
  June 30, 2017  December 31, 2016 
ASSETS      
      
Current Assets:      
Current assets:      
Cash $37,188  $745,078  $59,223  $398,290 
Inventory  106,332   277,823   240,806   109,573 
Prepaid expenses  62,926   31,986   85,149   81,666 
Total Current Assets  206,446   1,054,887 
Property and equipment, net  104   415 
Other Assets:        
Total current assets  385,178   589,529 
Other assets:        
Trademark and patents, net  152,372   176,086   131,947   151,444 
Lease deposit  4,272   4,272   2,735   4,272 
Total Other Assets  156,644   180,358 
Total Assets $363,194  $1,235,660 
Total other assets  134,682   155,716 
Total assets $519,860  $745,245 
                
LIABILITIES AND STOCKHOLDERS’ DEFICITLIABILITIES AND STOCKHOLDERS’ DEFICIT 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
                
Current Liabilities:        
Current liabilities:        
Accounts payable $545,681  $491,044  $624,920  $459,654 
Accounts payable – related parties  -   233,109 
Accrued expenses  587,222   554,834   599,481   592,621 
Accrued expenses – related parties  604,365   1,928,659   617,314   538,887 
Other payables  224,852   224,852   224,852   224,852 
Notes payable  307,617   297,396   298,765   297,332 
Notes payable – related parties  1,617,881   -   1,606,183   1,617,881 
Total Current Liabilities  3,887,618   3,729,894 
Warrant liability  755,494   985,163 
Total current liabilities  4,727,009   4,716,390 
Notes payable, net of current portion  75,000   75,000   75,000   75,000 
Total Liabilities  3,962,618   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;
373,934,068 and 369,434,068 shares outstanding, respectively
  373,934   369,434 
Total liabilities  4,802,009   4,791,390 
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; 399,934,068 and 393,934,068 shares issued and outstanding, respectively
  399,934   393,934 
Additional paid-in capital  32,700,146   32,496,646   34,692,207   33,680,146 
Accumulated other comprehensive loss  (42,475)  (36,968)  (50,235)  (48,043)
Accumulated deficit  (36,631,029)  (35,398,346)  (39,324,055)  (38,072,182)
Total Stockholders’ Deficit  (3,599,424)  (2,569,234)
Total Liabilities and Stockholders’ Deficit $363,194  $1,235,660 
Total stockholders’ deficit  (4,282,149)  (4,046,145)
Total liabilities and stockholders’ deficit $519,860  $745,245 
__________ 
(1)  The condensed consolidated balance sheet as of December 31, 20152016 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.
3


MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
 2016  2015  2016  2015  2017  2016  2017  2016 
                        
Revenues $237,000  $167,000  $237,000  $167,000  $-  $-  $-  $- 
Operating Expenses:                                
Cost of revenues  200,326   88,411   200,326   88,411   -   -   -   - 
General and administrative  363,209   800,185   858,455   1,401,199   292,531   216,182   1,269,793   495,246 
Research and development  75,332   56,263   343,368   210,336   62,920   82,075   147,456   268,036 
Depreciation and amortization  14,152   13,457   41,966   39,760   14,360   13,988   28,764   27,814 
Total Operating Expenses  653,019   958,316   1,444,115   1,739,706 
Loss from Operations  (416,019)  (791,316)  (1,207,115)  (1,572,706)
Total operating expenses  369,811   312,245   1,446,013   791,096 
Loss from operations  (369,811)  (312,245)  (1,446,013)  (791,096)
Other income (expense):                
Gain on measurement of warrant liability  127,087   -   229,669   - 
Interest expense  (8,504)  (6,820)  (25,634)  (19,438)  (26,933)  (8,539)  (35,548)  (17,130)
Interest income  2   -   66   -   4   11   19   64 
Net Loss  (424,521)  (798,136)  (1,232,683)  (1,592,144)
Other comprehensive (loss) gain on foreign currency translation  (4,021)  (1,051)  (5,507)  18,611 
Total Comprehensive Loss $(428,542) $(799,187) $(1,238,190) $(1,573,533)
Basic and Diluted Net Loss per Common Share $(0.00) $(0.00) $(0.00) $(0.00)
Net loss  (269,653)  (320,773)  (1,251,873)  (808,162)
Other comprehensive loss on foreign currency translation  (15)  (2,381)  (2,192)  (1,486)
Total comprehensive loss $(269,668) $(323,154) $(1,254,065) $(809,648)
Basic and diluted net loss per common share $(0.00) $(0.00) $(0.00) $(0.00)
                                
Weighted Average Number of Common Shares Outstanding  371,151,459   358,036,242   370,333,703   352,368,867 
Weighted average number of common shares outstanding  397,912,090   369,934,068   396,144,013   369,920,332 

The accompanying notes are an integral part of these condensed consolidated financial statements. 
4


MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
  For the Nine Months Ended 
  September 30, 
  2016  2015 
Cash Flows from Operating Activities:      
Net loss $(1,232,683) $(1,592,144)
Adjustments to reconcile net loss to net cash
 used in operating activities:
        
Depreciation and amortization  41,966   39,760 
Stock-based compensation expense  48,000   722,090 
Changes in operating assets and liabilities:        
     Prepaid expenses  35,815   7,838 
     Inventory  171,491   66,611 
     Accounts payable and accounts payable – related parties  49,637   (677)
     Accrued expenses and accrued expenses – related parties  97,866   25,086 
     Net Cash Used in Operating Activities  (787,908)  (731,436)
         
Cash Flows from Investing Activities:        
Cost of registering patents  (17,941)  (17,955)
Net Cash Used in Investing Activities  (17,941)  (17,955)
         
Cash Flows from Financing Activities:        
Issuance of common stock for cash  160,000   676,000 
Issuance of notes payable  -   75,000 
Principal payments on notes payable  (56,534)  (40,516)
Net Cash Provided by Financing Activities  103,466   710,484 
Effect of Foreign Currency Exchange Rates  (5,507)  18,611 
         
Net decrease  in cash  (707,890)  (20,296)
Cash as of beginning of the period  745,078   140,496 
Cash as of end of the period $37,188  $120,200 
  
For the Six Months Ended
June 30,
 
  2017  2016 
Cash flows from operating activities:      
Net loss $(1,251,873) $(808,162)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
        
Depreciation and amortization  28,764   27,814 
Stock-based compensation  718,061   48,000 
Change in warrant liability  (229,669)  - 
Changes in operating assets and liabilities:        
Inventory  (131,233)  (45,295)
Prepaid expenses  28,342   28,867 
Accounts payable  165,266   (62,218)
Accrued expenses and accrued expenses – related parties  85,287   45,527 
Customer deposits  1,537   118,500 
Net cash used in operating activities  (585,518)  (646,967)
         
Cash flows from investing activities:        
Cost of registering patents  (9,267)  (10,565)
Net cash used in investing activities  (9,267)  (10,565)
         
Cash flows from financing activities:        
Principal payments on notes payable and notes payable – related parties  (42,090)  (36,772)
Issuance of common stock for cash  300,000   - 
Net cash provided by (used in) financing activities  257,910   (36,772)
Effects of foreign currency exchange rates on cash  (2,192)  (1,486)
Net decrease in cash  (339,067)  (695,790)
Cash as of beginning of the period  398,290   745,078 
Cash as of end of the period $59,223  $49,288 
         
Supplemental cash flow information:        
   Cash paid for interest $12,227  $3,568 
Supplemental disclosure of non-cash financing activities:        
  Financing of insurance premiums $31,825  $31,500 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:      
Cash paid for interest $8,246  $1,006 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:        
Settlement of accounts payable and accrued expenses with notes payable – related parties  1,617,881   - 
Financing of insurance policies  66,755   49,964 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

MEDIZONE INTERNATIONAL, INC., SUBSIDIARY 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 for a fair presentation of results for the interim periods presented. The results of operations for the three and ninesix months ended SeptemberJune 30, 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 CompanyMedizone 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”)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 VIE’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the 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 
 September 30, 
 2016 2015 
     
Numerator: Net loss $(424,521) $(798,136)
Denominator: Weighted average number of common shares outstanding  371,151,459   358,036,242 
Basic and diluted net loss per common share $(0.00) $(0.00)

For the Nine Months Ended  For the Three Months Ended 
September 30,  June 30, 
2016 2015  2017  2016 
          
Numerator: Net loss $(1,232,683) $(1,592,144) $(269,653) $(320,773)
Denominator: Weighted average number of common shares outstanding  370,333,703   352,368,867   397,912,090   369,934,068 
Basic and diluted net loss per common share $(0.00) $(0.00) $(0.00) $(0.00)

  For the Six Months Ended 
  June 30, 
  2017  2016 
       
Numerator: Net loss $(1,251,873) $(808,162)
Denominator: Weighted average number of common shares outstanding  396,144,013   369,920,332 
Basic and diluted net loss per common share $(0.00) $(0.00)

6


MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 3     BASIC AND DILUTED NET LOSS PER COMMON SHARE (Continued)
Common stock equivalents, consisting of options to purchase 20,865,00020,565,000 shares and warrants to purchase up to $1,000,000 of common stock, with the number of shares determined based on a 40% discount of the 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.
6


MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited) Continued
NOTE 4     GOING CONCERN

The Company’s condensed consolidated financial statements are prepared using US GAAP applicable toassuming the Company is a going concern whichand 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 SeptemberJune 30, 2016,2017, which have resulted in an accumulated deficit of $36,631,029$39,324,055 as of SeptemberJune 30, 2016.2017.  The Company believes that it will require funding of approximately $1,500,000 over the next 12 months, based on current operations, for: (1) continued production manufacturing and related activities; (2) research, development, and marketing activities; and (3) general corporate purposes.  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 $3,681,172$4,341,831, and a total stockholders’ deficit of $4,282,149 as of SeptemberJune 30, 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.

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 during the next 12 months for continued product manufacturing, research, development and marketing activities, as well as for limited general corporate purposes.

During the ninesix months ended SeptemberJune 30, 2016,2017, the Company raised cash proceeds of $160,000totaling $300,000 through the sale of 4,000,0005,000,000 shares of common stock at a price of $0.04 per share.
In October 2016, the Company issued an aggregate of 20,000,000 common shares at $0.05$0.06 per share pursuantin a private offering to accredited investors, which included the exercise of warrants,Company’s Chairman and received cash proceeds of $1,000,000.Interim CEO and an independent director.

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 includingand eventually attaining profitable operations. TheseThe 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 were upgraded with the Company’s 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.
7


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

NOTE 6     WARRANT LIABILITY (Continued)

The estimate was calculated using the following inputs:
Input June 30, 2017 
Risk-free interest rate  1.14%
Expected life7 months 
Expected volatility  79.10%
Dividend yield  0.00%
Stock price $0.07 


As of June 30, 2017, the Company recorded a decrease in the warrant liability of $229,669 resulting from the fluctuation in the Company’s stock price. The warrant liability was $755,494 as of June 30, 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 recorded the original default judgment in the amount of $143,000, plus fees totaling $21,308, as of SeptemberJune 30, 20162017 and December 31, 20152016, in accounts payable. The Company intends to contest the judgment if and when it is able to do so in the future.

EmploymentRelated Party Agreements

In July 2016, the Company entered into employment agreements (“Employment Agreements”) with two executives. The employment agreements set out the executives’ base annual salary, vacation benefits, and option to elect health insurance coverage.
Promissory Notes
In conjunction with the Company entering into these Employment Agreements, the Company settled in aggregate $1,617,881 inconverted $228,109 of accounts payable – related parties, and $1,389,772 of accrued expenses with related parties through the issuance ofinto three promissory notes payable (“Promissory Notes”) with three executives for unpaid– related parties aggregating to $1,617,881. The amounts converted represent accrued expenses and accrued wages (see Note 9 – Notes Payable – Related Parties).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 in 2016 as described in the previous paragraph 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 promissory notes and is accruing interest at 5% per annum on the outstanding balance, with any payments made to be applied towards interest first.

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.

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

NOTE 7      COMMITMENTS AND CONTINGENCIES (Continued)

Other Payables

As of SeptemberJune 30, 20162017, and December 31, 2015,2016, the Company had $224,852 of past due payables for which the Company has not received statements or demands for payment for over 19 years.  Although management of the Company does not believe that the amounts will be required to be paid, the amounts are recorded as other payables until such time as the Company is certain that no liability exists and until the statute of limitations has expired.

Operating Leases

The Company operates a certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which provides a primary research and development platform. The lease term is month-to-monthJune 30, 2016 through June 29, 2018 with a monthly lease payment of $1,537$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 monthly lease payments of CD$1,537 and CD$475, respectively, plus the applicable GST.  tax.   

The Company has a non-cancelablelease arrangement for office space in Kalamazoo, Michigan. Monthly payments are approximately $1,000 and the lease expires in February of 2018. The Company previously had a month-to-month lease for office space located in California, with monthly payments of approximately $2,400 through December 31, 2016.$2,556. In February 2017, the Company gave 60-days’ notice that the lease would be terminated as of April 30, 2017 and has no further obligation under the lease.

NOTE 6     COMMON STOCK OPTIONS8     EQUITY TRANSACTIONS
In August 2013,
Recapitzalization

On December 15, 2016, the Company’s stockholders approved the Board’s recommendation to increase the number of authorized shares of common stock from 395,000,000 to 500,000,000 shares in order to provide the Company granted options forwith sufficient authorized shares to accomplish its objectives. The Company filed an amendment to modify its Articles of Incorporation with the purchaseState of 250,000Nevada on January 4, 2017, which was approved by the Secretary of State on January 24, 2017.

Common Stock Issuances

During January 2016, the Company issued 500,000 restricted shares of common stock to a consultant,consultant. The fair value of which 50,000 were immediately vested.  These options are exercisable at $0.10 per share for five years fromthe shares on 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.was $48,000, or $0.96 per share. The Company recognizedrecorded compensation expense of $17,659 during$48,000 in connection with the nineissuance of the shares.

During the six months ended SeptemberJune 30, 2015, as milestones were achieved for the remaining 200,000 options.
On February 26, 2014,2017, the Company granted to a new director options for the purchase of 2,000,000issued and sold 5,000,000 restricted shares of common stock with an exerciseat a price of $0.1095$0.06 per share.  Ofshare to accredited investors, which included the Company’s Chairman and Interim CEO and an independent director, for net proceeds of $300,000 as part of a private offering.  The market price of the Company’s common stock on the dates of these transactions ranged from $0.06 to $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 1,000,000 vestedto nonemployee consultants from time to time in consideration for services performed for the Company.

The Company’s 2016 Equity Incentive Award Plan (the “2016 Plan”) was approved on February 26, 2015,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 remaining 1,000,000 options2014 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 vest upon the successful achievement of certain milestones.  Unvested options vest immediately in the event of a change in controlremain outstanding until their expiration dates. Following adoption of the Company.  The options are exercisable for five years from the date of grant. The Company recognized $16,017 of expense in connection with these options during the nine months ended September 30, 2015. The Company will measure and begin recognizing the remaining expense when the achievement of the required milestones becomes probable.
On February 26, 2014,2016 Plan, the Company no longer makes 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. Under the 2016 Plan, as of June 30, 2017, the Company had granted options to six consultants and service providers for the purchase of a total of 250,0006,900,000 shares, of common stock athad awarded 1,000,000 shares with an exercise price of $0.1095 per share.  Options for 200,000additional 1,000,000 shares vested immediatelyto be awarded upon grant and options for the remaining 50,000 shares vested January 9, 2015.  The options are exercisable for five years from the date of grant. The grant date fair value of these options was $24,023. The Company recognized expense of $800 in connection with these options during the nine months ended September 30, 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 nine months ended September 30, 2015, when certain milestones were achieved.  The options are exercisable for five years from the date of grant. The Company recognized expense of $8,342 in connection with these options during the nine months ended September 30, 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 from the date of grant.  The Company will measure and begin recognizing expense when the achievement of the requiredcertain performance milestones, becomes probable.
On October 7, 2014, the Company granted to a board memberleaving 1,100,000 options available 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 $105,133 of expense in connection with these options during the nine months ended September 30, 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 options are fully vested and are exercisable for five years from the date of grant.  The Company recognized expense of $13,461 during the nine months ended September 30, 2015.future grants or awards.

MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited) Continued
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,
NOTE 8     EQUITY TRANSACTIONS (Continued)

Common Stock Options 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 from the date of grant.  The aggregate fair value of these options at the date of grant was $541,687, which the Company recognized as expense during the nine months ended September 30, 2015.Awards (Continued)
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 aggregate fair value of these options at the date of grant was $18,990, which the Company recognized as expense during the nine months ended September 30, 2015.
On May 19, 2016, the Company granted 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 these options on the date of grant was $6,461. The options were forfeited upon the termination of the employee in October 2016.
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 $722,090 related to stock options was recorded forFor the ninethree months ended SeptemberJune 30, 20162017 and 2015, respectively.  Excluding options whose performance condition is not yet deemed probable, as of September 30, 2016, the Company recorded stock-based compensation of $29,849 and $0, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded stock-based compensation of $718,061 and $0, respectively, of which $464,537, relates to options granted to employees, directors and consultants. Upon the appointment of its new Chairman and Interim 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 and Dr. Marshall’s stock options. In June 2017, Mr. Hoyt retired from the Board and was offered the same extension of exercisability related to his options, as that was provided to Mr. Marshall and Dr. Marshall. As the stock price on the date of modification of Mr. Hoyt’s options was significantly lower than the option’s exercise price, no additional expense was recorded as the result of this modification. An additional 1,000,000 shares of common stock has been reserved as a performance award to Mr. Esposito as part of his appointment to Chairman and Interim CEO, contingent upon meeting certain performance milestones. No expense has yet been recorded in conjunction with this award as the milestones have not been met as of June 30, 2017. As of June 30, 2017, the Company had outstanding unvested outstanding options for a total of 925,000 shares with related unrecognized expense of $104,647.approximately $75,000. 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 ofat the date of the grant, or date of re-measurement, based on the following weighted-averageweighted average assumptions:

Risk-free interest rate1.50%1.36% to 1.691.99%
Expected life5 years 
Expected volatility 130.31%98.38% to 136.34101.86%
Dividend yield  0.00%
A
The following is a summary of the status of the Company’s outstanding options as of SeptemberJune 30, 20162017 and changes during the ninesix months then ended, is presented below:ended:
  Shares  
Weighted Average
Exercise Price
 
Outstanding, beginning of the period  20,965,000  $0.145 
Granted  150,000   - 
Expired/Canceled  (250,000)  0.103 
Exercised  -   - 
Outstanding, end of the period  20,865,000   0.142 
Exercisable  19,640,000   0.145 
NOTE 7     STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS
  Number of Shares  
Weighted Average
Exercise Price
  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value 
             
As of December 31, 2016  20,715,000  $0.143   2.08  $261,220 
Granted  6,900,000   0.097         
Expired and canceled  (7,050,000)  0.209         
Exercised  -   -         
As of June 30, 2017  20,565,000   0.105   4.93   10,000 
Exercisable  19,640,000   0.105   4.83   5,000 
Warrants

In September 2016, the Company sold 4,000,000 shares of common stock to three accredited investors for gross proceeds of $160,000.
During JanuaryOctober 2016, the Company issued 500,000 restricted shares ofwarrants to purchase up to $1,000,000 in common stock towith the number of shares determined based on a consultant. The fair value of the shares on20-day average stock price prior to the date of grant was $48,000, or $0.096 per share.  The Company recorded compensation expense of $48,000 in connectionexercise with the issuance ofexercise prices discounted 40%. The warrants are exercisable between January 31, 2017 and January 30, 2018, at which point 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.outstanding warrants expire (see Note 6).

MEDIZONE INTERNATIONAL, INC., SUBSIDIARY AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited) Continued
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 September 30, 2016 and December 31, 2015, the Company owed $0 and $233,109, respectively, to certain consultants for services.  These consultants are stockholders of the Company and are related parties.

NOTE 9   NOTES PAYABLE – RELATED PARTIES
In July 2016, the Company settled an aggregate $1,617,881 of accounts payable and accrued expenses for unpaid expenses and wages by issuing Promissory Notes to those related parties, all of which are executives of the Company. The notes become payable upon a trigger event (“Trigger Event”) which is defined as a change in control, death, disability or failure to pay the employee’s base salary as described in their Employment Agreements. Upon a Trigger Event, interest will be calculated at 2% per annum until the balance is paid in full. In the event of default by the Company, the interest rate increases to 5%.
NOTE 109     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 thanthat are required under existing US GAAP. The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. Earlier adoption is 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 Concern.  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 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 assessing the impact, 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 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 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; 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 may have on its future financial 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 is assessingin the impactquarter ended March 31, 2017. The effect of ASU No. 2016-09 may have on its future financial position,this guidance was immaterial to the Company’s consolidated results of operations, financial position and liquidity.
10

cash flows.

MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to the Condensed Consolidated Financial Statements (Unaudited) Continued
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 is assessingin the impactquarter ended March 31, 2017. The effect of ASU No. 2016-17 may have on its consolidated financial statements.
NOTE 11     SUBSEQUENT EVENTS
In October 2016, the Company issued an aggregate of 20,000,000 common shares at $0.05 per share pursuant to the exercise of previously issued and outstanding warrants, and received cash proceeds of $1,000,000. 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 sold in transactions under Section 4(a)(2) of the Securities Act. The warrants were originally issued to these stockholders in connection with the negotiation and execution of a Distribution and License Agreement dated November 2015, which provided exclusive distribution rightsthis guidance was immaterial to the Company’s proprietary hospital disinfection technologyconsolidated 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 ASU No. 2017-04 will have on the Company’s consolidated results of operations, financial position and cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718). ASU No. 2017-09 provides clarity and reduces the diversity in certain territoriespractice and complexity in South America (the Distribution Agreement).
In connection with an amendmentdetermining when additional expense should be recorded resulting from a modification to stock-based grants and awards. ASU No. 2017-09 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted for interim periods. The Company is currently assessing the Distribution Agreement,potential impact ASU No. 2017-09 will have on the Company granted warrants for the purchaseCompany’s consolidated results of up to $1,000,000 of shares of common stock of the Company, exercisable for one year, commencing January 31, 2017operations, financial position and expiring January 30, 2018, with the number of shares to be determined based on a 20-day average stock price prior to the date of exercise with the average stock price discounted by 40%
cash flows.


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

Introduction

Medizone International, Inc., a Nevada corporation (collectively with its affiliate,our variable interest entity or “VIE” Canadian Foundation for Global Health or “CFGH”, and our subsidiary Medizone Canada, Inc., “Medizone,” the “Company,” “we,” “us,” or “our”) is engaged in conducting research into the use of ozone in the disinfection of surgical and other medical treatment facilities and in other applications. During 2012, we began to sell our patented ozone disinfection system, AsepticSure®.  The Company is currently and have been primarily focused in the field of hospital disinfection, rather than human therapies. With recent clearance from the US Environmental Protection Agency (“EPA”), we are prepared to introduce our technology commercially for use in disinfection and treatment of athletic facilities, sports equipment, preparation rooms in mortuary facilities, and remediation of buildings and hazardous cleanup sites. We are also working on obtaining appropriate clearance of our technology from the US Food and Drug Administration (“FDA”). 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 April 3, 2017, the Board of Directors (“Board”) appointed Dwayne Montgomery as a director and as the Chair of the Audit Committee. Mr. Montgomery’s business and other background and qualification to serve as a director of the Company are contained in a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission (“Commission”) on April 6, 2017.

On May 19, 2017, the Board of Directors appointed Stephen F. Meyers as a director. Mr. Meyer’s business and other background and qualifications to serve as a director are contained in a Current Report on Form 8-K filed by the Company with the Commission on May 23, 2017.

As reported by the Company in a Current Report on Form 8-K on June 22, 2017, on June 21, 2017 director Daniel J. Hoyt retired from the Board effective June 21, 2017. In connection with Mr. Hoyt’s retirement from the Board, in consideration of Septemberhis many years of service with the Company, the Board modified the exercise provisions of stock options granted previously to Mr. Hoyt under our 2014 Equity Incentive Plan to permit the exercise of such options for a period of up to three years from the date of Mr. Hoyt’s resignation (but not beyond the original expiration date of any such grant).

During the six months ended June 30, 2016,2017, we sold 5,000,000 shares of common stock in a private offering to accredited investors (the “Private Offering”) for gross proceeds of $300,000. Investors in the Private Offering included our Chairman and shipped three Generation III AsepticSure® systems under our agreement with our South American distributor GYD S.A.Interim CEO and one of the Company’s independent directors, who invested a total of $210,000. The units soldpurchase price of the restricted shares was $0.06 per share.  The terms of the Private Offering for all investors, including the insiders, included a purchase price at a discount of up to 40% to the distributormarket price of the common stock on the date the offering terms were Generation IIapproved by the Board. The participation of insiders of the Company in the Private Offering was approved by the disinterested members of the Board.

On May 17, 2017 we submitted a 513(g) Request for Information to the FDA requesting a decision on the classification of AsepticSure.  We are awaiting a response from FDA as of the date of this report.  In our Request, we asked the FDA to confirm that AsepticSure®  systems that were converted to Generation III systems,is not considered a medical device when used for general hospital disinfection purposes, and the price was not reflective of standard pricing.  In October 2016, we entered into an amended and restated Distribution Agreement with GYD S.A., adding Argentina to its exclusive territories.
In October 2016, we received additional patent protection for the AsepticSure ® systemin addition, is exempt from the European Union Patent and Trademark Office (EU)premarket notification requirements.”. We provided a detailed rationale for our patent application, “Healthcare Facility Disinfecting Process and System With Oxygen/Ozone Mixture”. With this EU patent, we secured patent protection inposition that devices which have been listed with FDA (class I device with pre-market exemptions) make virtually the United Kingdom, Germany, and France.same claims as the AsepticSure® system. We have engaged experienced legal counsel to lead our communications with the FDA.

Results of Operations

Three Months Ended SeptemberJune 30, 20162017 and 20152016

During the quarterthree months ended SeptemberJune 30, 2016,2017, we continued our primary focus of expandingidentifying strategic and financial partners while we expand our commercial operations in key markets around the world. Our distributors outside of our distribution channels, obtaining approval from the U.S. Environmental Protection Agency (“EPA”),US continue to make progress in demonstrating the efficacy of AsepticSure in hospitals and developing a computer control feature forin building remediation.  In the AsepticSure® system.US, we continue to make commercial progress with its sales channel partners in meeting with potential customers in various segments including healthcare, athletic facilities, building construction and funeral homes.

For the quartersthree months ended SeptemberJune 30, 2016 and 2015, revenues were $237,000 and $167,000, respectively.  For the quarters ended September 30, 2016 and 2015, cost of revenues was $200,326 and $88,411, respectively. The increase in revenue and cost of revenues for the quarter ended September 30, 2016 compared to the same period in 2015 is due to the sale of three AsepticSure® Systems in 2016.
For the quarter ended September 30, 2016,2017, we had a net loss of $424,521,$269,653, compared with a net loss of $798,136$320,773 for the quarterthree months ended SeptemberJune 30, 2015.2016.  Our primary expenses are payroll and consulting fees, research and development costs, stock-based compensation expense, office expenses, and interest expense.  The decrease in net loss for the quarterthree months ended SeptemberJune 30, 2016,2017 compared to the corresponding quarterthree months of 20152016 was primarily due to reduced general and administrative expenses from less stock-based compensation expense related to option grants, offset slightly by increasedthe completion of a significant portion of our research and development expenses.work in 2016 in preparation for supporting an expansion of our commercial strategy of our AsepticSure product.

 For the three months ended June 30, 2017 and 2016, we had no revenues or associated cost of revenues.

For the quartersthree months ended SeptemberJune 30, 20162017 and 2015,2016, we incurred $363,209$292,531 and $800,185,$216,182, respectively, in general and administrative expenses. The majority of these expenses were payroll, consulting fees and professional fees. The decreaseincrease for the quarterthree months ended SeptemberJune 30, 20162017, compared to the corresponding quarterperiod of 20152016 was primarily due to less stock-based compensation expense related to stock option grants and stock awards to our employees, directors and consultants.consultants and an increase in legal and professional services.

For the quartersthree months ended SeptemberJune 30, 20162017 and 2015,2016, we incurred $75,332$62,920 and $56,263,$82,075, respectively, in research and development expenses. Research and development expenses include consulting fees, interface development costs, prototypes, and research stageresearch-stage ozone generator and instrument development.development cost. The increasedecrease for the quarterthree months ended SeptemberJune 30, 20162017, compared to the corresponding quarterperiod of 20152016 was primarily due to increasedthe completion of a significant portion of our research and development work in 2016 in preparation for supporting an expansion of our commercial strategy in 2017.

Six Months Ended June 30, 2017 and 2016

For the six months ended June 30, 2017, we had a net loss of $1,251,873, compared with a net loss of $808,162 for the six months ended June 30, 2016. Our primary expenses are payroll and consulting fees, research and development costs, which were partially offset by lowerstock-based compensation expense, office expenses, and interest expense. The increase in net loss for the six months ended June 30, 2017, compared to the corresponding six months of 2016 was primarily due to stock-based compensation expense related to stock option grants and stock awards to our employees, directors and consultants, offset by a consultantdecrease in research and development expenses as we advance towards commercialization of our AsepticSure product.

For the six months ended June 30, 2017 and 2016, we had no revenues or associated cost of revenues.

For the six months ended June 30, 2017 and 2016, we incurred $1,269,793 and $495,246, respectively, in general and administrative expenses. The majority of these expenses were payroll, consulting fees and professional fees. The increase for the six months ended June 30, 2017, compared to the corresponding period of 2016 was primarily due to stock-based compensation expense of $718,061 related to stock option grants and stock awards to our employees, directors and consultants.

For the six months ended June 30, 2017 and 2016, we incurred $147,456 and $268,036, respectively, in research and development expenses.  Research and development expenses include consulting fees, interface development costs, prototypes, and research-stage ozone generator and instrument development costs. The decrease for the six months ended June 30, 2017, compared to the corresponding period of 2016 was primarily due to the completion of a significant portion of our research and development work in 2016 in preparation for supporting an employeeexpansion of our commercial strategy in 2015.2017.

Principal amounts owed on notes payable totaled $307,617$298,765 and $297,396$297,332 as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. Principal amounts owed on notes payable, net of current portion totaled $75,000 as of SeptemberJune 30, 20162017 and December 31, 2015.2016. Interest expense on these obligations for the quartersthree months ended SeptemberJune 30, 2017 and 2016, was $8,438 and 2015, was $8,504 and $6,820,$8,539, respectively. The annual interest rates on this debt rangenotes payable ranged from 4.88% to 12.00%.
12


Nine Months Ended September 30, 2016 and 2015
For the nine months ended September 30, 2016 and 2015, revenues were $237,000 and $167,000, respectively.  For the nine months ended September 30, 2016 and 2015, cost of revenues was $200,326 and $88,411, respectively. The increase in revenue and cost of revenues for the nine months ended September 30, 2016 compared to the corresponding period in 2015 is due to the sale of three AsepticSure® Systems in 2016.
For the nine months ended September 30, 2016, we had a net loss of $1,232,683, compared with a net loss of $1,592,144 for the nine months ended September 30, 2015. Our primary expenses are payroll, consulting fees, research and development costs, and office expenses, together with interest expense and stock-based compensation expense recorded as a result of option grants to directors, employees and consultants.  The decrease in net loss for the nine months ended September 30, 2016, compared to the corresponding period in 2015, was due to a decrease in stock-based compensation expense for option grants to directors, employees and consultants, offset, in part, by an increase in research and development expenses.
For the nine months ended September 30, 2016 and 2015, we incurred $858,455 and $1,401,199, respectively, in general and administrative expenses. The primary reason for the decrease for the nine months ended September 30, 2016, compared to the corresponding period in 2015, was decreased stock-based compensation expense.  The number of option grants and vesting for directors, employees and consultants resulting in compensation expense in 2016 was lower than in 2015.  Our primary expenses are payroll, consulting fees, and professional fees. The remaining general and administrative expenses include rent, office expenses and travel expenses.
For the nine months ended September 30, 2016 and 2015, we incurred $343,368 and $210,336, respectively, in research and development expenses as a result of prototype development expenses, consulting, and other research activities. The primary reason for the increase for the nine months ended September 30, 2016, compared to the corresponding period in 2015, was increased expenses for development software, supplies, and consulting, including stock-based compensation expense related to restricted common shares issued in January 2016.
Interest expense on the notes payable for the nine months ended September 30, 2016 and 2015, was $25,634 and $19,438, respectively. Principal amounts owed on notes payable net of current portion– related parties totaled $75,000$1,606,183 and $1,617,881 as of SeptemberJune 30, 20162017 and December 31, 2015. The2016, respectively. We failed to make principal payments under two promissory notes owed to former executives of the Company beginning in April 2017. Under the terms of these notes, the obligations of the Company under the notes from the date of this default will bear interest until paid in full at the annual rate of 5%. As a result, we recorded interest rates on this debt range from 4.88% to 12.00%.expense of $18,494 during the three and six months ended June 30, 2017.

Liquidity and Capital Resources

As of SeptemberJune 30, 2016,2017, our working capital deficiency was $3,681,172,$4,341,831, compared to a working capital deficiency of $2,675,007$4,126,861 as of December 31, 2015.2016. As of SeptemberJune 30, 2016,2017, we had approximately $37,000$59,223 of available cash. In October 2016,During the Companysix months ended June 30, 2017, we issued an aggregate of 20,000,0005,000,000 common shares at $0.05$0.06 per share pursuant to the exercise of warrants, and received cashfor proceeds of $1,000,000.$300,000.

We have incurred significant losses from inception through SeptemberJune 30, 2016,2017, which have resulted in an accumulated deficit of $36,631,029.$39,324,055. The stockholders’ deficit as of SeptemberJune 30, 20162017 was $3,599,424,$4,282,149, compared to $2,596,234$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 ninesix months ended SeptemberJune 30, 2016.
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 require funding of approximately $1,500,000 over the next 12 months, based on current operations, for: (1) continued production manufacturing and related activities; (2) research, development, and marketing activities; and (3) limited general corporate purposes.  
During the nine months ended September 30, 2015, we generated cash of $160,000 through the sale of 4,000,000 shares of common stock to three accredited investors at a price of $0.04 per share.  
We anticipate that we will be able to raise additional funds, as needed, from certain of the accredited investors who have purchased shares during previous years, although we have no agreements at this time with any of these investors to purchase our securities, and there can be no assurance that these investors will purchase additional shares.
13


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 we do not obtain additional financing is not obtained in the near term, we will be required to curtail or discontinue operations, or seek protection under 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” 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’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 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 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 considered obsolete or excessive as of SeptemberJune 30, 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, 2017, and interim periods therein. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The Company isWe are assessing the impact, if any, of implementing this guidance on itsour 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.  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 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 assessing the impact, 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 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 adopted this standard in the quarter ended March 31, 2017. The Company is assessing the impact, if any,effect of implementing this guidance on the Company’swas immaterial to our 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; 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. The Company isWe are assessing the impact that ASU No. 2016-02 may have on itsour future financial 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 us in the Company is assessing thequarter ended March 31, 2017. The impact ASU No. 2016-09 may have on its future financial position,of this guidance was immaterial to our results of operations, financial position and liquidity. 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 us in the Company is assessing the impact ASU No. 2016-17 may have on its consolidatedquarter ended March 31, 2017. The effect of this guidance was immaterial to our results of operations, financial statements.

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 ASU No. 2017-04 will have on our consolidated results of operations, financial position and cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation -Stock Compensation (Topic 718). ASU No. 2017-09 provides clarity and reduces the diversity in practice and complexity in determining when additional expense should be recorded resulting from a modification to stock-based grants and awards. ASU No. 2017-09 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted for interim periods. We are currently assessing the potential impact ASU No. 2017-09 will have on our consolidated results of operations, financial 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 procedures
There 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 recognizes 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 Rule 13a- 15(e)Rules 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 June 30, 2017, our disclosure controls and procedures were effective as of September 30, 2016.effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control 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 June 30, 2017 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 quarter ended SeptemberJune 30, 20162017 relative to the legal matters we have previously disclosed by the Company.disclosed.

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

In October 2016,March 2017, we awarded our 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.

During the six months ended June 2017, the Company issued an aggregate of 20,000,0005,000,000 common shares at $0.05$0.06, per share pursuant to the exerciseas part of warrants,a private offering for aggregate cash considerationgross proceeds of $1,000,000.$300,000. The shares were issued without registration under the Securities Act of 1933, as amended (the Securities Act)“Securities Act”), in reliance upon exemptions from registration for securities offered and sold to accredited investors in transactions under Section 4(a)(2) of the Securities Act and regulations promulgated thereunder.

In addition, in connection with the amendment and restatement of a distribution agreement for certain territories in South America on October 21, 2016, we granted warrants (the “New Warrants”) to the distributor exercisable for one year, commencing January 31, 2017 and expiring January 30, 2018, for the purchase of shares of common stock for an aggregated purchase price of $1,000,000.  The per-share purchase price and number of shares issuable upon exercise of the New Warrants will be determined based upon the market price of the Company’s common stock for the 20 trading days immediately preceding the date of exercise of the New Warrants with the average stock price discounted by 40%.
Our Articles of Incorporation authorize us to issue up to 395,000,000 shares of common stock.  As of November 4, 2016, there are approximately 394,000,000 common shares issued and outstanding, and approximately 41,000,000 shares subject to future issuance upon the exercise of outstanding options and warrants, including the shares issuable upon the exercise of the New Warrants when they become exercisable.  Our ability to raise additional financing will be limited unless we increase the number of shares of  authorized common stock.  Without additional authorized common shares, we will be unable to satisfy our commitments to issue common stock upon exercise of outstanding options and warrants.  We will also be forced to limit or slow the pace of our development activities, including efforts to identify and pursue potential strategic transactions and other opportunities.
At our Annual Meeting of Shareholders on December 15, 2016, we are seeking shareholder approval to increase the number of shares of common stock we are authorized to issue from 395,000,000 shares to 500,000,000 shares, in order to provide the Company with sufficient authorized shares to accomplish our objectives. The increase in the number of authorized shares requires an amendment to our articles of incorporation approved by a majority of our stockholders. There is no assurance we will obtain the approval required to adopt this amendment to increase the number of authorized common shares.
Item 3.  Defaults Upon Senior Securities.
None.
In February 2017, we entered into Separation and Termination Agreements with Edwin Marshall and Dr. Jill Marshall, former executive officers of the Company. Under the terms of these agreements, we and the Marshalls agreed to the modification of the terms of certain promissory notes previously issued by the Company to Mr. Marshall and Dr. Marshall for payment of earned and unpaid compensation. As modified, these notes required monthly principal payments to Mr. Marshall of $14,000 and to Dr. Marshall of $6,900. The notes were not to bear interest, except in the event of default. We made the first payments under the notes, but have been in default under both notes since April 2017 and owe principal payments for three months to Mr. Marshall totaling $42,000 and to Dr. Marshall totaling $20,700 for the months of April, May and June 2017. As a result, interest is now accruing on the unpaid obligations of these notes at an annual rate of 5% until the notes are paid in full.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information
None.

Item 6.  Exhibits

Exhibit 31.1   
  
Exhibit 31.2     
  
Exhibit 32.1 
  
Exhibit 32.2 
  
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/ Stephanie L. Sorensen                            
Stephanie L. Sorensen, Chief Financial Officer
(Principal Financial and Accounting Officer)

November 10, 2016August 8, 2017
1918