As filed with the Securities and Exchange Commission on December 14, 2005.
REGISTRATION NO. 333-124750
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
(AMENDMENT NO. 2)
----------------------------
HEALTH DISCOVERY CORPORATION
(Name of Small Business Issuer in Its Charter)
TEXAS 74-3002154
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8731
-------------------------------------------
(Primary Standard Industrial Classification Code Number)
1116 SOUTH OLD TEMPLE ROAD
LORENA, TEXAS 76655
(912) 352-7488
(Address and Telephone Number
of Principal Executive Offices)
-------------------------------------------
DR. STEPHEN D. BARNHILL
1116 SOUTH OLD TEMPLE ROAD
LORENA, TEXAS 76655
(912) 352-7488
-------------------------------------------
(Name, Address and Telephone Number
of Agent for Service)
COPIES TO:
TODD WADE, ESQ.
POWELL GOLDSTEIN LLP
1201 WEST PEACHTREE STREET
FOURTEENTH FLOOR
ATLANTA, GEORGIA 30309
(404) 572-6600
-------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time or at one time after the effective date of this registration
statement as determined by the selling stockholders.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
--------------------------------------- ----------------- ---------------------- ------------------------- -----------------------
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED PRICE PER UNIT PRICE REGISTRATION FEE
--------------------------------------- ----------------- ---------------------- ------------------------- -----------------------
Common Stock, no par value 31,622,749 $0.33 (1) $ 10,435,507 $ 1,236.24 (2)
--------------------------------------- ----------------- ---------------------- ------------------------- -----------------------
Common Stock, no par value, to be
issued upon the exercise of warrants 32,638,436 $0.33 (1) $ 10,770,684 $ 1,275.69 (2)
--------------------------------------- ----------------- ---------------------- ------------------------- -----------------------
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Fees for original share amount were paid with initial filing. THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED DECEMBER 14, 2005
PROSPECTUS
64,261,185 SHARES
HEALTH DISCOVERY CORPORATION
This prospectus relates to the resale of up to 64,261,185 shares of our
common stock, no par value, which are being offered for resale from time to time
by the stockholders named in the section entitled "Selling Stockholders" on page
14. The number of shares the selling stockholders may offer and sell under this
prospectus includes common shares:
o the selling stockholders currently hold; and
o issuable to them upon the exercise of warrants previously issued
by us. The selling stockholders may also offer additional shares
of common stock acquired upon the exercise of the warrants and
our issuance of stock as a result of anti-dilution provisions,
stock splits, stock dividends or similar transactions.
We are registering these shares to satisfy registration rights of the
selling stockholders.
We will not receive any of the proceeds from any resales by the selling
stockholders. We will, however, receive the proceeds from the exercise of the
warrants issued to the selling stockholders. The selling stockholders may sell
the shares of common stock from time to time in various types of transactions,
including on the Over-the-Counter Bulletin Board and in privately negotiated
transactions. For additional information on methods of sale, you should refer to
the section entitled "Plan of Distribution" on page 17.
On December 12, 2005, the last sales price of the common stock quoted on
the Over-the-Counter Bulletin Board was $0.16 per share. Our company's common
stock is quoted on the Over-the-Counter Bulletin Board under the symbol
"HDVY.OB."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ____________
The information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
Prospectus Summary.............................................................1
Risk Factors...................................................................4
Use of Proceeds...............................................................13
Price Range of Our Common Stock...............................................14
Dividend Policy...............................................................14
Selling Stockholders..........................................................14
Plan of Distribution..........................................................17
Business......................................................................17
Properties....................................................................27
Legal Proceedings.............................................................27
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................28
Significant Accounting Policies and Estimates.................................30
Management....................................................................31
Executive Compensation........................................................34
Principal Stockholders........................................................36
Certain Relationships and Related Party Transactions..........................37
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.......................................................37
Description of Capital Stock..................................................38
Legal Matters.................................................................38
Experts .....................................................................38
Available Information.........................................................39
-----------------------------
ABOUT THIS PROSPECTUS
This prospectus is a part of a registration statement that we have filed
with the Securities and Exchange Commission. You should read this prospectus and
any accompanying prospectus supplement, as well as any post-effective amendments
to the registration statement of which this prospectus is a part, together with
the additional information described under "Available Information" before you
make any investment decision.
The terms "Health Discovery," "Company," "we," "our" and "us" refer to
Health Discovery Corporation unless the context suggests otherwise. The term
"you" refers to a prospective purchaser of our common stock.
You should rely only on the information contained in this prospectus or
any accompanying prospectus supplement. We have not authorized anyone to provide
you with information different from that contained in this prospectus or any
accompanying prospectus supplement. These securities are being offered for sale
and offers to buy these securities are only being solicited in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus and any accompanying prospectus supplement is accurate only as of the
date on their respective covers, regardless of the time of delivery of this
prospectus or any accompanying prospectus supplement or any sale of the
securities.
i
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, including
or related to our future results, certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this prospectus, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this prospectus, you should not regard the inclusion of
such information as our representation that we will achieve any strategy,
objective or other plans. The forward-looking statements contained in this
prospectus speak only as of the date of this prospectus as stated on the front
cover, and we have no obligation to update publicly or revise any of these
forward-looking statements. These and other statements, which are not historical
facts are based largely on management's current expectations and assumptions and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those contemplate by such forward-looking
statements. These risk and uncertainties include, among others, the risks and
uncertainties described in "Risk Factors", beginning on page 4.
ii
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS,
BEFORE MAKING AN INVESTMENT DECISION.
OUR MISSION
Our mission is three-fold. First, we plan to identify new biomarkers and
patterns of biomarkers to create non-invasive, patient specific diagnostics for
the early detection of disease. Second, we will attempt to identify biomarkers
that will provide potential drug targets for such devastating diseases as
prostate cancer, breast cancer, leukemia, and obesity, among others. Finally, we
will focus on identifying patients at risk for certain adverse drug reactions
thereby identifying patients who should or should not be given certain drugs.
Our vision is to reshape the delivery of medicine in order to redefine
the relationship between diagnostics, therapeutics and treatment by delivering
personalized medicine that incorporates patient-specific information from gene
expression, metabolic indicators and therapeutic response.
OUR BUSINESS
Health Discovery Corporation was established in September 2003 to become
the world's first fully integrated biomarker discovery company. We are
positioning ourselves to provide pharmaceutical and diagnostic companies with
all aspects of "first phase" diagnostic and drug discovery from expert
assessment of the clinical dilemma through proper selection and procurement of
high quality specimens. In addition, we aim to provide proprietary analytical
evaluation methods and state-of-the-art computational analysis to produce
relevant and accurate clinical data, producing accurate biomarker and pathway
discoveries, resulting in patent protection of our biomarker discoveries for
future development and commercialization. We also intend to continue licensing
aspects of our patent portfolio for both medical and non-medical applications.
MARKET OPPORTUNITY
The market for post-genomic biomarker-based diagnostic products is
expected to grow from $100 million in 2003 to $2 billion by 2008, according to
Ken Rubenstein, Ph.D., in his publication REVOLUTIONIZING DRUG DEVELOPMENT AND
DIAGNOSTICS published in September 2003. Using our technologies, we intend to
become the first company to perform the total process of identifying a
particular clinical medical problem to be solved and performing the entire
process leading to the identification of the genes or proteins (called
biomarkers), and the relationships among them (called pathways), that are
relevant to the solution of the medical problem. This process will consist of an
assessment of the clinical problem, the determination of the clinical trial
set-up (the number of patients and what medical conditions they represent), the
proper selection and procurement of high quality specimens for analysis, an
analytical evaluation of the specimens through laboratory tests to produce the
clinical data, and the mathematical evaluation of the data using pattern
recognition techniques such as Support Vector Machines (SVM) and Fractal
Geometric Modeling (FGM) to produce an accurate determination of the relevant
genes and proteins and the manners in which they interact.
Biomarkers and pathways represent the products of our company. As of
November 2005, our intellectual property portfolio consisted of ownership and/or
rights to use 61 issued and pending patents worldwide. We intend to sell or
license all newly-discovered biomarkers and pathways to diagnostic companies for
development into diagnostic assays and to pharmaceutical companies for further
development as potential drug targets or to solve drug safety issues. In
addition, we intend to grant non-exclusive licenses, with exclusive licenses in
a few selected fields, for use of technology covered by our intellectual
property portfolio for third party discovery applications as well as for signal
and/or data processing applications.
STRATEGIC AGREEMENTS AND PARTNERSHIPS
In October 2003, we signed our first agreement with M.D. Anderson Cancer
Center in Houston Texas ("M.D. Anderson Cancer Center"). For the third time in
four years, M.D. Anderson Cancer Center is ranked the nation's top cancer
hospital in U.S. News and World Report's "America's Best Hospitals" survey,
published in the magazine's July
1
28, 2003 issue. Under this agreement we will analyze a gene expression database
to identify new biomarkers and pathways involved in leukemia. Under the terms of
the agreement, M.D. Anderson Cancer Center, has granted us a first option to
obtain an exclusive worldwide royalty-bearing commercial license to
commercialize any discovered biomarkers or pathways we identify.
In January 2004, we entered into our second Biomarker and Pathway
Discovery Agreement with M.D. Anderson Cancer Center. This second collaboration
will give us access to already collected clinical specimens for new biomarker
and pathway discovery in prostate cancer. We intend to use the findings of this
study to develop new diagnostic approaches for prostate cancer and improve the
clinical management of these patients. Under the terms of this agreement, M.D.
Anderson Cancer Center, has granted Health Discovery Corporation a first option
to obtain an exclusive, worldwide, royalty-bearing commercial license to
commercialize any discovered prostate cancer biomarkers or pathways identified
by us utilizing our patent protected computational techniques.
In March 2004, we entered into an agreement with Stanford University to
use our patent protected computational techniques to identify new patterns of
biomarkers in lymphatic insufficiency and its response to therapeutic
lymphangiogenesis. According to the agreement, ownership of Research Program
Inventions conceived, discovered or reduced to practice under the Research
Program will be determined based on inventorship. As such, any invention
discovered using our analytical tools on this Stanford database would be jointly
owned by Stanford and Health Discovery. In addition, Health Discovery has first
option for exclusive worldwide licensing for commercialization of all
discoveries.
In March 2004, we signed an agreement with The University of Miami to
use our patent protected computational techniques to identify new patters of
biomarkers in AIDS Related Dementia. It is hoped that this newly discovered
information will allow physicians to better understand the pathogenesis of AIDS
Related dementia and will assist in the diagnosis and treatment of this
devastating disease. In November 2005, we sold to The University of Miami full
ownership of the recent AIDS Biomarker Signature discovered by our scientists.
The University of Miami agreed to an upfront cash payment and continuing royalty
payments for any future commercial sales related to this new discovery.
In September of 2004, we entered into an agreement with Dr. Thomas
Stamey of Stanford University Medical Center to analyze what is thought by Dr.
Stamey to be the most comprehensive prostate cancer gene chip database in the
world. This database consists of Affymetrix gene chips containing 25,000
prostate related genes. This data is from 92 patients representing 9 classes of
prostate disease - from BPH through all grades of prostate cancer. Using this
database, Health Discovery hopes to identify new biomarkers for prostate cancer.
We will also use our patent protected computational techniques such as Support
Vector Machine and Fractal Genomics Modeling to analyze this data to determine
the most relevant proteins to be used for diagnostics and drug targets. All
discoveries will be jointly owned by Health Discovery and Dr. Stamey with Health
Discovery having a worldwide exclusive license for commercialization.
In addition, as a result of the Fractal Genomics acquisition, we are
preparing to begin validation studies of the recently discovered and patent
protected set of leukemia genes, discovered using our FGM technique, which was
shown to separate ALL-T-cell leukemia from ALL-B-cell leukemia with 100%
accuracy. This gene set, now intellectual property of Health Discovery, was
originally presented to the medical and scientific world by Dr. Herbert
Fritsche, Chairman of our Scientific Advisory Board, a world-renowned expert in
cancer markers and Professor at MD Anderson Cancer Center, at the 31st Meeting
of the International Society for Oncodevelopmental Biology and Medicine (ISOBM)
in Edinburgh, United Kingdom.
On November 22, 2005, we entered into a licensing agreement with
Clarient, Inc. a technology and services resource for pathologists, oncologists
and the pharmaceutical industry, in which Clarient will utilize our Support
Vector Machine (SVM) intellectual property. Under the terms of the agreement,
Clarient will pay us an upfront licensing fee, a monthly expert development fee,
and future royalties for any Clarient product developed using the licensed SVM
technology. We hope this will allow Clarient to develop applications to detect
cancer cells in peripheral blood and bone marrow.
THE OFFERING
We are registering up to 64,261,185 shares of our common stock for the
sale by the selling stockholders identified in the section of this prospectus
entitled "Selling Stockholders." The shares included in the table identifying
the selling stockholders include 31,622,749 shares of our issued common stock
plus an additional 32,638,436 shares of common stock that have not yet been, but
that may be, issued to the selling stockholder should they exercise their
2
warrants. Information regarding our common stock and the warrants is included in
the section of this prospectus entitled "Description of Capital Stock."
--------------------------------
We were incorporated in Texas on April 6, 2001. Our administrative
office is located at 5501 1/2 Abercorn Street, Savannah, Georgia 31406. Our
principal executive office is located at 1116 South Old Temple Road Lorena, TX
76655. Our telephone number is (912) 352-7488 and our web site is located at
www.HealthDiscoveryCorp.com. Information contained on our web site is not a part
of this prospectus.
3
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE SPECIFIC FACTORS LISTED BELOW TOGETHER WITH THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE WHETHER TO PURCHASE
SHARES OF OUR COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE
THAT ARE NOT YET IDENTIFIED OR THAT WE CURRENTLY THINK ARE IMMATERIAL, MAY ALSO
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS,
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE A DEVELOPING BUSINESS AND A HIGH-RISK COMPANY.
We are a high-risk company in a volatile industry. In September 2003, we
completely changed the focus of our business from wireless telecommunications to
biotechnology. Consequently, we have no history on which to base an evaluation
of our business and prospects. Thus, 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. If our efforts are unsuccessful or other
unexpected events occur, purchasers of the common stock offered hereby could
lose their entire investment.
WE EXPECT TO INCUR FUTURE LOSSES, AND WE MAY NEVER ACHIEVE OR SUSTAIN
PROFITABILITY.
We have never generated any revenue, and we expect to continue to incur
net losses and negative cash flows in the future due in part to high research
and development expenses, including enhancements to our technologies and
investments in new technologies. We cannot assure you that we will ever achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED HISTORY OF
OPERATIONS.
Since our reorganization in 2003, our focus and our business model have
been continually evolving. Accordingly, we have a history of operations in which
there is insufficient information to identify any historical pattern. Even if we
could discern such a pattern, the rapidly evolving nature of the biotechnology
and pharmaceutical industries would make it very difficult to identify any
meaningful information in such short a history. Therefore, it is also difficult
to make any projections about the future of our operations. This difficulty may
result in our shares trading below their value.
WE WILL HAVE NEGATIVE OPERATING INCOME AND MAY NEVER BECOME PROFITABLE.
Our operating expenses are expected to exceed our income for the next
six to nine months and thus 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.
WE MAY NEED ADDITIONAL FINANCING.
Additional proceeds may be required 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. No binding arrangements have been made to secure such
financing, and there can be no assurance that such additional financing will be
available when required on terms acceptable to us. If we fail to raise
sufficient funds, we may have to cease operations, which would materially harm
our business and financial results. 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
4
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:
o changes in the demand for our products and services;
o the nature, pricing and timing of products and services provided to our
collaborators;
o acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
o reduced capital investment for extended periods;
o losses and expenses related to our investments in joint ventures and
businesses;
o 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;
o changes in intellectual property laws that affect our rights in genetic
information that we sell; and
o payments of milestones, license fees or research payments under the
terms of our increasing number of external alliances.
Research and development costs associated with our technologies and
services, as well as personnel costs, marketing programs and overhead, account
for a substantial portion of its operating expenses. 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.
WE MAY FAIL TO MEET OUR DEBT OBLIGATIONS.
If our cash flow and capital resources are insufficient to fund our debt
obligations incurred in connection with recent acquisitions, we may be forced to
sell assets, seek additional equity or debt capital or restructure our debt. In
addition, any failure to make scheduled payment of interest and principal on our
outstanding notes or any other indebtedness could result in our creditors
exercising remedies on the notes and taking some or all of our assets or could
otherwise harm our ability to incur additional indebtedness on acceptable terms.
We cannot assure you that our cash flow and capital resources will be sufficient
for payment of interest and principal on our debt in the future, including
payments on any outstanding notes, or that any alternative methods would be
successful or would permit us to meet our debt obligations.
OUR STOCK PRICE HAS BEEN, AND IS LIKELY TO CONTINUE TO BE, HIGHLY VOLATILE.
Our stock price has, since September 1, 2003, traded as high as $.60 and
as low as $.06. Our stock price could fluctuate significantly due to a number of
factors beyond our control, including:
o variations in our actual or anticipated operating results;
o sales of substantial amounts of our stock;
o announcements about us or about our competitors, including technological
innovation or new products or services;
o litigation and other developments related to our patents or other
proprietary rights or those of our competitors;
o conditions in the life sciences, pharmaceuticals or genomics industries;
and
o 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 recently. 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 object of securities class action
litigation. If we became the object of securities class action litigation, it
could result in substantial
5
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 NOVEL 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. We are a drug and diagnostic
discovery company, which incorporates ideas and methods from mathematics,
computer science and physics into the disciplines of biology, organic chemistry
and medicine. Our objective is to significantly increase the probability of
success of drug discovery and diagnostic development. Our approach and the
products and technologies derived from our approach are novel. 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. 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, WE OR
OUR CUSTOMERS 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.
OUR ACQUIRED SVM PORTFOLIO UTILIZES TECHNOLOGY COVERED BY AN EARLIER-ISSUED
PATENT, AND IF WE LOSE THE RIGHTS TO USE THAT PATENT, OUR ABILITY TO EXPLOIT
CERTAIN ASPECTS OF OUR SVM TECHNOLOGY WILL BE IMPAIRED.
Our acquired SVM Portfolio utilizes technology covered by the original
hyperplane patent (Pat. No. 5,649,068) invented by members of our Scientific
Advisory Board and owned by Lucent Technologies, Inc. - GRL Corp. ("Lucent"). We
have obtained an assignment of a pre-existing patent license from Lucent. If
Lucent were to terminate the license, it is possible that we would not be able
to use portions of the Support Vector Machine technology.
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 one company that provides the full suite of services that we do, we
compete with entities in the U.S. and elsewhere that provide products and
services for the analysis of genomic information and information relating to the
study of proteins (proteomic information) or that commercialize novel genes and
proteins. These include genomics, pharmaceutical and biotechnology companies,
academic and research institutions and
6
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 staffs, 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 OUR POTENTIAL GROWTH.
We anticipate that once operations commence, a period of significant
expansion will be required to address potential growth in our customer base and
market opportunities. This expansion will place a significant strain on our
management, operational and financial resources. To manage the expected growth
of our operations, 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 and experience a reduction in our growth rate
and damage to 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.
7
WE MAY NOT BE ABLE TO FIND BUSINESS PARTNERS TO DEVELOP AND COMMERCIALIZE
PRODUCT CANDIDATES DERIVING FROM OUR DISCOVERY ACTIVITIES.
Our strategy for the development and commercialization of diagnostic
markers 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 WITH THIRD
PARTIES SUBJECTS US TO A NUMBER OF RISKS.
We may not be able to enter into licensing or other collaboration
agreements on terms favorable to us. Collaborators may typically be afforded
significant discretion in electing whether to pursue any of the planned
activities. In most cases, our collaborators or licensees will have
responsibility for formulating and implementing key strategic or operational
plans. Decisions by our collaborators or licensees 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 or a licensee'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
Chief Executive Officer, Board of Directors and Scientific Advisory Board. While
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 SCIENTIST, 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.
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
businesses, technologies, services or products. Acquisitions may involve
significant cash expenditures, debt incurrence, additional operating losses and
expenses that
8
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 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 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.
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 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 predicted 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. The patent positions of
biotechnology 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.
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
9
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. 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.
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 for
intellectual property rights infringement, we may incur significant costs in
litigating, whether or not we prevail in such litigation. These costs would also
include diversion of management and technical personnel to defend ourselves
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. 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.
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.
As is typical in the genomics, biotechnology and software industries, we
will probably receive in the future notices from third parties alleging patent
infringement. We believe that we are not infringing the patent rights of any
third parties. No third party has filed a patent lawsuit against us. We may,
however, be involved in future lawsuits alleging patent infringement or other
intellectual property rights violations. In addition, litigation may be
necessary to:
o assert claims of infringement;
o enforce our patents as they are granted;
o protect our trade secrets or know-how; or
o determine the enforceability, scope and validity of the proprietary
rights of others.
We may be unsuccessful in defending or pursuing these lawsuits.
Regardless of the outcome, litigation can be very costly and can divert
management's efforts. An adverse determination may subject us to significant
liabilities or require us to seek licenses to other parties' patents or
proprietary rights. We may also be restricted or prevented from licensing or
selling our products and services. Further, we may not be able to obtain any
necessary licenses on acceptable terms, if at all.
10
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.
Our business also relies on a combination of trade secrets, copyrights
and trademarks, non-disclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights. While we
generally require employees, collaborators, consultants and other third parties
to enter into confidentiality agreements where appropriate, it is not always
possible to enforce these arrangements.
Monitoring the unauthorized use of our technology is difficult, and the
steps we have taken may not prevent unauthorized use of our technology. The
disclosure or misappropriation of our intellectual property for any of the above
reasons could harm our ability to protect our rights and our competitive
position.
WE MAY BECOME INVOLVED IN DISPUTES REGARDING OUR PATENTS AND OTHER INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD RESULT IN THE FORFEITURE OF THESE RIGHTS, EXPOSE
THE BUSINESS TO SIGNIFICANT LIABILITY AND DIVERT MANAGEMENT'S FOCUS.
In order to protect or enforce our patent rights, our business may need
to initiate patent litigation against third parties. In addition, we may be sued
by third parties alleging that we are infringing their intellectual property
rights. These lawsuits are expensive, take significant time and divert
management's focus from other business concerns. These lawsuits could result in
the invalidation or limitation of the scope of our patents, forfeiture of the
rights associated with these patents or an injunction preventing Health
Discovery from selling any allegedly infringing product. In addition, we may not
prevail or a court may find damages or award other remedies in favor of the
opposing party in any of these suits. 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.
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 an 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:
o be found to be toxic or ineffective;
o fail to receive necessary regulatory approvals;
o be difficult or impossible to manufacture on a large scale;
o be uneconomical to market;
o fail to be developed prior to the successful marketing of similar
products by competitors; or
o be impossible to market because they infringe on the proprietary rights
of third parties or compete with superior products marketed by third
parties.
11
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 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 AND LICENSEES MAY
BE SUBJECT TO GOVERNMENTAL REGULATION.
Any new therapy or diagnostic product that may be developed by our
collaborators or by our licensees 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
product. 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 or licensees of our
discovery activities to file regulatory approval applications and generally
direct the regulatory review process. We cannot be certain whether our
collaborators or licensees will be able to obtain marketing clearance for any
product that may be developed on a timely basis, if at all. If our collaborators
or licensees 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 our collaborators or licensees.
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, 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.
12
RISKS RELATED TO THIS OFFERING
THE SO-CALLED "PENNY STOCK RULE" COULD MAKE IT CUMBERSOME FOR BROKERS AND
DEALERS TO TRADE IN OUR COMMON STOCK, MAKING THE MARKET FOR OUR COMMON STOCK
LESS LIQUID WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker-dealer to:
o make a special suitability determination for purchasers of our shares;
o receive the purchaser's written consent to the transaction prior to the
purchase; and
o deliver to a prospective purchaser of our stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of
broker-dealers to trade and/or maintain a market in our common stock. Also,
prospective investors may not want to get involved with the additional
administrative requirements, which may have a material adverse effect on the
trading of our shares.
ANY PROJECTIONS AND FORECASTS INCLUDED IN THIS PROSPECTUS WERE PREPARED BASED ON
ASSUMPTIONS REGARDING FACTS AND FUTURE EVENTS WHICH MAY OR MAY NOT MATERIALIZE.
Many factors influencing the operation of our business are beyond
management's control. There can be no assurance that the actual operation of our
company's business will correspond with any projections and the forecasts
included in this prospectus. No representation or warranty of any kind is made
by us, management, our accountant, attorneys or any other person associated with
our company, that the projections made by us will correspond with future events.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS.
As of December 6, 2005, executive officers and directors collectively
controlled approximately 37.54% of our outstanding shares. As a result, these
stockholders, if they act together, would be able to exert a significant degree
of influence over matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. Accordingly,
this concentration of ownership may harm the market price of our shares by
delaying or preventing a change in control of us, even if a change is in the
best interests of our company. In addition, the interests of this concentration
of ownership may not always coincide with our interests or the interests of
other stockholders, and accordingly, they could cause us to enter into
transactions or agreements that we would not otherwise consider.
INVESTORS MUST RELY ON OUR MANAGEMENT.
Holders of the common stock will have very limited rights or powers to
participate in the management of Health Discovery. Accordingly, no potential
investor should purchase the common stock unless he or she is willing to entrust
all aspects of day-to-day management and operations to our management. Investors
will be relying on the expertise and experience of our management to identify
and administer the business. Past experience and performance by our Board of
Directors, Scientific Advisory Board and employees provides no assurance of
future results.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the selling
stockholders in this offering but will receive proceeds from the exercise of
warrants held by the selling stockholders. We expect to use any proceeds we
receive for working capital and for other general corporate purposes, including
research and product development.
13
PRICE RANGE OF OUR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
HDVY.OB. The range of bids for our common stock, as reported on Bloomberg.com
during each quarter of the last two fiscal years was as follows. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
HIGH BID LOW BID
-------- -------
First Quarter 2003 $ .07 $ .025
Second Quarter 2003 $ .045 $ .02
Third Quarter 2003 $ .15 $ .02
Fourth Quarter 2003 $ .60 $ .06
First Quarter 2004 $ .48 $ .15
Second Quarter 2004 $ .30 $ .11
Third Quarter 2004 $ .22 $ .145
Fourth Quarter 2004 $ .45 $ .17
First Quarter 2005 $ .40 $ .20
Second Quarter 2005 $ .41 $ .21
Third Quarter 2005 $ .25 $ .145
The closing price of our common stock on December 12, 2005 was $0.16
per share. At December 12, 2005, there were approximately 470 holders of record
of our common stock.
DIVIDEND POLICY
We have not paid any cash dividends since inception, and we do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to support the development and growth
or our business. Payment of future dividends, if any, will be at the discretion
of our board of directors and will depend upon our earnings, our financial
condition, and opportunities for growth and expansion.
SELLING STOCKHOLDERS
Our shares of common stock to which this prospectus relates are being
registered for resale by the selling stockholders. The following shows the name
and number of shares of our common stock owned by the selling stockholders who
may sell shares covered by this prospectus.
The selling stockholders may resell all, a portion or none of such
shares of common stock from time to time. The table below sets forth with
respect to each selling stockholder, based upon information available to us as
the date of this prospectus, the number of shares of common stock beneficially
owned, the number of shares of common stock registered by this prospectus and
the number and percent of outstanding common stock that will be owned after the
sale of the registered shares of common stock assuming the sale of all of the
registered shares of common stock under this prospectus. Because the selling
stockholders may offer all, some or none of their respective shares of common
stock, no definitive estimate as to the number of shares thereof that will be
held by the selling stockholders after such offering can be provided. Therefore,
we have prepared the table below on the assumption that the selling stockholders
will sell all shares covered by this prospectus. With the exception of Double U
Master Fund LP, Westrock Advisors, Isabelle Guyon, Ana Maria Melo, William
Quirk, Jr. and Ed Taylor, none of the selling stockholders are affiliates of
Health Discovery, have had a material relationship with Health Discovery during
the past three years or are or were affiliates with registered broker-dealers.
14
BENEFICIALLY OWNED NUMBER OF SHARES NUMBER OF SHARES
BEFORE OFFERING BEING OFFERED BENEFICIALLY OWNED
NAME (1) AFTER OFFERING (3)
----------------------------------------------------------
Richard B. Aronson 312,500 (2) 312,500 (2) 0
Frank Brenton 156,250 (2) 156,250 (2) 0
Alpha Capital 3,375,000 (2) 3,375,000 (2) 0
Uriel Cohen 312,500 (2) 312,500 (2) 0
Congregation Darkei Tshivo of Dinov 312,500 (2) 312,500 (2) 0
Andrew Coulton 1,500,000 (2) 1,500,000 (2) 0
Mark D'Andrea 312,500 (2) 312,500 (2) 0
Kenneth Daniel 312,500 (2) 312,500 (2) 0
Pauline Daniel 312,500 (2) 312,500 (2) 0
Glen Davis 625,000 (2) 625,000 (2) 0
John Docherty 312,500 (2) 312,500 (2) 0
Domaco Venture Capital 312,500 (2) 312,500 (2) 0
Double U Master Fund LP 625,000 (2) 625,000 (2) 0
James Field 156,250 (2) 156,250 (2) 0
Jeffrey Fleeman 156,250 (2) 156,250 (2) 0
Alan Friedman 125,000 (2) 125,000 (2) 0
Stephen Fryer 156,250 (2) 156,250 (2) 0
L. George Elias 156,250 (2) 156,250 (2) 0
William Goldstein 625,000 (2) 625,000 (2) 0
Jimmie T. Hadley 312,500 (2) 312,500 (2) 0
Hillcrest R.V. Park Resort Inc. 625,000 (2) 625,000 (2) 0
Progressive Insurance 312,500 (2) 312,500 (2) 0
Ellis International 2,700,000 (2) 2,700,000 (2) 0
Iroquois Capital, LP 2,650,000 (2) 2,650,000 (2) 0
Ming Jaw 312,500 (2) 312,500 (2) 0
Thomas Kendall 156,250 (2) 156,250 (2) 0
Kevin Kowbel 1,300,000 (2) 1,300,000 (2) 0
Michael Kramm 312,500 (2) 312,500 (2) 0
Frank Lamond 156,250 (2) 156,250 (2) 0
Ronald Lazar 312,500 (2) 312,500 (2) 0
Little Gem Life Science Fund, LLC 2,550,000 (2) 2,550,000 (2) 0
William Lobel 125,000 (2) 125,000 (2) 0
John Madden IV 312,500 (2) 312,500 (2) 0
Kevin Maloney 1,000,000 (2) 1,000,000 (2) 0
Maryann Cawthorne Davis Irrevocable Trust 312,500 (2) 312,500 (2) 0
McCullough Family Trust 437,500 (2) 437,500 (2) 0
Kristina Mellen 312,500 (2) 312,500 (2) 0
Sharon Mills 312,500 (2) 312,500 (2) 0
David Minkoff 312,500 (2) 312,500 (2) 0
Charles Newman 800,000 (2) 800,000 (2) 0
Allen Notowitz 156,250 (2) 156,250 (2) 0
15
BENEFICIALLY OWNED NUMBER OF SHARES NUMBER OF SHARES
BEFORE OFFERING BEING OFFERED BENEFICIALLY OWNED
NAME (1) AFTER OFFERING (3)
----------------------------------------------------------
Platinum Partners 2,025,000 (2) 2,025,000 (2) 0
Michael Pisani 500,000 (2) 500,000 (2) 0
Anthony Polak 312,500 (2) 312,500 (2) 0
Risner Millennium Trust 125,000 (2) 125,000 (2) 0
RL Capital Partners 625,000 (2) 625,000 (2) 0
Gary Roberts 375,000 (2) 375,000 (2) 0
Ronald Sheldon Trust 625,000 (2) 625,000 (2) 0
James Royal 937,500 (2) 937,500 (2) 0
Ronald & Juanita Royal 312,500 (2) 312,500 (2) 0
Barry Saxe 1,250,000 (2) 1,250,000 (2) 0
Ben-Zion Schneider 1,280,000 (2) 1,280,000 (2) 0
Seaside Partners, LP 1,875,000 (2) 1,875,000 (2) 0
Robert Smith 312,500 (2) 312,500 (2) 0
South Ferry LP 2,700,000 (2) 2,700,000 (2) 0
Lawrence Starr 312,500 (2) 312,500 (2) 0
Michael Unrein 156,250 (2) 156,250 (2) 0
John Wechsler 625,000 (2) 625,000 (2) 0
Jon White 625,000 (2) 625,000 (2) 0
James C. Yadgir 400,000 (2) 400,000 (2) 0
Isabelle Guyon 100,000 (4) 100,000 (4) 0
Westrock Advisors 325,782 (5) 325,782 (5) 0
Ana Maria Melo 15,626 (6) 15,626 (6) 0
Edward Taylor 953,903 (7) 953,903 (7) 0
Joe McKenzie 2,301,688 (8) 379,624 (8) 1,922,064
Roger S. Brown 125,000 (2) 125,000 (2) 0
James D. Bond 62,500 (2) 62,500 (2) 0
Ron Vogel 4,000,000 (2) 4,000,000 (2) 0
Harry Snow 312,500 (2) 312,500 (2) 0
Trevor Colby IRA 1,000,000 (2) 1,000,000 (2) 0
Trevor Colby 1,000,000 (2) 1,000,000 (2) 0
William Quirk Jr. 10,500,000 (2) 10,500,000 (2) 0
Landsberger Family Trust 3,375,000 (2) 3,375,000 (2) 0
Rosemary G. Nelson 750,000 (2) 750,000 (2) 0
------------------ ----------------- -------------------
TOTAL: 66,183,249 64,261,185 1,922,064
------------------------------------------
(1) The number of shares beneficially owned is determined in accordance with
Rule 13(d)-3 of the Securities Exchange Act of 1934, and the information
is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to
which each selling stockholder has sole or shared voting power or
investment power and also any shares that the selling stockholder has
the right to acquire within 60 days.
(2) Includes warrants to acquire half the number of shares listed at an
exercise price of $0.24 per share and expiring on December 31, 2008.
(3) Assumes that all shares covered by this prospectus will be resold by the
selling stockholders in this offering.
(4) Comprised of warrants to acquire 100,000 shares of common stock at an
exercise price of $0.01 per share.
(5) Comprised of warrants to acquire 325,782 shares of common stock at an
exercise price of $0.24 per share.
(6) Comprised of warrants to acquire 15,626 shares of common stock at an
exercise price of $0.24 per share.
(7) Comprised of warrants to acquire 953,903 shares of common stock at an
exercise price of $0.24 per share.
(8) Does not include warrants.
16
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. All costs, expenses and fees in connection with the registration
of the shares offered by this prospectus will be borne by us, other than
brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares which will be borne by the selling stockholders. We have agreed
to indemnify the selling stockholders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act. Sales of shares
may be effected by selling stockholders from time to time in one or more types
of transactions (which may include block transactions) in the over-the-counter
market, any exchange or quotation system, in negotiated transactions, through
put or call options transactions relating to the shares, through short sales of
shares, or a combination of any such methods of sale, and any other method
permitted pursuant to applicable law, at market prices prevailing at the time of
sale, or at negotiated prices. Such transactions may or may not involve brokers
or dealers.
The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of the shares or of securities convertible into or exchangeable for the
shares in the course of hedging positions they assume with selling stockholders.
The selling stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as amended or supplemented to reflect such
transaction). The selling stockholders may pledge and/or loan these shares to
broker-dealers who may borrow the shares against their hedging short position
and in turn sell these shares under the prospectus to cover such short position.
The selling stockholders may make these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer is not expected to be in excess of customary commissions).
The selling stockholders and any broker-dealers that act in connection
with the sale of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.
Because selling stockholders may be deemed "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders may be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
Selling stockholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act
provided they meet the criteria and conform to the requirements of Rule 144.
BUSINESS
OUR HISTORY
We were organized under the name Direct Wireless Communications, Inc.,
in April 2001 by Direct Wireless Corporation, which licensed to us its
technology for a wireless telephone. In October 2001, Direct Wireless
Corporation, then our sole stockholder, pursuant to an effective registration
statement under the Securities Act of 1933, distributed its entire holdings of
our common stock as a stock dividend to its stockholders. As a result of the
dividend, Direct Wireless Corporation ceased to own any of our equity
securities. The negative events that occurred over the next several years in the
communications industry made it difficult for us to fund the advancement of our
communication platform. As a result, we made the decision to strategically
change the overall direction of our intended business activities.
On August 26, 2003, we acquired all of the assets of The Barnhill Group,
LLC, which was owned by Stephen D. Barnhill, M.D. Dr. Barnhill is a physician,
trained in laboratory medicine and clinical pathology. He developed artificial
intelligence and pattern recognition computational techniques used in medicine,
genomics, proteomics,
17
diagnostics and drug discovery. Following the acquisition, Dr. Barnhill became
our Chief Executive Officer and Chairman of our Board of Directors. Also,
immediately following our acquisition of The Barnhill Group and the change in
strategic direction of the company, our licensing rights to the
telecommunications technology previously granted by Direct Wireless Corporation
were terminated and all payments due to Direct Wireless Corporation were
terminated.
Subsequently, we amended our charter to change our name to Health
Discovery Corporation. Direct Wireless Communications (DWCM) officially became
Health Discovery Corporation on November 6, 2003, at which time the new trading
symbol (HDVY) became effective.
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC,
a company with patented Fractal Genomics Modeling software, through the issuance
of 3,825,000 common shares of the Company. In addition to the common stock
shares issued for the acquisition of Fractal Genomics, LLC's assets, the Company
agreed to execute a note for $500,000 payable in $62,500 quarterly installments
to the seller beginning on January 1, 2004 through October 1, 2005. Fractal
Genomics utilized its technology to find, link and model patterns of similarity
hidden in large amounts of information, such as the clinical databases used for
diagnostic and drug discovery. Fractal Genomics has applied its technology to
protein and pathway discovery in leukemia and lung development, which could lead
to the identification of novel proteins that could be used to develop diagnostic
markers and drug targets. Our acquisition of Fractal Genomics was completed
December 30, 2003.
On July 30, 2004, we began purchasing rights to a portfolio of 71
patents and pending patent applications, including patents on the use of Support
Vector Machines, or SVMs, and other machine learning tools useful for diagnostic
and drug discovery (the "SVM Portfolio"). On May 6, 2005 the Company acquired
the remaining interest in the SVM Portfolio from a group of unrelated third
parties.
Effective September 26, 2004, we were assigned a patent license
agreement with Lucent Technologies GRL Corporation ("Lucent"). The patent
license agreement was associated with the patents acquired July 30, 2004. We
agreed to pay minimum royalty fees to Lucent, which increase as a percentage of
revenue based on each licensed product that is sold, leased, or put into use by
the Company. The license granted will continue for the entire unexpired term of
Lucent's patents.
The SVM is a data driven mathematical program that uses "machine
learning" to find otherwise hidden relationships in data and has been
successfully used for colon cancer gene selection, breast cancer diagnosis,
leukemia classification, genomic analysis proteomic research and drug discovery.
The patents for the SVM also cover applications in a wide variety of research
endeavors unrelated to drug discovery. One of the issued patents includes a
description of a set of colon cancer genes and prostate cancer genes which could
be used for diagnostic testing and drug target identification. One of the genes
represents a potential vaccine for colon cancer.
The acquisition of rights to the patent portfolio brought together Dr.
Stephen Barnhill, our Chairman and CEO, and three members of our Scientific
Advisory Board who are pioneers of SVM: Prof. Dr. Vladimir Vapnik, and Drs.
Isabelle Guyon and Berhard Schoelkopf. Prof. Dr. Vapnik was recently awarded the
Humboldt Prize for developing Statistical Learning Theory, the cornerstone
behind the original SVM. Dr. Guyon was the co-inventor with Prof. Dr. Vapnik on
the original SVM patent, which is currently owned by Lucent Technologies, Inc. -
GRL Corp (and licensed to Health Discovery). Dr. Schoelkopf, who is the director
of the Max Plank Institute for Biological Cybernetics in Tubingen, Germany, won
the annual dissertation prize of the German Association for Computer Science for
his work on Support Vector learning.
OUR MARKET
We are positioning ourselves to provide pharmaceutical and diagnostic
companies with all aspects of "First Phase Biomarker Discovery" from expert
assessment of the clinical dilemma through proper selection and procurement of
high quality specimens. In addition, we aim to provide proprietary analytical
evaluation methods and state-of-the-art computational analysis to produce
relevant and accurate clinical data, producing accurate biomarker and pathway
discoveries, resulting in patent protection of our biomarker discoveries for
future development and commercialization.
Developing and evaluating new drugs and medical therapies in less time
and at lower cost is of enormous potential benefit for modern healthcare.
Genuinely new products must pass a series of both in-vitro and in-vivo testing
in order to demonstrate their safety and effectiveness for a specific clinical
application. Historically, the endpoints of these trials were "traditional" ones
tied to the actual disease being evaluated, such as a decrease in mortality or
18
an objective/semi-objective decrease in clinical symptoms associated with the
condition. In the last 10 to 15 years, there has been a move by the U.S. Food
and Drug Administration (FDA) to incorporate other endpoints, including genes
that are biomarkers for the existence or absence of a particular disease, which
are nontraditional findings that are related to the presence or absence of
disease. Examples of successful application of biomarker data to therapeutic
evaluation include the drugs Betaseron for use against multiple sclerosis and
Herceptin in the treatment of breast cancer.
The FDA began an initiative in 1987 designed to expedite approval for
drugs. Initially utilized for drugs that would combat the devastating AIDS
epidemic, these initiatives measured alternative factors such as biomarkers to
essentially evaluate the effectiveness of new therapeutics for diseases such as
AIDS.
Our goal is to leverage the FDA's expedited approval process by
producing more relevant and predictable biomarkers for drug discovery. By
speeding up approval, new and better medicines and diagnostic markers can be
developed for patients worldwide.
Biomarkers have long played a significant role in drug discovery and
development, but recent advances have signaled the potential for significant
deepening of their role in terms of both broader application within particular
stages of the process and application across a broader spectrum of functions.
Even before the recent resurgence of interest in the subject, single-analyte
biomarkers had already made significant impacts on clinical studies as
surrogates for clinical endpoints. Recent advances in discovery of
multi-component biomarkers and single-molecule markers derived from them show
promise of providing greatly improved clinical sensitivity and specificity over
their pre-genomic forbears.
One major difficulty with biomarker discovery relates to the
accessibility of patient samples. Whereas tissues from animal models are usually
readily available, human tumor specimens and human body fluid specimens are
often unavailable or inaccessible for most common diseases of major commercial
interest.
Another major difficulty is developing new mathematical tools capable of
handling the analysis of the terabytes of information being generated by the
genomic and proteomic analysis of clinical specimens that must be sifted through
to identify the key biomarkers that will provide important clues leading to the
identification of new diagnostic and drug targets, not only for cancer but for
other medically and commercially important diseases as well.
An additional difficulty in commercialization of newly discovered
biomarkers is establishing relationships at large US medical and cancer centers
to validate the results in a clinical setting. Validation studies are required
to ensure that the markers are valid for a large population. The validation
process is characterized by proving the efficacy of the newly discovered
biomarkers in larger sample sets. Access to these prestigious institutions for
validation studies can often be difficult to arrange.
Using our established relationships with top US medical and cancer
centers and our computational technologies, our goal is to overcome the
difficulties encountered with biomarker discovery and become the first company,
to our knowledge, to perform the total process of "first-phase" discovery by
identifying a particular clinical problem to be solved and performing the entire
process leading to the identification of the genes or proteins (called
biomarkers), and the relationships among them (called pathways) that are
relevant to the solution of the medical problem as described below. This process
will consist of an assessment of the clinical problem, the determination of the
clinical trial set-up (the number of patients and what medical conditions they
represent), the proper selection and procurement of high quality specimens for
analysis, an analytical evaluation of the specimens through laboratory tests to
produce the clinical data, and the mathematical evaluation of the data using our
proprietary pattern recognition techniques such as fractal geometric modeling to
produce an accurate determination of the relevant genes and proteins and the
manners in which they interact. Once we discover these new biomarkers and
pathways, we intend to immediately file patent applications to protect the
discoveries such as with the patents filed for our Prostate cancer and Leukemia
discovery.
These patent, protected biomarkers and pathways represent the products
of our company. After our discovery is patent protected, the process of selling
or licensing the newly discovered biomarkers and pathways will begin. The
information will then be sold or licensed to diagnostic companies for
development into new state-of-the-art diagnostic assays and the same information
will be sold or licensed to pharmaceutical companies for further development
into the next generation of therapeutic targets or to solve drug safety issues.
Intellectual property is a key asset in diagnostic and drug discovery.
Our products will be based on intellectual property, which includes the
discovered biomarkers and pathways produced through our own internal research
programs, as well as joint discovery efforts with academic institutions,
diagnostic and pharmaceutical companies worldwide.
19
Our discovery process has already been shown to lead to the
identification of biomarkers and pathways in leukemia and lung development and
we hope will be instrumental in diagnosing and treating patients with
devastating diseases like cancer, heart disease, obesity and AIDS.
OUR TECHNOLOGIES
Our goal is to develop a product line of newly discovered biomarkers and
pathways, which will include human genes and genetic variations, as well as
gene, protein, and metabolite expression differences. In drug discovery,
biomarkers can help elicit disease targets and pathways and validate mechanisms
of drug action. They may also be pharmacodynamic indicators of drug activity,
response and toxicity for use in clinical development.
We will provide pharmaceutical and diagnostic companies with all aspects
of "first phase" diagnostic and drug discovery from expert assessment of the
clinical dilemma through proper selection and procurement of high quality
specimens. We will then apply our proprietary analytical evaluation methods and
state-of-the-art computational analysis to produce relevant and accurate
clinical data, producing accurate biomarker and pathway discoveries, resulting
in patent protection of our biomarker discoveries for future development.
SUPPORT VECTOR MACHINES (SVMS)
Since their introduction in 1995, 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 Vladimir Vapnik, SVMs quickly gained
attention from the pattern recognition community due to a number of theoretical
and computational merits.
The capability of SVMs to discover hidden relationships in a dataset and
to exploit them in order to make informed extrapolations about future or unseen
data holds a tremendous potential for modern applications of computer
technology, particularly as large amounts of data are generated faster than
current analysis techniques can process them. The field of machine learning has
traditionally been a branch of artificial intelligence, dealing with the problem
of extracting relevant knowledge from data. Statistics has played a similar role
within mathematics. Not surprisingly, both fields have encountered the same
difficulties when analyzing complex datasets: nonlinear relations are hard to
learn, high dimensional spaces carry a high risk of detecting spurious relations
(relations that are just the effect of chance), and the computational cost is
often prohibitive. Previous generation computational technologies such as neural
networks, decision trees and other systems all try to deal with such limitations
by introducing several approximations and therefore usually produce sub-optimal
solutions.
Statistical Learning Theory, the backbone of SVMs, provides a new
framework for modeling learning algorithms, merges the fields of machine
learning and statistics, and inspires algorithms that overcome all of the above
difficulties. A new generation of learning algorithms - or equivalently of
statistical methods - has recently been developed, based on this theory. Such
methods prove remarkably resistant to the problems imposed by noisy data and
high dimensionality. They are computationally efficient. The optimal solution
can always be found. These methods have an inherent modular design that
simplifies their implementation and analysis and allows the insertion of domain
knowledge. More importantly, they come with theoretical guarantees about their
generalization ability.
CREATION OF THE SUPPORT VECTOR MACHINE
In the late 1990s, Vladimir Vapnik, together with Bernhard Boser and
Isabelle Guyon discovered a new algorithm for implementing SVM inductive
inference: the support vector machine. The key idea was to map input vectors
into a high dimensional space and to construct in that space hyperplanes with a
large margin (and hence with low capacity).
The basic idea for making the theory of statistical learning began in
the 1960's with the prominent work of Professors Vapnik and Chevronenkis with
the discovery of the VC dimension. The technology for mapping input vectors into
a high dimensional space was realized by the so-called kernel trick, which in
many cases avoids the need to manipulate data in the high dimensional space. By
1995, these ideas had been extended to all of the main function estimation
problems: pattern classification, regression estimation, density estimation, and
finding solutions to equations. Statistical Learning Theory and SVMs are now
widely accepted and described in international research journals and frequently
presented at major scientific meetings around the world.
20
There are several reasons for this popularity:
o Most importantly, in ALL benchmark problems, SVM solutions were among
the winners.
o These methods do not rely on heuristics, but rather on solid
mathematical foundations. Therefore, one can use mathematical tools to
understand the behavior of existing methods, to improve them, and to
design new methods.
o SVM methods are very well suited to the analysis of high dimensional
(even infinite dimensional) spaces. It appears that high dimensional
analysis will be crucial in the challenging problems that are emerging
in areas such as bioinformatics, image analysis, and information
retrieval.
SIGNIFICANT ADVANTAGES OF SUPPORT VECTOR MACHINES
Bioinformatics is facing new challenges as the amount of data and its
availability increase exponentially. Data is valuable only if it can be
understood and can help in making predictions, in the form, for instance, of
early detection diagnostics and minimizing new drug failure in late stage
trials. Computer algorithms have a critical role to play in annotating data,
organizing it, drawing attention to entries of particular interest, and
proposing tentative data explanations. It has always been tempting to seek a
universal tool that, much like the brain, has very broad data processing
capabilities.
Clearly, there is a need not only for powerful data analysis tools, but
also for tools that can be used effortlessly by a wider range of people who do
not necessarily have a strong background in statistics or computer science.
There is also a need for tools that can be used in a fast, flexible and evolving
fashion, such that new problems can be treated with previously developed tools.
The race to a real breakthrough is measured not only in accuracy, but also in
development time, cost and ease of next generation improvements.
We believe that this is why SVMs represent a significant solution to the
challenges of interpreting diagnostic and drug development data. They hold the
promise that other techniques, including artificial neural networks, have failed
to provide: optimal and trustworthy performance with easy implementation.
PREDICTION ACCURACY: Given examples of inputs and outputs, a SVM takes a
previously unseen input (e.g. measurements of a new patient) and predicts the
output (e.g. disease state). Statistical learning theory provides estimates of
the predictive accuracy, and SVMs work by directly optimizing these estimates.
As well as having these performance guarantees, the predictions of SVMs are
typically more accurate, in some cases very significantly, than those of other
methods.
HIGH-DIMENSIONAL DATA: SVMs can cope with very large numbers of input
variables. In processing the output of a mass spectrometer, for example, SVMs
can use the full spectrum directly, without having to first manually extract
relevant peaks. Many other techniques (such as parametric statistics and neural
networks) cannot cope with so many input variables.
DATA UNDERSTANDING: SVMs have the unique property that they
automatically extract SUPPORT VECTORS, which are the borderline cases.
Exhibiting such borderline cases allows us to identify outliers, to perform data
cleaning, to find flaws in experimental design, and to detect confounding
factors. In addition, the MARGINS of training examples (how far they are from
the decision boundary) provide useful information about the relevance of input
variables and allow the selection of the most predictive variable.
COMPUTATIONAL EFFICIENCY: Unlike many other machine learning and
statistical methods (such as neural networks, decision trees, and Bayesian
methods), learning with SVMs involves a convex optimization, which is
computationally efficient, and leads to a unique optimum solution. The
predictions made by SVM algorithms are also easy to compute because they involve
only the comparison of the novel pattern with a small subset of the training
patterns (the support vectors).
DECISION UNDERSTANDING: Unlike other nonlinear multivariate techniques
such as neural networks, the predictions made by SVMs are often easily
understood since they involve comparisons with the support vectors.
21
MODULARITY: Separate components of SVMs can be designed separately and
can easily be combined with other techniques. For instance, the kernel in a SVM
can be designed to incorporate expert knowledge about a problem domain, which
often significantly improves performance.
ROBUSTNESS: SVMs are often successful - even with sparse data (few
examples), unbalanced data (more examples of one category), redundant data (many
similar examples), and heterogeneous data (examples coming from different
sources).
FRACTAL GENOMICS MODELING
Fractal Genomics Modeling (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.
Fractal Genomics uses a new approach toward modeling network behavior to rapidly
generate diagrams and software simulations that facilitate prediction and
analysis of whatever process is your particular object of study. Two important
concepts behind FGM technology are the notions of scale-free networks and
self-similarity.
SELF-SIMILAR (FRACTAL) STRUCTURE
If it were possible to look at a section of a network in detail, it
would be possible to find an even smaller section that resembles the entire
network. This structural property, where the parts can resemble the whole, is
referred to as self-similarity and structures of this sort are sometimes called
fractals. Self-similar structures have been found to exist in many complex
networks.
SCALE-FREE NETWORKS
The structural property of self-similarity does not mean that if you
look at the hubs or nodes in the networks that they will all look basically the
same. Some nodes have a single branch leading to another node, where other nodes
have branches into a large number of other nodes. Using the example of an
airline routing network, many more links (branches) will connect to a large city
which is a major hub then to a minor, small town airport. So, although there may
be structural similarities between the parts and the whole, the individual nodes
can be quite different. This has been found to be a common trait in many complex
networks. Because of this feature, it is very difficult to measure or assign a
"scale" to what a typical node looks like in these networks.
For the most part, this is not the case in the mathematical world of
complex networks. There may be a few nodes with a thousand links, several with a
hundred links, and many with only one. In comparison, if human height were
distributed in a similar way, it would not be uncommon to see people over 100
feet tall in everyday life and people over a mile high would exist. Because it
is difficult to assign a single scale to look at nodes with links distributed in
this way, these kinds of networks they are called scale-free.
The acquisition of Fractal Genomics brought us a fully functional patent
protected computational tool, which is now known as the Health Discovery Fractal
Genomics Modeling (FGM) technology. This technology is designed to study complex
biological networks such as genomic and proteomic pathways in disease. A complex
network can be made up of genes or proteins inside a living organism. FGM uses
this new approach toward modeling network behavior to rapidly generate diagrams
and software simulations that facilitate prediction and analysis of genomic and
proteomic data to facilitate diagnostic and drug discovery.
The FGM modeling process starts out by creating a special mathematical
surface (the FGM surface) where every point on the surface can be used to
generate a network model with varying degrees of scale-free and fractal
properties. Using user-supplied clinical data, models which best match the
behavior of each node are selected and represented by a point on the FGM
surface. These point-models are then linked, compared, and combined to generate
diagrams, which reflect the behavior of genes or proteins in the entire network.
The end result of the FGM modeling process is biomarker and pathway
discovery diagrams that represent nodes in the network and directions of
causality or "flow" through the network such as which genes or proteins are
"turning-on" or "turning -off" other precursor and successor genes or proteins
in the biological system. FGM derived diagrams expedite forecasting, analysis,
and study of complex system behavior by clearly displaying all hubs, links, and
flow in the network. With this knowledge, diagnostic companies can use the newly
identified biomarkers to create state-of-the-
22
art tests to identify key genes and proteins involved in certain diseases and
pharmaceutical companies can explore new therapeutic drug targets designed to
interrupt ("turn-off") genes or proteins with undesirable effects or promote
("turn-on") genes or proteins with desirable effects.
In addition, as a result of the Fractal Genomics acquisition, we are
preparing to begin validation studies, at MD Anderson Cancer Center, of the
recently discovered and patent protected set of leukemia genes, discovered using
the newly acquired FGM technique, which was shown to separate ALL-T-cell
leukemia from ALL-B-cell leukemia with 100% accuracy. This gene set, now our
intellectual property, was originally presented to the medical and scientific
world by Dr. Herbert Fritsche, Chairman of our Scientific Advisory Board, a
world-renowned, expert in cancer markers and Professor at MD Anderson Cancer
Center, at the 31st Meeting of the International Society for Oncodevelopmental
Biology and Medicine (ISOBM) in Edinburgh, United Kingdom.
To date, our FGM technology has been successfully used to analyze
databases from MD Anderson Cancer Center, St. Jude Children's Hospital, Stanford
University, the University of Miami and the Alvin J. Siteman Cancer Center at
Washington University.
OUR CORPORATE STRATEGY
Our goal is to develop a product line of newly discovered biomarkers and
pathways, which will include human genes and genetic variations, as well as
gene, protein, and metabolite expression differences. In drug discovery,
biomarkers can help elicit disease targets and pathways and validate mechanisms
of drug action. They may also be pharmacodynamic indicators of drug activity,
response and toxicity for use in clinical development.
We intend to provide pharmaceutical and diagnostic companies with all
aspects of "first phase" diagnostic and drug discovery from expert assessment of
the clinical dilemma through proper selection and procurement of high quality
specimens. We will then apply our proprietary analytical evaluation methods and
state-of-the-art computational analysis to produce relevant and accurate
clinical data, producing accurate biomarker and pathway discoveries, resulting
in patent protection of our biomarker discoveries for future development.
"First Phase Biomarker Discovery" is based on the belief that in order
to discover the most clinically relevant biomarkers, the computational component
must begin at the inception of the clinical dilemma to be solved. This pathway
includes several critical levels of decision-making - all of which are part of
our business strategy.
FIRST LEVEL OF DISCOVERY - ASSESS THE CLINICAL DILEMMA
Is the desired biomarker or pathway to be identified related to early
diagnosis, metastasis, treatment response or some other aspect of a given
disease process? Based on the clinical question to be answered along with the
incidence, prevalence and nature of the particular disease, we will establish a
clinical study with the appropriate number of necessary specimens. We expect
that these studies will provide statistically significant results once the
biomarker and pathway discovery is completed.
SECOND LEVEL OF DISCOVERY - PROPERLY IDENTIFY AND PROCURE THE MOST RELEVANT AND
PROFESSIONALLY COLLECTED SPECIMENS
Based on the clinical dilemma to be solved, does the appropriate
clinical trial require blood, serum, aspirate fluid, tissue or some other
clinically relevant specimen? Once the correct decision is made, we will
contractually procure the specimens necessary for the discovery from highly
reputable institutions, where we believe proper collection and informed consent
are completed under the strictest scientific protocol.
THIRD LEVEL OF DISCOVERY - ANALYZE THE SPECIMENS
The clinical specimens must then be analyzed and converted into relevant
clinical data. We will determine which analytical method is appropriate for the
most successful biomarker and pathway discovery. The techniques we currently
expect to use include mass spectroscopy, MALDI, SELDI, DNA methylation, gene
chip analysis, 2-D Gel Electrophoresis, as well as other proprietary techniques
developed by companies and academic institutions with which we have
relationships. We will constantly monitor improvements in these techniques
worldwide.
23
FOURTH LEVEL OF DISCOVERY - ANALYZE THE DATA
The data generated from the analytical component must then be
computationally analyzed for the discovery of new biomarkers, patterns among
those biomarkers and causality pathways. We will decide which of the current
leading computational algorithms, such as our FGM and SVM techniques, are best
suited to solve the particular clinical dilemma in question. The data is then
computationally analyzed, and the new biomarkers and pathways are discovered and
patent protected.
FIFTH LEVEL OF DISCOVERY - PROTECT THE DISCOVERY
When a biomarker is discovered, we will immediately file a provisional
patent to protect the discovery for future licensing. Some of these discoveries
will be licensed to diagnostic companies for use in the diagnosis of diseases or
for measuring the state or status of a disease. Other discoveries will be
licensed to pharmaceutical companies to be used for discovering or evaluating
new drug targets.
SIXTH LEVEL OF DISCOVERY - EVALUATE THE CLINICAL AND UTILITY OF DISCOVERED
BIOMARKERS
Biomarkers uncovered through the first five stages of discovery will be
subsequently validated independently in larger, clinically relevant populations.
Clinical validity of a biomarker is confirmed by its presence in the clinical
condition in question and its ability to differentiate one disease state from
another, or a diseased state from a healthy state. We believe that markers
validated by our processes will provide: vastly improved diagnostic
capabilities; may identify potential therapeutic targets for pharmaceutical
intervention (e.g. membrane signaling proteins and inhibitors); and markers
suitable for monitoring disease progression following therapeutic intervention.
Application of clinically validated biomarkers in such a manner will result in
improved individual patient care and the advancement of the field of
personalized medicine. This unique approach to biomarker discovery and its
additional validation in relevant clinical samples advances the commercial
potential of biomarkers we uncover to diagnostic and therapeutic partners.
Integration of the six levels of biomarker discovery results in improved
efficiencies in translation of this information into commercial and medically
valuable products.
OUR STRATEGIC AGREEMENTS
In keeping with our corporate goal of building strong partnerships for
biomarker discovery, we have signed several biomarker discovery agreements with
strong academic centers of excellence in the United States, including MD
Anderson Cancer Center and Stanford University. All of these agreements include
either joint ownership in any biomarker or pathway discovered or rights to an
exclusive worldwide license to our discovery. Once we secure a contract with an
academic institution for biomarker and pathway discovery with commercialization
rights and/or generate preliminary results, we begin negotiating these
commercialization rights to our discoveries with diagnostic and pharmaceutical
companies worldwide.
In October 2003 we signed our first Agreement with M.D. Anderson Cancer
Center. With this agreement we will analyze a gene expression database to
identify new biomarkers and pathways involved in leukemia. Under the terms of
the agreement, M.D. Anderson, has granted us a first option to obtain an
exclusive worldwide royalty-bearing commercial license to commercialize any
discovered biomarkers or pathways we identify.
In January 2004 we entered into our second Biomarker and Pathway
Discovery Agreement with The University of Texas, M.D. Anderson Cancer Center in
Houston Texas. Under the terms of the agreement, The University of Texas, M.D.
Anderson Cancer Center, has again granted us a first option to obtain an
exclusive worldwide royalty-bearing commercial license to commercialize any
discovered prostate cancer biomarkers or pathways identified by us utilizing our
proprietary FGM computational techniques. This second collaboration with MD
Anderson Cancer Center will give us access to a new systems biology approach for
data analysis for new biomarker and pathway discovery in prostate cancer. We
intend to use the findings of this study to develop new diagnostic approaches
for prostate cancer and improve the clinical management of these patients. U.S.
CANCER STATISTICS: 2000 INCIDENCE recently released by the Department of Health
and Human Services shows that prostate cancer is the leading cancer overall in
men in the United States and according to the National Institutes of Health, in
1997, the estimated number of new cases of prostate cancer in the United States
is 209,900, and the estimated number of deaths from the disease is 41,800. The
current market for prostate cancer testing with PSA, the biomarker currently
used to diagnose prostate cancer, is estimated to be approximately $350 million
annually around the world.
24
In March 2004 we entered into an agreement with Stanford University to
use our proprietary and patent protected FGM computational techniques to
identify new patterns of biomarkers in lymphatic insufficiency and its response
to therapeutic lymphangiogenesis. According to the agreement, ownership of
Research Program Inventions conceived, discovered or reduced to practice under
the Research Program will be determined based on inventorship. As such, any
invention discovered using our analytical tools on this Stanford database will
be jointly owned by Stanford and us. According to the World Health Organization,
lymphedema affects 250 million people worldwide. Others estimate that one in
every twenty-five will suffer from some form of lymphedema during their
lifetime. The M.D. Anderson Cancer Center in Houston, Texas reports that
approximately 15% of all women with breast cancer will develop lymphedema over
the course of their lifetime and that lymphedema resulting from prostate cancer
is on the rise.
In March 2004, we signed an agreement with The University of Miami to
use our patent protected computational techniques to identify new patters of
biomarkers in AIDS Related Dementia. It is hoped that this newly discovered
information will allow physicians to better understand the pathogenesis of AIDS
Related dementia and will assist in the diagnosis and treatment of this
devastating disease. On November 16, 2005, we announced that The University of
Miami will acquire full ownership of the recent AIDS Biomarker Signature
discovered by our scientists using the company's patent-protected FGM
Technology. The University of Miami agreed to an upfront cash payment and
continuing royalty payments for any future commercial sales related to this new
discovery.
In September of 2004, we entered into an agreement with Dr. Thomas
Stamey of Stanford University Medical Center to analyze what is thought by Dr.
Stamey to be the most comprehensive prostate cancer gene chip database in the
world. This database consists of Affymetrix gene chips containing 25,000
prostate related genes. This data is from 92 patients representing 9 classes of
prostate disease - from BPH through all grades of prostate cancer. Using this
database, Health Discovery hopes to identify new biomarkers for prostate cancer.
We will also use our patent protected computational techniques such as Support
Vector Machine and Fractal Genomics Modeling to analyze this data to determine
the most relevant proteins to be used for diagnostics and drug targets. All
discoveries will be jointly owned by Health Discovery and Dr. Stamey with Health
Discovery having a worldwide exclusive license for commercialization.
On November 22, 2005, we entered into a licensing agreement with
Clarient, Inc. a technology and services resource for pathologists, oncologists
and the pharmaceutical industry, in which Clarient will utilize our SVM
intellectual property. Under the terms of the Agreement, Clarient will pay us an
upfront licensing fee, a monthly expert development fee, and future royalties
for any Clarient product developed using the licensed SVM technology. We hope
this will allow Clarient to develop applications to detect cancer cells in
peripheral blood and bone marrow.
EMPLOYEES
On December 12, 2005, we had 5 full time employees. We do not expect any
significant change in the number of employees over the next 12 months. We
consider our employee relations to be good, and we have no collective bargaining
agreements with any employees.
WEBSITE ADDRESS
Our corporate website address is . 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 of Form 10-KSB, quarterly reports on Form
10-QSB 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 "First Phase Biomarker Discovery." 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. Companies
licensing our discoveries or technologies will be responsible for all costs
involved in such approvals. If we are not successful in licensing these
discoveries and 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 governmental regulations that will affect the companies
current operations or products.
25
INTELLECTUAL PROPERTY
In connection with the SVM Acquisition, we obtained rights to the
intellectual property within the "SVM portfolio" that currently consists of
sixteen patents which were or have since issued as well as 36 other patent
applications that are pending in the US and elsewhere in the world. The issued
patents to date are:
U.S. Patent No. 6,128,608: Enhancing Knowledge Discovery Using Multiple Support
Vector Machines.
U.S. Patent No. 6,157,921: Enhancing Knowledge Discovery Using Support Vector
Machines in a Distributed Network Environment.
U.S. Patent No. 6,427,141: Enhancing Knowledge Discovery Using Multiple Support
Vector Machines.
U.S. Patent No. 6,658,395: Enhancing Knowledge Discovery from Multiple Data Sets
Using Multiple Support Vector Machines.
U.S. Patent No. 6,714,925: System for Identifying Patterns in Biological Data
Using a Distributed Network.
U.S. Patent No. 6,760,715: Enhancing Biological Knowledge Discovery Using
Multiple Support Vector Machines.
U.S. Patent No. 6,789,069: Method of Identifying Patterns in Biological Systems
and Method of Uses.
U.S. Patent No. 6,882,990: Method of Identifying Biological Patterns Using
Multiple Data Sets.
U.S. Patent No. 6,920,451: Spectral Kernels for Learning Machines
Australian Patent No. AU 764897: Pre-processing and Post-processing for
Enhancing Knowledge Discovery Using Support Vector Machines.
South African Patent No. ZA 00/7122: Pre-processing and Post-processing for
Enhancing Knowledge Discovery Using Support Vector Machines.
Australian Patent No. AU 780050: Enhancing Knowledge Discovery from Multiple
Data Sets Using Multiple Support Vector Machines.
Chinese Patent No. ZL00808062.3: Enhancing Knowledge Discovery from Multiple
Data Sets Using Multiple Support Vector Machines.
European Patent No. 1192595: Enhancing Knowledge Discovery from Multiple Data
Sets Using Multiple Support Vector Machines.
Norwegian Patent No. 319,838: Enhancing Knowledge Discovery from Multiple Data
Sets Using Multiple Support Vector Machines.
Australian Patent No. AU 779635: Method of Identifying Patterns in Biological
Systems and Method of Uses.
In conjunction with the Fractal Genomics acquisition, we obtained the
rights to the intellectual property currently covered by the following patent
and pending patent applications.
U.S. Patent No. 6,920,451: Method for the Manipulation, Storage, Modeling,
Visualization and Quantification of Datasets.
U.S. Application No. 10/887,624: Method for Identifying Biomarkers Using Fractal
Genomics Modeling.
U.S. Application No.: 10/920,035: Method for Identifying Biomarkers Using
Fractal Genomics Modeling.
U.S. Application No.: 10/932,920: Method for Studying Cellular Chronomics and
Causal Relationships of Genes Using Fractal Genomics Modeling.
26
U.S. Application No.: 10/959,844: Method for the Manipulation, Storage,
Modeling, Visualization and Quantification of Datasets.
WIPO Application No. PCT/US2004/022157: Method for Identifying Biomarkers Using
Fractal Genomics Modeling.
WIPO Application No.: PCT/US2004/028576: Method for Studying Cellular Chronomics
and Causal Relationships of Genes Using Fractal Genomics Modeling.
European Application No.: 01942746.7: Method for the Manipulation, Storage,
Modeling, Visualization and Quantification of Datasets.
COMPETITION
Health Discovery Corporation's main service/product is "First-Phase
Biomarker Discovery." While there are numerous companies that perform individual
steps in this process, we know of no other company that performs all steps in
"First-Phase Biomarker Discovery." Competing companies in the biomarker
discovery arena have made numerous promising discoveries but have failed to
bring fully validated biomarkers to market. We feel that by performing and
controlling all steps of this process, we can eliminate the problems these
companies have had in validating their findings, and thus, produce fully
validated, marketable biomarkers.
Our SVM technology and FGM technology give us a distinct advantage over
competing technologies. Neither classical statistical analysis nor neural
networks (the two competing technologies) can handle the large amounts of inputs
necessary to produce fully validated biomarkers.
RESEARCH AND DEVELOPMENT
Our past Research and Development costs have been minimal due to the
unique relationships we have maintained with the members of our scientific team
and their institutions. Our total R&D costs have consisted solely of the
consultant fees paid to Dr. Stamey, Dr. Vapnik, Dr. Hong, Dr. Guyon. These fees
consisted of $344,740 in cash and $170,000 in stock for a total 2005 R&D of
$534,740, and $202,460 in cash and $100,000 in stock for a total 2004 R&D cost
of $302,460. There were no R&D costs in 2003.
PROPERTIES
We do not own any real property. We do lease 1554 square feet of office
space in Savannah Georgia, on a month to month basis for a cost of $1,036.00 per
month. Our administrative office is located at 5501 1/2 Abercorn Street,
Savannah, Georgia 31406, telephone no. (800) 965-3198. Our principal executive
office is currently located at 1116 S. Old Temple Road Lorena, Texas 76655,
telephone no. (912) 352-7488.
LEGAL PROCEEDINGS
On May 25, 2004, we filed suit in the District Court of McLennan County,
Texas, against Bill G. Williams, Shirley K. Williams, W. Steven Walker, Jerry W.
Petermann and a company controlled by Mr. Williams. In this action we allege
that an aggregate of 7,000,000 shares of our common stock (4,900,000 after a 7-1
stock split) issued to Mr. Williams, Mr. Walker, Mr. Braswell and Mr. Petermann
were not issued in compliance with Texas law and we sought to restrain the
defendants and persons acting on their behalf or in concert with them from
selling any shares of our stock. We also requested that the Court declare we
were permitted to cancel the shares issued to the defendants and sought monetary
damages, attorney's fees and costs of the action.
In June 2004, Jerry W. Petermann agreed to return to the company
1,000,000 shares of the company stock, which were canceled upon return to the
company as full and final settlement of the claims brought in the afore
mentioned lawsuit. In addition, in June 2004, Robert S. Braswell IV agreed to
return to the company 2,100,000 shares of the company stock, all of which were
canceled upon return to the company.
In July 2004, W. Steven Walker Esq., former general counsel, an officer
and director of the company, agreed to settle with the company and return
366,036 shares of our common stock, which was all of the shares then owned by
him, and he will no longer be a party to the suit. Accordingly, only the shares
originally issued to Mr. Williams are subject to the suit, and the company
believes he controls approximately 2.1 million shares of our common stock.
27
After several rulings at the District Court, on August 25, 2004 the
Court of Appeals for the Tenth District of the State of Texas granted our appeal
and entered an order, remanding the case to the original trial judge with
instructions to issue a temporary injunction to preserve the status quo. The
injunction will remain until a judgment in the case becomes final or the court
otherwise instructs. The injunction requires the remaining defendants, their
agents, employees, affiliates, any person or entity they control, and any person
acting in concert with them to (i) stop and refrain from selling or otherwise
disposing of any share of our common stock; and (ii) deposit into the registry
of the District Court all shares of our common stock they now own or hold. Costs
of the appeal were assessed against the Respondents. The defendants have
asserted several counter claims against the company, including a derivative
action, and have brought third-party claims against several current officers of
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OUR CORPORATE STRATEGY
Our goal is to develop a product line of newly discovered biomarkers and
pathways, which will include human genes and genetic variations, as well as
gene, protein, and metabolite expression differences. In drug discovery,
biomarkers can help elicit disease targets and pathways and validate mechanisms
of drug action. They may also be pharmacodynamic indicators of drug activity,
response and toxicity for use in clinical development.
We intend to provide pharmaceutical and diagnostic companies with all
aspects of "first phase" diagnostic and drug discovery from expert assessment of
the clinical dilemma through proper selection and procurement of high quality
specimens. We will then apply our proprietary analytical evaluation methods and
state-of-the-art computational analysis to produce relevant and accurate
clinical data, producing accurate biomarker and pathway discoveries, resulting
in patent protection of our biomarker discoveries for future development.
"First Phase Biomarker Discovery" is based on the belief that in order
to discover the most clinically relevant biomarkers, the computational component
must begin at the inception of the clinical dilemma to be solved. This pathway
includes several critical levels of decision-making - all of which are part of
our business strategy.
The goal of Health Discovery Corporation is to produce more relevant and
predictable biomarkers for drug discovery so that new and better medicines and
diagnostic markers can be developed for patients worldwide. With the completion
of the acquisition of the SVM portfolio of patents the Company plans to begin to
license the use of this technology.
CASH REQUIREMENTS
The Company's two-pronged plan to have sufficient cash to support
operations on a going-forward basis is comprised of generating revenue through
licensing the Company's significant patent portfolio or providing services
related to those patents and obtaining additional equity or debt financing. The
Company has been and continues to be in meaningful discussions, which if
successful, will result in significant revenue. In the fourth quarter of this
year, the Company entered into two different agreements with third parties: (1)
an agreement wherein a third-party acquired our newly discovered AIDS biomarker
in exchange for an upfront payment and future royalty consideration; and (2) a
licensing and development program with a different third-party related to
circulating tumor cells which included an upfront payment, royalties on
commercial sales, and a monthly expert development fee. Earlier in 2005, the
Company secured $1,935,000 through the private sale to accredited investors of
shares of Company common stock. Management currently believes that it has
sufficient cash to support the Company's operations through May 2006.
28
On May 6, 2005, we acquired the remaining 7% of the SVM Patent Portfolio
for an aggregate cash payment of approximately $270,856, the issuance of
promissory notes totaling $37,871 and convertible notes totaling $147,401, and
the issuance of 867,065 shares of the Company's common stock. The convertible
notes were converted by the holders immediately upon issuance in exchange for
487,441 shares of our common stock. In addition, a third holder of previously
issued convertible notes exercised his conversion rights, resulting in 1,922,064
shares being issued as a result of the conversion of the $326,751 debt at $0.17
per share. Recurring monthly operating expenses for the remainder of 2005,
including salaries, are expected to be approximately $147,000. A significant
portion of our cash will be used to satisfy the Company's outstanding debt
obligations related to the acquisition of the SVM assets and fees due to
professionals for services performed. The final payment of $62,500 on the note
resulting from the acquisition of the assets of Fractal Genomics Corporation was
paid in August 2005. Scheduled payments of $188,280 (including interest) on
notes resulting from the acquisition of the SVM Portfolio will be due on January
1, 2006, and May 1, 2006. As of November 30, 2005, we had approximately $941,006
in cash.
PRODUCT R&D
We have entered into agreements with MD Anderson Cancer Center and
Stanford University Medical Center to perform analyses of clinical data using
our computational technologies, which we expect will earn income after the
identification, patent protecting and licensing of newly discovered biomarkers.
We have secured both joint ownership rights and/or first options for worldwide
exclusive rights to our discoveries in these contracts. After the close of the
second quarter of 2004, we acquired the rights to a portfolio of patents that
had initially been issued to Dr. Barnhill, our Chief Executive Officer, and to
several members of our Scientific Advisory Board. Those patents, together with
pending applications included in the portfolio, relate primarily to Support
Vector Machines (SVM's), which have applications in a wide variety of
disciplines in which it is necessary to analyze complex data sets. We expect to
be able to generate a stream of income by licensing the use of Support Vector
Machines covered by the patents. We have been able to fund our operations though
a private offering of our common stock under rules providing exemptions for such
offerings and will continue to do so.
During the remainder of 2005, we plan to focus on one or more of the
following initiatives. Management's time and fiscal resources will be allocated
among the projects based on management's judgment as to when discoveries in
these areas can be achieved and the possibility of securing revenue from those
discoveries. Management cannot guarantee that any discovery will result from any
of the following projects or that the company could obtain revenue from any such
discovery. Further, new initiatives may arise that management believes would be
more beneficial to the company. Initially, the five initiatives are:
CIRCULATING TUMOR CELL ANALYSIS - The Company is attempting to use SVMs
to analyze digitized images of blood cells to identify circulating tumor cells.
The company believes this project can be completed with current salaried
personnel and equipment. To that end, on November 22, 2005, we entered into a
licensing agreement with Clarient, Inc. a technology and services resource for
pathologists, oncologists and the pharmaceutical industry, in which Clarient
will utilize our SVM intellectual property. Under the terms of the agreement,
Clarient will pay us an upfront licensing fee, a monthly expert development fee,
and future royalties for any Clarient product developed using the SVM
technology. Under the terms of the agreement, the Company will own and have the
rights to use all new mathematical tools developed in connection with the
agreement.
PROSTATE CANCER DIAGNOSTICS - The Company has identified biomarkers that
have the potential to be useful in the diagnosis of prostate cancer with a much
higher degree of accuracy than existing tests, including the PSA test. In
addition, these biomarkers appear to allow us to differentiate high grade
prostate cancer from the less serious low grade prostate cancer. We expect to
contract with a third-party diagnostic company in hopes of validating our
biomarkers. Allowing a third-party to validate the biomarkers using their own
instrumentation will result in minimal out-of-pocket expense by the Company. We
are now in discussions with several national and international diagnostic
companies to identify possible opportunities, which if successful we believe
could lead to licensing revenue in the second quarter 2006. However, if we are
unable to identify a company willing to undertake such a project or unwilling to
do so on terms we view as desirable for the Company, we plan to complete
additional validation process itself at an estimated cost of $50,000. While the
Company believes that its biomarkers will ultimately be validated in light of
the Company's previously presented study that demonstrated a 90% accuracy on two
completely independent data sets, the Company cannot guarantee when any of the
third-party diagnostic companies with whom discussions continue will be able to
validate the biomarkers on their instrumentation or whether such validation will
occur.
29
BPH DRUG TARGET - While performing our analysis of prostate cancer
specimens to discover a new biomarker for diagnosing prostate cancer, we
discovered a number of genes that appear to be over expressed in patients with
Benign Prostatic Hyperplasia (BPH). Upon validation of this discovery, we plan
to license the discovery to a pharmaceutical or a diagnostic company. This set
of biomarkers could be used as a drug target by the pharmaceutical company to
develop a new drug to treat BPH or to monitor new or current BPH therapy. All
research and development related to this project will be done in conjunction
with the prostate cancer diagnostic project. No additional expenses are
expected.
BREAST CANCER (LYMPHANGIOGENESIS) - In March 2004 we entered into an
agreement with Stanford University to use our FGM computational techniques to
identify new patterns of biomarkers in lymphatic insufficiency and its response
to therapeutic lymphangiogenesis. This project will be completed with in-house,
salaried personnel. We expect no significant additional costs to be incurred
before completion of this project.
DIFFERENTIAL DIAGNOSIS FOR LEUKEMIA - The company will be validating our
discovery of a set of leukemia genes that have been shown to separate ALL-T-cell
leukemia from ALL-B-cell leukemia with 100% accuracy. We expect to incur
approximately $50,000 in costs to complete this validation.
REVENUE PLAN
The Company anticipates continuing to pursue revenue from the following
sources:
SVM / FGM patent licensing. The Company believes that a significant
number of companies are utilizing our technology without having first obtained a
license from us. We plan to actively pursue these license agreements in 2005 and
2006.
Diagnostic Biomarkers. The Company is currently performing validation
testing on several of its discoveries. If the testing confirms the initial
discoveries, the Company plans to license the newly discovered biomarkers to a
national reference laboratory.
Therapeutic Markers. The Company has identified several potential
therapeutic targets, which if validated by third parties could lead to licensing
or collaborative arrangements with larger pharmaceutical companies for further
development.
ADDITIONAL FUNDING REQUIREMENT
We believe we have sufficient cash to continue operations through May
2006 based on our current cash flows. Therefore, our continued operations will
depend on the production of revenue and/or the receipt of additional funding. In
addition to the agreements reached with The University of Miami and Clarient,
efforts to reach license agreements with companies using SVM Technologies and
biomarker discoveries continue and are currently in process.
Based on the current resources available to us, we will need additional
equity or debt financing or we will need to generate revenues through licensing
our products or providing services to others or entering into strategic
alliances to be able to sustain our operations until we can achieve
profitability, if ever. These matters raise substantial doubt about our ability
to continue as a going concern.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet arrangements. We have no
subsidiaries or other unconsolidated limited purpose entities, and we have not
guaranteed or otherwise supported the obligations of any other entity.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
NATURE OF OPERATIONS AND DESCRIPTION OF DEVELOPMENT STAGE ACTIVITIES
Health Discovery Corporation (formerly known as Direct Wireless
Communications, Inc.) has been in the development stage since the date of
incorporation on April 6, 2001. The Company was primarily engaged in the
activity of developing technology for a wireless telephone system until 2003,
when it decided to abandon its efforts in the
30
telecommunications industry and acquired new technologies in the biotechnology
industry. During 2003, the Company acquired the assets of the Barnhill Group,
LLC and Fractal Genomics, LLC in pursuit of its biotechnology focus. During 2004
and 2005, the Company continued pursuit of its biotechnology focus by acquiring
certain rights to patents and patent pending applications for certain machine
learning tools used for diagnostic and drug discovery.
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 suspectible to change in
the near-term include the valuation of non-cash consideration for services and
the recoverability of the patents.
PATENTS
Patents are amortized over their remaining legal lives, that range from
15 to 20 years, from the date they are acquired or approved. Legal costs
directly associated with the patent acquisitions and the application process for
new patents are capitalized when incurred and are being amortized over the
remaining legal life of the related patent. If the applied for patents are
abandoned or are not issued, the Company will expense the capitalized legal
costs as an impairment charge.
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 November 14, 2005, the Company does not believe there has
been any impairment of its intangible assets.
ISSUANCE OF EQUITY INSTRUMENTS FOR NON-CASH CONSIDERATION
All issuances of the Company's equity instruments for non-cash
consideration, which primarily pertain to services rendered by consultants and
others, have been assigned a per share amount equaling either the market value
of the shares issued or the value of consideration received, whichever is more
readily determinable.
MANAGEMENT
Our executive officers, directors and significant employees are:
------------------------------ -- --- - ------------------------------------------------------
NAME AGE POSITION
------------------------------ -- --- - ------------------------------------------------------
Stephen D. Barnhill, M.D. 45 Chief Executive Officer and Chairman of the Board
------------------------------ -- --- - ------------------------------------------------------
Robert S. Braswell IV 50 Senior Vice President, Director
------------------------------ -- --- - ------------------------------------------------------
Daniel R. Furth 42 Principal Financial Officer, Executive Vice President
------------------------------ -- --- - ------------------------------------------------------
Hong Zhang, Ph.D. 44 Senior Vice President, Computational Medicine
------------------------------ -- --- - ------------------------------------------------------
William F. Quirk, Jr. 63 Director
------------------------------ -- --- - ------------------------------------------------------
STEPHEN D. BARNHILL, M.D., has been our CHIEF EXECUTIVE OFFICER,
CHAIRMAN OF THE BOARD AND MEDICAL DIRECTOR and a member of the Board of
Directors since November 2003. He is a physician trained in laboratory medicine
and clinical pathology. He has developed and used artificial intelligence,
pattern-recognition and computational techniques in Medicine, Genomics,
Proteomics, Diagnostics and Drug Discovery.
Dr. Barnhill is or has been a Fellow of the American College of
Physician Inventors, the American College of International Physicians, the
American Medical Association, the American College of Physician Executives, the
American Association of Artificial Intelligence, the American College of Managed
Care Medicine, the Association of
31
Clinical Scientists, the American Society of Contemporary Medicine and Surgery,
the American Society of Law, Medicine and Ethics, the Southern Medical Society,
the American Federation for Clinical Research and the National Federation of
Catholic Physicians.
Dr. Barnhill founded the Barnhill Clinical Laboratories in 1988 and
served as Chairman, CEO, President and Medical Director. This Laboratory was
later acquired by Corning-Metpath in 1989 and after the acquisition he served as
Medical Director of this Clinical Laboratory until 1992. This Clinical
Laboratory, now owned by Quest Diagnostics, continues to be the largest and
busiest Clinical Laboratory in the Savannah Georgia area.
In 1992, Dr. Barnhill founded National Medical Specialty Laboratories
and served as Chairman, CEO, President, and Medical Director. This Research
Laboratory was founded to utilize pattern-recognition mathematics and artificial
intelligence techniques in cancer diagnosis. Dr. Barnhill is an inventor on the
very first patents issued by the United States Patent and Trademark Office for
the use of neural networks in medicine. This company was acquired by Horus
Therapeutics; a New York based pharmaceutical company. Dr. Barnhill served as
Executive Vice-President and Chairman of the Scientific Advisory Board for Horus
Therapeutics until 1998. Johnson & Johnson later acquired the Horus patents
invented by Dr. Barnhill.
In 1999, Dr. Barnhill founded and served as Chairman, President and CEO
of Barnhill BioInformatics, Inc. Barnhill BioInformatics, Inc. later became
Barnhill Genomics, Inc. and BioWulf Technologies, LLC and raised over $13.5
Million in Private Placement funding. The primary focus of these Companies was
to utilize the next generation of artificial intelligence and
pattern-recognition techniques, known as support vector machines, to identify
genes that cause cancer. Dr. Barnhill is the sole inventor on the very first
patents issued by the United States Patent and Trademark Office for the use of
support vector machines in medicine. From the summer of 2000 until he organized
The Barnhill Group L.L.C., in the summer of 2003, Dr. Barnhill was not engaged
in any professional activities as the result of a non-compete agreement signed
by Dr. Barnhill when he left the employment of Barnhill Genomics, Inc.
ROBERT S. BRASWELL IV is our SENIOR VICE PRESIDENT, and a member of the
Board of Directors. Mr. Braswell served as our President from April 2001 until
the acquisition of The Barnhill Group LLC, when he assumed the position of Chief
Administrative Officer. On November 29, 2005, Mr. Braswell resigned from that
position and assumed his current role, in connection with the consolidation of
the accounting functions at the Company's headquarters in Savanna, Georgia. As
its President, Mr. Braswell guided the creation of Direct Wireless
Communications Inc. (DWCI) and oversaw all administrative functions for both
DWCI and Direct Wireless Corporation. Mr. Braswell served as President of Direct
Wireless Corporation since December 1999 and a member of its Board of Directors
since January 1999. Prior to holding these positions, Mr. Braswell was an
independent businessman engaged in business evaluations, real estate
development, home construction while running a working ranch operation. His
administrative experience comes from eighteen years experience in the common
carrier freight business, working for Central Freight Lines, Inc. from
1974-1992. Mr. Braswell graduated from the University of Houston in 1983 with a
Bachelor of Business Administration in Organizational Behavior Management.
DANIEL R. FURTH is our PRINCIPAL FINANCIAL OFFICER, EXECUTIVE VICE
PRESIDENT, SECRETARY AND TREASURER. Mr. Furth is an experienced executive with a
proven track record in diverse industries for both private and public
corporations. Since October 2000, he served as a corporate communications
consultant for several private clients. During that same period, he also served
as a managing member and equity partner of Purple Shamrock LLC, a privately held
investment group. From 1994 to 2000, he served as Senior Director of Marketing &
Communications for Quality Distribution, Inc., North America's largest bulk
transportation services company, where he managed corporate communications,
marketing communications, investor relations, and public affairs. During that
time, he was chief of staff to QD's Chairman/CEO and played an instrumental role
in the company's initial public offering in 1994 and its subsequent leveraged
buyout in 1998. From 1986 to 1994, Furth held varied executive positions in both
the public and private sectors including particular experience with early stage
ventures. He earned his BA degree in government from Georgetown University in
Washington, DC.
HONG ZHANG, PH.D. is our SENIOR VICE PRESIDENT, COMPUTATIONAL MEDICINE.
As visiting faculty at Johns Hopkins University, Dr Zhang lectured at the Center
for Biomarker Discovery on Bioinformatics: Peak Detection Methods for Mass
Spectral Data. Currently a Yamacraw Associate Professor at Armstrong Atlantic
University, Dr. Zhang was the Vice President and CIO for a neural network and
computer assisted medical diagnostic systems company that employs neural network
and mathematical/statistical preprocessing techniques. In this position, Dr.
Zhang was involved in digital image processing and pattern recognition for
medical image processing as well as software design and programming for support
vector machine applications. Dr. Zhang was a professor in the Department of
Mathematical Sciences at Purdue University from 1989 to 1996. He has held
numerous academic positions, including Adjunct
32
Associate Professor, Associate Professor with Tenure, and Assistant Professor.
He was a visiting Associate Professor in 1995 in the Department of Biometry at
the Medical University of South Carolina.
Throughout his academic career, Dr. Zhang has consulted on many software
and analytical development projects for Union Switch and Signal, Inc., General
Electric Company, and the Department of Pharmacology at the University of
Pittsburgh. Dr. Zhang has published numerous articles on the use of neural
networks in the detection of cancers. He has been published in more than twenty
medical and technical journals. Dr. Zhang received a Ph.D., Mathematics at the
University of Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh,
1986, M.S.E.E., Electrical Engineering, University of Pittsburgh, 1984, B.S.,
Computer Science, Fudan University, 1982. Dr. Zhang's numerous awards and honors
include: National Cancer Institute SBIR Grant, 1999, 2000; Purdue Research
Foundation Summer Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew
Mellon Fellowship, 1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place,
Fudan University Mathematics Competition, 1979.
WILLIAM F. QUIRK, JR. is a member of the Board of Directors. Mr. Quirk
is the first outside director to join our board, succeeding Dr. David Cooper,
the Company's former president and chief medical officer who recently resigned
his positions to pursue other interests. Mr. Quirk is a private investor who
purchased a significant equity stake in the company in its successful private
placement in July 2005. Prior to his retirement in 1996, he held a variety of
senior executive positions in finance and management including: Fidelity
Management & Research in the mutual fund industry; the investment banking firm
Peterson, Diehl, Quirk & Company; leveraged buyout firm Kelso & Company; and
auto parts supplier Inline Brake Manufacturing. Quirk earned his B.S. from the
U.S. Naval Academy and an MBA from the Harvard Business School.
The directors named above will serve until the next annual meeting of
our stockholders. Absent an employment agreement, officers hold their positions
at the pleasure of the Board of Directors.
We do not have a separately-designated standing audit committee. The
entire board of directors is acting as our audit committee, and no individual on
our Board of Directors possesses all of the attributes of an "audit committee
expert." In forming our Board of Directors, we sought out individuals who would
be able to guide our operations based on their business experience, both past
and present, or their education. Responsibility for our operations is
centralized within management, which is comprised of four people. We rely on the
assistance of others, such as our accountant (not our auditor), to help us with
the preparation of our financial information. We recognize that having a person
who possesses all of the attributes of an audit committee financial expert would
be a valuable addition to our Board of Directors. However, we are not, at this
time, able to compensate such a person and therefore, we may find it difficult
to attract such a candidate.
The Board of Directors does not have a policy with regard to the
consideration of candidates to the Board recommended by stockholders. The Board
has made no determination as to whether or not such a policy should be adopted.
The Board of Directors will consider candidates recommended by stockholders. To
be considered for nomination by the Board of Directors at the next annual
meeting of stockholders, Chairman of the Board must receive stockholder
recommendations at least 120 calendar days before the anniversary date of the
company's proxy statement for the previous year's annual meeting. To recommend a
candidate, a stockholder should send the candidate's name, age, credentials
(including principal occupation and employment), contact information and the
candidate's consent to be considered to the Chairman of the Board in care of the
company at its principal executive office address. The stockholder should also
provide the stockholder's contact information, describe the stockholder's
relationship with the candidate, and include a statement as to the number of
Common Shares owned by the stockholder and the length of time such Common Shares
have been owned.
CODE OF ETHICS
The company has adopted a Code of Ethics applicable to its Chief
Executive Officer and Chief Administrative Officer. This Code of Ethics is
posted on our website at www.HealthDiscoveryCorp.com.
33
EXECUTIVE COMPENSATION
The following table sets forth various elements of compensation for our
Named Executive Officers for each of the last three calendar years:
---------------------- -------------- ---------------- -----------------
Name and Year Salary ($) Securities
Principal Position Underlying
Options (#)
---------------------- -------------- ---------------- -----------------
Stephen D. Barnhill, 2004 $337,500
M.D.
2003 $50,000
Chief Executive
Officer 2002 ---
---------------------- -------------- ---------------- -----------------
Robert S. Braswell, 2004 $81,666
IV
2003 $11,666
Senior Vice
President 2002 ---
---------------------- -------------- ---------------- -----------------
Hong Zhang, Ph.D. 2004 $40,000
Senior Vice 2003 ---
President,
Computational 2002 ---
Medicine
---------------------- -------------- ---------------- -----------------
David Cooper 2004 $110,000 3,000,000
Former President and 2003 ---
Chief Medical
Officer 2002 ---
---------------------- -------------- ---------------- -----------------
DIRECTOR COMPENSATION
None of the current directors is separately compensated for their
service as directors.
EMPLOYMENT AGREEMENTS
We entered into a five year employment agreement with Dr. Stephen
Barnhill on September 15, 2003 regarding Dr. Barnhill's employment as President
and Medical Director. The agreement will automatically renew for successive
one-year terms unless either party gives notice to the other party of its intent
not to renew within a thirty day period prior to the end of the then current
term. Under the terms of the agreement, Dr. Barnhill receives an initial base
salary of $25,000 per month, which is subject to adjustment at least annually.
Dr. Barnhill is eligible to be reimbursed monthly for reasonable and necessary
business expenses, to participate in an Incentive Stock Option Plan (as defined
in the agreement) and for other benefits maintained by us. Dr. Barnhill will be
entitled to 10 paid vacation days during the calendar year. Dr. Barnhill's
employment may be terminated without prior written notice for cause, in which
case we will make a lump sum payment equal to the sum of (i) accrued unpaid
wages, (ii) unreimbursed expenses properly incurred prior to the date of
termination and (iii) the value of all accrued unpaid vacation pay, less any
amounts he owes to us. If Dr. Barnhill terminates the Barnhill Agreement, then
he will receive the same benefits as if he was terminated for cause. If Dr.
Barnhill terminates the Barnhill Agreement, other than for cause, then we will
give two (2) weeks notice of termination, or in our sole discretion, two (2)
weeks wages in lieu of notice. The agreement also generally provides that Dr.
Barnhill will keep confidential information confidential and that he will not
compete with us in our business nor solicit our customers or employees for a
period of 12 months following termination of employment.
34
We entered into an employment agreement with Dr. David Cooper on
November 1, 2003 regarding Dr. Cooper's employment as President and Chief
Medical Officer. The employment commenced at signing and terminated on October
24, 2005, when Dr. Cooper resigned. As compensation for his employment, Dr.
Cooper was issued non-qualified stock options to acquire 3,000,000 shares of our
common stock, of which options to acquired 600,000 shares of our common stock
vested immediately while options to acquire the remaining 2,400,000 shares
vested over time or upon certain accomplishments of Dr. Cooper. At the time of
Dr. Cooper's resignation, options to acquire 400,000 shares had vested and the
remaining options terminated. Upon termination of his employment, Dr. Cooper
agreed to observe all post-employment covenants set forth in his agreement. Dr.
Cooper's agreement also generally provided that he will not compete with us in
our business nor solicit our customers or employees for a period of one year
following termination of his employment.
We entered into an employment agreement with Mr. Daniel R. Furth
effective November 18, 2005 regarding Mr. Furth's employment as Executive Vice
President. The term of the employment is for three years, with compensation of
$60,000, which is to be reviewed after the first year for potential increase.
Mr. Furth will also receive options to acquire 1,500,000 shares of our common
stock. Mr. Furth is eligible to be reimbursed monthly for reasonable and
necessary business expenses and for other benefits maintained by us. If we
terminate the employment agreement for cause, Mr. Furth will be entitled to
receive his salary only through the date such termination is effective. If Mr.
Furth terminates the employment agreement for cause, he will be entitled to
receive his salary for a period of three months from the date such termination
is effective. If the employment agreement is terminated by us without cause, Mr.
Furth will be entitled to receive his salary for a period of three months from
the date such termination is effective. If the agreement is terminated by Mr.
Furth without cause, he will be entitled to receive his salary only through the
date such termination is effective. The agreement also generally provides that
Mr. Furth will keep confidential information confidential and that he will not
compete with us in our business nor solicit our customers or employees for a
period of 12 months following termination of employment.
SCIENTIFIC ADVISORY BOARD
As of December 31, 2004, the Company contractually agreed to issue upon
the fulfillment of certain conditions 200,000 shares of common stock and 700,000
warrants to purchase the Company's common stock at an exercise price of $.01 per
share to members of the Company's Scientific Advisory Board for services
performed. In addition, the Company contractually agreed to issue upon the
fulfillment of certain conditions 500,000 warrants to purchase the Company's
common stock at an exercise price of $.01 per share to a consultant for services
performed. Warrants to purchase 200,000 shares vested in 2004 and the remaining
1,000,000 vest during 2005 and 2006. The shares vested in 2004. The Company has
issued or will issue the contractually agreed shares upon the fulfillment of
certain conditions as they are satisfied in 2005 and 2006.
In 2005, the Company committed to issue an additional 200,000 shares of
common stock and 300,000 warrants to purchase the Company's common stock at an
exercise price of $.01 per share to members of the Company's Scientific Advisory
Board for services performed. All of the committed shares and warrants vest in
2006 and will be issued upon vesting.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of December 1, 2005 with
respect to beneficial ownership of shares by (i) the following table sets forth
information concerning the beneficial ownership of our common stock as of
December 1, 2005 by (i) each of our directors, (ii) each of our executive
officers, (iii) each person who is known to us to be the beneficial owner of
more than five percent of our common stock, and (iv) all of our executive
officers and directors as a group. Other than Dr. Barnhill no person is known to
us to own shares of our common stock with 5% or more of the voting power of our
company. At December 1, 2005, there were 115,697,574 shares outstanding.
------------------------------------------ ----------------------------------- --------------------------------
NUMBER OF SHARES
NAME AND POSITION BENEFICIALLY OWNED PERCENT OF CLASS (1)
------------------------------------------ ----------------------------------- --------------------------------
Dr. Stephen D. Barnhill
Chairman of the Board, 29,825,564 (2) 25.78%
Chief Executive Officer and Chief
Medical Officer, Director
2 Springfield Place
Savannah, GA 37411
------------------------------------------ ----------------------------------- --------------------------------
Robert S. Braswell IV
Senior Vice President, Director 1,593,263 (3) 1.38%
One Chaparral Place
Lorena, TX 76655
------------------------------------------ ----------------------------------- --------------------------------
William Quirk
Director 10,500,000 9.08%
7 Water Witch Crossing
Savanna, GA 31411
------------------------------------------ ----------------------------------- --------------------------------
Daniel R. Furth
Executive Vice President and Principal 1,500,000 1.30%
Financial Officer
101 Bartram Road
Savanna, GA 31411
------------------------------------------ ----------------------------------- --------------------------------
Hong Zhang
22 Black Hawk Trail --- *
Savannah Georgia 31411
------------------------------------------ ----------------------------------- --------------------------------
All executive officers and directors as
a group (four persons) 43,418,827 37.54%
------------------------------------------ ----------------------------------- --------------------------------
---------------------------------------------------
* Less than 1% of outstanding shares.
(1) The percentage of our common stock beneficially owned was
calculated based on 115,697,574 shares of common stock issued
and outstanding as of December 6, 2005. The percentage assumes
the exercise by the stockholder or group named in each row of
all options or warrants for the purchase of our common stock
held by such stockholder or group and exercisable within 60 days
as of December 6, 2005.
(2) These shares are held by Barnhill Group LLC, which is wholly
owned by Dr. Barnhill.
(3) Includes 490,486 shares owned by Mr. Braswell individually and
11,667 shares owned by Mr. Braswell and his wife as joint
tenants, 226,676 shares owned by Mr. Braswell's wife, 140,000
shares owned by a corporation controlled by Mr. Braswell, and
413,324 shares owned by his minor children and 311,110 shares
held in trust in which Mr. Braswell has a one-third future
contingent interest, but is not a trustee.
36
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On August 15, 2003, we entered into an agreement with Dr. Stephen
Barnhill and The Barnhill Group, LLC to purchase the assets of The Barnhill
Group, LLC. As a part of the agreement, The Barnhill Group, LLC received
29,825,564 shares of our common stock. The asset acquisition agreement was
completed on September 25, 2003. The restricted shares of our common stock were
issued to The Barnhill Group LLC on August 26, 2003. As a result of this
transaction, we acquired a 49% interest in Fractal Genomics. Dr. Barnhill
currently serves as our Chief Executive Officer and the Chairman of our Board of
Directors.
On August 29, 2003, we signed a binding letter of agreement to acquire
all the assets of Fractal Genomics, a company founded by Mr. Sandy Shaw, in
exchange for 3,825,000 shares of our common stock and executed a $500,000 note
payable less relevant expenses. As a result of the acquisition, Dr. Barnhill
receives 49% of the $500,000 less relevant expenses. Our acquisition of the
assets was completed on December 30, 2003. Mr. Shaw previously served as our
Vice President, Fractal Technology.
On May 6, 2005, we acquired the remaining 7% of the SVM Patent Portfolio
for an aggregate cash payment of approximately $270,856, the issuance of the
promissory notes totaling $37,871 and convertible notes totaling $147,401, which
were converted by the holders immediately upon issuance in exchange for 867,065
shares of our common stock. Approximately, $175,000 of the purchase price was
used by the sellers to repay an outstanding obligation of a limited liability
company of which our chief executive officer was a member.
We currently sub-lease our principle executive office space from a
company owned by the wife of Dr. Stephen D. Barnhill. Our rent on this 1554 sq
ft office is $1,036.00 per month and is rented on a month to month basis.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 12, 2005, the Company was informed by Clyde Bailey, P.C.
("Bailey") that it was no longer providing audit services to any company in any
capacity. Accordingly, Bailey resigned and withdrew its audit as the Company's
independent auditor for fiscal year 2003 and the related statements of
operations, statements of stockholders' equity, and the statements of cash flows
for the years ended December 31, 2003 and 2002 and for the period from inception
(April 6, 2001) to December 31, 2003. Thereby, the engagement of Bailey as the
Company's independent auditor has terminated.
Bailey submitted audit reports on the Company's financial statements for
fiscal year 2003 and the related statements of operations, statements of
stockholders' equity, and the statements of cash flows for the years ended
December 31, 2003 and 2002 and for the period from inception (April 6, 2001) to
December 31, 2003. The submitted audit reports did not contain any adverse
opinions, disclaimers of opinions or other modifications or qualifications.
Bailey did not, during the applicable periods, advise the Company of any of the
enumerated items described in Item 304(a)(1) of Regulation S-B.
On August 2, 2004, the Company engaged Porter Keadle Moore, LLP, the
current independent auditor ("Porter Keadle Moore"), to audit all successive
periods beginning January 1, 2004. As a result, the Company's financial
statements covering periods beginning January 1, 2004 are not affected by
Bailey's withdrawal and were not re-audited. The decision to change accountants
was recommended and approved by the Board of Directors of the Company.
There were no disagreements with Bailey on any matter of accounting
principles or practices, financial statement disclosures, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Bailey,
would have caused Bailey to make reference thereto in, or in connection with,
its reports on financial statements for the periods covered by Bailey's audit.
On August 11, 2005, the Company engaged Porter Keadle Moore to perform a
re-audit of the Company's financial statements for fiscal year 2003. Darilek &
Butler, CPA ("Darilek & Butler") issued its audit of the Company's financial
statements for fiscal year 2002, and for the period between the Company's
inception and December 31, 2002. Darilek & Butler is the Company's original
auditor for such time periods.
The Company did not consult Porter Keadle Moore or Darilek & Butler
prior to their engagement regarding (i) the application of accounting principles
to a specified transaction, either completed or proposed nor (ii) any matter
that
37
was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-B and the related instructions to that Item).
We have had no disagreements with our former certifying accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 200,000,000 shares of common stock, no par
value. As of December 6, 2005, there were 115,697,574 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share for
the election of directors and on all other matters submitted to a vote of
stockholders. They are also entitled to dividends declared by the directors out
of funds legally available for payment of dividends. Holders of the common stock
do not have any cumulative voting rights or any preemptive or similar rights.
Our Transfer Agent is Corporate Stock Transfer, 3200 Cherry Creek Drive
South, Denver, Colorado 80209; telephone (303) 282-4800.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
We do not have any provision of our Articles of Incorporation or By-Laws
that require us to indemnify our officers and directors on account of any
liability they incur as a result of their actions as officers or directors.
However, Section 2.02-1 of the Texas Business Corporation Act permits the
indemnification of directors, officers, agents and employees of a corporation if
the person seeking indemnity acted in good faith and reasonably believed, if a
director, that his conduct was in the corporation's best interests, and, if not
a director, that his conduct was not opposed to the corporation's best
interests, and in the case of a criminal proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnity is not permitted if a person is
found liable to the corporation and is limited to expenses actually incurred in
the case of a person found liable on the basis of personal benefit improperly
received by him. Section 2.02-1 also provides that a corporation shall indemnify
directors and officers against reasonable expenses incurred in connection with a
proceeding if they are wholly successful, on the merits or otherwise, in the
defense of the proceeding.
A determination whether to pay indemnity in any preceding may be made by
a majority of a quorum of the board of directors, or a by committee of the board
of directors appointed for such purpose, or by special legal counsel, or by a
vote of the stockholders, but directors who are defendants or respondents in a
proceeding may not vote on the matter.
Section 2.02-1 also authorizes a corporation to purchase insurance on
behalf of directors, officers and employees against liability asserted against
them as a result of their capacities as such. The Company currently has such
insurance on behalf of directors, officers or employees.
We have been informed that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act of
1933, which may be permitted to our officers and directors or control persons
pursuant to the provisions of the Texas Business Corporation Act, is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LEGAL MATTERS
Certain legal matters in connection with the shares of common stock
offered by this prospectus have been passed on for Health Discovery Corporation
by Powell Goldstein LLP, Atlanta, Georgia.
EXPERTS
Porter Keadle Moore audited our balance sheets as of December 31, 2004
and 2003 and the related statements of operations, changes in stockholders'
equity, and cash flows for the years then ended and for the period from
inception (April 6, 2001) to December 31, 2004, except that they did not audit
the Company's financial statements for the period from inception (April 6, 2001)
to December 31, 2002 and Darilek & Butler audited our balance sheet as of
December 31, 2002 and the related statements of operations, statements of
stockholders' equity, and the statements of cash flows for the year ended
December 31, 2002 and for the period from inception to December 31, 2002, as
stated in their reports appearing herein (which reports express an unqualified
opinion, although Porter Keadle Moore's report includes an
38
explanatory paragraph referring to the Company's ability to continue as a going
concern), and are included in reliance upon the report of such firms given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We file annual, quarterly and special reports with the SEC pursuant to
the information requirements of the Securities Exchange Act of 1934. You can
read and copy these reports, proxy statements, and other information concerning
us at the SEC's Public Reference Room at 100 F Street, N.., Washington, D.C.
20549. Please call the SEC at (202) 942-8090 for further information on the
Public Reference Room. You can review our electronically filed reports, proxy
and information statements on the SEC's internet site at HTTP://WWW.SEC.GOV. Our
filings are also available on our website at HTTP://WWW.HEALTHDISCORYCORP.COM.
We are not required to deliver an annual report to our stockholders, and we do
not intend to do so for the foreseeable future.
We have filed with the SEC, a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
hereby. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. Certain items are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to our company and
the common stock, reference is made to the registration statement and the
exhibits and any schedules filed with the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. You
can obtain a copy of the full registration statement, including the exhibits and
schedules thereto, from the SEC as indicated above.
39
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS
We do not have any provision of our Articles of Incorporation or By-Laws
that require us to indemnify our officers and directors on account of any
liability they incur as a result of their actions as officers or directors.
However, Section 2.02-1 of the Texas Business Corporation Act permits the
indemnification of directors, officers, agents and employees of a corporation if
the person seeking indemnity acted in good faith and reasonably believed, if a
director, that his conduct was in the corporation's best interests, and, if not
a director, that his conduct was not opposed to the corporation's best
interests, and in the case of a criminal proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnity is not permitted if a person is
found liable to the corporation and is limited to expenses actually incurred in
the case of a person found liable on the basis of personal benefit improperly
received by him. Section 2.02-1 also provides that a corporation shall indemnify
directors and officers against reasonable expenses incurred in connection with a
proceeding if they are wholly successful, on the merits or otherwise, in the
defense of the proceeding.
A determination whether to pay indemnity in any preceding may be made by
a majority of a quorum of the board of directors, or a by committee of the board
of directors appointed for such purpose, or by special legal counsel, or by a
vote of the stockholders, but directors who are defendants or respondents in a
proceeding may not vote on the matter.
Section 2.02-1 also authorizes a corporation to purchase insurance on
behalf of directors, officers and employees against liability asserted against
them as a result of their capacities as such. Direct Wireless Communications,
Inc. does not have any insurance on behalf of directors, officers or employees.
We have been informed that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act of
1933, which may be permitted to our officers and directors or control persons
pursuant to the provisions of the Texas Business Corporation Act, is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses to be paid in
connection with the common stock being registered, all of which will be paid by
Health Discovery Corporation (on behalf of itself and the selling stockholders)
in connection with this offering. All amounts are estimates except for the
registration fee.
SEC Registration Fee.................... $ 2,511.93
Legal and Accounting Fees and Expenses.. $ 35,000.00
Printing and filing..................... $ 1,500.00
Miscellaneous........................... $ 500.00
Total................................... $ 39,511.93
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
2003 PRIVATE PLACEMENT
During 2003, the Company offered for sale of restricted stock to
qualified investors through a private placement offering. A total of 2,750,000
shares were sold for $.02 per share. The securities issued in the private
placement were not registered under the Securities Act of 1933, as amended, and
until they are registered the securities may not be offered or sold in the
United States absent registration or the availability of an applicable exemption
from registration. The shares were offered and sold in reliance upon exemptions
from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. Based on the information
provided by each of the investors, all investors qualify as accredited investors
(as defined by Rule 501 under the Securities Act of 1933, as amended). The
company filed a registration statement on September 15, 2003 and agreed that
should the company, before September 15, 2005, propose for itself or any other
person, the registration under the Act of any securities of the company on Form
S-1, S-2 or S-3, the company shall
40
include in any such Registration Statement and in any related underwriting
agreements, if the qualified investors so requests, such securities of the
investors.
PRIVATE PLACEMENT - ROUND 1
From February through July 2004, the Company offered for sale shares of
restricted stock to accredited investors through a private offering. The price
of the restricted stock was $.10 per share. A total of 15,235,000 restricted
common shares were issued to accredited investors for $1,499,900, net of
issuance cost of $23,600. The issuance cost consisted of $22,400 in cash and
3,429 in common shares valued at $1,200, paid to consultants for assistance in
selling the Company's common stock. In addition, each purchaser of shares of
common stock was granted a warrant to acquire an equal number of restricted
common shares at a fixed price of $0.35 per share, exercisable until February
2007. This could result in the issuance of up to 15,235,000 additional
restricted shares upon exercise. No portion of the proceeds was assigned to the
value of the warrants because the exercise price of the warrant exceeded the
market value of the underlying common stock on the date of purchase. We entered
into purchase agreements with each of the investors, the form of which is
attached as Exhibit 10.6. The securities issued in the private placement were
not registered under the Securities Act of 1933, as amended, and until they are
registered the securities may not be offered or sold in the United States absent
registration or the availability of an applicable exemption from registration.
The shares and the warrants, the form of which is attached as Exhibit 10.7, were
offered and sold in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. Based on the information provided by each of the
investors, all investors qualify as accredited investors (as defined by Rule 501
under the Securities Act of 1933, as amended).
PRIVATE PLACEMENT - ROUND 2
From November 2004 through March 2005, the Company offered for sale
shares of restricted stock to accredited investors through a private offering.
The price of the restricted stock was $.16 per share. In addition, each
purchaser of shares of common stock was granted a warrant to acquire an equal
number of restricted common shares at a fixed price of $0.24 per share until
December 2008. As of December 31, 2004, a total of 5,434,375 restricted common
shares were sold to accredited investors for $695,761, net of issuance costs of
$173,739. The issuance cost consisted of $128,950 in cash, 218,746 warrants,
each entitling the holder to buy one share of the Company's common stock for
$0.24 valued at $32,812 and 34,277 shares of common stock valued at $11,977
which was paid or accrued to consultants for assistance in selling the Company's
common stock. We entered into purchase agreements with each of the investors,
the form of which is attached as Exhibit 10.8. Under each agreement, the company
agreed to use its best efforts to file a registration statement to register the
shares of common stock and the shares underlying the warrants issued and sold to
the investors by May 9, 2005, and to use its best efforts to cause the
registration statement to be declared effective July 6, 2005.
On March 10, 2005, the Company finalized a sale of shares of restricted
common stock to accredited investors through a private offering. The price of
the restricted stock was $.16 per share. In addition, each purchaser of the
shares of common stock received a warrant to acquire an equal number of common
shares at a fixed price of $0.24 per share until December 2008. No portion of
the proceeds was assigned to the value of the warrants because the exercise
price of the warrant exceeded the market value of the underlying common stock on
the date of purchase. A total of 13,018,750 restricted common shares were sold
to accredited investors for $1,798,944, net of issuance costs of $284,056. The
issuance cost consisted of $157,000 in cash, 806,250 warrants, each entitling
the holder to buy one share of the Company's common stock for $0.24 valued at
$120,938, and 17,480 shares of common stock valued at $6,118 which was paid or
accrued to consultants for assistance in selling the Company's common stock. The
securities issued in the private placement were not registered under the
Securities Act of 1933, as amended, and until they are registered the securities
may not be offered or sold in the United States absent registration or the
availability of an applicable exemption from registration. The shares and the
warrants, the form of which is attached as Exhibit 10.9, were offered and sold
in reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Based on the information provided by each of the investors, all investors
qualify as accredited investors (as defined by Rule 501 under the Securities Act
of 1933, as amended).
On May 6, 2005 we acquired the remaining 7% of the SVM Patent Portfolio.
The cost of the remaining interest consisted of a cash payment of $270,856, the
issuance of promissory notes totaling $37,871 and convertible notes totaling
$147,401. The convertible notes were converted by the holders immediately upon
issuance in exchange for 867,065 shares of common stock.
41
During 2005, the Company extended its fundraising efforts through the
sale of common stock to accredited investors through a private placement. The
price of the restricted stock was $.16 per share. In addition, each purchaser of
shares of common stock was granted a warrant to acquire an equal number of
common shares at a fixed price of $0.24 per share until December 2008. No
portion of the proceeds was assigned to the value of the warrants because the
exercise price of the warrant exceeded the market value of the underlying common
stock on the date of purchase. As of September 22, 2005, a total of 12,093,750
restricted common shares were sold to accredited investors for $1,818,294, net
of issuance costs of $116,706. The issuance cost consisted of $70,300 in cash,
287,500 warrants, each entitling the holder to buy one share of common stock for
$0.24 valued at $43,125, and 9,375 shares of common stock valued at $3,281,
which was paid or accrued to consultants for assistance in selling the Company's
common stock. The shares were offered and sold in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. Based on the information
provided by each of the investors, all investors qualify as accredited
investors.
Under the Round 2 Private Placements, the Company agreed to use its best
efforts to file a registration statement to register the shares of common stock
and the shares underlying the warrants issued and sold to the investors by May
9, 2005, and to use its best efforts to cause the registration statement to be
declared effective within 120 days of March 10, 2005. As a result of provisions
in certain of the Round 2 Private Placement documents, 540,000 shares of the
Company's common stock and 540,000 warrants to purchase the Company's common
stock were issued to certain shareholders who acquired in the aggregate
6,812,500 shares in Round 2 Private Placement as a result of the registration
statement not becoming effective by such date. Effective December 6, 2005, each
of these shareholders executed an amendment to their respective purchase
agreements in the form attached as Exhibit 10.10 eliminating the applicable
provision. The shares were offered and sold in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. Based on the information
provided by each of the investors, all investors qualify as accredited
investors. The additional number of shares and warrants is based upon one
percent of the number of shares and warrants purchased by such participants for
each 30-day period beginning on the 121st day until the registration statement
is declared effective. Beginning September 7, 2005, the number of shares and
warrants to be issued increased from one percent to two percent for each 30-day
period until the registration statement is declared effective. In addition,
certain shareholders who purchased 6,812,500 shares of the Company's common
stock, have anti-dilution rights until the registration statement has been
effective for 365 days. Except for commercially standard exceptions, if the
Company sells shares of the Company's common stock at a price less than $.16 per
share or issues warrants to purchase the Company's common stock at an exercise
price less than $.24 per share, certain shareholders will receive an amount of
shares or warrants at no cost so that those shareholders have no diluted effect
from the sales of common stock or warrant issuances. No expense is recorded upon
the issuance of the additional shares.
SHARES ISSUED IN EXCHANGE FOR SERVICES
During 2003, the Company issued 355,000 common stock shares to
consultants and others for services. The shares were granted at the fair market
value of the services provided. Total consulting expense of $26,150 was recorded
for the issuance. The shares were offered and sold in reliance upon exemptions
from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. Based on the information
provided by each of the investors, all investors qualify as accredited
investors.
During 2004, the Company issued 222,372 common stock shares to
consultants for services. The shares were granted at the fair market value of
the services provided. Total consultant expense of $41,800 was recorded for the
issuance. In addition, under a consulting agreement, the Company was obligated
to issue an additional $60,000 of shares (amounting to 254,572 shares) to
consultants at December 31, 2004. The expense is accrued for at December 31,
2004 in accrued expenses on the Company's balance sheet and a corresponding
charge to consultant expense in the statement of operations. Warrants with a
fair value of $117,000 were issued to consultants and others for services
performed on behalf of the Company, and are included in the Statement of Changes
in Stockholders' Equity. The shares were offered and sold in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933, as amended, and Regulation D promulgated thereunder. Based on the
information provided by each of the investors, all investors qualify as
accredited investors.
The Company issued 200,000 shares of the Company's common stock in 2004
to two individuals who have agreed to serve on the Company's Scientific Advisory
Committee. The market value of the shares at the time of issuance was $37,000
and was recorded as compensation expense in the statement of operations. The
shares were
42
offered and sold in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder.
During 2005, the Company issued 1,197,620 common stock shares to
consultants for services. The shares were granted at the fair market value of
the services provided as determined by the consultants. Total consultant expense
of $202,867 was recorded for the issuances in 2005. The shares were offered and
sold in reliance upon exemptions from registration pursuant to Section 4(2)
under the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.
ITEM 27: EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENT SCHEDULES
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
EXHIBITS
The following exhibits are attached hereto or incorporated by reference herein
(numbered to correspond to Item 601(a) of Regulation S-B, as promulgated by the
Securities and Exchange Commission) and are filed as part of this Form SB-2:
3.1 Articles of Incorporation. Registrant incorporates by reference
Exhibit 3.1 to Registration Statement on Form SB-2, filed June 4,
2001.
3.1 (a) Articles of Amendment to Articles of Incorporation Registrant
incorporates by reference Exhibit 2.2 to Form10-QSB, filed November
14, 2001.
3.1(b) Articles of Amendment to Articles of Incorporation changing Registrant
name from Direct Wireless Communications, Inc., to Health Discovery
Corporation. Registrant incorporates by reference Exhibit 3.1 (b) to
form 10-KSB, filed March 3, 2004.
3.2 By-Laws. Registrant incorporates by reference Exhibit 3.2 to
Registration Statement on Form SB-2, filed June 4, 2001.
4.1 Copy of Specimen Certificate for shares of common stock. Registrant
incorporates by reference Exhibit 4.1 to Registration Statement on
Form SB-2, filed June 4, 2001.
4.1 (b) Copy of Specimen Certificate for shares of common stock.
Registrant incorporates by reference Exhibit 4.1 (b) to form 10-KSB,
filed March 30, 2004.
4.2 Excerpt from By-Laws. Registrant incorporates by reference Exhibit 4.2
to Registration Statement on Form SB-2, filed June 4, 2001.
4.2(A) Corrected Article 3.02 of By-Laws. Registrant incorporates by
reference Exhibit 4.2(A) to Amendment No. 2 to Registration Statement
on Form SB-2, filed August 15, 2001.
4.3(a) Non Qualified stock option agreements dated October 30, 2003 between
registrant and David Cooper. Registrant incorporates by reference
Exhibit 4.3(a) to form 10-KSB, filed March 30, 2004.
5.1 Opinion of Powell Goldstein LLP on the legality of the securities
being registered.
5.2 Opinion of Powell Goldstein LLP on the legality of the additional
securities being registered.
10.1 Asset purchase agreement between registrant dated September 15, 2003
and Barnhill Group LLC. Registrant incorporates by reference Exhibit
10.2 to form 10-KSB, filed March 30, 2004.
43
10.2 Asset purchase agreement between registrant dated December 30, 2003
and Fractal Genomics LLC. Registrant incorporates by reference Exhibit
10.3 to form 10-KSB, filed March 30, 2004.
10.3 Employment Agreement with Stephen Barnhill. Registrant incorporates by
reference Exhibit 10.3 to form 10-KSB, filed April 19, 2005. *
10.4 Employment Agreement with David Cooper. Registrant incorporates by
reference Exhibit 10.4 to form 10-KSB, filed April 19, 2005. *
10.5 Form of Asset Purchase agreement between the registrant and the
sellers of the SVM Portfolio and related assets. Registrant
incorporates by reference Exhibit 10.5 to form 10-KSB, filed March 30,
2004.
10.6 Form of Securities Purchase Agreement. Registrant incorporates by
reference Exhibit 10.6 to form 10-KSB, filed April 19, 2005.
10.7 Form of Warrant. Registrant incorporates by reference Exhibit 10.7 to
form 10-KSB, filed April 19, 2005.
10.8 Form of Securities Purchase Agreement. Registrant incorporates by
reference Exhibit 10.8 to form 10-KSB, filed April 19, 2005.
10.9 Form of Warrant. Registrant incorporates by reference Exhibit 10.9 to
form 10-KSB, filed 4/19/2005.
10.10 Form of Amendment to Securities Purchase Agreement.
10.11 Employment Agreement with Daniel R. Furth, dated as of December 5,
2005.*
23.1 Consent of Darilek & Butler, Certified Public Accountant.
23.2 Consent of Porter Keadle Moore, LLP.
23.3 Consent of Powell Goldstein LLP (included in Exhibits 5.1 and 5.2
filed herewith).
* Management contract or compensatory agreement.
ITEM 28: UNDERTAKINGS
(a) (1) The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this registration statement;
and
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold
44
to such purchaser by means of any of the following communications, the
undersigned small business issuer will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424 (Section 230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned small business issuer or used or referred to by
the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
(iv) Any other communication that is an offer in the offering made by
the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) (Section 230.424(b) of
this chapter) as part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A (Section 230.430A of this chapter), shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. PROVIDED, HOWEVER, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
45
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Savannah,
State of Georgia, on December 14, 2005.
HEALTH DISCOVERY CORPORATION
By: /s/ Stephen D. Barnhill, M.D.,
Chief Executive Officer
---------------------------------
Stephen D. Barnhill, M.D., Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
-------------------------------------- -------------------------------------- ----------------------------------
Name Title Date
-------------------------------------- -------------------------------------- ----------------------------------
/s/ Stephen D. Barnhill M.D. Chief Executive Officer, Chairman December 14, 2005
---------------------------
Stephen D. Barnhill M.D.
-------------------------------------- -------------------------------------- ----------------------------------
/s/ Daniel R. Furth Principal Financial Officer December 14, 2005
------------------
Daniel R. Furth
-------------------------------------- -------------------------------------- ----------------------------------
/s/ William F. Quirk, JR. Director December 14, 2005
------------------------
William F. Quirk, Jr.
-------------------------------------- -------------------------------------- ----------------------------------
/s/ Robert S. Braswell, IV Senior Vice President, Director December 14, 2005
-------------------------
Robert S. Braswell, IV
-------------------------------------- -------------------------------------- ----------------------------------
46
Index to Financial Statements
Independent Auditors' Report...........................................F-2 & F-3
Audited Financial Statements.................................................F-4
Notes to Audited Financial Statements........................................F-8
Unaudited Interim Financial Statements......................................F-19
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Health Discovery Corporation
We have audited the accompanying balance sheets of Health Discovery Corporation
(a development stage corporation) (the "Company"), (formerly Direct Wireless
Communications, Inc.) as of December 31, 2004 and 2003, and the related
statements of operations, changes in stockholders' equity, and the cash flows
for the years then ended and for the period from inception (April 6, 2001) to
December 31, 2004, except that we did not audit the Company's financial
statements for the period from inception (April 6, 2001) to December 31, 2002
which were audited by other auditors, whose report is dated February 25, 2003,
who expressed an unqualified opinion on those statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003 and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note L to the financial
statements, the Company is in the organization stage and has not fully commenced
operations. The Company has suffered recurring losses from operations and
negative working capital that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note L. The financial statements do not include any adjustments
relating to the recoverability of reported asset amounts or the amount of
liabilities that might result from the outcome of this uncertainty.
As discussed in Note M, management engaged us to re-audit the financial
statements of Health Discovery Corporation as of and for the year ended December
31, 2003. As a result of the audit certain 2003 adjustments were recorded by
management. Accordingly, the 2004 financial statements were corrected to reflect
these adjustments.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
September 22, 2005
F-2
DARILEK, BUTLER & CO., P.C.
2702 N. Loop 1604 E., Suite 202
San Antonio, Texas 78232
210-979-0055 phone
210-979-0058 fax
INDEPENDENT AUDITORS'REPORT
The Board of Directors
Direct Wireless Communications, Inc.
San Antonio, Texas
We have audited the accompanying balance sheet of Direct Wireless
Communications, Inc. (a Development Stage Company) as of December 31, 2002 and
the related statements income and cash flows for the year ended December 31,
2002 and the period from inception (April 6, 2001) to December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Direct Wireless Communications,
Inc. as of December 31, 2002 and the results of its operations and its cash
flows for the initial period then ended in conformity with accounting principles
generally accepted in the United States of America, consistently applied.
"DARILEK, BUTLER & CO., P.C."
San Antonio, Texas
February 25, 2003
F-3
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
---- ----
Current Assets
Cash $ 163,477 $ 76,589
---------- ----------
Total Current Assets 163,477 76,589
---------- ----------
Equipment, Less Accumulated Depreciation of $1,719 6,371 -
Other Assets
Patents, Less Accumulated Amortization of $166,438 and $23,831 3,340,339 1,340,940
---------- ----------
Total Assets $ 3,510,187 $ 1,417,529
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 234,685 $ 5,587
Accrued Liabilities 183,797 5,495
Current Portion of Long-Term Debt 697,491 250,000
---------- ----------
Total Current Liabilities 1,115,973 261,082
Convertible Notes Payable 1,127,818 -
Long-Term Debt, Less Current Portion 173,576 250,000
---------- ----------
Total Liabilities 2,417,367 511,082
---------- ----------
Commitments and Contingencies
Stockholders' Equity
Common Stock, No Par Value, 200,000,000 Shares Authorized
Issued and Outstanding 78,767,464 and 66,576,128 Shares, Respectively 3,788,442 2,092,742
Paid for but Not Issued 5,434,375 Shares 695,761 -
Deficit Accumulated During Development Stage (3,391,383) (1,186,295)
---------- ----------
Total Stockholders' Equity 1,092,820 906,447
---------- ----------
Total Liabilities and Stockholders' Equity $ 3,510,187 $ 1,417,529
========== ==========
See accompanying notes to financial statements and independent auditors' reports.
F-4
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND THE PERIOD FROM APRIL 6, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2004
April 6, 2001
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
2004 2003 2004
---- ---- ----
Revenues
Capital Loss on Sale of Assets $ - $ - $ (20)
Dividend Income - - 64
Miscellaneous Income 15 50 405
------------ ------------ ------------
Total Revenues 15 50 449
------------ ------------ ------------
Expenses
Administrative Fees 6,890 15,300 57,609
Amortization 142,607 23,831 166,438
License Fees 1,697 16,260 242,497
Outside Services - 76,625 80,841
Professional and Consulting Fees 830,835 57,270 1,472,432
Compensation 862,560 80,667 943,227
Other General and Administrative Expenses 360,514 37,509 428,788
------------ ------------ ------------
Total Expenses 2,205,103 307,462 3,391,832
------------ ------------ ------------
Net Loss $ (2,205,088) $ (307,412) $ (3,391,383)
============ ============ ============
Weighted Average Outstanding Shares 73,950,073 33,776,646 34,246,701
Loss Per Share $ (.03) $ (0.01) $ (.09)
See accompanying notes to financial statements and independent auditors' reports.
F-5
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 6, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2004
Common Stock
--------------------------------------------------------------
Issued and Outstanding Paid for but Not Issued Deficit Total
------------------------------ ------------------------------ Accumulated During Stockholders'
Shares Amount Shares Amount Development Stage Equity
-------------- -------------- -------------- -------------- ------------------- --------------
Contributed Services - $ 15,019 - $ - $ - $ 15,019
Stock Issued for Cash 2,001,650 168,645 - - - 168,645
Stock Issued as a Dividend to
Shareholders of
Direct Wireless 10,138,975 - - - - -
Corporation
Stock Issued to Officers of
Direct Wireless Corporation 7,100,000 - - - - -
Stock Issued for Services 2,213,995 315,496 - - - 315,496
Stock Held In Escrow 77,500 - - - - -
Cash Received for Sale of
Escrowed Shares 22,500 9,335 - - - 9,335
Net Loss - - - - (523,115) (523,115)
-------------- -------------- -------------- -------------- ------------------- --------------
Balance - December 31, 2001 21,554,620 508,495 - - (523,115) (14,620)
Contributed Services - 20,400 - - - 20,400
Stock Issued for Cash 467,500 87,810 - - - 87,810
Stock Issued for Services 3,598,444 248,100 - - - 248,100
Stock Held in Escrow 3,179,500 - - - - -
Cash Received for Sale of
Escrowed Shares 1,020,500 24,280 - - - 24,280
Net Loss - - - - (355,768) (355,768)
-------------- -------------- -------------- -------------- ------------------- --------------
Balance - December 31, 2002 29,820,564 889,085 - - (878,883) 10,202
Contributed Services - 15,300 - - - 15,300
Stock Issued for Cash 2,750,000 55,000 - - - 55,000
Stock Issued for Services 355,000 26,150 - - - 26,150
Paid in Capital for
Compensatory Options - 54,000 - - - 54,000
Stock Issued for Patents 33,650,564 864,261 - - - 864,261
Stock Held in Escrow (3,257,000) - - - - -
Cash Received for Sale of
Escrowed Shares 3,257,000 188,946 - - - 188,946
Net Loss - - - - (307,412) (307,412)
-------------- -------------- -------------- -------------- ------------------- --------------
Balance - December 31, 2003 66,576,128 2,092,742 - - (1,186,295) 906,447
Stock Issued for Cash 15,235,000 1,499,900 - - - 1,499,900
Stock Issued for Services 422,372 78,800 - - - 78,800
Cancellation of Common Stock (3,466,036) - - - - -
Paid in Capital for
Compensatory Warrants - 117,000 - - - 117,000
Stock Paid for but Not Issued - - 5,434,375 695,761 - 695,761
Net Loss - - - - (2,205,088) (2,205,088)
-------------- -------------- -------------- -------------- ------------------- --------------
Balance - December 31, 2004 78,767,464 $ 3,788,442 5,434,375 $ 695,761 $ (3,391,383) $ 1,092,820
============== ============== ============== ============== =================== ==============
See accompanying notes to financial statements and independent auditors' reports.
F-6
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND THE PERIOD FROM APRIL 6, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2004
From Inception
Year Ended Year Ended (April 6, 2001)
December 31, December 31, to December 31,
2004 2003 2004
---- ---- ----
Cash Flows From Operating Activities
Net Loss $ (2,205,088) $ (307,412) $ (3,391,383)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Noncash Compensation 117,000 54,000 171,000
Administrative Expenses Settled by Common Stock - 15,300 50,719
Services Exchanged for Common Stock 78,800 26,150 668,546
Depreciation and Amortization 144,326 23,831 168,157
Increase in Accounts Payable - Trade 229,098 15,710 234,685
Increase in Accrued Liabilities 132,313 5,495 132,808
------------ ------------ ------------
Net Cash Used by Operating Activities (1,503,551) (166,926) (1,965,468)
------------ ------------ ------------
Cash Flows From Investing Activities:
Purchase of Equipment (8,090) - (8,090)
Amounts Paid to Acquire Patents (166,529) (510) (167,039)
------------ ------------ ------------
Net Cash Used by Investing Activities (174,619) (510) (175,129)
------------ ------------ ------------
Cash Flows From Financing Activities:
Repayments of Notes Payable (476,592) - (476,592)
Proceeds from Sales of Common Stock, Net 2,241,650 243,946 2,780,666
------------ ------------ ------------
Net Cash Provided by Financing Activities 1,765,058 243,946 2,304,074
------------ ------------ ------------
Net Increase in Cash 86,888 76,510 163,477
Cash, at Beginning of Period 76,589 79 -
------------ ------------ ------------
Cash, at End of Period $ 163,477 $ 76,589 $ 163,477
============ ============ ============
Non-Cash Investing and Financing Transactions:
Patents Purchased Using Debt $ 1,975,477 $ 500,000 $ 2,475,477
Stock Issued for Professional and Consulting Services $ 78,800 $ 26,150 $ 668,546
Stock Issued for Patents $ - $ 864,261 $ 864,261
Non-cash Compensation Warrants $ 117,000 $ - $ 117,000
Non-cash Stock Issuance Costs $ 45,989 $ - $ 45,989
See accompanying notes to financial statements and independent auditors' reports.
F-7
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND DESCRIPTION OF DEVELOPMENT STAGE ACTIVITIES
Health Discovery Corporation (formerly known as Direct Wireless Communications,
Inc.) (the "Company") has been in the development stage since the date of
incorporation on April 6, 2001. The Company was primarily engaged in the
activity of developing technology for a wireless telephone system until 2003,
when it decided to abandon its efforts in the telecommunications industry and
acquired new technologies in the biotechnology industry. During 2003, the
Company acquired the assets of the Barnhill Group, LLC and Fractal Genomics, LLC
in pursuit of its biotechnology focus as discussed in Note D. During 2004, the
Company continued pursuit of its biotechnology focus by acquiring certain rights
to patents and patent pending applications for certain machine learning tools
used for diagnostic and drug discovery.
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 suspectible to change in the
near-term include the valuation of non-cash consideration for services and the
recoverability of the patents.
PATENTS
Patents are amortized over their remaining legal lives, that range from 15 to 20
years, from the date they are acquired or approved. Legal costs directly
associated with the patent acquisitions and the application process for new
patents are capitalized when incurred and are being amortized over the remaining
legal life of the related patent. If the applied for patents are abandoned or
are not issued, the Company will expense the capitalized legal costs as an
impairment charge.
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, 2004, the Company does not believe there has
been any impairment of its intangible assets.
INCOME TAXES
The Company accounts for income using the liability method. Deferred tax assets
and liabilities are recognized for future tax benefits 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. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be realized through future operations.
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 of the probability of being able to realize
the future benefits indicated by such assets is made. A valuation allowance is
provided for the portion of the deferred tax asset whenit is more likely than
not that some portion or all of the deferred tax asset will not be realized. In
assessing the realizabilty of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies.
F-8
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation under the intrinsic value
method prescribed in Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees." Had the Company used the fair-value-based method of
accounting for the stock option plan prescribed by SFAS No. 123 and charged
compensation expense against income over the vesting period based on the fair
value of options at the date of grant, net loss and loss per share for the years
ended December 31, 2004 and 2003:
From Inception
(April 6, 2001
to December
2004 2003 31, 2004)
---- ---- ---------
Net loss as reported $ (2,205,088) $ (307,412) $ (3,391,383)
Deduct: Stock-based Expense
Determined Under Fair Value Based
Method for:
Employee Stock Options (32,000) (60,000) (92,000)
----------- ----------- -----------
Proforma Net Loss $ (2,237,088) $ (367,412) $ (3,483,383)
=========== =========== ===========
Stock-based Expense Included in Net Loss $ 195,800 $ 80,150 $ 275,950
=========== =========== ===========
Loss Per Share:
Basic - As Reported $ (.03) $ (.01) $ (.09)
Basic - Proforma $ (.03) $ (.01) $ (.09)
There were no options granted in 2004.
Stock-based expense included in the 2004 net loss includes $117,000 in
compensatory warrants and $78,800 in stock issued to consultants for services.
Stock-based expense in the 2003 net loss includes $80,150 in compensatory
options. No stock-based expense was incurred in 2002 or 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts payable, accrued
expenses and long-term debt. Pursuant to SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," the Company is required to estimate the fair
value of all financial instruments at the balance sheet date. The Company
considers the carrying values of its financial instruments in the financial
statements to approximate their fair value.
F-9
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NET LOSS PER SHARE
Basic Earnings Per Share ("EPS") includes no dilution and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings or losses of
the entity. Due to the net loss in all periods presented, the calculation of
diluted per share amounts would result in an anti-dilutive result and therefore
is not presented. Potentially dilutive shares at December 31, 2004 and 2003
include the following:
2004 2003
---- ----
Stock options 3,000,000 5,500,000
Warrants 6,134,375 -
Convertible notes 6,634,224 -
----------- -----------
15,768,599 5,500,000
=========== ===========
Subsequent to December 31, 2004, the Company sold or otherwise issued an
additional 25,180,625 shares of restricted common stock as described in Note K.
Each of those shares had an associated warrant that would have been a
potentially dilutive share.
ISSUANCE OF EQUITY INSTRUMENTS FOR NON-CASH CONSIDERATION
All issuances of the Company's equity instruments for non-cash consideration,
which primarily pertain to services rendered by consultants and others, have
been assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable.
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 $100,000.
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. At December 31, 2004, all individual cash balances at
financial institutions were less than $100,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets", an amendment of APB Opinion 29, " Accounting for Non-Monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of non-monetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for non-monetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of non-monetary assets that do not have
"commercial substance." The provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Early application is permitted, and companies must apply the standard
prospectively. The Company adopted this statement on January 1, 2005. The
adoption of the statement should not cause a significant change in the current
manner in which the Company accounts for its exchanges of non-monetary assets.
The FASB has issued SFAS No. 123(R), "Share-Based Payment." The new rule
requires that the compensation cost relating to share-based payment transactions
be recognized in the financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. This statement
precludes the recognition of compensation expense under APB Opinion No. 25's
intrinsic value method. The Company will be required to apply SFAS No. 123(R)
beginning January 1, 2006. The Company does not believe that the impact of SFAS
No. 123(R) will be materially different from the amounts presented in the pro
forma disclosures.
F-10
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE B - RELATED PARTY TRANSACTIONS
Direct Wireless Corporation provided office space and administrative services to
the Company until September 30, 2003. The estimated value for the services
provided totaled $50,719 since inception and is recorded as contributed
administrative services in the accompanying financial statements.
As a result of the agreements between Barnhill, LLC and Fractal Genomics, LLC,
the Company's Chief Executive Officer receives 49% of each note payment, or
$30,625 plus interest per payment, made to Fractal Genomics, LLC from Health
Discovery Corporation that is more fully described in Note D.
As of September 15, 2005, the Company has agreed to lease a new location to be
used as the principle executive office from a company owned by the wife of the
Company's Chief Executive Officer. The term of the new principle executive
office space will be month-to-month and the rent expense associated with this
lease will be $1,036 per month. Prior to September 15, 2005, the Company had
been leasing its principle executive office space from a company owned by the
wife of the Company's Chief Executive Officer and its term was month-to-month.
Rent expense associated with this lease was $838 per month. Rent expense under
this lease arrangement amounted to approximately $10,000 in 2004. There was no
rent expense related to this lease in 2003 and prior years.
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. Additionally,
legal costs associated with patent acquisitions and the application process are
also capitalized as a part of patents. The Company has recorded $3,364,156 and
$1,364,757 in patents and patent related costs, net of accumulated amortization,
at December 31, 2004 and 2003.
Amortization charged to operations for the years ended December 31, 2004 and
2003 and from the period from April 6, 2001 (date of inception) to December 31,
2004, was $142,607, $23,831 and $166,438, respectively. The weighted average
amortization period for patents is 15 years. Estimated amortization expense for
the next five years is $228,500 per year.
NOTE D - ACQUISITIONS
On August 26, 2003, the Company acquired the assets of Barnhill Group, LLC,
which consisted of patents and related rights, through the issuance of
29,825,564 common shares of the Company (then known as Direct Wireless
Communications, Inc.). The purchase of Barnhill Group, LLC's assets was recorded
at $596,511, which was the market value of the shares issued at the date of
acquisition.
On September 30, 2003, the Company acquired the patents, patent rights, all
pending intellectual property of Fractal Genomics, LLC through the issuance of
3,825,000 common shares of the Company (then known as Direct Wireless
Communications, Inc.). In addition to the common stock shares issued for the
acquisition of Fractal Genomics, LLC's assets, the Company agreed to execute a
note for $500,000 payable in $62,500 quarterly installments to the seller
beginning on January 1, 2004 through October 1, 2005. The purchase of Fractal
Genomics, LLC's assets was recorded at $767,750, which was the market value of
the shares issued at the date of acquisition plus the amount of the note.
On July 30, 2004, the Company acquired certain rights to patents and patents
pending applications for certain machine learning tools used for diagnostic and
drug discovery. The rights to these assets were purchased from unrelated third
parties for a combination of non-interest bearing notes payable and interest
bearing notes payable that are convertible to common stock. Under the
non-interest bearing note payable, an initial cash payment of $175,394 was paid
to the sellers on December 30, 2004 and four additional payments of $175,394
will be made four months from the date of the initial payment and every fourth
month thereafter until $876,970 has been paid. The Company has imputed interest
on the non-interest bearing note payments using a rate of 3.16 %, which resulted
in a liability that amounts to $847,659. For the interest bearing notes payable
that are convertible to common stock, the sellers received notes payable
amounting to $1,127,818 that bear interest at 3.16 % and are convertible into
6,634,221 shares of common stock (at $.17 per share) until maturity on July 28,
2009. The agreements place certain limitations on the selling of the common
stock shares during certain periods after conversion. The purchase of these
patents and patents pending applications was recorded at $1,975,477, which was
the estimated present value of the notes issued at the date of acquisition.
F-11
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE D - ACQUISITIONS, CONTINUED
On May 6, 2005 the Company acquired the remaining interest in a portfolio of
patents from a group of unrelated third parties. The cost of the remaining
interest consisted of a cash payment of $270,856; the issuance of promissory
notes totaling $37,871 and convertible notes totaling $147,401. The convertible
notes were converted by the holders immediately upon issuance in exchange for
867,065 shares of common stock.
The entire purchase price for each of these acquisitions was assigned to the
acquired patents since no other net assets were acquired and the patents were
the sole interest of the acquirer.
NOTE E - LICENSE FEES EXPENSE-LICENSE AGREEMENT
Effective April 30, 2001, the Company entered into a license agreement with
Direct Wireless Corporation. The Company had agreed to pay $10,000,000 under the
terms of the license agreement as the Company gains money from the sale or sales
of sub-licenses for the United States. The Company had also agreed to pay a
percentage of all fees collected from licensed products to Direct Wireless under
the terms of the agreement.
As a result of the acquisition of Barnhill Group, LLC and the change in the
strategic direction of the Company, the license agreement was canceled in 2003.
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.
On August 30, 2004, the Company paid approximately $20,000 in royalty fees to
Lucent. Total fees of $18,886 were capitalized as part of the acqusition cost of
the patents acquired, the balance of $1667 was expensed as a license fee.
NOTE F - INCOME TAXES
The Company's effective tax rate differs from the federal and state statutory
rates due to the valuation allowance recorded for the deferred tax asset due. An
allowance has been provided for by the Company which reduced the tax benefits
accrued by the Company for its net operating losses and other deferred tax
attributes to zero, as management cannot determine when, or if, the tax benefits
derived from these operating losses and other deferred tax attributes will
materialize. At December 31, 2004, the Company had net operating loss carry
forwards totaling approximately $3,300,000, which will expire in various years
beginning in 2021.
NOTE G - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Notes payable consist of the following: 2004 2003
---- ----
Note payable to individuals, bearing interest at 6% payable in quarterly installments
of $62,500 with a final payment due on October 1, 2005 $ 187,500 $ 500,000
Notes payable to individuals, with imputed interest computed at 3.16 % with
installments due every fourth month with a final payment due February 28, 2006 683,567
----------- -----------
871,067 500,000
Less current maturities (697,491) (250,000)
----------- -----------
$ 173,576 $ 250,000
=========== ===========
Convertible notes in an aggregate amount of $1,127,818 mature on July 28, 2009,
and may be converted at the election of the noteholders until that time into
shares of the Company's Common Stock at $.17 per share. A total of 6,634,224
shares may be issued upon the conversion of the notes. In addition, the
noteholders are further limited to not sell more than 10% of such holder's
shares in any calendar quarter after the minimum holding period has expired. The
convertible notes bear interest at a rate of 3.16%.
F-12
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE G - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, CONTINUED
All of the Company's debt is collateralized by specific patents in the Company's
patent portfolio.
During 2005, certain convertible note holders elected to convert their debt to
shares of the Company's stock. The conversion reduced the debt by $609,576 in
exchange for 3,585,741 shares of common stock.
NOTE H - COMMITMENTS
Certain security purchase agreements, as discussed in note K, may obligate the
Company to issue additional shares and warrants to purchase the Company's common
stock.
The Company has entered into employment agreements with its Chief Executive
Officer, President and Chief Medical Officer and the Director of Operations. The
employment agreement with the Company's Chief Executive Officer is for a term of
five years beginning September 15, 2003. The employment agreement with the
Company's President and Chief Medical Officer will continue until terminated,
which can occur at any time by notice, provided that the Company's President and
Chief Medical Officer will not terminate his employment upon less than sixty
(60) days' prior written notice. The agreements provide for base salaries and
other perquisites commensurate with their employment.
The employment agreement with the Company's Director of Operations commenced on
June 16, 2004 and ended on August 1, 2005, when the parties elected to terminate
the agreement.
As of December 31, 2004, the Company contractually agreed to issue upon the
fulfillment of certain conditions 200,000 shares of common stock and 700,000
warrants to purchase the Company's common stock at an exercise price of $.01 per
share to members of the Company's Scientific Advisory Board for services
performed. In addition, the Company contractually agreed to issue upon the
fulfillment of certain conditions 500,000 warrants to purchase the Company's
common stock at an exercise price of $.01 per share to a consultant for services
performed. Warrants to purchase 200,000 shares vested in 2004 and the remaining
1,000,000 vest during 2005 and 2006. The shares vested in 2004. The Company has
issued or will issue the contractually agreed shares upon the fulfillment of
certain conditions as they are satisfied in 2005 and 2006.
In 2005, the Company committed to issue an additional 200,000 shares of common
stock and 300,000 warrants to purchase the Company's common stock at an exercise
price of $.01 per share to members of the Company's Scientific Advisory Board
for services performed. All of the committed shares and warrants vest in 2006
and will be issued upon vesting.
NOTE I - STOCK OPTIONS
On October 30, 2003, the Company approved 8,000,000 shares of common stock to be
reserved solely for issuance and delivery upon the exercise of option grants.
At December 31, 2004 and 2003, the Company has options to purchase 3,000,000
shares of common stock outstanding as follows:
F-13
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE I - STOCK OPTIONS, CONTINUED
NUMBER OF EXERCISE
2004 GRANT DATE SHARES PRICE VESTING
---- ---------- ------ -----
October 2003 600,000 $ .01 October 2003
October 2003 2,400,000 $ .10 400,000 shares each in November 2004, 2005 and 2006 with
the remaining based on performance.
NUMBER OF EXERCISE
2003 GRANT DATE SHARES PRICE VESTING
---- ---------- ------ -----
October 2003 1,900,000 $ .10 400,004 shares in November 2004, 400,000 shares each in
November 2005 and 2006 with the remaining based on
performance.
October 2003 600,000 $ .01 October 2003
October 2003 600,000 $ .01 October 2003
October 2003 2,400,000 $ .10 400,000 shares each in November 2004, 2005 and 2006 with
the remaining based on performance.
These options were awarded to an employee of the Company and expire in October
2013.
The following schedule summarizes stock option activity for the period from
April 6, 2001 (date of inception) to December 31, 2004:
Number of Stock Weighted-Average
Options Exercise Price
------- --------------
Granted - 2003 5,500,000 $ .08
Forfeited - 2004 (2,500,000) $ .08
---------
Outstanding at December 31, 2004 3,000,000 $ .08
=========
A former employee forfeited 2,500,000 during 2004. There were 1,200,000 options
with a weighted average exercise price of $.06 exercisable at December 31, 2004.
The weighted average remaining life of the options is 8 years.
The estimated weighted average fair value of options granted during 2003 was
$.08 per share. The fair value of options granted under the Company's fixed
stock option plan during 2003 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: expected dividend yield of 0%, expected volatility of 80%;
weighted average risk-free interest rate of 4.30% and an expected weighted
average life of ten years.
F-14
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE J - WARRANTS
There were no warrants outstanding at December 31, 2003. Information about
warrants outstanding at December 31, 2004 is summarized below:
APPROXIMATE WEIGHTED-
NUMBER AVERAGE REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE (YEARS)
--------------- ----------- ------------------------
$.01 100,000 1
$.08 600,000 2
$.24 5,434,375 4
$.35 15,235,000 2
$.24 218,746 4
The $.01 and $.08 warrants were issued to consultants and others for services
rendered on behalf of the Company and are currently exercisable. Amounts related
to these warrants have been included in Paid in Capital for Compensatory
Warrants in the Statement of Changes in Stockholders' Equity.
The $.35 Warrants were issued in conjunction with Round 1 Private Placement
described in Note J. The $.24 Warrants relate to the Round 2 Private Placement.
While the funds have been received for the Round 2 Private Placement, the shares
and the related warrants have not been issued. In addition to the Warrants
listed above, the Company has committed to issue consultants 218,746 Warrants
for assistance in selling the Company's common stock. During 2005, all of these
shares and Warrants have been issued.
The Company has ascribed no value to the Warrants associated with the Private
Placements that are described in Note K.
During 2005, the Company issued 1,000,000 warrants to consultants for services
rendered on behalf of the Company and are currently exercisable. The exercise
prices are $.20 per share for 500,000 of the warrants and $.22 per share for
500,000 warrants. The Company recorded $120,000 of consulting expense upon
issuance of the warrants.
NOTE K - STOCKHOLDERS' EQUITY
2003 PRIVATE PLACEMENT
During 2003, the Company offered sale of restricted stock to qualified investors
through a private placement offering. A total of 2,750,000 shares were sold for
$.02 per share.
2003 SALE OF ESCROW SHARES
During 2003, the Company received proceeds of $188,946 from the sale of
3,257,000 shares of common stock.
2003 STOCK ISSUED IN ACQUISITIONS
As discussed in Note D, the Company issued 33,560,564 shares of common stock in
connection with the acquisition of the assets of the Barnhill Group LLC and
Fractal Genomics, LLC. The shares were valued at $864,261 based on quoted market
prices.
F-15
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE K - STOCKHOLDERS' EQUITY, CONTINUED
PRIVATE PLACEMENT - ROUND 1
From February through July 2004, the Company offered for sale shares of
restricted stock to accredited investors through a private offering. The price
of the restricted stock was $.10 per share. A total of 15,235,000 restricted
common shares were issued to accredited investors for $1,499,900, net of
issuance cost of $23,600. The issuance cost consisted of $22,400 in cash and
3,429 in common shares valued at $1,200, paid to consultants for assistance in
selling the Company's common stock. The value of Company stock was based on a
contractual agreement of $.35 per share. In addition, each purchaser of shares
of common stock was granted a warrant to acquire an equal number of restricted
common shares at a fixed price of $0.35 per share until February 2007. No
portion of the proceeds was assigned to the value of the warrants because the
exercise price of the warrant exceeded the market value of the underlying common
stock on the date of purchase.
PRIVATE PLACEMENT - ROUND 2
From November 2004 through March 2005, the Company offered for sale shares of
restricted stock to accredited investors through a private offering. The price
of the restricted stock was $.16 per share. In addition, each purchaser of
shares of common stock was granted a warrant to acquire an equal number of
restricted common shares at a fixed price of $0.24 per share until December
2008. No portion of the proceeds were assigned to the value of the warrants
because the exercise price of the warrant exceeded the market value of the
underlying common stock on the date of purchase. As of December 31, 2004, a
total of 5,434,375 restricted common shares were sold to accredited investors
for $695,761, net of issuance costs of $173,739. The issuance cost consisted of
$128,950 in cash, 218,746 warrants, each entitling the holder to buy one share
of the Company's common stock for $0.24 valued at $32,812 and 34,277 shares of
common stock valued at $11,977 which was paid or accrued to consultants for
assistance in selling the Company's common stock As of December 31, 2004, the
common shares and related warrants had not been issued to the purchasers and are
recorded as common shares purchased and not issued on the Company's balance
sheet. The value of Company stock was derived based on a contractual arrangement
of $.35 per share. The values of the warrants were calculated using the
Black-Scholes option-pricing model.
On March 10, 2005, the Company finalized a sale of shares of restricted common
stock to accredited investors through a private offering. The price of the
restricted stock was $.16 per share. In addition, each purchaser of the shares
of common stock received a warrant to acquire an equal number of common shares
at a fixed price of $0.24 per share until December 2008. No portion of the
proceeds was assigned to the value of the warrants because the exercise price of
the warrant exceeded the market value of the underlying common stock on the date
of purchase. A total of 13,018,750 restricted common shares were sold to
accredited investors for $1,798,944, net of issuance costs of $284,056. The
issuance cost consisted of $157,000 in cash, 806,250 warrants, each entitling
the holder to buy one share of the Company's common stock for $0.24 valued at
$120,938, and 17,480 shares of common stock valued at $6,118 which was paid or
accrued to consultants for assistance in selling the Company's common stock. The
value of Company stock was derived based on a contractual arrangement of $.35
per share. The values of the warrants were calculated using the Black-Scholes
option-pricing model.
F-16
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE K- STOCKHOLDERS' EQUITY, CONTINUED
PRIVATE PLACEMENT - ROUND 2, CONTINUED
During 2005, the Company extended its fundraising efforts through the sale of
common stock to accredited investors through a private placement. The price of
the restricted stock was $.16 per share. In addition, each purchaser of stock
shares was granted a warrant to acquire an equal number of restricted common
shares at a fixed price of $0.24 per share until December 2008. No portion of
the proceeds was assigned to the value of the warrants because the exercise
price of the warrant exceeded the market value of the underlying common stock on
the date of purchase. As of September 22, 2005, a total of 12,093,750 restricted
common shares were sold to accredited investors for $1,818,294, net of issuance
costs of $116,706. The issuance cost consisted of $70,300 in cash, 287,500
warrants, each entitling the holder to buy one share of common stock for $0.24
valued at $43,125, and 9,375 shares of common stock valued at $3,281, which was
paid or accrued to consultants for assistance in selling the Company's common
stock. The value of Company stock was derived based on a contractual arrangement
of $.35 per share. The values of the warrants were calculated using the
Black-Scholes option-pricing model.
Under the Round 2 Private Placements, the Company agreed to use its best efforts
to file a registration statement to register the shares of common stock and the
shares underlying the warrants issued and sold to the investors by May 9, 2005,
and to use its best efforts to cause the registration statement to be declared
effective within 120 days of March 10, 2005. As a result of provisions in
certain of the Round 2 Private Placement documents, on August 7 and September 6,
2005, 68,125 shares of the Company's common stock and 68,125 warrants to
purchase the Company's common stock were issued to certain shareholders who
acquired in the aggregate 6,812,500 shares in Round 2 Private Placement for each
date as a result of the registration statement not becoming effective by such
date. The additional number of shares and warrants is based upon one percent of
the number of shares and warrants purchased by such participants for each 30-day
period beginning on the 121st day until the registration statement is declared
effective. Beginning September 7, 2005, the number of shares and warrants to be
issued will increase from one percent to two percent for each 30-day period
until the registration statement is declared effective. In addition, certain
shareholders who purchased 6,812,500 shares of the Company's common stock, have
anti-dilution rights until the registration statement has been effective for 365
days. If the Company sells shares of the Company's common stock at a price less
than $.16 per share or issues warrants to purchase the Company's common stock at
an exercise price less than $.24 per share, certain shareholders will receive an
amount of shares or warrants at no cost so that those shareholders have no
diluted effect from the sales of common stock or warrant issuances. No expense
is recorded upon the issuance of the additional shares.
SHARES ISSUED IN EXCHANGE FOR SERVICES
During 2003, the Company issued 355,000 common stock shares to consultants and
others for services. The shares were granted at the fair market value of the
services provided. Total consulting expense of $26,150 was recorded for the
issuance.
During 2004, the Company issued 222,372 common stock shares to consultants for
services. The shares were granted at the fair market value of the services
provided. Total consultant expense of $41,800 was recorded for the issuance. In
addition, under a consulting agreement, the Company was obligated to issue an
additional $60,000 of shares (amounting to 254,572 shares) to consultants at
December 31, 2004. The expense is accrued for at December 31, 2004 in accrued
expenses on the Company's balance sheet and a corresponding charge to consultant
expense in the statement of operations. Warrants with a fair value of $117,000
were issued to consultants and others for services performed on behalf of the
Company, and are included in the Statement of Changes in Stockholders' Equity.
The Company issued 200,000 shares of the Company's common stock in 2004 to two
individuals who have agreed to serve on the Company's Scientific Advisory
Committee. The market value of the shares at the time of issuance was $37,000
and was recorded as compensation expense in the statement of operations.
During 2005, the Company issued 1,197,620 common stock shares to consultants for
services. The shares were granted at the fair market value of the services
provided as determined by the consultants. Total consultant expense of $202,867
was recorded for the issuances in 2005.
F-17
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE K- STOCKHOLDERS' EQUITY, CONTINUED
STOCK CANCELLATION
During 2004, certain officers and former officers and former directors of the
Company surrendered 3,466,036 shares of the Company's common stock because the
issuance of the shares was not properly authorized. The shares were immediately
cancelled, and the Company gave no consideration for these shares.
NOTE L - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates the
realization of assets and the liquidation of liabilities in the normal course of
business. No operating revenue has been derived since inception, and the Company
has not yet generated sufficient working capital to support its operations. The
Company's ability to continue as a going concern is dependent, among other
things, on its ability to reduce certain costs, obtain new contracts and
additional financing and eventually, attain a profitable level of operations.
The Company has recently entered into joint ventures with several leading
medical schools and research facilities. Additionally, validation testing is
currently being performed on several of the Company's discoveries. Assuming that
the testing confirms the initial discoveries, the Company plans to market the
discoveries. In addition, the Company plans to license the technology underlying
several of its patents and to provide supporting services related to the
application of such technology. Based on these developments, management believes
revenue generation will commence in the near-term. As noted in Note K, the
Company raised additional capital subsequent to December 31, 2004 and may from
time-to-time, raise additional capital.
NOTE M - PREVIOUSLY ISSUED 2004 AUDITED FINANCIAL STATEMENTS
During 2005, the Company engaged an accounting firm to re-audit the Company's
2003 financial statements. As a result of the audit, management recorded two
adjustments to the 2003 financial statements. The first adjustment, which
amounted to $23,817, was made to record amortization expense for certain patents
that were acquired in 2003. The second adjustment, which amounted to $54,000,
was made to record compensation expense for a stock option grant that was
granted at an exercise price less than the fair market value of the Company's
stock at the time of grant. The impact on the 2004 financial statements, which
were previously issued with a report dated April 17, 2005, is as follows:
PRIOR TO AFTER
RESTATEMENT RESTATEMENT
----------- -----------
Patents $3,364,156 $3,340,339
Common Stock 3,734,442 3,788,442
Accumulated Deficit (3,313,566) (3,391,383)
Net Loss (2,205,088) (2,205,088)
F-18
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2005
ASSETS
Current Assets
Cash $ 1,038,722
Employee Advances 7,716
Prepaid Expenses 12,021
------------
Total Current Assets 1,058,459
------------
Equipment, Less Accumulated Depreciation of $5,038 9,866
Other Assets
Patents, Less Accumulated Amortization of $351,763 3,634,024
------------
Total Assets $ 4,702,349
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 231,665
Accrued Liabilities 405,028
Current Portion of Long-Term Debt 370,693
------------
Total Current Liabilities 1,007,386
Convertible Notes Payable 665,643
------------
Total Liabilities 1,673,029
------------
Commitments and Contingencies
Stockholders' Equity
Common Stock, No Par Value, 200,000,000 Shares Authorized
Issued and Outstanding 114,838,526 Shares 9,101,307
Deficit Accumulated During Development Stage (6,071,987)
------------
Total Stockholders' Equity 3,029,320
------------
Total Liabilities and Stockholders' Equity $ 4,702,349
============
F-19
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
AND THE PERIOD FROM APRIL 6, 2001 (DATE OF INCEPTION) TO SEPTEMBER 30, 2005
Three Months Three Months Nine Months Nine Months April 6, 2001
Ended Ended Ended Ended (Inception) to
Sept 30, Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004 2005
---- ---- ---- ---- ----
Revenues
Capital Gain (Loss) on Sale of Assets $ - $ - $ - $ - $ (20)
Dividend Income - - - - 64
Miscellaneous Income 103 1 103 15 508
----------- ----------- ----------- ----------- -----------
Total Revenues 103 1 103 15 552
----------- ----------- ----------- ----------- -----------
Expenses
Administrative Fees (309) - 7,147 2,896 64,756
Amortization 65,728 44,582 185,325 85,879 351,763
License Fees - 1,667 30 1,697 242,527
Outside Services - - 3,000 - 83,841
Professional and Consulting Fees 448,796 263,908 1,280,895 368,682 2,753,327
Compensation 259,080 175,000 628,235 573,167 1,571,462
Other General and Administrative
Expenses 150,488 116,474 576,075 284,898 1,004,863
----------- ----------- ----------- ----------- -----------
Total Expenses 923,783 601,631 2,680,707 1,317,219 6,072,539
----------- ----------- ----------- ----------- -----------
Net Loss $ (923,680) (601,630) $ (2,680,604) $ (1,317,204) $ (6,071,987)
=========== =========== =========== =========== ===========
Average Outstanding Shares 114,156,189 66,576,128 99,739,934 72,347,054 45,162,703
Loss Per Share $ (.01) $ (.01) $ (.03) $ (.02) $ (.13)
F-20
48
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
AND THE PERIOD FROM APRIL 6, 2001 (DATE OF INCEPTION) TO SEPTEMBER 30, 2005
Nine Months Nine Months From Inception
Ended Ended (April 6, 2001) to
September 30, September 30, September 30,
2005 2004 2005
---- ---- ----
Cash Flows From Operating Activities
Net Loss $ (2,680,604) $ (1,317,204) $ (6,071,987)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Noncash Compensation - - 171,000
Administrative Expenses Settled by Common Stock - - 50,719
Services Exchanged for Common Stock 341,876 117,800 1,010,422
Services Exchanged for Warrants 120,000 - 120,000
Depreciation and Amortization 188,643 87,168 356,800
Increase in Employee Advances (7,716) - (7,716)
Increase in Prepaid Expenses (12,021) (800) (12,021)
Decrease (Increase) in Accounts Payable - Trade (3,020) 67,237 231,665
Increase in Accrued Liabilities (48,819) 21,726 83,989
Net Cash Used by Operating Activities (2,101,661) (1,024,073) (4,067,129)
------------- ------------- -------------
Cash Flows From Investing Activities
Purchase of Equipment (6,813) (8,090) (14,903)
Amounts Paid to Acquire Patents (293,738) (84,194) (460,777)
------------- ------------- -------------
Net Cash Used by Investing Activities (300,551) (92,284) (475,680)
------------- ------------- -------------
Cash Flows From Financing Activities
Repayments of Notes Payable (538,246) (250,000) (1,014,838)
Proceeds from Sales of Common Stock, Net 3,815,703 1,501,000 6,596,369
------------- ------------- -------------
Net Cash Provided by Financing Activities 3,277,457 1,251,000 5,581,531
------------- ------------- -------------
Net Increase in Cash 875,245 134,643 1,038,722
Cash, at Beginning of Period 163,477 76,589 -
------------- ------------- -------------
Cash, at End of Period $ 1,038,722 $ 211,232 $ 1,038,722
============= ============= =============
Non-Cash Investing and Financing Transactions:
Patents Purchased Using Debt $ 185,272 $ 1,975,477 $ 2,660,749
Stock Issued for Professional and Consulting Services $ 341,876 $ - $ 1,010,422
Stock Issued for Patents $ - $ - $ 864,261
Stock Issued for Convertible Notes Payable $ 609,575 $ - $ 609,575
Non-cash Compensation Warrants $ 120,000 $ 3,600 $ 291,000
Non-cash Stock Issuance Costs $ 168,795 $ - $ 214,784
F-21
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
Health Discovery Corporation (formerly known as Direct Wireless Communications,
Inc.) (the "Company") has been in the development stage since the date of
incorporation on April 6, 2001. The Company was primarily engaged in the
activity of developing technology for a wireless telephone system until 2003,
when it decided to abandon its efforts in the telecommunications industry and
acquired new technologies in the biotechnology industry. During 2003, the
Company acquired the assets of the Barnhill Group, LLC and Fractal Genomics, LLC
in pursuit of its biotechnology focus. During 2004, the Company continued
pursuit of its biotechnology focus by acquiring certain rights to patents and
patent pending applications for certain machine learning tools used for
diagnostic and drug discovery. The Company further enhanced its position in the
biotechnology field by acquiring the remainder of the interest in the SVM
patents as discussed in Note D.
The accounting principles followed by the Company and the methods of applying
these principles conform with accounting principles generally accepted in the
United States of America (GAAP). In preparing financial statements in conformity
with GAAP, management is required to make estimates and assumptions that affect
the reported amounts in the financial statements. Actual results could differ
significantly from those estimates.
The interim financial statements included in this report are unaudited but
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial position and results of operations for the
interim periods presented. All such adjustments are of a normal recurring
nature. The results of operations for the period ended September 30, 2005 are
not necessarily indicative of the results of a full year's operations. For
further information, refer to the financial statements and footnotes included in
the Company's annual report on Form 10-KSB/A for the year ended December 31,
2004.
NOTE B - NET LOSS PER SHARE
Net loss per common share are based on the weighted average number of common
shares outstanding during the period. The effects of potential common shares
outstanding during the period would be included in diluted earnings (loss) per
share; however, the effects of potential shares would be antidilutive during all
periods presented.
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. Additionally,
legal costs associated with patent acquisitions and the application process are
also capitalized as a part of patents. The Company has recorded $3,634,024 in
patents and patent related costs, net of accumulated amortization, at September
30, 2005.
Amortization charged to operations for the three months and nine months ended
September 30, 2005 and from the period from April 6, 2001 (date of inception) to
September 30, 2005, was $65,728, $185,325 and $351,763, respectively. The
weighted average amortization period for patents is approximately 15 years.
Estimated amortization expense for the next five years is $263,000 per year.
NOTE D - ACQUISITIONS
On May 6, 2005 the Company acquired the remaining interest in a portfolio of
patents from a group of unrelated third parties. The cost of the remaining
interest consisted of a cash payment of $270,856 and the issuance of promissory
notes totaling $37,871 and convertible notes totaling $147,401. The convertible
notes were converted by the holders immediately upon issuance in exchange for
867,065 shares of common stock.
NOTE E - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Notes payable at September 30, 2005 consist of notes to individuals, with
imputed interest computed at 3.16% with installments due every fourth month with
a final payment due May 1, 2006. The notes payable at September 30, 2005 totaled
$370,693.
F-22
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE E - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, CONTINUED
Convertible notes in an aggregate amount of $665,643 mature on July 28, 2009,
and may be converted at the election of the noteholders until that time into
shares of the Company's common stock at $.17 per share. If the notes are
converted, the noteholders contractually agreed not to sell more than 10% of
such holder's shares in any calendar quarter after the minimum holding period
has expired. The convertible notes bear interest at a rate of 3.16%.
All of the Company's debt is secured by specific patents in the Company's patent
portfolio.
During 2005, a group of convertible note holders elected to convert their debt
to shares of the Company's stock. The conversion reduced the debt by $609,576 in
exchange for 3,585,741 shares of common stock.
NOTE F - STOCKHOLDERS' EQUITY
On March 10, 2005, the Company finalized a sale of shares of restricted common
stock to accredited investors through a private offering. The price of the
restricted stock was $.16 per share. In addition, each purchaser of the shares
of common stock received a warrant to acquire an equal number of common shares
at a fixed price of $0.24 per share until December 2008. No portion of the
proceeds was assigned to the value of the warrants because the exercise price of
the warrant exceeded the market value of the underlying common stock on the date
of purchase. A total of 13,018,750 restricted common shares were sold to
accredited investors for $1,798,944, net of issuance costs of $284,056. The
issuance cost consisted of $157,000 in cash, 806,250 warrants, each entitling
the holder to buy one share of the Company's common stock for $0.24 valued at
$120,938, and 17,480 shares of common stock valued at $6,118 which was paid or
accrued to consultants for assistance in selling the Company's common stock. The
value of Company stock was derived based on a contractual arrangement of $.35
per share. The values of the warrants were calculated using the Black-Scholes
option-pricing model.
During the second quarter and ending in the third quarter of 2005, the Company
extended its fundraising efforts through the sale of common stock to accredited
investors through a private placement. The price of the restricted stock was
$.16 per share. In addition, each purchaser of stock shares was granted a
warrant to acquire an equal number of restricted common shares at a fixed price
of $0.24 per share until December 2008. No portion of the proceeds was assigned
to the value of the warrants because the exercise price of the warrant exceeded
the market value of the underlying common stock on the date of purchase. As of
September 22, 2005, a total of 12,093,750 restricted common shares were sold to
accredited investors for $1,818,294, net of issuance costs of $116,706. The
issuance cost consisted of $70,300 in cash, 287,500 warrants, each entitling the
holder to buy one share of common stock for $0.24 valued at $43,125, and 9,375
shares of common stock valued at $3,281, which was paid or accrued to
consultants for assistance in selling the Company's common stock. The value of
Company stock was derived based on a contractual arrangement of $.35 per share.
The values of the warrants were calculated using the Black-Scholes
option-pricing model.
F-23
HEALTH DISCOVERY CORPORATION
(FORMERLY KNOWN AS DIRECT WIRELESS COMMUNICATIONS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE F - STOCKHOLDERS' EQUITY, CONTINUED
Under the Round 2 Private Placements, the Company agreed to use its best efforts
to file a registration statement to register the shares of common stock and the
shares underlying the warrants issued and sold to the investors by May 9, 2005,
and to use its best efforts to cause the registration statement to be declared
effective within 120 days of March 10, 2005. As a result of provisions in
certain of the Round 2 Private Placement documents, on August 7 and September 6,
2005, 68,125 shares of the Company's common stock and 68,125 warrants to
purchase the Company's common stock were issued to certain shareholders who
acquired in the aggregate 6,812,500 shares in Round 2 Private Placement for each
date as a result of the registration statement not becoming effective by such
date. In addition on, October 6, 2005 and November 5, 2005 an additional 136,250
shares of the Company's common stock and 136,250 warrants to purchase the
Company's common stock were issued to this group of shareholders. The additional
number of shares and warrants is based upon one percent of the number of shares
and warrants purchased by such participants for each 30-day period beginning on
the 121st day until the registration statement is declared effective. Beginning
September 7, 2005, the number of shares and warrants to be issued increased from
one percent to two percent for each 30-day period until the registration
statement is declared effective. A total of 408,750 shares and 408,750 warrants
were issued as a result of the provision. In addition, certain shareholders who
purchased 6,812,500 shares of the Company's common stock, have anti-dilution
rights until the registration statement has been effective for 365 days. If the
Company sells shares of the Company's common stock at a price less than $.16 per
share or issues warrants to purchase the Company's common stock at an exercise
price less than $.24 per share, certain shareholders will receive an amount of
shares or warrants at no cost so that those shareholders have no diluted effect
from the sales of common stock or warrant issuances. No expense is recorded upon
the issuance of the additional shares.
SHARES ISSUED IN EXCHANGE FOR SERVICES During 2005, the Company issued 1,567,910
common stock shares to consultants for services. The shares were granted at the
fair market value of the services provided. Total consultant expense of $360,621
was recorded for the issuances in 2005.
F-24