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.

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.

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 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 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.

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%.

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.

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.

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.

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:

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 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.

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 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.

None.

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.

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.

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.

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.