TRISTAR WELLNESS SOLUTIONS, INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - TRISTAR WELLNESS SOLUTIONS, INC.	Financial_Report.xls
EX-32.1 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.	twsi_ex321.htm
EX-32.2 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.	twsi_ex322.htm
EX-31.1 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.	twsi_ex311.htm
EX-31.2 - CERTIFICATION - TRISTAR WELLNESS SOLUTIONS, INC.	twsi_ex312.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 September 30, 2014

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

For the transition period from _______________ to _______________.

Commission file number: 000-29981

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 ¨

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 the 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	¨	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 ¨ 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 ¨ No ¨

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 November 18, 2014, there were 23,941,715 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	3

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	24

ITEM 4	Controls and Procedures	25

PART II – OTHER INFORMATION

ITEM 1	Legal Proceedings	26

ITEM 1A	Risk Factors	26

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	26

ITEM 3	Defaults Upon Senior Securities	26

ITEM 4	Mine Safety Disclosures	26

ITEM 5	Other Information	26

ITEM 6	Exhibits	27

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 and nine months ended September 30, 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.

TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollars in thousands)

	September 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	242		$	193
Accounts receivables, net		616			638
Prepaid expenses and other		226			178
Other receivables		1,500			1,500
Receivable from related party		1			-
Inventories, net		1,125			1,144
Total current assets		3,710			3,653
Non-current assets
Property and equipment, net		830			997
Intangible assets, net		804			867
Other non-current assets		173			41
Total non-current assets		1,807			1,905
TOTAL ASSETS	$	5,517		$	5,558

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses	$	1,792		$	1,321
Accounts payable and accrued expenses due to related parties		1,652			973
Current liabilities related to assets sold		1,500			1,500
Short-term notes (net of debt discount $305 and $497 as of September 30, 2014 and December 31, 2013, respectively)		3,339			714
Short-term notes - related party		3,970			3,970
Convertible notes (net of debt discount $34 and $0 as of September 30, 2014 and December 31, 2013, respectively)		637			356
Convertible notes - related party (net of debt discount $0 and $0 as of September 30, 2014 and December 31, 2013, respectively)		230			-
Deferred revenue		105			306
Derivative liability		620			-
Total current liabilities		13,845			9,140
Non-current Liabilities
Deferred revenue, net of current portion		-			48
Total non-current liabilities		-			48
TOTAL LIABILITIES		13,845			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 September 30, 2014 and December 31, 2013, respectively		6			6
Common stock; $0.0001 par value; 50,000,000 shares authorized;
23,941,715 and 22,041,713 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively		2			2
Additional paid-in capital		19,976			18,823
Other comprehensive gain/(loss)		115			(19	)
Accumulated deficit		(28,427	)		(22,442	)
TOTAL STOCKHOLDERS' DEFICIT		(8,328	)		(3,630	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	5,517		$	5,558

See accompanying unaudited notes to the condensed consolidated interim financial statements

TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

(dollars in thousands)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Sales revenue	$	1,908		$	1,281		$	4,435		$	2,574
Cost of Goods Sold		1,046			1,074			2,928			2,030
Gross profit		862			207			1,507			544

Continuing operations
Operating expenses:
General and administrative		780			1,069			2,472			3,260
Sales, marketing and development expenses		562			618			1,965			1,934
Amortization on intangible assets		21			33			63			33
Impairment of intangible assets		-			-			-			2
Total operating expenses		1,363			1,720			4,500			5,229

Loss from operations		(501	)		(1,513	)		(2,993	)		(4,685	)

Other income and (expenses)
Interest expense		(1,022	)		(1,238	)		(2,525	)		(1,897	)
(Loss) gain on sale of assets and liabilities		(6	)		2			(6	)		2
Change in fair value of derivative liability		1,172			-			(338	)		-
Other expenses		(123	)		73			(123	)		33
Total other income (expenses)		21			(1,163	)		(2,992	)		(1,862	)

Net loss		(480	)		(2,676	)		(5,985	)		(6,547	)

Other comprehensive gain (loss)
Foreign currency translation gain (loss)		110			(83	)		134			(84	)

Total comprehensive loss	$	(370	)	$	(2,759	)	$	(5,851	)	$	(6,631	)

Total
Loss per share	$	(0.02	)	$	(0.11	)	$	(0.26	)	$	(0.20	)
Diluted loss per share	$	(0.02	)	$	(0.11	)	$	(0.26	)	$	(0.20	)

Weighted average common shares outstanding		23,663,454			25,148,355			22,934,389			33,532,893
Diluted weighted average common shares outstanding		23,663,454			25,148,355			22,934,389			33,532,893

See accompanying unaudited notes to the condensed consolidated interim financial statements

TRISTAR WELLNESS SOLUTIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Loss for the period from continuing operations	$	(5,985	)	$	(6,547	)
Adjustments to reconcile net profit/loss from continuing operations to net cash provided by operating activities:
Depreciation expenses		203			72
Loss on disposal of assets		6			-
Change in fair value of derivative liability		338			-
Amortization of debt discount		1,491			1,561
Issuance of common stock for services		48			-
Issuance of warrants for research and development		-			921
Issuance of warrants for services		-			688
Intangible asset amortization		63			33
Intangible asset impairment		-			2
Imputed interest on note payable		38			23
Accounts receivables		(33	)		(158	)
Inventory		19			256
Prepaid expenses		(48	)		31
Accounts payable and accruals		471			352
Other non-current assets		(132	)		(17	)
Other receivables		54			-
Deferred revenue		(249	)		(95	)
Accounts payable and accrued expenses - related party		679			1,432
Net cash used in operating activities from continuing operations		(3,037	)		(1,446	)

Cash flow from investing activities:
Acquisition of HemCon		-			(3,139	)
Purchase of computer equipment		(42	)		-
Net cash used in investing activities		(42	)		(3,139	)

Cash flow from financing activities:
Proceeds from issuance of short-term notes		2,434			536
Proceeds from issuance of short-term convertible notes - related party		230			3,810
Proceeds from issuance of convertible notes		330			50
Proceeds from issuance of common stock		-			327
Proceeds from issuance of Series D convertible preferred stock		-			250
Net cash generated from financing activities from continuing operations		2,994			4,973

Cumulative translation adjustment		134			(84	)
Net change in cash		49			304

Cash and cash equivalent, beginning		193			11
Cash and cash equivalent, ending	$	242		$	315

Supplemental schedule of non-cash activities
Debt discount due to convertible debentures issued with warrants	$	1,053		$	1,876
Debt discount due to embedded derivative liabilities within convertible debentures issued	$	282		$	-
Conversion of notes payable to preferred stock	$	-		$	225
Conversion of notes payable to common stock	$	8		$	40
Conversion of preferred stock to common stock	$	-		$	2
Aquisition of NorthStar Consumer Prodcuts	$	-		$	2

See accompanying unaudited notes to the condensed consolidated interim financial statements

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 and nine month periods ended September 30, 2014 and 2013 are not necessarily indicative of results to be expected for a full year.

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, estimate the fair value of any derivative liabilities, 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.

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 September 30, 2014, the Company had an accumulated deficit of $28.4 million, and had incurred a net loss for the three months ended September 30, 2014 of $0.4 million and had negative working capital of $10.1 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.

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 and nine months ended September 30, 2014 and September 30, 2013 was $21, $63 and $0, $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):

	Nine months Ended September 30,
	2014			2013
(Unaudited)
Total revenue	$	4,435		$	4,214
Net loss from continuing operations	$	(5,851	)	$	(7,354	)

5. Inventories

Inventories, net consist of the following at September 30, 2014 and December 31, 2013 (in thousands):

	September 30,		December 31,
	2014		2013
Raw materials	$	305	$	318
Work in Progress		484		251
Finished Goods		336		575
	$	1,125	$	1,144

Reserve for obsolescence was approximately $228 as of September 30, 2014

6. Property and Equipment

Property and equipment consist of the following at September 30, 2014 and December 31, 2013 (in thousands):

	Estimates Useful Life		September 30,			December 31,
	(Years)		2014			2013
Manufacturing Equipment		7-10	$	630		$	623
Leasehold Improvements		7		535			520
Office Furniture and Equipment		3-7		21			32
Computer Equipment and Software		1-5		23			12
Construction in Progress				6			6
				1,215			1,193
Less: Accumulated Depreciation, amortization and impairments				(385	)		(196	)
			$	830		$	997

Depreciation expense was approximately $203 for the nine months ended September 30, 2014 and $72 for the nine months ended September 30, 2103.

7. Loans Payable

	September 30,		December 31,
	2014		2013
Short-term notes (net of debt discount $305 and $497 as of September 30, 2014 and December 31, 2013, respectively)		3,339		714
Short-term notes - related party		3,970		3,970
	$	7,309	$	4,684

Convertible notes (net of debt discount $34 and $0 as of September 30, 2014 and December 31, 2013, respectively)	$	637	$	356
Convertible notes - related party (net of debt discount $0 and $0 as of September 30, 2014 and December 31, 2013, respectively)		230		-
	$	867	$	356

Promissory Notes

First Quarter 2014 Activities

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 contains 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.

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%.

Second Quarter 2014 Activities

On April 1, 2014, the Company issued a convertible promissory note (“Note”) to a third party, in the principal amount of $230. The note has an interest rate of 24% per annum, simple interest and is due on or before November 1, 2014. In connection with this promissory note, the Company issued warrants to purchase 2,300,000 shares of our common stock at an exercise price $0.59 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 – 1.73%, volatility – 101.53%, expected term – 4 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.6 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $187 by crediting additional paid in capital. Amortization expense on the debt discount was $97. At any time after April 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 contains 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 $926 using the binomial option pricing model at April 1, 2014. The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 1.73%, volatility – 101.5%, expected term – 0.5 years, expected dividends– N/A.

On April 1, 2014, the Company issued a promissory note to a third party, in the principal amount of $824. 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 824,000 shares of our common stock at an exercise price $0.35 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 September 30, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.73%, volatility – 101.53%, expected term – 4 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.7 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $269 by crediting additional paid in capital. Amortization expense on the debt discount was $100 for the three months ended September 30, 2014.

Third Quarter 2014 Activities

On July 1, 2014, the Company issued a promissory note to a third party, in the principal amount of $870. 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 870,000 shares of our common stock at an exercise price $0.35 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 condensed consolidated balance sheet as of September 30, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.62%, volatility – 98.19%, expected term – 4 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.4 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $208 by crediting additional paid in capital. Amortization expense on the debt discount was $124 for the three months ended September 30, 2014.

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 September 30, 2014. Each share of Preferred D is convertible into twenty five shares of common stock. Convertible preferred stock was considered anti-dilutive for the nine months ended September 30, 2014 and 2013, due to net losses. As of September 30, 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 September 30, 2014, there are 12,176,600 warrants which are convertible into one share of common stock with a weighted average exercise price of $1.24. In addition, convertible debt of $867 as of September 30, 2014 is convertible into 48,068,253 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.

Shares Issued for Services

On July 25, 2014, the Company issued aggregate 100,000 common shares to two third parties for services. The fair value of the common shares were $48.

Note Conversions

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

During the third quarter of 2014, a third party partially converted their notes payable, in accordance with the original terms of the notes, with an aggregate principal amount of $6,400 into 800,000 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 is being amortized over a six to ten month period (through maturity) on a straight-line basis.

During the second quarter of 2014, the Company issued Promissory Notes containing 3,124,000 detachable Warrants. The relative fair value of the detachable Warrants compared to the debt of approximately $456 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 September 30, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.73%, volatility –101.53%, expected term – 4 years, expected dividends– N/A. The debt discount related to the warrants is being amortized over a seven to eight month period (through maturity) on a straight-line basis.

During the third quarter of 2014, the Company issued Promissory Notes containing 870,000 detachable Warrants. The relative fair value of the detachable Warrants compared to the debt of approximately $208 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 September 30, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.62%, volatility – 98.19%, expected term – 4 years, expected dividends– N/A. The debt discount related to the warrants is being amortized over a seven to eight 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 $75 and $75 for the nine months ended September 30, 2014 and 2013, respectively, and has an account payable balance related to this agreement of $169 as of September 30, 2014.

Accounts Payable and Accrued Expenses

As of September 30, 2014 the Company owed Daystar $50, James Barickman $3, John Linderman 16, Northstar $342, Chord Advisors $169 and Rivercoach $72.

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 $177 for the nine months ended September 30, 2014.

As of September 30, 2014, the Company owed to Daystar Funding, LP $3,970 and accrued interest of $993.

As of September 30, 2014, the Company owed John Linderman and James Barickman $12 and $12 of accrued interest, respectively.

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 nine months ended September 30, 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 and nine months ended September 30, 2014 and September 30, 2013 was $21, $63 and $33, $33, respectively.

					Amortized as of		Balance as of
Description	Life in Years		Price		September 30, 2014		September 30, 2014
Patents		12		336		39	$	297
Customer list		14		198		21	$	177
Trade name		16		266		19	$	247
Non-compete agreement		4		127		44	$	83
				927		123	$	804

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.

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 September 30, 2014 and December 31, 2013 (in thousands):

Description		Level 1				Level 2				Level 3
Derivative liability-conversion options		$	-			$	-			$	620

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

There were no transfers between Level 1, 2 or 3 during the three months ended September 30, 2014.

The following table presents changes in Level 3 liabilities measured at fair value from the period ended December 31, 2013 through September 30, 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 as of December 31, 2013	$	-
Discount related to embedded conversion feature *		239
Change in fair value of derivative liability - conversion option		1,799
Balance - March 31, 2014		2,038
Discount related to embedded conversion feature *		43
Change in fair value of derivative liability - conversion option		(289	)
Balance - June 30, 2014		1,792
Change in fair value of derivative liability - conversion option		(1,172	)
Balance - September 30, 2014	$	620

* 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

The Company has evaluated subsequent events through the date the financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.

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 September 30, 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.

·	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 September 30, 2014 and September 30, 2013

Summary of Results of Operations (in thousands)

	Three Months Ended September 30,
	2014			2013

Revenue	$	1,908		$	1,281
Cost of goods sold		1,046			1,074
Gross Profit		862			207

Operating expenses:
General and administrative		780			1,069
Sales, marketing and development expenses		562			618
Amortization of intangible assets		21			33
Impairment of intangible assets		-			-
Total operating expenses		1,363			1,720

Operating loss		(501	)		(1,513	)

Other income and (expenses)
Interest expense		(1,022	)		(1,238	)
(Loss) gain on sale of assets and liabilities		(6	)		2
Change in fair value of derivative liability		1,172			-
Other		(123	)		73

Net loss		(480	)		(2,676	)

Other comprehensive gain (loss)
Foreign currency translation gain (loss)		110			(83	)

Total comprehensive loss		(370	)		(2,759	)

Operating Loss

We had an operating loss of approximately $501,000 for the three months ended September 30, 2014, compared to an operating loss of approximately $1,513,000 for the three months ended September 30, 2013. This difference was largely attributable to an increase in our sales revenue of approximately $600,000 (which led to a gross profit of $862,000 for the period), a decrease in our general and administrative expenses of approximately $300,000, and a decrease in our sales, marketing and development expenses of approximately $50,000. The decrease in our general and administrative expenses for the period ended September 30, 2014 was largely due to certain cost cutting initiatives.

Revenue

Our revenue from the three months ended September 30, 2014 was $1,908,000 compared to $1,281,000 for the three months ended September 30, 2013. Our revenue was primarily derived from the operations of our subsidiary, HemCon. Revenue from HemCon amounted to approximately $1,764,000 for the three months ended September 30, 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 September 30, 2014 were $1,046,000, compared to $1,074,000 for the same period in 2013. The cost of goods sold for the three months ended September 30, 2014 primarily related to the revenues generated from HemCon. HemCon’s cost of goods sold amounted to approximately $909,995 or approximately 51.5% of HemCon’s revenue for the three months ended September 30, 2014.

General and Administrative Expenses

General and administrative expenses were $780,000 for the three months ended September 30, 2014, compared to $1,069,000 for the three months ended September 30, 2013. Our primary general and administrative expenses for the period in 2014 were $65,000 from accrued but not paid executive salaries, $104,000 from professional fees related to TriStar such as audit, marketing and legal fees, and $522,768 related to salaries, occupancy cost, utilities, etc. attributable to Hemcon.

Sales, Marketing and Development Expenses

Our expenses related to sales, marketing and development were $562,000 for the three months ended September 30, 2014, compared to $618,000 for the three months ended September 30, 2013. The vast majority of our sales, marketing and development expenses for both periods related to our Hemcon operations.

Amortization of Intangible Assets

During the three months ended September 30, 2014, we had $21,000 in amortization of intangible assets primary related to patents, non-compete agreements and customer lists acquired in the Hemcon acquisition. We had a comparable expense of $33,000 for the three months ended September 30, 2013.

Interest Expense

We had interest expense $1,022,000 for the three months ended September 30, 2014, compared to $1,238,000 for the three months ended September 30, 2013. During the three months ended September 30, 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 September 30, 2014 and September 30, 2013 we recognized a non-cash gain on derivative liabilities of $1,172,000 and $0, respectively, due primarily to the change in fair value of the conversion option on convertible debt which was recorded as a derivative liability.

Results of Operations for the Nine Months Ended September 30, 2014 and September 30, 2013

Summary of Results of Operations (in thousands)

	Nine Months Ended September 30,
	2014			2013

Revenue	$	4,435		$	2,574
Cost of goods sold		2,928			2,030
Gross Profit		1,507			544

Operating expenses:
General and administrative		2,472			3,260
Sales, marketing and development expenses		1,965			1,934
Amortization of intangible assets		63			33
Impairment of intangible assets		-			2
Total operating expenses		4,497			5,229

Operating loss		(2,993	)		(4,685	)

Other income and (expenses)
Interest expense		(2,525	)		(1,897	)
(Loss) gain on sale of assets and liabilities		(6	)		2
Change in fair value of derivative liability		(338	)		-
Other		(123	)		33

Net loss		(5,985	)		(6,547	)

Other comprehensive gain (loss)
Foreign currency translation gain (loss)		134			(84	)

Total comprehensive loss		(5,851	)		(6,631	)

Operating Loss

We had an operating loss of approximately $2,993,000 for the nine months ended September 30, 2014, compared to an operating loss of approximately $4,685,000 for the nine months ended September 30, 2013. The decrease in operating loss was primarily attributable to both a higher gross profit based on higher revenues and a decrease in general and administrative expenses related to certain cost cutting initiatives.

Revenue

Our revenue from the nine months ended September 30, 2014 was $4,435,000 compared to $2,574,000 for the nine months ended September 30, 2013. Our revenue was primarily derived from the operations of our subsidiary, HemCon. Revenue from HemCon amounted to approximately $4,274,000 for the nine months ended September 30, 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 nine months ended September 30, 2014 were $2,928,000, compared to $2,030,000 for the same period in 2013. The cost of goods sold for the nine months ended September 30, 2014 primarily related to the revenues generated from HemCon. HemCon’s cost of goods sold amounted to approximately $2,737,000 or approximately 64% of HemCon’s revenue for the nine months ended September 30, 2014.

General and Administrative Expenses

General and administrative expenses were $2,472,000 for the nine months ended September 30, 2014, compared to $3,260,000 for the nine months ended September 30, 2013. Our primary general and administrative expenses for the period in 2014 were $228,621 from accrued but not paid executive salaries, $564,000 from professional fees related to TriStar such as audit, marketing and legal fees, and $1,470,000 related to salaries, occupancy cost, utilities, etc. attributable to Hemcon.

Sales, Marketing and Development Expenses

Our expenses related to sales, marketing and development were $1,965,000 for the nine months ended September 30, 2014, compared to $1,934,000 for the nine months ended September 30, 2013. We expect our sales, marketing and development expenses to be similar in the next few six-month periods.

Amortization of Intangible Assets

During the nine months ended September 30, 2014, we had $63,000 in amortization of intangible assets primary related to patents, non-compete agreements and customer lists acquired in the Hemcon acquisition, compared to $33,000 for the nine months ended September 30, 2013.

Interest Expense

We had interest expense $2,525,000 for the nine months ended September 30, 2014, compared to $1,897,000 for the nine months ended September 30, 2013. During the nine months ended September 30, 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 nine months ended September 30, 2014 and September 30, 2013 we recognized a non-cash loss on derivative liabilities of $338,000 and $0, respectively, due primarily to the change in fair value of the conversion option on convertible debt which was recorded as a derivative liability.

Liquidity and Capital Resources for Nine Months Ended September 30, 2014 and 2013

Introduction

During the nine months ended September 30, 2014 and 2013, because of our operating losses, we did not generate positive operating cash flows. Our cash and cash equivalents as of September 30, 2014 was $242,000. 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 September 30, 2014 compared to December 31, 2013, respectively, are as follows (in thousands):

	September 30, 2014		December 31, 2013		Change
Cash and Cash Equivalents	$	242	$	193	$	49
Total Current Assets		3,710		3,653		57
Total Assets		5,517		5,558		(41	)
Total Current Liabilities		13,845		9,140		4,705
Total Liabilities	$	13,845	$	9,188	$	4,657

Our total assets decreased by $41,000 as of September 30, 2014 compared to December 31, 2013. While are total assets at September 30, 2014 were similar to our total assets at December 31, 2013, the composition of those assets was different. At September 30, 2014, we had $49,000 more in cash and cash equivalents, $48,000 more in prepaid expenses, and $132,000 more in other non-current assets, offset by decreases of $22,000 in accounts receivable, net, $19,000 in inventories, net, $167,000 in property and equipment, net, and $63,000 in intangible assets, net.

Our current liabilities increased by $4,705,000, as of September 30, 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, our accounts payable and accrued expenses due to related parties, and our derivative liability.

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.

Cash Requirements

We had cash and cash equivalents available as of September 30, 2014 of $242,000 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 $3,037,000 for the nine months ended September 30, 2014, as compared to $1,446,000 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the net cash used in operating activities consisted primarily of our net loss of $5,985,000, adjusted primarily by the amortization of debt discount of $1,491,000, loss on change in fair value of derivative liability of $338,000, depreciation expenses of $195,000, issuance of common stock for services of $48,000, intangible asset amortization of $63,000, imputed note interest on note payable of $38,000, accounts payable and accrued expenses – related party of $679,000, accounts payable and accruals of $471,000, inventory of $19,000, and other receivables of $54,000, offset by prepaid expenses of $48,000, deferred revenue of $249,000, other non-current assets of $132,000, and accounts receivable of $33,000.

Investing

We had net cash used in investing activities of $42,000 for the nine months ended September 30, 2014, as compared to $3,139,000 for the nine months ended September 30, 2013. Our net cash used in investing activities for the nine months ended September 30, 2014 related entirely to the purchase of computer equipment, while our net cash used in investing activities for the nine months ended September 30, 2013 related entirely to the acquisition of HemCon.

Financing

Our net cash provided by financing activities for the nine months ended September 30, 2014 was $2,994,000, compared to $4,973,000 for the nine months ended September 30, 2013. For the period in 2014, our financing activities consisted of $2,434,000 from proceeds from issuance of short terms notes, $330,000 from proceeds from issuance of convertible debt, and $230,000 from proceeds from issuances of convertible debt to related party. For the period in 2013, our financing activities consisted of $3,810,000 from proceeds from issuance of short terms notes to a related party, $536,000 from proceeds from issuance of short term notes, $227,000 from the issuance of common stock, $250,000 from the issuance of Series D Convertible Preferred Stock, and $50,000 from proceeds from issuances of convertible debt.

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.

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 September 30, 2014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 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 September 30, 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 September 30, 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 September 30, 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.

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 September 30, 2014, we issued the following unregistered securities:

In July, 2014, we received a notice of conversion from New Horizon, Inc., notifying us that it wished to convert $6,400 of principal and interest due under that certain TriStar Wellness Solutions, Inc. Convertible Promissory Note dated February 21, 2013 into 800,000 shares of our common stock. The shares were issued on August 6, 2014, without a restrictive legend, since New Horizon, Inc. paid the consideration for its promissory note more than six months ago and 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.

On August 5, 2014, we issued an aggregate of 50,000 shares of our common stock to two non-affiliate investors pursuant to an agreement in exchange for professional services, with the shares valued at $48,000. The shares were issued with a standard Rule 144 restrictive legend. This issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, based on representations by the two investors, due to the fact the two investors are either an accredited or sophisticated investors, and are 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.

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)
3.10		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)

10.10		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)
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)
10.20		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 Agreement 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.

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: November 19, 2014		/s/ John Linderman
	By:	John Linderman
	Its:	Chief Executive Officer

Attached files

TRISTAR WELLNESS SOLUTIONS, INC. Reports

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