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EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATION - PROLUNG INCf10q033114_ex32z1.htm
EX-32.2 - EXHIBIT 32.2 SECTION 906 CERTIFICATION - PROLUNG INCf10q033114_ex32z2.htm
EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION - PROLUNG INCf10q033114_ex31z1.htm
EX-10.2 - EXHIBIT 10.2 MASTER SERVICES AGREEMENT - PROLUNG INCf10q033114_ex10z2.htm
EX-10.1 - EXHIBIT 10.1 LEASE AGREEMENT - PROLUNG INCf10q033114_ex10z1.htm

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 March 31, 2014


      . 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: 000-54600


FRESH MEDICAL LABORATORIES, INC.

(Exact name of registrant as specified in its charter)


Delaware

 

20-1922768

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)


757 East South Temple, Suite 150

Salt Lake City, Utah   84102

(Address of principal executive offices)   (Zip Code)


(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 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 .


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 8, 2014, the issuer had 17,958,888 shares of Common Stock, $0.001 par value, outstanding.




FRESH MEDICAL LABORATORIES, INC.


TABLE OF CONTENTS


 

Part I – Financial Information

 

Item 1

Financial Statements

3

 

Condensed Consolidated Balance Sheets, March 31, 2014 and December 31, 2013 (Unaudited)

3

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013, and for the Period from November 22, 2004 (Date of Inception) through March 31, 2014 (Unaudited)

4

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2013 and 2014 (Unaudited)

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013, and for the Period from November 22, 2004 (Date of Inception) through March 31, 2014 (Unaudited)

6

 

Notes to the Unaudited Condensed Consolidated Financial Statements

7

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3

Quantitative and Qualitative Disclosures about Market Risk

18

Item 4

Controls and Procedures

18

 

 

 

 

Part II – Other Information

 

Item 1

Legal Proceedings

19

Item 1A

Risk Factors

19

Item 2

Unregistered Sales Of Equity Securities And Use Of Proceeds

19

Item 3

Defaults Upon Senior Securities

19

Item 4

Mine Safety Disclosures

19

Item 5

Other Information

19

Item 6

Exhibits

20

 

 

 

Signatures

21




2



PART I – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


Fresh Medical Laboratories, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(Unaudited)


 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

Assets

Current Assets

 

 

 

 

 

 

 

Cash

 

$

475,581

 

$

87,082

 

Inventory

 

 

115,205

 

 

11,610

 

Prepaid expenses

 

 

10,850

 

 

-

Total Current Assets

 

 

601,636

 

 

98,692

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation

 

 

41,732

 

 

6,301

 

 

 

 

 

 

 

 

Total Assets

 

$

643,368

 

$

104,993

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

146,084

 

$

83,963

 

Accrued liabilities

 

 

304,079

 

 

330,884

 

Related-party notes payable, current portion

 

 

-

 

 

356,931

Total Current Liabilities

 

 

450,163

 

 

771,778

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

 

 

Related-party notes payable, net of current portion

 

 

1,286,467

 

 

929,536

 

Convertible notes payable   

 

 

155,000

 

 

180,000

Total Long-Term Liabilities

 

 

1,441,467

 

 

1,109,536

 

 

 

 

 

 

 

 

Total Liabilities

 

 

1,891,630

 

 

1,881,314

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity (Deficit):

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding

 

 

-

 

 

-

 

Common stock, $0.001 par value; 20,000,000 shares authorized;17,958,888 shares and 15,980,028 shares issued and outstanding, respectively

 

 

17,959

 

 

15,980

 

Additional paid-in capital

 

 

7,772,388

 

 

6,793,934

 

Deficit accumulated during the development stage

 

 

(9,038,609)

 

 

(8,586,235)

Total Stockholders' Equity (Deficit)

 

 

(1,248,262)

 

 

(1,776,321)

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity (Deficit)

 

$

643,368

 

$

104,993


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



3




Fresh Medical Laboratories, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

For the Three Months Ended

March 31,

 

For the Period from November 22, 2004

(Date of Inception) Through March 31,

 

 

2014

 

2013

 

2014

Licensing income

 

$

-

 

$

-

 

$

215,000

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

 

190,121

 

 

136,735

 

 

6,175,299

General and administrative expense

 

 

220,169

 

 

61,064

 

 

2,152,367

Total expenses

 

 

410,290

 

 

197,799

 

 

8,327,666

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(410,290)

 

 

(197,799)

 

 

(8,112,666)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

U.S. government grant income

 

 

-

 

 

-

 

 

249,479

Loss on extinguishment of debt, net

 

 

-

 

 

-

 

 

(79,170)

Interest expense

 

 

(42,084)

 

 

(50,128)

 

 

(1,096,252)

  Net other income (expense)

 

 

(42,084)

 

 

(50,128)

 

 

(925,943)

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(452,374)

 

$

(247,927)

 

$

(9,038,609)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(0.03)

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

16,005,194

 

 

11,614,481

 

 

 


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




4




Fresh Medical Laboratories, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Stockholders' Equity (Deficit)

For the Three Months Ended March 31, 2013 and 2014

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional Paid-in

 

Deficit Accumulated During the Development

 

Total Stockholders' Equity

 

 

Shares

 

Amount

 

Capital

 

Stage

 

(Deficit)

Balance, December 31, 2012

 

11,452,675

 

$

11,452

 

$

4,973,557

 

$

(7,353,271)

 

$

(2,368,262)

Stock-based compensation

 

-

 

 

-

 

 

4,875

 

 

-

 

 

4,875

Common stock issued for conversion of notes and accrued interest at $0.80 per share

 

129,768

 

 

130

 

 

103,454

 

 

-

 

 

103,584

Common stock and warrants issued for cash at $0.80 per share

 

68,750

 

 

69

 

 

54,431

 

 

-

 

 

54,500

Net loss

 

-

 

 

-

 

 

-

 

 

(247,927)

 

 

(247,927)

Balance, March 31, 2013

 

11,651,193

 

$

11,651

 

$

5,136,317

 

$

(7,601,198)

 

$

(2,453,230)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

15,980,028

 

$

15,980

 

$

6,793,934

 

$

(8,586,235)

 

$

(1,776,321)

Stock-based compensation

 

120,000

 

 

120

 

 

66,923

 

 

-

 

 

67,043

Common stock issued for conversion of notes and accrued interest at $0.80 per share

 

35,421

 

 

36

 

 

28,301

 

 

-

 

 

28,337

Common stock issued for cash at $0.50 per share

 

1,770,000

 

 

1,770

 

 

883,230

 

 

-

 

 

885,000

Common stock issued for exercise of warrants at $0.001 per share

 

53,439

 

 

53

 

 

-

 

 

-

 

 

53

Net loss

 

-

 

 

-

 

 

-

 

 

(452,374)

 

 

(452,374)

Balance, March 31, 2014

 

17,958,888

 

$

17,959

 

$

7,772,388

 

$

(9,038,609)

 

$

(1,248,262)


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



5




Fresh Medical Laboratories, Inc. and Subsidiary

( A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

For the Period from November 22, 2004 (Date of Inception) Through March 31,

 

 

 

 

2014

 

2013

 

2014

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(452,374)

 

$

(247,927)

 

$

 (9,038,609)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

919

 

 

1,274

 

 

7,618

 

 

Loss on disposition of computer equipment

 

 

-

 

 

-

 

 

3,300

 

 

Loss on extinguishment of debt

 

 

-

 

 

-

 

 

79,170

 

 

Stock-based compensation

 

 

67,043

 

 

4,875

 

 

2,155,277

 

 

Amortization of debt discount

 

 

-

 

 

-

 

 

88,239

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

 

(103,595)

 

 

-

 

 

(115,205)

 

 

Prepaid expenses

 

 

(10,850)

 

 

-

 

 

(10,850)

 

 

Accounts payable

 

 

62,121

 

 

38,678

 

 

146,084

 

 

Accrued liabilities

 

 

(23,468)

 

 

52,018

 

 

942,096

Net cash used in operating activities

 

 

(460,204)

 

 

(151,082)

 

 

(5,742,880)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Purchase of equipment and furniture

 

 

(36,350)

 

 

-

 

 

(52,650)

Net cash used in investing activities

 

 

(36,350)

 

 

-

 

 

(52,650)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

885,000

 

 

54,500

 

 

4,060,058

 

Proceeds from exercise of warrants to purchase common stock

 

 

53

 

 

-

 

 

53

 

Proceeds from issuance of convertible notes payable

 

 

-

 

 

-

 

 

744,000

 

Proceeds from issuance of related-party notes payable

 

 

-

 

 

100,000

 

 

1,492,000

 

Principal payments on related-party notes payable and long-term debt

 

 

-

 

 

-

 

 

(25,000)

Net cash provided by financing activities

 

 

885,053

 

 

154,500

 

 

6,271,111

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

388,499

 

 

3,418

 

 

475,581

Cash at beginning of period

 

 

87,082

 

 

2,876

 

 

-

Cash at end of period

 

$

475,581

 

$

6,294

 

$

475,581

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

67,196

 

$

-

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

 

 

Long-term debt and accrued interest converted to common stock

 

$

28,337

 

$

103,584

 

 

 


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



6



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Note 1 – Organization and Summary of Significant Accounting Policies


Organization – Fresh Medical Laboratories, Inc. (the “Company”) is a Delaware corporation that was incorporated on November 22, 2004 and is doing business as “ProLung” in the United States and as “Freshmedx” outside the United States. 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 have consisted of research and development, developing markets for its products, securing strategic alliances and obtaining financing. The Company has developed, tested, and is commercializing its non-invasive lung cancer diagnostic test, the “Electro Pulmonary Nodule Scan” (“EPN Scan”). In April 2013, the Company entered into an agreement to license this technology to a distributor for the China market. In May 2013, the Company received the “CE” mark in Europe permitting the marketing of the EPN Scan in the European Union and certain other countries. In the United States, the Company has submitted its application for marketing approval to the United States Food and Drug Administration.


During the year ended December 31, 2012, the Company formed a wholly-owned subsidiary, Hilltop Acquisition Corporation, Inc., which has had no activity since its inception and is included in the accompanying consolidated financial statements from the date of its formation.


Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared by management in accordance with rules and regulations promulgated by the U.S. Securities and Exchange Commission and therefore 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 condensed consolidated financial statements contain all adjustments necessary for them to be presented fairly, with those adjustments consisting only of normal recurring adjustments. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements include in the Company’s annual report on Form 10-K for the year ended December 31, 2013. The results of operations for the three months ended March 31, 2014 may not be indicative of the results to be expected for the year ending December 31, 2014. The condensed consolidated balance sheet as of December 31, 2013, has been derived from the Company’s annual consolidated financial statements.


Business Condition – The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has generated minimal revenues from operations, has incurred substantial and recurring losses to date from operations, and has used cash in its operating activities during the three months ended March 31, 2014 and during the year ended December 31, 2013. Additionally, the Company had a stockholders’ deficit as of March 31, 2014 and December 31, 2013. 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 and operating activities. Management’s plans include issuing equity or debt securities to fund capital requirements and ongoing operations. Additionally, the Company expects to commence selling the EPN Scan in the near future. However, there can be no assurance the Company will be successful in these efforts. During the three months ended March 31, 2014, the Company obtained additional financing and extended the due date of a note payable in the amount of $356,931, which changed the note payable from a current liability to a long-term liability, and as a result, the Company has positive working capital as of March 31, 2014.


Basic and Diluted 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. As of March 31, 2014, there were warrants to purchase 523,211 shares of common stock outstanding, 1,283,635 non-vested shares of common stock and $155,000 of convertible notes payable that were excluded from the computation of diluted net loss per common share as they were anti-dilutive. As of March 31, 2013, there were warrants to purchase 576,650 shares of common stock outstanding, 42,500 non-vested shares of common stock, $424,588 of convertible notes payable, and $127,822 of convertible notes payable to related parties that were excluded from the computation of diluted net loss per common share as they were anti-dilutive.



7



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Reclassifications – Certain amounts of operating expenses in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2013, have been reclassified in the current presentation to conform to the presentation of operating expenses for the three months ended March 31, 2014. These reclassifications had no effect on the total amount of operating expenses, on the amount of net loss, or on the basic and diluted loss per common share for the three months ended March 31, 2013.


Recent Accounting Pronouncements – In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11) to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective January 1, 2015 with earlier adoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. Management is currently evaluating the impact of the pending adoption of ASU 2013-11 on the Company’s consolidated financial statements.


Note 2 – Inventory


Inventory principally consists of the cost of materials purchased and assembled during the quarters ended March 31, 2014 and December 31, 2013 for the initial assembly of the EPN Scan which has received regulatory approval in Europe. The Company has recorded these costs as inventory because regulatory approval has been received and management has determined that a future benefit is probable. Inventory is valued at the lower of cost or market value, with cost determined based on the first-in-first-out method. Inventory cost included in the accompanying condensed consolidated balance sheets at March 31, 2014 and December 31, 2013 totaled $115,205 and $11,610, respectively.


Note 3 – Property and Equipment


Property and equipment consists of the following:


 

 

March 31,

 

December 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

Computer equipment

 

$

7,228

 

$

7,228

Office equipment

 

 

3,800

 

 

3,800

Tooling

 

 

36,350

 

 

-

 

 

 

 

 

 

 

 

 

 

47,378

 

 

11,028

Less accumulated depreciation

 

 

(5,646)

 

 

(4,727)

 

 

 

 

 

 

 

Property and equipment, net

 

$

41,732

 

$

6,301


In January 2014, the Company ordered tooling having a total cost of $72,700, of which a deposit of $36,350 was paid during the three months ended March 31, 2014. The tooling will be for the purpose of manufacturing the EPN Scan case, and has been received and placed into service in April 2014. Depreciation of the tooling will commence on the date that the tooling was placed into service, over an expected useful life of five years.



8



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Note 4 – Accrued Liabilities


Accrued liabilities consisted of the following:


 

 

March 31,

 

December 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

Accrued interest

 

$

300,679

 

$

329,128

Accrued payroll and payroll taxes

 

 

3,400

 

 

1,756

 

 

 

 

 

 

 

Total accrued liabilities

 

$

304,079

 

$

330,884


Note 5 – Related-Party Notes Payable


As of March 31, 2014 and December 31, 2013, the Company was obligated under the terms of a promissory note payable to a founding shareholder and former member of its board of directors in the amount of $929,536. The note matures on April 30, 2015, bears interest at 11.10% and is unsecured. As of March 31, 2014 and December 31, 2013, the balance of accrued interest payable was $180,398 and $172,153, respectively. The Company paid accrued interest of $17,196 during the quarter ended March 31, 2014. Interest expense for the three months ended March 31, 2014 and 2013 was $25,441 for each period.


At March 31, 2014 and December 31, 2013, the Company was obligated under the terms of a master note payable to an individual related to an executive officer of the Company in the amount of $356,931. The note is secured by all the assets of the Company and bears interest at 15% per annum. The note was originally due on December 31, 2012, however, on March 27, 2014, the note holder and the Company entered into an amendment of the master note to extend the maturity date to June 30, 2016. The balance of accrued interest payable at March 31, 2014 and December 31, 2013 was $97,272 and $134,070, respectively. The Company paid accrued interest of $50,000 during the quarter ended March 31, 2014. Interest expense for the three months ended March 31, 2014 and 2013 was $13,202 and $13,202, respectively.


During the three months ended March 31, 2013, the Company received advances from a member of its board of directors in the amounts of $100,000. The terms of the advances were not initially established such as the interest rate, the security or the conversion terms. During the three months ended December 31, 2013, these and other advances totaling $175,000 were converted into 350,000 shares of common stock, or $0.50 per share. There was no interest paid on the advances during the periods that the advances were outstanding.


On June 30, 2012, the Company issued $127,822 of convertible notes payable to three members of the board of directors. The notes were due February through April 2015, bore interest at 8% per annum, and were unsecured. The notes and accrued interest were originally convertible into common stock at the greater of $0.80 per share or 85% of the closing price for the previous ten trading days prior to the conversion, or if the Company’s stock was not publicly traded, then the conversion price would be the average of the three prior private stock purchases of the Company’s common stock for cash. During the three months ended December 31, 2013, all of the principal of these notes plus accrued interest of $14,680 were converted into 285,009 shares of the Company’s common stock at $0.50 per share. The Company recognized a loss on extinguishment of debt of $53,439 as a result of the modification of the conversion price of the promissory notes. Interest expense for the three months ended March 31, 2013 was $2,521.




9



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Notes payable to related parties are summarized as follows:


 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

Related-Party Notes Payable:

 

 

 

 

 

 

 

Note payable to a former director; unsecured; interest at 11.10% per annum; due April 30, 2015

 

$

929,536

 

$

929,536

 

Note payable to a related party; secured by all the assets of the Company; interest at 15% per annum; due June 30, 2016

 

 

356,931

 

 

356,931

 

 

 

 

 

 

 

 

 

Total Related-Party Notes Payable

 

 

1,286,467

 

 

1,286,467

 

 

 

 

 

 

 

 

 

Less:  Current Portion

 

 

-

 

 

356,931

 

 

 

 

 

 

 

 

 

Long-Term Related Party Notes Payable

 

$

1,286,467

 

$

929,536


Note 6 – Convertible Notes Payable


In March 2012, the Company issued two notes payable to unrelated parties. The two notes had an aggregate principal balance of $60,000 and an aggregate carrying value of $70,588. The notes bore interest at 8%, were unsecured, and matured on October 1, 2013. The notes were convertible into common stock at 85% of the closing price for the previous ten trading days prior to the conversion. If the Company’s stock was not publicly traded, then the price would be the average of the three prior private stock purchases of the Company’s common stock for cash. During the three months ended December 31, 2013, all of the principal of these notes plus accrued interest of $7,686 was converted into 135,371 shares of the Company’s common stock at $0.50 per share.


During 2012 and 2013, the Company issued notes payable to unrelated parties totaling $679,000 and $5,000, respectively. These notes bear interest at 8%, are unsecured and mature from June through August 2015. The notes payable were originally convertible into common stock at the greater of $0.80 per share or 85% of the closing price for the previous ten trading days prior to the conversion. If the Company’s stock is not publicly traded, then the price will be the average of the three prior private stock purchases of the Company’s common stock for cash. During the year ended December 31, 2012, notes payable totaling $225,000 and related accrued interest of $4,570 were converted into 323,493 shares of the Company’s common stock, principally at $0.70 per share. During the year ended December 31, 2013, notes payable totaling $279,000 and related accrued interest of $20,045 were converted into 464,077 shares of the Company’s common stock, principally at $0.50 per share. The Company recognized a loss on extinguishment of debt of $42,931 as a result of the modification of the conversion price of certain of the promissory notes. During the three months ended March 31, 2014, one note payable in the amount of $25,000 and related accrued interest of $3,337 was converted into 35,421 shares of the Company’s common stock, at $0.80 per share. The balance due on the convertible notes payable was $155,000 and $180,000 at March 31, 2014 and December 31, 2013, respectively.


Note 7Preferred 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 March 31, 2014 and December 31, 2013, the board of directors has not designated any series of preferred stock and there are no shares of preferred stock issued or outstanding.



10



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Note 8 – Common Stock


The Company has authorized 20,000,000 shares of common stock, par value $0.001 per share.


Common Stock and Warrants Issued for Cash


During the three months ended March 31, 2013, the Company issued 68,750 shares of common stock and warrants for the purchase of 10,313 shares of common stock for cash. Proceeds from the issuances total $54,500, principally at $0.80 per share. The warrants are exercisable at $0.80 per share for a period of ten years.


During the three months ended March 31, 2014, the Company issued 1,770,000 shares of common stock for cash. Proceeds from the issuances totaled $885,000, or $0.50 per share.


Common Stock Issued Pursuant to the Exercise of Stock Warrants


On February 25, 2014, the Company issued 53,439 shares of common stock to a founding shareholder of the Company pursuant to his exercise of warrants to purchase common stock at $0.001 per share. Proceeds from the exercise were $53.


Common Stock Issued for Services


The Company issues non-vested common stock to various employees and directors as compensation for future services. The Company values the non-vested 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 non-vested shares are included in the total outstanding shares recorded in the financial statements. On January 8, 2014, the Company issued 120,000 non-vested shares of common stock to a newly-appointed director for his future services. These shares were valued at $60,000, or $0.50 per share, based on the price that common stock was issued to third parties for cash.


A summary of the status of the Company’s non-vested shares as of March 31, 2014 and changes during the three months then ended, is presented below:


 

 

Non-vested

 

 

 

 

Shares of

 

Weighted

 

 

Common

 

Average

 

 

Stock

 

Fair Value

 

 

 

 

 

 

Balance at December 31, 2013

 

1,297,722

 

$

0.50

Awarded

 

120,000

 

 

0.50

Vested

 

(134,087)

 

 

0.50

 

 

 

 

 

 

Balance at March 31, 2014

 

1,283,635

 

$

0.50


As of March 31, 2014 and December 31, 2013, there was $641,818 and $648,861, respectively, of total unrecognized compensation cost related to the non-vested share-based compensation arrangements awarded to directors, employees, and consultants. That cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of shares vested during the three months ended March 31, 2014 and December 31, 2013 was $67,043 and $4,875, respectively.


Total share-based compensation expense for the three months ended March 31, 2014 and 2013 has been included in the condensed consolidated statements of operations as follows:


 

 

2014

 

2013

 

 

 

 

 

 

 

Research and development expense

 

$

31,639

 

$

-

General and administrative expense

 

 

35,404

 

 

4,875

 

 

 

 

 

 

 

Total share-based compensation

 

$

67,043

 

$

4,875




11



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Note 9 – Common Stock Warrants


The Company has issued warrants to purchase its common stock for payment of consulting services, in connection with the extension of a note payable, and for cash. The fair value of warrants issued for consulting services was estimated on the date of issuance using the Black-Scholes option pricing model and was recognized as consulting expense at that date, which was the date the warrants were first exercisable. 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 date of issuance, 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.


A summary of warrant activity for the three months ended March 31, 2014 is presented below:


 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Shares

 

Average

 

Remaining

 

Aggregate

 

 

Under

 

Exercise

 

Contractual

 

Intrinsic

 

 

Warrants

 

Price

 

Life

 

Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2013

 

576,650

 

$

0.55

 

6.7 years

 

$

44,306

Issued

 

-

 

$

-

 

 

 

 

 

Exercised

 

(53,439)

 

$

0.001

 

 

 

 

 

Expired

 

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2014

 

523,211

 

$

0.60

 

6.7 years

 

$

17,640


The year-end intrinsic value at March 31, 2014 is calculated at $0.50 per share, based on the last price for which the Company issued shares of common stock for cash.


Note 10 – Master Services Agreement with Related Party


Effective January 11, 2014, the Company entered into a Master Services Agreement (the “Agreement”) with an entity that provides consulting and professional services (the “Consultant”). The Consultant is owned and managed by a director of the Company. The term of the Agreement is for one year following the effective date; however the Agreement may be terminated by either party with thirty days prior written notice.


The Agreement provides for the issuance of work orders by the Company to the Consultant. On January 13, 2014, the Company issued an initial work order to determine system requirements, project scope, project plan, and budget for the development on an Internet-based customer service portal. This work order was completed in March 2014 for a fixed fee of $8,500.


On March 26, 2014, the Company issued a second work order to the Consultant for the development, testing, and deployment of the Internet-based customer service portal. The second work order is to be completed in four phases (prototype completion, development completion, testing completion, and deployment) with estimated completion dates through July 25, 2014 for the four phases. The total cost for the services and expenses under the second work order is $147,900, payable in amounts specified in the work order upon the completion of each phase or milestone. 15% of the cost for services and expenses under the second work order will be paid through issuance of shares of the Company’s common stock, subject to the approval of the board of directors.


The costs incurred pursuant to the two work orders under the Agreement will be accounted for pursuant to generally accepted accounting principles governing the accounting for Website Development Costs and for Internal-Use Software. Accordingly, the costs for the initial work order related to the preliminary project stage have been charged to research and development expense during the three months ended March 31, 2014. No costs have been incurred under the second work order as of March 31, 2014. The costs related to the development, the testing, and the deployment of the Internet-based customer service portal will be capitalized as property and equipment and amortized on a straight-line basis over the estimated useful life of the technology, with periodic evaluation for impairment.



12



FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Note 11 – Subsequent Events


Lease Agreement


In April 2014, the Company entered into a new lease agreement with its landlord, expanding the amount office space that it occupies at 757 East South Temple, Salt Lake City, Utah to approximately 4,657 square feet. The new lease agreement is effective August 1, 2014 and has a term of three years, with an option to renew for an additional three years. Monthly rental payments under the non-cancelable lease will be $3,787 for the initial year and will escalate by 2% per year to $3,940 in the third year. If the Company exercises the option to renew the lease, the monthly rental payments will further escalate by 3% per year during the additional term.



13



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 prospectus. 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.


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, adverse results from testing or use of the Company products, adverse developments in the Company’s efforts to obtained marketing approval in the United States and other countries, adverse litigation and regulatory action related to the Company’s products or operations, any failures by the Company to pay debts and other payables as they come due, any inability of the Company to raise capital or the Company being forced to raise capital on onerous terms, unanticipated delays in the development of our products, the absence of market acceptance or installation of our products and services; adverse changes in government regulations; the unavailability of management and other key personnel and adverse developments in relationships with third-party equipment suppliers. 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.


Overview


Fresh Medical Laboratories, Inc. was incorporated under the laws of the State of Delaware on November 19, 2004 and does business under the trade name ProLung in the United States and Freshmedx in Europe. ProLung is a medical device company that has developed, tested, and is commercializing its non-invasive lung cancer diagnostic test (the Electro Pulmonary Nodule Scan or “EPN Scan,”. The EPN Scan was designed to be adjunctive to Computed Tomography (“CT”), or what is commonly referred to as a “CT scan” of the chest. The EPN Scan assists in evaluating the risk associated with a CT finding in the lung that is suspicious for cancer. Previously, the EPN Scan was known as the Freshmedx or ProLung test.


As many patients at high risk of lung cancer have suspicious lung findings when evaluated by CT, clarifying the risk of disease has the potential to reduce the cost, anxiety, and/or time associated with the inaccurate and/or delayed diagnosis of lung cancer. Risk clarification may also play a role in identifying those patients who need more vigilant follow-up. On December 31, 2013, the US Preventative Services Task Force recommended CT screening guidelines for lung cancer in adults aged 55 to 80 who have a 30 pack-year history and currently smoke or have quit smoking in the past 15 years. This guideline is expected to increase the number of patients with suspicious findings in the lung that may be candidates for the EPN Scan.


On May 10, 2013 the EPN Scan received the “CE” mark in Europe for its Electro Pulmonary Nodule Scanner and Probe, which marking permits the marketing of the EPN Scan in the European Economic Area (European Union member states plus Iceland, Liechtenstein and Norway), Switzerland and Turkey. In the United States, the Company has submitted its application for marketing approval under Section 510(k) from the United States Food and Drug Administration, or FDA, and is currently working to obtain FDA approval to enter the U.S. market.


From inception to date, we have generated limited revenues. We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements.


We plan 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. We will need to fund expansion and market growth by raising capital over the next two (2) years. The amount of capital needed could change based on the opportunities available to us and the ability to expand our markets.


Results of Operations


The following discussion is included to describe our consolidated financial position and results of operations. The consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.



14



Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013


Operating Expenses. Total operating expenses for general and administrative expense and for research and development expense for the three months ended March 31, 2014 were $410,290, compared to the total operating expenses for the three months ended March 31, 2013, of $197,799, representing an increase of $212,491. This increase was principally due to 1) an increase of $58,436 for professional fees, principally for auditing, accounting, and consulting services; 2) an increase of $69,235 for travel and meal costs, primarily related to European travel in connection with marketing efforts of our products which received regulatory approval in 2013; 3) an increase of $62,168 in stock-based compensation related to the amortization of compensation arising from stock issuances in August 2013 and January 2014 that vest for periods of up to 36 months; and 4) an increase of $22,652 in various other operating expenses. Operating expenses have been classified by management as either general and administrative expense or as research and development expense based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.


Other income/(expense). Other income (expense) amounted to net expense of $42,084 for the three months ended March 31, 2014, as compared to net expense of $50,128 for the three months ended March 31, 2013. Other income (expense) for the three months ended March 31, 2014 and 2013 solely consists of interest expense. Interest expense consists of interest incurred on notes payable with related parties and other investors. The decrease in interest expense of $8,044 between 2014 and 2013 is principally due to a decrease of $407,411 in the principle balance of interest-bearing convertible notes outstanding at March 31, 2014 compared March 31, 2013, as a result of the conversion of notes payable into common stock between those two dates.


Liquidity and Capital Resources


The following is a summary of our key liquidity measures at March 31, 2014 and 2013:


 

 

2014

 

2013

 

 

 

 

 

 

 

Cash

 

$

475,581

 

$

6,294

 

 

 

 

 

 

 

Current assets

 

$

601,636

 

$

6,294

Current liabilities

 

 

(450,163)

 

 

(1,060,220)

 

 

 

 

 

 

 

Working capital (deficit)

 

$

151,473

 

$

(1,053,926)


We are now executing plans to enter the European market through indirect or distributor channels for the marketing and sale of our EPN Scanner and EPN Scan Kit. The initial step requires the expenditure of an estimated $0.6 million, over a period of six months, to establish initial sales and create cash flow. Funds have been raised and are earmarked for this purpose.


We also plan to seek FDA 510(k) regulatory clearance, as well as the completion of the placement of investigational ProLung Test devices at hospitals in connection with ongoing clinical trials. The completion of this initial step, if it occurs, permits us us sell our product in the United States. If our FDA 510 (k) petition is granted, we plan to convert hospitals with investigational placements of our diagnostic to commercial installations selling our ProLung Test. The funds required for United States market launch are estimated to be approximately $1.0 million. The source of funds for this purpose, and for ordinary operations are expected to be obtained through the sales of our products and services in Europe and from the sale of debt and equity securities. We have no existing commitment to provide capital, and given our early stage of development, we may be unable to raise sufficient capital when needed and will likely be required to pay a high price for capital.



15



Our future capital requirements and adequacy of available funds will depend on many factors including:


·

our ability to obtain regulatory approval in markets outside of Europe;

·

our ability to successfully commercialize our EPN Scan, EPN Scanner and related products and the market acceptance of these products;

·

the pace of our orders, if any, and the pricing and payment terms of those orders;

·

whether we commence generating sales revenue and the pace of revenue growth;

·

our ability to establish and maintain collaborative arrangements with corporate partners for the development and commercialization of certain product opportunities;

·

the cost of manufacturing and production scale-up;

·

our financial results;

·

the cost and availability of capital generally; and

·

the occurrence of unexpected adverse expenses or events.


Notes Payable


Since our inception, the principal source of our financing has come from the issuance of equity securities and from debt financing. As of March 31, 2014, our outstanding debt financing includes the following notes payable.


Related-Party Notes Payable


As of March 31, 2014, we were obligated under the terms of a promissory note payable to a founding shareholder and former member of our Board of Directors in the amount of $929,536. The note matures on April 30, 2015, bears interest at 11.10% and is unsecured. As of March 31, 2014, the balance of accrued interest payable on this note is $180,398.


As of March 31, 2014, we were obligated under the terms of a master note agreement payable to an individual related to an executive officer of the Company in the amount of $356,931. The note is secured by all the assets of the Company and bears interest at 15% per annum. On March 27, 2014, the note holder and the Company entered into an amendment of the master note to extend the maturity date to June 30, 2016. The balance of accrued interest payable on this note at March 31, 2014 was $97,272.


Convertible Notes Payable


During 2012 and 2013, the Company issued notes payable to unrelated parties totaling $679,000 and $5,000, respectively. These notes bear interest at 8%, are unsecured and mature from June through August 2015. The notes payable were originally convertible into common stock at the greater of $0.80 per share or 85% of the closing price for the previous ten trading days prior to the conversion. If the Company’s stock is not publicly traded, then the price will be the average of the three prior private stock purchases of the Company’s common stock for cash. During the year ended December 31, 2012, notes payable totaling $225,000 and related accrued interest of $4,570 were converted into 323,493 shares of the Company’s common stock. During the year ended December 31, 2013, notes payable totaling $279,000 and related accrued interest of $20,045 were converted into 464,077 shares of the Company’s common stock. During the three months ended March 31, 2014, one note payable in the amount of $25,000 and related accrued interest of $3,337 was converted into 35,421 shares of the Company’s common stock, at $0.80 per share. The balance due on the remaining notes payable was $155,000 at March 31, 2014.


Uses and Sources of Cash


Cash provided by (used in) operating, investing and financing activities for the fiscal years ended March 31, 2014 and 2013 is as follows:


 

 

2014

 

2013

 

 

 

 

 

 

 

Operating activities

 

$

(460,204)

 

$

(151,082)

Investing activities

 

 

(36,350)

 

 

-

Financing activities

 

 

885,053

 

 

154,500

 

 

 

 

 

 

 

Net increase in cash

 

$

388,499

 

$

3,418




16



Operating Activities


For the three months ended March 31, 2014, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $67,962 included in our net loss for stock-based compensation and depreciation, less changes in non-cash working capital totaling $75,792. For the three months ended March 31, 2013, the differences between our net loss and net cash used in operating activities are due to net non-cash charges totaling $6,149 included in our net loss for stock-based compensation and depreciation, plus changes in non-cash working capital totaling $90,696.


Investing Activities


Net cash used in investing activities during the three months ended March 31, 2014 were $36,350 and were for the purchase of property and equipment. We had no cash flows from investing activities during the three months ended March 31, 2013. We currently estimate the amount of capital expenditures for the remainder of 2014 to be approximately $225,000.


Financing Activities


During the three months ended March 31, 2014, cash flows from financing activities principally related to proceeds of $885,000 from the issuance of 1,770,000 shares of common stock, or $0.50 per share, to related parties and other accredited investors. During the three months ended March 31, 2013, cash flows from financing activities totaled $154,500, principally related to proceeds of $54,500 from the issuance of 68,750 shares of common stock, principally at $0.80 per share, warrants for the purchase of 10,313 shares of common stock for cash, and proceeds of $100,000 from advances received from a member of our board of directors.


Critical Accounting Policies and Estimates


The Company’s accounting policies are more fully described in Note 1 of the consolidated financial statements filed in our annual report on Form 10-K for the year ended December 31, 2013.


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.


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.


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 for 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.


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. Although we have not delayed the adoption of any accounting standards, we may choose to take advantage of the extended transition period for complying with new or revised accounting standards in the future.



17



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


We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.


Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014 and concluded that the disclosure controls and procedures were not effective for the following reasons:


1.

We do not have in place review procedures sufficient to trigger the timely filing of Current Reports on Form 8-K in connection with events requiring such a filing.


2.

We did not maintain effective entity-level controls as defined by the framework issued by COSO. Specifically, we did not effectively segregate certain accounting duties due to the small size of our accounting staff, and did not maintain a sufficient number of adequately-trained personnel necessary to anticipate and identify risks critical to financial reporting.


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 March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



18




PART II--OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS


There have occurred no events requiring disclosure under this item.


ITEM 1A.

RISK FACTORS


We are a smaller reporting company and are not required to provide the information under this item.


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


During the period from January 1, 2014 through March 31, 2014, we issued 1,770,000 shares of common stock for cash to a total of sixteen investors. Proceeds from the issuances total $885,000, or $0.50 per share.


On January 8, 2014, we issued 120,000 shares of common stock to a new member of the board of directors for future services to be rendered over the following three years. The shares were valued at $60,000, or $0.50 per share.


On February 25, 2014, a founding shareholder exercised a warrant to purchase 53,439 shares of common stock for $53, or $0.001 per share.


On March 11, 2014, we issued 35,421 shares of common stock in connection with the conversion of $25,000 of notes payable plus accrued interest of $3,337 at a conversion price of $0.80 per share.


The offer and sale of such shares of our common stock were effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act, based upon the following: (a) each investor confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 promulgated under the Securities Act, were sophisticated, and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to each offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.

MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.

OTHER INFORMATION


Lease Agreement


In April 2014, the Company entered into a new lease agreement with its landlord, expanding the amount office space that it occupies at 757 East South Temple, Salt Lake City, Utah to approximately 4,657 square feet. The new lease agreement is effective August 1, 2014 and has a term of three years, with an option to renew for an additional three years. Monthly rental payments under the non-cancelable lease will be $3,787 for the initial year and will escalate by 2% per year to $3,940 in the third year. If the Company exercises the option to renew the lease, the monthly rental payments will further escalate by 3% per year during the additional term. The description set forth above is necessarily summary in nature qualified by the actual terms and conditions of such lease, a copy of which is filed herewith as Exhibit 10.1



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Related Party Contract


Effective January 11, 2014, the Company entered into a Master Services Agreement (the “Agreement”) with Corradiance, LLC, an entity that provides consulting and professional services (the “Consultant”). The Consultant is owned and managed by Dennis Tulane, who is a director of the Company. The term of the Agreement is for one year following the effective date; however the Agreement may be terminated by either party with thirty days prior written notice.


The Agreement provides for the issuance of work orders by the Company to the Consultant. On January 13, 2014, the Company issued an initial work order to determine system requirements, project scope, project plan, and budget for the development on an Internet-based customer service portal. This work order was completed in March 2014 for a fixed fee of $8,500.


On March 26, 2014, the Company issued a second work order to the Consultant for the development, testing, and deployment of the Internet-based customer service portal. The second work order is to be completed in four phases (prototype completion, development completion, testing completion, and deployment) with estimated completion dates through July 25, 2014 for the four phases. The total cost for the services and expenses under the second work order is $147,900, payable in amounts specified in the work order upon the completion of each phase or milestone. 15% of the cost for services and expenses under the second work order will be paid through issuance of shares of the Company’s common stock, subject to the approval of the board of directors.


The description set forth above is necessarily summary in nature qualified by the actual terms and conditions of such Agreement, a copy of which is filed herewith as Exhibit 10.2.


ITEM 6.

EXHIBITS


Exhibit

Number

 

Description

3.1

 

Corrected, Amended and Restated Certificate of Incorporation, as filed on November 15, 2006(1)

3.2

 

Certificate of Amendment of Certificate of Incorporation, as filed on June 9, 2011(1)

3.3

 

By-Laws(1)

10.1

 

Lease Agreement*

10.2

 

Master Services Agreement, dated January 11, 2014, with Corradiance, LLC*

31.1

 

Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended*

31.2

 

Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended*

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

 

101 INS

 

XBRL Instance Document**

101 SCH

 

XBRL Schema Document**

101 CAL

 

XBRL Calculation Linkbase Document**

101 LAB

 

XBRL Labels Linkbase Document**

101 PRE

 

XBRL Presentation Linkbase Document**

101 DEF

 

XBRL Definition Linkbase Document**


*

Filed herewith


**

The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.


(1)

Incorporated by reference with Form 10 filed February 10, 2012, File No. 12750426.




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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.

 

 

 

 

 

May 14, 2014

 

By: /s/ Steven C. Eror

 

Date

 

Steven C. Eror,

 

 

 

Chief Executive Officer and President

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

May 14, 2014

 

By: /s/ Steven C. Eror

 

Date

 

Steven C. Eror,

 

 

 

Chief Financial Officer

(Principal Financial Officer)




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