The consolidated financial statements presented are those of Medizone International, Inc. (Medizone), and its wholly owned subsidiary, Medizone International, Inc. Delaware (Medizone-Delaware). The consolidated financial statements presented also include the accounts of the Canadian Foundation for Global Health (CFGH), a not-for-profit foundation based in Ottawa, Canada, considered a variable interest entity (VIE) as described below. Collectively, they are referred to herein as the “Company”. The Company is in the business of designing, manufacturing and selling a patented system using ozone in the disinfection of surgical and other medical treatment facilities and in other applications. Historically, the Company has been considered a development stage company. During 2012, the Company commenced its planned operations, generated significant revenues, and is no longer considered a development stage company.

In late 2008, the Company assisted in the formation of the CFGH, a not-for-profit foundation based in Ottawa, Canada. The Company helped establish the 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 its technology to as many in need as possible.

Accounting standards require a VIE to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the VIE’s expected residual returns as a result of holding variable interests, (ownership, contractual, or other financial interests) in the VIE. 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 determined that the CFGH meets the requirements of a VIE, effective upon the first advance to the CFGH on February 12, 2009. Accordingly, the financial condition and operations of the CFGH are being consolidated with Medizone as of and for the periods ended December 31, 2012 and 2011.

The Company’s objective is to pursue an initiative in the field of hospital disinfection. The Company is working on the development of an ozone-based technology, specifically for the purpose of decontaminating and disinfecting hospital surgical suites, emergency rooms, and intensive care units.

Property and equipment are recorded at cost. Any major additions and improvements are capitalized. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as gain or loss on sale of property and equipment. Depreciation is computed using the straight-line method over a period of: (1) three years for computers and software, (2) five years for office equipment and furniture and (3) two years for leasehold improvements.

The Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s actual current income tax exposure together with assessing temporary differences resulting from differing treatment of items for income tax and financial reporting purposes. These temporary differences result in deferred income tax assets and liabilities, the net amount of which is included in the Company’s consolidated balance sheets. When appropriate, the Company records a valuation allowance to reduce its deferred income tax assets to the amount that the Company believes is more likely than not to be realized. Key assumptions used in estimating a valuation allowance include potential future taxable income, projected income tax rates, expiration dates of net operating loss and tax credit carry forwards, and ongoing prudent and feasible tax planning strategies.

As of December 31, 2012, the Company had net operating loss (“NOL”) carryforwards of approximately $8,940,000 that may be offset against future taxable income, if any, and expire in years 2013 through 2033. If substantial changes in the Company’s ownership should occur, there would also be an annual limitation of the amount of the NOL carryforwards which could be utilized. No tax benefit had been reported in the consolidated financial statements as, in the opinion of management, it is more likely than not that all of the deferred income tax assets will not be realized and the NOL carryforwards will expire unused. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. If the Company were to determine that it would be able to realize its deferred income tax assets in the future in excess of the net recorded amount, an adjustment to reduce the valuation allowance would increase income in the period such determination was made.

A company may adopt a policy of presenting taxes assessed by a governmental authority on revenue-producing transactions either on a gross basis or a net basis within revenues. The Company has elected to present revenues net of any tax collected.

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2012 and 2011 due to the following:

The Company had no uncertain income tax positions as of December 31, 2012 and 2011. As of December 31, 2012, the Company has approximately $9,826,600 of NOL carryforwards, which expire beginning in 2016 through 2032.

The Company files income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations for years before 2009.

The consolidated financial statements include the accounts of Medizone and its wholly owned inactive subsidiary, Medizone-Delaware. The consolidated financial statements presented also include the accounts of the CFGH, a VIE.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company records compensation expense in connection with the granting of stock options and their vesting periods based on their fair values. The Company estimates the fair value of each stock option awards at the grant date by using the Black-Scholes option-pricing model.

Trademarks and patents are recorded at cost. Amortization is computed using the straight-line method over a period of seven years. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis. Several factors are used to evaluate intangibles, including management’s plans for future operations, recent operating results and projected, undiscounted cash flows.

The Company commenced sales and emerged from the development stage in 2012. The Company recognizes revenue when it ships its products, payment from the customer is reasonably assured and the price is fixed or determinable. The Company records customer deposits that have not yet been earned as unearned revenue. Revenue is recognized only when title and risk of loss passes to customers.

The Company’s inventory consists of its AsepticSure product and is valued on a “specific identification basis”. The Company purchases its inventory as a finished product from unrelated manufacturing companies. The Company writes off 100% of the cost of inventory that it specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company did not deem any inventory obsolete or excessive as of December 31, 2012.

The Company’s financial instruments consist of cash, accounts payable, and notes payable. The carrying amounts of cash and accounts payable approximate their fair values because of the short-term nature of these items. The carrying amounts of the notes payable approximate fair values as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.

In 2011, the Financial Accounting Standards Board (“FASB”) issued two Accounting Standards Updates (“ASU”), namely, ASU No. 2011-05 and ASU No. 2011-12 which amend guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income or loss in one continuous statement, referred to as the statement of comprehensive income or loss, or in two separate, but consecutive statements. The option to report other comprehensive income or loss and its components in the statement of stockholders’ deficit has been eliminated. Although the new guidance changes the presentation of comprehensive income or loss, there are no changes to the components that are recognized in net income or loss or other comprehensive income or loss under existing guidance. The Company adopted these ASUs using one continuous statement for all years presented.

The Company maintains its cash in bank deposit accounts which, at times, exceeds federally insured limits. The Emergency Economic Stabilization Act of 2008 temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, made this $250,000 per depositor coverage limit permanent. As of December 31, 2012 and 2011, the Company had no cash that exceeded federally insured limits. To date, the Company has not experienced a material loss or lack of access to its cash; however, no assurance can be provided that access to the Company’s cash will not be impacted by adverse conditions in the financial markets.