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 September 30, 2016

      .

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)

(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.

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 November 14, 2016, the issuer had 22,810,870 shares of Common Stock, $0.001 par value, outstanding.

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FRESH MEDICAL LABORATORIES, INC.

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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

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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 “ProLungdx”. 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 and 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 but has since withdrawn such application with the intent of re-submitting it once certain tests are complete.

Principles of Consolidation – 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.

Going Concern – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has commenced selling the EPN Scan in Europe and to a licensee for China, but has generated minimal revenues thus far from operations. Therefore, the Company has not yet achieved its planned level of operations. The Company has incurred substantial and recurring losses to date from operations, and has used cash in its operating activities during the nine months ended September 30, 2016 and 2015. Additionally, the Company had a stockholders’ deficit as of September 30, 2016. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk and uncertainty.

The ability of the Company to continue as a going concern is dependent on the Company successfully developing products that can be sold profitably, and in the near term successfully generating cash through financing and operating activities. Management’s plans include issuing equity or debt securities to fund capital requirements and ongoing operations. Additionally, the Company commenced selling the EPN Scan during the year ended December 31, 2014. However, there can be no assurance the Company will be successful in these efforts.

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, 2015. The results of operations for the nine months ended September 30, 2016 may not be indicative of the results to be expected for the year ending December 31, 2016.

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 September 30, 2016 and 2015, the following items were excluded from the computation of diluted net loss per common share as their effect is anti-dilutive:

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Fresh Medical Laboratories, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recent Accounting Pronouncements –

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 will be effective for the Company’s fiscal year beginning January 1, 2019 on a modified retrospective basis and earlier adoption is permitted. Management is currently evaluating the impact of the pending adoption of ASU 2016-02 on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (“ASU 2016-09”), which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  ASU 2016-09 will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.  It is not anticipated that this update will have a material effect on the Company’s consolidated financial statements.

Note 2 – Inventory

Inventory valued at $10,193 was written off during the nine months ended September 30, 2016 due to obsolescence and is reported as cost of revenues in the accompanying statement of operations. Inventory consists of the following:

Note 3 – Accrued Liabilities

Accrued liabilities consisted of the following:

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Fresh Medical Laboratories, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4 –Short and Long-term Debt

Short and Long-term debt is summarized as follows:

During the nine months ended , notes totaling $187,000 were due. Subsequent to September 30, 2016, these notes were extended until December 24, 2016.

Related-Party Note payable

During the nine months ended September 30, 2016 the Company issued notes to related parties for $185,000. Also during the nine months ended September 30, 2016 $55,000 of the related party notes were paid back along with interest and fees of $599.

Note Payable to a Relative of an Executive Officer

At September 30, 2016 and December 31, 2015, 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 $189,389. 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 extended on June 30, 2016 and is now due September 30, 2018. The balance of accrued interest at September 30, 2016 and December 31, 2015 was $21,326 and $1,012, respectively.  As part of the extension of the due date, the Company analyzed the note and determined that the change in due date did not qualify as a debt modification under generally accepted accounting principles and accordingly, moved the note to long-term.

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Fresh Medical Laboratories, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5 – Common Stock

Private Placement of Common Stock of the Company

Pursuant to a Private Placement Memorandum dated December 28, 2015, the Company is offering a minimum of 333,333 shares, or a maximum of 3,500,000 shares of its common stock at a purchase price of $1.50 per share, for a minimum offering amount of $500,000 and a maximum offering amount of $5,250,000.  The shares are being offered to a limited number of prospective investors who qualify as “accredited investors”.  The shares are being offered on a “best efforts, all-or-none” basis for the first 333,333 shares subscribed for and on a “best efforts” basis thereafter.  The offering proceeds were being deposited into an escrow account until a minimum of 333,333 shares were sold for cash, at which time the proceeds were released to the Company.  During the nine months ended September 30, 2016, 659,038 shares were subscribed, conditions for the minimum offering were met, and the Company received net proceeds of $882,224 from the offering.    

Concurrently with the Private Placement Memorandum, the Company entered into a Placement Agent Agreement, effective December 28, 2015, that provides for compensation to a Placement Agent in connection with the offering of common stock.  Pursuant to the Placement Agent Agreement, the Company will pay the Placement Agent a cash commission of ten percent of the issuance price of the common stock sold in the offering, and one share of common stock of the Company for each ten shares of the Company’s common stock sold in the offering.  Pursuant to these provisions, with the release of shares described in the previous paragraph, the Company incurred commission fees to the Placement Agent of $106,334 and is obligated to issue the Placement Agent 65,905 shares of common stock.  The Placement Agent will also receive an expense allowance of up to $10,000 to reimburse it for direct out-of-pocket costs related to the offering and the Escrow Agent was paid $1,000 for services in connection with the offering. Legal fees of $6,478 were also paid in connection with the offering

Common Stock Issued for Conversion of Debt

During the nine months ended September 30, 2016, certain convertible debenture holders exercised their right and converted $717,950 of principal and $67,217 of accrued interest into common stock.  The Company issued 1,207,951 shares of common stock at $0.65 per share.

Common Stock Issued for Services

Periodically, the Company issues non-vested common stock to directors, officers and consultants as compensation for future services. During the nine months ended September 30, 2016, the Company recognized $121,400 in stock compensation expense related to the amortization of this deferred compensation.

In addition, during the nine months ended September 30, 2016, the Company issued 19,767 shares of common stock with a total value of $29,651 to two consultants for services rendered.

The Company recognized stock-based compensation related to the shares issued to directors, officers and consultants for the nine months ended September 30, 2016 and 2015 of $332,241 and $238,765, respectively.

A summary of the status of the Company’s non-vested shares as of September 30, 2016 and changes during the nine months then ended, is presented below:

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Fresh Medical Laboratories, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of September 30, 2016 there was $10,871 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 0.3 years.  

Total stock-based compensation expense from all sources for the three and nine months ended September 30, 2016 and 2015, including stock-based compensation for the warrant discussed below in Note 6, has been included in the condensed consolidated statements of operations as follows:

Note 6 – Common Stock Warrants

The Company has issued warrants to purchase its common stock for payment of consulting services, in connection with the extension of a note payable, as incentives to investors, and for cash. The fair value of warrants issued for consulting services is recognized as consulting expense at the date the warrants become exercisable. The Company values non-vested warrants 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 fair value of warrants was estimated using the Black-Scholes option pricing model.  The fair value of the warrant shares that vested during the nine months ended September 30, 2016 was $1.34 per share. The weighted-average assumptions used for the warrant shares that vested during the nine months ended September 30, 2016 were risk-free interest rate of 1.29%, expected volatility of 121%, expected life of 4.5 years, and expected dividend yield of zero. The fair value of the warrant shares that vested during the year ended December 31, 2015 was $0.402 per share.  The weighted-average assumptions used for the warrant shares that vested during the year ended December 31, 2015 were risk-free interest rate of 1.70%, expected volatility of 71%, expected life of 5.2 years, and expected dividend yield of zero. The Company recognized $181,190 and $50,113 as share-based compensation and additional paid-in capital related to the vesting of warrant shares for the nine months ended September 30, 2016 and 2015 respectively.  The Company recognized $60,905 and $21,519 as share-based compensation related to the vesting of warrant shares for the three months ended September 30, 2016 and 2015, respectively.

A summary of warrant activity for the nine months ended September 30, 2016 is presented below:

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Fresh Medical Laboratories, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The intrinsic value at September 30, 2016 is calculated at $1.50 per share less the exercise price, based on the management’s latest estimate of the fair value of the shares of common stock, which is the latest price the Company issued shares of common stock for cash.

Note 7 – Commitments and Contingencies

Consulting Representation Agreement

On January 1, 2016, the Company entered into a Consulting Representation Agreement with two consultants located in the European Union.  Pursuant to the Consulting Representation Agreement, the consultants have agreed to the completion of certain marketing milestones related to relationship development with key government and regulatory officials in the European Union and the introduction and marketing of the Company’s products to potential medical, clinical and hospital customers of the member states of the European Union.  Under the Consulting Representation Agreement, the Company is obligated to pay the consultants $70,000 per calendar quarter for the expenses.   The Consulting Representation Agreement is subject to termination by either the Company or by the consultants upon 15 days’ written notice.  Additionally, as an inducement to launch the European market as market representatives without other commission receivable, the Consulting Representation Agreement provides that for a period of one year, the consultants may receive up to the value of the compensation margin (actual net revenue less all actual expense, including marketing expense) in shares of the Company’s common stock valued at $1.50 per share and paid at the earliest of termination of the Consulting Representation Agreement or December 31, 2016.

Lease Agreement –Monthly rental payments as of September 30, 2016 are $3,940 per month.  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 September 30, 2016 for the remaining term of the lease are as follows:

Lease expense charged to operations related to this agreement for the nine months ended September 30, 2016 and 2015 was $34,917 and $36,907, 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 September 30, 2016 and December 31, 2015, accrued royalties under this license agreement total $17,873, respectively.

Note 8 – Other Related Party Transactions

During the nine months ended September 30, 2016, the Company has consulting agreements in place with two of the members of its board of directors. The directors provide marketing and medical advisory services. One of the agreements was terminated during the nine months ended September 30, 2016. The remaining consulting agreement may be terminated by either the Company or by the consultant at any time and for any reason. During the nine months ended September 30, 2016, the directors were paid a total of $135,000 under these agreements.

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Fresh Medical Laboratories, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 9 – Subsequent Events

Subsequent to September 30, 2016, 88,001 shares of common stock were issued for $132,002 cash as well as 8,800 shares of common stock were issued to the placement agent.

The Company evaluated all subsequent events that occurred after the balance sheet date through November 14, 2016, the date its financial statements were available to be issued, and concluded there were no additional events or transactions occurring during this period that required recognition or disclosure in the financial statements.

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

The following discussion and analysis should be read in conjunction with the financial statements and related notes that appear elsewhere in this Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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", “will”, "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. 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.

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 ProLungdx®. We are a medical device company that is developing, testing and commercializing our non-invasive lung cancer risk stratification test (the “Electro Pulmonary Nodule Scan” or “EPN Scan,”). The EPN Scan is 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 responded to the FDA regarding certain outstanding issues by August 27, 2015. As of August 27, 2015, the Company, in consultation with the FDA, determined that the remaining issues would require additional time for submission. Consequently, the device would undergo an automatic withdrawal followed by a re-application once the requested data was available for submission. The Company is now preparing a response.

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 September 30, 2016 compared to the Three Months Ended September 30, 2015

Revenues and Cost of Revenue. During the three months ended September 30, 2016, we had no revenues as compared to $10,450 of revenue for the three months ended September 30, 2015. The 2015 revenue was a result of providing consulting services to our licensee in China. These consulting services were not needed during 2016. For the three months ended September 30, 2016, there was no cost of revenues. For the three months ended September 30, 2015, cost of revenues 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.

Operating Expenses. Total operating expenses for selling, general and administrative expense and for research and development expense for the three months ended September 30, 2016 were $601,981, compared to the total operating expenses for the three months ended September 30, 2015, of $788,069, representing a decrease of $186,088. This decrease was due to 1) a decrease of $84,009 in travel costs related to our decreased regulatory and business development activities; 2) a decrease of $79,291 for professional fees also related to our decreased regulatory and business development activities; and 3) a net decrease of $40,271 in remaining operating expenses also related generally to our decreased operational activities. These decreased expenses were offset by an increase of $17,483 for payroll expenses, principally for consulting services related to our increased clinical and production activities. 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 $65,526 for the three months ended September 30, 2016, as compared to net expense of $81,335 for the three months ended September 30, 2015. Other income (expense) for the three months ended September 30, 2016 consists of interest expense of $65,526. Other income (expense) for the three months ended September 30, 2015 consists of interest expense of $79,004 and a foreign currency exchange loss of $2,331.

The decrease in interest expense during the three months ended September 30, 2016 principally relates to several Convertible Debentures being converted during the period. Otherwise, interest expense represents interest accrued on the remaining Convertible Debentures as well as notes to a former director and to a relative of an executive officer.

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 losses of $2,331 for the three months ended September 30, 2015 are the result of the changes in the exchange rates of Euros and Swiss Francs during the three-month period ended on September 30, 2015.

Nine months Ended September 30, 2016 compared to the Nine months Ended September 30, 2015

Revenues and Cost of Revenue. During the nine months ended September 30, 2016, we had no revenues as compared to $19,450 of revenue for the nine months ended September 30, 2015. The 2015 revenue was a result of providing consulting services to our licensee in China as well as selling two EPN scan units to our licensee in China pursuant to the pricing provisions of our license. The consulting services were not needed and no EPN scan units were sold during 2016. For the nine months ended September 30, 2016, cost of revenues of $10,193 represented old inventory that was written off for accounting purposes. For the nine months ended September 30, 2015, cost of revenues of $15,563 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.

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Operating Expenses. Total operating expenses for selling, general and administrative expense and for research and development expense for the nine months ended September 30, 2016 were $1,871,683, compared to the total operating expenses for the nine months ended September 30, 2015 of $1,714,526, representing an increase of $157,157. This increase was due to 1) an increase of $78,863 in professional fees related to our clinical, regulatory, and business development activities; 2) an increase in non-cash stock-based compensation of $63,825 that results based on the vesting arrangements of common stock and warrants that have been issued for services; 3) an increase of $100,357 in payroll expenses, and 4) a net increase of $35,654 in remaining operating expenses also related generally to our increased operational activities. These increased expenses were offset by 1) a decrease of $73,727 for traveling expense, principally for consulting services related to our decreased clinical, regulatory, and business development activities; and 2) a decrease of $47,815 for the provision for doubtful accounts for accounts receivable based on management’s estimates of the collectability of accounts receivable at each reporting date. 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 $204,282 for the nine months ended September 30, 2016, as compared to net expense of $215,699 for the nine months ended September 30, 2015. Other income (expense) for the nine months ended September 30, 2016 consists of interest expense of $204,282. Other income (expense) for the nine months ended September 30, 2015 consists of interest expense of $193,412 and a foreign currency exchange loss of $22,287. The increase in interest expense during the nine months ended September 30, 2016 principally relates to several new Convertible Debentures accruing interest.

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 losses of $22,287 for the nine months ended September 30, 2015 are the result of the changes in the exchange rates of Euros and Swiss Francs during the nine-month period ended on September 30, 2015.

Liquidity and Capital Resources

The following is a summary of our key liquidity measures at September 30, 2016 and 2015:

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

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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 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, may 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 fourth quarter of 2015, we commenced a private placement offering with a minimum of 333,333 shares or a maximum of 3,500,000 shares of common stock at a purchase price of $1.50 per share. The shares are being offered on a “best efforts, all-or-none” basis for the first 333,333 shares subscribed. During the nine months ended September 30, 2016, conditions for the minimum offering were met and the company issued 659,038 shares, and received net proceeds of $882,224 from the offering. We have no existing commitment to provide working 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 September 30, 2016, our outstanding debt financing includes the following borrowing arrangements.

Convertible Debentures

As of April 30, 2015, we had completed an offering and issued Convertible Debentures totaling $2,000,000. The Convertible 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 Convertible Debenture is entitled, at its option, to convert all or any portion of the outstanding principal of the Convertible 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. During the nine months ended September 30, 2016, $717,950 of these debentures along with $67,217 of accrued interest were converted to common stock.

Note Payable to a Relative of an Executive Officer

At September 30, 2016, 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 $189,389. The note is secured by all of our assets and bears interest at 15% per annum and is due June 30, 2018. The balance of accrued interest on this note at September 30, 2016 was $22,337.

Cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2016 and 2015 is as follows:

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Operating Activities

For the nine months ended September 30, 2016, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $367,323 included in our net loss for stock-based compensation, depreciation, stock issued for services, and loss on inventory obsolescence. For the nine months ended September 30, 2015, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $293,347 included in our net loss for stock-based compensation, depreciation, and provision for doubtful accounts.

Investing Activities

During the nine months ended September 30, 2016, the Company had no activities classified as investing activities. Net cash used in investing activities during the nine months ended September 30, 2015 was $62,619, and was for the purchase of property and equipment. We currently estimate the amount of capital expenditures for the year ending December 31, 2016 to be approximately $150,000.

Financing Activities

During the nine months ended September 30, 2016, cash flows from financing activities totaled $1,044,224, related to 1) proceeds of $882,224 from the issuance of 659,038 shares of common stock, 2) proceeds of $185,000 from related party debt, 3) proceeds of $32,000 from debt, and 4) repayments of $55,000 of principal on related party debt.

During the nine months ended September 30, 2016, notes totaling $187,000 were due. These notes were extended until December 24, 2016.

Critical Accounting Policies and Estimates

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.

Inventory – Inventory is valued at the lower of cost or market value, with cost determined based on the first-in-first-out method. Management evaluates inventory for obsolescence based on expectations about future demand and marketability of products, and if necessary, reduces inventory to the lower of cost or market through the use of on inventory valuation account for obsolescence. The estimated cost of inventory not expected to be converted to cash within one year is reflected as “Inventory, noncurrent” in the consolidated balance sheet.

Long-lived Assets – Long-lived assets, including property and equipment, and intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value.

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.

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Emerging Growth Company – We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Although we have not delayed the adoption of any accounting standards, we may choose to take advantage of the extended transition period for complying with new or revised accounting standards in the future.

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

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2016. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure; provided, however, as of September 30, 2016, the following material weakness in our internal controls and procedures existed:

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

In order to mitigate these material weaknesses to the fullest extent possible, all financial reports are reviewed by the Chief Executive Officer/Chief Financial Officer. In addition, we engage a third-party accounting firm to provide additional expertise in accounting for non-routine or complex transactions. Furthermore, regular meetings are held with the Board of Directors. If at any time we determine a new control can be implemented to mitigate these risks at a reasonable cost, it is implemented as soon as possible.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred in the nine months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have occurred no events requiring disclosure under this item.

ITEM 1A. RISK FACTORS

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

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

Pursuant to a Private Placement Memorandum dated December 28, 2015, the Company is offering a minimum of 333,333 shares, or a maximum of 3,500,000 shares of its common stock at a purchase price of $1.50 per share, for a minimum offering amount of $500,000 and a maximum offering amount of $5,250,000. The shares are being offered to a limited number of prospective investors who qualify as “accredited investors”. The shares are being offered on a “best efforts, all-or-none” basis for the first 333,333 shares subscribed for and on a “best efforts” basis thereafter. The offering proceeds were being deposited into an escrow account until a minimum of 333,333 shares were sold for cash, at which time the proceeds were released to the Company. During the nine months ended September 30, 2016, 659,038 shares were subscribed, conditions for the minimum offering were met, and the Company received net proceeds of $882,224 from the offering.

The offer and sale of such shares of common stock is being effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act and as set forth in Rule 506(b) under the Securities Act, based upon the following: (a) each investor has confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 promulgated under the Securities Act 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 has been no public offering or general solicitation with respect to each offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act; and (f) a Form D has been filed with respect to the offering.

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

* 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.

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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.

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