FORWARD-LOOKING STATEMENTS

Certain statements made in this Annual Report on Form 10-K are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Registrant to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Registrant's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Registrant. Although the Registrant believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Registrant or any other person that the objectives and plans of the Registrant will be achieved.

The forward-looking statements included in this Form 10-K and referred to elsewhere are related to future events or our strategies or future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may," "should," "believe," "anticipate," "future," "potential," "estimate," "encourage," "opportunity," "growth," "leader," "expect," "intend," "plan," "expand," "focus," "through," "strategy," "provide," "offer," "allow," commitment," "implement," "result," "increase," "establish," "perform," "make," "continue," "can," "ongoing," "include" or the negative of such terms or comparable terminology.  All forward-looking statements included in this Form 10-K are based on information available to us as of the filing date of this report, and the Company assumes no obligation to update any such forward-looking statements.  Our actual results could differ materially from the forward-looking statements.  Important factors that could cause actual results to differ materially from expectations reflected in our forward-looking statements include those described in Item 1A, "Risk Factors."

Our Services

Medytox Solutions, Inc. ("Medytox" or the "Company") is a holding company that owns and operates businesses in the medical services sector.  Its principal line of business is clinical laboratory blood and urine testing services, with a particular emphasis in the provision of urine drug toxicology and comprehensive pain medication monitoring programs to physicians, clinics and rehabilitation facilities in the United States.  In 2012, testing services to rehabilitation facilities represented over 70% of our revenues.

Medytox offers a complete, turn-key urine drug testing (UDT) program allowing physicians to proactively monitor and treat patients. The Medytox UDT program is utilized by physicians to identify and evaluate prescribed and/or non-prescribed drugs that when combined may cause adverse drug interactions dangerous to a patient's health.  With our UDT program, physicians can be more assured their patients are adhering to their therapeutic drug regimens and are in compliance with their prescribed guidelines. Our UDT program helps the health care provider achieve better outcomes for patients and in evaluating to what extent the prescribed medications and their dosages are working for the patient to achieve a better outcome towards recovery.

In addition to our clinical testing operations, we provide a web-based portal to provide laboratory ordering and results to our physician customers.

As a provider of clinical laboratory services, we continue to pursue our strategy of acquiring or entering into binding relationships with high-complexity laboratories that can facilitate our customers' needs. We have successfully completed several such acquisitions or strategic partnerships with laboratories located in different regions of the United States, allowing

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us to correspondingly increase our client base. These laboratories, and those we shall continue to seek out, offer or can be developed to offer the most advanced analytical technology for the processing of urine specimens including Immunoassay Analyzers (IA) for screens and GCMS/LCMS for confirmations.  We currently anticipate that the laboratories will be fully-staffed professional COLA-accredited high-complexity laboratories with additional certifications such as the COLA Laboratory of Excellence Award (COLA's Highest Commendation), CLIA (Clinical Laboratory Improvement Amendments) and the State of Florida's AHCA Clinical Laboratory License for Non-Waived High Complexity testing .  Our in-house billing company services all of our acquired or allied facilities, utilizing electronic processing of claims to the major insurance payers and eliminating the need to rely on and pay for the services of clearing houses allowing us to maximize profit retention.

History

Medytox, originally known as Casino Players, Inc., was organized July 20, 2005 under the laws of the State of Nevada.  The original business was conducted by a wholly-owned subsidiary, Casino Rated Players, Inc. ("CRP"), a Nevada corporation that operated as a casino representative company offering complementary rooms to rated players.

During 2010 and 2011, the casino representative business was minimal.  In the first half of 2011, Company management decided to reorganize as a holding company to acquire and manage a number of companies in the medical services sector.  

On June 22, 2011, the Company organized Medytox Medical Management Solutions Corp. (MMMS), a Florida corporation, as a wholly-owned subsidiary.  MMMS is a marketing company selling laboratory testing services to medical clinics, hospitals and physicians' offices. MMMS operates from the corporate offices in West Palm Beach, Florida.

On July 26, 2011, the Company organized Medytox Institute of Laboratory Medicine, Inc. (MILM), a Florida corporation, as a wholly-owned subsidiary.  MILM was organized to acquire and manage medical testing laboratories. MILM operates from the corporate offices in West Palm Beach, Florida.

On August 22, 2011, MILM entered into a purchase agreement to acquire 81% of Trident Laboratories, Inc. (Trident), a privately-owned Florida corporation.  Trident operates a medical testing laboratory specializing in urine testing from a facility in Hollywood, Florida.  MILM acquired 49% ownership in Trident at closing and had the right to acquire an additional 32% for $500,000 to be paid in full by August 22, 2012.  The sellers had an option to sell the remaining 19% ownership in Trident for a certain period.  The sellers requested the purchase agreement be rescinded on January 16, 2012. MILM filed an action seeking to enforce the purchase agreement against Trident and its shareholders, Michelle Steegstra, Christopher Hawley, Donnette Hawley, Michael Falestra and Skyler Lukas (collectively, the "Trident Defendants") for (i) civil conspiracy, (ii) specific performance, (iii) anticipatory breach of contract, (iv) constructive trust, (v) accounting, and (vi) interpleader.  In addition, the Trident Defendants filed a counterclaim and third-party complaint stating causes of action for (i) fraudulent inducement, (ii) civil conspiracy, (iii) tortious interference with business relationships, and (iv) defamation.  The claims and counterclaims of MILM and the Trident Defendants are set for trial beginning in June 2013.   Management believes that it will prevail in this action; however, the results of the litigation are unknown at this time and cannot be predicted with any certainty.

On August 22, 2011, the Company acquired 100% of Medical Billing Choices, Inc., a privately-held North Carolina corporation, for $100,000 cash and a $750,000 installment note.  Now known as ARC Medical Billing, the company operates a medical billing service for a variety of medical providers throughout the southeastern United States from offices in Charlotte, North Carolina.  ARC is the main billing company for the Medytox-owned laboratories and allows Medytox to offer medical billing services to its customers.  

On September 16, 2011, the board of directors agreed to change the name of the Company to Medytox Solutions Inc. and to file for a new trading symbol.  On October 27, 2011, FINRA approved the name change and the new symbol, "MMMS".  

On February 16, 2012,  Medytox Diagnostics, Inc., a recently formed wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement for the purchase of 50.5% of the outstanding membership interest in

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Collectaway, LLC ("Collectaway"), a clinical laboratory located in Palm Beach County, Florida.  The name of Collectaway, LLC was changed to PB Laboratories, LLC.

On March 9, 2012, the Company formed Medytox Medical Marketing & Sales, Inc., a Florida corporation, as a wholly-owned subsidiary that provides marketing for clinical laboratories that are owned by the Company.

On May 14, 2012, Medytox entered into a Revolving Credit Facility with TCA Global Credit Master Fund, LP, a Florida and London-based lender, in an amount of up to $4,000,000, subject to Medytox meeting certain qualifying criteria.  Medytox thereupon borrowed an initial $550,000 under this credit facility.

On June 28, 2012, PB Laboratories, LLC passed its first COLA inspection since coming under Medytox ownership and benefitting from Medytox's substantial investment in new laboratory equipment.

On August 8, 2012, Medytox borrowed an additional $525,000 under the Revolving Credit Facility with TCA Global Credit Master Fund, LP.

On September 10, 2012, the Company entered into an agreement to purchase all of the assets and intellectual property rights to the software known as "Medytox Advantage" that it did not already own from Dash Software, LLC for $150,000.

On October 12, 2012, the Company, through its wholly-owned subsidiary Medytox Diagnostics, Inc., completed an agreement to acquire the remaining 49.5% ownership in PB Laboratories, LLC that it did not already own. MILM now owns 100% of this laboratory.

On December 4^, 2012, Medytox borrowed an additional $650,000 under the Revolving Credit Facility with TCA Global Credit Master Fund, LP, for a total of $1,725,000 of borrowings thereunder through December 31, 2012 under the facility.

On December 7, 2012, the Company, through its wholly-owned subsidiary Medytox Diagnostics, Inc., entered into an agreement to acquire 50.5% ownership in Biohealth Medical Laboratory, Inc., a Miami-based clinical laboratory. The Company immediately initiated an investment program to increase the clinical lab testing capacity of blood and urine specimens at Biohealth Medical Laboratory, Inc.

Recent Acquisitions

On January 1, 2013, the Company's wholly-owned subsidiary, Medytox Diagnostics, Inc., purchased 100% of the stock of Alethea Laboratories, Inc. ("Alethea") from unrelated parties.  Althea operates a licensed clinical lab in Las Cruces, New Mexico and is an enrolled Medicare provider.  The purchase price was $675,000.  Medytox Diagnostics, Inc. paid $100,000 in cash at closing and issued two secured promissory notes totaling $575,000.  Under each note, the Company makes principal payments of $50,000 on each of April 1, 2013, October 1, 2013, January 1, 2014, April 1, 2014 and July 1, 2014 and of $37,500 on July 1, 2013.  The notes mature on July 1, 2014 and are secured by the common stock purchased from the sellers.  The notes may be prepaid at any time without premium or penalty.  The notes may be accelerated in the event of nonpayment after notice or upon certain bankruptcy events relating to Medytox Diagnostics, Inc.

Alethea had an outstanding obligation of $344,649.94, which was amended in connection with the acquisition.  Alethea issued a promissory note bearing interest of 4% per annum.  The principal amount is payable in 14 installments, of approximately $24,618 each, commencing on March 15, 2013 and continuing on the first day of each of the next 13 months until April 1, 2014, the maturity date.  The note may be prepaid at any time without premium or penalty.  The note may be accelerated in the event of nonpayment after notice or upon certain bankruptcy events relating to Alethea.  Both Medytox Diagnostics, Inc. and the Company guaranteed Alethea's obligations under the note, as well as its obligations under its existing equipment lease.

On April 4, 2013, Medytox Diagnostics, Inc. also purchased 100% of the membership interests of International Technologies, LLC ("International") from unrelated parties.  International operates a licensed clinical laboratory in Waldwick, New Jersey and is a licensed Medicare provider.  The purchase price was $627,000.  Medytox Diagnostics, Inc.

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paid $127,000 in cash upon the signing of the purchase agreement and the Company issued two convertible debentures totaling $500,000.  The debentures may not be converted for 90 days after closing and thereafter are convertible into Common Stock at a 10% discount to the average share price for 30 days prior to the date of conversion.  The debentures will convert automatically on January 17, 2014.  The debentures bear interest of 5% per annum and may be prepaid at any time without premium or penalty.  The debentures may be accelerated in the event of nonpayment or upon certain bankruptcy events relating to the Company.

Governmental Regulation

General

The clinical laboratory industry is subject to significant governmental regulation at the federal, state and local levels. As described below, these regulations concern licensure and operation of clinical laboratories, payment for laboratory services, health care fraud and abuse, security and confidentiality of health information, quality, and environmental and occupational safety.

Regulation of Clinical Laboratories

The Clinical Laboratory Improvement Amendments ("CLIA") extends federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories also must undergo proficiency testing and are subject to inspections.

There are many regulatory and legislative proposals that would increase general Federal Food and Drug Administration oversight of clinical laboratories and laboratory-developed tests. The outcome and ultimate impact of such proposals on the Company's business are difficult to predict at this time and could adversely affect the business model that the Company has adopted.

The Company is also subject to state and local laboratory regulation. CLIA provides that a state may adopt laboratory regulations different from or more stringent than those under federal law, and a number of states have implemented their own laboratory regulatory schemes. State laws may require that laboratory personnel meet certain qualifications, may specify certain quality controls, or may require maintenance of certain records.

The Company believes that it is in compliance with all applicable laboratory requirements. The Company's laboratories have continuing programs to ensure that their operations meet all such regulatory requirements, but no assurances can be given that the Company's laboratories will pass all future licensure or certification inspections.

Payment for Clinical Laboratory Services

In 2012, the Company derived approximately 0.5% of its net sales directly from the Medicare and Medicaid programs. In addition, the Company's other business depends significantly on continued participation in these programs and in other government healthcare programs, in part because clients often want a single laboratory to perform all of their testing services. In recent years, both governmental and private sector payers have made efforts to contain or reduce health care costs, including reducing reimbursement for clinical laboratory services.

Reimbursement under the Medicare program for clinical diagnostic laboratory services is subject to a clinical laboratory fee schedule that sets the maximum amount payable in each Medicare carrier's jurisdiction. This clinical laboratory fee schedule is updated annually. Laboratories bill the program directly for covered tests performed on behalf of Medicare beneficiaries. State Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients. Approximately 0.5% of the Company's revenue is reimbursed under the Medicare clinical laboratory fee schedule.

Payment under the Medicare fee schedule has been limited from year to year by Congressional action, including imposition of national limitation amounts and freezes on the otherwise applicable annual Consumer Price Index ("CPI") updates. For most diagnostic lab tests, the national limitation is now 74.0% of the national median of all local fee schedules

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established for each test. Under a provision of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"), the cap is set at 100.0% of the median for tests performed after January 1, 2001 that the Secretary of Health and Human Services determines are new tests for which no limitation amount has previously been established.

Medicare, Medicaid and other government program payment reductions will not have a direct adverse effect on the Company's net earnings and cash flows, due to insignificant revenue earned.

Congressional action in 1997 required the Department of Health and Human Services ("HHS") to adopt uniform coverage, administration and payment policies for many of the most commonly performed lab tests using a negotiated rulemaking process. Consensus was reached by the negotiated rulemaking committee which, among other things, established uniform policies limiting Medicare coverage for certain tests to patients with specified medical conditions or diagnoses, and replacing local Medicare coverage policies which varied around the country.  The final rules generally became effective in 2002, and the use of uniform policies improves the Company's ability to obtain necessary billing information in some cases, but Medicare, Medicaid and private payer diagnosis code requirements continue to negatively impact the Company's ability to be paid for some of the tests it performs. Due to the range of payers and policies, the extent of this impact continues to be difficult to quantify.

Future changes in federal, state and local laws and regulations (or in the interpretation of current regulations) affecting government payment for clinical laboratory testing could have a material adverse effect on the Company. Based on currently available information, the Company is unable to predict what type of changes in legislation or regulations, if any, will occur.

Standard Electronic Transactions, Security and Confidentiality of Health Information

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") was designed to address issues related to the security and confidentiality of health insurance information. In an effort to improve the efficiency and effectiveness of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions, new regulations were promulgated to protect the privacy and security of certain information. These regulations apply to health plans, health care providers that conduct standard transactions electronically and health care clearinghouses ("covered entities"). Five such regulations have been finalized: (i) the Transactions and Code Sets Rule; (ii) the Privacy Rule; (iii) the Security Rule; (iv) the Standard Unique Employer Identifier Rule, which requires the use of a unique employer identifier in connection with certain electronic transactions; and (v) the National Provider Identifier Rule, which requires the use of a unique health care provider identifier in connection with certain electronic transactions.

The Company's HIPAA project plan has three phases: (i) assessment of current systems, applications, processes and procedure testing and validation for HIPAA compliance; (ii) remediation of affected systems, applications, processes and procedure testing and validation for HIPAA compliance; and (iii) testing and validation.

The Privacy Rule regulates the use and disclosure of protected health information ("PHI") by covered entities. It also sets forth certain rights that an individual has with respect to his or her PHI maintained by a covered entity, such as the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The Privacy Rule requires covered entities to contractually bind third parties, known as business associates, in the event that they perform an activity or service for or on behalf of the covered entity that involves access to PHI. The Security Rule establishes requirements for safeguarding patient information that is electronically transmitted or electronically stored. The Company believes that it is in compliance with all HIPAA requirements of the Privacy and Security Rules.

The Company believes that it is in compliance in all material respects with the current Transactions and Code Sets Rule. The Company is within the testing and validation phase of Version 5010 Transactions and is moving to adopt the ICD-10-CM Code Set issued by HHS on January 16, 2009. The compliance date for Version 5010 is January 1, 2013 but the Center for Medicare and Medicaid Services ("CMS") has delayed enforcement until March 31, 2013. The compliance date for ICD-10-CM is October 1, 2013, but on February 16, 2012, HHS announced that it will postpone compliance until October 1, 2014. The Company will continue its assessment of computer systems, applications and processes for compliance with these requirements.

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The Federal Health Information Technology for Economic and Clinical Health Act ("HITECH"), which was enacted in February 2009, strengthens and expands the HIPAA Privacy and Security Rules and its restrictions on use and disclosure of PHI. HITECH includes, but is not limited to, prohibitions on exchanging patient identifiable health information for remuneration, restrictions on marketing to individuals and obligations to agree to provide individuals an accounting of virtually all disclosures of their health information. HITECH also fundamentally changes a business associate's obligations by imposing a number of Privacy Rule requirements and a majority of Security Rule provisions directly on business associates that were previously only directly applicable to covered entities. Moreover, HITECH requires covered entities to provide notice to individuals, HHS, and, as applicable, the media when unsecured protected health information is breached, as that term is defined by HITECH.  Business associates are similarly required to notify covered entities of a breach.  Most of the HITECH provisions were effective February 17, 2010.  HHS issued regulations governing breach notification effective in September 2009. However, it was not until January 2013 that HHS issued final regulations to clarify many of the new provisions.   The final regulations will take effect on September 23, 2013.  

The standard unique employer identifier regulations require that employers have standard national numbers that identify them on standard transactions. The Employer Identification Number, also known as a Federal Tax Identification Number, issued by the Internal Revenue Service, was selected as the identifier for employers and was adopted effective July 30, 2002. The Company believes it is in compliance with these requirements.

The administrative simplification provisions of HIPAA mandate the adoption of standard unique identifiers for health care providers. The intent of these provisions is to improve the efficiency and effectiveness of the electronic transmission of health information. The National Provider Identification rule requires that all HIPAA-covered health care providers, whether they are individuals or organizations, must obtain a National Provider Identifier ("NPI") for use to identify themselves in standard HIPAA transactions. NPI replaces the unique provider identification number - as well as other provider numbers previously assigned by payers and other entities - for the purpose of identifying providers in standard electronic transactions. The Company believes that it is in compliance with the HIPAA National Provider Identification Rule in all material respects.

The total cost associated with the requirements of HIPAA is not expected to be material to the Company's operations or cash flows. There are, however, many unresolved issues in these areas and future regulations and interpretations of HIPAA and HITECH could impose significant costs on the Company.

In addition to the federal HIPAA regulations described above, there are a number of state laws regarding the confidentiality of medical information, some of which apply to clinical laboratories. These laws vary widely and new laws in this area are pending, but they most commonly restrict the use and disclosure of medical and financial information. In some cases, state laws are more restrictive than the HIPAA Privacy Rule and, therefore, are not preempted by HIPAA. Penalties for violation of these laws may include sanctions against a laboratory's licensure, as well as civil and/or criminal penalties. Violations of the HIPAA provisions after the applicable compliance dates could result in civil and/or criminal penalties, including significant fines and up to 10 years in prison. HITECH also significantly strengthened HIPAA enforcement. It increased the civil penalty amounts that may be imposed, required HHS to conduct periodic audits to confirm compliance and also authorized state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of the HIPAA privacy and security regulations that affect the privacy of state residents. Additionally, numerous other countries have or are developing similar laws governing the collection, use, disclosure and transmission of personal or patient information.

Fraud and Abuse Laws and Regulations

Existing federal laws governing federal health care programs, including Medicare and Medicaid, as well as similar state laws, impose a variety of broadly described fraud and abuse prohibitions on health care providers, including clinical laboratories. These laws are interpreted liberally and enforced aggressively by multiple government agencies, including the U.S. Department of Justice, HHS' Office of Inspector General ("OIG"), and various state agencies. Historically, the clinical laboratory industry has been the focus of major governmental enforcement initiatives. The federal government's enforcement efforts have been increasing over the past decade, in part as a result of the enactment of HIPAA, which included several provisions related to fraud and abuse enforcement, including the establishment of a program to coordinate and fund federal, state and local law enforcement efforts. The Deficit Reduction Act of 2005 also included new requirements directed at Medicaid fraud, including increased spending on enforcement and financial incentives for states to adopt false claims act

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provisions similar to the federal False Claims Act. Recent amendments to the False Claims Act, as well as other enhancements to the federal fraud and abuse laws enacted as part of the Accountable Care Act ("ACA"), are widely expected to further increase fraud and abuse enforcement efforts.

The federal health care program's anti-kickback law (the "Anti-Kickback Law") prohibits knowingly providing anything of value in return for, or to induce, the referral of Medicare, Medicaid or other federal health care program business. Violations can result in imprisonment, fines, penalties, and/or exclusion from participation in federal health care programs. The OIG has published "safe harbor" regulations which specify certain arrangements that are protected from prosecution under the Anti-Kickback Law if all conditions of the relevant safe harbor are met. Failure to fit within a safe harbor does not necessarily constitute a violation of the Anti-Kickback Law; rather, the arrangement would be subject to scrutiny by regulators and prosecutors and would be evaluated on a case by case basis. Many states have their own Medicaid anti-kickback laws and several states also have anti-kickback laws that apply to all payers (i.e., not just government health care programs).

From time to time, the OIG issues alerts and other guidance on certain practices in the health care industry that implicate the Anti-Kickback Law or other federal fraud and abuse laws. Examples of such guidance documents particularly relevant to the Company and its operations follow.

In October 1994, the OIG issued a Special Fraud Alert on arrangements for the provision of clinical laboratory services. The Fraud Alert set forth a number of practices allegedly engaged in by some clinical laboratories and health care providers that raise issues under the federal fraud and abuse laws, including the Anti-Kickback Law. These practices include: (i) providing employees to furnish valuable services for physicians (other than collecting patient specimens for testing) that are typically the responsibility of the physicians' staff; (ii) offering certain laboratory services at prices below fair market value in return for referrals of other tests which are billed to Medicare at higher rates; (iii) providing free testing to physicians' managed care patients in situations where the referring physicians benefit from such reduced laboratory utilization; (iv) providing free pick-up and disposal of bio-hazardous waste for physicians for items unrelated to a laboratory's testing services; (v) providing general-use facsimile machines or computers to physicians that are not exclusively used in connection with the laboratory services; and (vi) providing free testing for health care providers, their families and their employees (i.e., so-called "professional courtesy" testing). The OIG emphasized in the Special Fraud Alert that when one purpose of such arrangements is to induce referrals of program-reimbursed laboratory testing, both the clinical laboratory and the health care provider (e.g., physician) may be liable under the Anti-Kickback Law, and may be subject to criminal prosecution and exclusion from participation in the Medicare and Medicaid programs.

Another issue the OIG has expressed concern about involves the provision of discounts on laboratory services billed to customers in return for the referral of federal health care program business. In a 1999 Advisory Opinion, the OIG concluded that a proposed arrangement whereby a laboratory would offer physicians significant discounts on non-federal health care program laboratory tests might violate the Anti-Kickback Law. The OIG reasoned that the laboratory could be viewed as providing such discounts to the physician in exchange for referrals by the physician of business to be billed by the laboratory to Medicare at non-discounted rates. The OIG indicated that the arrangement would not qualify for protection under the discount safe harbor to the Anti-Kickback Law because Medicare and Medicaid would not get the benefit of the discount. Similarly, in a 1999 correspondence, the OIG stated that if any direct or indirect link exists between a discount that a laboratory offers to a skilled nursing facility ("SNF") for tests covered under Medicare's payments to the SNF and the referral of tests billable by the laboratory under Medicare Part B, then the Anti-Kickback Law would be implicated.

The OIG also has issued guidance regarding joint venture arrangements that may be viewed as suspect under the Anti-Kickback Law. These documents have relevance to clinical laboratories that are part of (or are considering establishing) joint ventures with potential sources of federal health care program business. The first guidance document, which focused on investor referrals to such ventures, was issued in 1989 and another concerning contractual joint ventures was issued in April 2003. Some of the elements of joint ventures that the OIG identified as "suspect" include: arrangements in which the capital invested by the physicians is disproportionately small and the return on investment is disproportionately large when compared to a typical investment; specific selection of investors who are in a position to make referrals to the venture; and arrangements in which one of the parties to the joint venture expands into a line of business that is dependent on referrals from the other party (sometimes called "shell" joint ventures). In a 2004 advisory opinion, the OIG expressed concern about a proposed joint venture in which a laboratory company would assist physician groups in establishing off-site pathology laboratories. The OIG indicated that the physicians' financial and business risk in the venture was minimal and that the physicians would contract out substantially all laboratory operations, committing very little in the way of financial, capital, or

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human resources. The OIG was unable to exclude the possibility that the arrangement was designed to permit the laboratory to pay the physician groups for their referrals, and therefore was unwilling to find that the arrangement fell within a safe harbor or had sufficient safeguards to protect against fraud or abuse.

Violations of other fraud and abuse laws also can result in exclusion from participation in federal health care programs, including Medicare and Medicaid. One basis for such exclusion is an individual's or entity's submission of claims to Medicare or Medicaid that are substantially in excess of that individual's or entity's usual charges for like items or services. In 2003, the OIG issued a notice of proposed rulemaking that would have defined the terms "usual charges" and "substantially in excess" in ways that might have required providers, including the Company, to either lower their charges to Medicare and Medicaid or increase charges to certain other payers to avoid the risk of exclusion. On June 18, 2007, however, the OIG withdrew the proposed rule, saying it preferred to continue evaluating billing patterns on a case-by-case basis. In its withdrawal notice, the OIG also said it "remains concerned about disparities in the amounts charged to Medicare and Medicaid when compared to private payers," that it continues to believe its exclusion authority for excess charges "provides useful backstop protection for the public," and that it will continue to use "all tools available … to address instances where Medicare or Medicaid are charged substantially more than other payers." The enforcement by Medicaid officials of similar state law restrictions also could have a material adverse effect on the Company.

Under another federal statute, known as the "Stark Law" or "self-referral" prohibition, physicians who have an investment or compensation relationship with a clinical laboratory may not, unless an exception applies, refer Medicare patients for testing to the laboratory, regardless of the intent of the parties. Similarly, laboratories may not bill Medicare or any other party for services furnished pursuant to a prohibited self-referral. There are several Stark law exceptions that are relevant to arrangements involving clinical laboratories, including: 1) fair market value compensation for the provision of items or services; 2) payments by physicians to a laboratory for clinical laboratory services; 3) an exception for certain ancillary services (including laboratory services) provided within the referring physician's own office, if certain criteria are satisfied; 4) physician investment in a company whose stock is traded on a public exchange and has stockholder equity exceeding $75.0 million; and 5) certain space and equipment rental arrangements that are set at a fair market value rate and satisfy other requirements. All of the requirements of a Stark Law exception must be met to take advantage of the exception. Many states have their own self-referral laws as well, which in some cases apply to all patient referrals, not just Medicare.

There are a variety of other types of federal and state fraud and abuse laws, including laws prohibiting submission of false or fraudulent claims. The Company seeks to conduct its business in compliance with all federal and state fraud and abuse laws. The Company is unable to predict how these laws will be applied in the future, and no assurances can be given that its arrangements will not be subject to scrutiny under such laws. Sanctions for violations of these laws may include exclusion from participation in Medicare, Medicaid and other federal health care programs, significant criminal and civil fines and penalties, and loss of licensure. Any exclusion from participation in a federal health care program, or any loss of licensure, arising from any action by any federal or state regulatory or enforcement authority, would likely have a material adverse effect on the Company's business. In addition, any significant criminal or civil penalty resulting from such proceedings could have a material adverse effect on the Company's business.

Environmental, Health and Safety

The Company is subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety and laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. All Company laboratories are subject to applicable federal and state laws and regulations relating to biohazard disposal of all laboratory specimens and the Company generally utilizes outside vendors for disposal of such specimens. In addition, the federal Occupational Safety and Health Administration ("OSHA") has established extensive requirements relating to workplace safety for health care employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens.

On November 6, 2000, Congress passed the Needle Stick Safety and Prevention Act, which required, among other things, that companies include in their safety programs the evaluation and use of engineering controls such as safety needles

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if found to be effective at reducing the risk of needle stick injuries in the workplace. The Company has implemented the use of safety needles at all of its service locations, where applicable.

Although the Company is not aware of any current material non-compliance with such federal, state and local laws and regulations, failure to comply could subject the Company to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions.

Drug Testing

Drug testing for public sector employees is regulated by the Substance Abuse and Mental Health Services Administration ("SAMHSA") (formerly the National Institute on Drug Abuse), which has established detailed performance and quality standards that laboratories must meet to be approved to perform drug testing on employees of federal government contractors and certain other entities. To the extent that the Company's laboratories perform such testing, each must be certified as meeting SAMHSA standards.

Controlled Substances

The use of controlled substances in testing for drugs of abuse is regulated by the Federal Drug Enforcement Administration.

Compliance Program

The Company continuously evaluates and monitors its compliance with all Medicare, Medicaid and other rules and regulations. The objective of the Company's compliance program is to develop, implement, and update compliance safeguards as necessary. Emphasis is placed on developing compliance policies and guidelines, personnel training programs and various monitoring and audit procedures to attempt to achieve implementation of all applicable rules and regulations.

The Company seeks to conduct its business in compliance with all statutes, regulations, and other requirements applicable to its clinical laboratory operations. The clinical laboratory testing industry is, however, subject to extensive regulation, and many of these statutes and regulations have not been interpreted by the courts. There can be no assurance that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these statutes and regulations include significant fines and the loss of various licenses, certificates, and authorizations, which could have a material adverse effect on the Company's business.

Business Strategy  

The Company seeks to become a leading provider of laboratory services specializing in providing urine drug toxicology and comprehensive pain medication monitoring programs to physicians, clinics and rehabilitation facilities in the United States. The Company has several subsidiaries poised to execute our business plan.

A.

Medical Billing Choices:  Our in-house billing company compiles and sends invoices to the appropriate insurance companies (Medicaid, Medicare, PPO) for reimbursement.

B.

Medytox Medical Marketing & Sales, Inc.: Our marketing and sales subsidiary, currently employing  10 commissioned salespeople to sell our toxicology program and related products and services to providers.

C.

Medytox Diagnostics, Inc.: This subsidiary is our laboratory acquisition subsidiary and functions also as our in-house research and development subsidiary that seeks out new methodologies, modalities and processes for the better utilization of results. This subsidiary provides clinical support and client service to providers.  

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D.

PB Laboratories, LLC:  This is a clinical laboratory in which Medytox Diagnostics, Inc. acquired 100% interest on October 12, 2012 and which is utilized as our main laboratory. The Company is currently investing in new equipment that will enable PB Laboratories to facilitate the testing of approximately 4,000 samples per month. The lab is fully-accredited and licensed.

E.

Biohealth Medical Laboratory, Inc.:  Medytox Diagnostic Inc. acquired 50.5% ownership of this clinical laboratory specializing in testing blood specimens for alcohol and drugs on December 7, 2012.  The Company will acquire and provide additional equipment in order to allow Biohealth to test urine for drugs and medication monitoring.

F.

Alethea Laboratories, Inc. and International Technologies, LLC:  These are the most-recently acquired subsidiaries of the Company.

In addition, Trident Laboratories, Inc. is 49% owned by our wholly-owned subsidiary, Medytox Institute of Laboratory Medicine Inc. (MILM) (with the right to acquire an additional 32% ownership).  MILM was formed to acquire laboratories in targeted marketplaces.  Trident was our main testing facility during 2011.  Trident requested to rescind the purchase agreement on January 16, 2012.  MILM filed an action seeking to enforce the purchase agreement against Trident and its shareholders, Michelle Steegstra, Christopher Hawley, Donnette Hawley, Michael Falestra and Skyler Lukas (collectively, the "Trident Defendants") for (i) civil conspiracy, (ii) specific performance, (iii) anticipatory breach of contract, (iv) constructive trust, (v) accounting, and (vi) interpleader.  In addition, the Trident Defendants filed a counterclaim and third-party complaint stating causes of action for (i) fraudulent inducement, (ii) civil conspiracy, (iii) tortious interference with business relationships, and (iv) defamation.  The claims and counterclaims of MILM and the Trident Defendants are set for trial beginning in June 2013.

Marketing Strategy

Medytox is a holding company that owns and operates businesses in the medical services sector. Medytox has invested in a strong sales team, a client services team and in proprietary technologies to better serve the needs of a modern-day medical provider.

The Company intends to grow from the acquisition and formation of businesses into the expansion of these businesses to provide an extensive range of services to medical providers for improved patient care.

We intend to acquire or enter into agreements with laboratories that offer or can be developed to offer the most advanced analytical technology for the processing of urine specimens including Immunoassay Analyzers (IA) for screens and GCMS/LCMS for confirmations.  We currently anticipate that the laboratories will be fully-staffed professional COLA-accredited high-complexity laboratories with additional certifications such as the COLA Laboratory of Excellence Award (COLA's Highest Commendation), CLIA (Clinical Laboratory Improvement Amendment) and the State of Florida High-Complexity ACHA License.

Competition  

The Company competes in an industry that is fragmented between independently-owned and physician-owned laboratories. There are approximately 15,000 treatment facilities in the United States according to the National Survey of Substance Abuse Treatment Services. There are several larger players in the industry that operate as full-service clinical laboratories (processing blood, urine and other tissue).  The competition ranges from smaller privately-owned laboratories (3-6 employees) to publicly-traded laboratories with a $9 billion market capitalization, such as Quest Diagnostics, Inc. traded on the New York Stock Exchange (DGX).

Employees

We currently employ 68 full-time employees, including 10 salespeople, 6 customer service representatives, 3 accounting staff, 43 laboratory staff and 6 members of senior management.

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An investment in our securities is highly speculative and subject to numerous and substantial risks. These risks include those set forth herein. You should carefully consider the risks and uncertainties described below and the other information in this Annual Report. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.

Our limited operating history will make it difficult to evaluate an investment in our common stock.

The Company, under its current business model, commenced operations in July 2011 and has changed significantly in the past year which may make it difficult to evaluate our business and prospects based on prior performance. We have increased revenues, and our business model requires us to secure working capital for marketing expenses. If our model fails, then we will fail as a company.  Unless we raise sufficient funds, we will not be able to succeed in our business model.

The voting control by our director and executive officers will make it unlikely for other stockholders to effect change even if they are dissatisfied with management's performance.

The officers and directors of the Company, comprising a total of six people, own approximately 70.0% of the Company's currently issued and outstanding shares of common stock and 26.1% of the currently issued and outstanding Class C Convertible Preferred Stock.  Such persons, as a practical matter, would be able to prevent other stockholders from participating in decisions, such as the election of directors, which affect our management and business direction.

Our corporate structure has certain anti-takeover aspects.

Under our Certificate of Incorporation, our Board of Directors has the authority to issue shares of preferred stock in one or more series and to fix the rights and preferences of the shares of any such series without stockholder approval. Any series of preferred stock is likely to be senior to the Common Stock with respect to dividends, liquidation rights and, possibly, voting rights. In addition, since effective control of the Company is held by senior management voting together, they can limit or prohibit others from attempting to take over control of the Company and could have the effect of discouraging unsolicited acquisition proposals and other attempts to buy our Company. Further, it could be more difficult for a third party to acquire control of us, even if that change of control might be beneficial to our shareholders.

There is currently no market for our stock, one may never develop and be maintained, and there may only be limited ways to transfer your shares.

There is no established public trading market for our Common Stock.  An active trading market may never develop or, if developed, be sustained.  In the absence of an active trading market for our Common Stock investors may not be able to sell their shares when they would like to sell and may need to bear the economic risk of the investment for an indefinite period of time.

We plan to use our stock to pay, to a large extent, for future acquisitions and this would be dilutive to investors.

We plan to use additional stock to pay, to a large extent, for future acquisitions, and believe that doing so will enable us to retain a greater percentage of our operating capital to pay for operations and marketing. Price and volume fluctuations in our stock might negatively impact our ability to effectively use our stock to pay for acquisitions, or could cause us to offer stock as consideration for acquisitions on terms that are not favorable to us and our shareholders. If we did resort to issuing stock in lieu of cash for acquisitions under unfavorable circumstances, it would result in increased dilution to investors.

We are required to implement additional finance and accounting systems, procedures and controls in order to satisfy requirements under the securities laws, including the Sarbanes-Oxley Act of 2002, which increase our costs and divert management's time and attention.

We have established processes, controls and procedures that will allow our management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting when required to do so

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under Section 404 of the Sarbanes-Oxley Act of 2002. Additionally, we periodically review the effectiveness of our internal controls and procedures with a continuous improvement philosophy.

As a company with limited capital and human resources, we anticipate that more of management's time and attention will be diverted from our business to ensure compliance with regulatory requirements than would be the case with a company that has well established controls and procedures. This diversion of management's time and attention may have a material adverse effect on our business, financial condition and results of operations.

In the event we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting when we are required to do so, investors and others may lose confidence in the reliability of our financial statements. If this occurs, the trading price of our common stock, if any, and ability to obtain any necessary equity or debt financing could suffer. In addition, in the event that our independent registered public accounting firm is unable to rely on our internal control over financial reporting in connection with its audit of our financial statements, and in the further event that it is unable to devise alternative procedures in order to satisfy itself as to the material accuracy of our financial statements and related disclosures, we may be unable to file our periodic reports with the SEC. This would likely have an adverse effect on the trading price of our common stock, if any, and our ability to secure any necessary additional financing, and could result in the delisting of our common stock. In such event, the liquidity of our common stock would be severely limited and the market price of our common stock would likely decline significantly.

Regulation by the Food and Drug Administration ("FDA") of Laboratory Developed Tests ("LDTs") and clinical laboratories may result in significant change, and our business could be adversely impacted if we fail to adapt.

High complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to customers.  These tests have been traditionally offered by nearly all complex laboratories for the last few decades and LDTs are subject to CMS oversight through its enforcement of CLIA.  The FDA, which regulates the development and use of medical devices, has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices.  During 2010, the FDA publicly announced that it has decided to exercise regulatory authority over these LDTs, and that it plans to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it will be sensitive to the need to not adversely impact patient care or innovation. To date, the FDA has not announced a framework or timetable for implementing a new regulatory approach, and in its 2013 Work Plan, the U.S. Department of Health & Human Services Office of Inspector General ("OIG") announced that it would examine the oversight of the clinical effectiveness of LDTs given the current approaches by CMS and FDA with respect to LDTs. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA's approach is unknown, it may be extensive and may result in significant change. Our failure to adapt to these changes could have a material adverse effect on our business.

Some of our activities may subject us to risks under federal and state laws prohibiting "kickbacks" and other laws designed to prohibit payments for referrals.

Federal and state anti-kickback and similar laws prohibit payment, or offers of payment, in exchange for referrals of products and services for which reimbursement may be made by Medicare or other federal and state healthcare programs.  Some state laws contain similar prohibitions that apply without regard to the payor of reimbursement for the services. Under a federal statute, known as the "Stark Law" or "self-referral" prohibition, physicians, subject to certain exceptions, are prohibited from referring their Medicare or Medicaid program patients to clinical laboratories with which the physicians or their immediate family members have a financial relationship, and the laboratories are prohibited from billing for services rendered in violation of Stark Law referral prohibitions.  Violations of the federal Anti-Kickback Law and Stark Law may be punished by civil and criminal penalties, and/or exclusion from participation in federal health care programs, including Medicare and Medicaid.  States may impose similar penalties.  The Health Care Reform Law significantly strengthened provisions of the Federal False Claims Act and Anti-Kickback Law provisions, and other health care fraud provisions, leading to the possibility of greatly increased qui tam suits by relators for perceived violations of these laws.  There can be no assurance that our activities will not come under the scrutiny of regulators and other government authorities or that our

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practices will not be found to violate applicable laws, rules and regulations or prompt lawsuits by private citizen "relators" under federal or state false claims laws.

Federal officials responsible for administering and enforcing the healthcare laws and regulations have made a priority of eliminating healthcare fraud, and through a number of legislative measures, including the recent Health Care Reform Law, federal funding available for combating health care fraud and abuse has increased. While we seek to conduct our business in compliance with all applicable laws and regulations, many of the laws and regulations applicable to our business, particularly those relating to billing and reimbursement of tests and those relating to relationships with physicians, hospitals and patients, contain language that has not been interpreted by courts. We must rely on our interpretation of these laws and regulations based on the advice of our counsel and regulatory or law enforcement authorities may not agree with our interpretation of these laws and regulations and may seek to enforce legal remedies or penalties against us for violations. From time to time we may need to change our operations, particularly pricing or billing practices, in response to changing interpretations of these laws and regulations or regulatory or judicial determinations with respect to these laws and regulations. These occurrences, regardless of their outcome, could damage our reputation and harm important business relationships that we have with healthcare providers, payors and others. Furthermore, if a regulatory or judicial authority finds that we have not complied with applicable laws and regulations, we would be required to refund amounts that were billed and collected in violation of such laws and regulations. In addition, we may voluntarily refund amounts that were alleged to have been billed and collected in violation of applicable laws and regulations. In either case, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs and the loss of licenses, certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could harm our operating results and financial condition. Moreover, regardless of the outcome, if we or physicians or other third parties with whom we do business are investigated by a regulatory or law enforcement authority we could incur substantial costs, including legal fees, and our management may be required to divert a substantial amount of time to an investigation.

To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory authorities, such as the OIG, have recommended the adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the United States Sentencing Commission Guidelines Manual, and for many years the OIG has made available a model compliance program targeted to the clinical laboratory industry.  In addition, certain states require that health care providers, such as clinical laboratories, that engage in substantial business under the state Medicaid program have a compliance program that general adheres to the standards set forth in the Model Compliance Program.  Also, under the Health Care Reform Law, the U.S. Department of Health and Human Services, or HHS, will require suppliers, such as the Company, to adopt, as a condition of Medicare participation, compliance programs that meet a core set of requirements.  This mandate has not yet been implemented with respect to clinical laboratories, and HHS has not yet provided a time frame for implementation. While we have adopted or are in the process of adopting. healthcare compliance and ethics programs that generally incorporate the OIG's recommendations, and train our applicable employees in such compliance, having such a program can be no assurance that we will avoid any compliance issues.

We conduct our clinical laboratory testing business in a heavily regulated industry and changes in regulations or violations of regulations could, directly or indirectly, harm our operating results and financial condition.

The clinical laboratory testing industry is highly regulated and there can be no assurance that the regulatory environment in which we operate will not change significantly and adversely in the future. Areas of the regulatory environment that may affect our ability to conduct business include, without limitation:

federal and state laws applicable to billing and claims payment;

federal and state laboratory anti-mark-up laws;

federal and state anti-kickback laws;

federal and state false claims laws;

federal and state self-referral and financial inducement laws, including the federal physician anti-self-referral law, or the Stark Law;

coverage and reimbursement levels by Medicare and other governmental payors and private insurers;

federal and state laws governing laboratory licensing and testing, including CLIA;

federal and state laws governing the development, use and distribution of diagnostic medical tests known as laboratory developed tests or "LDTs";

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HIPAA, along with the revisions to HIPAA as a result of the HITECH Act, and analogous state laws;

federal, state and foreign regulation of privacy, security, electronic transactions and identity theft;

federal, state and local laws governing the handling, transportation and disposal of medical and hazardous waste;

Occupational Safety and Health Administration rules and regulations;

changes to laws, regulations and rules as a result of the Health Care Reform Law; and

changes to other federal, state and local laws, regulations and rules, including tax laws.

These laws and regulations are extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Any determination that we have violated these laws or regulations, or the public announcement that we are being investigated for possible violations of these laws or regulations, could harm our operating results and financial condition. In addition, a significant change in any of these laws or regulations may require us to change our business model in order to maintain compliance with these laws or regulations, which could harm our operating results and financial condition.

Failure to comply with complex federal and state laws and regulations related to submission of claims for clinical laboratory services can result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid Programs.

We are subject to extensive federal and state laws and regulations relating to the submission of claims for payment for clinical laboratory services, including those that relate to coverage of our services under Medicare, Medicaid and other governmental health care programs, the amounts that may be billed for our services and to whom claims for services may be submitted.   Submission of our claims is particularly complex because we provide both anatomic pathology services and clinical laboratory tests, which generally are paid using different reimbursement principles. The clinical laboratory tests are often paid under a clinical laboratory fee schedule, and the anatomic pathology services are often paid under a physician fee schedule.

Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result in attempts by third-party payors, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission of claims in violation of certain statutory or regulatory requirements can result in penalties, including substantial civil money penalties for each item or service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government authorities may also assert that violations of laws and regulations related to submission or causing the submission of claims violate the federal False Claims Act ("FCA") or other laws related to fraud and abuse, including submission of claims for services that were not medically necessary. Violations of the FCA could result in enormous economic liability. The FCA provides that all damages are trebled, and each false claim submitted is subject to a penalty of up to $11,000. For example, we could be subject to FCA liability if it was determined that the services we provided were not medically necessary and not reimbursable, particularly if it were asserted that we contributed to the physician's referrals of unnecessary services to us. It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity for services that we performed if we were found to have knowingly participated in the arrangement that resulted in submission of the improper claims.

Changes in regulation and policies, including increasing downward pressure on health care reimbursement, may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

Reimbursement levels for health care services are subject to continuous and often unexpected changes in policies, and we face a variety of efforts by government payors to reduce utilization and reimbursement for diagnostic testing services. Changes in governmental reimbursement may result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives, and other policy changes.

The Health Care Reform Law includes two separate reductions in the reimbursement rates for our clinical laboratory services under the clinical laboratory fee schedule.  First, it includes a "productivity adjustment" (which was 1.2 percent for 2012).  Second, it includes an additional 1.75 percent reduction, the first of a series of such annual reductions effective from 2011 to 2015, which would reduce the annual Consumer Price Index-based update that would otherwise determine our reimbursement for clinical laboratory services.  These reimbursement cuts could adversely affect our business.

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The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or both of the Medicare fee schedules under which we receive reimbursement, which include the physician fee schedule for anatomical pathology services, and the clinical laboratory fee schedule for our clinical laboratory services. For example, currently there is no copayment or coinsurance required for clinical laboratory services, although there is for our physician services. However, Congress has periodically considered imposing a 20 percent coinsurance on laboratory services. If enacted, this would require us to attempt to collect this amount from patients, although in many cases the costs of collection would exceed the amount actually received.

Center for Medicare and Medicaid Services pays laboratories on the basis of a fee schedule that is reviewed and re-calculated on an annual basis.  Center for Medicare and Medicaid Services may change the fee schedule upward or downward on billing codes that we submit for reimbursement on a regular basis; our revenue and business may be adversely affected if the reimbursement rates associated with such codes are reduced. Even when reimbursement rates are not reduced, policy changes add to our costs by increasing the complexity and volume of administrative requirements. Medicaid reimbursement, which varies by state, is also subject to administrative and billing requirements and budget pressures. Recently, state budget pressures have caused states to consider several policy changes that may impact our financial condition and results of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service coverage, and imposing taxes on our services.

Other legislative changes have been proposed since the passage of the Health Care Reform Law that could also affect reimbursement for our services. For example, the Budget Control Act of 2011 created a Joint Select Committee on Deficit Reduction, which was tasked with recommending proposals to reduce spending. Since that Joint Committee was unable to achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, absent further Congressional action, an automatic reduction in federal spending, or "sequestration" would be triggered, which, combined with the expiration of certain tax cuts on December 31, 2012, has typically been known as the Fiscal Cliff.  While Congress did agree to a package of tax and federal spending proposals on January 1, 2013, these did not eliminate "sequestration" threat, but moved it back to March 1, 2013.  These automatic cuts include Medicare, and, unless legislative action is taken, it will result in approximately 2% aggregate reductions to Medicare payments to providers starting on March 1, 2013.  To date, no Congressional action has been taken and the sequestration has gone into effect.

Healthcare plans have taken steps to control the utilization and reimbursement of healthcare services, including clinical test services.

We also face efforts by non-governmental third-party payors, including healthcare plans, to reduce utilization and reimbursement for clinical testing services.

The healthcare industry has experienced a trend of consolidation among healthcare insurance plans, resulting in fewer but larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers, including clinical testing providers. These healthcare plans, and independent physician associations, may demand that clinical testing providers accept discounted fee structures or assume all or a portion of the financial risk associated with providing testing services to their members through capped payment arrangements. In addition, some healthcare plans have been willing to limit the PPO or POS laboratory network to only a single national laboratory to obtain improved fee-for-service pricing. There are also an increasing number of patients enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.

The increased consolidation among healthcare plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer. The Health Care Reform Law includes provisions, including ones regarding the creation of healthcare exchanges, which may encourage healthcare insurance plans to increase exclusive contracting.

We expect continuing efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical test services. These efforts, including future changes in third-party payor rules, practices and policies, or ceasing to be a contracted provider to a healthcare plan, may have a material adverse effect on our business.

Failure to timely or accurately bill for our services could have a material adverse effect on our business.

Billing for clinical testing services is extremely complicated and is subject to extensive and non-uniform rules and administrative requirements. Depending on the billing arrangement and applicable law, we bill various payors, such as

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patients, insurance companies, Medicare, Medicaid, physicians, hospitals and employer groups. Changes in laws and regulations could increase the complexity and cost of our billing process. Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further cost and complexity to the billing process. Further, our billing systems require significant technology investment and, as a result of marketplace demands, we need to continually invest in our billing systems.

Missing or incorrect information on requisitions adds complexity to and slows the billing process, creates backlogs of unbilled requisitions, and generally increases the aging of accounts receivable and bad debt expense. Failure to timely or correctly bill may lead to our not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing government healthcare programs could lead to various penalties, including: (1) exclusion from participation in CMS and other government programs; (2) asset forfeitures; (3) civil and criminal fines and penalties; and (4) the loss of various licenses, certificates and authorizations necessary to operate our business, any of which could have a material adverse effect on our results of operations or cash flows.

There have been times when our accounts receivable have increased at a greater rate than revenue growth and, therefore, have adversely affected our cash flows from operations. We have taken steps to implement systems and processing changes intended to improve billing procedures and related collection results. We believe that we have made progress by reorganizing our accounts receivable and billing functions and that our allowance for doubtful accounts is adequate. However, we cannot assure that our ongoing assessment of accounts receivable will not result in the need for additional provisions. Such additional provisions, if implemented, could have a material adverse effect on our operating results.

Our operations may be adversely impacted by the effects of extreme weather conditions, natural disasters such as hurricanes and earthquakes, health pandemics, hostilities or acts of terrorism and other criminal activities.

Our operations are always subject to adverse impacts resulting from extreme weather conditions, natural disasters, health pandemics, hostilities or acts of terrorism or other criminal activities. Such events may result in a temporary decline in the number of patients who seek clinical testing services or in our employees' ability to perform their job duties. In addition, such events may temporarily interrupt our ability to transport specimens, to receive materials from our suppliers or otherwise to provide our services.

Increased competition, including price competition, could have a material adverse impact on our net revenues and profitability.

We operate in a business that is characterized by intense competition. Our major competitors include large national laboratories that possess greater name recognition, larger customer bases, significantly greater financial resources and employ substantially more personnel than we do. Many of our competitors have long established relationships. We cannot assure you that we will be able to compete successfully with such entities in the future.

The clinical laboratory business is intensely competitive both in terms of price and service. Pricing of laboratory testing services is often one of the most significant factors used by health care providers and third-party payors in selecting a laboratory. As a result of the clinical laboratory industry undergoing significant consolidation, larger clinical laboratory providers are able to increase cost efficiencies afforded by large-scale automated testing. This consolidation results in greater price competition. We may be unable to increase cost efficiencies sufficiently, if at all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition.  We may also face increased competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry.  Additionally, we may also face changes in fee schedules, competitive bidding for laboratory services or other actions or pressures reducing payment schedules as a result of increased or additional competition.

Additional competition, including price competition, could have a material adverse impact on our net revenues and profitability.

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Failure to comply with environmental, health and safety laws and regulations, including the federal Occupational Safety and Health Administration Act and the Needlestick Safety and Prevention Act, could result in fines and penalties and loss of licensure, and have a material adverse effect upon the Company's business.

The Company is subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, and infectious and hazardous waste materials, as well as regulations relating to the safety and health of laboratory employees. All of the Company's laboratories are subject to applicable federal and state laws and regulations relating to biohazard disposal of all laboratory specimens, and they utilize outside vendors for disposal of such specimens. In addition, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These requirements, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens.

Failure to comply with federal, state and local laws and regulations could subject the Company to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions which would have a material adverse effect on its business. In addition, compliance with future legislation could impose additional requirements on the Company which may be costly.

Regulations requiring the use of "standard transactions" for health care services issued under HIPAA may negatively impact the Company's profitability and cash flows.

Pursuant to HIPAA, the Secretary of Health and Human Services has issued regulations designed to improve the efficiency and effectiveness of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions while protecting the privacy and security of the information exchanged.

The HIPAA transaction standards are complex, and subject to differences in interpretation by payers. For instance, some payers may interpret the standards to require the Company to provide certain types of information, including demographic information not usually provided to the Company by physicians. As a result of inconsistent application of transaction standards by payers or the Company's inability to obtain certain billing information not usually provided to the Company by physicians, the Company could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues. In addition, new requirements for additional standard transactions, such as claims attachments, Version 5010 of the HIPAA Transaction Standards and the ICD-10-CM Code Set, could prove technically difficult, time-consuming or expensive to implement.

Failure to maintain the security of customer-related information or compliance with security requirements could damage the Company's reputation with customers, and cause it to incur substantial additional costs and to become subject to litigation.

The Company receives certain personal and financial information about its customers. In addition, the Company depends upon the secure transmission of confidential information over public networks, including information permitting cashless payments. A compromise in the Company's security systems that results in customer personal information being obtained by unauthorized persons or the Company's failure to comply with security requirements for financial transactions could adversely affect the Company's reputation with its customers and others, as well as the Company's results of operations, financial condition and liquidity. It could also result in litigation against the Company or the imposition of penalties.

Failure of the Company, third party payers or physicians to comply with Version 5010 of the HIPAA Transaction Standards or to comply with the ICD-10-CM Code Set by the compliance date of October 1, 2014, could negatively impact the Company's reimbursement, profitability and cash flow.

The Company believes that it is in compliance in all material respects with the current Transactions and Code Sets Rule. The Company implemented Version 5010 of the HIPAA Transaction Standards, and is within the remediation and implementation phase of the rule to adopt the ICD-10-CM code set. The compliance date for Version 5010 is January 1, 2013

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but CMS has delayed enforcement until March 31, 2013. The compliance date for ICD-10-CM was October 1, 2013, but CMS delayed the enforcement until October 1, 2014. The Company will continue its assessment and remediation of computer systems, applications and processes for compliance with these requirements. Clinical laboratories are typically required to submit health care claims with diagnosis codes to third party payers. The diagnosis codes must be obtained from the ordering physician. The failure of the Company, third party payers or physicians to transition within the required timeframe could have an adverse impact on reimbursement, days sales outstanding and cash collections.

The Administrative Simplification provisions of HIPAA have required the Department of Health and Human Services ("HHS") to establish national standards for electronic health care transactions and NPI. CMS requires the NPI on Part B professional claims after March 1, 2008. The failure of the Company or third parties to meet the NPI requirements for Medicare claims or other covered health plans could have a material adverse impact on the Company's reimbursement and profitability.

Compliance with the HIPAA security regulations and privacy regulations may increase the Company's costs.

The HIPAA privacy and security regulations, including the expanded requirements under HITECH, establish comprehensive federal standards with respect to the use and disclosure of protected health information by health plans, healthcare providers and healthcare clearinghouses, in addition to setting standards to protect the confidentiality, integrity and security of protected health information. The regulations establish a complex regulatory framework on a variety of subjects, including:

·

the circumstances under which the use and disclosure of protected health information are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for the Company's services, and its healthcare operations activities;

·

a patient's rights to access, amend and receive an accounting of certain disclosures of protected health information;

·

the content of notices of privacy practices for protected health information;

·

administrative, technical and physical safeguards required of entities that use or receive protected health information; and

·

the protection of computing systems maintaining Electronic Personal Health Information ("ePHI").

The Company has implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy and security regulations establish a "floor" and do not supersede state laws that are more stringent. Therefore, the Company is required to comply with both federal privacy and security regulations and varying state privacy and security laws. In addition, for healthcare data transfers from other countries relating to citizens of those countries, the Company must comply with the laws of those other countries. The federal privacy regulations restrict the Company's ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. HIPAA, as amended by HITECH, provides for significant fines and other penalties for wrongful use or disclosure of protected health information in violation of the privacy and security regulations, including potential civil and criminal fines and penalties. Due to the enactment of HITECH and an increase in the amount of monetary financed penalties, government enforcement has also increased.  It is not possible to predict what the extent of the impact on business will be, other than heightened scrutiny and emphasis on compliance.  If the Company does not comply with existing or new laws and regulations related to protecting the privacy and security of health information it could be subject to significant monetary fines, civil penalties or criminal sanctions. In addition, other federal and state laws that protect the privacy and security of patient information may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. For example, the Company could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of confidential health information or other private personal information.

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On January 17, 2013, the HHS, Office of Civil Rights issued its final rule modifying the HIPAA Privacy, Security, Enforcement and Breach Notification Rules under the Health Information Technology for Economic and Clinical Health Act ("HITECH").

HHS modified the definition of what constitutes a "breach" for purposes of the breach notification requirement.  Previously, a "breach" had been defined as the "acquisition, access, use or disclosure" of protected health information ("PHI") in violation of the Privacy Rule that "comprises the security or privacy" of the PHI.   The phrase "compromises the security or privacy" of the PHI meant that the acquisition, access, use or disclosure posed a "significant risk of financial, reputational, or other harm to the individual."  Under the new final rule, HHS revised the definition of a breach to state that a breach is presumed to have occurred, unless the covered entity (or business associate) demonstrates that there is a low probability that PHI has been compromised based on a series of specific factors.  In other words, the final rule makes it clear that notification is required for breaches, even if there is no "harm" to the individual.

HITECH made many of the HIPAA privacy and security requirements applicable directly to business associates.  The final rule clarifies the manner in which some of HITECH's provisions will be applied.  Finally, the final rule expanded individual rights, including, for example, an individual's right to receive electronic copies of his or her PHI.

The final rule becomes effective March 26, 2013 and compliance is required by September 23, 2013.

The Company is unable to predict the extent to which these new obligations may prove technically difficult, time-consuming or expensive to implement.

The clinical laboratory industry is subject to changing technology and new product introductions.

Advances in technology may lead to the development of more cost-effective technologies such as point-of-care testing equipment that can be operated by physicians or other healthcare providers in their offices or by patients themselves without requiring the services of freestanding clinical laboratories. Development of such technology and its use by the Company's customers could reduce the demand for its laboratory testing services and negatively impact its revenues.

Currently, most clinical laboratory testing is categorized as "high" or "moderate" complexity, and thereby is subject to extensive and costly regulation under CLIA. The cost of compliance with CLIA makes it impractical for most physicians to operate clinical laboratories in their offices, and other laws limit the ability of physicians to have ownership in a laboratory and to refer tests to such a laboratory. Manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-care laboratory equipment to physicians and by selling test kits approved for home or physician office use to both physicians and patients. Diagnostic tests approved for home use are automatically deemed to be "waived" tests under CLIA and may be performed in physician office laboratories as well as by patients in their homes with minimal regulatory oversight. Other tests meeting certain FDA criteria also may be classified as "waived" for CLIA purposes. The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used by clinical laboratories and has taken responsibility from the Centers for Disease Control for classifying the complexity of tests for CLIA purposes. Increased approval of "waived" test kits could lead to increased testing by physicians in their offices or by patients at home, which could affect the Company's market for laboratory testing services and negatively impact its revenues.

Health care reform and related products (e.g. Health Insurance Exchanges), changes in government payment and reimbursement systems, or changes in payer mix, including an increase in capitated reimbursement mechanisms and evolving delivery models, could have a material adverse impact on the Company's net revenues, profitability and cash flow.

Testing services are billed to private patients, Medicare, Medicaid, commercial clients, managed care organizations ("MCOs") and third-party insurance companies. Tests ordered by a physician may be billed to different payers depending on the medical insurance benefits of a particular patient. Most testing services are billed to a party other than the physician or other authorized person that ordered the test. Increases in the percentage of services billed to government and managed care payers could have an adverse impact on the Company's net revenues. For the year ended December 31, 2012, requisitions by payer were:

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·

private patients 5%  

·

Medicare and Medicaid 8%

·

commercial clients 77%

·

managed care 0%

·

third-party insurance 10%

The various MCOs have different contracting philosophies, which are influenced by the design of the products they offer to their members. Some MCOs contract with a limited number of clinical laboratories and engage in direct negotiation of the rates reimbursed to participating laboratories. Other MCOs adopt broader networks with a largely uniform fee structure offered to all participating clinical laboratories. In addition, some MCOs have used capitation in an effort to fix the cost of laboratory testing services for their enrollees. Under a capitated reimbursement mechanism, the clinical laboratory and the managed care organization agree to a per member, per month payment to pay for all authorized laboratory tests ordered during the month by the physician for the members, regardless of the number or cost of the tests actually performed. Capitation shifts the risk of increased test utilization (and the underlying mix of testing services) to the clinical laboratory provider.

A portion of the third-party insurance fee-for-service revenues are collectible from patients in the form of deductibles, copayments and coinsurance. As patient cost-sharing increases, collectability may be impacted.

In addition, Medicare and Medicaid and private insurers have increased their efforts to control the cost, utilization and delivery of health care services, including clinical laboratory services. Measures to regulate health care delivery in general, and clinical laboratories in particular, have resulted in reduced prices, added costs and decreased test utilization for the clinical laboratory industry by increasing complexity and adding new regulatory and administrative requirements. Pursuant to legislation passed in late 2003, the percentage of Medicare beneficiaries enrolled in Medicare managed care plans has increased. The percentage of Medicaid beneficiaries enrolled in Medicaid managed care plans has also increased, and is expected to continue to increase. Implementation of the Health Care Reform Law, the health care reform legislation passed in 2010, also may affect coverage, reimbursement, and utilization of laboratory services, as well as administrative requirements.

The Company expects efforts to impose reduced reimbursement, more stringent payment policies and cost controls by government and other payers to continue. If the Company cannot offset additional reductions in the payments it receives for its services by reducing costs, increasing test volume and/or introducing new procedures, it could have a material adverse impact on the Company's net revenues, profitability and cash flows.

As an employer, health care reform legislation also contains numerous regulations that will require the Company to implement significant process and record keeping changes to be in compliance. These changes increase the cost of providing healthcare coverage to employees and their families. Given the limited release of regulations to guide compliance, the exact impact to employers including the Company is uncertain.

A failure to obtain and retain new customers, a loss of existing customers or material contracts, a reduction in tests ordered or specimens submitted by existing customers, or the inability to retain existing and create new relationships with health systems could impact the Company's ability to successfully grow its business.

To offset efforts by payers to reduce the cost and utilization of clinical laboratory services, the Company needs to obtain and retain new customers and business partners. In addition, a reduction in tests ordered or specimens submitted by existing customers, without offsetting growth in its customer base, could impact the Company's ability to successfully grow its business and could have a material adverse impact on the Company's net revenues and profitability. The Company competes primarily on the basis of the quality of testing, timeliness of test reporting, reporting and information systems, reputation in the medical community, the pricing of  services and ability to employ qualified personnel. The Company's failure to successfully compete on any of these factors could result in the loss of customers and a reduction in the Company's ability to expand its customer base.

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In addition, as the broader healthcare industry trend of consolidation continues, including the acquisition of physician practices by health systems, relationships with hospital-based health systems and integrated delivery networks are becoming more important. The Company's inability to create relationships with those provider systems and networks could impact its ability to successfully grow its business.

A failure to identify and successfully close and integrate strategic acquisition targets could have a material adverse impact on the Company's business objectives and its net revenues and profitability.

Part of the Company's strategy involves deploying capital in investments that enhance the Company's business, which includes pursuing strategic acquisitions to strengthen the Company's presence in key geographic areas.  In the past two years, the Company has acquired an interest in clinical laboratories in Florida, New Jersey and New Mexico.  However, the Company cannot assure that it will be able to identify acquisition targets that are attractive to the Company or that are of a large enough size to have a meaningful impact on the Company's operating results. Furthermore, the successful closing and integration of a strategic acquisition entails numerous risks, including, among others:

·

failure to obtain regulatory clearance;

·

loss of key customers or employees;

·

difficulty in consolidating redundant facilities and infrastructure and in standardizing information and other systems;

·

unidentified regulatory problems;

·

failure to maintain the quality of services that such companies have historically provided;

·

coordination of geographically-separated facilities and workforces; and

·

diversion of management's attention from the day-to-day business of the Company.

The Company cannot assure that current or future acquisitions, if any, or any related integration efforts will be successful, or that the Company's business will not be adversely affected by any future acquisitions, including with respect to net revenues and profitability. Even if the Company is able to successfully integrate the operations of businesses that it may acquire in the future, the Company may not be able to realize the benefits that it expects from such acquisitions.

Adverse results in material litigation matters could have a material adverse effect upon the Company's business.

The Company may become subject in the ordinary course of business to material legal action related to, among other things, intellectual property disputes, professional liability and employee-related matters, as well as inquiries from governmental agencies and bodies and Medicare or Medicaid carriers requesting comment on allegations of billing irregularities or billing and pricing arrangements that are brought to their attention through billing audits or third parties. Legal actions could result in substantial monetary damages as well as damage to the Company's reputation with customers, which could have a material adverse effect upon its business.

An inability to attract and retain experienced and qualified personnel could adversely affect the Company's business.

The loss of key management personnel or the inability to attract and retain experienced and qualified employees at the Company's clinical laboratories and research centers could adversely affect the business. The success of the Company is dependent in part on the efforts of key members of its management team.

In addition, the success of the Company's clinical laboratories also depends on employing and retaining qualified and experienced laboratory professionals, including specialists, who perform clinical laboratory testing services. In the future, if competition for the services of these professionals increases, the Company may not be able to continue to attract and retain individuals in its markets. The Company's revenues and earnings could be adversely affected if a significant number of professionals terminate their relationship with the Company or become unable or unwilling to continue their employment.

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Failure in the Company's information technology systems could significantly increase testing turn-around time or billing processes and otherwise disrupt the Company's operations or customer relationships.

The Company's laboratory operations and customer relationships depend, in part, on the continued performance of its information technology systems. Despite network security measures and other precautions the Company has taken, its information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. In addition, the Company is in the process of integrating the information technology systems of its recently acquired subsidiaries, and the Company may experience system failures or interruptions as a result of this process. Sustained system failures or interruption of the Company's systems in one or more of its laboratory operations could disrupt the Company's ability to process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. Failure of the Company's information technology systems could adversely affect the Company's business, profitability and financial condition.

A significant deterioration in the economy could negatively impact testing volumes, cash collections and the availability of credit.

The Company's operations are dependent upon ongoing demand for diagnostic testing services by patients, physicians, hospitals, MCOs, and others. A significant downturn in the economy could negatively impact the demand for diagnostic testing as well as the ability of patients and other payers to pay for services ordered. In addition, uncertainty in the credit markets could reduce the availability of credit and impact the Company's ability to meet its financing needs in the future.

Certain issuances of our common stock and options may not have fully complied with applicable securities laws.

We are currently reviewing issuances of our common stock and issuances of our options to determine if the transactions fully complied with applicable federal and state securities laws and/or regulations.  In the event such transactions did not fully comply, we may be required to offer rescission of such  issuances to the recipients of such securities.  Although we cannot with any certainty estimate any contingent liability we may have with respect to such issuances, we currently believe that such rescission rights will not have a material adverse effect on our financial condition.

Our board of directors consists of one member, who is not independent.

Our board is currently comprised of one member, who is also our chief executive officer.  Accordingly, we lack the advantages that a multi-member board can afford us.  In addition, we lack the independent judgment, skill set and oversight  that independent board members can provide.  Although we have contemplated increasing our board to include additional and independent members, no assurance can  be given as to when, if ever, we will do so.

We do not have an audit or compensation committee.

As a consequence of having only one board member, our board of directors does not have any standing committees, including an audit,  compensation or nominating committee.  Accordingly, our sole director is the only interface, apart from our chief financial officer  who reports to our sole director in his capacity  as chief executive officer, with our auditors.  In addition,  there is no independence in determining our chief executive officer's compensation.

Our sole board member and chief executive officer is engaged in other business activities.

Although our sole board member and chief executive officer believes that he is devoting sufficient time to our business, no assurance can be given that his other business ventures and activities will not adversely affect his time availability to focus on our business.  In addition, no assurance can be given that such other business activities and any attendant problems associated therewith will not distract or otherwise impede our chief executive officer's performance.

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Increasing health insurance premiums and co-payments or high deductible health plans may cause individuals to forgo health insurance and avoid medical attention, either of which may reduce demand for our products and services.  

Health insurance premiums, co-payments and deductibles have generally increased in recent years. These increases may cause individuals to forgo health insurance, as well as medical attention. This behavior may reduce demand for testing by our laboratories.

If goodwill or other intangible assets that we have recorded in connection with our acquisitions of other businesses become impaired, we could have to take significant charges against earnings.  

As a result of our acquisitions, we have recorded, and may continue to record, a significant amount of goodwill and other intangible assets. Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assets has been impaired.  Any reduction or impairment of the value of goodwill or other intangible assets will result in additional charges against earnings, which could materially reduce our reported results of operations in future periods.

Our business has substantial indebtedness.

We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and expose us to interest rate fluctuations. As of December 31, 2012, we had total debt outstanding of approximately $3.4 million, almost all of which is short term.

We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from other debt or equity offerings. Accordingly, our ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, which we may be unable to do on acceptable terms, and forego attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.

We depend on distributions from our subsidiaries to make payments on our indebtedness.  These distributions may not he made.

A substantial portion of our business is conducted by our subsidiaries. Therefore, our ability to meet our payment obligations on our indebtedness is substantially dependent on the earnings of certain of our subsidiaries and the payment of funds to us by our subsidiaries as dividends, loans, advances or other payments. Our subsidiaries are separate and distinct legal entities and, unless they expressly guarantee any indebtedness of ours, they are not obligated to make funds available for payment of our indebtedness in the form of loans, distributions or otherwise. Our subsidiaries' ability to make any such loans, distributions or other payments to us will depend on their earnings, business results, the terms of their existing and any future indebtedness, tax considerations and legal or contractual restrictions to which they may be subject. If our subsidiaries do not make such payments to us, our ability to repay our indebtedness may be materially adversely affected.

We do not intend to pay cash dividends on our Common Stock in the foreseeable future.

We have never declared cash dividends on our Common Stock and we currently do not anticipate paying any cash dividends in its foreseeable future.  Accordingly, our stockholders will not realize a return on their investment unless the trading price of our Common Stock appreciates, which is uncertain and unpredictable.

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The acquisition of Medical Billing Choices, Inc. may be rescinded.

On August 27, 2011, the Company agreed to purchase 100% of Medical Billing Choices, Inc. ("MBC") from unrelated parties for cash and a note for a total amount of $850,000.  The Company paid $100,000 down in cash and is paying the $750,000 note in monthly payments from the collections in MBC on Medytox billings.  The note balance must be paid off within 24 months or the shareholders of MBC have the right to rescind the agreement

At the signing of the agreement, the shareholders of MBC assigned 49% of the stock in escrow for the benefit of Medytox and assumed the duties of billing the medical services provided by any subsidiary of Medytox.  Upon full payment of the $750,000 note, the Company will receive the 49% of the stock in escrow and the remaining 51% from the shareholders of MBC, at which time Medytox will own 100% of MBC.  Until the note is paid in full, the former shareholders of MBC will be allowed to keep 100% of the profits of their existing and future non-Medytox billings.

Our Common Stock is subject to substantial dilution.

The Company has outstanding options to purchase an aggregate of 21,320,000 shares of Common Stock, all of which are currently exercisable.  In addition, 1,000,000 shares of Series C Preferred Stock are convertible into Common Stock at a discount to the market price of the Common Stock.  Exercise of the options or conversion of the Series C Preferred Stock could result in substantial dilution of our Common Stock and a decline in its market price.

None.

The Company does not own any real property.  The table below summarizes certain information as to our principal facilities as of April 1, 2013:

We believe that each of our facilities as presently equipped has the production capacity for its currently foreseeable level of operations.

Legal Matters

During the course of business, litigation commonly occurs.  From time to time the Company may be a party to litigation matters involving claims against the Company.  The Company operates in a highly regulated industry and employs personnel which may inherently lend itself to legal matters.  Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a material effect on the Company's financial position or results of operations. Management, in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.

Legal Matters – Trident Labs

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As described in Note 4, Disputed Subsidiary, one subsidiary, Trident Laboratories, Inc. ("Trident") is currently in a contract dispute with the Company.  MILM filed suit seeking to enforce the purchase agreement against Trident and its shareholders, Michelle Steegstra, Christopher Hawley, Donnette Hawley, Michael Falestra and Skyler Lukas (collectively, the "Trident Defendants") for (i) civil conspiracy, (ii) specific performance, (iii) anticipatory breach of contract, (iv) constructive trust, (v) accounting, and (vi) interpleader.  In addition, the Trident Defendants filed a counterclaim and third-party complaint stating causes of actions for (i) fraudulent inducement, (ii) civil conspiracy, (iii) tortious  interference with business relationships and (iv) defamation.  The claims and counterclaims of the Company and the Trident Defendants are set for trial during June 2013.  The Company believes the counterclaims are devoid of legal and factual merit.  The litigation is ongoing and could have a negative effect on the Company's consolidated balance sheet.  However, the dispute did cause a disruption of our operations during 2012.

Legal Matters – Bradley T. Ray

On July 26, 2011, the Company organized Medytox Institute of Laboratory Medicine, Inc. ("MILM"), a Florida corporation, as a wholly-owned subsidiary.  MILM was organized to acquire and manage medical testing laboratories.  MILM operates from the corporate offices in West Palm Beach, Florida.

In February 2012, Bradley Ray filed a claim asserting that he owned the shares of MILM. 

On January 29, 2013, the parties  reached an agreement resolving and settling their disputes.  As a result of the settlement, all cases in which Mr. Ray alleged an ownership interest in MILM have been dismissed with prejudice.  

Legal Matters – Richard McCullough

The Company filed a two count complaint against Richard McCullough in Broward County, Florida on June 1, 2012, bringing claims against him for defamation and  tortious  interference with business relationships.  The Company intends to vigorously pursue this action and protect its reputation and business relationships.

None.

General

The authorized capital stock of the Company consists of 500 million shares of Common Stock, par value $.0001 per share, of which 29,567,153 shares are issued and outstanding as of March 31, 2013, and 100 million shares of Preferred Stock, par value $.0001 per share, of which 5,000 shares of Series B Non-Convertible Preferred Stock are issued and outstanding and 1,000,000 shares of Series C Convertible Preferred Stock are issued and outstanding.  There is no established public trading market for our Common Stock or for either class of Preferred Stock.

The following description of the rights and preferences of the Company's capital stock is merely a summary. Each prospective investor should refer to the Company's Articles of Incorporation for a complete description of the Company's capital stock as well as to the applicable statutes of the State of Nevada for a more complete description concerning the rights and liabilities of stockholders.

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Common Stock

Holders of the Common Stock do not have preemptive rights to purchase additional shares of Common Stock or other subscription rights. The Common Stock carries no conversion rights and is not subject to redemption or to any sinking fund provisions. Upon liquidation or dissolution of the Company, whether voluntary or involuntary, holders of shares of Common Stock are to share equally in the assets of the Company available for distribution to common stockholders. The Board of Directors is authorized to issue additional shares of Common Stock, not to exceed the amount authorized by the Company's Articles of Incorporation, on such terms and conditions and for such consideration as the Board may deem appropriate without further stockholder action.

Each holder of Common Stock is entitled to one vote per share on all matters on which such stockholders are entitled to vote. Since the shares of Common Stock do not have cumulative voting rights, the holders of more than 50% of the shares voting for the election of directors (including both the Common Stock and the Series C Convertible Preferred Stock) can elect all the directors if they choose to do so and, in such event, the holders of the remaining shares will not be able to elect any person to the Board of Directors.

Holders of the Company's Common Stock are entitled to dividends when, as, and if declared by the Board of Directors out of funds legally available therefor. The Company does not anticipate the declaration or payment of any dividends in the foreseeable future.

The Company intends to retain earnings, if any, to finance the development and expansion of its business. Future dividend policy will be subject to the discretion of the Board of Directors and will be contingent upon future earnings, if any, the Company's financial condition, capital requirements, general business conditions and other factors. Therefore, there can be no assurance that any dividends of any kind will ever be paid.

Preferred Stock

The Preferred Stock has been authorized as "blank check" preferred stock with such designations, rights, and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval (but subject to applicable government regulatory restrictions), to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock.

The Board of Directors is expressly authorized at any time and from time to time to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, but not to exceed one vote per share, or without voting powers, and with such designations, preferences and relative participating, optional or other special rights, qualifications, limitations or restrictions, as shall be fixed and determined in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors, and as are not stated and expressed in the Company's Articles of Incorporation or any amendment thereto, including (but without limiting the generality of the foregoing) the following:

(i)

The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by resolution by the Board of Directors;

(ii)

The rate of dividends payable on shares of such series, the times of payment, whether dividends shall be cumulative, the conditions upon which and the date from which such dividends shall be cumulative;

(iii)

Whether shares of such series can be redeemed, the time or times when, and the price or prices at which shares of such series shall be redeemable, the redemption price, terms and conditions of redemption, and the sinking fund provisions, if any, for the purchase or redemption of such shares;

(iv)

The amount payable on shares of such series and the rights of holders of such shares in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company;

Page 29 of 86

(v)

The rights, if any, of the holders of shares of such series to convert such shares into, or exchange such shares for, shares of Common Stock or shares of any other class or series of Preferred Stock and the terms and conditions of such conversion or exchange; and

(vi)

The rights, if any, of the holders of shares of such series to vote.

Except in respect of the relative rights and preferences that may be provided by the Board of Directors as hereinbefore provided, all shares of Preferred Stock shall be of equal rank and shall be identical, and each share of a series shall be identical in all respects with the other shares of the same series.

The Company has issued two Series of Preferred Stock:

Series B Preferred Stock.  The Company has authorized up to 5,000 shares of Series B Non-Convertible Preferred Stock with a par value of $.0001 per share ("Series B Preferred Stock").  The Series B Preferred Stock is senior to the Company's common stock as to the payment of dividends and the distribution of assets upon the occurrence of a liquidation, dissolution or winding-up of the Company, whether on a voluntary or involuntary basis (each, a "Liquidation Event").  

The Series B Preferred Stock pays a monthly dividend of 10% of the amount of gross sales in excess of $1 million collected by the Company or any subsidiary (on a consolidated basis) in the ordinary course of business during the month immediately preceding the month on which such dividend becomes payable, which amount shall not exceed $150,000 and (i) 15% of the amount of gross sales in excess of $2.5 million collected by the Company or any subsidiary (on a consolidated basis) in the ordinary course of business.  Each holder of Series B Preferred Stock receives a pro-rata portion of such dividend based on the number of shares of Series B Preferred Stock held by such holder and the total number of shares of Series B Preferred Stock outstanding at the time the dividend is declared.  

Upon the occurrence of a Liquidation Event, each holder of outstanding Series B Preferred Stock shall be entitled to receive, before any payment or distribution shall be made to the holders of the Common Stock or any other class of capital stock of the Company that is junior to the Series B Preferred Stock, an amount equal to (i) 25% of the distributable assets of the Company multiplied by (ii) a fraction, the numerator of which is the total number of shares of Series B Preferred Stock held by such holder and the denominator of which is the total number of shares of Series B Preferred Stock then-issued and outstanding.

The Series B Preferred Stock shall have no voting rights associated with it.

In the event of the Company is the subject of an Acquisition or Asset Transfer, each holder of Series B Preferred Stock shall receive an amount of the proceeds of such Acquisition or Asset Transfer as if such Acquisition or Asset Transfer was a Liquidation Event.  As used herein, "Acquisition" shall mean (i) any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other reorganization other than any such consolidation, merger or reorganization in which the equity holders of the Company immediately prior to such consolidation, merger or reorganization continue to hold at least a majority of the voting power of the surviving entity in substantially the same proportion immediately after such consolidation, merger or reorganization, or (ii) any transaction or series of related transactions to which the Company is a party in which a majority of the Company's voting power is transferred (other than to the Company), provided, that an Acquisition shall not include any transaction or series of related transactions principally for bona fide equity financing purpose in which cash is received by the Company or any successor or any indebtedness of the Company is cancelled or converted into a combination thereof.  As used herein, "Asset Transfer" shall mean a sale, lease, exclusive license or other disposition of all or substantially all of the assets of the Company.

So long as any shares of the Series B Preferred Stock are outstanding, the Company shall not, without first obtaining the written consent of stockholders holding a majority of the outstanding Series B Preferred Stock (i) authorize or issue additional shares of the Series B Preferred Stock or create, authorize the creation of, or issue any additional class or series of capital stock that ranks senior to the Series B Preferred Stock as to distributions in connection with Liquidation Events or (ii) amend, alter or repeal any provisions of the Articles of Incorporation of the Company or its Bylaws in any manner that adversely affects the powers, preferences or rights of the Series B Preferred Stock.

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If a holder of outstanding Series B Preferred Stock desires to, directly or indirectly, transfer, sell, assign, pledge, hypothecate, encumber or otherwise dispose (collectively, "Transfer"), all or any portion of any shares of Series B Preferred Stock, such holder must first inform the other holders of Series B Preferred Stock in writing (the "Offer Notice").  Such other holders shall then have 10 days to elect whether to purchase such offered shares of Series B Preferred Stock, which shall be allocated among such other holders electing to purchase the offered shares of Series B Preferred Stock on a pro-rata basis based on the number of shares of Series B Preferred Stock held.  If none of the other holders elect to purchase any of the offered shares, the Company shall have the right, but not the obligation, to purchase all (but not less than all) of such offered shares.  The Company shall have 10 days following the end of the other holders' purchase election period to communicate its election of whether to purchase such offered shares.  If the other holders of Series B Preferred Stock or the Company elect to purchase such offered shares, the closing of such transaction shall occur within 30 days of the end of the applicable purchase election period.  The purchasers (either the other holders or the Company, as applicable) shall have the option to pay (i) in a lump sum payment at closing or (ii) in 12 equal monthly installments (with interest payable at a rate of 8% per annum).  The purchase price of such offered shares shall be equal to (a) the total amount of dividends received by the holder with respect to all shares of Series B Preferred Stock held by such holder for the 12 month period immediately preceding the date upon which the Offer Notice was received by the other holders.  "Transfer" shall not include any transfer to an affiliate of the holder, any children or spouse of the holder or any entity solely owned or controlled by the children or spouse of the holder.

A holder's shares of Series B Preferred Stock may be cancelled any time if, during the 36 month period following the date on which such shares of Series B Preferred Stock is issued, such holder (i) breaches any restrictive covenant provision in any employment agreement or consulting agreement to which such holder (or its affiliate) and the Company (or its affiliate) is a party or (ii) directly or indirectly enters into the employment of, renders any services to, engages, manages, operates, joins, owns, lends money or otherwise offers other assistance to or participates in or is connected with, as an officer, director, employee, principal, agent, creditor, proprietor, representative, stockholder, partner, associate, consultant, sole proprietor or otherwise, any business that, directly or indirectly, is engaged in providing, selling, consulting with regard to or marketing any products or services that compete with the products and/or services of the Company or any of its affiliates in the United States or anywhere in the world that the Company or any affiliate thereof has customers, facilities, distributors or employees or otherwise does business.

If a holder of shares of Series B Preferred Stock is an employee or consultant of the Company and such holder terminates his or her employment or consulting relationship at any time within the 24 month period following the date that such shares of Series B Preferred Stock are issued to such holder, the Company shall have the right, but not the obligation, to cause such holder to sell to the Company all or any portion of such holder's shares of Series B Preferred Stock by delivering written notice to such holder within 10 days following the end date of such holder's employment or consulting relationship with the Company (the "Call Notice").  If the Company elects to purchase such all or any portion of such holder's shares, the closing of such transaction shall occur within 30 days of the date the Call Notice is received by the holder.  The Company shall have the option to pay (i) in a lump sum payment at closing or (ii) in 12 equal monthly installments (with interest payable at a rate of 8% per annum).  The purchase price of such shares shall be equal to (a) the total amount of dividends received by the holder with respect to all shares of Series B Preferred Stock held by such holder for the 12 month period immediately preceding the date upon which the Call Notice was received by such holder, plus all unpaid dividends (if any) multiplied by (ii) a fraction, the numerator of which is the total number of shares of Series B Preferred Stock to be purchased by the Company and the denominator of which is the total number of shares of Series B Preferred Stock held by such holder.

Series C Preferred Stock.  The Company has authorized up to 1,000,000 shares of Series C Convertible Preferred Stock with a par value of $.0001 per share ("Series C Preferred Stock").  The Series C Preferred Stock is in parity with the Company's common stock as to the payment of dividends and the distribution of assets upon the occurrence of a Liquidation Event.  

The holders of Series C Preferred Stock can convert to shares of Common Stock at a 20% discount to the Market Price at the time of conversion. The holders of Series C Preferred Stock shall vote with the holders of Common Stock as a single class.  "Market Price" shall mean the last reported share price of the Common Stock if shares of the Common Stock are quoted on a national market system (e.g. Nasdaq), or, if the Common Stock is not listed on a national market system but the bid and ask prices are reported by Nasdaq or the National Quotation Bureau Incorporated (or any successor), the Market Price shall mean the last bid and ask prices reported on such date.  If neither of the foregoing options are available, the Market Price shall be determined by the Company's Board of Directors by resolution setting forth the price per share of the Common Stock based on the price that would be paid for all of the capital stock of the Company in an arms'-length transaction between a willing buyer and seller as reasonably determined by the Company's Board of Directors; provided,

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however, that if such valuation would exceed $10 million, then the Market Price shall be determined by the valuation of a nationally recognized investment banking or appraisal firm.

Any shares of Series C Preferred Stock outstanding on the first anniversary of the date upon which such shares were issued (the "Mandatory Redemption Date") shall be automatically converted into that number of fully-paid non-assessable shares of Common Stock the holder thereof would have been entitled to receive had such shares been converted on the Mandatory Redemption Date.

The Company has the right, exercisable at any time, to redeem all or any portion of the outstanding shares of Series C Preferred Stock by paying holders of the Series C Preferred Stock an amount in cash equal to $1.00 for each outstanding share of Series C Preferred Stock that is redeemed.

Warrants and Options

As of December 31, 2012, we had not issued any warrants to purchase shares of our common stock.

Under their respective employment agreements, each of William Forhan, Jace Simmons, Francisco Roca, III, Dr. Thomas Mendolia, Sharon Hollis and Steven Sramowicz, executive officers of the Company, in 2012 were issued options to purchase 3,000,000 shares of Common Stock on the following terms:

i)

options to purchase 1,000,000 shares, exercisable at $2.50 per share through December 31, 2017;

ii)

options to purchase 1,000,000 shares exercisable at $5.00 per share through December 31, 2017; and

iii)

options to purchase 1,000,000 shares, exercisable at $10.00 per share through December 31, 2013.

The Company also granted options to purchase 3,000,000 shares of Common Stock, on the same terms, to Alcimede, LLC in 2012 pursuant to its consulting agreement with the Company.

Effective December 31, 2012, each of Joseph Fahoome and Robert Kuechenberg resigned from the Board of Directors of the Company.  The Company granted to each of Mr. Fahoome and Mr. Kuechenberg options to purchase 10,000 shares of Common Stock, exercisable at $2.50 a share through December 31, 2014.

In total, there are currently outstanding options to purchase 21,320,000 shares of Common Stock.

Convertible Debt

We issued a Convertible Promissory Note in the amount of  $500,000 on December 6, 2011, paying interest at 20% per annum, and with a conversion price of $2.50 per share.

Holders

As of March 31, 2013, there are 71 record holders of the Company's Common Stock, five record holders of the Series B Preferred Stock and 45 record holders of the Series C Preferred Stock.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On October 1, 2012, we issued 5,000 authorized shares of the Series B Preferred Stock in consideration for services rendered by employees and consultants.  The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On December 31, 2012, we issued 1,000,000 authorized shares of Series C Preferred Stock in consideration of the cancellation of promissory notes with existing security holders of the Company.  The shares are exempted from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.

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On October 1, 2012, we issued 4,500,000 authorized shares of Common Stock and 3,000,000 options to purchase Common Stock to (i) Alcimede LLC, for consulting services rendered, and (ii) each of the following officers of the Company: Francisco Roca III, Sharon L. Hollis, Dr. Thomas F. Mendolia and Steven Sramowicz.  The shares and options were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On October 1, 2012, we issued 1,000,000 authorized shares of Common Stock and 3,000,000 options to purchase Common Stock to the Company's Chief Financial Officer, Jace Simmons.  The shares and options were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On October 1, 2012, we issued 2,500,000 authorized shares of Common Stock and 3,000,000 options to purchase Common Stock to the Company's Chief Executive Officer, William Forhan.  The shares and options were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On December 31, 2012, we issued 20,128 authorized shares of Common Stock to a note holder of the Company in consideration of a cancellation of the note.  The shares are exempted from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On December 31, 2012, we issued 23,500 authorized shares of Common Stock in consideration for services rendered by consultants.  The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

Not applicable.

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under "Forward-Looking Statements" and "Item 1A. Risk Factors".  The discussion should be read in conjunction with the consolidated financial statements and notes thereto.  

Unless stated otherwise, the words "we," "us," "our," "the Company," "Medytox Solutions" or "Medytox Solutions, Inc." means Medytox Solutions, Inc.

Sufficiency of Cash Flows

The Company historically has utilized various credit facilities to fund working capital needs, acquisitions and capital expenditures. Future cash needs for working capital, acquisitions and capital expenditures may require management to seek additional equity or obtain additional credit facilities. The sale of additional equity could result in additional dilution to the Company's shareholders. A portion of the Company's cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies.

Results of Operations

Fiscal Year Ended December 31, 2012 to Fiscal Year Ended December 31, 2011

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The Company dramatically changed its business plan and focus during 2011.  The casino marketing business wound down and the medical urine testing business started. There is little basis for comparability between the last two years.  

Revenues

Revenues for the year ended December 31, 2012 were $21,076,357, entirely derived from laboratory and billing services.  Revenues in 2011 were $3,992,652, consisting of $17,165 in casino business revenue and the remainder from laboratory services.

Operating Expenses

Operating expenses for the year ended December 31, 2012 were $17,545,404, compared to $3,384,498 for the year ended December 31, 2011. The increase in expenses during 2012 was attributable to the start-up of medical testing operations at PB Laboratories, LLC, including marketing services, billing services, the direct costs of the testing laboratory and personnel wages. The operating expenses incurred during the year ended December 31, 2012 consisted of: (i) direct costs of the testing laboratories of $2,913,169 (2011: $481,891); (ii) general and administrative of $6,437,778 (2011: $1,161,498); (iii) sales and marketing expenses of $1,106,864 (2011: $879,246); (iv) bad debt expense of $7,021,945 (2011: $843,418); and (v) depreciation of $65,648 (2011: $18,445). Operating expenses increased due to an increase of $2,431,278 in direct costs of the testing laboratories, $5,276,280 in general and administrative, $227,618 in sales and marketing expenses, $6,178,527 in bad debt expense, and $47,203 in depreciation. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, and consulting costs.

Therefore, our income from operations for the year ended December 31, 2012 was $3,530,953 as compared to $608,154 for the year ended December 31, 2011.

Other expenses incurred during the year ended December 31, 2012 included: (i) interest expense of $653,588 (2011: $174,973); offset by (ii) gain on settlement of debt of $348,315 (2011: $-0-); (iii) gain on the settlement of assets of $2,546 (2011: loss of $18,586); and (iv) other income of $129 (2011: $-0-).

Net Income

Net income attributable to Medytox Solutions common shareholders for the year ended December 31, 2012 was $2,229,037 compared to  $92,701 for the year ended December 31, 2011.

Disputed Segment

The dispute with Trident Laboratories, Inc. occurred in 2012.  The assets and liabilities of Trident are excluded from the individual consolidated balance sheet line items and presented separately as assets and liabilities from disputed activity and operating activity for 2012 is excluded from the consolidated statement of operations. In addition, the Company has reserved $397,918 of net income from the disputed activity for the period from August 22, 2011 (date of acquisition) through December 31, 2012.  The net assets and liabilities attributable to the disputed activity are as follows at December 31, 2012:

Deferred Compensation

At December 31, 2011, two members of Company management were owed a total of $291,766 in deferred compensation from prior operations.  During 2012, $15,000 was paid and both members agreed to forgive the remaining $276,766 and allow the Company to cancel the liability.

SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable

Accounts receivable consists of amounts due primarily from insurance companies on behalf of customers for laboratory services performed and are shown net of an allowance for doubtful accounts.  Receivables are determined to be

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past due based on the payment terms of the original contracts or invoices.  The Company uses the allowance method for recognizing bad debts. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.   When an account is deemed uncollectible, it is written off against the allowance. The Company generally does not require collateral for its accounts receivable. The Company does not typically charge interest on past due receivables.  

Long-Lived Assets and Intangible Property

The Company accounts for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 360 "Property, Plant and Equipment". ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.  

Fair Value of Financial Instruments

The Company's balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.

ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) a reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1 -

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 -

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

Level 3 -

Inputs that are both significant to the fair value measurement and unobservable.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met:

·

persuasive evidence of an arrangement exists,

·

the product has been shipped or the services have been rendered to the customer,

·

the sales price is fixed or determinable, and

·

collectability is reasonably assured.

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The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when a urine or blood specimen is tested and the services are billed to an insurance company, an individual, Medicare or Medicaid.  We record the invoice as accounts receivable and reserve for bad debt, insurance discounts (self- pay write off 100%) and estimate net revenues to equal 60% of billed revenues.

Stock Based Compensation

The Company accounts for Stock-Based Compensation under ASC 718 "Compensation – Stock Compensation", which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.  

The Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Under ASC 505-50, the Company determines the fair value of the options, warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in capital in shareholders' equity/(deficit) over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options or warrants at the end of each period.

Income Taxes

Income taxes are accounted for under the liability method of accounting for income taxes.  Under the liability method, future tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of assets and liabilities and their respective tax bases.  Future tax assets and liabilities are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled.  The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs.  Future income tax assets are recognized to the extent that they are considered more likely than not to be realized.

The FASB has issued ASC 740 "Income Taxes".  ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements.  This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

Not applicable.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Medytox Solutions Inc.

West Palm Beach,  Florida

We have audited the accompanying consolidated balance sheet of Medytox Solutions, Inc. (the "Company") as of December 31, 2012 and the related consolidated statement of operations, consolidated stockholders' deficit and consolidated cash flows for the year then ended.  The financial statements as of December 31, 2011 and for the year then ended were audited by other auditors whose report dated April 9, 2012 included an unqualified opinion with an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we  engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2012 and the results of its consolidated operations and its consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ DKM Certified Public Accountants

DKM Certified Public Accountants

Clearwater, Florida

April 16, 2013

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders Medytox Solutions Inc.

W Palm Beach,  FL 33402

I have audited the accompanying consolidated balance sheets of Medytox Solutions, Inc. (the "Company") as of December 31, 2011 and the related consolidated statements of operations, consolidated stockholders' deficit and consolidated cash flows for the year then ended.  The financial statements as of December 31, 2010 and for the year then ended were audited by other auditors whose report dated April 2, 2011 included an unqualified opinion with an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern.  These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor was I  engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, I express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and the results of its consolidated operations and its consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has an accumulated deficit and negative cash flows from operations.  Additionally, there is certain litigation involving a consolidated entity which is unresolved, as discussed in Note 10.  The Company is currently reliant on shareholders funding operations and is requiring traditional financing or equity funding to expand its operating plan. These conditions raise doubt about the Company's ability to continue as a going concern.  Further information and management's plans in regard to this uncertainty are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Peter Messineo, CPA

Peter Messineo, CPA

Palm Harbor, Florida

April 9, 2012

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Note 1 – Organization, Nature of Business and Presentation (Continued)

Organization (Continued)

On March 9, 2012, the Company formed Medytox Medical Marketing & Sales, Inc., a Florida corporation, as a wholly-owned subsidiary that provides marketing for clinical laboratories that are owned by the Company.

On December 7, 2012, MDI acquired majority interest in Biohealth Medical Laboratory, Inc. (“Biohealth”), a Florida corporation.   The Company ordered and installed new equipment that will enable Biohealth to process the increased volume of urine toxicology and blood testing that the Company anticipates.  The financial results of Biohealth have been included in the Company's consolidated financial statements since the date of the acquisition of the majority interest.

Nature of Operations

As of December 31, 2012, the Company operates in the medical services segment.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (“SEC”). 

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant areas of estimate include the impairment of assets and rates for amortization, accrued liabilities, future income tax obligations and the inputs used in calculating stock-based compensation and transactions.  Actual results could differ from those estimates and would impact future results of operations and cash flows.

Principles of Consolidation

The consolidated financial statements include the accounts of Medytox Solutions, Inc. and its wholly-owned subsidiaries, Medytox Medical Management Solutions Corp., Medytox Institute of Laboratory Medicine, Inc., Medical Billing Choices, Inc., Medytox Diagnostics, Inc., PB Laboratories, LLC, and Medytox Medical Marketing & Sales, Inc., and its majority-owned subsidiary, Biohealth medical Laboratory, Inc.  Due to the dispute with Trident and its selling shareholders, the accounts of Trident Laboratories, Inc. have been excluded from consolidation.  In addition, a disputed net income reserve of $397,918 has been established as of December 31, 2012 representing all of Trident’s net income recognized by the Company since August 22, 2011, the date of acquisition.  All significant inter-company balances and transactions have been eliminated in consolidation.

Reclassifications

Certain items on the 2011 consolidated balance sheet, statement of operations and statement of cash flows have been reclassified to conform to the current period presentation.

Note 5 – Long-Lived Assets

Property and equipment at December 31, 2012 and 2011 consisted of the following: