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EX-31.1 - EXHIBIT 31.1 - Digipath, Inc.exhibit31_1.htm
EX-32.1 - EXHIBIT 32.1 - Digipath, Inc.exhibit32_1.htm
EX-14.1 - EXHIBIT 14.1 SUBSIDIARIES - Digipath, Inc.exhibit14_1subsidiaries.htm
EX-32.2 - EXHIBIT 32.2 - Digipath, Inc.exhibit32_2.htm
EX-31.2 - EXHIBIT 31.2 - Digipath, Inc.exhibit31_2.htm
EXCEL - IDEA: XBRL DOCUMENT - Digipath, Inc.Financial_Report.xls

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended March 31, 2014

 

or

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to         

 

Commission File Number 000-54239

 

DigiPath, Inc.

(Exact name of registrant issuer as specified in its charter)

 

Nevada   27-3601979

(State or other jurisdiction of incorporation or

organization)

  (I.R.S. Employer Identification No.)
     
28720 Roadside Drive, Suite 128, Agoura Hills, CA 91301
(Address of principal executive offices, including zip code)
 
Registrant’s phone number, including area code    (702) 527-2060

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files).

 

YES [X] NO [ ]

 

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

 

Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller reporting company [X]

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at May 9, 2014
Common Stock, $0.001 par value   36,036,400

 

 

 

INDEX

 

    Page No.
 PART I

FINANCIAL INFORMATION

 

 
ITEM 1.

FINANCIAL STATEMENTS:

 

 
  Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and September 30, 2013 3
 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2014 and 2013 (unaudited)

 

 

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2014 and 2013 (unaudited)

 

5

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6
 ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

14

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

23
ITEM 4T.

CONTROLS AND PROCEDURES

 

23
PART II

OTHER INFORMATION

 

25
ITEM 1 LEGAL PROCEEDINGS 25
     
ITEM 1A RISK FACTORS 25
     
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
     
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 25
     
ITEM 5 OTHER INFORMATION 25
     
ITEM 6 EXHIBITS 25

 

-2-
 

 

PART I - FINANCIAL INFORMATION

 

ITEM I — FINANCIAL STATEMENTS

DIGIPATH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

March 31,

2014

 

September 30,

2013

   (Unaudited)
ASSETS          
CURRENT ASSETS          
Cash  $127,370   $35,363 
Accounts receivable   45,361    43,596 
Inventory   156,786    158,963 
Deposits   1,200    15,700 
TOTAL CURRENT ASSETS   330,717    253,622 
Equipment, net   232    1,714 
Intellectual property   8,134    —   
TOTAL ASSETS  $339,083   $255,336 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $224,581   $55,796 
Deferred revenue   255,269    228,948 
Revolving note payable and accrued interest, related party   410,469    294,051 
Notes payable – related party   99,642    —   
Due to related party   183,478    223,463 
TOTAL CURRENT LIABILITIES   1,173,439    802,258 
           
STOCKHOLDERS’ DEFICIT:          
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at March 31, 2014 and September 30, 2013, respectively   —      —   
Common stock, $0.001 par value, 50,000,000 shares authorized, 5,536,400 shares issued and outstanding at March 31, 2014 and September 30, 2013   5,536    5,536 
Note receivable for common stock acquired   (278,125)   (250,000)
Additional paid in capital   418,932    380,429 
Accumulated deficit   (980,699)   (682,887)
TOTAL STOCKHOLDERS’ DEFICIT   (834,356)   (546,922)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $339,083   $255,336 
           

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

-3-
 

 

DIGIPATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

   Three Months Ended March 31,  Six Months Ended March 31,
   2014  2013  2014  2013
             
REVENUES  $50,602   $201,836   $105,544   $306,856 
COST OF SALES   33,701    143,627    64,972    182,791 
GROSS PROFIT   16,901    58,209    40,572    124,065 
OPERATING EXPENSES:                    
General and administrative expenses   277,041    157,922    326,967    323,454 
LOSS FROM OPERATIONS   (260,139)   (99,713)   (286,394)   (199,389)
Interest and other expense   (5,111)   (3,268)   (11,418)   (9,884)
LOSS BEFORE PROVISION FOR INCOME TAXES   (265,250)   (102,981)   (297,812)   (209,273)
Provision for income taxes   —      —      —      —   
                     
NET LOSS  $(265,250)   (102,981)  $(297,812)   (209,273)
NET LOSS PER SHARE OF COMMON STOCK — Basic and diluted  $(0.05)  $(0.02)  $(0.05)  $(0.04)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — Basic and diluted   5,536,400    5,526,345    5,536,400    5,526,345 

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

-4-
 

 

  DIGIPATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

   For the Six Months Ended March 31,
   2014  2013
OPERATING ACTIVITIES:          
Net loss  $(297,812)  $(209,273)
Adjustments to reconcile net loss to cash flows provided by / (used in) operating activities:          
Depreciation expense   1,482    14,025 
Stock and options issued for services   10,378    9,800 
Changes in operating assets and liabilities:          
Accounts receivable   (1,765)   29,805 
Inventory   2,177    (83,816)
Prepaid   14,500    (1,200)
Accounts payable and accrued expenses   168,785    61,668 
Due to related party   59,657    103,559 
Deferred revenue   26,321    104,490 
Accrued interest payable   11,418    7,256 
Net cash provided by / (used in) operating activities   (4,859)   36,314 
           
INVESTING ACTIVITIES:          
Purchase of intangibles   (8,134)   —   
Net cash used in investing activities   (8,134)   —   
           
FINANCING ACTIVITIES:          
Proceeds from note payable   105,000    —   
Repayment of revolving note due to related party   —      (156,350)
Net cash provided by (used in) financing activities   105,000    (156,350)
Net increase (decrease) in cash   92,007    (120,036)
Cash at beginning of period   35,363    195,571 
Cash at end of period  $127,370   $75,535 
           

 

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

-5-
 

 

DIGIPATH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND ORGANIZATION

Current Operations and Background — DigiPath, Inc. (“DigiPath®,” the “Company,” “we,” “our” or “us”) was incorporated in Nevada on October 5, 2010.

DigiPath through its subsidiary, DigiPath, Corp., develops and sells the affordable, innovative, and reliable digital pathology solutions for 2nd opinion, consultation, tumor board, archiving, and educational purposes for improved workflow, analysis and data mining in support of pathology in academic medical centers, reference laboratories, biopharma organizations, and life science research institutions. Our digital pathology image-based information environment enabled by computer technology that allows for the management of information generated from a digital slide. Digital pathology is enabled in part by virtual microscopy, which is the practice of converting glass slides into digital slides that can be viewed, managed, and analyzed. Our digital pathology products, PathScope™, PathLive™, PathCloud™, PathReview™, and PathConsult™ provide a digital platform to share and store archive tissue images.

On April 9, 2014, the Registrant entered into various Series A Convertible Preferred Stock Purchase Agreements with certain accredited investors (the “Investors”) pursuant to which the Registrant agreed to issue 6,000,000 shares, in the aggregate, of a newly formed Series A Convertible Preferred Stock (the “Series A Preferred”) in exchange for $6,000,000, in the aggregate, which consisted of money paid by investors and advances made to the Registrant by such Investors (each agreement, a “Securities Purchase Agreement” and collectively, the “Securities Purchase Agreements”).

The Company invested $1,000,000 of the gross proceeds received from the sale of its Series A Preferred (the “Gross Proceeds”) into DigitPath, Corp. for general working capital purposes in its existing digital pathology business. The remaining Gross Proceeds will be used to explore new lines of business associated with the research, development, licensing and operation of botanical and nutri-pharmaceutical products and services, including, without limitation, the licensing of brand name nutri-pharmaceutical products.

Basis of Presentation

 

The accompanying unaudited condensed interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

The unaudited condensed consolidated interim financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes for the year ended September 30, 2013 included in our Annual Report on Form 10-K. The results of the three and six month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year ending September 30, 2014.

 

-6-
 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates –

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

Income Taxes –

The Company accounts for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.

 

ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company's financial statements. ASC 740 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.

 

The Company performed a review of its material tax positions. During the period from October 5, 2010 through March 31, 2014, there were no increases or decreases in unrecognized tax benefits as a result of tax positions taken during period, there were no decreases in unrecognized tax benefits relating to settlements with taxing authorities, and there were no reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations. As of March 31, 2014, the Company had no unrecognized tax benefits that, if recognized, would affect the effective tax rate. As of March 31, 2014, the Company has no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.

 

The Company has elected to classify any interest or penalties recognized with respect to any unrecognized tax benefits as income taxes. During the period from October 5, 2010 through March 31, 2014, the Company did not recognize any amounts for interest or penalties with respect to any unrecognized tax benefits. As of March 31, 2014, no amounts for interest or penalties with respect to any unrecognized tax benefits have been accrued.

 

Cash and cash equivalents –

Cash and cash equivalents includes all highly liquid instruments with an original maturity of three months or less as of March 31, 2014. The Company had no cash equivalents as of March 31, 2014 and September 30, 2013.

Fair Value of Financial Instruments –

 

The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

- Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
- Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
- Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

 

-7-
 

 

The Company had no such assets or liabilities required to be valued on the basis above at March 31, 2014.

Accounts Receivable

 

Accounts receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company has no allowance for doubtful accounts as of March 31, 2014 and September 30, 2013.

 

Inventory

Inventory is valued at the lower of cost or market. Cost is determined on a first-in, first-out method. Inventory consists of digital slide scanners.

Equipment

Equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets' estimated useful lives. The useful lives are as follows: machinery 2 to 5 years and trade show booths 3 to 5 years. Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the historically recorded asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to other income / expense.

Revenue Recognition -

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. This occurs when the services for our advisory services are completed in accordance with the contracts we have with healthcare clients. In connection with our services arrangements, we are paid in advance for services which are incurred. These amounts are classified as deferred revenue and amortized over the term of the agreement. 

Deferred Revenue -

Customer payments received prior to the recognition of revenue are recorded as deferred revenue and advances from customers.

Net Loss Per Share –

Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share is computed by dividing the loss applicable to common shareholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. The Company currently has no dilutive securities and as such, basic and diluted loss per share are the same for the period presented. 

Stock Compensation for Services Rendered –

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and ASC 505-50, Equity, Equity-Based Payments to Non-employees (ASC 505-50). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty's performance is complete or the date on which it is probable that performance will occur.

-8-
 

 

Going Concern

The Company sustained operating losses during the six months ended March 31, 2014; and has a stockholders’ deficit of $(834,356) as of March 31, 2014. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and/or obtaining additional financing from its shareholders or other sources, as may be required.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company’s ability to do so. The condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. 

Recently Accounting Guidance Adopted

 

There are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable at March 31, 2014 and September 30, 2013 is $45,361 and $43,596, respectively. There is no allowance for uncollectible accounts at March 31, 2014 and September 30, 2013.

 

NOTE 4 – INVENTORY

 

Inventory at March 31, 2014 and September 30, 2013 is $156,786 and $158,963, respectively. There is no allowance for inventory obsolescence at March 31, 2014 and September 30, 2013.

 

NOTE 5 – EQUIPMENT

Equipment comprises of the following at March 31, 2014 and September 30, 2013.

 

   March 31, 2014  September 30, 2013
   (Unaudited)   
Machinery  $35,420   $35,420 
Trade Show Booths   13,359    13,359 
    48,779    48,779 
Less accumulated depreciation   (48,547)   (47,065)
Total   232    1,714 

 

For the six months ending March 31, 2014 and 2013, depreciation expense was $1,482 and $14,025, respectively.

 

NOTE 6 – DEFERRED REVENUE

 

Deferred revenue at March 31, 2014 and September 30, 2013 consisted of $212,205 and $164,993 for products not yet delivered and $43,064 and $63,955 for accrued software support, respectively.

 

-9-
 

 

NOTE 7 - RELATED PARTIES

 

We have adopted a written policy within our code of ethics that prohibits our executive officers and directors from entering into a related party transaction with us without the prior consent of our board of directors. All of our directors, executive officers and employees are required to report any such related party transaction to our board of directors. As of March 31, 2014, the Company owed Mr. Stoppenhagen $155,693 for expenses and compensation. As of March 31, 2014, the Company owed Mr. Barbee $27,775 for expenses and compensation.

 

NOTE 8 – RELATED PARTY NOTES PAYABLE

RELATED PARTY REVOLVING NOTE PAYABLE AND ACCRUED INTEREST

On February 14, 2011, the Company entered into a Revolving Promissory Note (the “Revolving Note”) with NYX Capital Advisors, Inc. (“NYX”) an entity owned by the Company’s President and Chief Financial Officer. Under the terms of the Revolving Note, NYX agreed to advance to the Company, from time to time and at the request of the Company, amounts up to an aggregate of $500,000 until June 30, 2014. All advances shall be paid on or before June 30, 2014 and interest shall accrue from the date of any advances on any principal amount withdrawn, and on accrued and unpaid interest thereon, at the rate of eight percent (8%) per annum, compounded annually. The Company’s obligations under the Revolving Note will accelerate upon a bankruptcy event of the Company, any default by the Company of its payment obligations under the Revolving Note or the breach by the Company of any provision of any material agreement between the Company and the note holder. As of March 31, 2014, the outstanding principal on the Revolving Note was $358,649. As of March 31, 2014, the accrued interest on the Revolving Notes was $51,820.

NOTES PAYABLE

On January 15, 2014, the Company converted $27,778 of past compensation due to Mr. Stoppenhagen and $71,864 of past unreimbursed expenses due to Mr. Stoppenhagen into two notes payable bearing an interest rate of 8% per annum (“Notes”). The notes are due December 31, 2014.

NOTE 9 - CONCENTRATION OF CREDIT RISK

 

We maintain our cash balances in financial institutions that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation (up to $250,000, per financial institution as of March 31, 2014). As of March 31, 2014 and September 30, 2013, our deposits did not exceed insured amounts. We have not experienced any losses in such accounts and we believe we are not exposed to any significant credit risk on cash.

 

NOTE 10 – STOCKHOLDERS’ DEFICIT

Common Stock - Common stock consists of $0.001 par value, 50,000,000 shares authorized, 5,536,400 shares issued and outstanding as of March 31, 2014. Effective as of April 4, 2014, the authorized shares of the Registrant’s common stock was increased from 50,000,000 to 900,000,000. 

In October 2010, the Company issued 5,000,000 shares of its common stock to the Company’s President, for services performed. In January 2011, the Company issued 10,000 shares of its common stock for services. On March 23, 2011, the Company completed a private placement offering to certain investors (“Investors”) pursuant to which the Company sold an aggregate of 286,750 shares of the Company’s common stock resulting in gross proceeds of $28,675 to the Company. From July 1, 2011 to March 31, 2014, the Company issued 209,650 shares of its common stock for services received by an unrelated party.

-10-
 

 

On March 5, 2012, the Company and Steven Barbee entered into a Restricted Stock Award Agreement under which the Company issued to Mr. Barbee 2,500,000 shares of DigiPath, Inc. restricted common stock (“Restricted Stock”) for $0.10 per share. Fifty percent of the Restricted Stock vests on January 9, 2014 and fifty percent of the Restricted Stock vests on February 14, 2014. In the event of Mr. Barbee’s termination the Restricted Stock shall be forfeited and reacquired by the Company for $0.10 per share. The Company loaned Mr. Barbee $250,000 to pay for the Restricted Stock through a recourse loan agreement. The loan has an interest rate of 5% and is secured against the Restricted Stock and all of Mr. Barbee’s assets. The note expires on March 4, 2016.

On March 5, 2012, Eric Stoppenhagen, the Company’s president, cancelled his ownership of 2,500,000 shares of DigiPath, Inc. common stock.

 

Preferred Stock - The articles of incorporation of the Company authorize 10,000,000 shares of preferred stock with a par value of $0.001 per share. The Board of Directors is authorized to determine any number of series into which shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. Effective as of April 4, 2014, the designations, rights and preferences of the preferred shares changed to blank check preferred. As of March 31, 2014, no shares of preferred stock were issued.

Stock Incentive Plan

 

On March 5, 2012, the action to adopt our 2012 Stock Incentive Plan (the “2012 Plan”) was approved by written consent of holders representing approximately 91% of the outstanding shares of our common stock. On March 5, 2012, our board of directors approved the 2012 Plan.

 

The approval of the 2012 Plan required such board approval and the affirmative vote of a majority of our outstanding shares of common stock. Such requirements have been met so no vote or further action of our stockholders is required to approve the adoption of the 2012 Plan. Our board of directors approved the 2012 Plan to ensure that we have adequate ways in which to provide stock based compensation to our directors, officers, employees and consultants. Our board of directors believes that the ability to grant stock-based compensation, such as stock options and stock grants, is important to our future success. The grant of such stock-based compensation can motivate high levels of performance and provide an effective means of recognizing employee and consultant contributions to our success. In addition, stock-based compensation can be valuable in recruiting and retaining highly qualified technical and other key personnel who are in great demand, as well as rewarding and providing incentives to our current employees and consultants.

 

Because awards under the 2012 Plan are discretionary, benefits or amounts that will hereinafter be received by or allocated to our chief executive officer, our named executive officers, our current executive officers as a group, our non-executive directors as a group, and our employees who are not executive officers, are not presently determinable.

 

The principal terms and features of the 2012 Plan are summarized below. The following is a summary description of the salient terms, conditions and features of the 2012 Plan and is qualified by the text of the plan.

 

General; Types of Awards; Number of Shares

 

The 2012 Plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights (“SARs”) and restricted stock units (rights to receive, in cash or stock, the market value of one share of our commons stock). Incentive stock options (“ISOs”) may be granted only to employees. Nonstatutory stock options and other stock-based awards may be granted to officers, employees, non-employee directors and consultants. A total of 5,000,000 shares of our common stock are reserved for issuance upon exercise of awards granted under the 2012 Plan. The 2012 Plan will terminate as to grants of awards after 10 years from the effective date, unless it is terminated earlier by our board of directors.

 

-11-
 

 

The 2012 Plan will be administered by our board of directors or a committee of our board of directors (the “Administrator”) as provided in the 2012 Plan. The Administrator will have the authority to select the eligible participants to whom awards will be granted, to determine the types of awards and the number of shares covered and to set the terms, conditions and provisions of such awards, to cancel or suspend awards under certain conditions, and to accelerate the exercisability of awards. The Administrator will be authorized to interpret the 2012 Plan, to establish, amend, and rescind any rules and regulations relating to the 2012 Plan, to determine the terms of agreements entered into with recipients under the 2012 Plan, and to make all other determinations that may be necessary or advisable for the administration of the 2012 Plan.

 

Options and other awards may be granted under the 2012 Plan to directors, officers, employees and consultants of our company and any of our subsidiaries, provided that the services of such consultants are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for our securities. At the date of this prospectus, all of our officers, directors and employees would have been eligible to receive awards under the 2012 Plan.

 

The exercise price per share of our common stock purchasable upon exercise of any stock option or SAR will be determined by the Administrator, but cannot in any event be less than 100% of the fair market value of our common stock on the date the award is granted. The Administrator will determine the term of each stock option or SAR (subject to a maximum term of 10 years) and each option or SAR will be exercisable pursuant to a vesting schedule determined by the Administrator. The grants and the terms of ISOs will be restricted to the extent required for qualification as ISOs by the U.S. Internal Revenue Code of 1986, as amended. Subject to approval of the Administrator, options or SARs may be exercised by payment of the exercise price in cash, shares of common stock or pursuant to a “cashless exercise” through a broker-dealer under an arrangement approved by the Administrator. The Administrator may require the grantee to pay to us any applicable withholding taxes that we are required to withhold with respect to the grant or exercise of any option. The withholding tax may be paid in cash or, subject to applicable law, the Administrator may permit the grantee to satisfy these obligations by the withholding or delivery of shares of our common stock. We may withhold from any shares of our common stock that may be issued pursuant to an option or from any cash amounts otherwise due from us to the recipient of the option an amount equal to such taxes.

 

Restricted shares may be sold or awarded for consideration determined by the Administrator, including cash, full-recourse promissory notes, as well as past and future services. Any award of restricted shares will be subject to a vesting schedule determined by the Administrator. Any restricted shares that are not vested will be subject to rights of repurchase, rights of first refusal or other restrictions as determined by the Administrator. In general, holders of restricted shares will have the same voting, dividend and other rights as our other stockholders.

 

In the event of any change affecting shares of our common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distribution to stockholders other than cash dividends, the Administrator will make substitutions or adjustments in the aggregate number of shares that may be distributed under the 2012 Plan, and in the number and types of shares subject to, and the exercise prices under, outstanding awards granted under the 2012 Plan, in accordance with Section 10 and other provisions of the 2012 Plan.

 

Unless otherwise permitted by the 2012 Plan and approved by the Administrator as permitted by the 2012 Plan, no award will be assignable or otherwise transferable by the grantee other than by will or the laws of descent and distribution and, during the grantee’s lifetime, an award may be exercised only by the grantee.

 

Our board of directors may amend the 2012 Plan in any and all respects without stockholder approval, except as such stockholder approval may be required under applicable law or pursuant to the listing requirements of any national market system or securities exchange on which our equity securities may be listed or quoted.

 

Unless sooner terminated by our board of directors, the 2012 Plan will terminate as to further grants of awards on March 5, 2022. Awards under the 2012 Plan will be made by the Administrator. The Administrator does not currently have plans to grant stock options or other awards to any individual or group of individuals under the 2012 Plan.

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NOTE 10 – SUBSEQUENT EVENT

 

On April 9, 2014, the Registrant entered into various Series A Convertible Preferred Stock Purchase Agreements with Investors pursuant to which the Registrant agreed to issue 6,000,000 shares, in the aggregate, of a newly Series A Preferred in exchange for $6,000,000, in the aggregate, which consisted of money paid by investors and the retirement of $400,000 of notes payable owned to Mr. Stoppenhagen. On April 9, 2014, the remaining balance of the Revolving Note was paid off. The $110,111 post conversion remaining balance of related party revolving note payable was paid in cash on April 10, 2014. Additionally, the $183,468 balance due to related party was paid out in cash on April 10, 2014.

The Company invested $1,000,000 of the gross proceeds received from the sale of its Series A Preferred (the “Gross Proceeds”) into DigiPath, Corp. for general working capital purposes in its existing digital pathology business. The remaining Gross Proceeds will be used to explore new lines of business associated with the research, development, licensing and operation of botanical and nutri-pharmaceutical products and services, including, without limitation, the licensing of brand name nutri-pharmaceutical products.

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

 

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended September 30, 2013 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K.  The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.

 

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control.  Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements.  We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended September 30, 2013 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

 

Business History and Background

 

DigiPath, a Nevada corporation, was incorporated on October 5, 2010 in Nevada.

During January, 2011, the Company no longer was considered a development stage company as it began recognizing revenue for its advisory services to a handful of healthcare clients.

On April 9, 2014, the Registrant entered into various Series A Convertible Preferred Stock Purchase Agreements with Investors pursuant to which the Company agreed to issue 6,000,000 shares, in the aggregate, of a newly formed Series A Preferred in exchange for $6,000,000, in the aggregate, which consisted of money paid by investors and advances made to the Registrant by such Investors. 

Business of Issuer

DigiPath through its subsidiary, DigiPath, Corp., develops and sells the affordable, innovative, and reliable digital pathology solutions for 2nd opinion, consultation, tumor board, archiving, and educational purposes for improved workflow, analysis and data mining in support of pathology in academic medical centers, reference laboratories, biopharma organizations, and life science research institutions. Our digital pathology image-based information environment enabled by computer technology that allows for the management of information generated from a digital slide. Digital pathology is enabled in part by virtual microscopy, which is the practice of converting glass slides into digital slides that can be viewed, managed, and analyzed. Our digital pathology products, PathScope™, PathLive™, PathCloud™, PathReview™, and PathConsult™ provide a digital platform to share and store archive tissue images.

The Registrant invested $1,000,000 of the gross proceeds received from the sale of its Series A Preferred (the “Gross Proceeds”) into DigitPath, Corp. for general working capital purposes in its existing digital pathology business. The remaining Gross Proceeds will be used to explore new lines of business associated with the research, development, licensing and operation of botanical and nutri-pharmaceutical products and services, including, without limitation, the licensing of brand name nutri-pharmaceutical products.

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Digital Pathology Products Summary

DigiPath's digital pathology products are digital pathology solutions which employ the optical components of a standard microscope, robotic automated slide handling capabilities combined with proprietary imaging and communication software to capture high magnification images in digital format. These devices are comprised of both hardware and software.

DigiPath's digital pathology products, marketed under the names PathScope, PathLive, PathCloud, PathReview, and PathConsult are used in hospital, educational pharmaceutical and research environments. Digital pathology solutions also include names of whole slide imaging and telepathology. 

PathScope™ hardware

PathScope™ is a whole slide imaging system. PathScope™ provides high quality images in an open file format, which works with third party software packages. PathScope™ objectives can be configured with either 2, 4, 10, 20, 40, or 60x. Stage capacity options are 2, 4, or 200 slide trays.

PathLive™ hardware

PathLive™ is an affordable real time telepathology system. PathLive provides high quality images in a real time fashion and allows the remote user to remotely control objective magnifications, X & Y axis stage location, and Z axis focus plane. PathLive™ objectives can be configured with 4, 10, 20, and 40x objectives. Stage capacity is 2 slides.

PathCloud™ service

DigiPath's PathCloud is an affordable digital pathology solution networked engineered and optimized for digital pathology performance and reliability. PathCloud includes a USA national backbone network with 8 points of presence, 1000 TB storage, and 100M bandwidth, optimized for digital pathology. The reliability is based on PathCloud’s service level agreement which includes; 100% availability, 100% packet delivery, sub 200 milliseconds latency, and sub 1 second viewing time.

PathReview™ and PathConsult TM software

DigiPath's PathReview provides a scanner agnostic viewer and image server to review images via third party browsers, including Chrome, Internet Explorer, Firefox, and Safari. PathConsult has the features of PathReview with capability of doing a report and searchable database.

DigiPlant™

DigiPath has adapted its digital pathology platform for multiple use cases in botany. The platform will allow live and remote viewing at 20x, 40x, and 60x magnifications. Additionally, one can create a digital slide of various plant specimens for later retrieval and comparison.

Advisory service(s)

DigiPath’s advisors bring over 60 years combined expertise in pioneering digital pathology, implementing over 500 installations at academic medical centers, reference laboratories, biopharma organizations, and life science research institutions worldwide. DigiPath provides advisory services for clients involved with digital pathology. Our current services range the full breadth of management operations for marketing, product development, sales outreach, operations, and customer support services. Our current clients seek our assistance in rolling out affordable, innovative, and reliable digital pathology solutions. Our potential clients include manufacturer (hardware and software), distribution and service firms, laboratories (reference, hospital owned, independent), private pathology practices (associated with hospitals), and centers of excellence.

 

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Critical Accounting Policies

 

We prepare our condensed financial statements in accordance with accounting principles generally accepted in the United States (GAAP), which requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

 

  - those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and

 

  - those for which changes in the estimate or assumptions, or the use of different estimates and assumptions, could have a material impact on our results of operations or financial condition.

 

Management has discussed the development, selection and disclosure of our critical accounting estimates with our Board of Directors. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our Annual Report on Form 10-K for the year ended September 30, 2013. We have not changed these policies from those previously disclosed.

 

Results of Operation

 

Three Months Ended March 31, 2014 and 2013

 

Revenues

For the three months ended March 31, 2014 and 2013, the Company had $50,602 and $201,836 of revenues. These revenues consisted of product sales of our digital pathology solutions. The decrease was due to a temporary reduction in marketing expenditures.

 

Cost of Sales

Cost of sales was $33,701 and $143,627 for the three months ended March 31, 2014 and 2013, respectively.

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $277,041 and $157,922 for the three months ended March 31, 2014 and 2013, respectively. The expenses consisted primarily of costs associated with professional services, development, and travel expenses.

 

Interest Expense and Other, Net

Interest expense was $5,111 and $3,268 for the three months ended March 31, 2014 and 2013, respectively which related to interest accrued on borrowings from the related party revolving note payable.

 

Six months Ended March 31, 2014 and 2013

 

Revenues

For the six months ended March 31, 2014 and 2013, the Company had $105,544 and $306,856 of revenues. These revenues consisted of product sales of our digital pathology solutions. The decrease was due to a temporary reduction in marketing expenditures.

 

Cost of Sales

Cost of sales was $64,972 and $182,791 for the six months ended March 31, 2014 and 2013, respectively.

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $326,967 and $323,454 for the six months ended March 31, 2014 and 2013, respectively. The expenses consisted primarily of costs associated with professional services, development, and travel expenses.

 

Interest Expense and Other, Net

Interest expense was $11,418 and $9,884 for the six months ended March 31, 2014 and 2013, respectively which related to interest accrued on borrowings from the related party revolving note payable.

  

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Liquidity and Capital Resources

 

As of March 31, 2014, the Company had assets equal to $339,083, comprising of cash, accounts receivable, inventory and equipment. The Company's current liabilities as of March 31, 2014 were $1,173,439 comprising of accounts payable, accrued expenses, deferred revenue, notes payable and related-party payable.

 

The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the six months ended March 31, 2014 and 2013:

 

   2014  2013
Operating Activities  $(104,511)  $36,314 
Investing Activities   (8,134)   —   
Financing Activities   204,652    (156,350)
Net increase (decrease) on Cash  $92,007   $(120,036)

 

To the extent the Company has a net loss, the Company is dependent upon the receipt of capital investment or other financing to fund its ongoing operations and to execute its business plan. In addition, the Company is dependent upon it related party revolving note payable facility to provide continued working capital funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms, the Company may not be able to implement its plan of operations.

 

On April 9, 2014, the Company entered into various Series A Convertible Preferred Stock Purchase Agreements with Investors pursuant to which the Registrant agreed to issue 6,000,000 shares, in the aggregate, of a newly Series A Preferred in exchange for $6,000,000, in the aggregate, which consisted of money paid by investors and advances made to the Registrant by such Investors. At a minimum, this funding should last the Company until the end of the year. 

Capital Expenditures

 

We had zero capital expenditures for the six months ended March 31, 2014 and 2013, respectively.

 

Commitments and Contractual Obligations

 

We currently do not have any material commitments and contractual obligations.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2014, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

Contractual Obligations

 

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

 

Critical Accounting Policies

 

The preparation of condensed financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - "Summary of Accounting Policies" to the Condensed Financial Statements contained in this Quarterly Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.

 

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Risk Factors

 

The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations.  Other risks and uncertainties may also affect our results or operations adversely.  The following and these other risks could materially and adversely affect our business, operations, results or financial condition.

 

An investment in the Company is highly speculative in nature and involves an extremely high degree of risk.

We expect to have losses until operations increase.

We have a limited operating history upon which investors may rely to evaluate our prospects and have only a preliminary business plan upon which investors may consider to evaluate our prospects. Such prospects must be considered in light of the problems, expenses, delays and complications associated with a business that seeks to commence more significant revenue operations. We commenced operations on October 5, 2010 as such we have a limited historical operating history. We expect to continue to incur operating losses until such time, if ever, as we are able to achieve sufficient levels of revenue from operations. We anticipate that our existing cash and cash equivalents will not be sufficient to fund our business needs. Our ability to increase revenue and achieve profitability will depend on our obtaining additional capital, entering into satisfactory agreements with strategic partners, acquiring the Digital Pathology consulting and finding customers for such technology. There can be no assurance that we will ever generate sufficient revenues or achieve profitability. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.

Investors may lose all of their investment in us.

Investment in us involves a high degree of risk. Investors may never recoup all or part of or realized any return on their investment. Accordingly, investors may lose all of their investment and must be prepared to do so.

There is currently no trading market for our common stock and a purchaser of our shares may never be able to resell them.

5,000,000 of the 5,536,400 outstanding shares of common stock are “restricted securities” as defined under Rule 144 promulgated under the Securities Act and may only be sold pursuant to an effective registration statement or an exemption from registration, if available. The SEC has adopted final rules amending Rule 144 which became effective on February 15, 2008. There can be no assurance that we will ever meet these conditions and any purchases of our shares are subject to these restrictions on resale. A purchase of our shares may never be available for resale.

We will continue to incur the expenses of complying with public company reporting requirements.

We have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act even though compliance with such reporting requirements is economically burdensome.

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We may need additional financing the failure of to raise such financing will have a material adverse effect on our business.

Our cash requirements may vary materially from those now planned depending on numerous factors, including our ability to obtain the Digital Pathology consulting, finding customers to use such technology and competition. If are not able to attract and retain customers, we may not have sufficient funds to institute our business plan. We therefore would need to raise additional funds to finance our capital requirements through new financings to achieve the level of operations we anticipate. Such financings could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to borrow from other sources. In addition, such securities may contain rights, preferences or privileges senior to those of the rights of our current stockholders. We do not have any commitments for additional financing. There can be no assurance that additional funds will be available on terms attractive to us, or at all. If adequate funds are not available, we may be required to curtail our development of the Digital Pathology consulting and/or otherwise materially reduce our operations. Any inability to raise adequate funds could have a material adverse effect on our business, results of operation and financial condition.

Our success will, to a large extent, depend on and experience of our officers and directors.

Our officers and directors will be responsible for the management and control of the Company. Although our officers and directors believe that they have the ability to manage the Company, they can give no assurance that their efforts will result in success. Stockholders have no right or power to take part in the management of the Company. Accordingly, no person should purchase any of the Shares offered hereby unless he is willing to entrust all aspects of the management of the Company to the officers and directors.

If we borrow money to expand our business, we will face the risks of leverage.

We anticipate that we may in the future incur debt for financing our growth. Our ability to borrow funds will depend upon a number of factors, including the condition of the financial markets. The risk of loss in such circumstances is increased because we would be obligated to meet fixed payment obligations on specified dates regardless of our revenue. If we do not meet our debt service payments when due, we may sustain the loss of our equity investment in any of our assets securing such debt upon the foreclosure on such debt by a secured lender.

Our common stock is considered a “penny stock,” any investment in our shares is considered to be a high-risk investment and is subject to restrictions on marketability.

We currently are listed on the OTC Bulletin Board. To the extent we are successful, our common stock is considered a “penny stock” because it is quoted and traded on the OTC Bulletin Board (“OTCBB”) and OTCQB and it trades for less than $5.00 per share. The OTCBB and OTCQB are generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $1.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to effecting a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.

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Since our common stock will be subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market in the future.

We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.

Our articles of incorporation authorize the issuance of 900,000,000 shares of common stock and 10,000,000 shares of blank check preferred stock. The common stock and preferred stock can be issued by our board of directors without stockholder approval. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common and preferred stock, in the event that buyers can be found therefor. Any future issuances of common stock would further dilute the percentage ownership of our Company held by the public stockholders.

Authorization of 10,000,000 shares of preferred stock can adversely affect the voting power and other rights of common stock owners.

Our Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by its Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, 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 common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any shares of its authorized preferred stock, there can be no assurance that the Company will not do so in the future.

Indemnification of officers and directors would allow for only limited recourse against our officers and directors.

The Articles of Incorporation and Bylaws of the Company contain broad indemnification and liability limiting provisions regarding our officers, directors and employees, including the limitation of liability for certain violations of fiduciary duties. Stockholders of the Company therefore will have only limited recourse against the individuals.

Risks Related to the Industry and Our Operations 

We depend on third-party licenses for our products and services.

We rely on certain software technology which we license from third parties and use in our products and services to perform key functions and provide additional functionality. Because our products and services incorporate software developed and maintained by third parties, we are, to a certain extent, dependent upon such third parties' ability to maintain or enhance their current products and services, to develop new products and services on a timely and cost-effective basis, and to respond to emerging industry standards and other technological changes. Further, these third-party technology licenses may not always be available to us on commercially reasonable terms or at all.

If our agreements with third-party vendors are not renewed or the third-party software fails to address the needs of our software products and services, we would be required to find alternative software products and services or technologies of equal performance or functionality. We cannot assure that we would be able to replace the functionality provided by third-party software if we lose the license to this software, it becomes obsolete or incompatible with future versions of our products and services or is otherwise not adequately maintained or updated.

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Certain of our customers rely on the availability of third-party reimbursement or third-party funding for the purchase of our products and services. Failure of sufficient reimbursement from third-party payors or sufficient funding could cause our sales and the future potential growth of our business to decline.

 

Hospitals and other healthcare institutions in the U.S. that purchase our products and services generally rely on third-party payors and other sources for reimbursement of healthcare costs to reimburse all or part of the cost of the procedures in which our products and services are used. If hospitals and other healthcare institutions are unable to obtain adequate reimbursement from third-party payors for the procedures in which our products and services or products and services currently under development are intended to be used, our sales and future growth of our business could be adversely affected. We cannot estimate what amount of our product is eligible for reimbursement approval. In addition, changes in the healthcare system may affect the reimbursability of future products and services.

 

Market acceptance of our products and services and products and services under development in countries outside of the U.S. is also dependent on availability of reimbursement within prevailing healthcare payment systems in those countries. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. We cannot assure you that we will be able to obtain international reimbursement approvals in a timely manner, if at all. Failure to receive international reimbursement approvals could harm the market acceptance of our products and services in the international markets in which such approvals are sought.

 

Other consumers in industries such as pathology, pharmaceutical and biotechnology that purchase our products and services generally rely on funding or grants from governments and private foundations to fund the purchase of our products and services. If such consumers are unable to obtain adequate funding sources for the purchase of our products and services, our sales and future growth of our business could be adversely affected.

 

The marketing and sale of our future products and services will require regulatory approval and on-going certifications. Failure to obtain and maintain required regulatory approvals and certifications could prevent or delay our ability to market and sell our future products and services and may subject us to significant regulatory fines or penalties.

 

The FDA regulates design, testing, manufacturing, labeling, distribution, marketing, sales and service of digital image analysis products and services. Such products and services are marketed in the U.S. according to premarket notifications to the FDA under Section 510(k) of the Federal Food, Drug and Cosmetic Act. Unless an exemption applies, each digital image analysis product that we wish to market in the U.S. must first receive either 510(k) clearance or premarket approval from the FDA. The process of obtaining required regulatory approval or clearance can be lengthy, expensive and uncertain. Moreover, regulatory clearance or approval, if granted, may include significant limitations on the indicated uses for which a product may be marketed.

 

Failure to comply with applicable requirements in the United States can result in fines, recall or seizure of products and services, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution.

 

Our products and services may be subject to similar regulation in other countries. Sales of our products and services outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements.

 

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We are uncertain of our ability to protect our trade secrets the loss of which would negatively impact our competitive advantage.

 

We rely on trade secrets, know-how and continuing knowledge to achieve and thereafter maintain a competitive advantage with respect to the Digital Pathology consulting. Although we have entered into and we intend to enter into confidentiality and invention agreements with employees, consultants, certain potential customers and advisors, no assurance can be given that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent techniques or otherwise gain access to our trade secrets and know-how.

Our failure to develop our limited marketing capabilities would have a material adverse effect on our business.

We have limited marketing capabilities and resources to expend on marketing the Digital Pathology consulting. In order to achieve market penetration we will have to undertake significant efforts and expenditures to create awareness of, and demand for, our Digital Pathology consulting and products. Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to encourage customers to adopt Digital Pathology. No assurance can be given that we will succeed. Our failure to successfully develop our marketing capabilities, both internally and through third-party joint ventures, would have a material adverse effect on our business, operating results and financial condition.

Our business plan will take a significant amount of time to implement.

The research and development related to the Digital Pathology consulting and our business plan will take a significant amount of time to implement. Investors must be prepared to hold the Shares as a long term investment as the value of the Shares will not increase in value in the short term, if ever.

Absence of cash dividends may affect the investment value of our common stock.

The Board of Directors has not and does not anticipate paying cash dividends on the common stock of the Company for the foreseeable future and intends to retain any future earnings to finance the growth of the Company’s business. Payment of dividends, if any, will depend, among other factors, on earnings, capital requirements and the general operating and financial conditions of the Company, as well as legal limitations on the payment of dividends out of paid-in capital.

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Item 3 Quantitative and Qualitative Disclosures About Market Risk.

 

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item

 

Item 4T Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures:  We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  The term "disclosure controls and procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended ("Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2014, that our disclosure controls and procedures are effective to a reasonable assurance level of achieving such objectives.  However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Management's Report on Internal Control Over Financial Reporting:  Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The internal controls for the Company are provided by executive management's review and approval of all transactions.  Our internal control over financial reporting also includes those policies and procedures that:

    1. pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
    2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
    3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.  Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls.

Based on this assessment, management has concluded that as of March 31, 2014, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

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This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

Changes in Internal Control over Financial Reporting:  There were no changes in our internal control over financial reporting during the quarter ending March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

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PART II -- OTHER INFORMATION  

Item 1. Legal Proceedings.

 

To the best knowledge of our sole officer and director, the Company is not a party to any legal proceeding or litigation.

 

Item 1A. Risk Factors.

 

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item. See the ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS which identifies and discloses certain risks and uncertainties including, without limitation, those "Risk Factors".

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 5. Other Information.

 

None.

 

  

ITEM 6.   Exhibits
    31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended..
       
    31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended..
       
    32.1 Certification of the Company’s Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
       
    32.2 Certification of the Company’s Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
       

 

 

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SIGNATURES

 

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

 

Date: January 9, 2014

 

DIGIPATH, INC.
 
 
/s/  Todd Denkin
Name: Todd Denkin
Title: President and Director

 

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