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EXCEL - IDEA: XBRL DOCUMENT - TRISTAR WELLNESS SOLUTIONS, INC.Financial_Report.xls
EX-32.2 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.twsi_ex322.htm
EX-31.2 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.twsi_ex312.htm
EX-32.1 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.twsi_ex321.htm
EX-31.1 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.twsi_ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
(Mark One)

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

For the quarterly period ended March 31, 2014

o
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: 000-29981

TRISTAR WELLNESS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

 Nevada
 
91-2027724
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
10 Saugatuck Ave.
Westport CT
 
 
06880
(Address of principal executive offices)   (Zip Code)

(203) 226-4449
Registrant’s telephone number, including area code

(Former address, if changed since last report)
 
(Former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o            

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 o.

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
       
Non-accelerated filer  o Smaller reporting company  x
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x.

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  o No  o

Applicable only to corporate issuers:

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 13, 2014, there were 23,041,713 shares of common stock, $0.001 par value, issued and outstanding.
 


 
 

 
TRISTAR WELLNESS SOLUTIONS, INC.
 
TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
     
         
ITEM 1.
Financial Statements.
   
4
 
           
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
   
17
 
           
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.
   
21
 
           
ITEM 4.
Controls and Procedures.
   
22
 
           
PART II – OTHER INFORMATION
       
           
ITEM 1.
Legal Proceedings.
   
23
 
           
ITEM 1A.
Risk Factors.
   
23
 
           
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
   
23
 
           
ITEM 3.
Defaults Upon Senior Securities.
   
23
 
           
ITEM 4.
Mine Safety Disclosures.
   
23
 
           
ITEM 5.
Other Information.
   
23
 
           
ITEM 6.
Exhibits.
   
24
 
 
 
2

 
 
PART I – FINANCIAL INFORMATION
 
This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider,” or similar expressions are used.

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
 
ITEM 1. Consolidated financial statements
 
The unaudited condensed consolidated interim financial statements of registrant for the three months ended March 31, 2014 and 2013 are below. The unaudited condensed consolidated interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.
 
 
3

 
 
TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
 
   
March 31,
2014
   
December 31,
2013
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 138     $ 193  
Accounts receivables, net
    609       636  
Prepaid expenses and other
    113       178  
Other receivables
    1,559       1,500  
Receivable from related party
    2       2  
Inventories, net
    1,009       1,144  
Total current assets
    3,430       3,653  
Non-current assets
               
Property and equipment, net
    952       997  
Intangible assets, net
    847       867  
Other non-current assets
    41       41  
Total non-current assets
    1,840       1,905  
TOTAL ASSETS
  $ 5,270     $ 5,558  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities
               
Accounts payable and accrued expenses
  $ 1,366     $ 1,321  
Accounts payable and accrued expenses due to related parties
    1,231       973  
Current liabilities related to assets sold
    1,500       1,500  
Short-term notes (net of debt discount $618 and $497 as of March 31, 2014 and December 31, 2013, respectively)
    1,332       714  
Short-term notes - related party
    3,970       3,970  
Convertible notes (net of debt discount $59 and $0 as of March 31, 2014 and December 31, 2013, respectively)
    389       356  
Convertible notes - related party  (net of debt discount $169 and $0 as of March 31, 2014 and December 31, 2013, respectively)
    61       -  
Deferred revenue
    218       306  
Derivative liability
    2,038       -  
Total current liabilities
    12,105       9,140  
Non-current Liabilities
               
Deferred revenue, net of current portion
    -       48  
Total non-current liabilities
    -       48  
TOTAL LIABILITIES
    12,105       9,188  
                 
STOCKHOLDERS' DEFICIT
               
Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized; 5,621,667 and 5,621,667 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
    6       6  
Common stock; $0.0001 par value; 50,000,000 shares authorized; 23,041,713 and 22,041,713 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
    2       2  
Additional paid-in capital
    19,227       18,823  
Other comprehensive loss
    (58 )     (19 )
Accumulated deficit
    (26,012 )     (22,442 )
TOTAL STOCKHOLDERS' DEFICIT
    (6,835 )     (3,630 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 5,270     $ 5,558  
 
 See accompanying unaudited notes to the condensed consolidated interim financial statements.
 
 
4

 

TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
(dollars in thousands)

   
For the Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Sales revenue
  $ 1,303     $ 7  
Cost of Goods Sold
    1,038       44  
Gross profit/(loss)
    265       (37 )
Continuing operations
               
Operating expenses:
               
General and administrative
    725       1,204  
Sales, marketing and development expenses
    727       921  
Amortization on intangible assets
    20       -  
Impairment of intangible assets
    -       2  
Total operating expenses
    1,472       2,127  
                 
Loss from operations
    (1,207 )     (2,164 )
                 
Other income and (expenses)
               
Interest expense
    (552 )     (9 )
Change in fair value of derivative liability
    (1,799 )     -  
Other
    (12 )     -  
Total other expenses
    (2,363 )     (9 )
                 
Net loss
    (3,570 )     (2,173 )
                 
Other comprehensive loss
               
Foreign currency translation loss
    (39 )     -  
                 
Total comprehensive loss
  $ (3,609 )   $ (2,173 )
                 
Total
               
Loss per share
  $ (0.16 )   $ (0.08 )
Diluted loss per share
  $ (0.16 )   $ (0.08 )
                 
Weighted average common shares outstanding
    22,163,935       26,865,090  
Diluted weighted average common shares outstanding
    22,163,935       26,865,090  
 
See accompanying unaudited notes to the condensed consolidated interim financial statements.
 
 
5

 

TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)
 
       
   
For the Three Months Ended March 31,
 
   
2014
   
2013
 
Cash flows from operating activities:
           
Loss for the period from continuing operations
  $ (3,570 )   $ (2,173 )
Adjustments to reconcile net profit/loss from continuing operations  to net cash provided by operating activities:
               
Non-cash research and development expenses
    -       921  
Depreciation expenses
    67       -  
Change in fair value of derivative liability
    1,799       -  
Amortization of debt discount
    278       -  
Issuance of warrants for services
    -       688  
Intangible asset amortization
    20       -  
Intangible asset impairment
    -       2  
Imputed interest on note payable
    7       9  
Accounts receivables
    (27 )     (3 )
Inventory
    135       (15 )
Prepaid expenses
    65       -  
Accounts payable and accruals
    45       49  
Other receivables
    (5 )     -  
Deferred revenue
    (136 )     -  
Accounts payable and accrued expenses - related party
    258       265  
Net cash used in operating activities from continuing operations
    (1,064 )     (257 )
                 
Cash flow from investing activities:
               
Purchase of fixed assets
    (22 )     -  
Net cash used in investing activities
    (22 )     -  
                 
Cash flow from financing activities:
               
Proceeds from issuance of short-term notes
    740       -  
Proceeds from issuance of short-term convertible notes - related party
    230       -  
Proceeds from issuance of convertible notes
    100       50  
Proceeds from issuance of Series D convertible preferred stock
    -       250  
Net cash generated from financing activities from continuing operations
    1,070       300  
                 
Cumulative translation adjustment
    (39 )     -  
Net change in cash
    (55 )     43  
                 
Cash and cash equivalent, beginning
    193       11  
Cash and cash equivalent, ending
  $ 138     $ 54  
                 
Supplemental disclosure
               
Interest Paid
               
                 
Supplemental schedule of non-cash activities
               
Debt discount due to convertible debentures issued with warrants
  $ 389     $ -  
Debt discount due to embedded derivative liabilities within convertible debentures issued
    239       -  
Conversion of notes payable to preferred stock
    -       225  
Conversion of notes payable to common stock
    8       32  
Conversion of  preferred stock to common stock
    -       2  
Aquisition of NorthStar Consumer Products
    -       2  

See accompanying unaudited notes to the condensed consolidated interim financial statements
 
 
6

 
 
TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited Notes to the Condensed Consolidated Financial Statements
(dollars in 000’s except per share)
 
1. The Company
 
TriStar Wellness Solutions, Inc. (“the Company”) was incorporated on August 28, 2000 in the state of Nevada under the name “Quadric Acquisitions”. From the date of its incorporation through April 27, 2012, the Company had several name changes and different business plans all under prior management that is no longer with the Company. On April 27, 2012, the Company underwent a change of control transaction and changed its business plan. On January 7, 2013, the Company changed its name from Biopack Environmental Solutions, Inc. to TriStar Wellness Solutions, Inc. with the State of Nevada, and such change was effected with FINRA on January 18, 2013. The Company conducts its current operations under the name TriStar Wellness Solutions, Inc. The vast majority of the Company’s operations are conducted through its wholly-owned subsidiary, HemCon Medical Technologies Inc., an Oregon corporation (“HemCon”), and involve the development, marketing and sale of HemCon’s innovative wound care products.

Overall, the Company is focused on bringing new technologies to consumers and patients that address underserved therapeutic healthcare opportunities based on a combination of superior science, product development and market positioning worldwide. Each of the Company’s products is designed to improve health advocacy and medical outcomes through superior and proven technologies. The Company’s innovative products and technologies focus in three categories:

·  
Wound Care products focused on superior hemostasis and infection control through the exploitation of proprietary and in licensed technologies targeting a wide range of professional medical (e.g., surgery, dialysis, post-procedure recovery), trauma, military and consumer OTC (over the counter) applications reducing the total cost of care. The Company has developed FDA-approved products targeted to specific procedures within the broad professional care medical market as well as innovative products targeted to the global OTC (consumer self-care) wound care market which have received FDA clearance, CE approval and other international approvals.

·  
Women’s Health products initially focused on the unique needs during pregnancy and nursing. Longer-term the Company plans to expand the TWSI portfolio to address broader, under-met needs in women’s health. The Company markets to the maternity segment under the Beaute de Maman™ brand sold via traditional retailers and internet portals.

·  
Therapeutic Skin Care products leveraging a proprietary delivery system enabling superior dosing and consumer therapeutic benefits related to several OTC skin care needs. These technology applications are being developed for potential third party licensing or internal brand expansion.
 
 2. Summary of Significant Accounting Policies
 
Basis of Presentation and Principles of Consolidation
 
The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). All normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the three month periods ended March 31, 2014 and 2013 are not necessarily indicative of results to be expected for a full year.
 
 
7

 

Use of Estimates
 
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, estimating the fair value of equity instruments upon issuance, and estimating the useful lives of depreciable assets and whether impairment charges may apply.
 
Reclassification
 
Certain reclassifications have been made to conform to prior year information to the 2014 classifications for comparative purposes.
 
Stock-Based Compensation
 
Compensation expense for all stock-based awards is measured on the grant date based on the fair value of the award and is recognized as an expense, on a straight-line basis, over the employee's requisite service period (generally the vesting period of the equity award). The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Stock-based compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. We estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures in compensation expense recognized. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.

Accounting for Derivative Liabilities – Conversion Option
 
The fair value of the conversion option was valued using the binomial lattice options pricing model, a “Level 3” input, based on the quoted price of common stock, volatility based on the Company’s peer group, the expected life based on the remaining contractual term of the conversion option and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the conversion options’ contractual life.

Income Taxes
 
The Company accounts for derivative instruments in accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”), which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts. The Company also considers ASC 815, which provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under ASC 815.
 
Additionally, the Company evaluated the conversion feature embedded in its convertible promissory notes based on the criteria of ASC 815 to determine whether the conversion feature would be required to be bifurcated from the promissory note and accounted for separately as a derivative. Based on management’s evaluation, the embedded conversion feature meets the requirements of derivative accounting under ASC 815. The Company recorded this conversion feature at its fair value in accordance with ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). The embedded conversion feature was valued using the binomial option pricing model. Increases or decreases in the fair value of the conversion feature are included as a component of other income (expense) in the accompanying condensed consolidated statements of operations for the respective period.
 
 
8

 
 
3. Liquidity and Going Concern
 
The Company's unaudited condensed consolidated interim financial statements are prepared using accounting principles generally accepted in the United States of America (GAAP) applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. In addition, as of March 31, 2014, the Company had an accumulated deficit of $26.0 million, and had incurred a net loss for the three months ended March 31, 2014 of $3.6 million and had negative working capital of $8.7 million. Funding has been provided by related parties as well as new investors committed to make it possible to maintain, expand, and ensure the advancement of the TriStar Wellness products.

The consolidated financial statements for the fiscal year ended December 31, 2013 states that because the Company has suffered recurring operating losses from operations, there is substantial doubt about the Company’s ability to continue as a going concern. A “going concern” opinion indicates that the consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
 
4. Business Combinations
 
On May 6, 2013, the Company closed the acquisition of HemCon, an Oregon corporation (“HemCon”), pursuant to the terms of an Agreement for Purchase and Sale of Stock entered into by and between us and HemCon (the “Agreement”). The Agreement was entered into as part of HemCon’s Fifth Amended Plan of Reorganization in its bankruptcy proceeding (United States Bankruptcy Court, District of Oregon, Case No. 12-32652-elp11) and was approved by the Court as part of HemCon’s approved Plan of Reorganization. Under the Agreement, the Company purchased 100 shares of HemCon’s common stock, representing 100% of HemCon’s then-outstanding voting securities, in exchange for approximately $3.1 million (the “Purchase Price”). The Purchase Price was paid to the Court and the Trustee of the bankruptcy proceeding to be distributed to HemCon’s creditors in accordance with the Plan of Reorganization.
 
The acquisition has been accounted for under the acquisition method of accounting. Accordingly, the assets and liabilities of the acquired entity were recorded at their estimated fair values at the date of the acquisition. The operating results for HemCon have been included in the Company's consolidated financial statements since the acquisition date.
 
The purchase price allocation is based on estimates of fair value as follows (in thousands):
 
Accounts receivables
 
$
653
 
Other receivables
   
1,500
 
Inventory
   
1,410
 
Other current assets
   
23
 
Prepaid expenses
   
156
 
Fixed assets
   
1,193
 
Accounts payable and accrued expenses
   
(341
)
Current liabilities related to assets held for sale
   
(1,500
)
Deferred revenue
   
(882
)
Patents
   
336
 
Customer list
   
198
 
Trade name
   
266
 
Non-compete agreement
   
127
 
Total acquisition cost allocated
 
$
3,139
 
 
Management assigned fair values to the identifiable intangible assets through a combination of the relief from royalty method and the multi-period excess earnings method.
 
 
9

 
 
The useful lives of the acquired intangibles are as follows:
 
   
Useful Lives
 
Patents
   
12
 
Customer lists
   
14
 
Non-compete arrangements
   
4
 
Trade name
   
16
 
 
Intangible asset amortization expense for the three months ended March 31, 2014 and March 31, 2013 was $20 and $0, respectively.

The following unaudited pro forma financial information presents results as if the acquisition of HemCon had occurred on January 1, 2014 and January 1, 2013 (in thousands): 
 
   
Three Months Ended
March 31,
 
(Unaudited)
 
2014
 
2013
 
           
Total revenue
 
$
1,303
   
$
1,290
 
Net loss from continuing operations
 
$
(3,565)
   
$
(4,493
)
 
5. Inventories
 
Inventories, net consist of the following at March 31, 2014 and December 31, 2013 (in thousands):
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Raw materials
  $ 349     $ 318  
Work in Progress
    212       251  
Finished Goods
    448       575  
    $ 1,009     $ 1,144  
 
Reserve for obsolescence was approximately $279 for three months ended March 31, 2014.
 
 
10

 
 
6. Property and Equipment
 
Property and equipment consist of the following at March 31, 2014 and December 31, 2013 (in thousands):
 
   
Estimates
Useful Life
   
March 31,
   
December 31,
 
   
(Years)
   
2014
   
2013
 
Manufacturing Equipment
    7-10     $ 623     $ 623  
Leasehold Improvements
    7       520       520  
Office Furniture and Equipment
    3-7       32       32  
Computer Equipment and Software
    1-5       12       12  
Construction in Progress
            6       6  
              1,193       1,193  
Less: Accumulated Depreciation, amortization and impairments
            (241 )     (196 )
            $ 952     $ 997  
 
Deprecation expense was approximately $67 for the three months ended March 31, 2014 and $0 for the three months ended March 31, 2103.
 
7. Loans Payable
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Short-term notes (net of debt discount $618 and $497 as March 31, 2014 and December 31, 2013, respectively)
 
$
1,332
   
$
714
 
Short-term notes - related party
   
3,970
     
3,970
 
   
$
5,302
   
$
4,684
 
 
Convertible notes (net of debt discount $59 and $0 as of March 31, 2014 and December 31, 2013, respectively)
 
$
389
   
 $
356
 
Convertible notes – related party (net of debt discount $169 and $0 as of March 31, 2014 and December 31, 2013, respectively)
   
61
     
-
 
   
$
5,752
   
$
5,040
 
 
Promissory Notes

1st Quarter 2014 Activity

On January 15, 2014, the Company issued a convertible promissory note (“Note”) to a third party, in the principal amount of $100. The note has an interest rate of 24% per annum, simple interest and is due on or before July 15, 2014. In connection with this promissory note, the Company issued warrants to purchase 1,000,000 shares of our common stock at an exercise price $1.32 per share, which was the fair market value of our common stock on the date of issuance. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.68%, volatility – 111.11%, expected term – 5 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.5 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $91 by crediting additional paid in capital. Amortization expense on the debt discount was $41. At any time after February 1, 2014, or in the event of default, the holder may choose to convert the balance due from this Note into sufficient number of common shares of the Company, to constitute 1% of the total number of fully diluted and, by doing so, accept the payment of shares as payment in full for the outstanding balance. The Note contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the Notes was valued at approximately $2,386 using the binomial option pricing model at January 15, 2014. The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 0.06%, volatility – 111.11%, expected term – 0.5 years, expected dividends– N/A.
 
 
11

 
 
During the first quarter of 2014 the Company issued a promissory note to a third party, in the principal amount of $740. The note has an interest rate of 21% per annum, simple interest and is due on or before November 30, 2014. In connection with this promissory note, the Company issued warrants to purchase 850,000 shares of our common stock at an exercise price between $0.75 and $1.32 per share, which was the fair market value of our common stock on the date of issuance. The relative fair value of the warrants compared to the debt was recorded as a component of stockholders’ equity with the offset recorded as a discount on the promissory notes and included as a component of promissory notes in the accompanying consolidated balance sheet as of March 31, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.56%, volatility – 100.10%, expected term – 4 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.8 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $298 by crediting additional paid in capital. Amortization expense on the debt discount was $176 for the three months ended March 31, 2014.
 
During the first quarter of 2014 the Company issued convertible promissory notes (“Notes”) to DayStar Funding, LP, a Texas limited partnership and a party controlled by Frederick A. Voight one of our officers and directors, in the principal amount of $230. The note has an interest rate of 24% per annum, simple interest and is due on or before August 11, 2014. No warrants were issued in connection with the promissory note. The Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. At any time after February 1, 2014, or in the event of default, the holder may choose to convert the balance due from this Note into sufficient number of common shares of the Company, to constitute 1% of the total number of fully diluted and, by doing so, accept the payment of shares as payment in full for the outstanding balance. The embedded conversion feature of the Notes was valued at approximately $1,483 using the binomial option pricing model at February 11, 2014. The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 0.10%, volatility – 92%, expected term – 0.5 years, expected dividends– N/A. Amortization expense on the debt discount was $61 for the three months ended March 31, 2014.
 
During the first quarter of 2014, two third parties partially converted their notes payable, in accordance with the original terms of the notes, with an aggregate principal amount of $8,000 into 1,000,000 common shares.
 
The Company recorded imputed interest on convertible debentures and interest expense of $7 and $9 for the three months ended March 31, 2014 and 2013 respectively, based upon a market interest rate of 8% and accrued interest based on the stated rate of 0.5%.
 
8. Stockholders’ Equity
 
Diluted Shares

There were 405,000 shares of Series A, 1,000,000 shares of Series B and no shares of Series C outstanding as of March 31, 2014. Each share of Preferred D is convertible into twenty five shares of common stock. Convertible preferred stock was considered anti-dilutive for the three months ended March 31, 2014 and 2013, due to net losses. As of March 31, 2014, there are 4,216,667 Series D Convertible Preferred Shares which are convertible into 105,416,675 of common shares. All Series D Convertible Preferred Stock voting rights are on an “as converted to common stock” basis. Dividends are not mandatory. If declared by the Board Series D Preferred Stock shall have preference over common stock and equal to other series of preferred stock. As of March 31, 2014, there are 8,182,600 warrants which are convertible into one share of common stock with a weighted average exercise price of $1.62. In addition, convertible debt of $682 as of March 31, 2014 is convertible into 47,789,867 shares of the Company’s common stock.

The Company has determined that common stock equivalents in excess of available authorized common shares are not derivative instruments due to the fact that an increase in authorized shares is within the Company’s control.
 
 
12

 
 
Note Conversions

All note conversions were within the original conversion terms and therefore no gain or loss was recorded on these conversions.

During the first quarter of 2014, two third parties partially converted their notes payable, in accordance with the original terms of the notes, with an aggregate principal amount of $8,000 into 1,000,000 common shares.
 
Detachable Warrants

During the first quarter of 2014, the Company issued Promissory Notes containing 1,850,000 detachable Warrants. The relative fair value of the detachable Warrants compared to the debt of approximately $389 was recorded as a component of stockholders’ equity with the offset recorded as a discount on the promissory notes and included as a component of promissory notes in the accompanying condensed consolidated balance sheet as of March 31, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.46% - 1.68%, volatility – 99.58 – 111.11%, expected term – 4 to 5 years, expected dividends– N/A. The debt discount related to the warrants are being amortized over a six to ten month period (through maturity) on a straight-line basis.
 
9. Related Party Transactions

Consulting Agreements
 
On January 6, 2014 the Company entered into a revised consulting agreement with Chord Advisors, LLC ("Chord"). David Horin, the Company's Chief Financial Officer has a significant equity partnership stake in Chord. Currently the agreement is on a month to month basis. The Company has agreed to pay Chord a monthly consulting fee of approximately $13 for Mr. Horin's services and services of his firm and 50,000 warrants upon the consummation of a financing transaction in excess of $2 million with an exercise price equal to the exercise price of such warrants in a financing transaction. The Company incurred $38 and $38 for the three months ended March 31, 2014 and 2013, respectively, and has an accounts payable balance related to this agreement of $120 as of March 31, 2014.
 
Accounts Payable and Accrued Expenses
 
As of March 31, 2014 the Company owed Daystar $50, James Barickman $3, John Linderman $16, Highpeak $2, Ingber $6, Northstar $271 and Rivercoach $72. The Company owed accrued compensation of $70,500 to related party officers as of March 31, 2014.
 
Related Party Notes
 
During the first quarter of 2014 the Company issued convertible promissory notes (“Notes”) to DayStar Funding, LP, a Texas limited partnership and a party controlled by Frederick A. Voight one of our officers and directors, in the principal amount of $230. The note has an interest rate of 24% per annum, simple interest and is due on or before August 11, 2014. No warrants were issued in connection with the promissory note. The Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the Notes was valued at approximately $1,483 using the binomial option pricing model at February 11, 2014. The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 0.10%, volatility – 92%, expected term – .05 years, expected dividends– N/A. Amortization expense on the debt discount was $61 for the three months ended March 31, 2014.

As of March 31, 2014, the Company owed to Daystar Funding, LP $3,970 and accrued interest of $621. As of March 31, 2014, the company owed John Linderman and James Barickman $24 and $8 of accrued interest.
 
 
13

 
 
10. Intangible Assets, Net
 
On May 6, 2013, the Company closed the acquisition of HemCon Medical Technologies Inc., an Oregon corporation (“HemCon”), pursuant to the terms of an Agreement for Purchase and Sale of Stock entered into by and between us and HemCon (the “Agreement”). The Agreement was entered into as part of HemCon’s Fifth Amended Plan of Reorganization in its bankruptcy proceeding (United States Bankruptcy Court, District of Oregon, Case No. 12-32652-elp11) and was approved by the Court as part of HemCon’s approved Plan of Reorganization. Under the Agreement, the Company purchased 100 shares of HemCon’s common stock, representing 100% of HemCon’s then-outstanding voting securities, in exchange for $3,139 in cash (the “Purchase Price”). The Purchase Price was paid to the Court and the Trustee of the bankruptcy proceeding to be distributed to HemCon’s creditors in accordance with the Plan of Reorganization.

For the three months ended March 31, 2014, intangible assets consisted primarily of patents, customer lists, non-compete arrangements and a trade name. Patents, customer lists, non-compete arrangements and a trade name acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. The intangible assets are amortized over their estimated useful life which is 4 to 16 years.

The amortization expense for the three months ended March 31, 2014 and March 31, 2013 was $20 and $0, respectively.
 
   
Life in
         
Amortized as of
   
Balance as of
 
Description
 
Years
   
Price
   
March 31, 2014
   
March 31, 2014
 
Patents
    12     $ 336       25     $ 311  
Customer list
    14       198       13     $ 185  
Trade name
    16       266       14     $ 252  
Non-compete agreement
    4       127       28     $ 99  
            $ 927       80     $ 847  
 
11. Litigation
 
The Company recognizes a liability for a contingency when it is probable that liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, the Company accrues the most likely amount of such loss, and if such amount is not determinable, then the Company accrues the minimum of the range of probable loss. As of March 31, 2014, there was no litigation against the Company and therefore the litigation accrual was zero.
 
12. Fair Value Measurements

The Company has adopted the provisions of ASC 820 which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 provides guidance on how to measure certain financial assets and financial liabilities at fair value. The requirement to measure an asset as liability at fair value is determined under the U.S. GAAP.
 
 
14

 
 
Certain of the Company’s assets and liabilities are considered to be financial instruments and are required to be measured at fair value in the consolidated balance sheets. Certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term debt and deferred revenue are measured at cost, which approximates fair value due to the short-term maturity of these instruments. Derivative liabilities are measured at fair value.

The Company measures fair value basis based on the following key objectives:
 
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
 
 
A three-level hierarchy (“Valuation Hierarchy”) which prioritizes the use of observable pricing data (Level 1 and Level 2 inputs as defined below) over unobservable pricing data (Level 3 inputs as defined below) is used in measuring value; and
 
 
The Company’s creditworthiness is considered when measuring the fair value of liabilities.
 
The valuation hierarchy used in measuring fair value is defined as follows:
 
 
Level 1 inputs are observed inputs such as quoted prices for identical instruments inactive markets;
 
 
Level 2 inputs are inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments inactive markets or quoted prices for identical or similar instruments in markets that are not active; and
 
 
Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs are unobservable. Level 3 requires significant management judgment or estimation.
 
All items measures at fair value are required to be classified and disclosed as a Level 1, 2 or 3 asset or liability based on the inputs used to measure for value of an asset or liability in its entirety. An asset or liability classified as Level 1 is measured by quoted prices in active markets for identical instruments. An asset or liability classified as Level 2 is measured using significant observable inputs and an asset or liability classified as Level 3 is measured using significant unobservable inputs.
 
The following table classifies the Company’s liabilities measured at fair value on a recurring basis (primarily reflecting an increase in stock price per share) into the fair value as of March 31, 2014 and December 31, 2013 (in thousands):
 
Description
 
Level 1
   
Level 2
   
Level 3
 
Derivative liability- conversion options
  $ -     $ -     $ 2,038  
 
 
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The following table represents our assets and liabilities by level measured at fair value on a recurring basis at December 31, 2013:
 
Description
 
Level 1
 
Level 2
 
Level 3
   
None
 
None
 
None
 
There were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2014.
 
The following table presents changes in Level 3 liabilities measured at fair value from the period ended December 31, 2013 through March 31, 2014. Both observable and unobservable inputs are used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

Balance – December 31, 2013
 
$
-
 
Discount related to embedded conversion feature 1
   
239
 
Change in fair value of derivative liability-conversion option
   
1,799
 
Balance – March 31, 2014
 
$
2,038
 
 
1. The Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815.

13. Subsequent Events
 
Stock Options for Services

During the second quarter of 2014, the Company issued 50,000 warrants to Hemcon employees with an exercise price of $0.38 and a four year term. Each option is exercisable into one share of common stock.

 
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q of TriStar Wellness Solutions, Inc. for the period ended March 31, 2014 contains forward-looking statements, principally in this Section and “Business.” Generally, you can identify these statements because they use words like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described in this filing. You should not place undue reliance on these forward-looking statements which apply only as of the date of this annual report. To the extent that such statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation of belief will be accomplished.

We believe it is important to communicate our expectations to our investors. There may be events in the future; however, that we are unable to predict accurately or over which we have no control. The risk factors listed in this filing, as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results or events to differ materially from those anticipated, include, but are not limited to: our ability to successfully obtain financing for product acquisition; changes in product strategies; general economic, financial and business conditions; changes in and compliance with governmental regulations; changes in various tax laws; and the availability of key management and other personnel.

Overview

We were incorporated on August 28, 2000 in the state of Nevada under the name “Quadric Acquisitions”. From the date of our incorporation through April 27, 2012, we had several name changes and different business plans all under prior management that is no longer with the company. On April 27, 2012, we underwent a change of control transaction and changed our business plan. On January 7, 2013, we changed our name from Biopack Environmental Solutions, Inc. to TriStar Wellness Solutions, Inc. with the State of Nevada, and such change was effected with FINRA on January 18, 2013. We conduct our current operations under the name TriStar Wellness Solutions, Inc. The vast majority of our operations are conducted through our wholly-owned subsidiary, HemCon Medical Technologies Inc., an Oregon corporation (“HemCon”), and involve the development, marketing and sale of HemCon’s innovative wound care products.

Overall, we are a company focused on bringing new technologies to consumers and patients that address underserved therapeutic healthcare opportunities based on a combination of superior science, product development and market positioning worldwide. Each of our products is designed to improve health advocacy and medical outcomes through superior and proven technologies. Our innovative products and technologies focus in three categories:

·  
Wound Care products focused on superior hemostasis and infection control through the exploitation of proprietary and in licensed technologies targeting a wide range of professional medical (e.g., surgery, dialysis, post-procedure recovery), trauma, military and consumer OTC (over the counter) applications reducing the total cost of care. We have developed FDA-approved products targeted to specific procedures within the broad professional care medical market as well as innovative products targeted to the global OTC (consumer self-care) wound care market which have received FDA clearance, CE approval and other international approvals. The superiority of the hemostasis properties of the product is demonstrated through its inclusion in the U.S. Department of Defense’s Committee on Tactical Combat Casualty Care guidelines.
 
 
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·  
Women’s Health products initially focused on the unique needs during pregnancy and nursing. Longer-term we plan to expand the TWSI portfolio to address broader, under-met needs in women’s health. We market to the maternity segment under the Beaute de Maman™ brand sold via traditional retailers and internet portals. The women’s healthcare market is projected to achieve 5.9% compounded annual growth rate from 2010 to 2016.1 Our management believes the incremental pace of market expansion within this category, combined with the traditional role for women as the household-family health decision maker, supports the company’s commercial initiative. By introducing our brands to this critical wellness consumer we believe we are building a positive relationship for our future brands and product solutions.

·  
Therapeutic Skin Care products leveraging a proprietary delivery system enabling superior dosing and consumer therapeutic benefits related to several OTC skin care needs. These technology applications are being developed for potential third party licensing or internal brand expansion.

1 Euromonitor Research & ACNielson Market Projects Expecting Mothers and Women’s Health-GAGR: Trade Sources & National Statistics: Copyright June 2012.

Results of Operations for the Three Months Ended March 31, 2014 and March 31, 2013

Summary of Results of Operations (in thousands)

   
Three Months Ended
March 31,
 
   
2014
   
2013
 
Revenue
  $ 1,303     $ 7  
Cost of goods sold
    1,038       44  
Gross Profit
    265       (37 )
                 
Operating expenses:
               
General and administrative
    725       1,204  
Sales, marketing and development expenses
    727       921  
Amortization of intangible assets
    20       -  
Impairment of intangible assets
    -       2  
Total operating expenses
    1,472       2,127  
                 
Operating loss
    (1,207 )     (2,164 )
                 
Other income and (expenses)
               
Interest expense
    (552 )     (9 )
Change in fair value of derivative liability
    (1,799 )     -  
Other
    (12     -  
                 
Net loss
    (3,570 )     (2,173 )
 
 
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Operating Loss

We had an operating loss of approximately $3,570,000 for the three months ended March 31, 2014, compared to an operating loss of approximately $2,173,000 for the three months ended March 31, 2013. This difference was largely attributable the change in fair value of an embedded conversion feature on $330,000 of convertible notes payable issued during the three months ended March 31, 2014, offset by a decrease in general and administrative expenses related to issuance of warrants for services during the three months ended March 31, 2013. We also had higher sales, marketing and development expenses for the period in 2013, primarily related to the issuance equity based awards for research and development. In contrast, during the three months ended March 31, 2014, we owned HemCon and its operations and the Beaute de Maman™ product line, which resulted in us having significantly more revenues and significantly more costs of goods sold, but we had lower general and administrative expenses during the period in 2014 primarily due to the issuance of warrants for services during the three months ended March 31, 2013 , leaving us with a higher net loss for the three months ended March 31, 2014 compared to March 31, 2013.
 
Revenue

Our revenue from the three months ended March 31, 2014 was $1,303,000 compared to $7,000 for the three months ended March 31, 2013. Our revenue was primarily derived from the operations of our subsidiary, HemCon. Revenue from HemCon amounted to approximately $1,295,000 for the three months ended March 31, 2014. This revenue was the result of sales of bleeding and wound management products for surgical, health care, consumer and military markets.

Cost of Goods Sold

Our cost of goods sold for the three months ended March 31, 2014 were $1,038,000, compared to $44,000 for the same period in 2013. The cost of goods sold for the three months ended March 31, 2014 primarily related to the revenues generated from HemCon. HemCon’s cost of goods sold amounted to approximately $1,008,000 or approximately 77.8% of HemCon’s revenue for the three months ended March 31, 2014.

General and Administrative Expenses

General and administrative expenses were $725,000 for the three months ended March 31, 2014, compared to $1,204,000 for the three months ended March 31, 2013. Our primary general and administrative expenses for the period in 2014 were $90,000 from salaries, $135,000 from professional fees related to TriStar such as audit, marketing and legal fees, and $458,000 related to salaries, occupancy cost, utilities etc. related to Hemcon.

Sales, Marketing and Development Expenses

Our expenses related to sales, marketing and development were $727,000 for the three months ended March 31, 2014, compared to $921,000 for the three months ended March 31, 2013. The decrease was attributable to expenses related to issuance of warrants for services during the three months ended March 31, 2013; offset by increased general and administrative expenses related to Hemcon’s operations.

Amortization of Intangible Assets

During the three months ended March 31, 2014, we had $20,000 in amortization of intangible assets primary related to patents, non-compete agreements and customer lists acquired in the Hemcon acquisition. We did not have any comparable expense in the three months ended March 31, 2013.
 
 
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Interest Expense

We had interest expense $552,000 for the three months ended March 31, 2014, compared to $9 for the three months ended March 31, 2013. During the three months ended March 31, 2014 interest expense primarily related to the amortization of debt discount on promissory notes and warrants issued in connection with the acquisition of HemCon.

Change in fair value of derivatives

During the three months ended March 31, 2014 and March 31, 2013 we recognized a non-cash loss on derivative liabilities of $1,799,000 and $0, respectively, due primarily to the change in value of the derivative liability with conversion option.

Liquidity and Capital Resources for Three Months Ended March 31, 2014 and 2013

Introduction

During the three months ended March 31, 2014 and 2013, because of our operating losses, we did not generate positive operating cash flows. Our cash and cash equivalents as of March 31, 2014 was $138,000. Due to our monthly cash burn rate we have significant short term cash needs. These needs are being satisfied through proceeds from the sales of our securities and the issuance of convertible notes. We currently do not believe we will be able to satisfy our cash needs from our revenues for some time.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2014 compared to December 31, 2013, respectively, are as follows (in thousands):

   
March 31,
2014
   
December 31,
2013
   
Change
 
                   
Cash and Cash Equivalents
  $ 138     $ 193     $ (55 )
Total Current Assets
    3,430       3,653       (223 )
Total Assets
    5,270       5,558       (288 )
Total Current Liabilities
    12,105       9,140       2,965  
Total Liabilities
  $ 12,105     $ 9,188     $ 2,917  

Our total assets decreased by $288,000 as of March 31, 2014 compared to December 31, 2013. The decrease in total assets was primarily attributed to decreases in our cash and cash equivalents, in our prepaid expenses, and in our inventories, net.

Our current liabilities increased by $2,965,000, as of March 31, 2014 as compared to December 31, 2013. A large portion of this increase was due to significant increases in our short terms notes, our accounts payable and accrued expenses, derivative liability, and our accounts payable and accrued expenses due to related parties, most of which relate to HemCon.

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.
 
 
20

 

Cash Requirements

We had cash and cash equivalents available as of March 31, 2014 of $138,000 and $193,000 as of December 31, 2013. We have significant short term cash needs. These needs are being satisfied through proceeds from the sales of our securities and the issuance of convertible notes. We currently do not believe we will be able to satisfy our cash needs from our revenues for some time.

Sources and Uses of Cash

Operations

We had net cash used in operating activities of $1,064,000 for the three months ended March 31, 2014, as compared to $257,000 for the three months ended March 31, 2013. For the period in 2014, the net cash used in operating activities consisted primarily of our net loss of $3,570,000, adjusted primarily by the amortization of debt discount of $278,000, loss on change in fair value of derivative liability of $1,799,000, accounts payable and accrued expenses – related party of $258,000, accounts payable and accruals of $45,000, inventory of $135,000, and prepaid expenses of $65,000, offset by deferred revenue of $136,000, and accounts receivable of $27,000.

Investing

 We had net cash used in investing activities of $22,000 for the three months ended March 31, 2014, as compared to $0 for the three months ended March 31, 2013.

Financing

Our net cash provided by financing activities for the three months ended March 31, 2014 was $1,070,000, compared to $300,000 for the three months ended March 31, 2013. For the period in 2014, our financing activities consisted of $740,000 from proceeds from issuance of short terms notes with warrants, $100,000 from proceeds from issuance of convertible debt, and $230,000 from proceeds from issuances of convertible debt to related party.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.
 
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.
 
 
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ITEM 4. Controls and Procedures

(a)            Evaluation of Disclosure Controls Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2014, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.

(b)           Management’s Report on Internal Controls over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-l5(f) of the Securities Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management believes that, as of March 31, 2014, the Company’s internal control over financial reporting was ineffective based on the COSO criteria, due to the following material weaknesses listed below.

Insufficient segregation of duties in our finance and accounting functions due to limited personnel. We internally performed all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact these duties were performed by limited personnel, a lack of review was created over the financial reporting process that might result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC.

Insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented.

These control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.

When we are financially able, we intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies and we intend to consider the results of our remediation efforts and related testing as part of our next assessment of the effectiveness of our internal control over financial reporting.

(c)           Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the period ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
(d)           Officer’s Certifications

Appearing as an exhibit to this Quarterly Report on Form 10-Q are “Certifications” of our Chief Executive and Financial Officer. The Certifications are required pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This section of the Quarterly Report on Form 10-Q contains information concerning the Controls Evaluation referred to in the Section 302 Certifications. This information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
 
 
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PART II – OTHER INFORMATION

 
ITEM 1. Legal Proceedings

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
 
ITEM 1A. Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2014, we issued the following unregistered securities:

In March 2014, we received a notice of conversion from New Horizon, Inc., notifying us that it wished to convert $4,000 of principal and interest due under that certain Tristar Wellness Solutions, Inc. Convertible Promissory Note dated February 21, 2013 into 500,000 shares of our common stock. The shares were issued on March 26, 2014, without a restrictive legend since New Horizon’s note is derived from and purchased from Ms. Alter’s promissory note dated in April 2012, and it is a non-affiliate. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, due to the fact New Horizon, Inc. has held the promissory note since February 2013, is either an accredited or sophisticated investor and is familiar with our operations.

In connection with the issuance of a promissory note, we issued warrants to purchase 1,000,000 shares of our common stock at an exercise price $1.32 per share, which was the fair market value of our common stock on the date of issuance. This issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, based on representations by the investor, due to the fact the investors were either accredited or sophisticated investors, and the investor is familiar with our operations.

In connection with the issuance of a promissory note, we issued warrants to purchase 850,000 shares of our common stock at an exercise price from $0.75 to $1.32 per share, which was the fair market value of our common stock on the date of issuance. This issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, based on representations by the investor, due to the fact the investors were either accredited or sophisticated investors, and the investor is familiar with our operations.
 
ITEM 3. Defaults Upon Senior Securities

During the period covered by this report there were no events which are required to be reported under this Item.
 
ITEM 4. Mine Safety Disclosures

During the period covered by this report there were no events which are required to be reported under this Item.
 
ITEM 5. Other Information

During the period covered by this report there were no events which are required to be reported under this Item.
 
 
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ITEM 6. Exhibits
 
Item No.
 
Description
(3)
 
Articles of Incorporation and Bylaws
3.1
 
Articles of Incorporation (incorporated by reference from our Current Report on Form 8-K filed on May 9, 2001)
3.2
 
Bylaws (incorporated by reference from our Current Report on Form 8-K filed on May 9, 2001)
3.3
 
Certificate of Amendment of Articles of Incorporation (incorporated by reference from our Current Report on Form 8-K filed on May 9, 2001)
3.4
 
Articles of Merger (incorporated by reference from our Current Report on Form 8-K filed on May 9, 2001)
3.5
 
Certificate of Designation (incorporated by reference from our Current Report on Form 8-K filed on May 9, 2001)
3.6
 
Articles of Merger filed with the Secretary of State of Nevada on November 21, 2006 effective on November 26, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 28, 2006)
3.7
 
Articles of Merger filed with the Secretary of State of Nevada on February 21, 2007 effective on February 26, 2007 (incorporated by reference from our Current Report on Form 8-K filed on February 27, 2007)
3.8
 
Certificate of Correction filed with the Secretary of State of Nevada on June 27, 2007 (incorporated by reference from our Annual Report on Form 10-KSB filed on April 15, 2009)
3.9
 
Certificate of Designation filed with the Secretary of State of Nevada on July 27, 2007 (incorporated by reference from our Annual Report on Form 10-KSB filed on April 15, 2009)
3.1
 
Certificate of Change filed with the Secretary of State of Nevada on June 6, 2009 (incorporated by reference from our Current Report on Form 8-K filed on June 11, 2009)
3.11
 
Certificate of Designation for Series D Convertible Preferred Stock filed with the Secretary of State of Nevada on June 19, 2012 (incorporated by reference from our Annual Report on Form 10-K filed on April 16, 2013)
3.12
 
Certificate of Amendment to Articles of Incorporation filed with the Secretary of State of Nevada on August 29, 2012 (incorporated by reference from our Annual Report on Form 10-K filed on April 16, 2013)
3.13
 
Certificate of Amendment to Articles of Incorporation filed with the Secretary of State of Nevada on January 7, 2013 (incorporated by reference from our Annual Report on Form 10-K filed on April 16, 2013)
(10)
 
Material Contracts
10.1
 
Agreement for the Purchase of Preferred Stock (the “Agreement”) with Rockland Group, LLC dated April 27, 2012 (incorporated by reference from our Current Report on Form 8-K filed on May 11, 2012)
10.2
 
License and Asset Option Purchase Agreement with NorthStar Consumer Products, LLC dated June 25, 2012 (incorporated by reference from our Current Report on Form 8-K filed on July 2, 2012)
10.3
 
Agreement for the Purchase of Preferred Stock with Rockland Group, LLC dated June 29, 2012 (incorporated by reference from our Current Report on Form 8-K filed on July 2, 2012)
10.4
 
Subsidiary Acquisition Option Agreement with Xinghui Ltd. dated April 25, 2012 (incorporated by reference from our Current Report on Form 8-K filed on November 30, 2012)
10.5
 
Marketing and Development Services Agreement with InterCore Energy, Inc. dated July 11, 2012 (incorporated by reference from our Current Report on Form 8-K filed on November 30, 2012)
10.6
 
Purchase and Assignment of Rights Agreement with RWIP, LLC dated July 11, 2012 (incorporated by reference from our Current Report on Form 8-K filed on November 30, 2012)
10.8
 
Asset Purchase Agreement with Northstar Consumer Products, LLC, dated February 4, 2013 (incorporated by reference from our Current Report on Form 8-K filed on February 19, 2013)
10.9
 
Asset Purchase Agreement with HLBC Distribution Company, Inc., dated February 12, 2013 (incorporated by reference from our Current Report on Form 8-K filed on February 19, 2013)
10.1
 
Employment Agreement with John R. Linderman dated February 1, 2013 (incorporated by reference from our Current Report on Form 8-K filed on February 19, 2013)
10.11
 
Employment Agreement with James Barickman dated February 1, 2013 (incorporated by reference from our Current Report on Form 8-K filed on February 19, 2013)
10.12
 
Employment Agreement with Fredrick A. Voight dated February 1, 2013 (incorporated by reference from our Current Report on Form 8-K filed on February 19, 2013)
10.13
 
Employment Agreement with Michael S. Wax dated February 1, 2013 (incorporated by reference from our Current Report on Form 8-K filed on February 19, 2013)
 
 
24

 
 
10.14
 
Exclusive Manufacturing, Marketing and Distribution Definitive License Agreement with Argentum Medical, LLC dated March 7, 2013 (incorporated by reference from our Current Report on Form 8-K filed on March 14, 2013)
10.15
 
Order Confirming Debtor’s Fifth Amended Plan of Reorganization and Plan of Reorganization in In re HemCon Medical Technologies, Inc. filed May 6, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.16
 
Agreement for Purchase and Sale of Stock entered into by and between TriStar Wellness Solutions, Inc. and HemCon Medical Services, Inc. dated April 18, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.17
 
Employment Agreement with Barry Starkman (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.18
 
Employment Agreement with Simon McCarthy (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.19
 
Promissory Note with DayStar Funding, LP dated May 6, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.2
 
Promissory Note with Lawrence K. Ingber Trust, dated June 14, 1980, as amended and restated March 6, 2006, dated May 6, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.21
 
Promissory Note with James Barickman dated May 6, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.22
 
Promissory Note with John Linderman dated May 6, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.23
 
Promissory Note with James Linderman dated May 6, 2013 (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2013)
10.24
 
Stock Exchange Agreement with M&K Family Limited Partnership dated July 11, 2013 (incorporated by reference from our Current Report on Form 8-K filed on August 1, 2013)
10.25
 
Stock Exchange Agreement with Northstar Consumer Products, LLC, dated July 11, 2013 (incorporated by reference from our Current Report on Form 8-K filed on August 1, 2013)
10.26
 
Stock Exchange Agreegment with Rivercoach Partners, LP dated July 11, 2013 (incorporated by reference from our Current Report on Form 8-K filed on August 1, 2013)
(31)
 
Rule 13a-14(a)/15d-14(a) Certifications
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith).
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Accounting Officer (filed herewith).
(32)
 
Section 1350 Certifications
32.1
 
Section 1350 Certification of Chief Executive Officer (filed herewith).
32.2
 
Section 1350 Certification of Chief Accounting Officer (filed herewith).
101.INS **
 
XBRL Instance Document
101.SCH **
 
XBRL Taxonomy Extension Schema Document
101.CAL **
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF **
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB **
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE **
 
XBRL Taxonomy Extension Presentation Linkbase Document
_____________________
* Filed herewith.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
25

 

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.


 
TriStar Wellness Solutions, Inc.
a Nevada corporation
 
       
Dated: May 21, 2014
 
/s/ John Linderman
 
 
By:
John Linderman
 
 
Its:
Chief Executive Officer
 
 
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