Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
¨
No
x
Indicate by check mark whether the registrant:
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition
of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes
¨
No
x
The aggregate market value of the voting common
stock held by non-affiliates as of June 30, 2015 was $5,294,380.
As of March 30, 2016, there were 268,718,989
shares of common stock outstanding, no shares of Series A Preferred Stock outstanding, no shares of Series B Preferred Stock outstanding
and 30,000,000 shares of Series C Preferred Stock outstanding.
PART I
ITEM 1. BUSINESS
Our Company Overview
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. A good example of this
is the Company’s joint venture, SVM Capital, LLC (“SVM Capital”), that applies SVM technology to the financial
markets.
Our Company’s principal asset is its intellectual property, which includes advanced mathematical
algorithms called 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 61 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.
Our Technology
HDC owns a patent portfolio
of machine learning technology, including certain pioneer patents on SVM. We also have consulting arrangements with clinical specialists
and mathematicians responsible for developing our SVM patents for the analysis of data.
The
Company’s SVM technology is commonly considered within the context of artificial intelligence. This is a branch of computer
science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as
reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development
of algorithms and techniques that allow computers to learn. Pattern recognition is machine learning with a wide spectrum of applications
including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object
recognition in computer vision, and robotics.
Support Vector Machines Overview
SVMs are mathematical
algorithms that allow computers to sift through large, complex datasets to identify patterns. SVMs are known for their ability
to discover hidden relationships in these complex datasets. With the ability to handle what is known as infinite dimensional space,
SVMs are broadly considered to be an improvement to neural networks and other mathematical techniques. SVM is a core machine learning
technology with strong theoretical foundations and excellent empirical successes.
With their introduction
in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the
Statistical Learning Theory developed by Professor Vladimir Vapnik, SVMs quickly gained attention from the math and science communities
due to a number of theoretical and computational merits. This development advanced a new framework for modeling learning algorithms.
Within this framework, the fields of machine learning and statistics were merged introducing powerful algorithms designed to handle
the difficulties of prior computational techniques.
The generation of learning
algorithms that were developed based on this theory have proved to be resistant to the problems imposed by noisy data and high
dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis
and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization
ability. SVMs have been validated in numerous independent academic publications and presentations.
SVMs have become widely
established as one of the leading approaches to pattern recognition and machine learning worldwide and have replaced other technologies
in a variety of fields, including engineering, information retrieval and bioinformatics. This technology has been incorporated
into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies. Educational
and research institutions throughout the world have applied SVMs to a wide array of applications, including gene and protein expression
analysis, medical image analysis, flow cytometry, and mass spectrometry.
Recursive Feature Elimination - Support
Vector Machine Overview
Recursive Feature Elimination
(“RFE-SVM”) is an application of SVM that was created by members of HDC’s science team to find discriminate
relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of
tumor versus normal tissues. In general, SVMs identify patterns – for instance, a biomarker/genetic expression signature
of a disease. The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute
most to the desired results. The Company believes that its RFE-SVM patents are currently the only properly issued RFE patents
in the world.
Using RFE-SVM, we have
been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed. In one micro-array
experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also
been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence. It has been
shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool. The Company believes that
these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with
the pharmacogenetic and toxicological profiling of patients. The RFE-SVM method is also capable of finding those specific genes
and proteins that are unhindered by ever-increasing patent protection.
Fractal Genomic Modeling Overview
On September 30, 2003,
we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software. The fractal technology is used to find
discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease
versus normal tissues.
The Fractal Genomic Modeling
(“FGM”) data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis
and prevention of certain diseases. HDC scientists believe that these analytic methods are effective for finding genes implicated
in several cancers, HIV infection, lymphedema, Down's syndrome, and a host of other diseases, as well as the pharmacogenetic profiling
of patients.
FGM technology is designed
to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks
within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM
uses an approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction
and analysis of the process, which is the particular object of a study.
Our Business Activity
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 paid us $1,000,000 in cash and 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 United States Generally Accepted
Accounting Principles (“GAAP”) revenue recognized by NeoGenomics 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, 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 derives from any sublicensing arrangements it may put in
place for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System.
NeoGenomics 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 has completed both of its one-year extension terms of the license. While those one-year extension terms are complete,
the Company and NeoGenomics continue to collaborate on efforts to commercialize the licensed technologies.
If NeoGenomics has not
generated $5.0 million of net revenue from products, services and sublicensing arrangements by January 2017, 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 implemented in conjunction with NeoGenomics.
Plasma Test for Prostate Cancer
NeoGenomics is developing
a Blood 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 completed Phase I of their research and published
the results in 2014. Additionally, NeoGenomics completed Phase II of their prostate test validation in 2014. The results were
largely the same as those published regarding Phase I. NeoGenomics is currently concluding a clinical trial for this test, named
NeoLAB™ Prostate – Liquid Alternative to Biopsy. NeoGenomics announced in March 2016 the test is now commercially
available.
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.
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. SVM Capital has been pleased with the
results of the application of the SVM technology.
On June 16, 2015, SVM Capital joined Manifold Partners, LLC (“Manifold Partners”) as a partner.
Manifold Partners is a San Francisco-based multi-strategy portfolio management firm specializing in
quantitative investment methodologies. As a part of the partnership, SVM Capital will contribute their proprietary service to
the collaboration with Manifold Partners. This new collaboration will be known as Manifold Vector. SVM Capital specializes
in the application of an artificial intelligence technique to investment strategies. SVM Capital has developed mathematical algorithms
to rank-order S&P 500 stocks to determine investment desirability, including long and short equity positions. Importantly,
only fundamental corporate data is analyzed, which Manifold Partners believes to be unique in the quantitative investment field.
This technology is an outgrowth of the machine learning techniques created by the Company.
A thorough exposition of SVM
Capital may be found on the appropriate link in HDC's web page.
Employees
On December 31, 2015,
we had 3 executive officers and 3 consultants.
Website Address
Our corporate website
address is www.HealthDiscoveryCorp.com. To view our public filings from the home page, select the “Display SEC
Filings” tab followed by “SEC Filings.” This is a direct link to our filings with the Securities
and Exchange Commission (“SEC”), including but not limited to our Annual Report on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K, and any amendments to these reports. These reports are accessible soon after
we file them with the SEC.
Governmental Regulation
Our business plan involves
discovery
in the field of molecular diagnostics. This early discovery process does not involve any governmental
regulations or approvals. If we are successful in licensing our discoveries to other companies, FDA approvals may be
required before the ultimate product may be sold to consumers. Our current plan is to require the companies licensing
our discoveries or technologies to be responsible for the costs involved in such approvals. If we are not successful
in licensing these discoveries on these terms or choose to take these discoveries to market ourselves, we may then be subject
to applicable FDA regulations and would then bear the costs of such approvals.
We know of no current governmental regulations
that will materially affect the Company’s current operations or products. However, if the FDA changes its current position,
and decides to regulate laboratory-developed tests (LDT's) currently regulated by CLIA certification, this could materially affect
the development costs and commercialization timelines for our products.
Research and Development
Research and development
fees were $40,813 during 2015 and $99,200 for the same period in 2014. The research and development fees in 2015 were related
primarily to fees paid to consultants relating to the development work completed as a part of our NeoGenomics License.
Intellectual Property
In connection with the
SVM Acquisition, we obtained rights to the intellectual property within the “SVM portfolio” that currently consists
of fifty-one (51) patents which were or have since issued as well as eight (8) other patent applications that are pending in the
U.S. and elsewhere in the world. The issued patents and pending applications in the SVM portfolio to date, including new applications
that we have filed since acquiring the original intellectual property are:
|
Patent/Application No.
|
Title
|
Expiration Date
|
|
|
|
|
|
U.S. Patent No. 6,128,608
|
Enhancing Knowledge Discovery Using Multiple Support Vector Machines
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,157,921
|
Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,658,395
|
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,714,925
|
System for Identifying Patterns in Biological Data Using a Distributed Network.
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,760,715
|
Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,789,069
|
Method of Identifying Patterns in Biological Systems and Method of Uses.
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,882,990
|
Method of Identifying Biological Patterns Using Multiple Data Sets.
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 6,944,602
|
Spectral Kernels for Learning Machines
|
02/19/2023
|
|
|
|
|
|
U.S. Patent No. 6,996,542
|
Computer-Aided Image Analysis
|
04/21/2021
|
|
|
|
|
|
U.S. Patent No. 7,117,188
|
Methods of Identifying Patterns in Biological Systems and Uses Thereof
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 7,299,213
|
Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset
|
03/01/2022
|
|
|
|
|
|
U.S. Patent No. 7,318,051
|
Methods for Feature Selection in a Learning Machine
|
02/25/2021
|
|
|
|
|
|
U.S. Patent No. 7,353,215
|
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
|
05/07/2022
|
|
|
|
|
|
U.S. Patent No. 7,383,237
|
Computer-Aided Image Analysis
|
11/04/2019
|
|
|
|
|
|
U.S. Patent No. 7,444,308
|
Data Mining Platform for Bioinformatics
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 7,475,048
|
Pre-Processed Feature Ranking for a Support Vector Machine
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 7,542,947
|
Data Mining Platform for Bioinformatics and Other Knowledge Discovery
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 7,542,959
|
Feature Selection Using Support Vector Machine Classifier
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 7,617,163
|
Kernels and Kernel Methods for Spectral Data
|
11/09/2021
|
|
Patent/Application No.
|
Title
|
Expiration Date
|
|
|
|
|
|
U.S. Patent No. 7,624,074
|
Methods for Feature Selection in a Learning Machine
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 7,970,718
|
Feature Selection and for Evaluating Features Identified as Significant
for Classifying Data
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 8,008,012
|
Biomarkers Downregulated in Prostate Cancer
|
01/24/2022
|
|
|
|
|
|
U.S. Patent No. 8,095,483
|
Support Vector Machine-Recursive Feature Elimination (SVM-RFE)
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 8,126,825
|
Method for Visualizing Feature Ranking of a Subset of Features for Classifying Data Using
a Support Vector
|
05/20/2022
|
|
|
|
|
|
U.S. Patent No. 8,209,269
|
Kernels for Identifying Patterns in Datasets Containing Noise or Transformation
Invariance
|
05/07/2022
|
|
|
|
|
|
U.S. Patent No. 8,275,723
|
System for Providing Data Analysis Services Using a Support Vector
Machine for Processing Data Received from a Remote Source
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 8,293,461
|
Biomarkers Downregulated in Prostate Cancer
|
01/24/2022
|
|
|
|
|
|
U.S. Patent No. 8,463,718
|
Support Vector Machine-Based Method for Analysis of Spectral Data
|
08/07/2020
|
|
|
|
|
|
U.S. Patent No. 8,489,531
|
Identification of Co-Regulation Patterns by Unsupervised Cluster Analysis of Gene Expression
Data
|
05/17/2022
|
|
|
|
|
|
Australian Patent No. 764897
|
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector
Machines.
|
05/01/2019
|
|
|
|
|
|
Canadian Patent No. 2,330,878
|
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
|
|
European Patent No. 1082646
|
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
|
|
South African Patent No. 00/7122
|
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector
Machines.
|
05/01/2019
|
|
|
|
|
|
European Patent No. 1192595
|
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
|
05/24/2020
|
|
|
|
|
|
Australian Patent No. 779635
|
Method of Identifying Patterns in Biological Systems and Method of Uses.
|
10/27/2020
|
|
|
|
|
|
Canadian Patent No. 2,388,595
|
Method of Identifying Patterns in Biological Systems and Method of Uses
|
08/07/2020
|
|
|
|
|
|
Japanese Patent No. 506462
|
Method of Identifying Patterns in Biological Systems and Methods of Uses
|
08/07/2020
|
|
|
|
|
|
Australian Patent No. 2002243783
|
Computer Aided Image Analysis
|
01/23/2022
|
|
|
|
|
|
Canadian Patent No. 2,435,290
|
Computer Aided Image Analysis
|
01/23/2022
|
|
|
|
|
|
European Patent No.1356421
|
Computer Aided Image Analysis
|
01/23/2022
|
|
|
|
|
|
Japanese Patent No. 3947109
|
Computer Aided Image Analysis
|
01/23/2022
|
|
|
|
|
|
Canadian Patent No. 2,435,254
|
Methods of Identifying Patterns in Biological Systems and Uses Thereof
|
01/24/2022
|
|
|
|
|
|
Japanese Patent No. 4138486
|
Methods of Identifying Patterns in Biological Systems and Uses Thereof
|
01/24/2022
|
|
Patent/Application No.
|
Title
|
Expiration Date
|
|
|
|
|
|
European Patent No. 1459235
|
Methods of Identifying Patterns in Biological Systems and Uses Thereof
|
01/24/2022
|
|
|
|
|
|
European Patent No. 2296105
|
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
|
|
U.S. Patent No. 8,682,810
|
Method and System for Analysis of Flow Cytometry Data Using Support
Vector Machines
|
02/08/2029
|
|
|
|
|
|
Japanese Patent No. 5425814
|
Method and System for Analysis of Flow Cytometry Data Using Support
Vector Machines
|
02/08/2029
|
|
|
|
|
|
U.S. Patent No. 8,543,519
|
System and Method for Remote Melanoma Screening
|
05/01/2019
|
|
|
|
|
|
European Publication No. 2357582
|
Method of Identifying Patterns in Biological Systems and Method of Uses
|
08/07/2020
|
|
|
|
|
|
U.S. Patent Publication No. 2011/0106735
|
Recursive Feature Elimination Method Using Support Vector Machines
|
05/01/2019
|
|
|
|
|
|
European Patent No. 2373816
|
Methods for Screening, Predicting and Monitoring Prostate Cancer
|
12/04/2029
|
|
|
|
|
|
U.S. Patent Publication No. 2015/0339448
|
Methods for Screening, Predicting and Monitoring Prostate Cancer
|
01/24/2022
|
|
|
|
|
|
U.S. Patent Publication No. 2013/0297607
|
Identification of Pattern Similarities by Unsupervised Cluster Analysis
|
05/17/2022
|
|
|
|
|
|
Australian Patent No. 2009212193
|
Method and System for Analysis of Flow Cytometry Data Using Support
Vector Machines
|
02/08/2029
|
|
|
|
|
|
Chinese Patent No. ZL 200980110847.2
|
Method and System for Analysis of Flow Cytometry Data Using Support
Vector Machines
|
02/08/2029
|
|
|
|
|
|
European Publication No. 2252889
|
Method and System for Analysis of Flow Cytometry Data Using Support
Vector Machines
|
02/08/2029
|
|
|
|
|
|
Indian Application No. 5526/CHENP/2010
|
Method and System for Analysis of Flow Cytometry Data Using Support
Vector Machines
|
02/08/2029
|
|
|
|
|
|
U.S. Patent Publication No. 2014/0016843
|
Computer-Assisted Karyotyping
|
06/19/2033
|
|
|
|
|
|
European Publication No. 2862113
|
Computer-Assisted Karyotyping
|
06/19/2033
|
HDC also
owns intellectual property rights in U.S. patents covering the FGM technology. The FGM portfolio includes two issued patents,
which are:
|
Patent/Application No.
|
Title
|
Expiration Date
|
|
|
|
|
|
U.S. Patent No. 6,920,451
|
Method for the Manipulation, Storage, Modeling, Visualization
and Quantification of Datasets.
|
01/19/2021
|
|
|
|
|
|
U.S. Patent No. 7,366,719
|
Method for the Manipulation, Storage, Modeling, Visualization
and Quantification of Datasets
|
01/19/2021
|
Our Competition
HDC conducts its business
principally in the diagnostics industry in the field of biomarker discovery and image analysis. The diagnostics industry
is highly fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics
companies attempting to discover potential new diagnostic products. These companies may:
|
|
·
|
develop
new diagnostic products before we or our collaborators are able to;
|
|
|
·
|
develop
diagnostic products that are more effective or cost-effective than those developed by
us or our collaborators; or
|
|
|
·
|
patent
protect other intellectual property rights that would limit our ability to develop and
commercialize our technology by limiting the ability to use, ours, or our collaborators’,
diagnostic products.
|
The Company competes with
companies in the United States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize
biomarker discovery and image analysis techniques. These companies may develop products that are competitive with and/or perform
the same or similar to the products offered by our collaborators or us. Also, clinical laboratories may offer testing services
that are competitive with the products sold by our collaborators or us. The testing services offered by clinical laboratories
may be easier to develop and market than test kits developed by us or our collaborators because the testing services are not subject
to the same clinical validation requirements that are applicable to FDA-cleared or approved diagnostic test kits.
While a number of companies
perform biomarker discovery, we believe that our SVM and SVM-RFE technologies give us a distinct advantage over competing technologies. Neither
classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs
necessary to produce fully validated biomarkers like the Company’s technology.
Customers and Licensees
On January 6, 2012, we
entered into the NeoGenomics License pursuant to which 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. See Item
7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure
regarding our activities with NeoGenomics.
ITEM 1A. RISK FACTORS
This annual report on Form 10-K contains certain forward-looking statements including, without limitation,
all statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate
will or may occur in the future, including but not limited to statements regarding the successful implementation of our services,
business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and
operations, references to future success, the ability of the Company to utilize its SVM and FGM assets and other intellectual property
to identify biomarkers which can be used in diagnostic tests, the ability to enter into agreements with strategic partners for
the development and commercialization of diagnostic tests, the ability of the Company to develop a product line, the ability to
achieve profitability, about anticipated size of the market for diagnostic tests, the capabilities of molecular diagnostic tests,
regarding working with our collaborators resulting in revenue for the Company, the sufficiency of our liquidity and capital resources,
and other such matters. All such statements are forward-looking statements and are based on the beliefs of, assumptions
made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,”
“believe,” “intend,” “plan” and similar expressions and variations thereof are intended to
identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause
the actual results and performance of our company to be materially different from future results or performance expressed or implied
by such statements.
The cautionary statements
set forth in this “Risk Factors” section and elsewhere in this annual report identify important factors with respect
to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to differ materially
from those expressed in or implied by such forward-looking statements. Among others, factors that could adversely affect actual
results and performance include failure to successfully develop a profitable business, delays in identifying and enrolling customers,
the inability to retain a significant number of customers, effectiveness and execution of licensing efforts, our ability to employ
and retain key employees and experienced scientists, our access to tissue samples, loss of the ability to use certain patent rights,
the inability to continue to protect our proprietary information, competitive conditions, our ability to remain competitive in
a rapidly changing technological environment, acceptance of our products by the market, volatility in U.S. and global stock markets
generally and in our stock price specifically, potential shareholder claims which could result in substantial dilution to our
shareholders, economic conditions generally, the effect of current difficulties in the credit markets on our business, factors
beyond our control, including, but not limited to, catastrophes (both natural and man-made), earthquakes, floods, fires, explosions,
acts of terrorism or war, and the risks identified elsewhere in this report. All written or oral forward-looking statements attributable
to us are expressly qualified in their entirety by the foregoing cautionary statement. All forward looking statements
and cautionary statements included in this report are made as of the date hereof based on information available to us, and we
assume no obligation to update any forward looking statement or cautionary statement.
Risks Related to Our Business
Our financial statements have been prepared
on a going concern basis.
We have prepared our financial
statements on a “going concern” basis, which presumes that we will be able to realize our assets and discharge our
liabilities in the normal course of business for the foreseeable future.
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 December 31, 2015, we had $417,208 cash on hand along with NeoGenomics Stock worth $141,978. As a result,
the Company estimates cash will be depleted by the end of 2016 unless the Company is able to generate sufficient
revenue from operations. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
for additional disclosure regarding our liquidity and capital resources.
We are a developing business and a high-risk
company.
We are a high-risk company
in a volatile industry. Investors should recognize that an investment in our company is risky and highly speculative. We
are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development. Failure to implement and execute our business
and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate,
retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial
condition. We must successfully overcome these and other business risks.
We may incur future losses, and we may
never sustain profitability.
Our expenses are expected
to exceed our income until we successfully complete transactions resulting in significant revenue. Accordingly, our
capital will be decreased to pay these operating expenses. If we ever become profitable, of which there is no assurance
that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these
operating expenses. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
We will need additional financing.
We will be required to
raise additional capital to finance our activities. We cannot assure prospective investors that we will not need to raise additional
capital or that we would be able to raise sufficient additional capital on favorable terms, if at all. There can be
no assurance that additional financing will be available, if required, on terms acceptable to us. If we fail to raise
sufficient funds or do not increase our revenues from licensing our technology or performing services, we may have to cease operations
or materially curtail our business operations. If we raise additional capital by issuing equity securities, our stockholders may
experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish
some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
Our operating results are unpredictable
and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
Our operating results
may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and
acceptance of our services. Factors that may cause our results to vary by period include:
|
|
·
|
payments of
milestones, license fees or research payments under the terms of our increasing number
of external alliances;
|
|
|
·
|
changes in
the demand for our products and services;
|
|
|
·
|
the nature,
pricing and timing of products and services provided to our collaborators;
|
|
|
·
|
acquisition,
licensing and other costs related to the expansion of our operations;
|
|
|
·
|
reduced capital
investment for extended periods;
|
|
|
·
|
losses and
expenses related to our investments in joint ventures and businesses;
|
|
|
·
|
regulatory
developments or changes in public perceptions relating to the use of genetic information
and the diagnosis and treatment of disease based on genetic information; and
|
|
|
·
|
changes in
intellectual property laws that affect our rights in genetic information that we sell
and license.
|
Advisory and personnel
costs, marketing programs and overhead account for a substantial portion of our operating expenses. Some of these expenses cannot
be adjusted quickly in the short term. If revenues of the business decline or do not grow as anticipated, we may not
be able to reduce our operating expenses accordingly. Failure to achieve anticipated levels of revenue could therefore
significantly harm our operating results for a particular period.
Because we do not intend to pay dividends
on our Common Stock, holders of our Common Stock will benefit from an investment in our Company only if it appreciates in
value.
We have never declared
or paid any cash dividends on our Common Stock. We currently intend to retain the Company’s future earnings, if any, to
finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future. As
a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee
that our Common Stock will appreciate in value or even maintain the price at which its investors purchased their shares.
Our stock price has been, and is likely
to continue to be, highly volatile
.
Our stock price could
fluctuate significantly due to a number of factors beyond our control, including:
|
|
·
|
variations
in our actual or anticipated operating results;
|
|
|
·
|
sales of substantial
amounts of our stock;
|
|
|
·
|
announcements
about us or about our competitors, including technological innovation or new products
or services;
|
|
|
·
|
litigation
and other developments related to our patents or other proprietary rights or those of
our competitors;
|
|
|
·
|
conditions
in the life sciences, pharmaceuticals or genomics industries; and
|
|
|
·
|
Governmental
regulation and legislation.
|
In addition, the stock
market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and
volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance
of these companies. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our
actual operating performance.
In the past, companies
that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation.
If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s
attention and resources, which could affect our profitability.
Our approach of incorporating ideas and
methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively
new and may not be accepted by our potential customers or collaborators.
We intend to create a
fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically
relevant and economically significant biomarkers. Our potential customers and collaborators may be reluctant to accept
our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove
to be ineffective or not as effective as other methods. For example, our products and technologies may prove to be
ineffective if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model. If
our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective,
our business may fail or we may never become profitable.
Even if our computational technologies
are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products
based on them.
Even if our computational
technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting
from them to produce new drugs, therapies, diagnostic products or other life science products. Despite recent scientific
advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement
in diseases and in other life processes is not well understood. Only a few therapeutic products based on the study
of and discoveries relating to genes or proteins have been developed and commercialized. If our customers are unable
to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.
The industries in which we are active are
evolving rapidly, and we may be unable to keep pace with changes in technology.
The pharmaceutical and
biotechnology industries are characterized by rapid technological change. This is especially true of the data-intensive
areas of such technologies. Our future success will largely depend on maintaining a competitive position in the field
of drug, therapeutics and diagnostic products discovery. If we fail to keep pace with changes in technology, our business
will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This
may occur even before we recover the expenses that we incurred in connection with developing those products and technologies. Products
or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics
discovery technologies. We may not be able to make the necessary enhancements to our technologies to compete successfully
with newly emerging technologies.
We face intense competition, and if we
are unable to compete successfully we may never achieve profitability.
The markets for our products
and services are very competitive, and we expect our competition to increase in the future. Although we have not identified
specific companies that provide the full suite of services that we do, we compete with entities in the U.S. and worldwide that
provide products and services for the analysis of genomic information and information relating to the study of proteins (proteomic
information) or that commercializes novel genes and proteins. These include genomics, pharmaceutical and biotechnology
companies, academic and research institutions and government and other publicly funded agencies. We may not be able
to successfully compete with current and future competitors. Many of our competitors have substantially greater capital
resources, research and development staff, facilities, manufacturing and marketing experience, distribution channels and human
resources than we do. This may allow these competitors to discover or to develop products in advance of us or of our
customers.
Some of our competitors,
especially academic and research institutions and government and other publicly funded agencies, may provide for free services
or data similar to the services and data that we provide for a fee. Moreover, our competitors may obtain patent and
other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use
or commercialize our discoveries, products and services. If we are unable to compete successfully against existing
or potential competitors, we may never achieve profitability.
Our management may be unable to address
future growth.
We anticipate that if
we experience a period of growth in our customer base and market opportunities, a period of significant expansion of the Company
will be required. This expansion will place a significant strain on our management, operational and financial resources. To manage
future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures
and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel,
systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train,
retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential
strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect
on our business, results of operations and financial condition.
If our business
does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share
or recover investments in our technologies.
Technologies in the biomarker
industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace
with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve
market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors, limit our
growth and damage our reputation and business.
The future success of
our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We
believe that successful new product introductions provide a significant competitive advantage because customers make an investment
of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial
selection. However, our business or others may make rapid technological developments, which could result in our technologies,
products or services becoming obsolete before we are able to recover the expenses incurred to develop them.
If our business cannot enter into strategic
alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services
or continue to commercialize existing products or services.
We may be unable to maintain
or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop
and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current
or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell
or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another
third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve
increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.
We also depend on collaborators
for the development and manufacture of complex instrument systems and chemicals and other materials that are used in laboratory
experiments. We cannot control the amount and timing of resources our collaborators devote to our products. We may
not be able to enter into or satisfactorily retain these research, development and manufacturing collaborations and licensing
agreements, which could reduce our growth and harm our competitive position.
We may not be able to find business partners
to develop and commercialize product candidates derived from our discovery activities.
Our strategy for the development
and commercialization of diagnostic biomarkers and therapeutic proteins depends on the formation of collaborations or licensing
relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical
and biotechnology companies, diagnostic companies, academic institutions and other entities. We cannot assure you that
we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.
Our dependence on licensing and other collaboration
agreements makes us heavily dependent on our collaborators.
We may not be able to
enter into licensing or other collaboration agreements on terms favorable to us. Even if we do enter into an acceptable
agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities. In
most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions
by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory
management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
In addition, we
may not be able to control the amount and timing of resources our collaborators devote to the product candidates and collaborators
may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s business
strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us. Furthermore,
our rights in any intellectual property or products that may result from our collaborations may depend on additional investment
of money that we may not be able or willing to make.
Potential or future collaborators
may also pursue alternative technologies, including those of our competitors. Disputes may arise with respect to the
ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators
or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization
of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative
technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us,
our business, financial condition and results of operations may be significantly harmed.
If we are unable to hire or retain key
personnel or sufficient qualified employees, we may be unable to successfully operate our business.
Our business is highly
dependent upon the continued services of our executive team and board of directors. While certain members of our senior
management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure
you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results
and our ability to compete. The loss, incapacity or unavailability for any reason of any of these individuals could
have a material adverse effect upon our business, as well as our relationships with our potential customers. We do
not carry key person life insurance on any member of our senior management. Furthermore, competition for highly qualified
personnel in our industry and geographic locations is intense. Our business would be seriously harmed if we were unable
to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.
We may not be able to employ and retain
experienced scientists, mathematicians and management.
Technologies in our industry
have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing,
marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance.
Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected
revenues and earnings.
If our access to tissue samples or to genomic
data or other information is restricted, or if this data is faulty, our business may suffer.
To continue to build our
technologies and related products and services, we need access to third parties’ scientific and other data and information. We
also need access to normal and diseased human and other tissue samples and biological materials. We may not be able
to obtain or maintain such access on commercially acceptable terms. Some of our suppliers could become our competitors
and discontinue selling supplies to us. Information and data from these suppliers could contain errors or defects that
could corrupt our databases or the results of our analysis of the information and data. In addition, government regulation
in the United States and other countries could result in restricted access to, or use of, human and other tissue samples. Although
currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources
of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business
may suffer.
The sales cycle for some of our products
and services is lengthy. We expend substantial funds and management effort with no assurance of successfully selling
our products or services.
Our ability to obtain
customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate
their efforts in drug and diagnostics discovery. Our ability to obtain customers for our therapeutic or diagnostic
product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for
our claimed therapeutic or diagnostic purposes. Our ability to obtain customers will also depend on our ability to
successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product
candidates is typically lengthy and may take more than 12 months.
An inability to protect our proprietary
data, technology or products may harm our competitive position.
If we do not adequately
protect the intellectual property underlying our products and services, competitors may be able to develop and market the same
or similar products and services. This would erode our competitive advantage. In addition, the laws of some countries
do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.
We use contractual obligations
to protect a significant portion of our confidential and proprietary information and know-how. This includes a substantial
portion of the knowledge base from which we develop a large portion of our proprietary products and services. However,
these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how. Customers,
employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their
agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.
In addition, we have applied
for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have discovered
using these technologies. We plan to continue to apply for patents covering parts of our technologies and discoveries,
as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will be upheld if
challenged. The patent positions of biotechnology related companies are generally uncertain and involve complex legal
and factual questions. Legislative changes and/or changes in the examination guidelines of governmental patents offices
may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with
respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In contrast to recent
court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed to identifying
relationships between small groups of genes and proteins that are useful for diagnosing, treating and prognosing diseases and
other conditions.
Our success depends in large part on our
ability to patent our discoveries.
Our success depends, in
large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize. We
face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and
technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries. We
cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered
or may discover in the future. Our patent applications may conflict with prior applications of third parties or with
prior publications. They may not result in issued patents and, even if issued, our patents could be invalidated or
may not be sufficiently broad to provide us with any competitive advantages. U.S. and other patent applications ordinarily
remain confidential for 18 months from the date of filing. As a result, patent applications that we file which we believe
are novel at the time of filing may be determined at a later stage to be inconsistent with earlier applications. Additionally,
the scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our
competitive position. Any issued patents that cover our proprietary technologies may not provide us with substantial
protection or be commercially beneficial to the business. The issuance of a patent is not conclusive as to its validity
or its enforceability. Federal courts may invalidate these patents or find them unenforceable. Competitors
may also be able to design around our patents. If we are unable to protect our patented technologies, we may not be
able to commercialize our technologies, products or services and our competitors could commercialize our technologies. Any of
these events could materially harm our business or financial results.
Litigation or other proceedings or third
party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries
or require us to spend time and money to modify our operations.
The technology that we
use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe
the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and
software industries expand, more patents are issued and other companies engage in other genomic-related businesses. If
we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies
and products, we could experience serious harm. If litigation is commenced against us alleging intellectual property rights infringement
or if we initiate a lawsuit to assert claims of infringement, protect our trade secrets or know-how or to determine the enforceability,
scope and validity of the proprietary rights of others, we may incur significant costs in litigating, whether or not we prevail
in such litigation. Regardless of the outcome, litigation can be very costly. These costs would also include
diversion of management and technical personnel to defend us against third parties or to enforce our patents (once issued) or
other rights against others. In addition, parties making claims against us may be able to obtain injunctive or other
equitable relief that could prevent us from being able to further develop or commercialize. Further, these lawsuits
could result in the invalidation or limitation of the scope of our patents or the forfeiture of the rights associated with these
patents. This could also result in the award of substantial damages against us. In the event of a successful
claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. If
we are not able to obtain these licenses at a reasonable cost, if at all, we could encounter delays in product introductions while
we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could
prevent us from commercializing available products, all of which could negatively impact our business, financial condition or
results of operations. Moreover, during the course of these suits, there may be public announcements of the results
of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive
these announcements to be negative, which could cause the market price of our common stock to decline.
Many of our services will
be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these
products could be developed by the business without knowledge of published or unpublished patent applications that cover some
aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by
litigation and licensing. If we are found to be infringing the intellectual property of others, we could be required
to stop the infringing activity, or we may be required to design around or license the intellectual property in question. If
we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may
be unable to sell some of our services, which could result in reduced revenue.
We may acquire or make strategic investments
in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results.
If opportunities arise,
we may consider making acquisitions of or investments in businesses, technologies, services or products. These activities
may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material
adverse effect on the operating results of our business. Moreover, even if we acquire complementary businesses or technologies,
we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.
Difficulties in integrating
an acquired business or managing an investment could disrupt our business, distract our management and employees and increase
our expenses. Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating
to intangible assets. Sizable acquisitions or investments may also divert senior management from focusing on our existing
business plan. Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders
may be diluted, which could affect the market price of our stock.
We have identified a material
weakness in our internal accounting control over financial reporting.
Management has concluded
that our internal control over financial reporting was not effective as of December 31, 2015. Our Chief Executive Officer,
who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material weaknesses
in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number
of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources
of the Company.
All internal control systems
no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective may not prevent
or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As an issuer of “penny stock,”
the protection provided by the federal securities laws relating to forward looking statements does not apply to the Company.
Although federal securities
laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities
laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this
safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained
a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any
statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
Risks Related to Our Industry
There are many risks of failure in the
development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development
and commercialization of these types of products.
Risks of failure are inseparable
from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These
risks include the possibility that any of these products will:
|
|
·
|
be found to
be toxic or ineffective;
|
|
|
·
|
fail to receive
necessary regulatory approvals;
|
|
|
·
|
be difficult
or impossible to manufacture on a large scale;
|
|
|
·
|
be uneconomical
to market;
|
|
|
·
|
fail to be
developed prior to the successful marketing of similar products by competitors; or
|
|
|
·
|
be impossible
to market because they infringe on the proprietary rights of third parties or compete
with superior products marketed by third parties.
|
We are dependent on our
customers’ commercialization of our discoveries. Any of these risks could materially harm our business and financial
results.
The trend towards consolidation in the
pharmaceutical and biotechnology industries may adversely affect us.
The trend towards consolidation
in the pharmaceutical and biotechnology industries may negatively affect us in several ways. These consolidations usually
involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources
and technological capabilities, thus strengthening competition in the industry. In addition, continued consolidation
may result in fewer customers for our products and services.
We may be subject to product liability
claims if products derived from our products or services harm people.
We may be held liable
if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise
unsuitable. These risks are inherent in the development of genomics, functional genomics and pharmaceutical products. If
we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total
assets. In addition, such claims could cause us to incur substantial costs, divert management’s attention from
executing the Company’s business plan and subject us to negative publicity even if we prevail in our defense of such claims.
Our business and the products
developed by our collaborators may be subject to governmental regulation.
New therapeutic or diagnostic
products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process in
the United States and other countries before it can be marketed. It may be several years, or longer, before any therapy
or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues. This
may delay or prevent us from becoming profitable. Changes in policies of regulatory bodies in the United States and
in other countries could increase the delay for each new therapy and diagnostic products.
Even if regulatory approval
is obtained, a product on the market and its manufacturer are subject to continuing review. Discovery of previously
unknown problems with a product may result in withdrawal of the product from the market.
Although we intend to
become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities
to file regulatory approval applications and generally direct the regulatory review process. We cannot be certain whether
they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all. If
they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until
clearance can be obtained, if at all. This will in turn reduce our chances of receiving various forms of payments,
including those relating to sales of marketed therapeutic or diagnostic products by them.
The law applicable to us may change in
a manner that negatively affects our prospects.
We must comply with various
legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change
over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements,
which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, which in turn
would result in adverse consequences.
If ethical and other concerns surrounding
the use of genetic information become widespread, there may be less demand for our products and services.
Genetic testing has raised
ethical issues regarding confidentiality and the appropriate uses of the resulting information. For these reasons,
governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition
to various conditions, particularly for those that have no known cure. Any of these scenarios could reduce the potential
markets for our technologies in the field of predictive drug response, which could materially harm our business and financial
results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
We do not own any real
property. We lease 350 square feet of office space in Atlanta, Georgia, pursuant to a month-to-month lease dated April
1, 2013. We currently pay base rent in the amount of $600 per month. Our principal executive office is located at 4243 Dunwoody
Club Drive, Suite 202, Atlanta, Georgia, and our telephone number is (678) 336-5300.
ITEM 3. LEGAL PROCEEDINGS
On July 17, 2013, the
Company received a Civil Investigative Demand (the "Demand") from the Federal Trade Commission of the United States
of America (the "FTC") relating to the Company's MelApp software application. In the Demand, the FTC requested information
relating to potentially unfair or deceptive acts or practices related to (i) false advertising and (ii) consumer privacy and data
security, in violation of Trade Commission Act, 15 U.S.C. Sections 45 and 42.
On February 23, 2015,
the FTC notified the Company of its approval, by a vote of 4-1, to accept an Agreement Containing Consent Order (“Agreement”).
The Agreement is for settlement purposes only. The Company neither admits nor denies any of the allegations, except as specifically
stated in the Agreement. The Company believed the effort to contest this matter with the FTC would require funds greater than
the Company had at its disposal.
The Agreement, among other
things, bars the Company from claiming that any device detects or diagnoses melanoma or its risk factors, or increases users’
chances of early detection, unless the representation is not misleading and supported by competent and reliable scientific evidence
in the form of human clinical testing of the device. The Agreement also prohibits the Company from making any other misleading
or unsubstantiated claims about a device’s health benefits or efficacy, unless the representation is not misleading and
supported by competent and reliable scientific evidence in the form of human clinical testing of the device. Finally, the Company
was required to pay $17,693 to the FTC. The Company made this payment on April 16, 2015. This amount is included as Settlement
Expense in the accompanying statements of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is
traded on the OTC Bulletin Board under the symbol HDVY. The range of closing prices for our common stock, as reported
on Bloomberg.com during each quarter for the last two fiscal years was as follows. These quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent actual transactions.
|
|
|
High
|
|
|
Low
|
|
|
First Quarter 2015
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
Second Quarter 2015
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
Third Quarter 2015
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
Fourth Quarter 2015
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
|
|
|
High
|
|
|
|
Low
|
|
|
First Quarter 2014
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
Second Quarter 2014
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
Third Quarter 2014
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
Fourth Quarter 2014
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
Holders of Record
As of March 30, 2016, there were approximately
300 holders of record of our common stock.
Dividends
We have not paid any
cash dividends for common shares since inception, and we do not anticipate paying any in the foreseeable future on common shares. We
intend to retain future earnings, if any, to support the development and growth of our business. Payment of future dividends,
if any, will be at the discretion of our board of directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for expansion. Under the Georgia Business
Corporation Act, a company is prohibited from paying a dividend if, after giving effect to that dividend, either the company would
not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less
than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the
dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving
the dividends. If the Company were to pay dividends, the holders of the shares of the Series C Preferred Stock have
a right to first receive, or simultaneously receive, a dividend on each outstanding share of Series C Preferred Stock on an as
if converted to common stock basis.
The Company has had
limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital
investment in order to fund operations. Accordingly, depending on the Company’s financial condition, it may not
be able to pay any dividends on any shares of its Capital Stock. For further discussion of the Company’s liquidity
and capital resources, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Sales of Unregistered Securities
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 will be issued only if the Company has not attained profitability by the end of
the first quarter 2016. The 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 may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration
by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding
warrants and options. 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. If the Company were to be dissolved, the Series C Preferred
Stock receives preferential treatment over 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 Common 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 Common Shares are accompanied by $0.03 warrants and $0.06 contingency warrants. The contingency warrants will
be issued only if the Company has not attained profitability by the end of the first quarter 2016. The 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.
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.
|
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
As a smaller reporting company, we are
not required to provide the information required by this item.
|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
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 over 60 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 paid us $1,000,000 in cash and 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 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,
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 derives from any sublicensing
arrangements it may put in place for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System.
NeoGenomics 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 has completed both of its one-year extension terms of the license. While those one-year extension terms are complete,
the Company and NeoGenomics continue to collaborate on efforts to commercialize the licensed technologies.
If NeoGenomics has
not generated $5.0 million of net revenue from products, services and sublicensing arrangements by January 2017, 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 Blood 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 completed Phase I of their research and published
the results in 2014. Additionally, NeoGenomics completed Phase II of their prostate test validation in 2014. The results were largely
the same as those published regarding Phase I. NeoGenomics is currently concluding a clinical trial for this test, named NeoLAB™
Prostate – Liquid Alternative to Biopsy. NeoGenomics announced in March 2016 the test is now commercially available.
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.
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. SVM Capital has been pleased with the results of
the application of the SVM technology.
On June 16, 2015, SVM Capital joined Manifold Partners, LLC (“Manifold Partners”) as a partner.
Manifold Partners is a San Francisco-based multi-strategy portfolio management firm specializing in
quantitative investment methodologies. As a part of the partnership, SVM Capital will contribute their proprietary service to
the collaboration with Manifold Partners. This new collaboration will be known as Manifold Vector. SVM Capital specializes
in the application of an artificial intelligence technique to investment strategies. SVM Capital has developed mathematical algorithms
to rank-order S&P 500 stocks to determine investment desirability, including long and short equity positions. Importantly,
only fundamental corporate data is analyzed, which Manifold Partners believes to be unique in the quantitative investment field.
This technology is an outgrowth of the machine learning techniques created by the Company.
A thorough exposition of SVM
Capital may be found on the appropriate link in HDC's web page.
Intellectual Property Developments
In June 2015, the Company
filed a new continuation application with claims covering a computer-implemented method for screening of a patient for prostate
cancer based on the four-genes that had been identified using the Company’s proprietary RFE algorithm. The continuation application
was filed to continue efforts to obtain coverage for the four-gene test after three pending applications were finally rejected
as claiming patent-ineligible subject matter under the revised definitions of patentable subject matter established based on the
U.S. Supreme Court.
In December 2015, IP
Australia (the Australian Patent Office) granted an Australian patent covering the Company’s technology for analysis of flow
cytometry data using support vector machines. Also in December, the State Intellectual Property Office of China issued a notice
of allowance of the corresponding Chinese application for flow cytometry data analysis. The Chinese patent was granted in March
2016.
In January 2016, the
U.S. Patent Office issued a notice of allowance of the Company’s application covering analysis of chromosomal abnormalities
using support vector machines. The automated analysis method greatly reduces the time required for visual inspection of images
of chromosomes while providing more accurate and repeatable results. The Company has a companion application covering this technology
still pending in Europe.
The Company now holds
the exclusive rights to 53 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 8 pending U.S. and foreign patent applications covering uses of the SVM technology as well
as diagnostic methods that have been discovered using the SVM technology. The reduction in the total number of issued and pending
patents during 2015 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. In addition, a few U.S. patents that were either near the ends of their
terms and/or had parallel applications with broader claims in force were allowed to expire. In addition, significant changes in
the U.S. Patent Laws relating to the eligibility of certain subject matter for patent protection influenced the Company’s
decision to abandon a few of its pending U.S. applications. This in turn reduced the Company’s total expenses for patent
maintenance.
Intel Update
The Company’s
patent application that was submitted to provoke an interference with Intel’s Patent No. 7,685,077 remains pending. The application
file has been transferred to the U.S. Patent Office’s Interference Division, which reportedly has a significant backlog,
and is not likely to be acted on for quite some time.
Inflation
The Company does not
expect that inflation or changing prices will have a material effect on revenues or income.
Year Ended December 31, 2015 Compared
with Year Ended December 31, 2014
Revenue
For the year ended
December 31, 2015, revenue was $44,601 compared with $1,032,127 in revenue for the year ended December 31, 2014. Revenue
is recognized for licensing and development fees over the period earned, which in most cases is the length of the license. The
revenue recognized in 2014 was primarily the recognition of revenue of $981,600 associated with our NeoGenomics License. The revenue
recognition for the NeoGenomics license ended in 2014 and resulted in the substantially lower revenue recognized for 2015. As
of December 31, 2015, the Company had deferred revenue of $148,241, which includes cash received but not yet recognized as revenue.
Deferred revenue was $191,628 at December 31, 2014.
Operating and Other Expenses
Amortization expense,
which is the amortization of costs of acquiring or filing of patents over their estimated useful lives, was $262,719 for each of
the years ended December 31, 2015 and 2014.
Professional and consulting
fees totaled $160,121 for 2015 compared with $161,600 for 2014. These fees consist primarily of patent filing and maintenance
costs, consulting fees, and accounting fees.
Legal fees were lower
in 2015 with fees of $40,357 during the year ended December 31, 2015, versus $58,950 during the same period 2014. This decrease
was a result of costs during 2014 associated with the Company’s response to the Federal Trade Commission’s Civil Investigative
Demand.
Research and development
fees were $40,813 during 2015 and $99,200 for 2014. The research and development fees in 2015 and 2014 were related primarily to
fees paid to consultants for the development work completed as a part of our NeoGenomics License.
Compensation expense
of $192,701 for the year ended December 31, 2015 was lower than the $249,475 reported for the comparable period of 2014. The decrease
is attributed to the further reductions in compensation to management in order to preserve cash for the Company.
Other general and administrative
expenses decreased from $161,735 in 2014 to $148,538 in 2015. This decrease was due to the Company’s continued
effort to reduce 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. For the year ended December 31, 2015, the unrealized loss on NeoGenomics stock
held at the end of the reporting period was $123,161, which is recorded as other expense in the statements of operations. In addition,
the Company realized a gain on the sale of NeoGenomics stock of $232,937 in 2015. During the same period in 2014, the Company reported
an unrealized loss of $199,894 and realized a gain on the sale of NeoGenomics stock of $338,087.
The Company’s
balance sheet for the year ended December 31, 2014 reflected an accrued liability of approximately $239,910 for professional services.
In an effort to conserve cash, the Company negotiated with certain of the service providers regarding potential reduction
of the amount billed. During the quarter ended September 30, 2015, the Company and the service providers successfully renegotiated
the amounts owed and as a result, the Company recorded a decrease in accounts payables of $121,504.
As a result of the
settlement with the FTC over actions by previous management, the Company recognized a settlement expense of $17,693 during the
first quarter 2015.
Liquidity and Capital Resources
At December 31, 2015,
the Company had $417,208 in cash and total current liabilities of $287,658. The primary amount of current liabilities relates
to $244,270 in dividends payable and accounts payable. Additionally, we continue to sell our NeoGenomics Stock in order to fund
operations. Although the NeoGenomics stock has increased in value since the initial acquisition date, 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 will not have sufficient resources to meet all of our current obligations unless the Company is able to secure funds
via licensing activity or other forms of fund raising either in the debt or equity markets. None of these options are definitive
and there is no guarantee the Company will be successful in these fund raising efforts. The Company estimates cash will be depleted
by the end of 2016 unless the Company is able to raise additional capital.
At December 31, 2015, the Company had no contractual obligations that require disclosure.
The Company has relied primarily on equity and debt financing for liquidity. The Company produced sales,
licensing, and developmental revenue starting in late 2005 and 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 patent portfolio, providing services related to those patents, and obtaining additional
equity or debt financing. Since January 2015, the Company has been unable to generate significant revenue, as further described
above. As a result, the Company has implemented a cash conservation program. Specifically, the Company has eliminated several highly
compensated former employees and consultants. The new management team has significantly reduced their compensation. Our Interim
Chief Executive Officer, who receives no salary or compensation for his work on behalf of the Company, leads this effort. This
effort has reduced the monthly expenditures or “burn rate”.
Cash Flow from Operating, Investing
and Financing Activities
For the year ended December 31, 2015, the Company had a net loss of
$587,061
with $608,605 of cash being used by operating activities. During 2015, $331,465 was provided by the sale of 68,900
NeoGenomics shares that were received as a part of the NeoGenomics License signed in January 2012. In addition, there was
$688,000 provided by financing activities during 2015 resulting from proceeds received from Series C Preferred and Common Stock
issuances. As a result, the Company realized a net increase of cash of $409,566 during the year ended December 31, 2015.
The Company has taken
steps to reduce the Company’s expenditures in order to considerably reduce the monthly “burn rate”. These steps
included reducing expenses and allocating our remaining cash reserves for our operational requirements at a reduced level.
Cash Flow from Financing Activities
In the fourth quarter
of 2013, the Board of Directors authorized issuing Series C Preferred Shares. As of December 31, 2015, the Company issued 30,000,000
preferred shares at $0.03 for a total of $560,732. The Series C Preferred Shares feature $0.03 warrants and $0.03 contingency warrants.
The contingency warrants will be issued only if the Company has not attained profitability by the end of the first quarter 2016.
This funding is anti-dilutive because the purchase price is significantly higher than the current 180-day average share price.
The Company sold to
individual investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses,
in 2009. The Series B Preferred Stock was converted into Common Stock of the Company in the fourth quarter of 2014,
which was the fifth anniversary of the date of issuance as outlined in the original purchase agreement.
Dividends have been
accrued for the Series B Preferred Stock in the amount of $373,346 as of December 31, 2014. The Company gave the Series B holders
the choice of either (1) Common Stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to
defer payment of the dividend in cash until the Company is able to pay, at the sole discretion of the Company. During the first
quarter of 2015, $166,709 in dividends were paid with the issuance of 3,334,179 shares of Common Stock. The remaining accrued dividend
is recorded as a current liability in the amount of $206,637 as of December 31, 2015.
The Company has relied
primarily on equity funding plus debt financing for liquidity. In the longer term, the Company plans to generate additional
cash from its licensing arrangement with NeoGenomics. While the Company has produced limited revenue, it must continue to do so
in order to generate sufficient cash to continue operations. The Company does not have sufficient cash to support operations
until it is able to generate revenue through royalty payments from licensing deals from its patent portfolio and development fees
for providing services related to those patents. There can be no assurance that the Company will be able to fully implement its
cash conservation program, sell sufficient number of NeoGenomics shares to fund ongoing operations, or generate sufficient revenues
from the NeoGenomics License that would permit funding of ongoing operations. In such event, the Company may also consider such
alternatives as raising additional equity through private placements and/or debt offerings. There can be no assurance that
the Company will be able to secure such funding.
Critical Accounting Policies, Estimates and Assumptions
We consider our accounting policies related to revenue recognition, impairment of intangible assets and
stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are
inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation
expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a
particular arrangement are present, estimating the fair value of an intangible asset, which can be estimated from the future
discounted cash flows expected to be derived from the intangible asset, and estimating the useful life and volatility of stock
awards granted. We base our estimates and judgments on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results could differ materially from these estimates.
Valuation of intangible and other long-lived assets
We assess the carrying
value of intangible and other long-lived assets at least annually, which requires us to make assumptions and judgments regarding
the future cash flows related to these assets. The assets are considered to be impaired if we determine that the carrying
value may not be recoverable based upon our assessment of events or changes in circumstances such as:
|
|
·
|
the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
|
|
|
·
|
loss of legal ownership or title to the asset;
|
|
|
·
|
significant changes in our strategic business objectives and utilization of the asset(s); and
|
|
|
·
|
the impact of significant negative industry or economic trends.
|
If the assets are considered
to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the
assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that
the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible
assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows
from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material
change in our reported results would increase.
Revenue Recognition
We recognize revenue
principally from license and royalty fees for intellectual property and from development agreements with research partners. Each
element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to
the buyer is fixed or determinable; (iv) collectability is reasonably assured, and (v) both title and the risks and rewards of
ownership are transferred to the buyer. We are required to make significant estimates involving our recognition of revenue from
license and royalty fees. Our license and royalty fee revenue estimates depend upon our interpretation of the specific terms of
each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these
deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life
of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period
of time over which to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third
party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received. Changes
to these assumptions or market conditions could cause changes in revenues.
Share-Based Compensation
Share-based compensation
expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining
the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe
it is important for investors to be aware of the high degree of subjectivity involved when using option-pricing models to estimate
share-based compensation. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing
model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables
include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of
the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and
we employ different assumptions in future periods, the compensation expense that we record could differ significantly from what
we have recorded in the current period.
For share-based awards,
we estimated the expected term by considering various factors including the vesting period of options granted, employees’
historical exercise, and post-employment termination behavior; however, due to the limited history of our Company, such data is
limited. We estimated the expected life will be longer than the vesting period given the early stage
nature of
our operations and accordingly have used the expected life as the expected term. Our estimated volatility was derived using our
historical stock price volatility. We have never declared or paid any cash dividends on our Common Stock and currently do not anticipate
paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to
the expected term of the share-based awards.
Common Stock Warrants Liability
In September 2015, the Company completed
a private placement of 30,000,000 shares of preferred stock as well as a private placement of 4,000,000 shares of common stock
and issued warrants to purchase an additional 34,000,000 shares of common stock. 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 and warrants. As a result, these warrants are required
to be classified as a liability. 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.
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.
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
As a smaller reporting company, we are not
required to provide the information required by this item.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS
|
The following financial statements are included beginning on
page F-1 of this report:
|
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
As of the end
of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our
Principal Financial Officer and Principal Accounting Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Based upon this evaluation, our Chief Executive Officer concluded that, as of the Evaluation
Date, because of the Company’s internal control weakness, our disclosure controls and procedures were not effective to
provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities
and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions
regarding required disclosure.
Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure
controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose
material information otherwise required to be set forth in the Company’s periodic reports.
Management's Annual Report on Internal
Control over Financial Reporting
The Company’s
management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles,
and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In connection with
the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2015 based on the framework in Internal Control—Integrated Framework
(“1992 Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s
assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational
effectiveness of those controls.
Based on this evaluation, under that framework, management has
concluded that our internal control over financial reporting was not effective as of December 31, 2015. Our Chief Executive Officer,
who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material weaknesses
in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number
of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources
of the Company.
This annual report
does not include an attestation report of the Company’s independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered
public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s
report in this annual report.
Changes In Internal Controls over Financial
Reporting
No changes were made
in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during
our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
Notes to Financial Statements
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Health Discovery Corporation
(the “Company”) is a biotechnology-oriented company that has acquired patents and has patent pending applications for
certain machine learning tools, primarily pattern recognition techniques using advanced mathematical algorithms to analyze large
amounts of data thereby uncovering patterns that might otherwise be undetectable. Such machine learning tools are currently
in use for diagnostics and drug discovery, but are also marketed for other applications. The Company licenses the use
of its patent protected technology and may provide services to develop specific learning tools under development agreements or
to sell to third parties.
USE OF ESTIMATES
The preparation of financial
statements 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, disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the period. Accordingly,
actual results could differ from those estimates. Significant estimates that are particularly susceptible to change
in the near-term include the valuation of share-based compensation and consideration for services and the recoverability of the
patents.
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.
CASH
Cash includes cash deposited with financial institutions.
ACCOUNTS RECEIVABLE
Trade accounts receivable
for licensing fees and development services are recorded at net contract value based upon the written agreement with the customer.
In certain cases, accounts receivable may include royalties receivable from customers based upon those customers estimated sales
of the products or diagnostic tests containing patented processes and technologies. The Company considers amounts past due based
on the related terms of the agreement and reviews its exposure to amounts receivable based upon collection history and specific
customer credit analysis. The Company provides an allowance for doubtful amounts if collectability is no longer reasonably
assured. There were no amounts outstanding as of December 31, 2015. As of December 31, 2014, all amounts receivable are considered
fully collectable and no allowance for doubtful accounts was recorded.
EQUIPMENT
Equipment, which consists
of office furniture, computer equipment, and leasehold improvements, are stated at cost, less accumulated depreciation. Depreciation
is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years.
Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of
the lease, whichever is shorter.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
PATENTS
Initial costs paid to purchase
patents are capitalized and amortized using the straight line method over the remaining life of the patent. The Company capitalizes
the external costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the
straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the
date the patent is issued. Annual patent maintenance costs and annual license and renewal registration fees are expensed
as period costs. If the applied for patents are abandoned or are not issued, the Company will expense the costs capitalized to
date in the period of abandonment or earlier if abandonment appears probable. The carrying value of patents is reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of December
31, 2015, the Company does not believe there has been any impairment of its patents.
INVESTMENTS
The Company uses the equity
method to account for its equity investments in ventures for which it has 50% or less ownership and the ability to exercise significant
influence over operating and financial policies, but does not control. The Company uses the cost method to account for its investments
in companies that it does not control and for which it does not have the ability to exercise significant influence over operating
and financial policies.
INCOME TAXES
The Company accounts for
income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax benefits and
expenses or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income for the years in which those temporary differences are expected to be recovered or settled.
In the event the future
tax consequences of differences between the financial reporting bases and tax bases of the Company’s assets and liabilities
result in deferred tax assets, an evaluation is made of the probability of being able to realize the future benefits indicated
by such assets. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. In assessing the probability of realizing the deferred tax
assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning
strategies.
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.
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.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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.
RESEARCH AND DEVELOPMENT EXPENSE
The Company’s research
and development costs are expensed as incurred and consist of expenses paid to consultants and external laboratories and related
primarily to the costs of co-development studies, clinical trials, and projects undertaken.
The R&D costs were $40,813
in 2015 and $99,200 in 2014.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial
instruments consist of cash, available for sale securities, accounts receivable, and accounts payable. The Company considers
the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short-term
nature of such items. Refer to Note J for discussion regarding the valuation of the Company’s investment in available for
sale securities.
NET INCOME (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 for
the year ended December 31, 2015, the calculation of diluted per share amounts would create an anti-dilutive result and therefore
are not presented in the following table. Potentially dilutive shares at December 31, 2015, include options and warrants outstanding
of 46,750,000.
The following is an analysis
of the basic and diluted earnings per common share computations for the year ended December 31, 2014:
|
|
|
Year ended December 31, 2014
|
|
|
Basic:
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
112,019
|
|
|
Basic weighted average common shares outstanding
|
|
|
253,292,935
|
|
|
Net income per share attributable to common stockholders - basic
|
|
$
|
0.0004
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
112,019
|
|
|
Basic weighted average common shares outstanding
|
|
|
253,292,935
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Conversion of options and warrants
|
|
|
-
|
|
|
Conversion of preferred shares to common shares
|
|
|
6,640,000
|
|
|
Diluted weighted average common shares outstanding
|
|
|
259,932,935
|
|
|
Net income per share attributable to common stockholders - diluted
|
|
$
|
0.0004
|
|
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
During the year ended December
31, 2014, 19,390,000 outstanding stock options and warrants were not included in the computation of diluted earnings per common
share because to do so would have an antidilutive effect. Please refer to Note H regarding detail for outstanding stock options.
CONCENTRATIONS OF CREDIT RISK
The Company maintains its
cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000 per account. From time-to-time, the Company’s cash balances exceed the amount insured by the FDIC. Management
believes the risk of loss of cash balances in excess of the insured limit to be low.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued Accounting
Standards (“ASU”) 2016-02, Leases. This standard update was issued to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities, including for operating leases, on the balance sheet and
disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that adopting ASU 2016-02
will have on its consolidated financial statements.
In November 2015,
the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This standard update provides
guidance for balance sheet classification of deferred taxes. This standard requires that deferred tax assets and liabilities be
classified as non-current on the balance sheet, and eliminates the prior guidance which required an entity to separate deferred
tax liabilities and assets into a current amount and a noncurrent amount on the balance sheet. ASU 2015-17 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2016. Earlier application is permitted as of the
beginning of an interim or annual period. The Company is currently evaluating the impact that adopting ASU 2015-17 will
have on its consolidated financial statements
COMMON STOCK WARRANTS LIABILITY
In September 2015, the
Company completed a private placement of 30,000,000 shares of preferred stock as well as a private placement of 4,000,000 shares
of common stock and issued warrants to purchase an additional 34,000,000 shares of common stock. 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 and warrants. As a result, these warrants
are required to be classified as a liability. 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.
Note B – DEFERRED REVENUE
Deferred revenue represents the unearned portion of payments received in advance for licensing or service agreements.
The Company received $2,944,800
as a part of the NeoGenomics license agreement in January 2012. Deferred revenue of $2,944,800 was recorded and recognized as income
over the three years of the term of the license agreement, which ended in January 2015. The remaining amount of deferred revenue
relates to the Company’s settlement with Vermillion.
The
Company had total unearned revenue of $148,241 as of December 31, 2015. The long-term portion of unearned revenue represents the
remaining term of the agreements or the remaining lives of the underlying patents, as appropriate, and ranges from one to seven
years.
The expected future annual recognition of revenue
is as follows:
|
2016
|
|
$
|
43,388
|
|
|
2017
|
|
|
43,388
|
|
|
2018
|
|
|
43,388
|
|
|
2019
|
|
|
18,077
|
|
|
Total expected future annual amortization
|
|
$
|
148,241
|
|
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note C – PATENTS
The Company has acquired
a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery.
The cost and accumulated amortization as of
December 31, 2015 and 2014 are as follows:
|
|
|
2015
|
|
|
2014
|
|
|
Cost of Patents
|
|
$
|
3,985,794
|
|
|
$
|
3,985,794
|
|
|
Accumulated Amortization
|
|
|
(3,044,728
|
)
|
|
|
(2,782,009
|
)
|
|
Patents, Net of Amortization
|
|
$
|
941,066
|
|
|
$
|
1,203,785
|
|
Amortization charged to
operations for each of the years ended December 31, 2015 and 2014 was $262,719. The weighted average remaining amortization
period for patents at December 31, 2015 is 3.60 years. Estimated amortization expense for the next three years is $262,719
per year.
Note D – INVESTMENTS
On March
27, 2007, the Company and an investment partner formed SVM Capital, LLC (“SVM Capital”) as an equity investment for
purposes of utilizing SVM as a quantitative investment management technique. The Company owns 45% of the membership
interest and has significant influence with the operation of the entity but does not have control over the entity. The Company
does not have any obligation to fund or provide support to SVM Capital. Accordingly, the investment is accounted for
using the equity method of accounting. The Company’s initial investment was $5,000 and the license to use the
SVM technology applied to financial markets. The carrying value of this investment was zero as of December 31, 2015
and 2014.
Note E – LICENSE FEES EXPENSE - LUCENT AGREEMENT
Effective September 26,
2004, the Company was assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The
patent license agreement was associated with the patents acquired July 30, 2004. The Company agreed to pay royalty fees to Lucent
in the amount of the greater of an annual fee of $10,000 or at the rate of five percent (5%) on each licensed product which is
sold, leased, or put into use by the Company, until cumulative royalties equal $40,000 and at the rate of one percent (1%) subsequently. The
license granted will continue for the entire unexpired term of Lucent’s patents. During 2014, the Company paid $6,095
in royalty fees to Lucent. The Lucent patents expired in July 2014, and therefore the license agreement with Lucent expired. The
Company is no longer required to make royalty payments to Lucent.
Note F – INCOME TAXES
The Company has incurred
net losses since inception, and we have determined that it is more likely than not we will be unable to benefit in the future from
the accumulated net operating loss (“NOL”). Consequently, we have not recorded any U.S. federal or
state income tax expense or benefit. We have not recorded income tax expense or benefit for the fiscal years ending
December 31, 2015 or 2014 due to a full valuation allowance for any NOL’s that would have been generated or used.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note F – INCOME TAXES, continued
The following items comprise the Company’s
net deferred tax assets (liabilities) as of December 31, 2015 and 2014:
|
|
|
2015
|
|
|
2014
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
8,026,288
|
|
|
$
|
7,877,660
|
|
|
Deferred revenue
|
|
|
50,402
|
|
|
|
65,154
|
|
|
Stock compensation
|
|
|
410,550
|
|
|
|
55,991
|
|
|
Deferred tax asset
|
|
|
8,487,240
|
|
|
|
7,998,805
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(4,007
|
)
|
|
|
(4,007
|
)
|
|
Unrealized gain
|
|
|
(39,413
|
)
|
|
|
(80,956
|
)
|
|
Deferred tax liability
|
|
|
(43,420
|
)
|
|
|
(84,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
8,443,820
|
|
|
|
7,913,842
|
|
|
Less valuation allowance
|
|
|
(8,443,820
|
)
|
|
|
(7,913,842
|
)
|
|
Net deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
For the year ended December
31, 2015, an increase in the valuation allowance of $529,978 has been recorded for the deferred tax asset, as management has determined
that it is more likely than not that the deferred tax asset will not be realized.
Total income tax expense
(benefit) differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax loss for the fiscal years
ended December 31, 2015 and 2014, as follows:
|
|
|
2015
|
|
|
2014
|
|
|
Total benefit computed by:
|
|
|
|
|
|
|
|
|
|
Applying the U.S. Federal statutory rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
State income taxes, net of federal tax benefit
|
|
|
(3
|
)%
|
|
|
(3
|
)%
|
|
Valuation allowance
|
|
|
37
|
%
|
|
|
37
|
%
|
|
Effective tax rate
|
|
|
-
|
|
|
|
-
|
|
The Company has unused
net operating loss carry-forwards of approximately $23.6 million that are available to offset future income tax expense. The net
operating losses will begin to expire in 2020.
Based on its evaluation
of tax positions, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its
financial statements. The Company’s evaluation was performed for all tax years, which remain subject to examination
and adjustment, by major tax jurisdictions as of December 31, 2015. The Company is generally no longer subject to U.S. federal,
state, and local, or non-US income tax examinations for the years before 2012.
Note G – COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company does not own
any real property. The Company leases approximately 350 square feet of office space in Atlanta, Georgia, pursuant to
a month-to-month lease dated April 1, 2013. The Company currently pays base rent in the amount of $600 per month.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note G – COMMITMENTS AND CONTINGENCIES, continued
Legal Issues
On July 17, 2013, the Company
received a Civil Investigative Demand (the "Demand") from the Federal Trade Commission of the United States of America
(the "FTC") relating to the Company's MelApp software application. In the Demand, the FTC has requested information relating
to potentially unfair or deceptive acts or practices related to (i) false advertising and (ii) consumer privacy and data security,
in violation of Trade Commission Act, 15 U.S.C. Sections 45 and 42.
On February 23, 2015, the
FTC notified the Company of its approval, by a vote of 4-1, to accept an Agreement Containing Consent Order (“Agreement”).
This Agreement was for settlement purposes only. The Company neither admits nor denies any of the allegations, except as specifically
stated in the Agreement. The Company believes the effort to contest this matter with the FTC would have required funds greater
than the Company had at its disposal.
The Agreement
, among other things, bars the Company from claiming that any device detects or diagnoses melanoma or its risk factors, or increases
users’ chances of early detection, unless the representation is not misleading and supported by competent and reliable scientific
evidence in the form of human clinical testing of the device. The Agreement also prohibits the Company from making any other misleading
or unsubstantiated claims about a device’s health benefits or efficacy, unless the representation is not misleading and supported
by competent and reliable scientific evidence in the form of human clinical testing of the device. Finally, the Company was required
to pay $17,693 to the FTC. The Company made this payment on April 16, 2015. This amount is included as Settlement Expense in the
accompanying statements of operations.
The Company’s balance
sheet for the year ended December 31, 2014 reflected accounts payable of approximately $239,910 for professional services.
In an effort to conserve cash, the Company negotiated with certain of the service providers regarding potential reduction
of the amount billed. During the quarter ended September 30, 2015, the Company and the service providers successfully renegotiated
the amounts owed and as a result, the Company recorded a decrease in accounts payables of $121,504.
The Company is subject
to various claims primarily arising in the normal course of business. Although the outcome of these matters cannot be
determined, the Company does not believe it is probable that any such claims will result in material costs and expenses.
Note H – STOCK COMPENSATION AND EQUITY BASED PAYMENTS
Information about options and warrants outstanding for 2015 and
2014 is summarized below:
|
Number of Warrants and Options Issued
|
|
2015
|
|
|
Weighted Average
Exercise Price
|
|
|
2014
|
|
|
Weighted Average
Exercise Price
|
|
|
Outstanding beginning of year
|
|
|
19,390,000
|
|
|
$
|
0.034
|
|
|
|
13,500,000
|
|
|
$
|
0.050
|
|
|
Granted
|
|
|
27,360,000
|
|
|
|
0.030
|
|
|
|
6,640,000
|
|
|
|
0.030
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired un-exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(750,000
|
)
|
|
|
0.080
|
|
|
Outstanding end of the year
|
|
|
46,750,000
|
|
|
$
|
0.032
|
|
|
|
19,390,000
|
|
|
$
|
0.034
|
|
|
Exercisable December 31
|
|
|
39,916,668
|
|
|
$
|
0.032
|
|
|
|
13,723,335
|
|
|
$
|
0.034
|
|
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note H – STOCK COMPENSATION AND EQUITY BASED PAYMENTS,
continued
The following schedule summarizes combined stock option and warrant
information as of December 31, 2015.
|
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
of
Exercisable
Warrants
|
|
|
|
$0.027
|
|
|
|
3,000,000
|
|
|
|
7.50
|
|
|
|
2,000,000
|
|
|
|
7.50
|
|
|
|
$0.030
|
|
|
|
34,000,000
|
|
|
|
8.50
|
|
|
|
34,000,000
|
|
|
|
8.50
|
|
|
|
$0.036
|
|
|
|
7,750,000
|
|
|
|
7.75
|
|
|
|
5,875,000
|
|
|
|
7.75
|
|
|
|
$0.040
|
|
|
|
1,000,000
|
|
|
|
2.00
|
|
|
|
1,000,000
|
|
|
|
2.00
|
|
|
|
$0.050
|
|
|
|
1,000,000
|
|
|
|
2.00
|
|
|
|
1,000,000
|
|
|
|
2.00
|
|
|
|
Total
|
|
|
|
46,750,000
|
|
|
|
|
|
|
|
39,916,668
|
|
|
|
|
|
As of December 31, 2015,
there was $51,892 of unrecognized cost related to stock option and warrant grants. The cost is to be recognized over
the remaining vesting periods that average approximately nine months. The weighted average remaining life of all outstanding
warrants and options at December 31, 2015 are 7.5 years. The aggregate intrinsic value of all options and warrants outstanding
and exercisable as of December 31, 2015 was $6,000, based on the market closing price of $0.03 on December 31, 2015, less exercise
prices.
Stock-based expense included
in the 2015 net loss consisted of $68,283 in directors, employees and consultants option expenses for services. Specifically, director
option expenses were $33,198 and common stock issued for service expenses related to employees and consultants were $35,085. During
2014, stock-based expense included in the net income consisted of $73,766. Specifically, director option expenses were $33,199
and option expenses related to employees and consultants were $40,567.
The following table reflects stock-based compensation and expense
recorded in 2015 and 2014:
|
|
|
2015
|
|
|
2014
|
|
|
Director and consultant option expenses
|
|
$
|
52,933
|
|
|
$
|
58,416
|
|
|
Employee option expenses
|
|
|
15,350
|
|
|
|
15,350
|
|
|
Total stock compensation expenses
|
|
$
|
68,283
|
|
|
$
|
73,766
|
|
In connection with their
election to the Board of Directors, on July 25, 2013, the Company granted to Mr. Henry Kaplan, Mr. Kevin Kowbel, and Mr. Eric Winger
each an option to purchase 1,500,000 shares of the Company’s common stock. Upon his appointment to Interim Chief Executive
Officer, Mr. Kowbel returned his options back to the Company. As a result, only the options for Messrs. Kaplan and Winger vest
250,000 shares every six months, have an exercise price of $0.027, and expire on July 25, 2023. The fair value of each option granted
is $0.020 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend
yield at 0%, risk-free interest rate of 1.91%, an expected life of 5 years, and volatility of 98%. The aggregate computed fair
value of these options is $60,124, and this amount is charged as an expense over the three-year vesting period. There is no expense
related to Mr. Kowbel as he returned all of the options granted to him back to the Company.
In connection with his
appointment to the Board of Directors in July 2013, on October 21, 2013, Mr. William F. Quirk, Jr. was granted an option to purchase
1,500,000 shares of the Company’s common stock. This option grant is consistent with what has been granted to other board
members. The options vest 250,000 shares every six months, have an exercise price of $0.036, and expire on October 21, 2023. The
non-cash charge of $39,471 for the fair value of these options will be recognized as an expense over the three-year vesting period.
Also, on October 21, 2013,
the Company granted options to purchase 6,000,000 shares of the Company’s common stock to a group of employees and consultants
in recognition of their efforts to lower the Company’s monthly expenditures and compensation and their continuing contributions
to the Company. The options vest over a three-year period, have an exercise price of $.036, and expire on October 21, 2023. Within
the group of 6,000,000 options, the Company’s Vice President, Mark A. Moore, Ph.D., received an option to purchase 1,000,000
shares of the Company’s common stock and the Company’s Senior Vice President, Hong Zhang, Ph.D., received an option
to purchase 750,000 shares of the Company’s common stock. The non-cash charge of $203,931 for the fair value of these options
will be recognized as an expense over the three-year vesting period.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note I - STOCKHOLDERS’ EQUITY
Series B Preferred Stock
The Company sold to individual
investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses, in 2009. The
Series B Preferred Stock was converted into Common Stock of the Company in the fourth quarter of 2014, which was the fifth anniversary
of the date of issuance as outlined in the original purchase agreement.
Dividends have been accrued
for the Series B Preferred Stock in the amount of $373,346 as of December 31, 2014. The Company gave the Series B holders the choice
of either (1) Common Stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to defer payment
of the dividend in cash until the Company is able to pay, at the sole discretion of the Company. During the first quarter of 2015,
$166,709 in dividends were paid with the issuance of 3,334,179 shares of Common Stock. The remaining accrued dividend is recorded
as a current liability in the amount of $206,637 as of December 31, 2015.
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 $560,732. The Series C Preferred
Shares are accompanied by $0.03 warrants and $0.03 contingency warrants. The contingency warrants will be issued only if the Company
has not attained profitability by the end of the first quarter 2016. The 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 has not been registered under either federal or state securities laws and must be held until a registration statement covering
such securities is declared effective by the Securities and Exchange Commission or an applicable exemption applies.
The Series C Preferred
Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration
by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding
warrants and options. 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. If the Company were to be dissolved, the Series C Preferred
Stock receives preferential treatment over 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 Common 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 Common Shares are accompanied by $0.03 warrants and $0.06 contingency warrants. The contingency warrants will
be issued only if the Company has not attained profitability by the end of the first quarter 2016. The 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.
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 as of December 31, 2015 was zero, based on the market closing price of $0.03 on
December 31, 2015, less exercise 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.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note J – INVESTMENT IN AVAILABLE FOR SALE SECURITIES
The Company has elected
the fair value option in accordance with ASC 825,
Financial Instruments,
as it relates to its shares held in NeoGenomics’
common stock that were acquired resulting from the NeoGenomics Master License Agreement executed on January 6, 2012. Management
made the election for the fair value option related to this investment because it believes the fair value option for the NeoGenomics
common stock provides a better measurement from which to compare financial statements from reporting period to reporting period.
No other financial assets or liabilities are fair valued using the fair value option.
The Company’s investment in NeoGenomics’ common stock is recorded on the accompanying balance
sheets under the caption Investment in Available for Sale Securities. The carrying value of this investment on the date of acquisition
approximated $1,945,000. The change in fair value from the December 31, 2014 to December 31, 2015 is an unrecognized loss of $123,161
for the remaining 18,000 shares held and is classified as other expense under the caption Unrealized Loss on Available for Sale
Securities in the accompanying statements of operations. There are three levels of investments in the fair value hierarchy that
assesses a company's assets based on the degree of certainty around the asset's underlying value. Level 1 asset can be valued with
certainty because they are liquid and have clear market prices. At the other end of the spectrum, Level 3 assets are illiquid and
estimating their value requires inputs that are unobservable and reflect management assumptions.
The Company classifies its investment as an available for sale security presented as a trading security on the balance sheet and
the fair value is considered a Level 1 investment in the fair value hierarchy. The December 31, 2015 fair value of the investment
of $141,978 is for the remaining shares held and is calculated using the closing stock price of the NeoGenomics common stock at
the end of the reporting period.
During 2015, the Company
sold 68,900 shares of NeoGenomics and received proceeds in the amount of $331,465. These transactions resulted in the Company recognizing
a Realized Gain on the Sale of Available for Sale Securities in the accompanying statements of operations in the amount of $232,937
in the current period.
As of December 31, 2015,
the Company held 18,000 shares of NeoGenomics stock as compared to 86,900 shares as of December 31, 2014. The initial 1,360,000
shares were acquired in January 2012 as a result of the NeoGenomics Master License Agreement.
Note K – SUBSEQUENT EVENTS
On February 8, 2016, the
Company granted options to purchase 5,000,000 shares of the Company’s common stock to a group of employees and consultants
in recognition of their efforts to lower the Company’s monthly expenditures and compensation and their continuing contributions
to the Company. The options vest over a two-year period, have an exercise price of $.03, and expire on February 8, 2026. Within
the group of 5,000,000 options, the Company’s Vice President, Mark A. Moore, Ph.D., received an option to purchase 500,000
shares of the Company’s common stock and the Company’s Senior Vice President, Hong Zhang, Ph.D., received an option
to purchase 1,250,000 shares of the Company’s common stock. The non-cash charge of $109,721 for the fair value of these options
will be recognized as an expense over the two-year vesting period.
Because these options exceed the amount of common
shares available if the holders exercise the previously issued outstanding options and warrants, The Company will need to increase
the authorized shares of common stock in order to satisfy these options. Furthermore, the Company will record an increase in the
common stock warrants liability during the first quarter of 2016.
Note L – 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.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note L – FINANCIAL CONDITION AND GOING CONCERN, continued
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 December 31, 2015
the Company had $417,208 cash on hand along with its investment in NeoGenomics stock available for sale securities worth $141,978.
As a result, the Company estimates cash will be depleted by the end of 2016 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 its relationship with NeoGenomics, providing services related to those patents, selling its NeoGenomics stock, and obtaining
additional equity or debt financing. Specifically, the Company expects to begin receiving revenue from commercialization of
the flow cytometry service and prostate tests developed as a part of the NeoGenomics relationship.
As a result, the Company
focused its efforts to secure funds via licensing activity or other forms of fund raising either in the debt or equity markets. In
addition, prior to the beginning of this year, the Company began raising capital through the Series C Preferred Stock offering.
The Series C Preferred Stock offering was fully subscribed and completed in August 2015. As a result, the Company received $568,000
in 2015 in addition to the $332,000 received in prior years for a total of $900,000.
The Company believes the
funds received from the Series C Preferred Stock offering, along with disciplined expense management, will allow the Company to
maintain operations until the end of 2016. While the Company believes these efforts will create a profitable future, there
is no guarantee the Company will be successful in these efforts.