UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

  X .

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

      .  

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ______________

Commission file number: 000-54600

FRESH MEDICAL LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-1922768
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

757 East South Temple, Suite 150
Salt Lake City, Utah		84102
(Address of principal executive offices)		(Zip Code)

(801) 736–0729

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X .  No      .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  X .  No      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	.   (Do not check if a smaller reporting company)	Smaller reporting company	X .

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      .  No  X .

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 7, 2015, the issuer had 20,723,948 shares of Common Stock, $0.001 par value, outstanding.

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FRESH MEDICAL LABORATORIES, INC.

TABLE OF CONTENTS

	Part I – Financial Information
Item 1	Financial Statements	3
	Condensed Consolidated Balance Sheets, June 30, 2015 and December 31, 2014 (Unaudited)	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4	Controls and Procedures	20
	Part II – Other Information
Item 1	Legal Proceedings	21
Item 1A	Risk Factors	21
Item 2	Unregistered Sales Of Equity Securities And Use Of Proceeds	21
Item 3	Defaults Upon Senior Securities	21
Item 4	Mine Safety Disclosures	21
Item 5	Other Information	21
Item 6	Exhibits	22
Signatures		23

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PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Fresh Medical Laboratories, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
			June 30,		December 31,
			2015		2014
Assets
Current Assets
	Cash	$	1,301,108	$	4,044
	Accounts receivable, net of allowance for doubtful accounts of $99,000 and $100,000, respectively		128,028		154,799
	Inventory		213,495		210,474
	Prepaid expenses		14,814		38,640
Total Current Assets			1,657,445		407,957
Property and equipment, net of accumulated depreciation			105,397		65,775
Total Assets		$	1,762,842	$	473,732
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
	Accounts payable	$	69,335	$	105,316
	Accrued liabilities		218,255		406,336
	Related-party notes payable, current portion		-		929,536
	Notes payable, current portion		606,931		-
	Convertible notes payable		-		90,000
Total Current Liabilities			894,521		1,531,188
Long-Term Liabilities
	Related-party notes payable, net of current portion		-		356,931
	Notes payable, net of current portion		650,000		-
	Convertible debentures		2,000,000		-
Total Long-Term Liabilities			2,650,000		356,931
Total Liabilities			3,544,521		1,888,119
Commitments and contingencies			-		-
Stockholders' Equity (Deficit):
	Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding		-		-
	Common stock, $0.001 par value; 40,000,000 shares authorized;20,590,615 shares and 19,730,052 shares issued and outstanding, respectively		20,591		19,730
	Additional paid-in capital		9,767,058		9,075,590
	Accumulated deficit		(11,569,328)		(10,509,707)
Total Stockholders' Equity (Deficit)			(1,781,679)		(1,414,387)
Total Liabilities and Stockholders' Equity (Deficit)		$	1,762,842	$	473,732

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

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Fresh Medical Laboratories, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
			For the Three Months Ended June 30,				For the Six Months Ended June 30,
			2015		2014		2015		2014
Revenues:
	Sales	$	-	$	214,805	$	-	$	214,805
	Licensee revenue		4,500		-		9,000		-
	Total revenue		4,500		214,805		9,000		214,805
Cost of revenue			3,900		25,659		7,800		25,659
Gross margin			600		189,146		1,200		189,146
Operating expenses:
	Research and development expense		354,016		168,610		487,701		358,731
	Selling, general and administrative expense		221,286		615,054		438,756		835,223
	Total operating expenses		575,302		783,664		926,457		1,193,954
Loss from operations			(574,702)		(594,518)		(925,257)		(1,004,808)
Other income (expense):
	Interest expense		(73,990)		(42,164)		(114,408)		(84,248)
	Foreign currency exchange gain (loss), net		8,813		-		(19,956)		-
	Total other income (expense)		(65,177)		(42,164)		(134,364)		(84,248)
	Net loss	$	(639,879)	$	(636,682)	$	(1,059,621)	$	(1,089,056)
	Basic and diluted loss per share	$	(0.03)	$	(0.04)	$	(0.05)	$	(0.07)
	Weighted-average common shares outstanding, basic and diluted		19,772,906		17,380,608		19,658,877		16,749,503

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

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Fresh Medical Laboratories, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
				For the Six Months Ended June 30,
				2015		2014
Cash flows from operating activities:
	Net loss		$	(1,059,621)	$	(1,089,056)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation		2,119		1,838
		Stock-based compensation		158,528		552,204
		Provision for doubtful accounts		6,815		-
		Change in assets and liabilities:
		Accounts receivable		19,956		(204,805)
		Inventory		(3,021)		(205,352)
		Prepaid expenses		(4,768)		(8,902)
		Accounts payable		(59,181)		6,452
		Accrued liabilities		(176,146)		3,618
Net cash used in operating activities				(1,115,319)		(944,003)
Cash flows from investing activities:
	Payments for property and equipment			(18,541)		(36,350)
Net cash used in investing activities				(18,541)		(36,350)
Cash flows from financing activities:
	Proceeds from issuance of common stock			500,460		985,000
	Proceeds from exercise of warrants to purchase common stock			-		53
	Proceeds from issuance of convertible debentures			2,000,000		-
	Repayment of principal on convertible notes payable			(40,000)		-
	Repayment of principal on notes payable			(29,536)		-
Net cash provided by financing activities				2,430,924		985,053
Net increase in cash				1,297,064		4,700
Cash at beginning of period				4,044		87,082
Cash at end of period			$	1,301,108	$	91,782
Supplemental disclosure of cash flow information:
	Cash paid for interest		$	284,478	$	92,991
	Cash paid for income taxes		$	-	$	-
Supplemental disclosure of non-cash investing and financing activities:
	Notes payable and accrued interest converted to common stock		$	61,935	$	28,337
	Website development costs financed in accounts payable		$	23,200	$	26,800
	Common stock issued in satisfaction of account payable		$	-	$	10,000

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

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Organization and Summary of Significant Accounting Policies

Organization – Fresh Medical Laboratories, Inc. (the “Company”) is a Delaware corporation that was incorporated on November 22, 2004 and is doing business as “ProLung” in the United States and as “Freshmedx” outside the United States. The Company’s headquarters are located in Salt Lake City, Utah. The Company’s business is the development and deployment of medical devices and procedures specializing in the immediate, non-invasive evaluation of indeterminate lung masses suspicious for cancer as seen in CT and radiography. The Company’s principal activities have consisted of research and development, developing markets for its products, securing strategic alliances and obtaining financing.  The Company has developed, tested, and is commercializing its non-invasive lung cancer risk stratification test, the “Electro Pulmonary Nodule Scan” (“EPN Scan”).  In April 2013, the Company entered into an agreement to license this technology to a distributor for the China market.  In May 2013, the Company received the “CE” mark in Europe permitting the marketing of the EPN Scan in the European Union and certain other countries.  During the year ended December 31, 2014, the Company commenced selling the EPN Scan to customers in the European Union.  In the United States, the Company has submitted its application for marketing approval to the United States Food and Drug Administration.

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

Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared by management in accordance with rules and regulations promulgated by the U.S. Securities and Exchange Commission and therefore certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for them to be presented fairly, with those adjustments consisting only of normal recurring adjustments. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2014. The results of operations for the three and six months ended June 30, 2015 may not be indicative of the results to be expected for the year ending December 31, 2015.   

Basic and Diluted Loss Per Share – The Company computes basic loss per share by dividing net loss by the weighted-average number of common shares outstanding during the period. The Company computes diluted loss per share by dividing net loss by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding.  The computation of diluted loss per share does not assume exercise or conversion of securities that would have an anti-dilutive effect.  As of June 30, 2015, there were warrants to purchase 1,423,211 shares of common stock outstanding, 505,634 non-vested shares of common stock, and $2,000,000 of convertible debentures that were excluded from the computation of diluted net loss per common share as they were anti-dilutive.  As of June 30, 2014, there were warrants to purchase 523,211 shares of common stock outstanding, 1,117,453 non-vested shares of common stock, and $155,000 of convertible notes that were excluded from the computation of diluted net loss per common share as they were anti-dilutive.  

Recent Accounting Pronouncements – In April 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 will be effective for the Company’s fiscal year beginning January 1, 2016 and subsequent interim periods, with earlier adoption permitted.  Management adopted ASU 2015-03 as of April 1, 2015, with no immediate impact of the adoption on the Company’s consolidated financial statements.  When the issuance costs of the recently-issued convertible debentures are paid or settled, the issuance costs will be reported as a deduction from the carrying amount of the convertible debentures in the consolidated balance sheet.

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

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligations.   On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year.  As a result, ASU 2014-09 will be effective for the Company retrospectively beginning January 1, 2018, with early adoption not permitted.  Management has not yet selected a transition method and is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.

Note 2 – Inventory

Inventory principally consists of the cost of materials purchased and assembled for the EPN Scan which has received regulatory approval in Europe.  The Company has recorded these costs as inventory because regulatory approval has been received and management has determined that a future benefit is probable.  The cost of inventory also includes the costs of direct labor for the assembly of the EPN Scan and certain indirect costs incurred in connection with purchasing of parts and the assembly of products. Inventory is valued at the lower of cost or market value, with cost determined based on the first-in-first-out method.  Inventory consists of the following:

		June 30,		December 31,
		2015		2014
Raw materials	$	93,377	$	93,699
Work in progress		28,305		12,002
Finished goods		91,813		104,773
Total inventory	$	213,495	$	210,474

Note 3 – Property and Equipment

Property and equipment consists of the following:

		June 30,		December 31,
		2015		2014
Computer equipment	$	15,717	$	7,228
Office equipment		13,852		3,800
Tooling		36,350		36,350
Website development		50,000		26,800
		115,919		74,178
Less accumulated depreciation		(10,522)		(8,403)
Property and equipment, net	$	105,397	$	65,775

In January 2014, the Company ordered tooling having a total cost of $72,700, of which a deposit of $36,350 was paid during the three months ended March 31, 2014.  The tooling will be for the purpose of manufacturing the case for the EPN Scan.  Subsequent to June 30, 2015, the Company has accepted the tooling and paid the remaining balance of $36,350.  Depreciation of the tooling will commence during the three months ending September 30, 2015 on the date that the tooling was placed into service, over an expected useful life of five years.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Effective January 11, 2014, the Company entered into a Master Services Agreement (the “Agreement”) with an entity that provides consulting and professional services.  The entity is owned and managed by a director of the Company.  On March 26, 2014, the Company issued a work order under the Agreement for the development, testing, and deployment of the Internet-based customer service portal.  The work order was planned to be completed in four phases (prototype completion, development completion, testing completion, and deployment) for a total estimated cost of $147,900, payable in amounts specified in the work order upon the completion of each phase or milestone.  The consultant completed the first phase for the prototype completion and was paid the corresponding cost of $26,800.  The Company has agreed to pay an additional $23,200 under the Agreement in full satisfaction of amounts owed for additional services provided under the Agreement.  This amount settles the Agreement in full, is included in accounts payable at June 30, 2015, and has been paid on July 7, 2015, bringing the total amount paid for the project to $50,000.  

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

Note 4 – Accrued Liabilities

Accrued liabilities consisted of the following:

		June 30,		December 31,
		2015		2014
Accrued interest	$	198,118	$	380,122
Accrued payroll and payroll taxes		2,787		8,864
Accrued royalties		17,350		17,350
Total accrued liabilities	$	218,255	$	406,336

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5 – Long-term Debt

Long-term debt is summarized as follows:

		June 30,		December 31,
		2015		2014
Convertible debentures; unsecured; interest at 8.00% per annum; due May 1, 2018	$	2,000,000	$	-
Note payable to a former director and founding shareholder; unsecured; interest at 11.10% per annum; $250,000 due January 1, 2016 and the balance due April 30, 2017		900,000		929,536
Note payable to a relative of an executive officer; secured by all the assets of the Company; interest at 15% per annum; due June 30, 2016		356,931		356,931
Convertible notes; unsecured; interest at 8.00% per annum		-		90,000
Total long-term debt		3,256,931		1,376,467
Less:  current portion		606,931		1,019,536
Long-term debt, net of current portion	$	2,650,000	$	356,931

Convertible Debentures

In February 2015, the Company commenced an offering of convertible debentures (the “Debentures”) in an aggregate amount of up to $2,000,000.  As of April 30, 2015, the Company has received subscriptions with respect to $2,000,000 in Debentures.  The Debentures were issued in April 2015 and bear interest at the rate 8% per annum commencing on the issuance date.  Principal and accrued interest are due on the maturity date, which is May 1, 2018. The holder of the Debenture is entitled, at its option, to convert all or any portion of the outstanding principal of the Debenture into shares of the Company’s common stock at a conversion price of $0.65 per share.  Interest accruing from the date of issuance to the conversion date shall be paid on the maturity date.  Issuance costs, when paid or settled, will be amortized over the term of the Debentures using the effective interest method.  The Company evaluated the Debentures for consideration of any beneficial conversion features as required under generally accepted accounting principles.  The Company determined the beneficial conversion feature to be $0.

Note Payable to Former Director and Founding Shareholder

As of December 31, 2014, the Company was obligated under the terms of a master note to a founding stockholder and former member of its board of directors in the principal amount of $929,536 plus accrued interest of $223,742.  The note and accrued interest of $249,348 were due on April 30, 2015.  The note bore interest at 11.10% and was unsecured.

On May 1, 2015, the Company and the noteholder entered into an Amended and Restated Master Loan Agreement and Promissory Note (the “Revised Note”) in the principal amount of $900,000, which terminated and replaced the previous note.  On April 30, 2015, in anticipation of entering into the Revised Note, the Company paid all accrued interest in the amount of $249,348 and principal of $29,536.  Interest under the Revised Note also accrues at the rate of 11.10% per annum and is payable monthly in arrears. The Company is obligated to make a $250,000 principal payment on January 1, 2016, and the balance of the Revised Note matures on April 30, 2017.  The Revised Note is unsecured and includes standard creditor remedies in the event of default.  

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company evaluated the modification of the term of the note under generally accepted accounting principles for troubled debt restructurings by debtors and for debt modifications and extinguishments.  The Company determined the modification is not within the scope of a troubled debt restructuring.  The Company also determined that the modification is not substantial, and as such, the transaction should not be accounted for as an extinguishment, and no gain or loss should be recognized.

In total, the Company paid accrued interest of $274,642 and $42,991 during the six months ended June 30, 2015 and 2014, respectively.  Interest expense for the three months ended June 30, 2015 and 2014 was $25,458 and $25,724, respectively.  Interest expense for the six months ended June 30, 2015 and 2014 was $50,899 and $51,165, respectively.

In periods prior to January 1, 2015, this note was presented as a related-party arrangement in the Company’s consolidated financial statements.  However, management has concluded that this note no longer meets the definition of a related party transaction under generally accepted accounting principles.

Note Payable to a Relative of an Executive Officer

At June 30, 2015 and December 31, 2014, the Company was obligated under the terms of a master note to an individual related to an executive officer of the Company in the amount of $356,931. The note is secured by all the assets of the Company, bears interest at 15% per annum, and requires the board of directors to retain the current management as long as the note is outstanding. The note was originally due on December 31, 2012, however, on March 27, 2014, the note holder and the Company entered into an amendment of the master note to extend the due date of the note and accrued interest to June 30, 2016.  The balance of accrued interest at June 30, 2015 and December 31, 2014 was $164,160 and $137,610, respectively.  The Company paid accrued interest of $50,000 during the six months ended June 30, 2014 (none during the six months ended June 30, 2015).  Interest expense for the three months ended June 30, 2015 and 2014 was $13,348 for each period.  Interest expense for the six months ended June 30, 2015 and 2014 was $26,550 for each period.  

In periods prior to January 1, 2015, this note was presented as a related-party arrangement in the Company’s consolidated financial statements.  However, management has concluded that this note no longer meets the definition of a related party transaction under generally accepted accounting principles.

Convertible Notes

During 2012 and 2013, the Company issued notes payable totaling $679,000 and $5,000, respectively. These notes bore interest at 8% and were unsecured.  The notes and accrued interest were due, if not previously converted, from June through August 2015. The terms of the notes payable were that the notes were originally convertible into common stock at the greater of $0.80 per share or 85% of the closing price for the previous ten trading days prior to the conversion. If the Company’s stock was not publicly traded, then the price would be the average of the three prior private stock purchases of the Company’s common stock for cash.  During the years ended December 31, 2012, 2013, and 2014, notes payable totaling $594,000 and related accrued interest of $40,858 were converted into 951,865 shares of the Company’s common stock, representing a weighted average of approximately $0.67 per share, which resulted in a remaining balance payable on convertible notes of $90,000 at December 31, 2014.  During the six months ended June 30, 2015, one note payable in the amount of $40,000 and related accrued interest of $9,837 was paid off for cash.  During the six months ended June 30, 2015, the other remaining note payable in the amount of $50,000 and related accrued interest of $11,935 was converted into 95,283 shares of the Company’s common stock, at $0.65 per share.  During the six months ended June 30, 2014, one note payable in the amount of $25,000 and related accrued interest of $3,337 was converted into 35,421 shares of the Company’s common stock, at $0.80 per share.

Note 6 – Preferred Stock

The stockholders of the Company have authorized 10,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock may be issued in one or more series. The board of directors has the right to fix the number of shares of each series (within the total number of authorized shares of the preferred stock available for designation as a part of such series), and designate, in whole or part, the preferences, limitations and relative rights of each series of preferred stock. As of June 30, 2015 and December 31, 2014, the board of directors has not designated any series of preferred stock and there are no shares of preferred stock issued or outstanding.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 7 – Common Stock

On December 3, 2014, the Company held an annual and special meeting of stockholders.  At the meeting, the stockholders approved an amendment to increase the number of shares of common stock authorized under the Company’s Second Amended and Restated Certificate of Incorporation to 40 million shares.  The Second Amended and Restated Certificate of Incorporation was filed with the State of Delaware on December 8, 2014.  

Common Stock Issued for Cash

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

During the three months ended June 30, 2015, the Company received proceeds of $353,460 in excess of the amount of Convertible Debentures authorized by the Company’s board of directors.  These investors purchased shares of common stock in the Company at $0.75 per share, which resulted in the issuance of 471,280 shares of common stock.  

Common Stock Issued for Services

Periodically, the Company issues non-vested common stock to directors, officers and consultants as compensation for future services. The Company values the non-vested shares of common stock based on the fair value of the stock on the date of issuance and records compensation over the requisite service period which is usually the vesting period. The non-vested shares are included in the total outstanding shares recorded in the condensed consolidated financial statements.  The Company recognized stock-based compensation related to the vesting of shares issued to directors, officers and consultants for the three months ended June 30, 2015 and 2014 of $64,967 and $83,091, respectively, and for the six months ended June 30, 2015 and 2014 of $129,934 and 150,134, respectively.

A summary of the status of the Company’s non-vested shares as of June 30, 2015 and changes during the six months then ended, is presented below:

		Non-vested
		Shares of		Weighted
		Common		Average
		Stock		Fair Value
Balance at December 31, 2014		765,500	$	0.50
Awarded		-		-
Vested		(259,866)		0.50
Balance at June 30, 2015		505,634	$	0.50

As of June 30, 2015 and December 31, 2014, there was $252,817 and $382,750, respectively, of total unrecognized compensation cost related to the non-vested stock-based compensation arrangements awarded to directors, officers, and consultants. That cost is expected to be recognized over a weighted-average period of 1.1 years from June 30, 2015.  

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Total stock-based compensation expense from all sources for the three and six months ended June 30, 2015 (including stock-based compensation for the warrant discussed below in Note 8) and 2014 has been included in the condensed consolidated statements of operations as follows:

		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2015		2014		2015		2014
Research and development expense	$	35,658	$	79,407	$	71,158	$	111,046
Selling, general and administrative expense		43,685		405,754		87,370		441,158
Total share-based compensation	$	79,343	$	485,161	$	158,528	$	552,204

Note 8 – Common Stock Warrants

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

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

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

In accordance with the accounting standards relating to the issuance of stock-based compensation to non-employees, the Company recognized a current asset for the prepayment of stock-based compensation to which it has an enforceable right to receive consulting services through the first anniversary date of the Consulting Agreement.  Accordingly, the Company recognized $109,900 as prepaid compensation expense and additional paid-in capital related to the issuance of the warrants to Leavitt Partners.  Based on the vesting pattern of the warrants, the Company has amortized $81,306 of stock-based compensation during the six months ended December 31, 2014, amortized an additional $14,376 and $28,594 during the three months and six months ended June 30, 2015.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A summary of warrant activity for the six months ended June 30, 2015 is presented below:

						Weighted		Aggregate
				Weighted		Average		Intrinsic
		Shares		Average		Remaining		Value of
		Under		Exercise		Contractual		Vested
		Warrants		Price		Life		Warrants
Outstanding at December 31, 2014		1,423,211	$	0.54		8.3 years	$	17,640
Issued		-		-
Exercised		-		-
Expired		-		-
Outstanding at June 30, 2015		1,423,211	$	0.54		7.8 years	$	190,864

The intrinsic value at June 30, 2015 is calculated at $0.75 per share less the exercise price, based on the management’s latest estimate of the fair value of the shares of common stock, which is the latest price the Company issued shares of common stock for cash.

Note 9 – Commitments and Contingencies

Lease Agreement – Prior to August 2014, the Company leased office space under a non-cancelable operating lease that expired in July 2014.  Monthly rental payments were $2,888 per month.  Effective August 1, 2014, the Company entered into a new lease agreement with its landlord, expanding the amount of office space that it occupies at 757 East South Temple, Salt Lake City, Utah to approximately 4,657 square feet.  The new lease agreement has a term of three years, with an option to renew for an additional three years.  Monthly rental payments under the new non-cancelable lease are $3,787 for the initial year and will escalate by 2% per year to $3,940 in the third year.  If the Company exercises the option to renew the lease, the monthly rental payments will further escalate by 3% per year during the additional term.

Minimum lease commitments at June 30, 2015 for the remaining term of the lease are as follows:

Year ending June 30,
	2016	$	46,274
	2017		47,199
	2018		3,940
	Thereafter		-
	Total	$	97,413

Lease expense charged to operations for the three months ended June 30, 2015 and 2014 was $12,960 and $9,934, respectively and for the six months ended June 30, 2015 and 2014 was $24,264 and $18,781, respectively.

License Agreement – The Company has a license agreement with a party related through a shareholder and former member of the board of directors. Under the agreement, the Company has the right to the exclusive use of certain patents pending and related technology (the “technology”) in its medical devices and other products for an indefinite term. In return, the Company agreed to incur a minimum of $4,750,000 in development costs by the year 2014 to develop and market its products worldwide based on a graduated schedule and to make royalty payments based on a percentage of the aggregate worldwide net sales (as defined in the agreement) of its medical device and other products that utilize the technology.  At June 30, 2015 and December 31, 2014, accrued royalties under this license agreement total $17,350.

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FRESH MEDICAL LABORATORIES, INC. and SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 10 – Subsequent Events

Common Stock Issued for Cash

During the period subsequent to June 30, 2015 through the date of issuance of the unaudited condensed consolidated financial statements, the Company issued 133,333 shares of common stock for cash.  Proceeds from the issuances total $100,000, or $0.75 per share.  

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

The following discussion of our plan of operation should be read in conjunction with the financial statements and related notes that appear elsewhere in this Form 10-Q.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

Certain statements in this Form 10-Q constitute “forward-looking statements.”  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; receipt or denial of marketing approval from the FDA and similar agencies; receipt or denial of reimbursement from government agencies and insurance companies; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

Overview

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

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

On May 10, 2013, the EPN Scan received the “CE” mark in Europe for its Electro Pulmonary Nodule Scanner and Probe.  This marking is regulatory approval that clears the marketing and sale of the EPN Scan in the European Economic Area and European Free Trade Association Countries representing 509 million individuals and 31 member states.  The new screening guidelines and Medicare coverage recently announced in the U.S. for lung cancer screening are not available in Europe.

In the United States, we have submitted an application for marketing approval under Section 510(k) from the United States Food and Drug Administration, or FDA.  On February 27, 2015, we received a review letter from the FDA identifying a number of issues, concerns and weaknesses in our application, including the risk classification of the test, the study design and study analysis along with what we consider other less important questions.  On July 16, 2015, we met with the FDA to clarify and refine our understanding of the issues related to our pending application.  Before the FDA can grant approval of our application, we must resolve or negotiate the removal of all issues identified by the FDA and address possible issues to be identified in the future. Certain completed studies address some of the issues identified by the FDA, and we will respond to the FDA regarding outstanding issues by August 27, 2015.  According to draft FDA guidelines, a response may be expected in 60 days from our submission.

From inception to date, we have generated limited revenues.  During the year ended December 31, 2014, we commenced selling the EPN Scan to customers in the European Union.

 

We plan to continue the development and deployment of medical devices and procedures specializing in the immediate, non-invasive evaluation of indeterminate masses in the lung seen in CT and radiography.  We anticipate the need to fund expansion and market growth by raising capital over the next two years.  The amount of capital needed could change based on the opportunities available to us and the ability to expand our markets.

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Results of Operations

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

 

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

 

Revenues and Cost of Revenue.  During the three months ended June 30, 2015, we provided certain services to our licensee in China and recognized revenue in the amount of $4,500.  We incurred costs related to these services in the amount of $3,900.

During the three months ended June 30, 2014, we sold our first EPN Scan units and test kits in the European Union.  We also sold additional units under the exclusive license of our technology for China.  Total sales revenue for the three months ended June 30, 2014 was $214,805.  During the three months ended June 30, 2014, we recognized $25,659 in cost of sales related to the EPN Scan units sold in the European Union and in China.  Cost of sales includes the cost of direct materials and labor for the assembly of the units, other indirect costs related to the purchase and assembly of inventory, plus the accrual of royalties under our technology license agreement.  Our gross margin reflects the uniqueness of our products, our position in this market, the sufficiency of revenue to recover our investment in research and development over the last several years, and the relative low cost of raw materials.

Under the agreement with our licensee for China, we will be entitled to additional payments if the distributor achieves certain cumulative revenues and an annual royalty based on net sales.  However, as of June 30, 2015, there is no additional revenue due from either of these sources.    

Operating Expenses. Total operating expenses for selling, general and administrative expense and for research and development expense for the three months ended June 30, 2015 were $575,302, compared to the total operating expenses for the three months ended June 30, 2014, of $783,664, representing a decrease of $208,362.  This decrease was due to a decrease in stock-based compensation of $405,818 principally related to the issuance in May 2014 of 804,140 shares of our common stock to employees, directors, and a consultant as compensation for current services valued at $402,070 ($0.50 per share, the price of the most recent issuances of common stock for cash).  There was no similar issuance of common stock during the three months ended June 30, 2015. In addition to the decrease in stock-based compensation, the change in operating expenses was caused by 1) an increase of $117,723 for professional fees, principally for consulting services related to our increased clinical and regulatory activities; 2) an increase of $49,626 in other clinical expenses also related to our increased clinical activities; 3) an increase in the provision for doubtful accounts in the amount of $17,815 for accounts receivable; and 4) an increase of $12,292 in various other operating expenses.  Operating expenses have been classified by management as either selling, general and administrative expense or as research and development expense based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.

Other income/(expense).  Other income (expense) amounted to net expense of $65,177 for the three months ended June 30, 2015, as compared to net expense of $42,164 for the three months ended June 30, 2014.  Other income (expense) for the three months ended June 30, 2015 consists of interest expense of $73,990 and a foreign currency exchange gain of $8,813.  Other income (expense) for the three months ended June 30, 2014 consists solely of interest expense of $42,164.  Interest expense consists of interest incurred on debentures and notes payable with certain third parties and other investors.  The increase in interest expense of $31,826 between 2015 and 2014 is due primarily to the issuance of $2,000,000 of 8% convertible debentures in April 2015.

Accounts receivable for sales of the EPN Scan units and test kits in Europe are denominated in Euros and Swiss Francs, and translated into U.S. Dollars at the date of each sale and at each balance sheet date.  The foreign currency exchange gain of $8,813 for the three months ended June 30, 2015 is the result of the increase in the exchange rate of Euros from 1.074 at March 31, 2015 to 1.115 at June 30, 2015.

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Six Months Ended June 30, 2015 compared to the Six Months Ended June 30, 2014

 

Revenues and Cost of Revenue.  During the six months ended June 30, 2015, we provided certain services to our licensee in China and recognized revenue in the amount of $9,000.  We incurred costs related to these services in the amount of $7,800.

During the six months ended June 30, 2014, we sold our first EPN Scan units and test kits in the European Union.  We also sold additional units under the exclusive license of our technology for China.  Total sales revenue for the six months ended June 30, 2014 was $214,805.  During the six months ended June 30, 2014, we recognized $25,659 in cost of sales related to the EPN Scan units sold in the European Union and in China.  Cost of sales includes the cost of direct materials and labor for the assembly of the units, other indirect costs related to the purchase and assembly of inventory, plus the accrual of royalties under our technology license agreement. Our gross margin reflects the uniqueness of our products, our position in this market, the sufficiency of revenue to recover our investment in research and development over the last several years, and the relative low cost of raw materials.

Under the agreement with our licensee for China, we will be entitled to additional payments if the distributor achieves certain cumulative revenues and an annual royalty based on net sales.  However, as of June 30, 2015, there is no additional revenue due from either of these sources.

Operating Expenses. Total operating expenses for selling, general and administrative expense and for research and development expense for the six months ended June 30, 2015 were $926,457, compared to the total operating expenses for the six months ended June 30, 2014, of $1,193,954, representing a decrease of $267,497.  This decrease was due to a decrease in stock-based compensation of $393,676 principally related to the issuance in May 2014 of 804,140 shares of our common stock to employees, directors, and a consultant as compensation for current services valued at $402,070 ($0.50 per share, the price of the most recent issuances of common stock for cash).  There was no similar issuance of common stock during the six months ended June 30, 2015.  In addition to the decrease in stock-based compensation, the change in operating expenses was caused by 1) a decrease of $52,014 in travel and meal costs, primarily related to decreased European travel in 2015 compared to early 2014 when we were launching our marketing efforts for our products which had recently received European regulatory approval in 2013; 2) an increase of $92,729 for professional fees, principally for consulting services related to our increased clinical and regulatory activities; 2) an increase of $46,072 in other clinical expenses also related to our increased clinical activities; 3) an increase of $32,442 in net payroll expense and contract labor resulting from the amount of direct and indirect labor allocated to inventory during 2014 compared to 2015; and 4) an increase of $6,950 in various other operating expenses.  Operating expenses have been classified by management as either selling, general and administrative expense or as research and development expense based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.

Other income/(expense).  Other income (expense) amounted to net expense of $134,364 for the six months ended June 30, 2015, as compared to net expense of $84,248 for the six months ended June 30, 2014.  Other income (expense) for the six months ended June 30, 2015 consists of interest expense of $114,408 and a foreign currency exchange loss of $19,956.  Other income (expense) for the six months ended June 30, 2014 consists solely of interest expense of $84,248.  Interest expense consists of interest incurred on debentures and notes payable with certain third parties and other investors.  The increase in interest expense of $30,160 between 2015 and 2014 is due primarily to the issuance of $2,000,000 of 8% convertible debentures in April 2015.

Accounts receivable for sales of the EPN Scan units and test kits in Europe are denominated in Euros and Swiss Francs, and translated into U.S. Dollars at the date of each sale and at each balance sheet date.  The foreign currency exchange loss of $19,956 for the six months ended June 30, 2015 is the result of the decrease in the exchange rate of Euros from 1.211 at December 31, 2014 to 1.115 at June 30, 2015.

Liquidity and Capital Resources

The following is a summary of our key liquidity measures at June 30, 2015 and 2014:

		2015		2014
Cash	$	1,301,108	$	91,782
Current assets	$	1,657,445	$	522,451
Current liabilities		(894,521)		(1,522,916)
Working capital (deficit)	$	762,924	$	(1,000,465)

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If we obtain FDA clearance to market in the United States of America, we plan to convert U.S. hospitals with existing investigational placements of our diagnostic to commercial installations selling our ProLung EPN Scan.  The funds required for the United States market launch are estimated to be approximately $4.0 million.  Funds for this purpose, and for ordinary operations, are expected to be obtained in part through the sales of our products and services in Europe but primarily from the sale of debt and equity securities.  During the six months ended June 30, 2015, we offered and sold $2,000,000 in convertible debentures (the “Debentures”) and $500,460 in common stock.   We have no existing commitment to provide capital, and given our early stage of development, we may be unable to raise sufficient capital when needed and may be required to pay a high price for capital

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

·

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

·

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

·

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

·

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

·

the cost of manufacturing and production scale-up;

·

our financial results;

·

the cost and availability of capital generally; and

·

the occurrence of unexpected adverse expenses or events.

Long-Term Debt

Since our inception, the principal source of our financing has come from the issuance of equity securities and from debt financing. As of June 30, 2015, our outstanding debt financing includes the following borrowing arrangements.

Convertible Debentures

In February 2015, we commenced an offering of Debentures in an aggregate amount of up to $2,000,000.  As of April 30, 2015, we had completed the offering and issued Debentures totaling $2,000,000.  The Debentures bear interest at the rate 8% per annum commencing on the issuance date in April 2015.  Principal and accrued interest are due on the maturity date, which is May 1, 2018. The holder of the Debenture is entitled, at its option, to convert all or any portion of the outstanding principal of the Debenture into shares of our common stock at a conversion price of $0.65 per share.  Interest accruing from the date of issuance to the conversion date shall be paid on the maturity date.  

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Note Payable to a Former Director and Founding Shareholder

As of December 31, 2014, we were obligated under the terms of a master note agreement to a founding stockholder and former member of our Board of Directors in the amount of $929,536, plus accrued interest of $223,742.  The note and accrued interest of $249,348 were due on April 30, 2015.  The note bears interest at 11.10% and is unsecured. On May 1, 2015, we and the noteholder entered into an Amended and Restated Master Loan Agreement and Promissory Note (the “Revised Note”) in the principal amount of $900,000, which terminated and replaced the previous note.  On April 30, 2015, in anticipation of entering into the Revised Note, we paid all accrued interest in the amount of $249,348 and principal of $29,536.  Interest under the Revised Note also accrues at the rate of 11.10% per annum and is payable monthly in arrears.  We are obligated to make a $250,000 principal payment on January 1, 2016, and the balance of the Revised Note matures on April 30, 2017.  The Revised Note is unsecured and includes standard creditor remedies in the event of default.  

Note Payable to a Relative of an Executive Officer

At June 30, 2015, we were obligated under the terms of a master note agreement to an individual related to an executive officer of the Company in the amount of $356,931. The note is secured by all of our assets and bears interest at 15% per annum.  On March 27, 2014, we entered into an amendment of the master note to extend the due date for payment of the note and accrued interest to June 30, 2016.  The balance of accrued interest on this note at June 30, 2015 was $164,160.

Convertible Notes Payable

During 2012 and 2013, we issued notes payable to unrelated parties totaling $679,000 and $5,000, respectively. The notes and accrued interest were scheduled to mature, if not previously converted, from June through August 2015. As of June 30, 2015, all of these notes and accrued interest have either been converted into common stock or have otherwise been paid off in full.

Cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2015 and 2014 is as follows:

		2015		2014
Operating activities	$	(1,115,319)	$	(944,003)
Investing activities		(18,541)		(36,350)
Financing activities		2,430,924		985,053
Net increase in cash	$	1,297,064	$	4,700

Operating Activities

For the six months ended June 30, 2015, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $167,462 included in our net loss for stock-based compensation, depreciation, and provision for doubtful accounts, less changes in non-cash working capital totaling $223,160.  For the six months ended June 30, 2014, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $554,042 included in our net loss for stock-based compensation and depreciation, less changes in non-cash working capital totaling $408,989.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2015 and 2014 were $18,541 and $36,350, respectively, and was for the purchase of property and equipment.  We currently estimate the amount of capital expenditures for the year ending December 31, 2015 to be approximately $150,000.

Financing Activities

During the six months ended June 30, 2015, cash flows from financing activities totaled $2,430,924, related to 1) proceeds of $2,000,000 from the issuance of Debentures, 2) proceeds of $147,000 from the issuance of 294,000 shares of common stock ($0.50 per share), 3) proceeds of $353,460 from the issuance of 471,280 shares of common stock ($0.75 per share), and 4) the repayment of $69,536 of principal on notes payable and convertible notes payable.

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Critical Accounting Policies and Estimates

 

The Company’s accounting policies are more fully described in Note 1 of the consolidated financial statements filed in our annual report on Form 10-K for the year ended December 31, 2014.

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

 Revenue Recognition – Revenue is recognized by the Company when a binding sales or service agreement exists between the parties, services have been rendered, the price for the services is fixed or determinable, collection is reasonably assured, and the Company has no significant obligations remaining with respect to the arrangement.

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

Stock-based Compensation – The Company measures the cost of employee and consulting services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The awards issued are valued using a fair value-based measurement method. The resulting cost is recognized over the period during which an employee or consultant is required to provide services in exchange for the award, usually the vesting period.

Off Balance Sheet Arrangements

 

The Company has not had any off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015 and concluded that the disclosure controls and procedures were not effective for the following reasons:

1.

We did not maintain effective entity-level controls as defined by the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Specifically, we did not effectively segregate certain accounting duties due to the small size of our accounting staff, and did not maintain a sufficient number of adequately-trained personnel necessary to anticipate and identify risks critical to financial reporting.

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Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred in the three months ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have occurred no events requiring disclosure under this item.

ITEM 1A. RISK FACTORS

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

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

During the three months ended June 30, 2015, we offered and sold an aggregate of 471,280 shares of common stock for cash to an aggregate of 12 investors for an aggregate purchase price of $353,460, or $0.75 per share.

On May 31, 2015, we issued 95,283 shares of common stock in connection with the conversion of $50,000 of notes payable plus accrued interest of $11,935 at a conversion price of $0.65 per share.  

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

Exhibit Number	Description
3.1	Second Amended and Restated Certificate of Incorporation(2)
3.2	By-Laws(1)
10.1	Form of Eight Percent (8%) Convertible Debenture, dated ___________, 2015(3)
10.2	Amended and Restated Master Loan Agreement and Promissory Note with William Fresh(4)
31.1	Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended*
31.2	Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101 INS	XBRL Instance Document*
101 SCH	XBRL Schema Document*
101 CAL	XBRL Calculation Linkbase Document*
101 LAB	XBRL Labels Linkbase Document*
101 PRE	XBRL Presentation Linkbase Document*
101 DEF	XBRL Definition Linkbase Document*

* Filed herewith

(1)

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

(2)

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

(3)

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

(4)

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

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SIGNATURES

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

			FRESH MEDICAL LABORATORIES, INC.
	August 12, 2015		By:  /s/  Steven C. Eror
	Date		Steven C. Eror,
			Chief Executive Officer and President (Principal Executive Officer)
	August 12, 2015		By:  /s/  Steven C. Eror
	Date		Steven C. Eror,
			Chief Financial Officer (Principal Financial Officer)

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