Management’s Discussion and Analysis
Corporate Overview
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial
intelligence and machine learning are sometimes used to describe pattern recognition tools.
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our SVM assets in particular have broad applicability in many other fields. Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by 80 patents that have been issued or are currently pending around the world.
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities. In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM and FGM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
Operational Activities
The Company markets its technology and related developmental expertise to prospects in the healthcare, biotech, and life sciences industries. Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts may produce favorable results in the future.
NeoGenomics License
On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”). Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (IVD) test kit development.
Upon execution of the NeoGenomics License, NeoGenomics Laboratories paid us $1,000,000 in cash and NeoGenomics issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012. In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License. Milestone payments will be in increments of $500,000 for every $2,000,000 in
GAAP revenue recognized by NeoGenomics Laboratories up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics Laboratories, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics Laboratories derives from any sublicensing arrangements it may put in place for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
NeoGenomics Laboratories agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetic Interpretation System”, and a “Flow Cytometry Interpretation System.” NeoGenomics is currently under the second of its one-year extension terms of the license.
If NeoGenomics Laboratories has not generated $5 million of net revenue from products, services and sublicensing arrangements within five years, we may, at our option, revoke the exclusivity with respect to any one or more of the initial licensed products, subject to certain conditions.
The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development. We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with NeoGenomics.
Plasma Test for Prostate Cancer
NeoGenomics is developing a test for Prostate Cancer under the direction of Dr. Maher Albitar using the genes patented by HDC. The test is performed on blood plasma and urine rather than only prostate tissue biopsies. NeoGenomics recently announced that a publication has been released regarding Phase I of the test’s development. Additionally, NeoGenomics completed Phase II of the prostate test validation. The results were largely the same as those published regarding Phase I. These results for Phase II have been submitted as an abstract for presentation at an upcoming conference. NeoGenomics announced their expectation is to launch a limited release of the test in the second quarter of 2014 and a full roll out of the test in the second half of 2014.
Cytogenetic Analysis
Cytogenetic analysis is the science of studying chromosomes. Microscopic evaluation of individual chromosomes remains the first step in the evaluation of the human genome. Cytogenetic analysis is performed on almost all patients with hematopoietic diseases (blood cancers such as leukemia and lymphoma) and on a significant number of patients with solid tumors. The collected data is useful for diagnosis, prognosis and monitoring of diseases. Currently, specially trained technicians perform most of the analysis manually. The work is labor-intensive and subjective. Computer automation of this work could significantly reduce cost and improve the quality of the test.
NeoGenomics is currently working on development, validation and commercialization of this new image analysis tool for cytogenetic analysis under the direction of Dr. Maher Albitar. The Company and NeoGenomics have spent a considerable amount of time using SVM Technology to create significant improvement in cytogenetic analysis. NeoGenomics is currently beta testing this co-developed technology within their facilities. One of the goals with this technology is for NeoGenomics to sub-license this technology after successful internal testing and validation. Per the license agreement, HDC will receive a portion of the sub-license revenue generated by NeoGenomics.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Flow Cytometry
Management believes that our efforts to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company, along with NeoGenomics, is now capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data. This test has been licensed to NeoGenomics for final development and work has begun on the further development of this technology.
SVM Capital, LLC
In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.
In November 2012 Atlantic Alpha began auditable formal live trading by applying SVM technology to quarterly fundamental corporate data such as sales, earnings and projected earnings. The SVM algorithm is utilized to select U.S. stocks which are expected to outperform or underperform in the next quarter based on current data while at the same time rendering superior portfolio risk metrics. This application of SVM technology allows the creation of a variety of equity portfolios. In the fourteen months ending February 28, 2014, the three key portfolios, large-cap long, large-cap long/short and mid-cap long/short rose approximately 40%, 18% and 29%, respectively.
SVM Capital’s immediate goal is to secure a “seed investor”, i.e. an “anchor tenant” for whom to manage money, which may then lead to capital inflow from other investors. The seed investor may be an institution, family office or individual. To this end, SVM Capital is working both independently and with one or more intermediaries. The long-term strategy is to form hedge funds in other financial markets such as foreign stock markets, debt instruments and commodities. SVM Capital may also consider licensing its technology or using other methods that may lead to monetization. In 2013, SVM Capital formed a strategic relationship with Lucena Research of Atlanta, GA which provides machine learning tools to hedge funds, to jointly work on specific projects designed to further the interests of both companies.
A thorough exposition of SVM Capital may be found on the appropriate link on the Company’s web page.
Intellectual Property Developments
Currently, the Company holds the exclusive rights to 65 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets. The Company also has 15 pending U.S. and foreign patent applications covering uses of the SVM technology as well as biomarkers and diagnostic methods that have been discovered using the SVM technology. The reduction in the total number of issued and pending patents during the past year resulted from the Company’s decision to allow certain foreign patents issued and/or filed in countries that were deemed to have lower strategic value to lapse. This in turn reduced the Company’s total expenses for patent maintenance.
Intel
The
Company’s patent application that was submitted to provoke an interference with Intel’s Patent No. 7,685,077
remains pending, and interference proceedings have yet to be initiated. The Company continues to evaluate the best approach
to this matter that will allow protection of the patent in the most cost efficient manner possible.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013
Revenue
For the three months ended March 31, 2014, revenue was $261,359 compared with $284,139 for the three months ended March 31, 2013. The revenue earned during the first quarter of 2014 and 2013 is primarily related to the licensing revenue recognition for the NeoGenomics License.
Operating and Other Expenses
Amortization expense was $65,680 for both the three months ended March 31, 2014 and 2013. Amortization expense relates primarily to the costs associated with filing patent applications and acquiring rights to the patents.
Professional and consulting fees totaled $91,917 for the three months ended March 31, 2014, compared with $279,083 for the same 2013 period. These fees consist primarily of patent filing and maintenance costs, professional fees, and accounting fees. The decrease was due to the elimination of professional services provided to the Company, specifically consulting fees paid to a former management consultant.
Legal fees were reduced with fees totaling $16,681 during the three months ended March 31, 2014 and $39,155 during the same period in 2013. The reduction was related to legal costs in the first quarter 2013 related to matters pertaining to the Company’s previous CEO, Steve Barnhill.
Research and development expense was $23,438 for the three months ended March 31, 2014, and $35,151 for the same period in 2013. This expense for research and development relates primarily to work completed under the NeoGenomics License.
Compensation expense of $78,530 for the three months ended March 31, 2014 was lower than the $166,025 reported for the comparable 2013 period. The decrease is attributed to the elimination of several highly compensated former employees.
Other general and administrative expense decreased to $43,685 for the three months ended March 31, 2014, compared to $114,333, for the same period in 2013. This decrease principally was due to a reduction in all non-essential costs by the new leadership beginning in August 2013.
Loss from Operations
The loss from operations for the three months ended March 31, 2014 was $58,572
,
compared to $
415,288
for the three months ended March 31, 2013. The reduced loss was due to a disciplined approach by the new leadership team. Specifically substantial reductions in costs associated with compensation and other general and administrative expenses.
Other Income and Expense
The Company received a portion of the NeoGenomics license fee in NeoGenomics stock. The Company has chosen to measure the gain or loss on the value of this asset using the fair value option method. During the three month period ending March 31, 2014, the change in the NeoGenomics stock fair value decreased by $17,720, which is recorded as other expense in the statements of operations. During the same three month period in 2013, the change in the NeoGenomics stock fair value increased by $730,100.
Net (Loss) Income
The
net loss for the three months ended March 31, 2014 was $76,292, compared to net income of $314,812 for the three months ended
March 31, 2013. The net income was due primarily to the gain on the sale of NeoGenomics stock.
The loss attributable to common shareholders was $93,705 for the three months ended March 31, 2014 compared to earnings of $280,607 in the three months ended March 31, 2013. This significant change is related to the treatment of the NeoGenomics stock (Investment in Available for Sale Securities), which occurred in the three-month period, ended March 31, 2013.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Loss
per share was $0.000 for the three-month period ended March 31, 2014 compared to earnings per share of $0.001 for the
quarterly period ended March 31, 2013.
Liquidity and Capital Resources
Our ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing our technologies to the market. The outcome of these matters cannot be predicted at this time. Our financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.
If the going concern assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments may be material.
At March 31, 2014, the Company had $38,737 in cash and total current liabilities of $1,448,440. The primary amount of current liabilities relates to $779,588 in deferred revenue. Additionally, we continue to sell our NeoGenomics Stock in order to fund operations. Although the NeoGenomics Stock has increased in value, the number of shares and amount of cash we can generate from the sale of NeoGenomics Stock is subject to fluctuating market and price conditions. As a result we do not believe we have sufficient resources to meet all of our current obligations unless the Company is able to secure revenue via licensing activity or other forms of fund raising either in the debt or equity markets. None of these options are definitive and there can be no assurances the Company will be successful in these financing efforts.
The Company has relied primarily on equity and debt financing for liquidity. The Company must increase revenues in order to generate sufficient cash to continue operations. The Company’s plan to have sufficient cash to support operations is comprised of selling its NeoGenomics stock, generating revenue through licensing its significant patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing. The Company has been unable to generate significant revenue, as further described above. As a result, the Company has implemented a cash conservation program.
As
previously disclosed, the Company initially took steps to reduce its expenditures in order to reduce the
“burn rate” of cash to approximately $185,000 per month. These steps included reducing expenses and allocating
our remaining cash reserves for our operational requirements at a reduced level. Subsequently, the new Board and management
team took steps necessary to substantially improve the prior burn. They have been successful in this endeavor and
the burn rate has been reduced to approximately $50,000 per month. Nevertheless, the Company still will need
additional financing in order to continue operations beyond September 2014. The Company continues to explore various means
to raise capital, either via debt or equity offerings.
The following table summarizes the due dates of our contr
actual obligations.
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Total
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|
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1 Year Or Less
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|
|
More Than 1 Year
|
|
Accrued Liabilities
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
|
-
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Total
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$
|
5,000
|
|
|
$
|
5,000
|
|
|
|
-
|
|
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
HEALTH DISCOVERY CORPORATION
Forward-Looking Statements
This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans. The forward-looking statements contained in this Report speak only as of the date of this Report as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers, and the inability to retain a significant number of customers, as well as the risks and uncertainties described in “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2013.