Digipath, Inc. - Quarter Report: 2014 June (Form 10-Q)

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 June 30, 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)

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.

INDEX

PART I - FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

DIGIPATH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

DIGIPATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

DIGIPATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

DIGIPATH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND ORGANIZATION

Current Operations and Background — DigiPath, Inc. and its subsidiaries (“DigiPath®,” the “Company,” “we,” “our” or “us”) was incorporated in Nevada on October 5, 2010. DigiPath is a digital laboratory provider within the human and animal testing markets. DigiPath is rapidly expanding operations into the laboratory education & training and cannabis testing markets. DigiPath provides affordable and accurate solutions that ensure patient safety. DigiPath through its subsidiaries focuses on digital pathology, botanical and nutri-pharmaceutical laboratories, and education.

On April 9, 2014, the Company entered into various Series A Convertible Preferred Stock Purchase Agreements with certain accredited investors pursuant to which the Company 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 Company 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 are being 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.

On May 14, 2014, the Company completed a private placement offering to certain accredited investors pursuant to which the Company sold an aggregate of 44,200,000 shares of the Company’s common stock resulting in gross proceeds of $2,210,000 to the Company. The Company intends to use proceeds of the offering for working capital and to develop its new lines of business associated with the research, development, licensing and operation of botanical and nutra-pharmaceutical products and services, including, without limitation, the licensing of brand name nutra-pharmaceutical products. These business lines will supplement its existing digital pathology solutions business that continues to generate revenue.

Basis of Presentation –

The accompanying unaudited condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  Intercompany accounts and transactions have been eliminated. 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 nine months periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year ending September 30, 2014.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Our condensed consolidated financial statements include the accounts of DigiPath, Inc., and its 100% majority-owned subsidiary, DigiPath Labs, Inc. and DigiPath, Corp.  All significant intercompany transactions and balances have been eliminated in consolidation. 

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 June 30, 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 June 30, 2014, the Company had no unrecognized tax benefits that, if recognized, would affect the effective tax rate. As of June 30, 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 June 30, 2014, the Company did not recognize any amounts for interest or penalties with respect to any unrecognized tax benefits. As of June 30, 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 June 30, 2014. The Company had no cash equivalents as of June 30, 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:

The Company had no such assets or liabilities required to be valued on the basis above at June 30, 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 June 30, 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.

Capitalized Costs

The Company capitalizes costs related to internal use software and website application, infrastructure development and content development costs in accordance with FASB Topic 350, Intangibles--Goodwill and Other. During the three months ended June 30, 2014, the Company entered into three agreements to develop content for its websites with three, separate non-related companies. The assets that are in development include radio and TV programs which are usable over the Company’s website and other platforms, educational content to be used over the Company’s website and other training venues, and instructional course offerings to be utilized through online courses and in-person teaching venues. During the current period, $1,008,416 was invested to acquire these assets. Once placed in service, amortization of these costs will be recognized over their useful lives. No amortization expense was recognized on these assets during the three months ended June 30, 2014.

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 of product has met the criteria established in the arrangement or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. This occurs when the products or services are completed in accordance with the contracts we have with clients. In connection with our products and services arrangements, when we are paid in advance, 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.

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 June 30, 2014 and September 30, 2013 is $94,183 and $43,596, respectively. There is no allowance for uncollectible accounts at June 30, 2014 and September 30, 2013.

NOTE 4 – INVENTORY

Inventory at June 30, 2014 and September 30, 2013 is $198,522 and $158,963, respectively. There is no allowance for inventory obsolescence at June 30, 2014 and September 30, 2013.

NOTE 5 – EQUIPMENT

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

For the nine months ending June 30, 2014 and 2013, depreciation expense was $2,469 and $20,827, respectively.

NOTE 6 – CAPITALIZED DEVELOPMENT COSTS

Capitalized development costs of the following at June 30, 2014 and September 30, 2013.

NOTE 7 – DEFERRED REVENUE

Deferred revenue at June 30, 2014 and September 30, 2013 consisted of $60,749 and $164,993 for products not yet delivered and $45,286 and $63,955 for unrecognized software support, respectively.

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 June 30, 2014). As of June 30, 2014 and September 30, 2013, our deposits exceeded insured amounts by $5,138,599. 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, 900,000,000 shares authorized, 51,246,400 shares issued and outstanding as of June 30, 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 June 30, 2014, the Company issued 209,650 shares of its common stock for services received by an unrelated party.

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 February 14, 2013 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. This loan was transferred to DigiPath, Corp. on March 24, 2014 and offsets the Company’s additional paid in capital.

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

On May 14, 2014, the Company completed a private placement offering to certain accredited investors pursuant to which the Company sold an aggregate of 44,200,000 shares of the Company’s common stock resulting in gross proceeds of $2,210,000 to the Company.

For the quarter ended June 30, 2014, the Company approved the issuance of 15,000,000 million shares of the Company’s common stock. Of these 1.5 million shares have vested and issued and 13.5 million shares have not vested and not issued. The Company recorded a stock compensation expense of $67,500 associated with these issuances for the vesting portion and $25,000 as capitalized development costs as issuance to the service providers.

During the quarter ended June 30, 2014, the Company issued 10,000 shares associated with the exercise of 10,000 options at $0.33 and received $3,300 cash.

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. As of June 30, 2014, there are 6,000,000 shares of the preferred stock issued and outstanding. 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.

On April 9, 2014, the Registrant entered into various Series A Convertible Preferred Stock Purchase Agreements with certain accredited investors pursuant to which the Company 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 Company by such Investors prior to December 31, 2013 (each agreement, a “Securities Purchase Agreement” and collectively, the “Securities Purchase Agreements”). All the Securities Purchase Agreements have the same terms, whereby the shares of Series A Preferred are convertible after three months from the date of issue based on a conversion formula equal to the price per share ($1.00) divided by a conversion price equal to the lesser of (A) $0.02 and (B) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average prices (“VWAPs”) occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert any shares of Series A Preferred Stock. The conversion price is further adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in the event of certain negative actions undertaken by the Company. At a conversion price equal to $0.02 per share, the Series A Preferred are convertible into 300,000,000 shares of the common stock of the Company. No holder is permitted to convert its shares of Series A Preferred Stock if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.

The additional terms of the Series A Preferred include the following:

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.

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.

On May 30, 2014, the Registrant amended its 2012 Stock Incentive Plan (“Amendment”) to increase the maximum aggregate number of Shares which may be issued pursuant to awards granted under the plan is Thirty Million (30,000,000) shares.

Non-Plan Options

During the nine months ended June 30, 2014, the Company issued the following non-plan options: 38,813 options with an exercise price of $0.33 per share and recorded an expense associated with these options of $28,414; 3,000,000 options with and exercise price of $0.02 vesting quarterly over a period of one year. The value the Company associated with these options was $22,502; and 1,000,000 options with an exercise price of $0.05 vesting quarterly over a period of one year. The value the Company associated with these options was $31,794.

Subsidiary Warrants

On April 19, 2014, DigiPath, Corp., a subsidiary of DigiPath, Inc. which is dedicated to digital pathology granted a five year Common Stock Purchase (“Warrants”) to both Steven Barbee and Eric Stoppenhagen (the “Consultant”). The Warrant will entitle the Consultant to purchase 3,000,000 shares of common stock at an exercise price of $0.10. No equity or debt shall be issued in DigiPath, Corp. or its subsidiaries without the expressed written consent of Consultant, which shall not be unreasonably withheld. To the extent the issuance could be dilutive the Consultant shall be made whole. The Warrants shall vest immediately and are considered to be earned in full. Warrants shall have a cashless provision.

In the event that there is ever a Change in Control, and at such time the DigiPath, Corp’s value exceeds $1,600,000, as measured by the fair market value of the greater of DigiPath, Corp or its assets, Consultant shall be paid $300,000. Change in Control of DigiPath, Corp shall be deemed to have occurred if: (i) any “Person,” as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than DigiPath, Corp, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of DigiPath, Corp in substantially the same proportions as their ownership of stock of the Company), is or becomes the “beneficial owner’ (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of DigiPath, Corp’s then outstanding securities; (ii) during any 12-month period (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the company to effect a transaction described in subclauses (i), (iii) or (iv) of this Section 4.3) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least 66 2/3 % of the members of the Board then still in office who either were Directors at the beginning of the period or whose election or nomination for

election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the DigiPath, Corp’s stockholders approve a merger or consolidation of DigiPath, Corp with any other corporation, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) a merger or consolidation effected to implement a recapitalization of DigiPath, Corp (or similar transaction) in which no Person acquires more than 50% of the combined voting power of DigiPath, Corp’s then outstanding securities; or (iv) the stockholders of DigiPath, Corp approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by DigiPath, Corp of all or substantially all of DigiPath, Corp ‘s assets.

Mr. Stoppenhagen’s Warrants shall not be able to be converted into more than 4.99% of the Company’s common stock without giving a 65 days’ notice to void such provision.

The Company recorded a total of total of $343,533 expense associated with warrants and recorded as a non-controlling interest because the warrants are issued by the subsidiary.

ITEM 2.  MANAGEMENTS’ 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, Inc. and its subsidiaries (“DigiPath®,” the “Company,” “we,” “our” or “us”) was incorporated in Nevada on October 5, 2010. DigiPath is a digital laboratory provider within the human and animal testing markets. DigiPath is rapidly expanding operations into the laboratory education & training and cannabis testing markets. DigiPath provides affordable and accurate solutions that ensure patient safety. DigiPath through its subsidiaries focuses on digital pathology, botanical and nutri-pharmaceutical laboratories, and education.

On April 9, 2014, the Company entered into various Series A Convertible Preferred Stock Purchase Agreements with certain accredited investors pursuant to which the Company 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 Company 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 is being 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.

On May 14, 2014, the Company completed a private placement offering to certain accredited investors pursuant to which the Company sold an aggregate of 44,200,000 shares of the Company’s common stock resulting in gross proceeds of $2,210,000 to the Company. The Company intends to use proceeds of the offering for working capital and to develop its new lines of business associated with the research, development, licensing and operation of botanical and nutra-pharmaceutical products and services, including, without limitation, the licensing of brand name nutra-pharmaceutical products. These business lines will supplement its existing digital pathology solutions business that continues to generate revenue.

Business of Issuer

DigiPath, Corp - Digital Pathology

DigiPath, Corp. provides the next generation of affordable, innovative, and reliable digital pathology solutions. DigiPath Corp’s clients are involved in laboratory testing for animal and human subjects. DigiPath, Corp. is rapidly expanding in developing new and innovative solutions for the cannabis testing markets.

DigiPath provides the next generation of affordable, innovative, and reliable digital pathology solutions and advisory services for clients involved within healthcare. Services range the full breadth of management operations for marketing, product development, sales, outreach, operations, customer service, regulatory, and financial. Clients include Manufacturer (hardware and software), Distribution & Service Firms, Laboratories (reference, hospital owned, independent), Private Pathology Practices (associated with hospitals), and Centers of Excellence.

DigiPath Labs, Inc. - Botanical and Nutri-pharmaceutical Laboratories

DigiPath Labs ™ is aiming to set the industry standard for testing all forms of cannabis-based products using FDA-compliant laboratory equipment and processes. The Company’s product safety testing will reveal the presence of harmful contaminants—including pesticides, solvent residues, heavy metals, fungi, mold, bacteria, and mycotoxins, which can adversely impact patients’ health.

DigiPath Labs will use innovative technologies to accurately separate and quantitate the cannabinoid and terpenoid content of any cannabis-based product. This is important because cannabis strains vary in their levels of cannabinoids and terpenoids, the documented “active ingredients” in cannabis. Certain blends of these compounds are effective in treating symptoms associated with chronic diseases like cancer and epilepsy. DigiPath testing will give doctors, caregivers, dispensary owners, and patients the ability to match cannabis products to a patient’s specific medical conditions.

DigiPath University - Education and Training

DigiPath University ™ is launching its new cannabis education and training division, which will support its newly expanded service offerings in the cannabis testing and education realm. The Company is seeking to solve some of the major shortcomings within the cannabis industry today—such as lack of best practices for growing and testing cannabis—by developing an industry-leading training curriculum.

DigiPath is now developing a two-day seminar and a modularized six-week, instructor-facilitated online course. The seminar will educate students ranging from cannabis industry newcomers and job seekers to doctors and nurses to lawmakers and law enforcement personnel. It will cover the political, historical, social, medical, physical, and financial aspects of marijuana and their impact on cannabis commerce.

The six-week course will adapt an interactive story-based format currently in use in graduate schools to give students a deep dive into the many facets of botanical nutraceuticals, particularly cannabis, and to teach them the critical skills needed in the cannabis industry. 

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:

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 June 30, 2014 and 2013

Revenues

For the three months ended June 30, 2014 and 2013, the Company had $217,248 and $196,906 of revenues. These revenues consisted of product sales of our digital pathology solutions. The increase was due to increase liquidity in the Company.

Cost of Sales

Cost of sales was $130,181 and $114,831 for the three months ended June 30, 2014 and 2013, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $739,718 and $135,632 for the three months ended June 30, 2014 and 2013, respectively. The increase in expenses consisted primarily of costs associated with professional services, development, and stock compensation expense related to the commencement of operations surrounding our lab business and educational business.

Interest Expense and Other, Net

Interest expense was $1,730 and $4,801 for the three months ended June 30, 2014 and 2013, respectively which related to interest accrued on borrowings.

Nine Months Ended June 30, 2014 and 2013

Revenues

For the nine months ended June 30, 2014 and 2013, the Company had $322,792 and $503,762 of revenues. These revenues consisted of product sales of our digital pathology solutions. The decrease was due to a temporary reduction in marketing expenditures due to a previous lack of funding.

Cost of Sales

Cost of sales was $195,153 and $297,622 for the nine months ended June 30, 2014 and 2013, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,066,686 and $459,087 for the nine months ended June 30, 2014 and 2013, respectively. The increase in expenses consisted primarily of costs associated with professional services, development, and stock compensation expense related to the commencement of operations surrounding our lab business and educational business.

Interest Expense and Other, Net

Interest expense was $13,150 and $14,684 for the nine months ended June 30, 2014 and 2013, respectively which related to interest accrued on borrowings.

Liquidity and Capital Resources

As of June 30, 2014, the Company had assets equal to $7,541,509, comprising of cash of $5.9 million. The Company's current liabilities as of June 30, 2014 were $163,579 comprising of accounts payable, accrued expenses, and deferred revenue.

The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the nine months ended June 30, 2014 and 2013:

The increase for the nine months ended June 30, 2014 from the nine months ended June 30, 2013 in funds used in operating and investing activities was due to the commencement of operations surrounding our lab business and educational business.

The increase for the nine months ended June 30, 2014 from the nine months ended June 30, 2013 in funds provided by financing activities was due the following financings. On April 9, 2014, the Company 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 Series A Preferred in exchange for $6,000,000, in the aggregate, which consisted of money paid by investors and advances made to the Company by such Investors. On May 14, 2014, the Company completed a private placement offering to certain accredited investors pursuant to which the Company sold an aggregate of 44,200,000 shares of the Company’s common stock resulting in gross proceeds of $2,210,000 to the Company. At a minimum, this funding should last the Company until June 30, 2015. 

Capital Expenditures

We had $1,020,341 and zero capital expenditures for the nine months ended June 30, 2014 and 2013, respectively. The increase was related to the commencement of operations of our lab business and education business.

Commitments and Contractual Obligations

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

Off-Balance Sheet Arrangements

As of June 30, 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.

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. 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.

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.

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 OTCBB and OTCQB. 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.

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 additional 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.

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.

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.

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 June 30, 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 June 30, 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 June 30, 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.

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 June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

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.

Effective April 19, 2014, DigiPath Corp., a Kansas corporation wholly owned subsidiary dedicated to digital pathology (the “DP Corp”), issued to Steven D. Barbee, our interim Chief Executive Officer and director, and Eric Stoppenhagen, our former Chief Financial Officer, Secretary and director, warrants to acquire up to 3,000,000 shares of DP Corp common stock at an exercise price of $0.10 per share. The Registrant accepted and acknowledged these agreements on June 30, 2014. 

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclousure

Not applicable.

Item 5. Other Information.

None.

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: July 14, 2014