HDVY Health Discovery Corporation (CE)

Notes to Financial Statements (unaudited)

Note A - BASIS OF PRESENTATION

Health Discovery Corporation (“HDC” or the “Company”) is a machine learning 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 may play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“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 SVM, as well as biomarkers that we discovered by applying our SVM 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 31 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 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. 

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP). In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates.

The interim financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2020 are not necessarily indicative of the results of a full year’s operations and should be read in conjunction with the financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

Note B – SIGNIFICANT ACCOUNTING POLICIES

Stock-based Compensation

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.

Valuation and Amortization Method – The fair value awards of stock that do not contain a market condition target are estimated on the grant date using the Black-Scholes option-pricing model. The fair value of options that contain a market condition, such as a specified hurdle price, is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model.  Both the Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected life, expected dividend yield and expected risk-free interest rates.

Expected Term – The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and forfeitures due to departure prior to the end of the vesting schedule.  

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited) , continued

Note B – SIGNIFICANT ACCOUNTING POLICIES, continued

Expected Volatility – Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent to the expected term to estimate expected volatility

Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.

Note C - NET LOSS PER SHARE

Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. Due to the net loss in all periods presented, potentially dilutive shares are not included in the calculation of diluted EPS as those shares would create an anti-dilutive result.

Note D - STOCK-BASED COMPENSATION and other EQUITY BASED PAYMENTS

Stock-based expense included in our net loss for the three months ended March 31, 2020 consisted of $0 for stock options granted to employees and directors. Stock-based expense included in our net loss for the three months ended March 31, 2019 was $3,308 for stock options granted to employees and directors. As of March 31, 2020, there was $0 of unrecognized cost related to stock option grants. 

The aggregate intrinsic value of all options and warrants outstanding and exercisable as of March 31, 2020 was $304,000, based on the market closing price of $0.027 on March 31, 2020, less exercise prices.

As of March 31, 2020, there were 158,358,781 option and warrant shares outstanding. The following schedule summarizes combined stock option and warrant information as of December 31, 2019 and March 31, 2020.

The following table reflects stock-based compensation and expense recorded for the periods ended March 31, 2020 and March 31, 2019:

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited) , continued

Note E - PATENTS

The Company has acquired and developed a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Initial costs paid to purchase patents are capitalized and amortized using the straight-line method over the remaining life of the patent. The Company has fully amortized the cost of the patents and patent related costs of $3,985,794, at March 31, 2020.

Amortization charged to operations for the three months ended March 31, 2020 and 2019 was $0 and $65,680, respectively. As the patents have been fully amortized since July 2019, there is no further estimated amortization expense expected.

Note F – STOCKHOLDERS’ EQUITY

Series C Preferred Stock

In the fourth quarter of 2013, the Board of Directors authorized the issuance of Series C Preferred Shares in private placement transactions. As of December 31, 2014, and 2015, the Company had issued a total of 6,640,000 and 30,000,000 preferred shares, respectively. The Series C Preferred Shares were fully subscribed in the third quarter 2015. The Company received total net proceeds of $900,000, of which $568,000 was received during the year ended December 31, 2015. The Series C Preferred Shares are accompanied by $0.03 warrants and $0.03 contingency warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days.  The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days.  The warrants were valued at $0.022 each using the Black Scholes Method.

The Series C Preferred Stock were to be converted into common stock of the Company at the option of the holder, without the payment of additional consideration by the holder. The Shares of Series C Preferred Stock must be converted into common stock of the Company either by the demand by the shareholder or at the fifth anniversary of the date of issuance. During the period ended March 31, 2019, the Series C Preferred Stock was converted to common stock of the Company.

Series D Preferred Stock

On April 22, 2019 the Company issued a convertible promissory note (the “Additional Promissory Note”) in the amount of $200,000 to George H. McGovern, III, the Chairman and CEO of the Company, and James Dengler, a Company shareholder (the “Note Holders”) for funds advanced to the Company. The Additional Promissory Note was approved by the Board on August 1, 2018. Funds were advanced to the Company from August 1, 2018 through March 13, 2019. The Additional Promissory Note was executed on April 22, 2019 by the Company. The Additional Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Additional Promissory Note into Series D Preferred Stock (“Preferred Stock”) of the Company at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The right of conversion (“Optional Conversion”) is solely at the Note Holders’ discretion.

On December 31, 2019, the Note Holders notified the Company of their election to convert the Additional Promissory Note into Series D Preferred Stock. As a result, the Note Holders received 20,991,891 shares of Series D Preferred Stock on February 10, 2020. Because of this conversion, the Company recognized a change in Stockholder Equity during the period ended March 31, 2020. Specifically, the Company recognized an increase of $216,688 in Preferred Stock expense.

Additionally, the Note Holders retain two warrants to purchase Common Stock of the Company for each share of Preferred Stock held and the price of each warrant is equal to the Conversion Price. Each warrant shall expire on July 31, 2029. These additional warrants account for 41,983,781 shares at an average weighted price of $0.029.

Common Stock

During the third quarter of 2015, the Board of Directors authorized the issuance of common stock in a private placement of 7,000,000 shares with certain warrant features. As of December 31, 2015, 4,000,000 shares of this offering were sold, and the Company received proceeds of $120,000. The shares are accompanied by $0.03 warrants and $0.06 contingency warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days.  The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days.  The warrants were valued at $0.022 each using the Black Scholes Method.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

Note F - STOCKHOLDERS’ EQUITY, continued

On October 23, 2017, the Company issued a convertible promissory note (the “Promissory Note”) to the Note Holders, for $300,000. The Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Promissory Note into the Company’s common stock (“Common Stock”) at a conversion price of $0.004.

On December 31, 2019, the Note Holders notified the Company of their election to convert the Promissory Note into Common Stock. As a result, the Note Holders received 86,927,397 shares of Common Stock on December 31, 2019.

All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

Due to the warrant features that accompany the sale of the Company’s preferred and common shares, if all outstanding options and warrants were exercised, the Company would not have sufficient shares of common stock to meet the exercised options. The aggregate intrinsic value of all options and warrants outstanding and exercisable prices. The Company will need to increase the authorized shares of common stock in order to satisfy the options and warrants if the holders exercise the outstanding options and warrants.

Note G – COMMON STOCK WARRANT LIABILITY

In the event the number of shares or warrants of Common Stock granted exceeds the number of shares available if the holders exercised all of the previously issued outstanding options and warrants, the Company accounts for this excess as a Common Stock Warrant Liability, which is adjusted to fair value at the end of each reporting period. If and when the Company authorizes sufficient shares of common stock and preferred stock, the Common Stock Warrant Liability is reclassified to equity at the fair value of the liability at the date of reclassification.

On December 31, 2019, as more fully disclosed in Note H, the Note Holders converted the Promissory Notes into 86,927,397 shares of Common Stock, thereby causing the Company to again exceed its authorized number of shares of Common Stock to be issued. Accordingly, the Company reclassified $1,898,126 from stockholders’ equity to common stock warrants liability as of December 31, 2019.

The common stock warrants liability is recorded based upon the number of warrants which exceed the number of common shares available to meet the exercised options and warrants using the Black-Scholes option-pricing model. Due to the warrant features that accompany the sale of the Company’s preferred and common shares, if all outstanding options and warrants were exercised, the Company would not have sufficient shares of common stock to meet the exercised options. The Company will need to increase the authorized shares of common stock in order to satisfy the options and warrants if the holders exercise the outstanding options and warrants.

Because the Company issued warrants exceeding the amount of common shares available if the holders exercised the previously issued outstanding options and warrants, the Company has recorded an increase in the common stock warrants liability of $1,194,097 during the three month period ended March 31, 2020.

Note H – CONVERTIBLE DEBT

$300,000 Promissory Note

On October 23, 2017, the Company issued a Promissory Note to the Note Holders, for $300,000. The Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Promissory Note into Common Stock at a conversion price of $0.004

On April 22, 2019, the Note Holders waived the event of default and extended the terms of the note until July 31, 2019. In consideration for the waiver and extension, the Note Holders received a 5% share of any potential recovery from the Arbitration. Such share was limited to $1 million. In connection with the announcement of the Award, the Company recorded an additional expense of $333,052, which was included in the arbitration related fees in the statement of operations for the year ended December 31, 2019.

On December 31, 2019, the Note Holders notified the Company of their election to convert the Promissory Note into Common Stock. As a result, the Note Holders received 86,927,397 shares of Common Stock on December 31, 2019.

$200,000 Additional Promissory Note

Additionally, on April 22, 2019 the Company issued the Additional Promissory Note in the amount of $200,000 to the Note Holders for funds advanced to the Company. The Additional Promissory Note was approved by the Board on August 1, 2018. Funds were advanced to the Company from August 1, 2018 through March 13, 2019. The Additional Promissory Note was executed on April 22, 2019 by the Company. The Additional Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Additional Promissory Note into Series D Preferred Stock of the Company at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The Optional Conversion is solely at the Note Holders’ discretion.

On December 31, 2019, the Note Holders notified the Company of their election to convert the Additional Promissory Note into Series D Preferred Stock. As a result, the Note Holders received 20,991,891 shares of Series D Preferred Stock on February 10, 2020.

Additionally, the Note Holders retain two warrants to purchase Common Stock of the Company for each share of Preferred Stock held and the price of each warrant is equal to the Conversion Price. Each warrant shall expire on July 31, 2029. These additional warrants account for 41,983,781 shares at an average weighted Conversion Price of $0.029.

All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

Note I – COMMITMENTS AND CONTINGENCIES

Operating Lease

The Company does not own any real property.  The Company leases approximately 600 square feet of office space in Atlanta, Georgia, pursuant to a short-term lease as of August 2019. The Company currently pays base rent in the amount of $2,539 per month. The Company also leases approximately 400 square feet of office space in Berwyn, Pennsylvania, pursuant to a short-term lease as of November 2019. The Company currently pays base rent in the amount of $1,078 per month.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

Note I – COMMITMENTS AND CONTINGENCIES, continued

Legal Proceedings

The Company received notification that the United States Patent and Trademark Office (“USPTO”) had declared an Interference between Health Discovery Corporation’s pending patent application covering SVM-Recursive Feature Elimination (“SVM-RFE”) and Intel Corporation’s Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector Machine”. Prior to 2013, when the America Invents Act (AIA) was enacted, a patent would be awarded to the “first to invent” a claimed invention. An Interference is an administrative proceeding within the USPTO that is used to determine which party was the first to invent an invention that is claimed in two (or more) independently owned patent applications.

On February 27, 2019, the USPTO ruled in favor of the Company on the SVM-RFE Patents in the Interference proceeding between the Company and Intel Corporation. The Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision, finding that the Company is entitled to claim exclusive rights to the SVM-RFE technology as set forth in the pending patent application that was filed to provoke the Interference. The decision, issued by Administrative Patent Judge James Moore, ordered Intel’s patent to be cancelled. The decision also dismissed Intel’s motions challenging the validity of the Company’s pending claims and issued patents covering SVM-RFE. The Company is currently evaluating its options for further action regarding this matter.

On February 7, 2020, two shareholders of the Company, William F. Quirk, Jr. (“Quirk”) and Cindy Bear (“Bear”), filed a motion for a temporary restraining order and preliminary injunction in DeKalb County Superior Court. Among the items in the motion, Quirk and Bear requested to have a special meeting of the shareholders and Quirk and Bear alleged misconduct by the Company and its directors.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

Note I – COMMITMENTS AND CONTINGENCIES, continued

On March 2, 2020, having received no relief, Quirk and Bear dismissed their action in DeKalb County and filed a new lawsuit in Fulton County Superior Court based on substantially similar allegations and seeking similar relief. On March 4, 2020, the Fulton County court ordered a hearing on the emergency motion for a temporary restraining order against the Company for the following day.

At the hearing on March 5, 2020, Quirk and Bear presented their version of the facts through affidavits submitted by both Quirk and Bear, arguing that the affidavits supported the emergency relief they sought. The judge denied the motion and did not enter a temporary restraining order. The court set an evidentiary hearing on Quirk and Bear’s motion for a preliminary injunction for March 27, 2020. This hearing was postponed due to the COVID-19 pandemic.

On May 5, 2020, Fox Rothschild LLP moved to withdraw as counsel for Quirk and Bear abruptly and without notice. On May 13, 2020, the Court entered an order granting the law firm’s withdrawal as counsel. As of May 13, 2020, Quirk and Bear are representing themselves pro se.

On June 18, 2020, the Company was successful in its motion to transfer this action to the Business Division of Fulton County.

Quirk and Bear filed this suit after attempting to call a special meeting of shareholders and making a demand for inspection of certain books and records. The Company determined the demand for a special meeting was defective for a number of reasons, but as the Company previously announced and subsequently completed, the Company held its annual meeting after the Company filed its annual report on Form 10-K. The Company has provided counsel for Quirk and Bear with the records to which Quirk and Bear were legally entitled.

The Company denies all allegations of improper conduct in the complaint and will continue to defend itself against all allegations.  As a result, the Company has recognized expenses totaling $152,000 for the period ended March 31, 2020 related to legal fees associated with this litigation. Although the Company believes that it will ultimately be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should Quirk and Bear be successful, the outcome could have a material adverse effect on the Company.

The Company will continue to refute the baseless claims brought by Quirk and Bear, and is evaluating its rights including, but not limited to, recoupment from Quirk and Bear of the Company’s attorneys’ fees and costs incurred in doing so.

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of COVID-19 have intensified. The outbreak of COVID-19 has evolved into a global pandemic. The coronavirus has spread to many regions of the world, including the areas of the United States where we operate. At this time, the United States and certain other countries are the subject of lockdowns and self-isolation procedures, which have significantly limited business operations and restricted internal and external meetings. Further, the outbreak and any preventative or protective actions that we or our customers may take in respect of COVID-19 may result in a period of disruption to our work in progress.

Should the coronavirus continue to spread, our business operations could be delayed or interrupted. For instance, our executive officers or directors may become infected with the virus and become unable to fulfill their duties. We are taking precautionary steps to protect our executive officers consistent with White House guidance and state and local orders. 

The intense focus on COVID-19 also has led to the suspension of clinical trials and research projects relating to other conditions, which may impact our ability to form new contractual arrangements to exploit our technology. While the potential economic impact brought by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets, which may reduce our ability to access capital either at all or on favorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common stock.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

Note I – COMMITMENTS AND CONTINGENCIES, continued

The ultimate impact of the current pandemic, or any other health epidemic, is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, or the economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the situation closely.

Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business and financial condition. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

Note J – FINANCIAL CONDITION AND GOING CONCERN

The Company has prepared its financial statements on a “going concern” basis, which presumes that it will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

The Company’s 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 the Company’s technologies to the market.  The outcome of these matters cannot be predicted at this time.  The Company’s 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 the Company be unable to continue in business.

If the going concern assumption was not appropriate for the Company’s 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, 2020, the Company had $2.16 million cash on hand. As a result, the Company estimates cash will be depleted by the second quarter of 2023 if the Company does not generate sufficient cash to support operations.

The Company’s plan to have sufficient cash to support operations is comprised of generating revenue through providing services related to those patents, pursuing infringement opportunities and obtaining additional equity or debt financing.

The Company believes the funds received from the NeoGenomics arbitration award will allow the Company to maintain operations until second quarter 2023. While the Company believes these efforts should increase the value of the Company, there is no guarantee the Company will be successful in these efforts.

Note K – RECENT ACCOUNTING PRONOUNCEMENTS

On August 28, 2018, the Financial Accounting Standards Board issued a new standard, ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, “Fair Value Measurement.” Certain requirements were removed such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, certain requirements were modified and certain disclosures were added such as the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. This standard will be effective for the Company on January 4, 2021. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows.

On December 18, 2019, the Financial Accounting Standards Board issued a new standard, ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This new guidance simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income/gain from other items; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for income taxes under certain circumstances such as requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This standard will be effective for the Company on January 4, 2021. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

Note L – REVENUE RECOGNITION

Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements.  These arrangements are generally governed by contracts that dictate responsibilities and payment terms.  The Company recognizes revenues as they are earned over the duration of a license agreement once all contractual obligations have been fulfilled.  If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five-step analysis: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step analysis to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.