UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-Q

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

For the quarterly period ended September 30, 2012

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

Commission file number:  000-54600

FRESH MEDICAL LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

(801) 736–0729

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) 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  X . 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 Ruble 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes      . No  X .

The number of shares of Common Stock, $0.001 par value, outstanding on November 1, 2012 was 11,094,718.

FRESH MEDICAL LABORATORIES, INC.

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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See the accompanying notes to condensed consolidated financial statements

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FRESH MEDICAL LABORATORIES, INC.

dba Prolung

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Summary of Significant Accounting Policies

Organization – Fresh Medical Laboratories, Inc., dba Prolung (the “Company”) is a Delaware corporation that was incorporated on November 22, 2004. The Company’s headquarters are located in Salt Lake City, Utah. The Company’s business is the development and deployment of medical devices and procedures specializing in the immediate, non-invasive evaluation of indeterminate masses seen in CT and radiography.  The Company is in the development stage and its activities to date consist of research and development, developing markets for its products, securing strategic alliances and obtaining financing.  During the nine months ended September 30, 2012, the Company formed a wholly-owned subsidiary, Hilltop Acquisition Corporation, Inc. (“Hilltop”), which has had no activity since inception.  Hilltop’s financial statements have been consolidated herein.

On September 10, 2012, the Fresh Medical Laboratories, Inc. filed an application to do business as Prolung.  The Company filed an 8-K reporting the name change on September 9, 2012.

Basis of Presentation – The accompanying unaudited interim condensed financial information has been prepared in accordance with rules and regulations promulgated by the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim financial information contains all adjustments necessary for it to be presented fairly, and consisting only of normal recurring adjustments. These interim financial statements should be read in conjunction with the Company’s annual financial statements and notes thereto. The results of operations for the three months and nine months ended September 30, 2012 may not be indicative of the results to be expected for the year ending December 31, 2012.

Development Stage – For the period from November 22, 2004 (date of inception) to September 30, 2012, the Company has not generated significant revenues from operations and has been developing its products. Therefore, the Company is considered to be in the development stage in accordance with the provisions of FASB ASC 915-10-05, Accounting and Reporting by Development Stage Enterprises.

Business Condition – The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s products are not yet fully developed. The Company has generated minimal revenues from operations and has incurred substantial and recurring losses to date. Additionally, the Company has minimal cash, negative working capital, and a stockholders’ deficit as of September 30, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The ability of the Company to continue as a going concern is dependent on the Company successfully developing products that can be sold profitably, and in the near term successfully generating cash through financing activities. Management’s plans include selling equity or debt securities to fund capital requirements and ongoing operations. However, there can be no assurance the Company will be successful in these efforts.

The Company has raised cash through debt and equity offerings to fund operations.  For the nine months ended September 30, 2012 the Company issued notes payable totaling $789,000.

Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Revenue Recognition – Revenue is recognized by the Company when a binding sales or service agreement exists between the parties, services have been rendered, the price for the services is fixed or determinable, collection is reasonably assured and the Company has no significant obligations remaining with respect to the arrangement. The Company recorded no revenue for the three months and nine months ended September 30, 2012 and 2011.  

Stock-based Compensation – The Company measures the cost of employee and consulting services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The awards issued are valued using a fair value-based measurement method. The resulting cost is recognized over the period during which an employee or consultant is required to provide services in exchange for the award, usually the vesting period. As of September 30, 2012 there were no outstanding stock options, warrants, or other common stock equivalents due to employees or directors.  There were, however, unvested common stock awards outstanding (see Note 5) issued to officers and directors of the Company.

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FRESH MEDICAL LABORATORIES, INC.

dba Prolung

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Income Taxes – The Company accounts for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The Company establishes valuation allowances to reduce deferred income tax assets to their realizable values based on whether it is more likely than not that such deferred income tax assets will be realized.  

At September 30, 2012 management had recorded a full valuation allowance against the net deferred tax assets related to temporary differences and operating losses because there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more-likely-than-not that the net deferred tax assets will not be realized.

Loss Per Share – The Company computes basic loss per share by dividing net loss by the weighted-average number of common shares outstanding during the period.

The Company computes diluted loss per share by dividing net loss by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding.  The computation of diluted loss per share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Common share equivalents consist of shares issuable upon the exercise of common stock warrants and conversion of notes payable. As of both September 30, 2012 and 2011, there were 566,337 warrants to purchase common stock and at September 30, 2012, notes payable were convertible into 1,150,072 common shares and 160,000 non-vested common shares that were not included in the computation of diluted loss per common share as their effect would be anti-dilutive.

Note 2 – Accrued Liabilities

Accrued liabilities consisted of the following as of September 30, 2012 and December 31, 2011:

Note 3 – Related-Party Notes Payable

During the nine months ended September 30, 2012, the Company issued notes payable to three directors and officers of the company with principal balances of $75,000, $25,000 and $25,000 with maturity dates of December 31, 2013, all at 8% interest rate. Effective June 30, 2012, the Company’s Board of Directors resolved to modify these notes to convertible notes and capitalize $2,821 of interest through June 30, 2012 into the principal balance of the notes. In addition the maturity dates were extended to be 36 months from the original issuance of the notes. The lenders have the right to convert the principal amount of the debentures through the maturity date into shares of the Company’s common stock at the greater of $0.80 per share or a discount of 15% of the average of the closing bid price of the previous ten trading days prior to the conversion. The conversion feature was not beneficial to the three directors at the date of the modification. As of September 30, 2012 the balance of the note was $127,821, with accrued interest of $2,577

On May 1, 2012 the Company and a director of the Company entered into a Master Loan Agreement whereby they agreed to capitalize $129,566 of accrued interest with $799,790 of principal due under a promissory note payable to the director into the note and extend the note, which bears interest at 11.1%, to a maturity date of April 30, 2015. As of September 30, 2012 the balance of the note was $929,536 with $43,013 of accrued interest.

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FRESH MEDICAL LABORATORIES, INC.

dba Prolung

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Notes payable to a relative of an officer of the Company totaled $352,705 at September 30, 2012. The notes bear interest at 15% per annum and mature December 31, 2012. The notes are secured by all of the assets of the Company. An unamortized discount of $4,228 at September 30, 2012 is being amortized over the life of the notes.

Related party notes payable consisted of the following as of September 30, 2012 and December 31, 2011:

Note 4 – Convertible Notes Payable

In March 2012 the Company borrowed $60,000, from unrelated third parties pursuant to convertible debenture agreements. The debentures bear interest at 8% per annum and mature October 1, 2013. The lenders have the right to convert the principal amount of the debentures, but not accrued interest, before the maturity date into shares of the Company’s common stock at a discount of 15% of the average closing bid price for the previous ten trading days prior to the conversion. Since the notes are convertible into a variable number of shares based on a fixed monetary value, they have been valued in accordance with the guidance in ASC 480-10-25-14, which requires the notes to be classified as a liability and reported at the fixed monetary value of shares into which the notes are convertible. The excess of the amount recognized as a liability for the convertible notes over the proceeds received upon issuance of $10,588 was recognized as interest expense on the dates of issuance. As a result, the convertible notes payable are carried at $70,588 as of September 30, 2012.

In May, June, July and August 2012 the Company borrowed a total of $604,000, from unrelated third parties pursuant to convertible debenture agreements. The debentures bear interest at 8% per annum and mature in May thru August 2015. The lenders have the right to convert the principal amount of the debentures, but not accrued interest, before the maturity date into shares of the Company’s common stock at the greater of $0.80 per share or at a discount of 15% of the closing bid price for the previous ten trading days prior to the conversion. The conversion feature was not beneficial to the third parties at the date the convertible debentures were issued.

Note 5 – Capital Stock

The shareholders of the Company have authorized 10,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock may be issued in one or more series. The board of directors has the right to fix the number of shares of each series (within the total number of authorized shares of the preferred stock available for designation as a part of such series), and designate, in whole or part, the preferences, limitations and relative rights of each series of preferred stock. As of September 30, 2012, the board of directors had not established a series of preferred stock and there are no shares of preferred stock outstanding.

The Company has authorized 20,000,000 shares of common stock, par value $.001 per share.

On June 30, 2012 the Company issued 13,000 shares of its Common stock to an unrelated third party for consulting services. The shares were valued at $0.30 per share or $3,900, based on the last price shares of the Company were issued for cash, which was in November 2011.

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FRESH MEDICAL LABORATORIES, INC.

dba Prolung

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In August 2012 the Company issued 597,500 shares of its Common stock to members of its Board of Directors. The shares were valued at $0.30 per share or $179,250, based on the last price shares of the Company were issued for cash, which was in November 2011.

In August and September 2012 the Company issued 62,500 shares of its Common stock for services. The shares were valued at $0.30 per share or $18,750, based on the last price shares of the Company were issued for cash, which was in November 2011.

The Company issued nonvested common stock to various employees and directors for future compensation. The Company values the nonvested shares of common stock based on the fair value of the stock on the date of issuance and records compensation over the requisite service period which is usually the vesting period. The nonvested shares are included in the total outstanding shares recorded in the financial statements.

A summary of the status of the Company’s nonvested shares as of September 30, 2012, and changes during the nine months then ended, is presented below:

As of September 30, 2012 there was $21,412 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted to directors and employees. That cost is expected to be recognized over a weighted-average period of 1.07 years. There were 100,000 shares that vested during the nine months ended September 30, 2012, which had a fair value at the grant date of $43,000.

During the nine months ended September 30, 2012 and 2011, compensation expense related to share-based payments to employees, directors and contractors totaled $47,012 and $252,834, respectively. The grant date fair value of all shares awarded during the nine  months ended September 30,  2012 were issued at $0.30 per share as determined by management and the board of directors based on historical sales of the Company’s common stock during the period.

During the period November 22, 2004 (date of inception) to September 30, 2012, compensation expense related to share-based payments to employees, directors and contractors totaled $1,545,882 and is recorded as either research and development expense or general and administrative expense.

Note 6 – Warrants

The Company issues warrants to purchase its common stock for payment of consulting services and as incentives to investors. The fair value of each issuance is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates ranges of assumptions for each input. Expected volatilities are based on the historical volatility of an appropriate industry sector index, comparable companies in the index and other factors. The Company estimates expected life of each warrant based on the midpoint between the dates the warrant vests, which is usually the issue date, and the contractual term of the warrant. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related warrant.

During the nine months ended September 30, 2011 the Company issued warrants to purchase 25,000 shares of common stock in connection with the issuance of 100,000 shares of common stock for cash consideration of $50,000.  The warrants issued had an exercise price of $0.45 per share with a 10-year expiration and immediate vesting.  The warrants were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date $0.50; expected term of 5 years; expected volatility of 97%; and discount rate of 1.35-1.96%. The total fair value of the warrants issued was calculated at $9,320.

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FRESH MEDICAL LABORATORIES, INC.

dba Prolung

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On July 6, 2012 The Company’s Board of Directors resolved to grant 150,000 common stock warrants, that have a 10 year life, with immediate vesting and $.80 per share strike price, to a director of the Company as inducement to enter into a Master Loan Agreement whereby the director agreed to extend the maturity date of certain notes valued with a principal of $929,536 and which bear 11.1% interest to April 30, 2015. The warrants were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date $0.30; expected term of 5 years; expected volatility of 97%; and discount rate of 0.64%. The expected life and discount rate were determined by using the “simplified” method as prescribed by the SEC under FASB ASC 718-10-S99, which the Company has determined to be more appropriate given its limited historical experience with respect to option exercises.  The total fair value of the warrants issued was calculated at $25,757.A summary of warrants outstanding as of December 31, 2011 and September 30, 2012 is presented below:

The year-end intrinsic values are based on a September 30, 2012 estimated fair value of the Company’s common stock of $0.30 per share, which was determined by the last price that the Company issued shares for cash ,which was in November 2011.

Note 7 – Subsequent Events

The Company has evaluated all events and transactions that occurred subsequent to September 30, 2012, through the date these financial statements were issued.

The Company has determined that there are no events required for disclosure.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our plan of operation should be read in conjunction with the financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

Management’s Discussion and Analysis or Plan of Operations

Certain statements in this Report constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Condensed Consolidated Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. The Company believes there have been no significant changes during the year ended December 31, 2011 or the Nine Months ended September 30, 2012.

The Company’s accounting policies are more fully described in Note 1 of the financial statements. As discussed in Note 1, the preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the future events that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual differences could differ from these estimates under different assumptions or conditions.

Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Revenue Recognition – Revenue is recognized by the Company when a binding sales or service agreement exists between the parties, services have been rendered, the price for the services is fixed or determinable, collection is reasonably assured, and the Company has no significant obligations remaining with respect to the arrangement. The Company recorded no revenue for the year ended December 31, 2011 or the Nine Months ended June 30, 2012.

Stock-based Compensation – The Company measures the cost of employee and consulting services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The awards issued are valued using a fair value-based measurement method. The resulting cost is recognized over the period during which an employee or consultant is required to provide services in exchange for the award, usually the vesting period. As of September 30, 2012 there were no outstanding stock options, warrants, or other common stock equivalents due to employees or directors.  There were, however, unvested common stock awards outstanding (see Note 5) issued to officers and directors of the Company.

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Income Taxes – The Company is a C corporation for income tax purposes and accounts for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The Company establishes valuation allowances to reduce deferred income tax assets to their realizable values based on whether it is more likely than not that such deferred income tax assets will be realized.

At September 30, 2012, management had recorded a full valuation allowance against the net deferred tax assets related to temporary differences and operating losses in the current period because there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more-likely-than-not that the net deferred tax assets will not be realized.

Emerging Growth Company – We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.

Plan of Operation

The Company plans to continue the development and deployment of medical devices and procedures specializing in the immediate, non-invasive evaluation of indeterminate masses seen in CT and radiography. The Company will need to fund expansion by raising capital over the next two (2) years. The amount of capital could change based on the opportunities available to us and the ability to expand our markets. The Company believes that over the next two (2) years our operations will be cash flow positive but will not provide sufficient revenue to fund the expansion and or potential acquisitions.

Results of Operations

The Company is primarily engaged in development and deployment of medical devices and procedures specializing in the immediate, non-invasive evaluation of indeterminate masses seen in CT and radiography, securing strategic alliances, completing its reorganization, and obtaining financing.  During the period from inception (November 22, 2004) to September 30, 2012, Fresh Medical Laboratories recognized licensing income of $100,000 and incurred operating expenses totaling $6,602,253.  Our operating expenses consisted of research and development and general and administrative expenses totaling $4,923,883 and $1,678,370 respectively.  The Company did not generate any revenue prior to 2010.  During the period from inception (November 22, 2004) to September 30, 2012, Fresh Medical Laboratories recognized government grant income of $249,479 and a gain on debt extinguishment of $17,201.  During the period from inception (November 22, 2004) to September 30, 2012, the Company recognized interest expense of $771,425.

The Company received a reimbursement grant from the IRS under Section 48D of the Internal Revenue Code based on qualified investments in a qualifying therapeutic discovery project. The grant was limited to 50% of the qualified investment. The IRS certified the Company qualified investment of $488,959 in 2010. The Company recognized $249,479 of grant income in 2010 for the IRS grant.

For the Three and Nine Months ended September 30, 2012, the Company has continued development and deployment of medical devices and procedures specializing in the immediate, non-invasive evaluation of indeterminate masses seen in CT and radiography, securing strategic alliances, completing its reorganization, and obtaining financing.   

Three months ended September 30, 2012 compared to Three months ended September 30, 2011

During the three months ended September 30, 2012 the Company incurred operating expenses totaling $565,228, an increase of $402,735 when compared to the Three Months ending September 30, 2011 amount of $162,493.  The increase is primarily a result of an increase in General and Administrative expenses of approximately $280,000 and an increase in Research and development expense of approximately $123,000. General and administrative expenses for the Three Months ending September 30, 2012 increased to $320,556 from $40,574 for the Three Months ending September 30, 2011 primarily due to an increase in stock based compensation expense for the three months ended September 30, 2012 of $210,832.  Research and development expenses for the Three Months ended September 30, 2012 increased to $244,672 when compared to $121,919 for the Three Months ended September 30, 2011, primarily due to an increase in payroll expenses related to Research and Development activities of approximately $28,000, and Professional fees related to Research and Development of approximately $82,000. The Company did not generate any revenue during either of the Three Month periods ended September 30, 2011 or 2012.

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Nine months ended September 30, 2012 compared to Nine months ended September 30, 2011

For the Nine Months ended September 30, 2012, the Company incurred operating expenses totaling $1,019,540, a $238,106 increase from the Nine Months ending September 30, 2011 amount of $781,434.  The increase is primarily a result of an increase in General and Administrative expenses of approximately $143,000 and an increase in Research and development expense of approximately $96,000. General and administrative expenses for the Nine Months ending September 30, 2012 increased to $420,928 from $278,501 for the Nine Months ended September 30, 2011, as a result of an increase in professional services related to the companies financing activities.  Research and development expenses for the Nine Months ended September 30, 2012 increased to $598,612 from $502,933 for the Nine Months ended September 30, 2011, due to an increase in payroll expenses and professional fees related to Research and Development activities. The Company did not generate any revenue during the either of the Nine Month periods ending September 30, 2011 or 2012.

Liquidity and Capital Resources

The Company’s principal liquidity from inception ((November 22, 2004) to September 30, 2012, came from the sale of equity interests and debt financing.  The Company issued 11,094,718 common shares and received for $2,373,058 of proceeds.  The Company received $1,317,000 for issuance of notes payable with interest rates between 6.5 and 15 percent and $664,000 for issuance of convertible notes payable.  During the Nine Months ended September 30, 2012 the Company used $816,231 to fund operations compared to $431,461 during the Nine Months ended September 30, 2011.  Fresh Medical Laboratories received proceeds of $60,000 during the Nine Months Ended September 30, 2012 in connection with a stock subscription receivable that was outstanding at December 31, 2011.  

As discussed above, the Company anticipates incurring significant expenditures during the remainder of 2012 and to pursue its planned business operations including additional research and development of products and technology.  The Company’s ability to execute on these plans is dependent on its ability to generate additional investment proceeds.  In the event that the Company is unable to raise the necessary funds, it would have to modify its current business plans and may not be able to attract the customers necessary to generate positive income from operations in such case; the business plan would have to be modified to address the funding issues.  

As noted, the past operating expenses and cash needs are not indicative of our current operations which require substantially more cash to operate.  At this time, the Company is dependent on outside funding to support its operations and anticipates it will need outside funding for at least the next twelve to twenty four months to support its business model.  If the Company is unable to obtain continued outside funding, its operations would be severely impacted and it may not be possible to remain in business.  Given current operations, traditional debt financing is not likely and the Company will have to continue to rely on equity or debt investments for outside non-banking sources.  

The initial focus of the Company was to develop, market, and sell noninvasive diagnostic devices for life threatening diseases. Clinical studies demonstrated the utility of the device to evaluate risk of lung cancer in patients with lung masses suspicious for cancer and potentially improve the accuracy of pre-surgical staging and diagnosis of lung cancer.  

The Company now plans to enter the market through direct (U.S.) and indirect channels (international) for the marketing and sale of its BSP and CB Test Kit.  The initial step in the U.S. requires the expenditure of an estimated $1.3 to $1.5 million, over a period of eight to twelve months, to achieve U.S. FDA 510(k) de novo regulatory clearance, as well as the completion of the placement of an estimated 22 investigational BSP devices at hospitals.  The completion of this initial step is projected to allow ProLung to achieve the first sale of its product in the U.S.  Once the Company’s U.S. FDA 510 (k) de novo petition is granted, it plans to convert hospitals with investigational placements of its diagnostic to commercial installations selling its CB Test.  

Next, the Company plans to launch its products in Mexico and Turkey.  The Company estimates that by early 2013, it will have invested an additional $0.5 million in the development of the Mexican and Turkish markets.  The Company projects that this amount is sufficient to complete initial clinical validation and secure a local distribution partner together with national regulatory and pricing approvals.

Finally, the Company plans to complete a scaled commercial rollout, beginning in late 2013, following any revenue in the U.S. and initial international markets.  At this time, the Company plans to build working capital, engage additional distributors, and hire additional sales, marketing, and customer service personnel for a projected $4.0 million.  During this time, ProLung plans to add about 90 new U.S. installations.  Following this final step, the Company expects to be cash flow positive unless new, additional international markets present opportunity for additional investments.

The financing required to execute these steps will be approximately $2.0 million over the next twelve months of operation.  

The Company intends to fund the BMC patent purchase through the private placement of shares of the Company’s common stock..

The amount of funds needed for compliance with the Company’s obligations under the federal securities laws is approximately $39,500 per year. This includes an estimate of $7,500 for ongoing Edgar and XBRL filing fees, $2,000 for transfer agent fees, and $30,000 for preparation and audit of the company’s financial statements.

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Off Balance Sheet Arrangements

The Company has not had any off balance sheet arrangements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not applicable as we are currently considered a smaller reporting company.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report.  Based on that evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting  

There has been no change in our internal control over financial reporting that occurred in the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We know of no existing or pending legal proceedings against us, nor are we involved as a plaintiff in any proceeding or pending litigation. There are no proceedings in which any of our directors, officers or any of their respective affiliates, or any beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

ITEM 1A.  RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the three months ended September 30, 2012 the Company issued 597,500 shares of its Common stock to members of its Board of Directors. The shares were valued at $0.30 per share or $179,250, based on the last price shares of the Company were issued for cash. The Company also issued 62,500 shares its Common stock for services. These shares were valued at $0.30 per share or $18,750, based on the last price shares of the Company were issued for cash.

Issuer Purchases of Equity Securities

We did not repurchase any of our securities during the quarter ended September 30, 2012.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FRESH MEDICAL LABORATORIES, INC.

(Registrant)

By:

/s/ Steven C. Eror                                

Steven C. Eror

Chief Executive Officer, President, and Director

(Principal Executive Officer)

Date: November 16, 2012

By:

/s/ Steven C. Eror                                 

Steven C. Eror

Acting Chief Financial Officer

(Acting Principal Financial and Accounting Officer)

Date: November 16, 2012

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