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EX-32.2 - 10JUN PRIN FIN 906 CERT - MEDIZONE INTERNATIONAL INCmedizone10juneex322.htm
EX-31.1 - 10JUN PRIN EXEC 302 CERT - MEDIZONE INTERNATIONAL INCmedizone10juneex311.htm
EX-31.2 - 10JUN PRIN FIN 302 CERT - MEDIZONE INTERNATIONAL INCmedizone10juneex312.htm
EX-32.1 - 10JUN PRIN EXEC 906 CERT - MEDIZONE INTERNATIONAL INCmedizone10juneex321.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q


(Mark One)

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


For the quarterly period ended June 30, 2010

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.)


144 Buena Vista P.O. Box 742 Stinson Beach, CA 94970

(Address of principal executive offices, Zip Code)


(415) 868-0300

(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 [X] 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.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)

Smaller reporting company [X]


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


At July 31, 2010, there were 251,319,444 shares of the issuer’s common stock issued and outstanding.



MEDIZONE INTERNATIONAL, INC.

FORM 10-Q


INDEX

June 30, 2010




Page No.

Part I — Financial Information




Item 1.  Financial Statements




Consolidated Balance Sheets: June 30, 2010 (Unaudited) and December 31, 2009

3



Consolidated Statements of Operations (Unaudited): For the Three Months and Six Months Ended June 30, 2010 and 2009

5



Consolidated Statements of Other Comprehensive Loss (Unaudited): For the Three Months and Six Months Ended June 30, 2010 and 2009

6



Consolidated Statements of Cash Flow (Unaudited) For the Six Months Ended June 30, 2010 and 2009

7



Notes to the Consolidated Financial Statements

9



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

16



Item 3.  Quantitative and Qualitative Disclosures About Market Risk

21



Item 4.  Controls and Procedures

21



Part II — Other Information




Item 1.  Legal Proceedings

21



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

21



Item 6.  Exhibits

22



Signatures

22


















PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Balance Sheets









ASSETS






June 30,


December 31,






2010


2009






(Unaudited)



CURRENT ASSETS







Cash


$

330,813 

$

 359,891   


Prepaid expenses



 2,466 


 6,786   


Deferred consulting fees



 23,047 


21,211   



Total Current Assets



    356,326 


387,888   









PROPERTY AND EQUIPMENT (Net)



2,192 


3,041   









OTHER ASSETS







Trademark and patents, net



29,766


19,440   


Deferred stock offering costs



77,500


  -       


Lease deposit



1,122


1,122   



Total Other Assets



108,388


20,562   











TOTAL ASSETS


$

 466,906 

$

411,491   












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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Balance Sheets (Continued)









LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)














June 30,


December 31,






2010


2009






(Unaudited)



CURRENT LIABILITIES







Accounts payable


$

  655,761 

$

  699,026 


Due to related parties



  7,000 


  7,000 


Accrued expenses



  2,486,542 


  2,470,904 


Notes payable



  280,491 


 283,211 



Total Current Liabilities



3,429,794 


   3,460,141 









CONTINGENT LIABILITIES



   224,852 


   224,852 











Total Liabilities



 3,654,646 


3,684,993 









STOCKHOLDERS' EQUITY (DEFICIT)







Preferred stock, 50,000,000 shares authorized of $0.00001





 par value, no shares issued or outstanding



  - 


  - 


Common stock, 395,000,000 shares authorized of $0.001







 par value, 246,919,444 and 241,701,432 shares issued







 and outstanding, respectively



   246,919 


 241,701 


Additional paid-in capital



  19,318,167 


  18,533,363 


Other comprehensive loss



  (9,910)


  (3,611)


Deficit accumulated during the development stage


 (22,742,916)


  (22,044,955)



Total Stockholders' Equity (Deficit)



 (3,187,740)


  (3,273,502)











TOTAL LIABILITIES AND STOCKHOLDERS'







 EQUITY (DEFICIT)


$

  466,906 

$

    411,491 













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



            MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)











From Inception



 For the


 For the


on January 31, 1986



 Three Months Ended


 Six Months Ended


Through



 June 30,


 June 30,


June 30,



2010


2009


2010


2009


2010

REVENUES

$

             - 

$

     - 

$

    - 

$

  - 

$

   133,349 












EXPENSES











    Cost of sales






103,790 

    Research and development


156,243 


74,329 


291,023 


140,646 


3,530,812 

    General and administrative


207,944 


133,470 


392,698 


316,228 


17,003,365 

    Expense on extension of warrants



75,480 



105,393 


2,092,315 

    Bad debt expense






48,947 

    Depreciation and amortization


1,209 


470 


2,368 


814 


53,059 

        Total Expenses


365,396 


283,749 


686,089 


563,081 


22,832,288 

        Loss from Operations


(365,396)


(283,749)


(686,089)


(563,081)


(22,698,939)












OTHER INCOME (EXPENSES)











    Minority interest in loss






26,091 

    Other income






19,780 

    Gain on sale of subsidiary






208,417 

    Debt forgiveness





61,514 


61,514 

    Loss on termination of











       license agreement






(125,000)

    Interest expense


(5,918)


(5,914)


(11,872)


(11,828)


(1,129,517)

        Total Other Income (Expenses)


(5,918)


(5,914)


(11,872)


49,686 


(938,715)












LOSS BEFORE EXTRAORDINARY ITEMS

(371,314)


(289,663)


(697,961)


(513,395)


(23,637,654)












EXTRAORDINARY ITEMS











    Lawsuit settlement






415,000 

    Debt forgiveness






479,738 

        Total Extraordinary Items






894,738 












NET LOSS

$

   (371,314)

$

   (289,663)

$

 (697,961)

$

 (513,395)

$

(22,742,916)












BASIC LOSS PER SHARE

$

     (0.00)

$

     (0.00)

$

      (0.00)

$

     (0.00)














WEIGHTED AVERAGE NUMBER











 OF COMMON SHARES OUTSTANDING


244,738,453 


206,592,796 


243,449,840 


204,557,805 
















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




                MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Statements of Other Comprehensive Loss

(Unaudited)











From Inception



 For the


 For the


on January 31, 1986



 Three Months Ended


 Six Months Ended


Through



 June 30,


 June 30,


June 30,



2010


2009


2010


2009


2010












NET LOSS

$

   (371,314)

$

   (289,663)

$

 (697,961)

$

 (513,395)

$

(22,742,916)












OTHER COMPREHENSIVE LOSS











    Loss on foreign currency











         translation


(4,701)


(366)


(6,299)


(366)


(9,910)












TOTAL COMPREHENSIVE LOSS

$

   (376,015)

$

   (290,029)

$

 (704,260)

$

 (513,761)

$

(22,752,826)
















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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)










From Inception










on January 31,






 For the Six Months Ended


1986 Through






 June 30,


June 30,






2010


2009


2010

CASH FLOWS FROM OPERATING ACTIVITIES:








Net loss


$

  (697,961)

$

 (513,395)

$

  (22,742,916)

Adjustments to reconcile net loss to net cash








 used in operating activities:









Depreciation and amortization



       2,334 


      816 


    53,025 


Stock issued for services



   86,191 


   32,851 


    3,477,089 


Stock issued for early termination of a marketing

   rights agreement and a joint venture agreement



   - 


   - 


    125,000 


Amortization of deferred consulting fees



   45,048 


      65,000 


161,225 


Expense for extension of warrants below









 market value



   - 


     105,393 


   2,092,315 


Value of stock options granted



   23,047 


    - 


   169,144 


Bad debt expense



   - 


    - 


  48,947 


Minority interest in loss



   - 


     - 


  (26,091)


Loss on disposal of assets



   - 


     - 


   693,752 


Gain on settlement of debt and lawsuit settlements



   - 


  (61,514)


   (603,510)

Changes in assets and liabilities:









(Increase) decrease in prepaid expenses









 and deposits



   4,320 


  (5,280)


  (46,511)


Increase (decrease) in accounts payable



  (43,265)


  (21,486)


1,276,638 


Increase (decrease) in accrued expenses



   15,638 


   51,654 


   3,134,565 



Net Cash Used by Operating Activities



  (564,648)


  (345,961)


  (12,187,328)

CASH FLOWS FROM INVESTING ACTIVITIES:









Trademark and patent costs



  (11,811)


  (5,329)


 (26,044)


Purchase of fixed assets



     - 


  (1,027)


    (44,182)



Net Cash Used by Investing Activities



  (11,811)


   (6,356)


   (70,226)

CASH FLOWS FROM FINANCING ACTIVITIES:









Proceeds from lawsuit settlement



      - 


     - 


   415,000 


Principal payments on notes payable



  (2,720)


      - 


  (198,798)


Cash received from notes payable



     - 


      - 


  1,129,518 


Advances from shareholders



     - 


      - 


    44,658 


Payment on shareholder advances



     - 


      - 


   (24,191)


Capital contributions



      - 


      - 


    439,870 


Stock issuance costs



  (10,000)


      - 


    (115,312)


Increase in minority interest



      - 


       - 


    14,470 


Issuance of common stock for cash



     566,400 


      768,000 


   10,893,062 



Net Cash Provided by Financing Activities



     553,680 


   768,000 


   12,598,277 

EFFECT ON CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS



  (6,299)


  (366)


  (9,910)

NET INCREASE (DECREASE) IN CASH



  (29,078)


     415,317 


  330,813 

CASH AT BEGINNING OF PERIOD



      359,891 


      12,272 


         - 

CASH AT END OF PERIOD


$

   330,813 

$

  427,589 

$

   330,813 


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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Statements of Cash Flows (Continued)

(Unaudited)










From Inception










on January 31,






 For the Six Months Ended


1986 Through






 June 30,


June 30,






2010


2009


2010











SUPPLEMENTAL CASH FLOW INFORMATION


















CASH PAID FOR:










Interest


$

   44 

$

      - 

$

  29,907 



Income taxes


$

     - 

$

  - 

$

       - 











NON-CASH FINANCING ACTIVITIES




















Stock issued for services


$

   86,191 

$

   32,851 

$

 3,477,089 



Stock issued for prepaid consulting fees


$

   23,838 

$

   44,499 

$

 261,726 



Stock issued for stock offering costs


$

   100,000 

$

  - 

$

100,000 



Stock issued for conversion of debt


$

    - 

$

  - 

$

 4,373,912 



Stock issued for license agreement


$

    - 

$

   - 

$

 693,752 



Stock issued for patent costs


$

    - 

$

    - 

$

 14,750 



Stock issued for early termination of marketing

   rights agreement and joint venture agreement


$

    - 

$

    - 

$

 125,000 




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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009


NOTE 1 -

BASIS OF PRESENTATION


The financial information included herein is unaudited and has been prepared consistent with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements.  These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.  In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period presented.


The results of operations for the three months and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.


Recently Adopted Accounting Pronouncements


In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13 for Revenue Recognition – Multiple Deliverable Revenue Arrangements (Subtopic 605-25) “Subtopic”. This accounting standard update establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue generating activities. Vendors often provide multiple products or services to their customers. Those deliverables often are provided at different points in time or over different time periods. Specifically, this Subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting.  The amendments in this guidance will affect the accounting and reporting for all vendors that enter into multiple-deliverable arrangements with their customers when those arrangements are within the scope of this Subtopic.


This new accounting standard is effective for fiscal years beginning on or after June 15, 2010. Earlier adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity will apply the amendments under this Subtopic retrospectively from the beginning of the entity’s fiscal year.  The presentation and disclosure requirements shall be applied retrospectively for all periods presented. As the Company has not yet generated any revenues, this standard is not yet applicable, but will be adopted once revenues are generated.


NOTE 2 -

CANADIAN FOUNDATION FOR GLOBAL HEALTH


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


The CFGH is specifically not authorized to contract for research or other services on behalf of the Company without prior approval.  All intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on the Company’s behalf or at its request, by CFGH or parties contracted by CFGH with the Company’s prior approval, are the sole and exclusive property of the Company.


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009


NOTE 2 -

CANADIAN FOUNDATION FOR GLOBAL HEALTH (Continued)


In January 2003, the Financial Accounting Standards Board issued a new standard which requires a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity.  In addition, a legal entity is 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 it.  


The Company has determined that CFGH meets the requirements of a VIE, effective upon the first advance to CFGH on February 12, 2009.  Accordingly, the financial condition and operations of CFGH are being consolidated with the Company as of and for the three and six months ended June 30, 2010 and 2009.


NOTE 3 -

LOSS PER SHARE


The computations of basic loss per share of common stock are based on the weighted average number of common shares outstanding during the period of the consolidated financial statements as follows:



For the Three Months Ended June 30,


2010


2009

Numerator




 - Loss before extraordinary items

$            (371,314)


$        (289,663)

 - Extraordinary items






Denominator (weighted average number of shares outstanding)


244,738,453 



206,592,796 





Basic income (loss) per share




 - Before extraordinary items

$                  (0.00)


$              (0.00)

 - Extraordinary items

                     0.00 


                 0.00 





Basic Income (Loss) Per Share

$                  (0.00)


$              (0.00)







For the Six Months Ended June 30,


2010


2009

Numerator




 - Loss before extraordinary items

$            (697,961)


$        (513,395)

 - Extraordinary items






Denominator (weighted average number of shares outstanding)


243,449,840 



204,557,805 





Basic income (loss) per share




 - Before extraordinary items

$                  (0.00)


$              (0.00)

 - Extraordinary items

                     0.00 


                 0.00 





Basic Income (Loss) Per Share

$                  (0.00)


$              (0.00)





Common stock equivalents, consisting of warrants and options, have not been included in the calculation as their effect is antidilutive for the periods presented.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009

NOTE 4 -

GOING CONCERN


The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant losses from its inception through June 30, 2010, which have resulted in an accumulated deficit of $22,742,916 at June 30, 2010.  The Company currently does not have an established source of funds sufficient to cover its operating costs beyond the next three or four months, has a working capital deficit of approximately $3,073,000, and has relied exclusively on debt and equity financing.  Accordingly, there is substantial doubt about its ability to continue as a going concern.  Continuation of the Company as a going concern is dependent upon obtaining additional capital and ultimately, upon the Company’s attaining profitable operations.  The Company will require a substantial amount of additional funds to complete the development of its products, hospital beta testing, commercialization, and to fund additional losses, until revenues are sufficient to cover the Company’s operating expenses.  


Over the past several years, the Company has raised approximately $2,100,000 through the sale of 52,547,175 restricted shares of common stock at prices ranging from $0.01 to $0.25 per share, which funds have been used to pay certain corporate obligations, including the initial costs of development for its hospital sterilization initiative.  Subsequent to June 30, 2010, the Company has raised an additional $145,000 through the sale of 1,208,333 shares of common stock at $0.12 per share.  However, the Company will need to raise additional capital in the near future in order to sustain operations and to fund additional research.  The Company believes that it will be able to raise these additional needed funds from some of the same investors who have purchased shares over the past several years, although there is no guarantee that these investors will purchase additional shares.  However, these investors have verbally committed to continue to fund the Company’s projects on a monthly basis, as needed.  If the Company is unsuccessful in finalizing this or other additional funding, it will most likely be forced to substantially reduce or cease operations.


During 2009, the Company began pursuing the development of a novel ozone-based technology (“AsepticSure™ technology”) which will offer a safe, inexpensive means of disinfecting medical facilities of all bacteria, fungi and viruses known to cause hospital derived infections.  Since this technology is not considered a medical treatment or a diagnostic, its developmental pathway will not be subject to regulatory review or the requirement of a lengthy clinical trial process.  The Company completed a third series of laboratory trials of this hospital sterilization technology at Innovation Park, Queen’s University, Ontario, Canada, during January 2010 which has enabled the Company to establish the precise protocols necessary in order to obtain maximum bactericidal action in combination with minimum turn-around times in keeping with normal hospital flow patterns.  Most recently, the Company research has shown that the technology can now achieve a level of bacterial decontamination heretofore unseen in open space settings using conventional means.  Additional test results have demonstrated that the AsepticSure™ technology is successful on Porcelain and Formica, as well as stainless surfaces, which surfaces represent the majority of all hospital surfaces.  Recent research has shown that the AsepticSure™ technology is successful on Listeria monocytogenes and Salmonella thphium with thirty-minute exposure to the patented gas mixture, thus reducing food-borne illnesses.  The Company believes that these recent developments will significantly expand the utility for the AsepticSure™ technology, and also greatly reduce the time required for the thorough sterilization of a hospital room, and the return of the hospital room back into service.  


In addition, the Company’s full-scale development prototype has been completed and demonstrated in bacteria-free runs that it can reach both the charge time and saturation requirements of its design criteria.  Hospital beta testing of the AsepticSure™ hospital sterilization prototype system is scheduled to begin during late summer of 2010 for both public and government applications.  Assuming successful hospital beta testing, commercialization of the system with first product deliveries is expected during late 2010 or early 2011, which the Company believes will provide the necessary revenue to fund additional advanced efforts with this technology for bio-terrorism counter measures, as well as other projects.


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009


NOTE 4 -

GOING CONCERN (Continued)


The management of the Company intends to seek additional funding which will be utilized to fund additional research and continue operations.  The Company recognizes that if it is unable to raise additional capital, it may find it necessary to substantially reduce or cease operations.


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

NOTE 5 -

COMMITMENTS AND CONTINGENCIES


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


Effective July 1, 2009, the Company entered into a lease agreement and established its own certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which will provide a primary research and development platform for the Company as it proceeds towards commercialization of its products.  The lease term has been extended through June 30, 2011 and includes a monthly lease payment of $1,300 Canadian Dollars plus the applicable Goods and Services Tax (GST).  Additional space was rented during December 2009 that includes a monthly lease payment of $1,200 Canadian Dollars, plus the applicable GST, through June 30, 2011.    


NOTE 6 -

OUTSTANDING WARRANTS AND OPTIONS


Warrants


On various dates over the past several years, the Board of Directors of the Company agreed to extend the expiration date on certain outstanding warrants to purchase common stock.  The Company estimates the fair value of each stock award or expiration extension at the grant date or extension date 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 warrants.  Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.  Under the provisions of this accounting standard, additional expense of $-0- and $105,393 was recorded for the six months ended June 30, 2010 and 2009, respectively, under the Black-Scholes option pricing model for these warrant extensions.  


The Company estimated the fair value of the stock warrants at the date of the maturity extension, based on the following weighted average assumptions:


Risk-free interest rate

0.11% - 0.27%

Expected life

1 to 4 months

Expected volatility

139.91% - 245.55%

Dividend yield

0.00%


All outstanding warrants were either exercised or expired unexercised prior to the end of the year ended December 31, 2009, thus there are no warrants outstanding as of June 30, 2010.



MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009


NOTE 6 -

OUTSTANDING WARRANTS AND OPTIONS (Continued)


Options


On August 26, 2009, the Company granted a total of 1,000,000 options to a Company director with an exercise price of $0.10 per share, exercisable for up to five years.  On the same date, the Company granted an additional 1,500,000 options to an outside consultant for services rendered, with an exercise price of $0.10 per share, exercisable for up to five years, but including vesting provisions as follows: i) 500,000 of the options vested immediately on the date of grant, ii) 500,000 options will vest on the date certified by the Company as the date the Company’s hospital sterilization program completes its beta-testing, and iii) the remaining 500,000 options will vest on the date certified by the Company as the date that the Company’s process has been commercialized and a minimum of fifty units or devices have been sold to third parties by the Company.  As of June 30, 2010, 1,000,000 of the 1,500,000 options granted to this consultant had not yet vested.  Additional expense of $97,398 will be recorded in the future as the additional vesting requirements are met on the 1,000,000 unvested options.  


On March 29, 2010, the Company granted 250,000 options to an individual for research and development consulting services to be rendered for the period of April 1, 2010 through September 30, 2010.  The options have an exercise price of $0.19 per share, and are exercisable for up to five years.  The value of these options granted, totaling $46,094, is being recognized as an expense on a monthly basis beginning on April 1, 2010 at $7,682 per month.  $23,047 of this expense was recorded during the three months ended June 30, 2010 with the remaining $23,047 being recorded as deferred consulting fees to be recognized during the three months ended September 30, 2010.


As previously discussed, the Company estimates the fair value of each stock award by using the Black-Scholes option pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options.  Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.  Under the provisions of this accounting standard, additional expense of $23,047 and $-0- was recorded for the six months ended June 30, 2010 and 2009, respectively, under the Black-Scholes option pricing model.  


The Company estimated the fair value of the stock options at the date of the grant, based on the following weighted average assumptions:


Risk-free interest rate

2.46%

Expected life

5 years

Expected volatility

192.37 - 196.94%

Dividend yield

0.00%


A summary of the status of the Company’s outstanding options as of June 30, 2010 and changes during the six months then ended is presented below:




              Shares     

Weighted Average Exercise Price

Outstanding, beginning of period

2,500,000 

$0.10

Granted

250,000 

$0.19

Expired/Canceled

-

n/a

Exercised

   -

n/a

Outstanding, end of period

2,750,000 

$0.11

Exercisable

1,750,000 

$0.11

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009


NOTE 7 -

STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS

During the six months ended June 30, 2010, the Company issued 4,122,777 shares of common stock for cash proceeds of $556,400 (net of stock issuance costs of $10,000), at prices ranging from $0.12 to $0.25 per share.

During April 2009, the Company’s Board of Directors approved the issuance of 700,000 (350,000 restricted and 350,000 free-trading) shares of common stock to a consultant. The stock was valued at $25,200, or $0.036 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement was based on a one-year term, the shares vested in equal increments, and the consulting expense was recognized over the same period.  $16,800 of the $25,200 was recognized during the year ended December 31, 2009.  The remaining $8,400 was recognized during the six months ended June 30, 2010.

During May 2009, the Company’s Board of Directors approved the issuance of 500,000 restricted shares of common stock to a consultant valued at $19,500, or $0.039 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement was based on a one-year term, the shares vested in equal increments, and the consulting expense was recognized over the same period.  $11,911 of the $19,500 was recognized during the year ended December 31, 2009.  The remaining $7,589 was recognized during the six months ended June 30, 2010.

During February 2010, the Company’s Board of Directors approved the issuance of a total of 137,000 restricted shares of common stock to two consultants for consulting, marketing, and web support services valued at a total of $39,730, or $0.29 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  Both consulting agreements were based on a five-month term, the shares vested in equal increments, and the consulting expense has been recognized over the same period through June 30, 2010.  

On March 29, 2010, the Company’s Board of Directors approved the issuance of a total of 250,000 restricted shares of common stock to a consulting firm for investor relation services valued at $47,500, or $0.19 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement was for the period of April 1, 2010 through June 30, 2010.  The entire amount of $47,500 has been recognized as consulting fees during the second quarter of 2010 at $15,833 per month.

As previously discussed in Note 6, on March 29, 2010, the Company granted options to acquire 250,000 free-trading shares of common stock to an individual to assist the Company in the scientific development of its technology as well as patent support for the period of April 1, 2010 through September 30, 2010.  The options have an exercise price of $0.19 per share, and are exercisable for up to five years.  Pursuant to the Black-Scholes option pricing model, the value of these options is $46,094.  $23,047 of the $46,094 was recognized during the three months ended June 30, 2010 with the remaining $23,047 recorded as deferred consulting fees as of June 30, 2010, to be recognized during the third quarter of 2010 at $7,682 per month.  


On April 9, 2010, the Company’s Board of Directors approved the issuance of a total of 588,235 restricted shares of common stock in satisfaction of a one-year contract with an investment firm to assist the Company in raising the necessary capital to continue the development of the Company’s research and technology.  The shares were valued at $100,000, or $0.17 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  $22,500 of the $100,000 value was recognized as a stock offering cost, and offset against the cash proceeds received as a result of the investment firm’s efforts, during the three months ended June 30, 2010 with the remaining $77,500 recorded as deferred stock offering costs as of June 30, 2010, to be recognized as stock offering costs during the remaining nine-month period of the contract at $8,333 per month.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2010 and December 31, 2009


NOTE 7 -

STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS (Continued)


On April 12, 2010, the Company’s Board of Directors approved the issuance of a total of 120,000 restricted shares of common stock to a consultant in lieu of outstanding consulting fees valued at $22,800, or $0.19 per share, which represented the market value of the shares on the date that the shares were approved to be issued.


NOTE 8 -

PROTOTYPE AGREEMENT


On June 29, 2010, the Company entered into a six-month “Prototype Evaluation Agreement” (“Prototype Agreement”) with a company to produce a prototype AsepticSure™ system apparatus prior to August 24, 2010 and a second prototype apparatus prior to September 24, 2010.  In addition, as additional consideration for the assistance provided by this company pursuant to this Prototype Agreement, the Company has agreed to issue 1,000,000 shares of restricted common stock upon the Company’s acceptance of the prototype apparatuses, with any required changes agreed to, as being ready for regular production.


NOTE 9 -

SUBSEQUENT EVENTS


Subsequent to June 30, 2010, the Company raised additional funds totaling $145,000, through the issuance of 1,208,333 shares of restricted common stock, issued at $0.12 per share.


On July 15, 2010, the Company issued 135,000 shares of common stock to an investor relations company pursuant to a one-year agreement through July 15, 2011.  The shares are valued at $25,650, or $0.19 per share, the market value of the shares on the date that the Board of Directors approved the issuance of the shares.


On July 21, 2010, the Company issued a total of 4,000,000 shares of common stock to certain directors and officers for board service and performance bonuses.  These shares are valued at a total of $840,000, or $0.21 per share, the market value of the shares on the date that the dis-interested members of the Board of Directors authorized the issuance of the shares.  The same directors and officers also were granted options for the purchase of a total of 3,500,000 shares of common stock, exercisable at $0.20 per share for a period of five years.  These options do not vest, however, until the Company achieves commercial sales.


In addition, on the same date, the Company granted to one of its directors (in lieu of the stock grant mentioned in the previous paragraph) a stock option for the purchase of 1,000,000 shares of common stock, exercisable at $0.20 per share, which carries a five-year term of exercise and which vests immediately.


The Company has evaluated subsequent events per the requirements of Topic 855 and notes that there are no additional events to be reported.














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

General

Medizone International, Inc. ("Medizone," the "Company," “we,” “us,” “our”), prior to 2008, had been dedicated to (i) seeking regulatory approval of a precise mixture of ozone and oxygen, and its process of inactivating lipid-enveloped viruses for the intended purpose of decontaminating blood and blood products and assisting in the treatment of certain diseases; (ii) developing or acquiring the related technology and equipment for the medical application of its products, including a drug production and delivery system; and, (iii) applying its novel technology to the problem of nosocomial infections world-wide.  

Ozone is a gas composed of three oxygen atoms in an unstable and highly reactive form.  Ozone naturally tends to seek its normal state, exhibiting a short half-life as it reverts to oxygen fairly rapidly.  There are many uses of ozone as a disinfecting agent.  Ozone does not react with organic matter and therefore it leaves no residue in water or on the treated product.  Ozone also does not form any toxic byproducts and when used in water, it can be filtered and reused.  This means that no change in color or flavor results from ozone treatment, unlike chlorine treatment.  Ozone can be generated onsite from ambient air or from oxygen.  Each method has its advantages and unique challenges.  It has been demonstrated that ozone can be economically produced and is effectively used as an agent in food processing, equipment sanitizing, and in water treatment facilities globally.  Ozone technology is replacing conventional sanitation techniques such as chlorine, steam, or hot water.

Corporate Operations

Early in 2008, our management and Board of Directors began to consider other applications of our core technologies and new technologies with lower development costs with the objective of moving us to revenue production in the shortest period of time.

Beginning in 2008, management re-positioned the Company to pursue an initiative in the field of hospital sterilization.  Following laboratory results with Bacillus subtilis, an internationally recognized surrogate for Anthrax, that produced 7 log reductions (sterilization), we have expanded our research and business plan to include bio-terrorism countermeasures as well as hospital sterilization and critical infrastructure de-contamination.

This change in focus is based, in part, on a review of published data on hospital-derived infections, an area of rapidly growing concern in the medical community. Management believes that there is an opportunity to build on our experience with ozone technologies and its bio-oxidative qualities in pursuing this initiative. We have shifted our near term efforts towards one of its founding tenets, namely that under the right conditions, ozone can be extremely effective at sterilizing biological fluids (blood, serum, and plasma and its fractionates) as well as biologically contaminated equipment and spaces.

We believe that our unique ozone generating technologies could play a vital role in addressing what public health officials and surgeons world-wide are beginning to recognize as "the silent epidemic" (American Academy of Orthopedic Surgeons, May 2008, copy on file with the Company (“AAOS Study”)), a reference to MRSA (methicillin-resistant staphylococcus aureus) infection.  This is a strain of Staphylococcus aureus bacteria (“staph”) that is resistant to the broad-spectrum antibiotics commonly used to treat it. MRSA can be fatal.  According to the AAOS Study, "the number of hospital admissions for MRSA has exploded in the past decade. By 2005, admissions were triple the number in 2000 and 10-fold higher than in 1995. In 2005, in the United States alone, 368,600 hospital admissions for MRSA — including 94,000 invasive infections — resulted in 18,650 deaths. The number of MRSA fatalities in 2005 surpassed the number of fatalities from hurricane Katrina and AIDS combined and is substantially higher than fatalities at the peak of the U. S. polio epidemic."  Indeed, biological contamination of medical treatment areas such as hospitals and chronic care facilities has recently been identified by several world renowned public health institutions, including the Centers for Disease Control or “CDC” (CDC Report, 17 Oct, 2007, copy on file with the Company), as one of the greatest threats to public health and safety in the industrial world. This concern was reflected in an article published in the journal Science (18 July 2008, Vol 321, pp 356-361, copy on file with the Company) which estimated that hospital-based infections in 2006 accounted for almost 100,000 deaths in the US alone.

In response to this situation, we are developing a highly portable, low-cost, ozone-based technology (“AsepticSure™”) specifically for the purpose of decontaminating and sterilizing hospital surgical suites, emergency rooms, and intensive care units. Since this technology is not considered a medical treatment or a diagnostic, its development pathway is not subject to a stringent and expensive regulatory review process.  The development pathway will be based on independent peer-reviewed science and engineering excellence.  A government variant of AsepticSure™ is being developed for bio-terrorism countermeasures.

In 2008, we entered into a five-year agreement with BiOzone Corporation (“BiOzone”).  Under the agreement, BiOzone and the Company have been developing equipment for specialized laboratory trials, a prototype AsepticSure™ system for hospital beta-testing and ozone destruct technology.  The agreement also covers initial product manufacturing by BiOzone exclusively for Medizone. Under this agreement, we retain the right to outsource additional manufacturing capacity.  

During May 2009, we commenced the first of a series of trials designed to confirm that our AsepticSure™ Hospital Sterilization System can rapidly eliminate hospital-based bacterial pathogens known to be responsible for the growing number of deaths and serious infections currently plaguing the healthcare system worldwide.  We have engaged an internationally recognized expert in medical microbiology and hospital infections to lead the trials.  

A second series of laboratory trials were commenced in early June 2009, after the first series produced results that management believes to have demonstrated significant bactericidal effects against C-difficile, E-coli, Pseudomonas aeruginous, MRSA and VRE, the main causative agents of hospital derived nosocomial infections.  This second series of laboratory trials resulted in what management believes to be levels of bactericidal action necessary to achieve our commercial objectives.  

A third series of laboratory trials were commenced during October 2009 in order to establish the precise protocols necessary in order to obtain maximum bactericidal action in combination with minimum turn-around times in keeping with normal hospital flow patterns.  This third series of laboratory trials were completed during January 2010.  These tests now predictably demonstrate greater than 6 logs (99.9999%) of bacterial “kill” across the full spectrum of hospital contaminants including MRSA, C difficile, E coli, Pseudomonas aeruginosa and VRE (Vanocomycin-resistant Enterococci) in addition to the internationally accepted surrogate for Anthrax, Bacillus subtilis.  Our research has shown that the technology can now achieve a level of bacterial decontamination heretofore unseen in open space settings using conventional means.  We now believe that this development will significantly expand the utility and acceptance for the AsepticSure™ technology.   

Simultaneously with this recent testing, a development prototype was completed, which has demonstrated that it can reach both the charge time and saturation requirements of its design criteria.   Mock-up trials began in January 2010 for both public (hospital) and government (bio-terrorism countermeasures) applications.  Results obtained during early February 2010 show that every full-scale test run completed in our hospital room mock-up facility has resulted in the total elimination of all bacteria present in the room. In this current phase of development, we will attempt to confirm, in a more realistic hospital setting, recent laboratory findings indicating extremely high antibacterial efficacy for its novel technology (6-7.2 log reductions) against the primary causative agents of hospital acquired infections (HAI’s), sometimes referred to as “Super Bugs”.  We have now completed multiple runs with very high concentrations of MRSA, VRE and E coli samples that were distributed throughout the test room.  In every instance, the AsepticSure™ system produced greater than 6 log (99.9999%) reductions, which by definition, is sterilization.  We now intend to systematically collect empirically verifiable scientific data on all of the remaining causative agents of HAI’s.  Given these recent results in a full room test setting which precisely mirrors our laboratory setup, we fully expect the same results with all remaining bacteria as well as Bacillus subtilis, the recognized surrogate for Anthrax.   If the hospital mock-up continues to be successful, we will proceed to hospital beta testing of a production prototype in preparation for marketing.  Commercialization of the system, with first product deliveries, is expected later this year or during early 2011.

On June 29, 2010, the Company entered into a six-month “Prototype Evaluation Agreement” (“Prototype Agreement”) with a company to produce a prototype AsepticSure™ system apparatus prior to August 24, 2010 and a second prototype apparatus prior to September 24, 2010.  As additional consideration for the assistance provided by this company pursuant to this Prototype Agreement, we agreed to issue 1,000,000 shares of restricted common stock upon our acceptance of the prototype apparatuses, with any required changes agreed to, as being ready for regular production.

In addition to the hospital sterilization initiative, we have developed an ozone-destruct unit which is used following sterilization of the treated infrastructure to reverse the ozone gas (O3) in the space, and turn it back into O2 in a short period of time.  We have initially targeted the treatment of a typically sized surgical suite including sterilization followed by ozone destruct to habitable standards in two hours or less.  This short turn-around period is considered of great importance relative to commercialization of the technology.  While full room-scale testing only began in January 2010, preliminary results have demonstrated greater than 6 log (99.9999%) reductions are obtainable with the room cleared and then returned to service in under two hours.  Therefore, early results have demonstrated that the system meets our design criteria.

In addition, work just recently completed by the Company at Queen’s University has demonstrated that the AsepticSure™ system can reliably eliminate in excess of 7 logs (99.99999%) reductions of Listeria monocytogenes and Salmonella typhium with 30-minute exposure to its unique and patented gas mixture, which provides an additional application of the AsepticSure™ technology, beyond that of hospital acquired infections.

An application for registration of a trademark has been filed for the system with the United States Patent and Trademark Office for the mark AsepticSure™. The mark is used to describe a portable decontamination and sterilization system for hospitals, government buildings, schools and other functionally critical environments that might currently require, or need to be prepared for countermeasures capability from contamination by infectious biological agents such as C difficile, E coli, Pseudomonas aeruginous, MRSA and VRE.

On July 6, 2009, we filed US patent application 61/223,219 titled “Healthcare Facility Disinfecting System” for the AsepticSure™ technology.  The patent covers disinfection for rooms and their contents within all healthcare facilities, mobile or stationary, and other critical infrastructure such as schools and government buildings.  

During the third round of trials, additional technologies were added to the AsepticSure™ system, each having their own antimicrobial effects, which in combination, were shown not to be additive, but multiplicative.  The unprecedented results obtained of 6-log reductions or greater with all HAI associated pathogens provided us with valuable inventive information that resulted in a second patent filing made on January 20, 2010.  

This second patent filing (US patent application 61/295,851) was filed to protect improvements in our basic procedure and protocol achieved by combining it with another procedure, resulting in a significant increase in disinfecting capabilities demonstrated during the third round of laboratory trials against a wide variety of bacteria and on a range of different surfaces commonly found in healthcare and other essential facilities.  Both patent applications currently afford international protection for this technology, and can be expanded into full international patent applications, in countries of our choice.

On July 7, 2010, the Company filed an international patent application under the auspices of the Patent Co-operation Treaty (“PCT”) to secure international patent protection for its AsepticSure™ technology.  The international patent application consolidates the two previously filed patent applications as described above and expands the technical evidence, both laboratory scale and practical scale, supporting the effectiveness of the technology in clearing healthcare and other critical infrastructure of bacterial infections such as C difficile, E coli, Pseudomonas aeruginous, MRSA and VRE down to complete sterilization standards.  After the international patent application has been searched and examined by the International Patent Office authorities, the Company can register it in any or all countries of the world that have ratified the PCT (of which there are over 140 such countries, which includes all major industrialized countries), and secure grant of patents on the application in countries of its choice.

Also effective July 1, 2009, we entered into a lease agreement and established our own certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which has provided us with a primary research and development platform as we proceed towards commercialization of the AsepticSure ™ product.  Our laboratory space was doubled in size during January 2010 in order to conduct full-size room testing (mock-trials).

We believe our research and development time frame as well as intellectual property development remain on track.  Once the trial program for the AsepticSure™ hospital sterilization system is concluded, we expect to out-source the manufacturing of the product and partner with large, well established companies that are already fully embedded in our sector of business as suppliers, such as medical device manufacturers or service companies.  

We possibly may partner with several such companies, perhaps covering different geographical markets such as North America, Asia, and Europe.  The same may prove to be true for the outsourcing of additional manufacturing capacity.  By developing relationships with multiple corporate partners, management believes that we will be able to better maintain control over our products and obtain more competitive returns.  We have held preliminary talks with potential corporate partners in the hospital sector, but have not committed to any corporate relationship at the present time.  At this time, we intend to maintain sales of the government variant of AsepticSure™ in-house, as we have full-time staff and consultants that are very experienced in dealing with government affairs and government contracts.

Canadian Foundation for Global Health (CFGH) – Consolidated Variable Interest Entity

We assisted in the formation of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada.  We helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with Medizone 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 us to use a tiered pricing structure for services and products in emerging economies and extend the reach of our technology to as many in need as possible.

The CFGH is specifically not authorized to contract for research or other services on our behalf without prior approval.  All intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on our behalf or at our request, by CFGH or parties contracted by CFGH with our prior approval, are the sole and exclusive property of Medizone.

The CFGH is registered as a not-for-profit corporation under Canadian Federal Charter.  CFGH maintains offices at 170 Lauier Avenue West in Ottawa, Canada.  Dr. Michael E. Shannon M.A., M.Sc., M.D. is President of CFGH and maintains offices at CFGH.  Dr. Shannon is also a member of our Board of Directors and is our Director of Medical Affairs.  Mr. Brad Goble, President of TDVGlobal, Inc., is also a board member of CFGH and serves as the Secretary-Treasurer for the organization. According to its website, TDVGlobal, Inc. “is a strategic management consulting company” focusing on the public sector.  It is based in Ottawa, Ontario, Canada.  Other members of the CFGH board are Edwin G. Marshall (our CEO and Chairman), Daniel D. Hoyt, a director of the Company, Jill C. Marshall, NMD, Mr. Marshall’s wife and a former corporate officer of the Company, and Dr. Ron St. John.

In January 2003, the Financial Accounting Standards Board issued a new accounting standard which requires a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity.  In addition, a legal entity is 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 it.  We have determined that CFGH meets the requirements of a VIE, effective upon the first advance to CFGH on February 12, 2009.  Accordingly, the financial condition and operations of CFGH are being consolidated with Medizone as of and for the quarters ended June 30, 2010 and 2009.

Results of Operations

We were incorporated in January 1986.  We are a development stage company primarily engaged in research into the medical uses of ozone.  Our current work is in the field of hospital sterilization, not human therapies.  We have not generated, and cannot predict when or if we will generate, revenues or sufficient cash flow 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 United States bankruptcy laws.

Three Months Ended June 30, 2010 and 2009

There were no sales during the quarters ended June 30, 2010 or 2009. For the three months ended June 30, 2010, we had a net loss of $371,314, compared with a net loss for the three months ended June 30, 2009 of $289,663.  Our primary expense is payroll and consulting fees, research and development costs, office expenses, together with interest expense and additional expense recorded as a result of options granted to consultants, and the extension of certain stock purchase warrants outstanding.  

For the three months ended June 30, 2010 and 2009, we incurred $156,243 and $74,329 in research and development costs as a result of prototype development costs, consulting, and other research activities.  Since inception, we have spent a total of $3,530,812 for research and development related to our ozone technology and related apparatus. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.

General and administrative expenses in the quarter ended June 30, 2010, were $207,944 compared to $133,470 during the same period in 2009. The majority of these costs include payroll and consulting fees, and professional fees.  The remaining general and administrative expenses include rent, office expenses and travel expenses.  

Principal amounts owed on notes payable totaled $280,491 and $283,211 at June 30, 2010 and December 31, 2009, respectively.  Interest expense on these obligations during the three months ended June 30, 2010 and 2009 was $5,918 and $5,914, respectively.  

Six Months Ended June 30, 2010 and 2009

There were no sales during the six months ended June 30, 2010 or 2009. For the six months ended June 30, 2010, we had a net loss of $697,961, compared with a net loss for the six months ended June 30, 2009 of $513,395.  Our primary expense is payroll and consulting fees, research and development costs, office expenses, together with interest expense and additional expense recorded as a result of options granted to consultants, and the extension of certain stock purchase warrants outstanding.  

For the six months ended June 30, 2010 and 2009, we incurred $291,023 and $140,646 in research and development costs as a result of prototype development costs, consulting, and other research activities.  Since inception, we have spent a total of $3,530,812 for research and development related to our ozone technology and related apparatus. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.

General and administrative expenses in the six months ended June 30, 2010, were $392,698 compared to $316,228 during the same period in 2009. The majority of these costs include payroll and consulting fees, and professional fees.  The remaining general and administrative expenses include rent, office expenses and travel expenses.  

Principal amounts owed on notes payable totaled $280,491 and $283,211 at June 30, 2010 and December 31, 2009, respectively.  Interest expense on these obligations during the six months ended June 30, 2010 and 2009 was $11,872 and $11,828, respectively.  

The Company also recorded debt forgiveness of $61,614 from a professional service firm during the six months ended June 30, 2009.

Liquidity and Capital Resources

At June 30, 2010, our working capital deficiency was $3,073,468, compared to a working capital deficiency of $3,072,253 at December 31, 2009.  The stockholders’ deficit at June 30, 2010 was $3,187,740 compared to $3,273,502 at December 31, 2009.  

As a development stage company, we have had no revenues. We will continue to require additional financing to fund operations and to continue to fund the research necessary to undertake our new business plans, to further the ongoing testing as previously described, and then to market a system for hospital and medical sterilization.  Our only source of financing to date has been the periodic sale of common stock. During the six months ended June 30, 2010, we generated cash of $556,400 (net of stock offering costs paid in cash of $10,000) through common stock sales at prices ranging from $0.12 to $0.25 per share.  During July and August 2010, we raised an additional $145,000 through the sale of common stock at $0.12 per share.  However, we will need to raise additional capital in the near future in order to continue our research and development activities and to sustain operations.  We believe that we will be able to raise these additional needed funds from some of the same investors who have purchased shares over the past several years, although there is no assurance that these investors will purchase additional shares.  However, these investors have verbally committed to continue to fund our projects on a monthly basis, as needed.  

Our unaudited financial statements included in this report have been prepared on the assumption that the Company will continue as a going concern. Through the date of this report, it has been necessary to rely upon financing from the sale of our equity securities to sustain operations as indicated above. Additional financing will be required if we are to continue as a going concern. If additional financing is not obtained in the near future, we will be required to curtail or discontinue operations, or seek protection under the bankruptcy laws. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to the Company. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing shareholders.

Forward-Looking Statements and Risks Affecting the Company

The statements contained in this report on Form 10-Q that are not purely 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. These statements regard our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases "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 assets 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, 2009.  The Company believes that many of the risks previously discussed and in its SEC filings are part of doing business in the industry in which we operate and compete 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 ability to obtain needed financing.

Critical Accounting Policies and Estimates

This Discussion and Analysis of Financial Condition and Results of Operations are based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. These estimates are based on historical experience and other assumptions that management considers to be appropriate in the circumstances. However, actual future results may vary from these estimates, since 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 bad debts, intangible assets, warranty obligations, product liability, revenue, and income taxes.

We account for equity securities issued for services rendered at the fair value of the securities on the date of issuance.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in prevailing market interest rates affecting the return on our investments but do not consider this interest rate market risk exposure to be material to our financial condition or results of operations.  We invest primarily in United States Treasury instruments with short-term (less than one year) maturities.  The carrying amount of these investments approximates fair value due to the short-term maturities.  Under current policies, we do not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage our exposure to changes in interest rates or commodity prices.

Item 4.  Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, management, including the principal executive officer and principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1.     Legal Proceedings


There were no material developments during the quarter ended June 30, 2010 relative to the legal matters previously disclosed by the Company in reports on Form 10-K or Form 10-Q filed with the Securities and Exchange Commission.


Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds


Six Months Ended June 30, 2010


In January and February, 2010, we issued an aggregate of 500,000 shares of common stock for cash proceeds totaling $125,000, or $0.25 per share.  The shares were issued in private transactions to four accredited investors not otherwise affiliated with the Company.  There were no underwriters involved.  In April, May and June 2010, we issued an additional 3,622,777 shares of common stock for cash proceeds totaling $441,400, at prices ranging from $0.12 to $0.18 per share.  We also paid stock offering costs to an investment firm of $10,000 who assisted us in raising these funds.  These shares were issued in private transactions to a total of thirteen accredited investors not otherwise affiliated with the Company.  All of these proceeds received were used for general operating expenses and to pay for the development of the AsepticSure™ hospital sterilization system.  These sales were made without registration under the Securities Act of 1933, as amended, (the “Securities Act”) in reliance upon exemptions from registration, including, without limitation, the exemption provided under Section 4(2) of the Securities Act for private and limited offers and sales of securities made to accredited investors, and the exemptions provided under Regulation D and Rule 506 under the Securities Act for private and limited offers and sales of securities made to accredited investors.


During February 2010, we issued a total of 137,000 restricted shares of common stock to two consultants for consulting, marketing, and web support services valued at a total of $39,730, or $0.29 per share, which represented the market value of the shares on the date that our Board of Directors authorized the issuance of the shares.  Both consulting agreements were based on a five-month term through June 30, 2010, the shares vested in equal increments, and the consulting expense was recognized over the same period.


On March 29, 2010, we issued a total of 250,000 restricted shares of common stock to a consulting firm for investor relation services valued at $47,500, or $0.19 per share, which represented the market value of the shares on the date that the Board of Directors authorized the issuance of the shares.  The consulting agreement is for the period of April 1, 2010 through June 30, 2010.  


On April 9, 2010, we issued a total of 588,235 restricted shares of common stock in satisfaction of a one-year contract with an investment firm to assist the Company in raising required capital, valued at $100,000, or $0.17 per share, which represented the market value of the shares on the date that the Board of Directors authorized the issuance of the shares.


On April 12, 2010, we issued 120,000 restricted shares of common stock in lieu of outstanding consulting fees totaling $22,800, or $0.17 per share, which represented the market value of the shares on the date that the Board of Directors authorized the issuance of the shares.


These issuances of shares for services rendered were made without registration under the Securities Act in reliance upon exemptions from registration, including, without limitation, the exemption provided under Section 4(2) of the Securities Act for private and limited offers and sales of securities made solely to accredited investors.


Item 6.

Exhibits


Exhibit 31.01

Certification of Principal Executive Officer, Section 302 of the Sarbanes-Oxley Act of 2002.


Exhibit 31.02

Certification of Principal Financial Officer, Section 302 of the Sarbanes-Oxley Act of 2002.


Exhibit 32.01

Certification of Principal Executive Officer, Section 906 of the Sarbanes-Oxley Act of 2002.


Exhibit 32.02

Certification of Principal Financial Officer, Section 906 of the Sarbanes-Oxley Act of 2002.


SIGNATURES


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


MEDIZONE INTERNATIONAL, INC.

(Registrant)


/s/ Edwin G. Marshall

Edwin G. Marshall, Chairman and Chief Executive

Officer (Principal Executive Officer)


/s/ Steve M. Hanni

Steve M. Hanni, Chief Financial Officer

(Principal Financial and Principal Accounting Officer)

August 10, 2010