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, 2015

       

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, 2015, the issuer had 20,024,052 shares of Common Stock, $0.001 par value, outstanding.

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FRESH MEDICAL LABORATORIES, INC.

TABLE OF CONTENTS

	Part I – Financial Information
Item 1	Financial Statements	3
	Condensed Consolidated Balance Sheets, March 31, 2015 and December 31, 2014 (Unaudited)	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4	Controls and Procedures	19
	Part II – Other Information
Item 1	Legal Proceedings	20
Item 1A	Risk Factors	20
Item 2	Unregistered Sales Of Equity Securities And Use Of Proceeds	20
Item 3	Defaults Upon Senior Securities	21
Item 4	Mine Safety Disclosures	21
Item 5	Other Information	21
Item 6	Exhibits	21
Signatures		22

2

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PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Fresh Medical Laboratories, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
			March 31,		December 31,
			2015		2014
Assets
Current Assets
	Cash	$	917,039	$	4,044
	Accounts receivable, net of allowance for doubtful accounts of $89,000 and $100,000, respectively		137,030		154,799
	Inventory		223,015		210,474
	Prepaid expenses		26,962		38,640
Total Current Assets			1,304,046		407,957
Property and equipment, net of accumulated depreciation			64,868		65,775
Total Assets		$	1,368,914	$	473,732
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
	Accounts payable	$	89,229	$	105,316
	Accrued liabilities		439,330		406,336
	Related-party notes payable, current portion		-		929,536
	Notes payable, current portion		279,536		-
	Convertible notes payable		90,000		90,000
Total Current Liabilities			898,095		1,531,188
Long-Term Liabilities
	Related-party notes payable, net of current portion		-		356,931
	Notes payable, net of current portion		1,006,931		-
	Convertible debentures		1,086,050		-
Total Long-Term Liabilities			2,092,981		356,931
Total Liabilities			2,991,076		1,888,119
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; 40,000,000 shares authorized;20,024,052 shares and 19,730,052 shares issued and outstanding, respectively		20,024		19,730
	Additional paid-in capital		9,287,263		9,075,590
	Accumulated deficit		(10,929,449)		(10,509,707)
Total Stockholders' Equity (Deficit)			(1,622,162)		(1,414,387)
Total Liabilities and Stockholders' Equity (Deficit)		$	1,368,914	$	473,732

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

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Fresh Medical Laboratories, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
			For the Three Months Ended March 31,
			2015		2014
Revenues:
	Licensee revenue	$	4,500	$	-
	Total revenue		4,500		-
Cost of revenue			3,900		-
Gross margin			600		-
Operating expenses:
	Research and development expense		133,685		190,121
	Selling, general and administrative expense		217,470		220,169
	Total operating expenses		351,155		410,290
Loss from operations			(350,555)		(410,290)
Other income (expense):
	Interest expense		(40,418)		(42,084)
	Foreign currency exchange gain (loss), net		(28,769)		-
	Total other income (expense)		(69,187)		(42,084)
	Net loss	$	(419,742)	$	(452,374)
	Basic and diluted loss per share	$	(0.02)	$	(0.03)
	Weighted-average common shares outstanding, basic and diluted		19,291,241		16,005,194

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

4

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Fresh Medical Laboratories, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
				For the Three Months Ended March 31,
				2015		2014
Cash flows from operating activities:
	Net loss		$	(419,742)	$	(452,374)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation		907		919
		Stock-based compensation		79,185		67,043
		Provision for doubtful accounts		(11,000)		-
		Change in assets and liabilities:
		Accounts receivable		28,769		-
		Inventory		(12,541)		(103,595)
		Prepaid expenses		(2,540)		(10,850)
		Accounts payable		(16,087)		62,121
		Accrued liabilities		32,994		(23,468)
Net cash used in operating activities				(320,055)		(460,204)
Cash flows from investing activities:
	Payments for property and equipment			-		(36,350)
Net cash used in investing activities				-		(36,350)
Cash flows from financing activities:
	Proceeds from issuance of common stock			147,000		885,000
	Proceeds from exercise of warrants to purchase common stock			-		53
	Proceeds from issuance of convertible debentures			1,086,050		-
Net cash provided by financing activities				1,233,050		885,053
Net increase in cash				912,995		388,499
Cash at beginning of period				4,044		87,082
Cash at end of period			$	917,039	$	475,581
Supplemental disclosure of cash flow information:
	Cash paid for interest		$	8,598	$	67,196
	Cash paid for income taxes		$	-	$	-
Supplemental disclosure of non-cash investing and financing activities:
	Notes payable and accrued interest converted to common stock		$	-	$	28,337

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

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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 lung masses suspicious for cancer as seen in CT and radiography. The Company’s principal activities 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 risk stratification 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.  During the year ended December 31, 2014, the Company commenced selling the EPN Scan to customers in the European Union.  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 condensed 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 included in the Company’s annual report on Form 10-K for the year ended December 31, 2014. The results of operations for the three months ended March 31, 2015 may not be indicative of the results to be expected for the year ending December 31, 2015.   

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, 2015, there were warrants to purchase 1,423,211 shares of common stock outstanding, 635,567 non-vested shares of common stock, $90,000 of convertible notes, and $1,086,050 of convertible debentures that were excluded from the computation of diluted net loss per common share as they were anti-dilutive.  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 that were excluded from the computation of diluted net loss per common share as they were anti-dilutive.  

Recent Accounting Pronouncements – In April 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 will be effective for the Company’s fiscal year beginning January 1, 2016 and subsequent interim periods, with earlier adoption permitted.  Management will adopt ASU 2015-03 as of April 1, 2015, with the only immediate effects of the adoption being the presentation of debt issuance costs for the newly issued convertible debentures as a deduction from the carrying amount of the convertible debentures in the consolidated balance sheet.  

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 will be effective for the Company’s fiscal year beginning January 1, 2016 and subsequent interim periods. Management is currently evaluating the impact of the pending adoption of ASU 2014-15 on the Company’s consolidated financial statements.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.  ASU 2014-09 will be effective for the Company retrospectively beginning January 1, 2017, with early adoption not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.

In July 2013, the FASB 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 was effective January 1, 2015 and was adopted as of that date.  The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial statements.

Note 2 – Inventory

Inventory principally consists of the cost of materials purchased and assembled for 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.  The cost of inventory also includes the costs of direct labor for the assembly of the EPN Scan and certain indirect costs incurred in connection with purchasing of parts and the assembly of products.  Inventory is valued at the lower of cost or market value, with cost determined based on the first-in-first-out method.  Inventory consists of the following:

		March 31,		December 31,
		2015		2014
Raw materials	$	107,028	$	93,699
Work in progress		13,651		12,002
Finished goods		102,336		104,773
Total inventory	$	223,015	$	210,474

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 3 – Property and Equipment

Property and equipment consists of the following:

		March 31,		December 31,
		2015		2014
Computer equipment	$	7,228	$	7,228
Office equipment		3,800		3,800
Tooling		36,350		36,350
Website development		26,800		26,800
		74,178		74,178
Less accumulated depreciation		(9,310)		(8,403)
Property and equipment, net	$	64,868	$	65,775

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 case for the EPN Scan, has been received and is in the process of being validated.  Depreciation of the tooling will commence on the date that the tooling is placed into service, over an expected useful life of five years.

As further described in Note 9 to these condensed consolidated financial statements, the Company entered into a Master Services Agreement with an entity that provides consulting and professional services.  The entity is owned and managed by a director of the Company.  On March 26, 2014, the Company issued a second work order under the Master Services Agreement for the development, testing, and deployment of the Internet-based customer service portal.  The second work order was planned to be completed in four phases (prototype completion, development completion, testing completion, and deployment) for a total estimated cost of $147,900, payable in amounts specified in the work order upon the completion of each phase or milestone.  The consultant completed the first phase for the prototype completion and has been paid the corresponding cost of $26,800, which has been recorded as property and equipment.  However, after completion of the first phase, further work under the Agreement was temporarily suspended by the mutual agreement of the Company and the consultant pending sufficient availability of working capital.  Management expects that it is probable that the Internet-based customer service portal will be completed for its intended purpose.

The costs incurred for the development of the prototype of the Internet-based customer service portal pursuant to the second work order have been accounted for pursuant to generally accepted accounting principles governing the accounting for Website Development Costs and for Internal-Use Software.  Those standards require that costs incurred during the preliminary project stage be expensed as incurred, costs incurred to develop internal-use computer software during the application development stage be capitalized, and costs incurred for training and during the post-implementation operation stage be expensed as incurred.  Since the costs incurred related to the application development stage, the costs were capitalized as property and equipment and will be amortized on a straight-line basis over the estimated useful life of the technology when completed and placed in service, with periodic evaluation for impairment.

Note 4 – Accrued Liabilities

Accrued liabilities consisted of the following:

		March 31,		December 31,
		2015		2014
Accrued interest	$	411,942	$	380,122
Accrued payroll and payroll taxes		10,038		8,864
Accrued royalties		17,350		17,350
Total accrued liabilities	$	439,330	$	406,336

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5 – Long-term Debt

Long-term debt is summarized as follows:

		March 31,		December 31,
		2015		2014
Convertible debentures; unsecured; interest at 8.00% per annum; due May 1, 2018	$	1,086,050	$	-
Note payable to a former director and founding shareholder; unsecured; interest at 11.10% per annum; due April 30, 2017		929,536		929,536
Note payable to a relative of an executive officer; secured by all the assets of the Company; interest at 15% per annum; due June 30, 2016		356,931		356,931
Convertible notes; unsecured; interest at 8.00% per annum; due June 1 to July 1, 2015		90,000		90,000
Total long-term debt		2,462,517		1,376,467
Less:  current portion		369,536		1,019,536
Long-term debt, net of current portion	$	2,092,981	$	356,931

Convertible Debentures

In February 2015, the Company commenced an offering of convertible debentures (the “Debentures”) in an aggregate amount of up to $2,000,000.  As of March 31, 2015, the Company has received subscriptions with respect to $1,086,050 in Debentures.  The Debentures bear interest at the rate 8% per annum commencing April 6, 2015.  Principal and accrued interest are due on the maturity date, which is May 1, 2018. The holder of the Debenture is entitled, at its option, to convert all or any portion of the outstanding principal of the Debenture into shares of the Company’s common stock at a conversion price of $0.65 per share.  Interest accruing from the date of issuance to the conversion date shall be paid on the maturity date.  Issuance costs, when paid or settled, will be amortized over the term of the Debentures using the effective interest method.  The Company evaluated the Debentures for consideration of any beneficial conversion features as required under generally accepted accounting principles.  The Company determined the beneficial conversion feature to be $0.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note Payable to Former Director and Founding Shareholder

As of March 31, 2015 and December 31, 2014, the Company was obligated under the terms of a master note to a founding stockholder and former member of its board of directors in the amount of $929,536.  The note and accrued interest were due on April 30, 2015. The note bore interest at 11.10% and was unsecured. As of March 31, 2015 and December 31, 2014, the balance of accrued interest was $240,585 and $223,742, respectively. The Company paid accrued interest of $8,598 and $17,196 during the three months ended March 31, 2015 and 2014, respectively.  Interest expense for the three months ended March 31, 2015 and 2014 was $25,441 for each period.  

On May 1, 2015, the Company and the noteholder entered into an Amended and Restated Master Loan Agreement and Promissory Note (the “Revised Note”) in the principal amount of $900,000, which terminated and replaced the previous note.  On April 30, 2015, in anticipation of entering into the Revised Note, the Company paid all accrued interest in the amount of $249,348 and principal of $29,536.  Interest under the Revised Note accrues at the rate of 11.10% per annum and is payable monthly in arrears.  The Company is obligated to make a $250,000 principal payment on January 1, 2016, and the Revised Note matures on April 30, 2017.  The Revised Note is unsecured and includes standard creditor remedies in the event of default.  The current portion and long-term portion of this note have been presented in the accompanying condensed consolidated balance sheet consistent with the terms of the Revised Note, with $279,536 included in current portion of long-term debt and $650,000 included in long-term debt, net of current portion.  In periods prior to January 1, 2015, this note was presented as a related-party arrangement in the Company’s consolidated financial statements.  However, management has concluded that this note no longer meets the definition of a related party transaction under generally accepted accounting principles.

Note Payable to a Relative of an Executive Officer

At March 31, 2015 and December 31, 2014, the Company was obligated under the terms of a master note 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 also required the board of directors to retain the current management team as long as the note was outstanding. 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 due date of the note and accrued interest to June 30, 2016.  The balance of accrued interest at March 31, 2015 and December 31, 2014 was $150,811 and $137,610, respectively.  The Company paid accrued interest of $50,000 during the three months ended March 31, 2014 (none during the three months ended March 31, 2015).  Interest expense for the three months ended March 31, 2015 and 2014 was $13,202 for each period.  In periods prior to January 1, 2015, this note was presented as a related-party arrangement in the Company’s consolidated financial statements.  However, management has concluded that this note no longer meets the definition of a related party transaction under generally accepted accounting principles.

Convertible Notes

During 2012 and 2013, the Company issued notes payable totaling $679,000 and $5,000, respectively. These notes bear interest at 8% and are unsecured.  The notes and accrued interest are due, if not previously converted, from June through August 2015. The terms of the notes payable are that the notes are 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 years ended December 31, 2012, 2013, and 2014, notes payable totaling $594,000 and related accrued interest of $40,858 were converted into 951,865 shares of the Company’s common stock, representing a weighted average of approximately $0.67 per share, which resulted in a remaining balance payable on convertible notes of $90,000 at March 31, 2015 and at December 31, 2014.  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.

Note 6 – Preferred Stock

The stockholders 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, 2015 and December 31, 2014, the board of directors has not designated any series of preferred stock and there are no shares of preferred stock issued or outstanding.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 7 – Common Stock

On December 3, 2014, the Company held an annual and special meeting of stockholders.  At the meeting, the stockholders approved an amendment to increase the number of shares of common stock authorized under the Company’s Second Amended and Restated Certificate of Incorporation to forty million shares.  The Second Amended and Restated Certificate of Incorporation was filed with the State of Delaware on December 8, 2014.  

Common Stock Issued for Cash

During the three months ended March 31, 2015, the Company issued 294,000 shares of common stock for cash.  Proceeds from the issuances total $147,000, or $0.50 per share.

During the three months ended March 31, 2014, the Company issued 1,770,000 shares of common stock for cash.  Proceeds from the issuances total $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 stockholder 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

Periodically, the Company issues non-vested common stock to directors, officers and consultants 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 condensed consolidated 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.  The Company recognized stock-based compensation related to the vesting of shares issued to directors, officers and consultants for the three months ended March 31, 2015 and 2014 of $64,967 and $67,043, respectively.

A summary of the status of the Company’s non-vested shares as of March 31, 2015 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, 2014	$	765,500	$	0.50
Awarded		-		-
Vested		(129,933)		0.50
Balance at March 31, 2015	$	635,567	$	0.50

As of March 31, 2015 and December 31, 2014, there was $317,784 and $382,750, respectively, of total unrecognized compensation cost related to the non-vested stock-based compensation arrangements awarded to directors, officers, and consultants. That cost is expected to be recognized over a weighted-average period of 1.3 years from March 31, 2015.  

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Total stock-based compensation expense from all sources for the three months ended March 31, 2015 (including stock-based compensation of $14,218 for the warrant discussed below in Note 8) and 2014 has been included in the condensed consolidated statements of operations as follows:

		2015		2014
Research and development expense	$	35,500	$	31,639
Selling, general and administrative expense		43,685		35,404
Total stock-based compensation	$	79,185	$	67,043

Note 8 – Common Stock Warrants

The Company has issued warrants to purchase shares of its common stock for payment of consulting services, in connection with the extension of a note payable, as incentives to investors, and for cash. The fair value of each warrant issuance is estimated on the date of issuance using the Black-Scholes option pricing model.  The fair value of warrants issued for consulting services is recognized as consulting expense at the date the warrants become 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 the expected life of each warrant based on the midpoint between the date the warrant vests and the contractual term of the warrant (the Simplified Method). The Company uses the Simplified Method because it does not have more detailed information about exercise behavior that would allow a more reliable method of predicting the expected life of each warrant.  The risk-free interest rate represents the U.S. Treasury Department’s constant maturities rate for the expected life of the related warrant.  And the dividend yield represents anticipated cash dividends to be paid over the expected life of the warrant.

Effective July 1, 2014, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”) with Leavitt Partners, LLC (“Leavitt Partners”) pursuant to which Leavitt Partners agreed to provide strategic consulting services to the Company.  The Consulting Agreement has a term of four years, but may be terminated by either party as of the first, second, or third anniversary date of the Consulting Agreement, without cause and in the sole discretion of either party.  As consideration for the services, in two transactions during the six months ended December 31, 2014, the Company issued warrants to Leavitt Partners to purchase 900,000 shares of common stock of the Company.  The Consulting Agreement provided that the warrants would stop vesting upon termination of the Consulting Agreement.  The warrants have an exercise price of $0.50 per share and expire 10 years after issuance.  During the three months ended September 30, 2014, the Company issued a warrant, as amended, to purchase 225,000, with all of the shares under the amended warrant exercisable as of September 1, 2014, and with the rights to exercise the warrant expiring on September 1, 2024.  The fair value of the amended warrant was estimated using the Black-Scholes option pricing model.  The fair value of the amended warrant was $62,123, or $0.2761 per share.  The assumptions used for the amended warrant were risk-free interest rate of 1.69%, expected volatility of 65%, expected life of 5 years, and expected dividend yield of zero.  

During the three months ended December 31, 2014, the Company issued a second warrant to Leavitt Partners to purchase 675,000 shares of common stock of the Company. This second warrant has an exercise price of $0.50 per share, vests with respect to 15,000 shares per month commencing October 1, 2014, and expires 10 years after issuance.    The fair value of the second warrant was estimated using the Black-Scholes option pricing model.  The fair value of the second warrant was $216,338, or $0.3205 per share.  The assumptions used for the amended warrant were risk-free interest rate of 1.98%, expected volatility of 72%, expected life of 5.9 years, and expected dividend yield of zero.  

In accordance with the accounting standards relating to the issuance of stock-based compensation to non-employees, the Company recognized a current asset for the prepayment of stock-based compensation to which it has an enforceable right to receive consulting services through the first anniversary date of the Consulting Agreement.  Accordingly, the Company recognized $109,900 as prepaid compensation expense and additional paid-in capital related to the issuance of the warrants to Leavitt Partners.  Based on the vesting pattern of the warrants, the Company has amortized $81,306 of stock-based compensation during the six months ended December 31, 2014, amortized an additional $14,218 during the three months ended March 31, 2015, and has a prepaid expense of $14,376 that will be amortized as stock-based compensation for the three months ending June 30, 2015.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A summary of warrant activity for the three months ended March 31, 2015 is presented below:

						Weighted
				Weighted		Average
		Shares		Average		Remaining		Aggregate
		Under		Exercise		Contractual		Intrinsic
		Warrants		Price		Life		Value
Outstanding at December 31, 2014		1,423,211	$	0.54		8.3 years	$	17,640
Issued		-		-		-		-
Exercised		-		-		-		-
Expired		-		-		-		-
Outstanding at March 31, 2015		1,423,211	$	0.54		8.1 years	$	17,640

The intrinsic value at March 31, 2015 is calculated at $0.50 per share less the exercise price, based on the management’s latest estimate of the fair value of the shares of common stock, which is the latest price the Company issued shares of common stock for cash.

Note 9 – 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 was originally for one year following the effective date; however, work under the Agreement has been suspended by mutual agreement of the Company and the Consultant, as further described below.  

The Agreement provided 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.  These 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.  

On March 26, 2014, the Company issued a second work order to the Consultant under the Agreement for the development, testing, and deployment of the Internet-based customer service portal.  The second work order was planned to be completed in four phases (prototype completion, development completion, testing completion, and deployment).  The total cost for the services under the second work order was estimated to be $147,900, payable in amounts specified in the work order upon the completion of each phase or milestone.  However, after completion of the first phase (prototype completion), further work under the Agreement was temporarily suspended by the mutual agreement of the Company and the Consultant pending sufficient availability of working capital.  According to the Agreement, the cost for completion of the first phase was $26,800, which has been paid.  As further described in Note 3 to these condensed consolidated financial statements, the cost for completion of the prototype has been capitalized and included in property and equipment in the accompanying condensed consolidated balance sheets.  

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 10 – Commitments and Contingencies

Lease Agreement – Prior to August 2014, the Company leased office space under a non-cancelable operating lease that expired in July 2014.  Monthly rental payments were $2,888 per month.  Effective August 1, 2014, the Company entered into a new lease agreement with its landlord, expanding the amount of office space that it occupies at 757 East South Temple, Salt Lake City, Utah to approximately 4,657 square feet.  The new lease agreement has a term of three years, with an option to renew for an additional three years.  Monthly rental payments under the new non-cancelable lease are $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.  

Minimum lease commitments at March 31, 2015 for the remaining term of the lease are as follows:

Year ending March 31,
	2016	$	46,047
	2017		46,968
	2018		15,759
	Thereafter		-
	Total	$	108,774

Lease expense charged to operations for the three months ended March 31, 2015 and 2014 was $11,304 and $8,847, respectively.

License Agreement – The Company has a license agreement with a party related through a shareholder and former member of the board of directors. Under the agreement, the Company has the right to the exclusive use of certain patents pending and related technology (the “technology”) in its medical devices and other products for an indefinite term. In return, the Company agreed to incur a minimum of $4,750,000 in development costs by the year 2014 to develop and market its products worldwide based on a graduated schedule and to make royalty payments based on a percentage of the aggregate worldwide net sales (as defined in the agreement) of its medical device and other products that utilize the technology.  At March 31, 2015 and December 31, 2014, accrued royalties under this license agreement total $17,350.

Note 11 – Subsequent Events

Offering of Convertible Debentures

As further described in Note 5 to these condensed consolidated financial statements, in February 2015, the Company commenced an offering of convertible debentures in an aggregate amount of up to $2,000,000.  As of March 31, 2015, the Company had received subscriptions with respect to $1,086,050 in debentures.  During the period from April 1, 2015 through the date these condensed consolidated financial statements were available to be issued, the Company has received additional subscriptions in the aggregate amount of $1,027,410 in debentures, bringing the total subscriptions in the offering to $2,113,460.  

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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 Form 10-Q.  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 Form 10-Q 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; receipt or denial of marketing approval from the FDA and similar agencies; receipt or denial of reimbursement from government agencies and insurance companies; 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.

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. We are a medical device company that is developing, testing and commercializing its non-invasive lung cancer risk stratification 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.  

As many patients at high risk of lung cancer have suspicious lung findings when evaluated by CT, clarifying the risk of the disease, or risk stratification, has the potential to reduce the cost, anxiety, and/or time associated with the inaccurate and/or delayed diagnosis of lung cancer.  Risk stratification may also play a role in identifying those patients who need to modulate the extent and frequency of follow-up.  On December 31, 2013, the U.S. 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.  This marking is regulatory approval that clears the marketing and sale of the EPN Scan in the European Economic Area and European Free Trade Association Countries representing 509 million individuals and 31 member states.  The new screening guidelines and Medicare coverage recently announced in the U.S. for lung cancer screening are not available in Europe.

In the United States, we have submitted an application for marketing approval under Section 510(k) from the United States Food and Drug Administration, or FDA.  On February 27, 2015, we received a review letter from the FDA identifying a number of issues, concerns and weaknesses in our application, including the risk classification of the test, the study design and study analysis along with what we consider other less important questions.  Before the FDA can grant approval of our application, we must resolve or negotiate the removal of all issues identified by the FDA and address possible issues to be identified in the future. Certain completed studies address some of the issues identified by the FDA, and we have developed a plan to address the remaining issues as soon as practicable.

From inception to date, we have generated limited revenues.  During the year ended December 31, 2014, we commenced selling the EPN Scan to customers in the European Union.  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 in the lung seen in CT and radiography.  We anticipate the need to fund expansion and market growth by raising capital over the next two years.  The amount of capital needed could change based on the opportunities available to us and the ability to expand our markets.  

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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.

 

Three Months Ended March 31, 2015 compared to the Three Months Ended March 31, 2014

 

Revenues and Cost of Revenue.  During the three months ended March 31, 2015, we provided certain services to our licensee in China and recognized revenue in the amount of $4,500.  We incurred costs related to these services in the amount of $3,900.  We had no revenue or related costs during the three months ended March 31, 2014.  

Operating Expenses. Total operating expenses for selling, general and administrative expense and for research and development expense for the three months ended March 31, 2015 were $351,155, compared to the total operating expenses for the three months ended March 31, 2014, of $410,290, representing a decrease of $59,135.  This decrease was due to 1) a decrease of $24,993 for professional fees, principally for consulting services; 2) a decrease of $51,995 for travel and meal costs, primarily related to more extensive European travel in the three months ended March 31, 2014 in connection with initial marketing efforts of our products after we had recently received regulatory approval in 2013; and 3) a decrease in the provision for doubtful accounts in the amount of $11,000 for accounts receivable.  These decreases were offset by increases in operating expenses related to 1) salaries and wages of $16,526; 2) share-based compensation of $12,142 principally pertaining to the Leavitt warrants; and 3) $185 in various other operating expenses.  Operating expenses have been classified by management as either selling, 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 $69,187 for the three months ended March 31, 2015, as compared to net expense of $42,084 for the three months ended March 31, 2014.  Other income (expense) for the three months ended March 31, 2015 consists of interest expense of $40,418 and a foreign currency exchange loss of $28,769.  Other income (expense) for the three months ended March 31, 2014 consists solely of interest expense of $42,084.  Interest expense consists of interest incurred on notes payable with certain third parties and other investors.  The decrease in interest expense of $1,666 between 2015 and 2014 is due to a decrease of $65,000 in the principle balance of interest-bearing convertible notes outstanding at March 31, 2015 compared to March 31, 2014, as a result of the conversion of notes payable into common stock between those two dates.

Accounts receivable for sales of the EPN Scan units and test kits in Europe are denominated in Euros and translated into U.S. Dollars at the date of each sale and at each balance sheet date.  The foreign currency exchange loss of $28,769 for the three months ended March 31, 2015 is the result of the decrease in the exchange rate to 1.074 at March 31, 2015 compared to 1.211 at December 31, 2014.

Liquidity and Capital Resources

The following is a summary of our key liquidity measures at March 31, 2015 and 2014:

		2015		2014
Cash	$	917,039	$	475,581
Current assets	$	1,304,046	$	601,636
Current liabilities		(898,095)		(450,163)
Working capital	$	405,951	$	151,473

In June 2014, the FDA informed us that 510(k) clearance would not be available to the Company for its EPN Scan device and indicated that a 510(k) de novo petition may be an appropriate pathway to approval due to the novel technology and indication used in the device based upon section 513(a)(1) of the Food, Drug and Cosmetic Act. The enhanced 510(k) de novo petition was prepared and submitted to the FDA for review in 2014. On February 27, 2015, we received a review letter from the FDA identifying a number of issues, concerns and weaknesses in our application, including the risk classification of the test, the study design and study analysis along with what we consider other less important questions.  Before the FDA can grant approval of our application, we must resolve or negotiate the removal of all issues identified by the FDA and address possible issues to be identified in the future. Certain completed studies address some of the issues identified by the FDA, and we have developed a plan to address the remaining issues as soon as practicable.  The Company will establish a budget and seek the funding required to satisfy the additional request.  The nature and scale of any additional requests, if any, are unknown, and will not be known until the FDA makes a definitive response to the 510(k) de novo petition pending.

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If we obtain FDA clearance to market in the United States of America, we plan to convert U.S. hospitals with existing investigational placements of our diagnostic to commercial installations selling our ProLung EPN Scan.  The funds required for the United States market launch are estimated to be approximately $4.0 million.  Funds for this purpose, and for ordinary operations, are expected to be obtained in part through the sales of our products and services in Europe but primarily from the sale of debt and equity securities.  During the three months ended March 31, 2015 and for the period from April 1, 2015 through May 8, 2015, we have received subscriptions for the issuance of $1,086,050 and $913,950, respectively, in convertible debentures (the “Debentures”), as part of an offering of $2,000,000 in Debentures.   Other than such subscriptions, 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 may be required to pay a high price for capital.

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;

·

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.

Long-Term Debt

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, 2015, our outstanding debt financing includes the following borrowing arrangements.

Convertible Debentures

In February 2015, we commenced an offering of Debentures in an aggregate amount of up to $2,000,000.  As of March 31, 2015, we had received subscriptions with respect to $1,086,050 in Debentures.  The Debentures bear interest at the rate 8% per annum commencing April 6, 2015.  Principal and accrued interest are due on the maturity date, which is May 1, 2018. The holder of the Debenture is entitled, at its option, to convert all or any portion of the outstanding principal of the Debenture into shares of our common stock at a conversion price of $0.65 per share.  Interest accruing from the date of issuance to the conversion date shall be paid on the maturity date.  

Note Payable to a Former Director and Founding Shareholder

As of March 31, 2015, we were obligated under the terms of a master note agreement to a founding stockholder and former member of our Board of Directors in the amount of $929,536.  The note and accrued interest were due on April 30, 2015.  The note bears interest at 11.10% and is unsecured. As of March 31, 2015, the balance of accrued interest on this note is $240,585.  On May 1, 2015, we and the noteholder entered into an Amended and Restated Master Loan Agreement and Promissory Note (the “Revised Note”) in the principal amount of $900,000, which terminated and replaced the previous note.  On April 30, 2015, in anticipation of entering into the Revised Note, we paid all accrued interest in the amount of $249,348 and principal of $29,536.  Interest under the Revised Note accrues at the rate of 11.10% per annum and is payable monthly in arrears.  We are obligated to make a $250,000 principal payment on January 1, 2016, and the Revised Note matures on April 30, 2017.  The Revised Note is unsecured and includes standard creditor remedies in the event of default.  

Note Payable to a Relative of an Executive Officer

At March 31, 2015, we were obligated under the terms of a master note agreement to an individual related to an executive officer of the Company in the amount of $356,931. The note is secured by all of our assets and bears interest at 15% per annum.  On March 27, 2014, we entered into an amendment of the master note to extend the due date for payment of the note and accrued interest to June 30, 2016.  The balance of accrued interest on this note at March 31, 2015 was $150,811.

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Convertible Notes Payable

During 2012 and 2013, we issued notes payable to unrelated parties totaling $679,000 and $5,000, respectively. These notes bear interest at 8% and are unsecured.  The notes and accrued interest were scheduled to mature, if not previously converted, 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 our common stock is not publicly traded, then the price will be the average of the three prior private stock purchases of our common stock for cash.  During the years ended December 31, 2012, 2013, and 2014, notes payable totaling $594,000 and related accrued interest of $40,858 were converted into 951,865 shares of our common stock, representing a weighted average of approximately $0.67 per share, which resulted in a remaining balance payable on convertible notes of $90,000 at March 31, 2015.

Cash provided by (used in) operating, investing and financing activities for the three months ended March 31, 2015 and 2014 is as follows:  

		2015		2014
Operating activities	$	(320,055)	$	(460,204)
Investing activities		-		(36,350)
Financing activities		1,233,050		885,053
Net increase in cash	$	912,995	$	388,499

Operating Activities

For the three months ended March 31, 2015, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $69,092 included in our net loss for stock-based compensation, depreciation, and provision for doubtful accounts, plus changes in non-cash working capital totaling $30,595.  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.  

Investing Activities

Net cash used in investing activities during the three months ended March 31, 2014 were $36,350 and was for the purchase of property and equipment.  There were no investing activities during the three months ended March 31, 2015.  We currently estimate the amount of capital expenditures for the year ending December 31, 2015 to be approximately $150,000.

Financing Activities

During the three months ended March 31, 2015, cash flows from financing activities totaled $1,233,050, related to proceeds of 1) $1,086,050 from the issuance of Debentures and 2) $147,000 from the issuance of 294,000 shares of common stock, or $0.50 per share, to related parties and other accredited investors.  During the three months ended March 31, 2014, cash flows from financing activities totaled $885,053, principally related to proceeds from the issuance of 1,770,000 shares of common stock, or $0.50 per share, to related parties and other accredited investors.  

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, 2014.

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. The allowance for doubtful accounts is particularly susceptible to change in the near term.  

 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.

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Trade Receivables and Credit Policies – Accounts receivable are recorded at the invoiced amount, with foreign currencies reflected in U.S. dollars (based on the exchange rate on the date of sale and adjusted to current exchange rates at the end of each reporting period), and do not bear interest.  The Company uses an allowance for doubtful accounts to reflect the Company’s best estimate of the amount of probable credit losses in accounts receivable.  Account balances will be charged off against the allowance when the account receivable is considered uncollectible. The allowance for doubtful accounts is an estimate that is particularly susceptible to change in the near term.  

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.

Off Balance Sheet Arrangements

 

The Company has not had any off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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, 2015 and concluded that the disclosure controls and procedures were not effective for the following reasons:

1.

We did not maintain effective entity-level controls as defined by the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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

During the three months ended March 31, 2015, we modified our accounting policies and procedures related to inventory count procedures, which resolved the material weakness in internal control that was reported in our Form 10-K for the three months ended December 31, 2014.  Otherwise, there has been no change in our internal control over financial reporting that occurred in the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, as a result, are not required to provide the information under this item.

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

During January and February 2015, we offered and sold an aggregate of 294,000 shares of common stock for cash to an aggregate of 10 investors for an aggregate purchase price of $147,000, or $0.50 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(a)(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, or have direct access to as a result of their positions, 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.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit Number	Description
3.1	Second Amended and Restated Certificate of Incorporation(2)
3.2	By-Laws(1)
10.1	Form of Eight Percent (8%) Convertible Debenture, dated ___________, 2015(3)
10.2	Amended and Restated Master Loan Agreement and Promissory Note with William Fresh(4)
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

(1)

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

(2)

Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on December 9, 2014.

(3)

Incorporated by reference from an exhibit to our Annual Report on Form 10-K filed on March 31, 2015.

(4)

Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on May 5, 2015.

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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 13, 2015		By:  /s/  Steven C. Eror
	Date		Steven C. Eror,
			Chief Executive Officer and President (Principal Executive Officer)
	May 13, 2015		By:  /s/  Steven C. Eror
	Date		Steven C. Eror,
			Chief Financial Officer (Principal Financial Officer)

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