U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  (Mark One)  X.QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2013  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 000-27023  ACCELPATH, INC. (Formerly - TECHNEST HOLDINGS, INC.) (Exact name of registrant as specified in its charter)  Delaware45-5151193(State or other jurisdiction of incorporation or organization )(IRS Employer Identification No.)  850 3rd Avenue, Suite 16c, NYC, NY 10022 (Address of principal executive offices and zip code)  (212) 994-9875 (Registrants telephone number, including area code)  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 filed 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 12 months (or such shorter period that the registrant was required to submit and post such files). Yes X. No .  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  Large accelerated filer.Accelerated filer.Non-accelerated filer. (Do not check if a smaller reporting company)Smaller reporting companyX.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes . No X.  As of March 31, 2014, there were 992,549,379 shares of common stock, $0.001 par value, of the registrant issued and outstanding.   FORM 10-Q TABLE OF CONTENTS September 30, 2013   PagePART I.FINANCIAL INFORMATION:Item 1.Financial Statements (Unaudited)Consolidated Balance Sheets at September 30, 2013 and June 30, 20133Consolidated Statements of Operations for the Three Ended September 30, 2013 and 20124Consolidated Statement of Changes in Stockholders Deficit for the Three Months Ended September 30, 20135Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2013 and 20127Notes to Condensed Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 4.Controls and Procedures24PART II.OTHER INFORMATIONItem 1A.Risk Factors25Item 6.Exhibits36Signatures37  STATEMENTS CONTAINED IN THIS FORM 10-Q, WHICH ARE NOT HISTORICAL FACTS CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE MADE UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY", "WILL", "EXPECT", "ANTICIPATE", "BELIEVE", "ESTIMATE", "CONTINUE", AND SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN PART I, ITEM 1, OF THIS QUARTERLY REPORT AND WITH THE INFORMATION CONTAINED IN ITEM 2, TOGETHER WITH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2013, INCLUDING, BUT NOT LIMITED TO, THE SECTION THEREIN ENTITLED "RISK FACTORS."    2   (A Development Stage Company) Balance Sheets  September 30,June 30,20132013(Unaudited)Current assetsCash and cash equivalents$4,810$1,201Total current assets4,8101,201Property and equipment  net73,93978,719Total assets$78,749$79,920Current LiabilitiesAccounts payable$1,261,579$1,261,579Accrued expenses and other current liabilities790,697759,702Accrued compensation306,555306,555Current portion of notes payable- net of discounts of $69,057 and $12,218 at September 30, 2013  and June 30, 2013 , respectively564,251384,785Total current liabilities2,923,0822,712,621Long-term portion of notes payable- net of discounts of $28,092 and $31,400 at September 30, 2013  and June 30, 2013 , respectively106,908116,954Total  Liabilities3,029,9902,829,575Stockholders' (Deficit)Preferred stock- Series E 5% Convertible; stated value $1,000 per share; -0- and 100 shares issued and outstanding at September 30, 2013 and June 30, 2013, respectively (preference in liquidation at September  30, 2013 and June 30, 2013 of $-0- and $115,239 respectively-100,000Preferred stock- Series F Convertible; stated value $1,000 per share; 90 shares issued and outstanding at September 30, 201390,00090,000Preferred stock- Series G Convertible; stated value $1,000 per share; No shares issued and outstanding at September 30, 2013--Preferred stock- Series H Convertible; stated value $1,000 per share; 51 shares issued and outstanding at September 30, 2013 and June 30, 2013--Common stock, $0.001 par value, 995,000,000 shares authorized;384,566,827 and 360,385,085 issued and outstanding at September 30, 2013 and June 30, 2012, respectively384,567360,385Additional paid-in capital4,597,6394,372,168Accumulated Deficit(7,821,371)(7,470,132)Total stockholders' (deficit) of AccelPath, Inc.(2,749,165)(2,547,579)Non-Controlling interest(202,077)(202,077)Total stockholders' (deficit)(2,951,242)(2,749,656)Total liabilities and stockholders' (deficit)$78,749$79,919   3   Consolidated Statements of Operations For the Three Months Ended September 30, 2013 (Unaudited)  Three Months Ended September 30 31,20132012Revenues$54,000$63,298Cost of Revenues-2,642Gross Profits54,00060,656Operating ExpensesSelling General and Administrative Expenses345,517530,629Amortization of customer contracts-21,042Total Operating Expenses345,517551,671Operating Loss(291,517)(491,015)Other Income (Expense)Interest expense(66,223)(67,086)Bargain Purchase gain921,005Technology licensing Income6,50110,240Total Other (Expense) - net(59,722)864,159Net Income (Loss)(351,239)373,144Net income (Loss) attributable to non-controlling interest-15,693Net Income (Loss) Accelpath, Inc.(351,239)388,837Deemed and cash dividends to Preferred Stockholders(1,139)(361,528)Net loss applicable to Common shareholders$(352,378)$27,309Net loss per common share - basic and diluted$(0.001)$0.003Weighted average number of common shares outstandingduring the period/year - basic and diluted378,521,392126,617,790   4   Consolidated Statements of Stockholders Equity (Deficit)  Non-Controlling Interest in Subsidiary
($)Total Stockholders' Equity (Deficit)
($)Preferred stockCommon StockAdditional Paid-In Capital
($)Accumulated Deficit
($)Series E
($)Series F
($)Series G
($)Series H
($)SharesAmount
($)Balance, June 30, 2011300,000---120,279,296120,2792,917,952(3,437,130)(187,291)(286,190)Sale of Common stock----1,047,6341,04833,592--34,640Deferred stock issuance costs------(36,000)--(36,000)Warrants issued with convertible notes payable------49,005--49,005Restricted stock award------29,167--29,167Conversion of 100 shares of preferred stock- Series E to common stock(100,000)---2,251,3902,25197,749---Cash dividends accrued on preferred stock - Series E------(13,360)--(13,360)Stock based Compensation------494,989--494,989Net loss-------(2,056,310)2,689(2,053,621)Balance, June 30, 2012200,000---123,578,320123,5783,573,094(5,493,440)(184,602)(1,781,370)Sale of Common stock----701,7547025,298--6,000Sale of 90 shares of Series F Preferred Stock-90,000-------90,000Warrants issued for Convertible notes payable------5,410--5,410Beneficial conversion feature on notes payable------133,222--133,222Restricted stock award----2,500,0002,50018,333--20,833Conversion of notes payable to common stock----236,809,509236,81053,111--289,920Rescission of common shares issued at par----(3,204,498)(3,204)3,204---Conversion of 100 shares of Series E Preferred Stock to note payable(100,000)--------(100,000)Cash dividends accrued on Series E Preferred stock------(5,617)--(5,617)  5    Issuance of Series H Preferred stock------60,000--60,000Stock-based compensation------526,113--526,113Net loss-------(1,976,692)(17,475)(1,994,167)Balance, June 30, 2013100,00090,000--360,385,085360,3854,372,168(7,470,132)(202,077)(2,749,656)Shares issued for debt converted in prior quarter----24,181,74224,182(12,091)--12,091Beneficial conversion feature on notes payable------105,000--105,000Conversion of 100 shares of Series E Preferred Stock to note payable(100,000)--------(100,000)Cash dividends accrued on Series E Preferred stock------(1,139)--(1,139)Stock-based compensation------133,701--133,701Net loss-------(351,239)-(351,239)Balance-September 30, 2013-90,000--384,566,827384,5674,597,639(7,821,371)(202,077)(2,951,242)   6   AccelPath, Inc. (Formerly Technest Holdings, Inc.) (A Development Stage Company) Statements of Cash Flows (Unaudited)  Three Months Ended September 30,20132012CASH FLOWS FROM OPERATING ACTIVITIES:Net loss$(351,239)$373,144Adjustments to reconcile net lossto net cash provided by (used in) operating activities:Share based paymentsStock based compensation133,701189,128Depreciation and amortization of property and equipment4,7804,722Amortization of note payable discount54,96448,283Amortization of customer contracts-21,042Restricted Stock Award Expense-20,833Bargain Purchase Option-(921,005)Amortization of Original Issue Discount174-Accrued dividends converted to notes payable13,143-Reduction in liabilities for issuance of common stock12,091-Fair value of comnmon stock issued under ESA--Changes in operating assets and liabilities:Decrease (Increase) in Deposits, prepaid expenses and other assets-104,601Increase (decrease) in accounts payable-(15,939)Increase (decrease) in Accrued Expenses and other liabilities30,99538,816Increase in Accrued compensation-6,040Net cash provided by (used in) operating activities(101,391)(130,335)CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for acquisition-(500)Cash distribution to former Digipath member-(96,662)Purchase of property and equipment-(14,100)Net cash used in investing activities-(111,262)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of notes payable and common stock warrants105,000137,000Proceeds from issuance of Series F Preferred stock-90,000Proceeds from issuance of common stock-6,000Net cash provided by financing activities105,000233,000Net (Decrease) in Cash3,609(8,597)Cash - Beginning of Period/Year1,20116,404Cash - End of Period/Year$4,810$7,807SUPPLEMENTARY CASH FLOW INFORMATION:Cash paid during the period/year for:Interest$-$7,015Income Taxes$-$-SUPPLEMENTARY DISCLOSURE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES:Fair value of common stock warrants issued with convertible notes payable$15,000$1,979Fair value of beneficial conversion feature on notes payable$105,000$99,889Notes payable and accrued interest converted to common stock$35,347Preferred Stock- Series E converted to Notes payable, including accrued dividends of $14,282 and $5,834, respectively for September 30, 2013 and September 30, 2012$114,282$105,834Cash dividend accrued on Preferred Stock-Series E$1,138$1,528   7   ACCELPATH, INC. (Formerly - TECHNEST HOLDINGS INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2011 (Unaudited)  1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION  Business  AccelPath, Inc. (formerly - Technest Holdings, Inc.) (the Company) includes its wholly-owned subsidiaries AccelPath, LLC (AccelPath) and Genex Technologies, Inc. (Genex), and its 49% owned subsidiary Technest, Inc. (Technest) (see Basis of Presentation below).  See Digipath Solutions, LLC (Digipath) discussion below.  The Company has two primary businesses: AccelPath is in the business of enabling pathology diagnostics and Technest was in the business of the design, research and development, integration, sales and support of three-dimensional imaging devices and systems.  Name Change and Domicile Change  On February 7, 2012, the Board of Directors approved and recommended a change in the parent companys name from Technest Holdings, Inc. to AccelPath, Inc. and a change in the domicile of the Company from Nevada to Delaware.  The name change and domicile change became effective on May 2, 2012.  Digipath Solutions, LLC  On September 18, 2012, the Company entered into an agreement to acquire all of the outstanding membership interests of Digipath, from its sole member pursuant to an Equity Purchase Agreement among the Company, Digipath and Mr. Rishi Reddy (the Purchase Agreement). In accordance with the Purchase Agreement, the Company issued Mr. Reddy a convertible promissory note in the amount of $1,050,000 (the Note), 1,250 shares of Series G Preferred Stock (the Shares), and agreed to make a cash payment totaling $100,000, $500 of which was paid at closing and $49,500 was paid on October 31, 2012 by Digipath.  In addition, Mr. Reddy entered into a one-year consulting agreement with the Company pursuant to which he agreed to perform consulting and advisory services in the field of pathology and to serve as a member of the Companys Medical Advisory Board for a monthly retainer of $8,333.  On February 15, 2013, due to information that came to light subsequent to September 18, 2012, the Company and Mr. Reddy entered into a Rescission Agreement, whereby the Purchase Agreement was cancelled and all parties were restored to their status before the Purchase Agreement was executed (the Rescission).  As a result of the Rescission, the Company returned to Mr. Reddy all of the outstanding membership interests of Digipath and Mr. Reddy returned to the Company, the Note, the Shares and all cash payments received to date.  The consulting and advisory services arrangement between the Company and Mr. Reddy was canceled.  The Company also recognized a loss on the terminated acquisition of $30,648 for the three months ended September 30, 2013.  The Company concluded that the acquisition agreement was not legally consummated and therefore consolidation was not appropriate. Consequently, the Company should not have presented consolidated financial statements in the September 30, 2012 SEC filing on Form 10-Q, and therefore, the accounting and reporting was an error. As a result, the Companys financial statements for the three months ended September 30, 2013 do not include any of the acquisition entries or the consolidation of Digipaths results for such period.  In addition, the Company evaluated the materiality of the impact of the consolidation in the Companys financial statements for the three months ended September 30, 2012 (reflecting DigiPaths assets and liabilities at such date and its operating results for the period from September 18, 2012 through September 30, 2012) and determined that the Companys Quarterly Report on Form 10-Q for the period ended September 30, 2012 will be amended accordingly. There was no impact to any other period previously reported.  Basis of Presentation  The accompanying consolidated financial statements include the operations of the Company, its wholly-owned subsidiary AccelPath, its inactive wholly-owned subsidiary Genex, and its 49% owned subsidiary Technest.  Technest became inactive in the three months ending September 30, 2013.  Technest previously conducted research and development in the field of computer vision technology and the Company has the right of first refusal to commercialize products resulting from this research and development.  The Companys former Chief Executive Officer beneficially owns 23% of Technest, an employee owns 23% and an unrelated a third party owns 5%.  Technest is considered a variable interest entity (VIE) for which the Company is the primary beneficiary.   8   The Company consolidates all entities in which the Company holds a controlling financial interest. For voting interest entities, the Company is considered to hold a controlling financial interest when the Company is able to exercise control over the investees operating and financial decisions. For variable interest entities (VIEs), the Company is considered to hold a controlling financial interest when it is determined to be the primary beneficiary. For VIEs, a primary beneficiary is a party that has both: (1) the power to direct the activities of a VIE that most significantly impact that entity's economic performance, and (2) the obligation to absorb losses, or the right to receive benefits, from the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE is based on the amount and characteristics of the entity's equity.  All significant inter-company balances and transactions have been eliminated in consolidation.  The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, without being audited, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary to make the financial statements not misleading have been included. Operating results for the three months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2012 filed with the Securities and Exchange Commission.  Recent Accounting Pronouncements  There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Companys consolidated financial statements.  2.  GOING CONCERN UNCERTAINTY AND MANAGEMENTS PLAN  The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate the continuation of the Company as a going concern. The Company had a net loss applicable to common shareholders of $352,378 for the three months ended September 30, 2013 and net income applicable to common shareholders of $27,309 for the three months  ended September 30, 2012.  Further, the Company had a working capital deficit of $2,918,272 and a stockholders deficit of $2,749,165 at September 30, 2013.  These factors raise substantial doubt about the Companys ability to continue as a going concern.  Management is anticipating revenue growth through expansion of its customer base, and is also actively seeking financing through new and existing investors to fund operations. There is no assurance that the Company can reverse its net losses, or that the Company will be able to raise capital. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.  3.  NOTES PAYABLE  Notes payable  related parties and a third parties consist of the following:  September 30,
2013June 30,
2013Note payable  former Managing Member$27,750$27,750Note payable  related corporation4,3004,300Notes payable  stockholders13,00013,000Note payable  Former Chief Executive Officer5,0005,000Convertible notes payable718,259497,308Total768,309545,358Convertible notes payable, discount(97,150(43,619)Total, net of discount671,159501,739Less current portion564,251384,785Long-term debt$106,908$116,954  Maturities of notes payable for the years ending June 30, 2014 and 2015 are $633,309 and $135,000, respectively.  9   On March 4, 2011, AccelPath entered into a resignation and repurchase agreement with one of its Managing Members.  The Managing Member resigned on March 4, 2011 and AccelPath agreed to repurchase 10,498,120 shares of $0.001 par value common stock for $74,000.  To complete the repurchase, AccelPath issued a $74,000 note payable due in eight monthly installments of $9,269 including interest at 0.54% per annum.  At September 30, 2013, AccelPath has not paid $27,750 of principal payments due for August through October 2011.  During a default, unpaid principal bears interest at 12% per annum.  In addition, AccelPath entered into a consulting agreement with the Managing Member requiring payments of $750 per month for a period of eight months in consideration for continuing services.  At September 30, 2013, AccelPath has accrued but not made the $2,250 of consulting payments due for August through October 2011.  Consulting expense for the three and three months ended September 30, 2013 was $750 and $3,000, respectively.  On August 18, 2011, the Company borrowed $3,300 from a corporation controlled by our Chief Executive Officer. The Company borrowed an additional $1,000 on January 12, 2012.  The note is payable on demand and accrues interest at a rate of 0.32% per annum.  During the three months ended September 30, 2012, the Company borrowed $15,000 from a stockholder.  On February 27, 2012, the Company repaid $2,000 of the note payable - stockholder. The balance of this note is payable on demand and accrues interest at 0.19% per annum. On October 1, 2012, the Company borrowed $100,000 from a stockholder.  The loan will be repaid with three monthly payments of $23,000 beginning May 1, 2014 and ending on October 1, 2014 for a total payment amount of $138,000.  During the three months ended September 30, 2012, the Company borrowed $5,000 from our Chief Executive Officer.  During the three months ended September 30, 2013, the Company borrowed an additional $34,700 from our Chief Executive Officer.  The balance of these notes are payable on demand and accrue interest at 0.19% per annum.  On February 10, 2012, the Company borrowed $40,000 from a third party under a promissory note which matured on August 31, 2012.  The note bears interest at 8% per annum and includes a redemption premium of $6,000 due on the maturity date.  The redemption premium is being accrued over the term of the note as additional interest.  On February 10, 2012, the Company borrowed $50,000 from a a third party.  The Company repaid $5,000 of the note on March 12, 2012.  The convertible promissory note bears interest at 5% per annum and matured on August 10, 2012.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date and the investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  The Company also issued the investor a five-year warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision and has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  The Company allocated $8,037 of the proceeds to the warrant and $41,963 of the proceeds to the discounted value of the note based on their relative fair values.  On October 2, 2012, the Company entered into an amendment to the agreement to extend the maturity date to November 10, 2012 in exchange for a payment of $2,000 and the issuance of a warrant to purchase 250,000 shares of common stock at an exercise price of $0.01 per share.  The Company evaluated the modification of the note and determined that it did not qualify as a debt extinguishment.  Consequently, the $3,431 fair value of the warrant was recognized as an additional debt discount and fully amortized to interest expense during the three months ended September 30, 2013.  The $2,000 payment was made in January 2013.  On February 17, 2012, the Company borrowed $100,000 from a a third party.  The convertible promissory note bears interest at 5% per annum and matures on August 16, 2013.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory note into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision.  The Company granted piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  The Company allocated $32,743 of the proceeds to the warrant and $67,257 of the proceeds to the discounted value of the note based on their relative fair values.  10   On April 18, 2012, the Company borrowed $50,000 from a a third party.  The convertible promissory note bears interest at 5% per annum and matures on October 17, 2013.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory note into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision and the investor has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.   The Company allocated $8,225 of the proceeds to the warrant and $41,775 of the proceeds to the discounted value of the note based on their relative fair values.  On July 18, 2012, the Company entered into a subscription agreement with a third party ("a third party") for the purchase of a convertible promissory note in the aggregate principal amount of $100,000. The note accrues interest at a rate of 5% per annum and became due on January 31, 2013.  The Company is in default of this note. a third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price of $0.0075 per share.  The Company recorded a beneficial conversion discount of $29,333 based on the fair value of the common stock into which the note was convertible to on the commitment date and allocated $70,667 of the proceeds to the discounted value of the note.  On July 18, 2012, the Company entered into an agreement with a third party to exchange 100 shares of Series E Preferred Stock and accrued dividends of $5,834 into a convertible promissory note in the principal amount of $105,834. The note accrues interest at a rate of 5% per annum and is due on September 1, 2013.  a third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 60% of the current market price. The Company recorded a beneficial conversion discount of $70,556 based on the fair value of the common stock into which the note is convertible to and allocated $35,278 of the proceeds to the discounted value of the note.  During the three months ended September 30, 2013, a third party converted the entire principal value of the note plus $1,692 of accrued interest into 48,770,841 shares of common stock.  On July 31, 2012, the Company borrowed a total of $7,000 from two individuals.  The convertible promissory notes bear interest at 5% per annum and mature on January 31, 2014.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investors have the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory notes into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investors a five-year warrant to purchase a total of 70,000 shares of common stock at an exercise price of $0.01 per share.  The warrants include a cashless net exercise provision and the investors have piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the notes.  The Company allocated $443 of the proceeds to the warrants and $6,557 of the proceeds to the discounted value of the note based on their relative fair values.  In August 2012, the investors converted their notes into a total of 700,000 shares of common stock.  On September 14, 2012, the Company borrowed $25,000 from a stockholder.  The convertible promissory note bears interest at 5% per annum and matures on March 14, 2014.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory notes into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase a total of 250,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision and the investor has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  The Company allocated $1,536 of the proceeds to the warrants and $23,464 of the proceeds to the discounted value of the note based on their relative fair values.  On March 22, 2013, the Company borrowed $35,000 from a a third party.  The convertible promissory note bears interest at 5% per annum and matures on December 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the ten days prior to the converison. The Company recorded a beneficial conversion discount of $23,333 based on the fair value of the common stock into which the note is convertible to and allocated $11,667 of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  11   On May 13, 2013, the Company borrowed $10,000 from a third party.  The convertible promissory note bears interest at 5% per annum and matures on December 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the ten days prior to the conversion. The Company recorded a beneficial conversion discount of $10,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On July 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on January 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On August 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on February 28, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On September 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on March 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On September 5, 2013, an Investor advanced the Company $15,000 in a Promissory Note.  The Promissory Note has a one year term, an interest rate of ten percent and a ten percent original issue discount (OID).  An OID represents the difference between the amount received and the face value of the note.  The Promissory Note has a face value of $17,500, and the OID will be amortized into expense pro-rata over the term of the Note. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The Market Price is defined as 50% of the lowest closing bid price for the thirty (30) days immediately preceding the conversion date.  At September 30, 2013, the bl;ance of the note with the OID accrued was $15,174.  On September 20, 2013, an Investor exchanged its remaining interest,$100,000, in the Series E 5% convertible Preferred stock plus accrued dividends of $14,282 into a new Secured Note for $114,282.  The Secured Note matures on September 30, 2014 and has an interest rate of five percent.    Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The Market Price is defined as 50% of the lowest closing bid price for the thirty (30) days immediately preceding the conversion date.  Interest expense on notes payable, including amortization of the discount on the convertible notes and the accrual of the redemption premium, was $66,223 and $10,443 for the three months ended September 30, 2013 and 2012, respectively.  The Company evaluated whether the convertible promissory notes contain a beneficial conversion feature (BCF) and determined that certain of the notes contained a BCF.   The Company also evaluated the terms of the convertible promissory notes and the related warrants issued with the notes under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 815-15 and determined that these instruments do not require derivative accounting treatment.  4.  PREFERRED STOCK  Series E  During the current quarter, the Company exchanged its remaining 100 shares of Series E Preferred Stock plus $14,282 of accrued dividends into a new Secured Note of $114,282 (See Footnote Three above)  As of September 30, 2013, the Company has -0- outstanding shares of its Series E 5% Convertible Preferred Stock outstanding.   The Company accrued cash dividends payable on the Series E Preferred of$1,138 and $1,528 for the three months ended September 30, 2013 and 2012, respectively. During the three months ended September 30, 2012, there was also a non-cash deemed dividend of $360,000 on the Series F convertible preferred stock due to a beneficial conversion feature. Accrued dividends payable of $-0- and $13,143 are included in accrued expenses and other current liabilities at September 30, 2013 and June 30, 2013, respectively.  12   Series F  On September 7, 2012, the Company authorized 100 shares of Series F Convertible Preferred Stock, with a stated value of $1,000.  The Series F Preferred is convertible into common stock at any time at the option of the holder.  The number of shares of common stock into which one share of Series F Preferred is convertible is determined by (i) dividing $1,000 (the stated value) outstanding by the closing bid price on the trading day immediately prior to the date of the conversion notice (the Conversion Price), and (ii) multiplying by ten; provided that if the closing bid price on such trading day is less than $0.02 per share, then the Conversion Price shall be $0.02.  Accordingly, the authorized 100 shares of Series F Preferred are currently convertible into 50,000,000 shares of common stock using a Conversion Price of $0.02.  On September 10, 2012, the Company issued 90 shares of its Series F Preferred Stock for the purchase price of $90,000 to certain existing investors of the Company.  The 90 shares of Series F Preferred are currently convertible into 45,000,000 shares of common stock. The Company determined that there was a beneficial conversion feature of $360,000 for the issuance of the 90 shares of Series F Preferred Stock.  The beneficial conversion feature was calculated based on the effective conversion price per share compared to the fair value per share of common stock on the commitment date.  This resulted in a deemed dividend in the amount of $360,000 for the three months ended September 30, 2013.  Series G  On September 18, 2012, the Company authorized 1,250 shares of Series G Convertible Preferred Stock, with a stated value of $1,000.  The Series G Preferred is convertible into common stock at any time at the option of the holder three months after the date of issuance. After five years from the date of issuance or upon a change of control, the Series G Preferred is automatically converted into shares of common stock. The number of shares of common stock into which one share of Series G Preferred is convertible is determined by dividing $1,000 (the stated value) outstanding by the closing bid price on the trading day immediately prior to the date of the conversion notice (the Conversion Price); provided that if the closing bid price on such trading day is less than $0.02 per share, then the Conversion Price shall be $0.02. Accordingly, the authorized 1,250 shares of Series G Preferred are convertible into 62,500,000 shares of common stock at an assumed Conversion Price of $0.02.  The Company also evaluated the terms of the convertible preferred stock under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 815-15 and determined that these instruments do not require derivative accounting treatment and do not qualify for mezzathree presentation in the consolidated balance sheets.  Series H  The number, designation, rights, preferences and privileges of the Series H Preferred were established by the Board at a meeting on April 2, 2013.  The designation, rights, preferences and privileges that the Board established for the Series H Preferred is set forth in a Certificate of Designation that was filed with the Secretary of State of the State of Delaware on April 3, 2013. Among other things, the Certificate of Designation provides that each one share of Series H Preferred has voting rights equal to (x) 0.019607multiplied by  the total issued and outstanding Common Stock eligible to vote at the time of the respective vote (the "Numerator"),divided by  (y) 0.49,minus  (z) the Numerator.  At a meeting of the Board, the Board issued an aggregate of fifty one (51) shares of Series H Preferred to one individual, Shekhar Wadekar, Chief Executive Officer of the Company.  As a result of the voting rights granted to the Series H Preferred, the Series H Stockholder holds in the aggregate approximately 50.9989% of the total voting power of all issued and outstanding voting capital of the Company  On March 21, 2014, ownership of the Series H Preferred was transferred to Mr. Steedley, our Chief Executive Officer.  At September 30, 2013, the Series H Preferred was convertible into 196,086,780 shares of common stock.  5.  COMMON STOCK  On March 7, 2011, the Company entered into an Equity Purchase Agreement..  Pursuant to the Equity Purchase Agreement, a third party commited to purchase up to $5,000,000 of common stock over the course of 24 months commencing on the effective date of the registration statement pursuant to the registration rights agreement.  The registration statement was declared effective on February 9, 2012. The purchase price of the common stock to be sold pursuant to the Equity Purchase Agreement will be 95% of the average of the lowest three closing bid prices, consecutive or inconsecutive, during the five trading day period commencing on the date a put notice requesting that a third party purchase shares of common stock under the Equity Purchase Agreement is delivered. On July 19, 2012, the Company received proceeds of $6,000 for the sale of 701,754 shares of common stock pursuant to the Equity Purchase Agreement with a third party. The registration statement is no longer effective.  During the quarter, the only shares of common stock that were issued were for debt converted in the prior quarter but issued this quarter.  13   6.  OPTIONS, WARRANTS AND STOCK-BASED COMPENSATION  2011 Equity Incentive Plan  On March 4, 2011, the Board of Directors adopted the 2011 Equity Incentive Plan and reserved up to 50,000,000 shares of common stock for issuance to employees, directors and consultants, subject to stockholder approval.  On February 17, 2012, the stockholders approved the plan.  The plan also provides for automatic annual increases on January 1st of each year (commencing on January 1, 2012 and ending on January 1, 2021), in the aggregate number of shares reserved equal to the lesser of (a) five percent of the total number of shares outstanding on December 31st of the preceding year or (b) 3,000,000 shares.  As of January 1, 2013, the number of shares reserved under the plan automatically increased to 56,000,000.  Under the plan, the Board may grant stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards.  Valuation and amortization method. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model.  The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period.  Volatility. The Company estimates volatility based on the Companys historical volatility.  Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.  Expected term. The expected term of stock options granted is based on an estimate of when options will be exercised in the future.  The Company applied the simplified method of estimating the expected term of the options, as described in the SECs Staff Accounting Bulletins 107 and 110, as the Company has had a significant change in its business operations and the historical experience is not indicative of the expected behavior in the future.  The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms.  Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.  Forfeitures.   Stock-based compensation expense is recorded only for those awards that are expected to vest.  FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The term forfeitures is distinct from cancellations or expirations and represents only the unvested portion of the surrendered option.  An annual forfeiture rate of 0% was applied to all unvested options as of September 30, 2013 which was managements best estimate.  This analysis will be re-evaluated semi-annually and the forfeiture rate will be adjusted as necessary.  Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.  The following weighted average assumptions were used to estimate the fair value of stock options using the Black-Scholes option pricing model:  Three Months
Ended
September 30, 2013Three Months
Ended
September 30, 2012Risk-free interest rate0.62% - 0.72%0.90% - 0.96%Expected dividend yieldExpected term4.25 - 5.5 years5.5 yearsForfeiture rate0%0%Expected volatility244.90% - 262.52%122.33% - 124.91%   14   A summary of option activity as of September 30, 2013 and for the three months then ended is presented below:  OptionsSharesWeighted-
Average
Exercise
PriceWeighted-
Average
Remaining
Contractual
TermAggregate
Intrinsic
ValueOutstanding at July 1, 201346,690,000$0.0628.83 years$588Granted240,0000.008Exercised$Forfeited or expired$Outstanding at September 30, 201346,930,000$0.0627.59years$Exercisable at September 30, 201316,843,000$0.0577.59 years$  On August 6, 2012, the Board of Directors granted stock options to purchase 120,000 shares of common stock at an exercise price of $0.0067.  The weighted average fair value of the options on the grant date was estimated at $0.0067 per share. These options vest over one year and have a contractual term of 10 years.  On September 6, 2012, the Board of Directors granted stock option to purchase 120,000 shares of common stock at an exercise price of $0.009.  The weighted average fair value of the options on the grant date was estimated at $0.009 per share. These options vest over one year and have a contractual term of 10 years.  Stock-based compensation expense for options for the three months ended September 30, 2013 and 2012 was $133,508 and $_____, respectively.. At September 30, 2013, unrecognized total compensation cost related to all unvested awards of $299,490 is expected to be recognized over a weighted average period of .81 years.  On March 15, 2012, the Company agreed to issue a restricted stock award of 2,500,000 shares of common stock to a consultant for services to be rendered with 1,250,000 shares vesting on June 15, 2012 and 1,250,000 shares vesting on September 15, 2012.  Consulting expense recorded for the restricted stock award was $20,833 for the three months ended September 30, 2013.  At September 30, 2013 there were 6,570,000 shares reserved for future grants.  Warrants  No warrants were exercised during the three months ended September 30, 2013.    During the three months ended September 30, 2013, the Company issued 570,000 warrants in connection with convertible notes payable (see Note 3).  The warrants have an exercise price of $0.01 per share, are immediately exercisable and expire in five years. The Company has reserved 2,645,000 shares of common stock for the exercise of outstanding warrants.  The following table summarizes the warrants outstanding at September 30, 2013:  Exercise priceNumberExpiration Date$5.8575,00008/03/20130.01500,00002/10/20170.011,000,00002/17/20170.01500,00004/18/20170.0120,00008/15/20170.0150,00008/20/20170.01250,00009/14/20170.01250,00010/02/20172,645,000  The weighted average grant date fair value of the warrants granted during the three months ended September 30, 2013 was $0.0095 per share.  The warrants were valued using the Black-Scholes option pricing model.  The following assumptions were used for warrants issued during the three months ended September 30, 2013; risk free interest rates of 0.60% - 0.72%; expected dividend yield of 0%; expected term of 5 years and expected volatility of  244.07% - 248.52%.  The weighted average remaining life of the warrants at September 30, 2013 was 4.19 years.  At September 30, 2013, all warrants are exercisable and there is no aggregate intrinsic value for the warrants outstanding.  15   Stock Award Plan  Under the 2006 Stock Award Plan the Company may award shares of common stock to employees, officers, directors, consultants and advisors and may make grants subject to such terms and conditions as determined by the Board of Directors. As of September 30, 2013, the Company has 111,845 shares available for future grant under the Plan.  7.  NET LOSS PER SHARE  Securities that could potentially dilute basic earnings (loss) per share ("EPS") as of September 30, 2013 and 2012, and that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the three and three months ended September 30, 2013 and 2011 consist of the following: redo Shares Potentially IssuableSeptember 30, 2013June 30, 2013Series E Convertible Preferred Stock-2,251,391Series F Convertible Preferred Stock45,000,00045,000,000Series G Convertible Preferred Stock--Series H Convertible Preferred Stock196,086,780183,756,751Convertible notes payable1,824,818,889332,000,000Stock options46,690,00046,690,000Restricted stock award2,500,0002,500,000Warrants2,650,0002,650,000Total2,117,740,669614,843,142  8.  COMMITMENTS AND CONTINGENCIES  Operating Lease  Currently, the Company rents space at 850 3rd Avenue in New York City on a month-to-month basis.  Monthly rent approximates $2,000.  There are no future minimum lease rental payments.  On December 7, 2011, the Company entered into a one-year lease for 1,957 square feet in Gaithersburg, Maryland which expires on September 30, 2013.  On November 16, 2012, the Company extended the lease for one year.  Monthly lease amounts for this facility in 2013 total approximately $2,018 including monthly operating expense charges of $781.  Consulting Agreements  The Company signed a consulting agreement which calls for a $30,000 monthly payment in the form of a convertible promissory note.  Through September 30, 2013, the Company has incurred $90,000 in expenses. See Footnote 3 for details on the Notes  9.  EMPLOYEE BENEFIT PLAN  The Company has a 401(k) plan for the benefit of certain employees. The Company also contributed to the plan under a safe harbor plan requiring a 3% contribution for all eligible participants. In addition, the Company may contribute a 3% elective match.  Effective January 1, 2013, the Company amended the plan to remove the 3% safe harbor contribution.  Contributions and other costs of the plan for the three months ended September 30, 2013 and 2011 were $1,632 and $3,843, respectively. Contributions and other costs of the plan for the three months ended September 30, 2013 and 2011 were $4,061 and $12,150, respectively.  10.  OPERATING SEGMENTS  The Company operates in two operating segments which are consistent with its internal organization. The major segments are medical diagnostic services and government contracting.  The government contracting segment became inactive during the three months ended September 30, 2013.  Where applicable, Unallocated represents items necessary to reconcile to the consolidated financial statements, which generally include corporate activity at the parent level and eliminations.  The Company evaluates performance of individual operating segments based on operating income (loss). On a consolidated basis, this amount represents total net loss as shown in the consolidated statement of operations. Reconciling items represent executive compensation costs that are not allocated to the operating segments.  Such costs have not been allocated from the parent to the subsidiaries.  16    Three Months Ended September 30, 2013Medical
DiagnosticsGovernment
ContractingUnallocatedTotalRevenues$54,000$-$-$54,000Operating loss(24,974)(478)(266,064)(291,517)Other income6,501--6,501Interest expense--66,22366,223Depreciation and amortization4,302478-4,780Expenditure for long-lived assets, including intangibles----Total Assets at September 30, 201372,3556,394-78,749  Three Months Ended September 30, 2012Medical
DiagnosticsGovernment
ContractingUnallocatedTotalRevenues$63,298$-$-$63,298Operating loss(52,079)(205,034)(233,992)(491,015)Other income-10,240921,005931,245Interest expense9,73957,347-67,086Depreciation and amortization25,764--25,764Expenditure for long-lived assets, including intangibles14,100--14,100Total Assets at September 30, 20122,936,3036,394638,3043,581,001  11.  SUBSEQUENT EVENTS  Issuance of Debt  Subsequent to the Balance sheet date, the company issued the following debt:  On October 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on April 30, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On November 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on May 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On December 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on June 30, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.   17   On January 1, 2014, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on July 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On February 1, 2014, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on August 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On February 28, 2013, an Investor advanced the Company $5,000 in a Promissory Note.  The Promissory Note matures on March 31, 201,has an interest rate of ten percent and a ten percent original issue discount (OID).  An OID represents the difference between the amount received and the face value of the note.  The Promissory Note has a face value of $5,500, and the OID will be amortized into expense pro-rata over the term of the Note. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The Market Price is defined as 50% of the lowest closing bid price for the thirty (30) days immediately preceding the conversion date.  On March 1, 2014, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on September 30, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  Conversion of debt  From the balance sheet date until the date of this report, the Company converted $103,600 of debt, $1,954 of accrued interest, $1,925 of legal fees into 517,195,217 shares of common stock    18   Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations  The following discussion and analysis of our financial condition and results of operations for the three and three months ended September 30, 2013 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report.  FORWARD LOOKING STATEMENTS  The information in this discussion contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including but not limited, to statements regarding the Companys capital needs, business strategy, and all other statements regarding future performance.  All such information and statements are subject to certain risks and uncertainties, the effects of which are difficult to predict and generally beyond the control of the Company, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements contained herein.  These risks and uncertainties include, but are not limited to, whether the Company will realize the improvements in its operations that it expects; general economic conditions; and those risks identified and discussed by the Company in its filings with the U.S. Securities and Exchange Commission. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in the Risk Factors section below, and, from time to time, in other reports we file with the Securities and Exchange Commission (the SEC). These factors may cause our actual results to differ materially from any forward-looking statement. Readers are cautioned not to place undue reliance on any forward looking statements contained in this report. We will not update these forward looking statements unless the securities laws and regulations require us to do so.  OVERVIEW  The Company has two primary businesses: AccelPath which is in the business of enabling pathology diagnostics and Technest which is in the business of the design, research and development, integration, sales and support of three-dimensional imaging devices and systems.  Each of these businesses is described below.  AccelPath Business  We are a technology solutions company that delivers services that play a key role in the delivery of information for diagnosis of diseases and other pathologic conditions with and through our associated pathologists and strategic alliances. The experienced pathologists and medical institutions with which we partner to manage slide and information delivery prepare comprehensive diagnostic reports of a patients condition and consult with referring physicians to help determine the appropriate treatment. Such diagnostic reports often enable the early detection of disease, allowing referring physicians to make informed and timely treatment decisions that improve their patients health in a cost-effective manner. We seek out referring physicians and histology laboratories in need of pathology interpretations for our associated pathologists and manage slide delivery and develop services for managing the information.  We are focused on providing technology solutions for the anatomic pathology market. Our business model builds upon the expertise of experienced pathologists to provide seamless, reliable and comprehensive pathology and special test offerings to referring physicians using conventional and digital technologies.  The pathologists with whom we contract seek to establish long-standing relationships with the referring physicians as a result of focused delivery of our diagnostic services, personalized responses and frequent consultations, and flexible information technology, or IT, solutions that are customizable to the referring physicians or laboratories as well as the pathologists needs. Our IT and communications platform enables us to deliver diagnostic reports to referring physicians generally within 24 hours of slide receipt, helping to improve patient care. In addition, our IT platform enables us to closely track and monitor medical trends from referring physicians.  Technest Business  Technest focuses on the design, research and development, integration, sales and support of three-dimensional imaging devices and systems primarily in the healthcare industries and intelligent surveillance devices and systems, and three-dimensional facial recognition in the security industries. Historically, the Companys largest customers have been the National Institutes of Health and the Department of Defense.  During the three months ended September 30, 2013, the Technest business became inactive.  The Company is considering strategic alternatives to maximize the value of Technest and its intellectual property.  The Company is actively pursuing licensing opportunities for the further commercialization of these products and the related intellectual property.  19   Digipath Solutions, LLC  On September 18, 2012, the Company entered into an agreement to acquire all of the outstanding membership interests of Digipath, from its sole member pursuant to an Equity Purchase Agreement among the Company, Digipath and Mr. Rishi Reddy (the Purchase Agreement). In accordance with the Purchase Agreement, the Company issued Mr. Reddy a convertible promissory note in the amount of $1,050,000 (the Note), 1,250 shares of Series G Preferred Stock (the Shares), and agreed to make a cash payment totaling $100,000, $500 of which was paid at closing and $49,500 was paid on October 31, 2012 by Digipath.  In addition, Mr. Reddy entered into a one-year consulting agreement with the Company pursuant to which he agreed to perform consulting and advisory services in the field of pathology and to serve as a member of the Companys Medical Advisory Board for a monthly retainer of $8,333.  On February 15, 2013, due to information that came to light subsequent to September 18, 2012, the Company and Mr. Reddy entered into a Rescission Agreement, whereby the Purchase Agreement was cancelled and all parties were restored to their status before the Purchase Agreement was executed (the Rescission).  As a result of the Rescission, the Company returned to Mr. Reddy all of the outstanding membership interests of Digipath and Mr. Reddy returned to the Company, the Note, the Shares and all cash payments received to date.  The consulting and advisory services arrangement between the Company and Mr. Reddy was cancelled.  The Company concluded that the acquisition agreement was not legally consummated and therefore consolidation was not appropriate. As a result, the Companys financial statements for the three months ended September 30, 2013 do not include the consolidation of Digipaths results for such period  Name Change and Domicile Change  On February 7, 2012, the Companys Board of Directors approved and recommended a change in the Companys name from Technest Holdings, Inc. to AccelPath, Inc. and a change in the domicile of the Company from Nevada to Delaware.  On February 17, 2012, a majority of the stockholders approved the name change and the domicile change as more fully described in the Companys Definitive Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on March 16, 2012, which description is incorporated by reference herein (the Information Statement). The name change and domicile change became effective on May 2, 2012. In connection with the name and domicile change, the Companys common stock began trading on the OTCBB under the trading symbol ACLP.OB (instead of TCNH.OB) as of May 9, 2012.  RESULTS OF OPERATIONS  Three months ended September 30, 2013 compared with the three and three months ended September 30, 2012  On March 4, 2011, the Company acquired AccelPath, LLC and it became a wholly-owned subsidiary of the Company. Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial statement reporting purposes. The acquisition was accounted for as a reverse acquisition whereby AccelPath, LLC was deemed to be the accounting acquirer.  Accordingly, the results of operations of the Company have been included in the consolidated financial statements since the date of the reverse acquisition.  Revenues  The Company had $54,000 in revenues during the three months ended September 30, 2013 compared with $63,298 in revenues during the three months ended September 30, 2012.  Revenues for the three months ended September 30, 2013 consisted of $54,000 of revenues generated from medical diagnostic services provided by AccelPath, and no revenues generated by Technest.  Revenues for the three months ended September 30, 2012 consisted of $63,298 of revenues generated by medical diagnostic services provided by AccelPath and $-0- of revenues generated by Technest.  The $9,298 decrease in medical diagnostic revenues is due to reduced activity.  Future revenues for Technest are dependent on the receipt of new government contracts or the commercialization of its products.  Technest became inactive during the three months ended September 30, 2012.  Gross profit  The gross profit for the three months ended September 30, 2013 was $54,000 or 100% of revenues compared to a gross profit of $60,656 or 96% of revenues for the three months ended September 30, 2012.  The $6,656 decrease in gross profit was primarily due to reduced medical diagnostic services revenue in the current period.  20   Selling, general and administrative expenses  Selling, general and administrative expenses for the three months ended September 30, 2013 were $345,517 compared to $530,629 for the three months ended September 30, 2012, a decrease of $185,112.  During the three months ended September 30, 2013 and 2012, these expenses consisted primarily of compensation expenses, professional fees, consulting fees, occupancy expenses and travel expenses.  During the three months ended September 30, 2013 and 2012, the Company recognized stock-based compensation expense of $133,700 and $189,128, respectively, an increase of $55,428.  The remaining decrease of $240,540 was primarily due to decreases at our Technest subsidiary due to the winding down of operations.  Amortization of customer contracts  Amortization of intangible assets for the three months ended September 30, 2013 was $0 compared to $21,042 of amortization expense for the three months ended September 30, 2012.  Amortization expense for the three months ended September 30, 2012 consists of amortization of the Technest customer contracts recorded in the March 4, 2011 reverse acquisition.  Operating loss  The operating loss for the three months ended September 30, 2013 was $291,517 compared with $491,015 for the three months ended September 30, 2012.  The $334,157 decrease in the operating loss is primarily due to the $246,050 decrease in selling, general and administrative expenses.   Other income (expense)  Other income (expense) was $(59,722) for the three months ended September 30, 2013 compared to $864,159 for the three months ended September 30, 2012.  During the three months ended September 30, 2013, the Company had $66,223 in interest expense on notes payable, which was partially offset by $6,501 in technology licensing income.  During the three months ended September 30, 2012, the Company had a bargain purchase gain of $921,005,and technology licensing income of $10,240.  This was partially offset by $67,086 in interest expense on notes payable.   Net loss applicable to common shareholders  The net loss applicable to common shareholders for the three months ended September 30, 2013 was $352,378 in comparison with a net gain of $27,309 applicable to common shareholders for the three months ended September 30, 2012.  The net loss per share was $0.001 per share for the three months ended September 30, 2013 and $0.003 per share for the three months ended September 30, 2012.  Included in the net loss applicable to common shareholders for the three months ended September 30, 2013 are accrued cash dividends of $1,139 on the Series E 5% convertible preferred stock.Included in the net loss applicable to common shareholders for the three months ended September 30, 2012 are accrued cash dividends of $1,528 on the Series E 5% convertible preferred stock and a non-cash deemed dividend of $360,000 on the Series F convertible preferred stock due to a beneficial conversion feature.  LIQUIDITY AND CAPITAL RESOURCES  Cash and Working Capital  On September 30, 2013, the Company had a working capital deficit of $2,918,272 compared to a working capital deficit of $2,711,419 at June 30, 2013.  The $206,853 decrease in working capital is due primarily to the operating loss incurred by the Company during the three months ended September 30, 2013.   Our primary source of operating cash flows to date has been from financing activities.  During the three months ended September 30, 2013, we received $105,000 from the issuance of notes payable.  During the three months ended September 30, 2012, we received proceeds of $137,000 from the issuance of debt, $90,000 from the issuance of Series F Preferred stock and $6,000 from the sale of common stock  Cash used by operating activities was $101,391 for the three months ended September 30, 2013 versus $130,335 for the three months ended September 30, 2012.  Our primary uses of operating cash were for, compensation payments, legal and accounting fees, consulting fees, investor relations expenses and travel expenses.   21   Sources of Liquidity  During the three months ended September 30, 2013 and the year ended June 30, 2013, we satisfied our operating cash requirements primarily from the sale of preferred and common stock, the issuance of notes payable, and the collection of our accounts receivable.  We have also increased our accounts payable, primarily for costs incurred in connection with the reverse acquisition.  On February 10, 2012, the Company borrowed $40,000 from a third party  under a promissory note which matures on August 31, 2012.  The note bears interest at 8% per annum and includes a redemption premium of $6,000 due on the maturity date.  On February 10, 2012, the Company borrowed $50,000.  The convertible promissory note bears interest at 5% per annum and matures on August 10, 2012.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  The Company also issued the investor a five-year warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share.  The warrant also includes a cashless net exercise provision. The Company granted piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  On February 17, 2012, the Company borrowed $100,000.  The convertible promissory note bears interest at 5% per annum and matures on August 16, 2013.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory note into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision.  The Company granted piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  On April 18, 2012, the Company borrowed $50,000.  The convertible promissory note bears interest at 5% per annum and matures on October 17, 2013.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory note into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision.  The Company granted piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  On July 18, 2012, the Company borrowed $100,000 from a third party. The note accrues interest at a rate of 5% per annum and is due on January 31, 2013.  a third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price of $0.0075 per share.  On July 18, 2012, the Company entered into an agreement with a third party to exchange 100 shares of Series E Preferred Stock and accrued dividends of $5,834 into a convertible promissory note in the principal amount of $105,834. The note accrues interest at a rate of 5% per annum and is due on September 1, 2013.  a third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 60% of the current market price.  During the three months ended September 30, 2013, a third party converted $68,315 of the note plus $1,692 of accrued interest into 48,770,841 shares of common stock.  On July 31, 2012, the Company borrowed a total of $7,000 from two individuals.  The convertible promissory notes bear interest at 5% per annum and mature on January 31, 2014.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investors have the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory notes into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investors a five-year warrant to purchase a total of 70,000 shares of common stock at an exercise price of $0.01 per share.  The warrants include a cashless net exercise provision and the investors have piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the notes.  In August 2012, the investors converted their notes into a total of 700,000 shares of common stock.   22   On September 14, 2012, the Company borrowed $25,000 from a stockholder.  The convertible promissory note bears interest at 5% per annum and matures on March 14, 2014.  The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date.  The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date.  In addition, the Company has the option to convert the promissory notes into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase a total of 250,000 shares of common stock at an exercise price of $0.01 per share.  The warrant includes a cashless net exercise provision and the investor has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note.  On October 1, 2012, the Company entered into a loan agreement and a promissory note to borrow $100,000 from a stockholder.  The loan will be repaid with three monthly payments of $23,000 beginning May 1, 2014 and ending on October 1, 2014 for a total payment amount of $138,000.  On March 7, 2011, the Company entered into an Equity Purchase Agreement with a third party Partners II, LP where a third party committed to purchase up to $5,000,000 of our common stock over the course of 24 months commencing on the effective date of our registration statement pursuant to the registration rights agreement.  The registration statement was declared effective on February 9, 2012 and a post-effective amendment was declared effective on June 13, 2012.  No post-effective amendments have been filed since June 2012 and the registration statement is no longer effective.  The purchase price of the common stock to be sold pursuant to the Equity Purchase Agreement will be 95% of the average of the lowest three closing bid prices, consecutive or inconsecutive, during the five trading day period commencing on the date a put notice requesting that a third party purchase shares of common stock under the Equity Purchase Agreement is delivered.  During the year ended June 30, 2012, the Company received proceeds of $34,640 for the sale of 1,047,634 shares of common stock under the Equity Purchase Agreement.  During the three months ended September 30, 2013, the Company received proceeds of $6,000 for the sale of 701,754 shares of common stock under the Equity Purchase Agreement.  Our ability to draw down funds under the Equity Purchase Agreement is subject to a number of conditions set forth in the Equity Purchase Agreement, as are more fully discussed in the Risk Factors Section entitled Risks Related to Market Conditions.  On September 7, 2012, the Company authorized 100 shares of Series F Convertible Preferred Stock, with a stated value of $1,000.  The Series F Preferred is convertible into common stock at any time at the option of the holder.  The number of shares of common stock into which one share of Series F Preferred is convertible is determined by (i) dividing $1,000 (the stated value) outstanding by the closing bid price on the trading day immediately prior to the date of the conversion notice (the Conversion Price), and (ii) multiplying by ten; provided that if the closing bid price on such trading day is less than $0.02 per share, then the Conversion Price shall be $0.02.  Accordingly, the authorized 100 shares of Series F Preferred are currently convertible into 50,000,000 shares of common stock using a Conversion Price of $0.02.  On September 10, 2012, the Company issued 90 shares of its Series F Preferred Stock for the purchase price of $90,000 to certain existing investors of the Company.  The 90 shares of Series F Preferred are currently convertible into 45,000,000 shares of common stock.  On March 22, 2013, the Company borrowed $35,000 from a a third party.  The convertible promissory note bears interest at 5% per annum and matures on December 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the ten days prior to the converison. The Company recorded a beneficial conversion discount of $23,333 based on the fair value of the common stock into which the note is convertible to and allocated $11,667 of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On May 13, 2013, the Company borrowed $10,000 from a third party.  The convertible promissory note bears interest at 5% per annum and matures on December 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the ten days prior to the conversion. The Company recorded a beneficial conversion discount of $10,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On July 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on January 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.   23   On August 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on February 28, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On September 1, 2013, the Company issued a note for $30,000 for consulting services.    The convertible promissory note bears no interest and matures on March 31, 2014. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion. The Company recorded a beneficial conversion discount of $30,000 based on the fair value of the common stock into which the note is convertible to and allocated $-0- of the proceeds to the discounted value of the note.  As of the date of this filing, there have been no conversions of this Note and the entire amount is outstanding.  On September 5, 2013, an Investor advanced the Company $15,000 in a Promissory Note.  The Promissory Note has a one year term, an interest rate of ten percent and a ten percent original issue discount (OID).  An OID represents the difference between the amount received and the face value of the note.  The Promissory Note has a face value of $17,500, and the OID will be amortized into expense pro-rata over the term of the Note. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The Market Price is defined as 50% of the lowest closing bid price for the thirty (30) days immediately preceding the conversion date.  On September 20, 2013, an Investor exchanged its remaining interest,$100,000, in the Series E 5% convertible Preferred stock plus accrued dividends of $14,282 into a new Secured Note for $114,282.  The Secured Note matures on September 30, 2014 and has an interest rate of five percent.    Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The Market Price is defined as 50% of the lowest closing bid price for the thirty (30) days immediately preceding the conversion date.  Management believes that, at the current share price, we will not be able to sell a sufficient amount of our common stock to a third party to provide enough capital to satisfy our obligations for the next 12 months.  Management is anticipating revenue growth through expansion of its customer base, and is also actively seeking financing through new and existing investors to fund operations. There is no assurance that the Company can reverse its net losses, or that the Company will be able to raise capital.  If the Company is not successful in its capital raising efforts, then its expansion plans and software development efforts would need to be curtailed.  COMMITMENTS AND CONTINGENCIES  Facilities  Technest currently leases office space at 850 3rd Avenue in NYC, NY on a month-to-month basis  Monthly lease amounts for this facility total approximately $2,000.  Off Balance Sheet Arrangements  We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. As of September 30, 2013, the Company had warrants outstanding for the purchase of 2,645,000 shares of common stock.  The Company does not expect any material cash proceeds from exercise of these warrants.  As of September 30, 2013, the Company had stock options outstanding for the purchase of 46,930,000 shares of common stock.  Effect of inflation and changes in prices  Management does not believe that inflation and changes in prices has had or will have a material effect on operations.  Critical Accounting Policies and Estimates  The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and the amounts of revenues and expenses recorded during the reporting periods. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.   24   Our critical accounting policies and use of estimates are discussed in, and should be read in conjunction with, the annual consolidated financial statements and notes included in the Companys Annual Report on Form 10-K for the year ended June 30, 2012 as filed with the SEC.   Item 4. Controls and Procedures  Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.  Our management, with the participation of our Chief Executive Officer (CEO) and our Principal Financial Officer (PFO), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2013. In designing and evaluating disclosure controls and procedures, we and our management recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of September 30, 2013, based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the CEO and PFO concluded that our disclosure controls and procedures were not effective.  In light of the conclusion that our internal controls over financial reporting were ineffective as of September 30, 2013, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regards to this quarterly report on Form 10-Q. Accordingly, management believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the periods covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this quarterly report.  Managements Report on Internal Control over Financial Reporting  Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision of our CEO and PFO, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2012 using the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of June 30, 2012, we determined that control deficiencies existed that constituted material weaknesses, as described below:  1) lack of documented policies and procedures; 2) inadequate resources dedicated to the financial reporting function; and 3) ineffective separation of duties due to limited staff.  Subject to the Companys ability to obtain financing and hire additional employees, the Company expects to be able to design and implement effective internal controls in the future that address these material weaknesses.  Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.  As a result of the material weaknesses described above, our CEO and PFO have concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2013 and June 30, 2012 based on criteria established in Internal ControlIntegrated Framework issued by COSO.  Changes in Internal Control Over Financial Reporting.  There were no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.    25   PART II. OTHER INFORMATION   ITEM 1A. Risk Factors.  Any investment in our common stock involves a high degree of risk. You should consider carefully the risks described below and elsewhere in this report and the information under Note Regarding Forward-Looking Statements, before you decide to buy our common stock. If any of the following risks, or other risks not presently known to us or that we currently believe are not material, develop into an actual event, then our business, financial condition and results of operations could be adversely affected. In that case, the trading price of our common stock could decline due to any of these risks and uncertainties, and you may lose part or all of your investment.  Risks Related to our AccelPath Business  We have a limited operating history in our services business, which may make it difficult to accurately evaluate our business and prospects.  AccelPath commenced providing services in October 2010.  As a result, we have a limited operating history upon which to accurately predict our potential revenue. Our revenues and income potential and our ability to expand our business into new markets for pathology services are still unproven. As a result of these factors, the future revenues and income potential of our business are uncertain. Any evaluation of our business and our prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in our stage of development. Our profitability may be adversely affected as we expand our infrastructure or if we incur increased selling expenses or other general and administrative expenses. Some of these risks and uncertainties include our ability to:  · execute our business model; · create brand recognition; · respond effectively to competition; · manage growth in our operations; · respond to changes in applicable government regulations and legislation; · access additional capital when required; and · attract and retain key personnel.  If we cannot complete additional financing, our operating results and financial condition may suffer and the price of our stock may decline.  The development of our business and technologies will require additional capital, and we may be unable to obtain additional funds, in a timely manner or on acceptable terms, which may render us unable to fund our operations or expand our business. If we are unable to obtain capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. If this occurs, the price of our common stock may decline and you may lose part or all of your investment.  We will have ongoing capital needs as we expand our business.  If we raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will be reduced. In addition, these transactions may dilute the value of our common stock.  We may have to issue securities that have rights, preferences and privileges senior to our common stock.  The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand. Although we have been successful in the past in obtaining financing for working capital, there can be no assurance that we will be able to obtain the additional financing we may need to fund our business, or that such financing will be available on acceptable terms.  In addition, we may attempt to obtain financing by selling shares of our common stock, possibly at a discount to market. Such issuances will cause our security holders interests in our Company to be diluted, which may negatively affect the value of their shares.  The market in which we participate is competitive and we expect competition to increase in the future, which will make it more difficult for us to sell our services and may result in pricing pressure, reduced revenue and reduced market share.  The market for anatomic pathology services is competitive and rapidly changing, barriers to entry are relatively low, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our operating results will be harmed.  In addition, if one or more of our competitors were to merge or partner with another of our competitors, or if companies larger than we are enter the market through internal expansion or acquisition of one of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. These competitors could have established customer relationships and greater financial, technical, sales, marketing and other resources than we do, and could be able to respond more quickly to new or emerging technologies or devote greater resources to the development, promotion and sale of their services. This competition could harm our ability to provide our services, which may lead to lower prices, reduced revenue and, ultimately, reduced market share.   26   If our arrangements with our associated pathologists or interpretation centers are found to violate state laws prohibiting the corporate practice of medicine or fee splitting, our business, financial condition and our ability to operate in those states could be adversely impacted.  The laws of many states, including states in which referring physicians and the pathologists at the interpretation centers with whom we contract are located, prohibit us from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as splitting professional fees with physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. We enter into independent contractor relationships with our interpretation centers and pathology departments of hospitals, pursuant to which their pathologists render professional medical services. We structure our relationships with these centers in a manner that we believe is in compliance with prohibitions against the corporate practice of medicine and fee splitting. However, state regulatory authorities or other parties could assert that we are engaged in the corporate practice of medicine. If such a claim were successfully asserted, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements. A determination that these arrangements violate state statutes, or our inability to successfully restructure our relationships with our associated pathologists to comply with these statutes, could eliminate referring physicians located in certain states from the market for our services, which would have a materially adverse effect on our business, financial condition and operations.  We may become subject to medical liability claims, which could cause us to incur significant expenses and may require us to pay significant damages if not covered by insurance.  Our business entails the risk of medical liability claims against our associated pathologists and us. Successful medical liability claims could result in substantial damage awards, which could exceed the limits of our insurance coverage. In addition, medical liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services to include primary reads. As a result, adequate medical liability insurance may not be available to our associated pathologists or us in the future at acceptable costs or at all.  Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our associated pathologists from our operations, which could adversely affect our operations and financial performance. In addition, any claims might adversely affect our business or reputation.  Changes in the regulatory environment may constrain or require us to restructure our operations, which may harm our revenue and operating results.  Healthcare laws and regulations change frequently and may change significantly in the future. We monitor legal and regulatory developments and modify our operations from time to time as the regulatory environment changes.  However, we may not be able to adapt our operations to address every new regulation, and new regulations may adversely affect our business. In addition, although we believe that we are operating in compliance with applicable foreign, federal and state laws, neither our current nor anticipated business operations have been scrutinized or assessed by judicial or regulatory agencies. We cannot assure you that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our operations or that the healthcare regulatory environment will not change in a way that restricts our operations.  Non-governmental a third-party payers have taken steps to control the utilization and reimbursement of diagnostic services.  Efforts are being made by non-governmental a third-party payers, including health plans, to reduce utilization of diagnostic testing services and reimbursement for diagnostic services. For instance, a third-party payers often use the payment amounts under the Medicare fee schedules as a reference in negotiating their payment amounts. As a result, a reduction in volumes and reimbursement rates could result in a reduction in the fees we receive from our associated pathologists. Changes in test coverage policies of and reimbursement from other a third-party payers may also occur independently from changes in Medicare. Such reimbursement and coverage changes in the past have resulted in reduced prices, added costs and reduced accession volume and have added more complex and new regulatory and administrative requirements.  The health care industry has also experienced a trend of consolidation among health insurance plans, resulting in fewer, larger health plans with significant bargaining power to negotiate fee arrangements with health care providers like our associated pathologists. In addition, some health plans have limited the preferred provider organization or point-of-service laboratory network to only a single national laboratory and its associated physicians to obtain improved fee-for-service pricing. The increased consolidation among health plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer.  We expect that efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of diagnostic testing services will continue. These efforts may have a material adverse effect on the fees we negotiate with our interpretation centers and our results of operations.  27   Failure to adequately safeguard data, including patient data that is subject to regulations related to patient privacy, could adversely impact our business.  The success of our business depends on our ability to obtain, process, analyze, maintain and manage data, including sensitive information such as patient data. If we do not adequately safeguard that information and it were to become available to persons or entities that should not have access to it, our business could be impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. Although we have implemented security measures, our infrastructure is vulnerable to computer viruses, break-ins and similar disruptive problems caused by our clients or others that could result in interruption, delay or cessation of service. Break-ins, whether electronic or physical, could potentially jeopardize the security of confidential client and supplier information stored physically at our locations or electronically in our computer systems. Such an event could damage our reputation, cause us to lose existing clients and deter potential clients. It could also expose us to liability to parties whose security or privacy has been infringed, to regulatory actions by the Centers for Medicare & Medicaid Services, or CMS, part of the United States Department of Health and Human Services, or HHS, or by the Office of Civil Rights, also part of HHS, and to civil or criminal sanctions. The occurrence of any of the foregoing events could adversely impact our business.  The American Recovery and Reinvestment Act of 2009 imposed additional obligations on health care entities with respect to data privacy and security, including new notifications in case of a breach of privacy and security standards. We are unable to predict the extent to which these new obligations may prove technically difficult, time-consuming or expensive to implement.  We are an early-stage company that is in the process of building relationships with associated pathologists and referring physicians, and our business may be harmed by the loss of any one associated pathologist or customer of an associated pathologist.  We are an early-stage company that is in the process of building relationships with associated pathologists and referring physicians.  We currently service a limited number of referring physicians through agreements with a limited number of associated pathologists; therefore the loss of any one customer of an associated pathologist may have a significant impact on our business, financial condition, results of operations and cash flows.  No assurance can be given that we will continue to maintain our competitive position with our associated pathologists or their referring physicians.  The loss of, or a significant curtailment of purchases by, one or more customers of an associated pathologist could cause our net sales to decline significantly, which would harm our business, financial condition, results of operations and cash flows.  Similarly, delays in payments by our associated pathologists could have a significant impact on our cash flows.  In addition, as a result of our dependence on a limited number of associated pathologists and referring physicians, we have significant concentrations of accounts receivable.  These significant and concentrated receivables expose us to additional risks, including the risk of default by any of the associated pathologists representing a significant portion of our total receivables.  If we were required to take additional accounts receivable reserves, our business, financial condition and results of operations could be materially adversely affected.  Failure to effectively continue or manage our strategic and organic growth could cause our growth rate to decline.  To continue growth, we will need to continue to identify appropriate providers, such as laboratories, for which our associated pathologists can provide professional pathology services. Consolidation and competition within our industry, among other factors, may make it difficult or impossible to identify such providers on timely basis, or at all. In particular, the competition to acquire independent private labs and pathology groups has increased. In addition to historical competitors such as national lab companies, regional hospital centers and specialty lab companies, a number of private equity firms have recently made initial investments in the pathology and laboratory industry and may become potential competitors to our efforts to secure new customers for our associated pathologists. Our inability to continue our strategic growth would cause our growth rate to decline and could have a material adverse effect on our business.  We also seek to continue our organic growth through the expansion of our sales force, and the targeting of international customers for pathology services. Because of limitations in available capital and competition within our industry, among other factors, we may not be able to implement any or all of these organic growth strategies on a reasonable schedule, or at all. Our failure to continue our organic growth would cause our growth rate to decline and could have a material adverse effect on our business.  To manage our growth, we must continue to implement and improve our operational and financial systems and to expand, train, manage and motivate our employees. We may not be able to effectively manage the expansion of our operations, and our systems, procedures or controls may not be adequate to support our operations. Our management may not be able to rapidly scale the infrastructure necessary to exploit the market opportunity for our services. Our inability to manage growth could have a material adverse effect on our business.   28   Our growth could strain our personnel, management and infrastructure resources, which may harm our business.  We are currently experiencing a period of rapid growth in our operations, which has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We also anticipate that further growth will be required to address increases in the scope of our operations and size of our customer base. Our success will depend in part upon the ability of our current senior management team to manage this growth effectively.  To effectively manage our anticipated growth, we will need to continue to improve our operational, financial and management processes and controls. If we fail to successfully manage our growth, our business and operating results will be harmed.  Failure to adequately scale our infrastructure to meet demand for our diagnostic services or to support our growth could create capacity constraints and divert resources, resulting in a material adverse effect on our business.  Increases in demand for diagnostic services, including unforeseen or significant increases in demand due to accession volume, could strain the capacity of our personnel and infrastructure. Any strain on our personnel or infrastructure could lead to inaccurate test results, unacceptable turn-around times or client service failures. Furthermore, although we are not currently subject to these capacity constraints, if demand increases for diagnostic services, we may not be able to scale our personnel or infrastructure accordingly. Any failure to handle increases in demand, including increases due to accession volumes, could lead to the loss of established clients and have a material adverse effect on our business.  We intend to expand by contracting with interpretation centers in additional geographic markets. In addition to development costs, this will require us to spend considerable time and money to expand our infrastructure and to hire and retain skilled laboratory and IT staff, experienced sales representatives, case coordination associates and other personnel for additional laboratories. We may also need federal, state and local certifications, as well as supporting operational, logistical and administrative infrastructure. Even after new centers are operational, it may take time for us to derive the same economies of scale we currently have. Moreover, we may suffer reduced economies of scale in our existing center as we seek to balance the amount of work allocated to each center. An expansion of our systems could divert resources, including the focus of our management, away from our current business.  Our growth strategy depends on the ability of the interpretation centers with whom we contract to recruit and retain qualified pathologists and other skilled personnel. If they are unable to do so, our future growth would be limited and our business and operating results would be harmed.  Our success is dependent upon the continuing ability of the interpretation centers with whom we contract to recruit and retain qualified pathologists at their facilities. An inability to recruit and retain pathologists and pathology departments in medical institutions would have a material adverse effect on our ability to grow and would adversely affect our results of operations. They face competition for pathologists from other healthcare providers, including pathology groups, research and academic institutions, government entities and other organizations.  We must also identify, recruit and retain skilled executive, technical, administrative, sales, marketing and operations personnel. Competition for highly qualified and experienced personnel is intense due to the limited number of people available with the necessary skills. Failure to attract and retain the necessary personnel would inhibit our growth and harm our business.  Interruptions or delays in our information systems or in network or related services provided by a third-party suppliers could impair the delivery of our services and harm our business.  Our operations depend on the uninterrupted performance of our information systems, which are substantially dependent on systems provided by a third parties over which we have little control. Failure to maintain reliable information systems, or disruptions in our information systems could cause disruptions and delays in our business operations which could have a material adverse effect on our business, financial condition and results of operations.  We rely on broadband connections provided by a third party suppliers to route digital images from laboratories within the United States to our associated pathologists at the interpretation centers with whom we contract. Any interruption in the availability of the network connections between the hospitals and our interpretation centers would reduce our revenue and profits. Frequent or persistent interruptions in our services could cause permanent harm to our reputation and brand and could cause current or potential referring physicians to believe that our systems are unreliable, leading them to switch to our competitors. Because referring physicians may use our services for critical healthcare services, any system failures could result in damage to the referring physicians businesses and reputation. These referring physicians could seek significant compensation from us for their losses, and our agreements with our customers do not limit the amount of compensation that they may receive. Any claim for compensation, even if unsuccessful, would likely be time-consuming and costly for us to resolve.   29   Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences and have multiple backups, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, break-ins, sabotage, and acts of vandalism. Despite any precautions that we may take, the occurrence of a natural disaster or other unanticipated problems at our interpretation centers or in the networks that connect our interpretation centers with laboratories could result in lengthy interruptions in our services. We do not carry business interruption insurance to protect us against losses that may result from interruptions in our service as a result of system failures.  Hospital privileging requirements or physician licensure laws may limit our market, and the loss of hospital privileges or state medical licenses held by our associated pathologists could have a material adverse effect on our business, financial condition and results of operations.  Each of our associated pathologists must be granted privileges to practice at each hospital from which the pathologist receives images and must hold a license in good standing to practice medicine in the state in which the hospital or laboratory is located. The requirements for obtaining and maintaining hospital privileges and state medical licenses vary significantly among hospitals and states. If a hospital or state restricts or impedes the ability of physicians located outside of the state to obtain privileges or a license to practice medicine at that hospital or in that state, the market for our services could be reduced. In addition, any loss of existing privileges or medical licenses held by our associated pathologists could impair our ability to serve our existing referring physicians and have a material adverse effect on our business, financial condition and results of operations.  Changes in the healthcare industry or litigation reform could reduce the number of diagnostic procedures ordered by physicians, which could result in a decline in the demand for our services, pricing pressure and decreased revenue.  Changes in the healthcare industry directed at controlling healthcare costs and perceived over-utilization of diagnostic pathology procedures could reduce the volume of biopsy procedures performed. For example, in an effort to contain increasing costs, some managed care organizations and private insurers are instituting pre-authorization policies, which require physicians to pre-clear orders for diagnostic biopsy procedures before those procedures can be performed. If pre-clearance protocols are broadly instituted throughout the healthcare industry, the volume of biopsy procedures could decrease, resulting in pricing pressure and declining demand for our services. Some payers have hinted at reducing the number of units of service that would be reimbursed in a connection with a single case.  In addition, it is often alleged that many physicians order diagnostic procedures even when the procedures may have limited clinical utility in large part to establish a record for defense in the event of a medical liability claim. Changes in perceived malpractice risk could reduce the number of biopsy procedures ordered for this purpose and therefore reduce the total number of biopsy procedures performed each year, which could harm our operating results.  We may not have adequate intellectual property rights in our brand, which could limit our ability to enforce such rights.  Our success depends in part upon our ability to market our services under the AccelPath brand and we have not secured registrations of this or other marks. Other businesses may have prior rights in the brand names that we market under or in similar names, which could limit or prevent our ability to use these marks, or to prevent others from using similar marks. If we are unable to prevent others from using our brand names, or if others prohibit us from using them, our revenue could be adversely affected. Even if we are able to protect our intellectual property rights in such brands, we could incur significant costs in doing so.  Any failure to protect our intellectual property rights in our workflow technology could impair its value and our competitive advantage.  We rely heavily on our workflow technology to distribute pathology slide images and information to the appropriately licensed and privileged associated pathologist best able to provide the necessary clinical insight in the least amount of turnaround time and reports to referring physicians. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology, and our business may be harmed. We currently do not hold any patents with respect to our technology, and we have not filed any applications for patents. Although we intend to file applications for patents covering our workflow technology, we may be unable to obtain patent protection for this technology. In addition, any patents we may obtain may be challenged by a third parties. Accordingly, despite our efforts, we may be unable to prevent a third parties from infringing upon or misappropriating our intellectual property.   30   We may in the future become subject to intellectual property rights claims, which could harm our business and operating results.  The information technology industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. If a a third party asserts that our technology violates that a third-partys proprietary rights, or if a court holds that our technology violates such rights, we may be required to re-engineer our technology, obtain licenses from a third parties to continue using our technology without substantial re-engineering or remove the infringing functionality or feature. In addition, we may incur substantial costs defending against any such claim. We may also become subject to damage awards, which could cause us to incur additional losses and hurt our financial position.  Monitoring potential infringement of and defending or asserting our intellectual property rights may entail significant expense. We may initiate claims or litigation against a third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.  Failure to attract and retain experienced and qualified personnel could adversely affect our business.  Our success depends on our ability to attract, retain and motivate experienced IT staff, experienced sales representatives and other personnel and also on our ability to contract with affiliated pathologists and interpretation centers.  Competition for these employees and pathologists is strong, and if we are not able to attract and retain qualified personnel or contract with qualified pathologists and interpretation centers it would have a material adverse effect on our business.  Our sales representatives have developed and maintain close relationships with a number of health care professionals, and our specialized approach to marketing our services positions our sales representatives to have a deep knowledge of the needs of the referring physicians they serve. Given the nature of the relationships we seek to develop with referring physicians, losses of sales representatives may cause us to lose clients.  We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.  Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Shekhar Wadekar, our Chief Executive Officer. The loss of Mr. Wadekar or other key personnel could have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock. In addition, the search for replacements could be time consuming and could distract our management team from the day-to-day operations of our business.  We may be unable to enforce non-compete agreements with our associated interpretation centers.  Our independent contractor agreements with our associated pathologists typically provide that the pathologists may not compete with us for a period of time, typically one year, after the agreements terminate. These covenants not to compete are enforceable to varying degrees from jurisdiction to jurisdiction. In most jurisdictions, a covenant not to compete will be enforced only to the extent that it is necessary to protect the legitimate business interest of the party seeking enforcement, that it does not unreasonably restrain the party against whom enforcement is sought and that it is not contrary to the public interest. This determination is made based upon all the facts and circumstances of the specific case at the time enforcement is sought. It is unclear whether our interests will be viewed by courts as the type of protected business interest that would permit us to enforce a non-competition covenant against the pathologists. Since our success depends in substantial part on our ability to preserve the business of our associated pathologists, a determination that these provisions are not enforceable could have a material adverse effect on us.  Enforcement of state and federal anti-kickback laws may adversely affect our business, financial condition or operations.  Various federal and state laws govern financial arrangements among healthcare providers. The federal anti-kickback law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or with the purpose to induce, the referral of Medicare, Medicaid, or other federal healthcare program patients, or in return for, or with the purpose to induce, the purchase, lease or order of items or services that are covered by Medicare, Medicaid, or other federal healthcare programs. Similarly, many state laws prohibit the solicitation, payment or receipt of remuneration in return for, or to induce the referral of patients in private as well as government programs. Violation of these anti-kickback laws may result in substantial civil or criminal penalties for individuals or entities and/or exclusion from participating in federal or state healthcare programs. We believe that we are operating in compliance with applicable law and believe that our arrangements with our affiliated pathologists and referring physicians would not be found to violate the anti-kickback laws. However, these laws could be interpreted in a manner inconsistent with our operations.   31   Because referring physicians submit claims to the Medicare program based on the services provided by our affiliated pathologists, it is possible that a lawsuit could be brought against us, our affiliated pathologists or the referring physicians under the federal False Claims Act, and the outcome of any such lawsuit could have a material adverse effect on our business, financial condition and operations.  The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. The government has taken the position that claims presented in violation of the federal anti-kickback law may be considered a violation of the Federal False Claims Act. The Federal False Claims Act further provides that a lawsuit brought under that act may be initiated in the name of the United States by an individual who was the original source of the allegations, known as the relator. Actions brought under the Federal False Claims Act are sealed by the court at the time of filing. The only parties privy to the information contained in the complaint are the relator, the federal government and the court. Therefore, it is possible that lawsuits have been filed against us that we are unaware of or which we have been ordered by the court not to discuss until the court lifts the seal from the case. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person. We believe that we are operating in compliance with the Medicare rules and regulations, and thus, the Federal False Claims Act. However, if we were found to have violated certain rules and regulations and, as a result, submitted or caused the submission of allegedly false claims, any sanctions imposed under the Federal False Claims Act could result in substantial fines and penalties or exclusion from participation in federal and state healthcare programs which could have a material adverse effect on our business and financial condition.  Risks Related to our Technest Business and Contracting with the United States Government  Although we are currently actively pursuing licensing opportunities for the commercialization of our Technest products and intellectual property as well as products developed by Technest, Inc., if we are not able to enter into such licensing arrangements, our financial condition could suffer.  The Company is considering strategic alternatives to maximize the value of Technest and its products and intellectual property, including those developed by Technest, Inc.  The Company is actively pursuing licensing opportunities for the further commercialization of these products and the related intellectual property. If the Company is not successful in these efforts, the financial condition of the Company could suffer.  Our prior contracts and administrative processes and systems are subject to audits and cost adjustments by the Government, which could reduce our revenue, disrupt our business or otherwise adversely affect our results of operations.  Substantially all of our revenue from our Technest, Inc. operation was derived from Small Business Innovation Research contracts with the U.S. Government. Government agencies, including the Defense Contract Audit Agency, or DCAA, routinely audit and investigate government contracts and government contractors administrative processes and systems. These agencies review our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. They also review our compliance with regulations and policies and the adequacy of our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and any such costs already reimbursed must be refunded. Therefore, an unfavorable outcome to an audit by the DCAA or another agency could cause actual results to differ materially from those anticipated. If an investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including forfeitures of profits, fines and suspension or debarment from doing business with the Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Each of these results could cause actual results to differ materially from those anticipated.  Unfavorable government audit results could force us to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.  The federal government audits and reviews our performance on awards, pricing practices, cost structure, and compliance with applicable laws, regulations, and standards. Like most large government vendors, our awards are audited and reviewed on a continual basis by federal agencies, including the Defense Contract Management Agency and the Defense Contract Audit Agency. An audit of our work, including an audit of work performed by companies we have acquired or may acquire or subcontractors we have hired or may hire, could result in a substantial adjustment in our operating results for the applicable period. For example, any costs which were originally reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded and our operating margins may be reduced. To date, we have not experienced any significant adverse consequences as a result of government audits.   32   If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with U.S. Government agencies.  Failure to attract and retain experienced and qualified personnel could adversely affect our business.  Within the last few years, we have had significant employee turnover.  Our success depends on our ability to attract, retain and motivate experienced personnel in the field of three-dimensional imaging. Competition for these employees is strong, and if we are not able to attract and retain qualified personnel, it would have a material adverse effect on our business.  Risks Related To Controlled Companies  Our controlling stockholder has significant influence over the Company.  As of  March 31, 2013, Gilbert Steedley, the Companys Chief Executive Officer owned all of our Series H Preferred stock. Each share of Series H Preferred has the equivalent of 4,985,269 votes of Common Stock (based upon the outstanding number of shares of Common Stock issued at the time hereof).  Currently, there is one holder of Series H Preferred (the "Series H Stockholder" or the "Majority Stockholder"), holding fifty-one (51) shares of Series H Preferred, resulting in the Series H Stockholder holding in the aggregate approximately 50.9989% of the total voting power of all issued and outstanding voting capital of the Company.  As a result, Mr. Steedley possesses significant influence over our affairs.  His stock ownership and relationships with members of our board of directors may have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could materially and adversely affect the market price of our common stock.  A very small number of investors hold a controlling interest in our stock. As a result, the ability of minority shareholders to influence our affairs is extremely limited.  A very small number of investors collectively owned a controlling interest in our outstanding common stock on a primary basis.  As a result, those investors have the ability to control all matters submitted to our stockholders for approval (including the election and removal of directors).  A significant change to the composition of our board could lead to a change in management and our business plan. Any such transition could lead to, among other things, a decline in service levels, disruption in our operations and departures of key personnel, which could in turn harm our business.  Moreover, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, which in turn could materially and adversely affect the market price of the common stock.  Minority shareholders of the Company will be unable to affect the outcome of stockholder voting as these investors or any other party retains a controlling interest.  Risks related to our Common Stock  Any additional funding we arrange through the sale of our common stock will result in dilution to existing security holders.  We will have to raise additional capital in order for our business plan to succeed. Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. Therefore, our most likely source of additional capital will be through the sale of additional shares of our common stock. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized 995,000,000 shares.  In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. Such issuances will cause our security holders interests in our Company to be diluted, which may negatively affect the value of their shares.  It may be difficult for you to resell shares of our common stock if an active market for our common stock does not develop.  Our common stock is not actively traded on a securities exchange and we do not meet the initial listing criteria for any registered securities exchange or the Nasdaq National Market System. It is quoted on the less recognized OTCBB.  This factor may further impair your ability to sell your shares when you want and/or could depress our stock price. As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.  33   The market price of our common stock may be volatile. As a result, you may not be able to sell our common stock in short time periods, or possibly at all.  Our stock price has been volatile.  From July 2007 to September 2013, the trading price of our common stock ranged from a low price of $0.0001 per share to a high price of $0.64 per share. Many factors may cause the market price of our common stock to fluctuate, including:  · variations in our quarterly results of operations; · the introduction of new products by us or our competitors; · acquisitions or strategic alliances involving us or our competitors; · future sales of shares of common stock in the public market; and · market conditions in our industries and the economy as a whole.  In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a companys stock drops significantly, stockholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business.  Future sales of common stock by shareholders, or the perception that such sales may occur, may depress the price of our common stock.  The sale or availability for sale of substantial amounts of our shares in the public market, including shares issuable upon conversion of outstanding preferred stock, upon conversion of the principal and interest of our outstanding promissory notes or exercise of common stock options and warrants, or the perception that such sales could occur, could adversely affect the market price of our common stock and also could impair our ability to raise capital through future offerings of our shares. As of September 30, 2013, we had 992,549,379 outstanding shares of common stock and have reserved approximately 700,000,000 shares for future issuances upon exercise of outstanding options, conversion of preferred stock, exercise of outstanding warrants and the conversion of the principal amount of the outstanding convertible promissory notes.  Any decline in the price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.  Any trading market that may develop may be restricted by virtue of state securities Blue Sky laws, making it difficult or impossible for our security holders to sell shares of its common stock in those states.  There is a limited public market for our shares of common stock, and there can be no assurance that any public market will develop in the foreseeable future.  Transfer of our common stock may also be restricted under the securities regulations and laws promulgated by various states and foreign jurisdictions, commonly referred to as Blue Sky laws, which prohibit trading absent compliance with individual state laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions.  Our common stock is penny stock, with the result that trading of our common stock in any secondary market may be impeded.  Due to the current price of our common stock, many brokerage firms may not be willing to effect transactions in our securities, particularly because low-priced securities are subject to SEC rules imposing additional sales requirements on broker-dealers who sell low-priced securities (generally defined as those having a per share price below $5.00). These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock as it is subject to these penny stock rules. Therefore, stockholders may have difficulty selling those securities.  These factors severely limit the liquidity, if any, of our common stock, and will likely continue to have a material adverse effect on its market price and on our ability to raise additional capital.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that:  a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; b) contains a description of the brokers or dealers duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities laws; c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; d) contains a toll-free telephone number for inquiries on disciplinary actions; e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and f) contains such other information and is in such form, including language, type, size and format, as the SEC may require by rule or regulation.   34   In addition, the broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with:  a) bid and ask quotations for the penny stock; b) the compensation of the broker-dealer and its salesperson in the transaction; c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and d) monthly account statements showing the market value of each penny stock held in the customers account.  Also, the penny stock rules require that prior to 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 acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.  We cannot predict the extent to which investor interest in our stock or a business combination, if any, will lead to an increase in our market price or the development of an active trading market or how liquid that market, if any, might become.  We do not expect to pay dividends to holders of our common stock in the foreseeable future. As a result, holders of our common stock must rely on stock appreciation for any return on their investment.  Other than the special return of capital cash distribution made in connection with the Settlement Agreement with EOIR Holdings, Inc., we have not declared any dividends since our inception, and we do not plan to declare any dividends in the foreseeable future. If we were to become profitable, it would be expected that all of such earnings would be retained to support our business. Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock.  Risks Related To Market Conditions  The sale of material amounts of common stock could encourage short sales by a third parties and further depress the price of our common stock.  As a result, you may lose all or part of your investment.  The significant downward pressure on our stock price caused by the sale of a significant number of shares could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock.  Certain provisions of our articles of incorporation could discourage potential acquisition proposals or change in control.  Our board of directors, without further stockholder approval, may issue preferred stock that would contain provisions that could have the effect of delaying or preventing a change in control or which may prevent or frustrate any attempt by stockholders to replace or remove the current management. The issuance of additional shares of preferred stock could also adversely affect the voting power of the holders of our common stock, including the loss of voting control to others.  Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in this report.  The reports from our independent registered public accounting firms for the years ended June 30, 2012 and 2011 include an explanatory paragraph stating that our recurring losses from operations, negative cash flows from operations, stockholders deficit and working capital deficit raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment. After the sale of the shares registered hereunder, future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.  We have identified weaknesses in our internal controls.  Our management has concluded that our internal control over financial reporting was not effective as of June 30, 2012, as a result of several material weaknesses in our internal control over financial reporting.   35   A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of June 30, 2012, we determined that control deficiencies existed that constituted material weaknesses, as described below:  1) lack of documented policies and procedures; 2) inadequate resources dedicated to the financial reporting function; and 3) ineffective separation of duties due to limited staff.  As a result of these material weaknesses, we performed additional procedures to obtain reasonable assurance regarding the reliability of our financial statements.   Material weaknesses could result in a misstatement of accounts and disclosures, which would result in a misstatement of annual or interim financial statements that would not be prevented or detected. Errors in our financial statements could require a restatement or prevent us from timely filing our periodic reports with the Securities and Exchange Commission. Additionally, ineffective internal control over financial reporting could cause investors to lose confidence in our reported financial information.  Our inability to remediate all weaknesses or any additional material weaknesses that may be identified in the future could, among other things, cause us to fail to timely file our periodic reports with the SEC and require us to incur additional costs and divert management resources. Additionally, the effectiveness of our system of disclosure controls and procedures is subject to inherent limitations, and therefore we cannot be certain that our internal control over financial reporting or our disclosure controls and procedures will prevent or detect future errors or fraud in connection with our financial statements.    36   ITEM 6.  Exhibits  Exhibit
No.DescriptionFiled with this
Quarterly ReportIncorporated by referenceFormFiling DateExhibit No.4.1AccelPath Inc. Common Stock Warrant issued to Mr. Albert Friesen dated October 2, 20128-KOctober 4, 20124.110.1Loan Agreement dated as of October 1, 2012, by and among AccelPath, Inc. and Mr. Khal Aljerian8-KOctober 4, 201210.110.2Promissory Note dated as of October 1, 2012 payable to Mr. Khal Aljerian8-KOctober 4, 201210.210.3Amendment dated October 2, 2012 to Loan Agreement dated February 10, 2012 between Technest Holdings, Inc. and Albert Friesen8-KOctober 4, 201210.310.4First Allonge to Promissory Note dated February 10, 2012 payable to Mr. Friesen8-KOctober 4, 201210.410.5First Amendment to Lease Agreement dated November 16, 2012 between PS Business Parks, LP, Technest, Inc. and AccelPath, Inc.X31.1Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X31.2Certification by PFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X32.1Certification by CEO and PFO of Periodic Report Pursuant to 18 U.S.C. Section 1350.X101.INS*XBRL Instance DocumentX101.SCH*XBRL Taxonomy Extension Schema DocumentX101.CAL*XBRL Taxonomy Extension Calculation Linkbase DocumentX101.DEF*XBRL Taxonomy Definition Linkbase DocumentX101.LAB*XBRL Taxonomy Extension Label Linkbase DocumentX101.PRE*XBRL Taxonomy Extension Presentation Linkbase DocumentX  * Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.   37   SIGNATURES  In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  ACCELPATH, INC.Date: March 31, 2014By:/s/ Gilbert SteedleyGilbert SteedleyChief Executive Officer and President    38   Exhibit Index  Exhibit
No.DescriptionFiled with this
Quarterly ReportIncorporated by referenceFormFiling DateExhibit No.4.1AccelPath Inc. Common Stock Warrant issued to Mr. Albert Friesen dated October 2, 20128-KOctober 4, 20124.110.1Loan Agreement dated as of October 1, 2012, by and among AccelPath, Inc. and Mr. Khal Aljerian8-KOctober 4, 201210.110.2Promissory Note dated as of October 1, 2012 payable to Mr. Khal Aljerian8-KOctober 4, 201210.210.3Amendment dated October 2, 2012 to Loan Agreement dated February 10, 2012 between Technest Holdings, Inc. and Albert Friesen8-KOctober 4, 201210.310.4First Allonge to Promissory Note dated February 10, 2012 payable to Mr. Friesen8-KOctober 4, 201210.410.5First Amendment to Lease Agreement dated November 16, 2012 between PS Business Parks, LP, Technest, Inc. and AccelPath, Inc.X31.1Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X31.2Certification by PFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X32.1Certification by CEO and PFO of Periodic Report Pursuant to 18 U.S.C. Section 1350.X101.INS*XBRL Instance DocumentX101.SCH*XBRL Taxonomy Extension Schema DocumentX101.CAL*XBRL Taxonomy Extension Calculation Linkbase DocumentX101.DEF*XBRL Taxonomy Definition Linkbase DocumentX101.LAB*XBRL Taxonomy Extension Label Linkbase DocumentX101.PRE*XBRL Taxonomy Extension Presentation Linkbase DocumentX  * Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.      39