As
filed with the Securities and Exchange Commission on September 19 ,
2008
Registration
No. 333-150878
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_______________
PRE-EFFECTIVE
AMENDMENT NO. 2
to
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
HEALTH
DISCOVERY CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Georgia
(State
or other jurisdiction of
incorporation
or organization)
|
8099
(Primary
Standard Industrial
Classification
Code Number)
|
74-3002154
(I.R.S. Employer
Identification
Number)
|
2
East Bryan Street, Suite #601
Savannah,
GA 31401
(912)
443-1987
(Address,
including zip code, and telephone number, including area code,
of
registrant’s principal executive offices)
_______________
Stephen
D. Barnhill, M.D.
Chief
Executive Officer
Health
Discovery Corporation
2
East Bryan Street, Suite #601
Savannah,
GA 31401
(912)
443-1987
(Name,
address, including zip code, and telephone number, including area
code,
of agent
for service)
_______________
Copies
of Communications to:
M.
Todd Wade, Esq.
Powell
Goldstein LLP
One
Atlantic Center, Fourteenth Floor
1201
West Peachtree Street, NW
Atlanta,
Georgia 30309-3488
(404)
572-6600
_______________
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this Registration Statement.
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, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
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. o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer (Do not check if a smaller reporting company) o
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
To Be Registered
|
AMOUNT
TO BE
REGISTERED
|
PROPOSED
MAXIMUM
OFFERING
PRICE
PER UNIT
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee (2)
|
|
|
|
|
|
Common
Stock, no par value, to be issued upon exercise of warrants exercisable at
$0.14 per share
|
35,274,934
|
$0.14(1)
|
$4,938,490.76
|
$283.57
|
Common
Stock, no par value, to be issued upon exercise of warrants exercisable at
$0.19 per share
|
35,274,934
|
$0.19(1)
|
$6,702,237.46
|
$384.84
|
Common
Stock, no par value
|
352,746
|
$0.08(1)
|
$41,230.72
|
$2.38
|
(1)
Estimated solely for the purpose of computing the registration fee pursuant to
Rule 457.
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 hereafter 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.
The
information in this preliminary 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 preliminary prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Subject
to Completion, dated September 19 , 2008
PROSPECTUS
70,549,868
Shares of Common Stock to be issued upon Exercise of Warrants
352,746 Shares of Common Stock
HEALTH
DISCOVERY CORPORATION
2
East Bryan Street
Suite
#601
Savannah,
GA 31401
(912)
443-1987
This
prospectus relates to the issuance of up to 70,549,868 shares of our common
stock, no par value, which may be issued upon the exercise of warrants
previously issued by us and 352,746 shares of our common stock, no par value,
and which may be offered for resale from time to time by the shareholders
named in the section entitled “Selling Shareholders” on page 13. The number of
shares the selling shareholders may offer and sell under this prospectus
includes common shares issuable to them upon the exercise of warrants previously
issued by us as well as shares of our common stock previously issued to the
selling shareholders . The selling shareholders 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
shareholders.
We will
not receive any of the proceeds from any resales by the selling shareholders. We
will, however, receive the proceeds from the exercise of the warrants issued to
the selling shareholders. The selling shareholders 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 15.
On
September 15 , 2008, the last sales price of the common stock quoted
on the Over-the-Counter Bulletin Board was $ 0.06 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 3.
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 September ,
2008.
TABLE
OF CONTENTS
Page #
PROSPECTUS SUMMARY
|
1
|
RISK FACTORS
|
3
|
USE OF PROCEEDS
|
12
|
PRICE RANGE OF COMMON STOCK AND
DIVIDENDS
|
13
|
SELLING SHAREHOLDERS
|
13
|
PLAN OF
DISTRIBUTION
|
15
|
BUSINESS
|
16
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
30
|
DIRECTORS AND EXECUTIVE
OFFICERS
|
37
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
|
42
|
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
|
43
|
DESCRIPTION OF CAPITAL
STOCK
|
44
|
LEGAL MATTERS
|
45
|
EXPERTS
|
45
|
WHERE YOU CAN FIND MORE
INFORMATION
|
45
|
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.
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
Company Overview
HDC is a
pattern recognition company that uses advanced mathematical techniques to
analyze large amounts of data to uncover patterns that might otherwise be
undetectable. The Company operates primarily in the emerging field of
molecular diagnostics where such tools are critical to scientific
discovery. The terms artificial intelligence and
machine learning are
sometimes used to describe pattern recognition tools.
HDC’s
mission is to use its patents, intellectual prowess, and clinical partnerships
principally to identify patterns that can advance the science of medicine, as
well as to advance the effective use of our technology in other diverse business
disciplines, including the high-tech, financial, and homeland security
markets.
Our
historical foundation lies in the molecular diagnostics field where we have made
a number of important discoveries that may play a critical role in developing
more personalized approaches to the diagnosis and treatment of certain
diseases. However, our SVM assets in particular have broad
applicability in many other fields. Intelligently applied, HDC’s
pattern recognition technology can be a portal between enormous amounts of
otherwise undecipherable data and truly meaningful discovery.
Our
Company’s principal asset is its intellectual property which includes advanced
mathematical algorithms called Support Vector Machines (SVM)
and Fractal Genomic
Modeling (FGM), as well as biomarkers that we discovered
by applying our SVM and FGM techniques to complex genetic and proteomic
data. Biomarkers are biological indicators or genetic expression
signatures of certain disease states. Our intellectual property is
protected by 69 patents that have been issued or are currently pending
around the world.
Our
business model has evolved over time to respond to business trends that
intersect with our technological expertise and our capacity to professionally
manage these opportunities. In the beginning, we sought only to use
our SVMs internally in order to discover and license our biomarker signatures to
various diagnostic and pharmaceutical companies. Today, our
commercialization efforts include: utilization of our discoveries and knowledge
to help develop biomarkers for use as companion diagnostics, surrogate
biomarkers, and diagnostic and prognostic predictive tests; licensure of the SVM
and FGM technologies directly to diagnostic and pharmaceutical companies; and,
the formation of new ventures with domain experts in other fields where our
pattern recognition technology holds commercial promise.
Our
Principal Market
The
principal healthcare market for our pattern recognition technology and biomarker
discoveries is medical diagnostics, particularly the rapidly growing field of
molecular diagnostics. The market consists of two basic types of
diagnostic procedures: in
vitro tests performed on a patient’s fluid or tissue samples and in vivo tests performed
directly on the body, including blood pressure monitoring and imaging analysis
such as x-rays. In
vitro diagnostics (IVD) can be
further divided into several major segments including clinical chemistry,
immunochemistry, hematology/cytometry, microbiology, and molecular
diagnostics.
The IVD
portion of the diagnostics market currently accounts for over $31 billion in
sales worldwide. Today, the molecular diagnostics segment represents
a fraction of the IVD revenues with about $2.5 billion in sales, but it is
widely considered to be the fastest growing segment, estimated at a 20-25%
compounded annual growth rate, mainly in the U.S. and EU markets, versus 6-7%
for IVD as a whole. It is difficult to accurately assess the size of
this segment since many countries do not have reference laboratories external to
hospitals. Areas of particular growth include infectious diseases,
oncology, genetic diseases, and pharmacogenetic analyses. Companies
involved in this space include several major pharmaceutical and diversified
corporations. Roche, Abbott, and Johnson & Johnson have
diagnostics divisions, while Siemens and General Electric operate medical
imaging segments that are expanding in diagnostics. Other market
players include large technology companies like Becton-Dickinson, Beckman
Coulter, and Bio-Rad.
IVDs have
been established as effective tools for all aspects of disease management,
especially in areas of unmet clinical need. Such tests have been
developed for screening and prognosis as well as for applications, such as
determination of genetic predisposition to disease, detection of presymptomatic
disease, and prediction of individual drug response.
The
Offering
Common
stock offered upon
exercise of warrants
|
70,549,868 Shares
|
|
|
Common
Stock |
352,746
Shares |
|
|
Common
stock to be outstanding after this offering(1)
|
240,072,458 Shares
|
|
|
Exercise
price of warrants
|
35,274,934 at
$0.14/share
35,274,934
at $0.19/share
|
|
|
Net
Proceeds
|
The
Company will not receive any proceeds from this offering. The
Company will receive cash upon the exercise of the warrants of up to
$11,640,728.22.
|
|
|
Use
of proceeds from exercise of warrants
|
We
will use the proceeds from the exercise of the warrants for general
corporate purposes, which may include, among other things, our working
capital needs and other general corporate purposes, including research and
product development. See “Use of Proceeds” on page
12.
|
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 3 and other information included in this
prospectus for a discussion of factors you should consider carefully
before deciding to invest in our common stock.
|
|
|
Dividend
Policy
|
We
have not declared a dividend since our inception and we do not expect to
do so in the foreseeable future. Instead, we anticipate that
all of our earnings, if any, will be used for working capital, to support
our operations and to finance the growth and development of our
business. Any future determination relating to dividend policy
will be made at the discretion of our Board of Directors and will depend
on a number of factors, including our future earnings, capital
requirements, financial condition, future prospects and other factors that
our Board of Directors may deem relevant. See “Price Range of Our Common
Stock and Dividends” on page 13.
|
|
|
Over-the-Counter
Bulleting Board Symbol
|
Our
common stock is traded on the Over-the-Counter Bulletin Board under the
symbol “HDVY-OB.”
|
(1)
|
The
number of shares outstanding after this offering is based on the number of
shares outstanding on September 15 , 2008 and assumes the issuance
of the Shares upon the exercise of the warrants but excludes
87,124,476 shares issuable upon the exercise of stock options and
other warrants, which are vested and outstanding as of September
15 , 2008 at a weighted average exercise price of $ 0.186 per
share.
|
The
Offering
We are
registering up to 70,549,868 shares of our common
stock that may be issued upon the exercise of warrants and 352,746 shares of
our common stock to enable the sale of such shares by the selling
shareholders identified in the section of this prospectus entitled “Selling
Shareholders.” Information regarding our common stock and the
warrants is included in the section of this prospectus entitled “Description of
Capital Stock.”
RISK
FACTORS
This
document contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation,
all statements, other than statements of historical facts, that address
activities, events or developments that we expect or anticipate will or may
occur in the future, including the successful implementation of our services,
business strategies and measures to implement such strategies, competitive
strengths, expansion and growth of our business and operations, references to
future success and other such matters are forward-looking statements and are
based on the beliefs of, assumptions made by and information currently available
to our management. The words “expect,” “estimate,” “anticipate,” “believe,”
“intend,” “plan” and similar expressions and variations thereof are intended to
identify forward-looking statements. Such forward-looking statements may involve
uncertainties and other factors that may cause the actual results and
performance of our company to be materially different from future results or
performance expressed or implied by such statements.
The
cautionary statements set forth in this “Risk Factors” section and elsewhere in
this registration statement identify important factors with respect to such
forward-looking statements, including certain risks and uncertainties, which
could cause actual results to differ materially from those expressed in or
implied by such forward-looking statements. Among others, factors that could
adversely affect actual results and performance include failure to successfully
develop a profitable business, delays in identifying and enrolling customers,
and the inability to retain a significant number of customers. All
written or oral forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary statement.
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 a limited 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 expect
to continue to incur net losses and have 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
reorganizing in 2003, our focus and our business model have been continually
evolving. Accordingly, we have a history of operations in which there
is limited 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 a short 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 until we successfully
complete transactions resulting in sufficient revenue 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.
If we are
unable to generate sufficient revenue, 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 shareholders may
experience dilution. If we raise additional funds through collaboration and
licensing arrangements, we may be required to relinquish some rights to our
technologies or product candidates, or grant licenses on terms that are not
favorable to us.
Demand
for additional shares of Company common stock from private placement investor
could cause substantial dilution to existing shareholders.
On
September 8, 2008, the Company received a letter from an investor in the
Company’s 2007 private placement, claiming that its anti-dilution rights had
been triggered by an amendment to the vesting provisions of an outstanding
warrant and that, as a result, it is entitled to receive additional shares of
Company common stock. If the investor’s position is correct, the
Company may be required under the terms of the securities purchase agreement to
issue approximately 43,000,000 shares to such investor, and, if all of the other
investors sought the same remedy, the Company may be required to issue
approximately 360,000,000 shares in the aggregate. Issuing shares of
common stock to satisfy the Company's obligations under the anti-dilution
provisions of the securities purchase agreement, if triggered, could cause
substantial dilution to existing shareholders and would exceed the number of the
Company’s authorized shares of common stock. For additional
information of the investor’s claim, see Item 15, Recent Sales of Unregistered
Securities on page II-3.
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:
|
§
|
changes
in the demand for our products and services;
|
|
|
|
|
§
|
the
nature, pricing and timing of products and services provided to our
collaborators;
|
|
|
|
|
§
|
acquisition,
licensing and other costs related to the expansion of our operations,
including operating losses of acquired businesses;
|
|
|
|
|
§
|
reduced
capital investment for extended periods;
|
|
|
|
|
§
|
losses
and expenses related to our investments in joint ventures and
businesses;
|
|
|
|
|
§
|
regulatory
developments or changes in public perceptions relating to the use of
genetic information and the diagnosis and treatment of disease based on
genetic information;
|
|
|
|
|
§
|
changes
in intellectual property laws that affect our rights in genetic
information that we sell; and
|
|
|
|
|
§
|
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 our 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.
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 $0.60 and as low as
$0.04. Our stock price could fluctuate significantly due to a number
of factors beyond our control, including:
|
§
|
variations
in our actual or anticipated operating results;
|
|
|
|
|
§
|
sales
of substantial amounts of our stock;
|
|
|
|
|
§
|
announcements
about us or about our competitors, including technological innovation or
new products or services;
|
|
|
|
|
§
|
litigation
and other developments related to our patents or other proprietary rights
or those of our competitors;
|
|
|
|
|
§
|
conditions
in the life sciences, pharmaceuticals or genomics industries;
and
|
|
|
|
|
§
|
governmental
regulation and legislation.
|
In
addition, the stock market in general, and the market for life sciences and
technology companies in particular, have experienced extreme price and volume
fluctuations 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 objects of securities class action litigation. If we became
the object of securities class action litigation, it could result in substantial
costs and a diversion of management’s attention and resources, which could
affect our profitability.
Our
approach of incorporating ideas and methods from mathematics, computer science
and physics into the disciplines of biology, organic chemistry and medicine is
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, our customers
or we may be unable to develop or commercialize new drugs, therapies or other
products based on them.
Even if
our computational technologies perform their intended functions as research
tools, our customers may be unable to use the discoveries resulting from them to
produce new drugs, therapies, diagnostic products or other life science
products. Despite recent scientific advances in the life sciences and
our improved understanding of biology, the roles of genes and proteins and their
involvement in diseases and in other life processes is not well
understood. Only a few therapeutic products based on the study of and
discoveries relating to genes or proteins have been developed and
commercialized. If our customers are unable to use our discoveries to
make new drugs or other life science products, our business may fail or we may
never become profitable.
Our
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 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 commercializes novel genes and
proteins. These include genomics, pharmaceutical and biotechnology
companies, academic and research institutions and government and other publicly
funded agencies. We may not be able to successfully compete with
current and future competitors. Many of our competitors have
substantially greater capital resources, research and development 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 future growth.
We
anticipate that if we experience a period of growth in the future, 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 future
growth of our operations, if any, we will be required to improve existing and
implement new operational systems, procedures and controls, and to expand, train
and manage our employee base. There can be no assurance that our current and
planned personnel, systems, procedures and controls will be adequate to support
our future operations, that management will be able to hire, train, retain,
motivate and manage the required personnel or that we will be able to identify,
manage and exploit existing and potential strategic relationships and market
opportunities. Our failure to manage growth effectively could have a material
adverse effect on our business, results of operations and financial
condition.
If our business does not keep up
with rapid technological change or continue to introduce new products, we may be
unable to maintain market share or recover investments in our
technologies.
Technologies
in the biomarker industry have undergone, and are expected to continue to
undergo, rapid and significant change. We may not be able to keep pace with the
rapid rate of change and introduce new products that will adequately meet the
requirements of the marketplace or achieve market acceptance. If we fail to
introduce new and innovative products, we could lose market share to our
competitors 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.
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,
including the recent departure of our Executive Vice President, could have a
material adverse effect upon our business, as well as our relationships with our
potential customers. We do not carry key person life insurance
on any member of our senior management. Furthermore, competition for
highly qualified personnel in our industry and geographic locations is
intense. Our business would be seriously harmed if we were unable to
retain our key employees, or to attract, integrate or retain other highly
qualified personnel in the future.
We
may not be able to employ and retain experienced scientists, mathematicians and
management.
Technologies
in our industry have undergone, and are expected to continue to undergo, rapid
and significant change. A highly skilled staff is integral to developing,
marketing and supporting new products that will meet or exceed the expectations
of the marketplace and achieve market acceptance. Without experienced staff, our
business may be unable to maintain or grow market share, which could result in
lower than expected revenues and earnings.
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 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 shareholders 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 part upon the perception that our technologies can help accelerate their
efforts in drug and diagnostics discovery. Our ability to obtain
customers for our therapeutic or diagnostic product candidates significantly
depends on our ability to validate and prove that each such product candidate is
suitable for our claimed therapeutic or diagnostic purposes. Our
ability to obtain customers will also depend on our ability to successfully
negotiate terms and conditions for such arrangements. The sales cycle for our
therapeutic and diagnostic product candidates is typically lengthy and may take
more than 12 months.
An
inability to protect our proprietary data, technology or products may harm our
competitive position.
If we do
not adequately protect the intellectual property underlying our products and
services, competitors may be able to develop and market the same or similar
products and services. This would erode our competitive advantage. In
addition, the laws of some countries do not protect or enable the enforcement of
intellectual property to the same extent as the laws of the United
States.
We use
contractual obligations to protect a significant portion of our confidential and
proprietary information and know-how. This includes a substantial
portion of the knowledge base from which we develop a large portion of our
proprietary products and services. However, these measures may not
provide adequate protection for our trade secrets or other proprietary
information and know-how. Customers, employees, scientific advisors,
collaborators or consultants may still disclose our proprietary information in
violation of their agreements with us, and we may not be able to meaningfully
protect our trade secrets against this disclosure.
In
addition, we have applied for patents covering some aspects of some of our
technologies and 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 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 us against
third parties or to enforce our patents (once issued) or other rights against
others. In addition, parties making claims against us may be able to
obtain injunctive or other equitable relief that could prevent us from being
able to further develop or commercialize. 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:
|
§
|
assert
claims of infringement;
|
|
|
|
|
§
|
enforce
our patents as they are granted;
|
|
|
|
|
§
|
protect
our trade secrets or know-how; or
|
|
|
|
|
§
|
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.
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 inseparable from the process of developing and commercializing
drugs, therapies, diagnostic products and other life science products. These
risks include the possibility that any of these products will:
|
§
|
be
found to be toxic or ineffective;
|
|
|
|
|
§
|
fail
to receive necessary regulatory approvals;
|
|
|
|
|
§
|
be
difficult or impossible to manufacture on a large
scale;
|
|
|
|
|
§
|
be
uneconomical to market;
|
|
|
|
|
§
|
fail
to be developed prior to the successful marketing of similar products by
competitors; or
|
|
|
|
|
§
|
be
impossible to market because they infringe on the proprietary rights of
third parties or compete with superior products marketed by third
parties.
|
We are
dependent on our customers’ commercialization of our discoveries. Any
of these risks could materially harm our business and financial
results.
The
trend towards consolidation in the pharmaceutical and biotechnology industries
may adversely affect us.
The trend
towards consolidation in the pharmaceutical and biotechnology industries may
negatively affect us in several ways. These consolidations usually
involve larger companies acquiring smaller companies, which results in the
remaining companies having greater financial resources and technological
capabilities, thus strengthening competition in the industry. In
addition, continued consolidation may result in fewer customers for our products
and services.
We
may be subject to product liability claims if products derived from our products
or services harm people.
We may be
held liable if any product that is made with the use, or incorporation of, any
of our technologies or data causes harm or is found otherwise
unsuitable. These risks are inherent in the development of genomics,
functional genomics and pharmaceutical products. If we are sued for
any harm or injury caused by products derived from our services or products, our
liability could exceed our total assets. In addition, such claims
could cause us to incur substantial costs 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 they will be able to
obtain marketing clearance for any product that may be developed on a timely
basis, if at all. If they fail to obtain required governmental
clearances, it will prevent them from marketing therapeutic or diagnostic
products until clearance can be obtained, if at all. This will in
turn reduce our chances of receiving various forms of payments, including those
relating to sales of marketed therapeutic or diagnostic products by
them.
The
law applicable to us may change in a manner that negatively affects our
prospects.
We must
comply with various legal requirements, including requirements imposed by
federal and state securities and tax laws. Should any of those laws change over
the term of our existence, the legal requirements to which we may be subject
could differ materially from current requirements, which could increase the cost
of doing business or preclude us from undertaking certain parts of our business
plan, 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.
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:
|
●
|
make
a special suitability determination for purchasers of our
shares;
|
|
|
|
|
●
|
receive
the purchaser’s written consent to the transaction prior to the purchase;
and
|
|
|
|
|
●
|
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 our and our
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 shareholders can exert control over us and may not make
decisions that are in the best interests of all shareholders.
As
of September 15 , 2008, executive officers and directors
collectively controlled approximately 13.08 % of our outstanding shares.
As a result, these shareholders, if they act together, would be able to exert a
significant degree of influence over matters requiring shareholder 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 shareholders, 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 the shares in this offering by the selling
shareholders. We will, however, receive proceeds from the exercise of
warrants held by the selling shareholders. We expect to use any
proceeds we receive for working capital and for other general corporate
purposes, including research and product development.
PRICE
RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is traded on the OTC
Bulletin Board under the symbol HDVY. The range of closing prices for
our common stock, as reported on Bloomberg.com during each quarter 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
|
|
|
Low
|
|
Third
Quarter 2006
|
|
$ |
0.13 |
|
|
$ |
0.07 |
|
Fourth
Quarter 2006
|
|
$ |
0.17 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
First
Quarter 2007
|
|
$ |
0.16 |
|
|
$ |
0.09 |
|
Second
Quarter 2007
|
|
$ |
0.14 |
|
|
$ |
0.09 |
|
Third
Quarter 2007
|
|
$ |
0.11 |
|
|
$ |
0.07 |
|
Fourth
Quarter 2007
|
|
$ |
0.11 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
First
Quarter 2008
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
Second
Quarter 2008
|
|
$ |
0.07 |
|
|
$ |
0.04 |
|
On September
15 , 2008, our common stock had a closing price of
$ 0.06 . At September 15 , 2008, there were
approximately 360 holders of record of our common stock. On
September 15 , 2008, there was one holder of our Series A Preferred
Stock.
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
SHAREHOLDERS
In
connection with the Securities Purchase Agreement by and among the Company and
the selling shareholders dated August 16, 2007 (the “Private Placement”) a copy
of which is attached as Exhibit 10.13, the Company issued 51,538,822 shares of
restricted common stock at $0.08 per share in exchange for $2.55 million in cash
and conversion of approximately $1.5 million in debt to common
shares. In addition, each of the selling shareholders acquired a
warrant to purchase shares equivalent to its investment, with an aggregate of
warrants to purchase 51,538,822 shares of Company common stock issued at an
exercise price of $0.14 and a warrant to purchase shares equivalent to its
investment, with an aggregate of warrants to purchase 51,538,822 shares of
Company common stock issued at an exercise price of $0.19. A form of
warrant is attached here to as Exhibit 10.14. There was no private
placement agent in connection with the Private Placement.
Certain
of our shares of common stock which may be issued to the selling shareholders
upon the exercise of warrants acquired by the selling shareholders in the
Private Placement are being registered for resale by the selling shareholders.
Certain of our shares of common stock, which were issued to the selling
shareholders pursuant to the terms of the securities purchase agreement as a
result of this registration statement not having been declared effective by
August 28, 2008, are also being registered for resale by the selling
shareholders . The table below shows the name and number of shares of
our common stock owned by the selling shareholders who may sell shares covered
by this prospectus.
The
selling shareholders may resell all, a portion or none of such shares of common
stock , whether previously issued or which may be issued upon the
exercise of warrants from time to time. The table below sets forth with respect
to each selling shareholder, 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 and all other currently effective
prospectuses. Because the selling shareholders 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 shareholders after such
offering can be provided. Therefore, we have prepared the table below
on the assumption that the selling shareholders will sell all shares covered by
this prospectus. Except as noted below by footnote, none of the
selling shareholders 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.
Name
|
Beneficially
Owned
Before
Offering (1)
|
Number
of Shares
Being
Offered (2)
|
Number
of Shares
Beneficially
Owned
After
Offering (3)
|
Percentage
of Class
Owned
After
Offering
(3)
|
|
|
|
|
|
Curtis
G. Anderson
|
14,248,915
(6)
|
9,515,056
|
4,733,859
|
2.76 %
|
Athena
Venture Partners, L.P. (4)
|
9,406,250
(6)
|
6,281,250
|
3,125,000
|
1.84 %
|
Bloom
Investment Co. (5)
|
940,625
(6)
|
628,125
|
312,500
|
*
|
William
M. Goldstein (7)
|
2,313,125
(8)
|
125,625
|
2,187,500
|
1.29%
|
Stephen
M. Grosberg
|
12,040,000
(6)
|
8,040,000
|
4,000,000
|
2.36 %
|
John
A. Landsberger
|
5,450,000
(9)
|
2,512,500
|
2,937,500
|
1.73 %
|
John
and Laura Maring
|
940,625
(6)
|
628,125
|
312,500
|
*
|
Joe
McKenzie
|
5,556,295 (10)
|
3,456,800
|
2,099,495
|
1.24%
|
MicroCapital
Fund LP (11)
|
10,299,843
(6)
|
6,877,968
|
3,421,875
|
2.02%
|
MicroCapital
Fund Ltd. (12)
|
3,433,281
(6)
|
2,292,656
|
1,140,625
|
*
|
Molly
Murphy Crowley Revocable
Trust
UTD April 1991 (13)
|
1,128,750
(6)
|
753,750
|
375,000
|
*
|
Frank
T. Nickell
|
9,406,250
(6)
|
6,281,250
|
3,125,000
|
1.84 %
|
Jules
Paderewski
|
3,400,222
(14)
|
1,738,623
|
1,661,599
|
*
|
Prime
Mover Capital Partners, L.P. (15)
|
20,693,750
(6)
|
13,818,750
|
6,875,000
|
4.06 %
|
James
Tobey Roberts
|
6,473,390
(6)
|
4,322,762
|
2,150,628
|
1.27%
|
Julian
Stern
|
4,118,158
(6)
|
2,749,999
|
1,368,159
|
*
|
Manish
Vora (16)
|
376,250
(6)
|
251,250
|
125,000
|
*
|
Jimmy
Woodward (17)
|
940,625
(6)
|
628,125
|
312,500
|
*
|
|
*
represents less than 1%
|
|
(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 shareholder has sole or shared voting
power or investment power and also any shares that the selling shareholder
has the right to acquire within 60 days.
|
|
(2)
|
Represents the number of shares of
company common stock that may be issued to the selling shareholders upon
the exercise of warrants plus the number of shares of common stock
issued to the selling shareholders (1% of the number of shares initially
purchased by the selling shareholders) . The warrants were
issued to the selling shareholders in connection with the Private
Placement described above.
|
|
(3)
|
Assumes
that 169,522,590 shares are outstanding and that all common shares
and shares issued upon the exercise of warrants will be resold by the
selling shareholders in this offering. On September 8, 2008, the
Company received notice, claiming that certain anti-dilution rights had
been triggered under the terms of the private placement. See Item
15, Recent Sales of Unregistered Securities on page
II-3.
|
|
(4)
|
A
limited partnership in which the children of Dr. Richard Caruso, one
of the Company’s former directors, are limited partners. Voting
and dispositive power are vested in Richard E. Caruso, Gary R. DiLella and
Gerald N. Holtz.
|
|
(5)
|
Voting
and dispositive power vested in Harold S. Bloom.
|
|
(6)
|
Includes
warrants to acquire one-third the number of shares initially purchased
by the selling shareholder at an exercise price of $0.14 per share and
expiring on September 7, 2010, and warrants to acquire one-third the
number of shares initially purchased by the selling shareholder at
an exercise price of $0.19 per share and expiring on September 7,
2010. Includes the number of shares of common stock issued to the
selling shareholders (1% of the number of shares initially purchased
by the selling shareholder).
|
|
(7)
|
Resigned
as a director on April 11, 2008.
|
|
(8)
|
Includes warrants to acquire
62,500 shares at an exercise price of
$0.14 per share and expiring on September 7, 2010, and warrants to acquire
62,500 shares at an exercise price of
$0.19 per share and expiring on September 7, 2010. Includes
warrants to acquire 312,500 shares at an exercise price of $0.24 per share
and expiring December 31, 2008. Includes warrants to acquire
1,500,000 shares at an exercise price of $0.13 per share and expiring on
January 31, 2012. Includes the number of shares of common stock
issued to the selling shareholders (1% of the number of shares initially
purchased by the selling shareholder).
|
|
(9)
|
Includes warrants to acquire
1,250,000 shares at an exercise price of
$0.14 per share and expiring on September 7, 2010, and warrants to acquire
1,250,000 shares at an exercise price of
$0.19 per share and expiring on September 7, 2010. Includes
warrants to acquire 1,687,500 shares at an exercise price of $0.24 per
share and expiring on December 31, 2008. Includes the number of
shares of common stock issued to the selling shareholders (1% of the
number of shares initially purchased by the selling
shareholder).
|
|
(10)
|
Includes warrants to acquire
1,719,801 shares at an exercise price of
$0.14 per share and expiring on September 7, 2010, and warrants to acquire
1,719,801
shares at an
exercise price of $0.19 per share and expiring on September 7, 2010.
Includes the number of shares of common stock issued to the selling
shareholders (1% of the number of shares initially purchased by the
selling shareholder).
|
|
(11)
|
Voting and dispositive power
vested in Ian Ellis and Tim
Creutz.
|
|
(12)
|
Voting and dispositive power
vested in John Ivanac.
|
|
(13)
|
Voting and dispositive power
vested in Molly
Crowley.
|
|
(14)
|
Includes
warrants to acquire 864,987 shares at an exercise price of $0.14 per share
and expiring on September 7, 2010, and warrants to acquire 864,987
shares at an exercise price of $0.19 per share and expiring on
September 7, 2010. Includes the number of shares of common
stock issued to the selling shareholders (1% of the number of shares
initially purchased by the selling
shareholder).
|
|
(15)
|
Voting
and dispositive power vested in Peter Belton.
|
|
(16)
|
Affiliated
with registered broker dealer. Vora purchased the securities in
his individual capacity and at the time of the purchase of the
securities to be resold, he had no agreements or understandings, directly
or indirectly, with any person to distribute the
securities.
|
|
(17)
|
Resigned
as a director on November 13, 2007.
|
PLAN
OF DISTRIBUTION
We are registering the shares of common
stock to be issued upon the exercise of warrants on behalf of the selling
shareholders. We are also registering certain of our shares of common stock
which were issued to the selling shareholders pursuant to the terms of the
securities purchase agreement on behalf of the selling shareholders.
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 shareholders. We have agreed to indemnify the
selling shareholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act. Sales of shares may
be effected by selling shareholders 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 shareholders 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 shareholders. The selling
shareholders 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 shareholders 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 shareholders 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 shareholders 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 shareholders 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 shareholders 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 shareholders may be deemed “underwriters” within the meaning of Section
2(11) of the Securities Act, the selling shareholders may be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
selling shareholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the
market.
Selling
shareholders 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 shareholders. 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, 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 assets of The Barnhill Group, LLC
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 (“FGM”) software, through the issuance
of 3,825,000 common shares of the Company. In addition to the shares
of common stock of the Company 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 with
the final payment being made in October 2005. Our acquisition of
Fractal Genomics’ assets was completed on 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, we 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 increases 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.
On July
12, 2007, we completed our reincorporation in Georgia by effecting a conversion
in our legal domicile from Texas to Georgia. Our business, assets,
liabilities, net worth and headquarters were unchanged as a result of the
conversion, and our directors and officers prior to the conversion continued to
serve after the conversion. In connection with the conversion, the
Company’s shares were converted on a one-for-one basis.
The
conversion was approved by the shareholders holding at least two-thirds of the
outstanding common shares of the Company at the reconvened special meeting of
the shareholders held on June 13, 2007. Articles of Conversion were
filed with the Secretaries of State of Texas and Georgia on July 12, 2007 to
effect the reincorporation.
In
connection with the conversion, we filed Articles of Incorporation in the State
of Georgia, which increased the number of authorized shares of common stock, no
par value, from two hundred million (200,000,000) shares to three hundred
million (300,000,000) shares and authorized thirty million (30,000,000) shares
of preferred stock, no par value, with the rights and preferences to be
determined by the Company’s Board of Directors prior to issuance. We
also amended and restated our Bylaws. The Articles of Incorporation
and Bylaws were submitted to the shareholders and were approved on June 13,
2007.
On
October 9, 2007, we filed Articles of Amendment (the “Amendment”) with the
Secretary of State of the State of Georgia to amend our Articles of
Incorporation. The Amendment sets forth the rights and preferences of
the Series A Preferred Stock, including the right to receive dividends, the
right to vote on matters presented to holders of common stock, a preference
right in the event of liquidation, and the right to convert the Series A
Preferred Stock into Common Stock. The Amendment was authorized by
the Board of Directors on October 5, 2007.
On March
4, 2008, we formed two wholly owned subsidiaries, SVM Technology Inc., a Georgia
corporation, and SVM Technology Inc., a Delaware corporation. We
anticipate that we will use each of these subsidiaries to expand our business
model by applying SVM technology outside of scientific discovery in the
healthcare arena.
Our
Company Overview
HDC is a
pattern recognition company that uses advanced mathematical techniques to
analyze large amounts of data to uncover patterns that might otherwise be
undetectable. The Company operates primarily in the emerging field of
molecular diagnostics where such tools are critical to scientific
discovery. The terms artificial intelligence and
machine learning are
sometimes used to describe pattern recognition tools.
HDC’s
mission is to use its patents, intellectual prowess, and clinical partnerships
principally to identify patterns that can advance the science of medicine, as
well as to advance the effective use of our technology in other diverse business
disciplines, including the high-tech, financial, and homeland security
markets.
Our
historical foundation lies in the molecular diagnostics field where we have made
a number of important discoveries that may play a critical role in developing
more personalized approaches to the diagnosis and treatment of certain
diseases. However, our SVM assets in particular have broad
applicability in many other fields. Intelligently applied, HDC’s
pattern recognition technology can be a portal between enormous amounts of
otherwise undecipherable data and truly meaningful discovery.
Our
Company’s principal asset is its intellectual property which includes advanced
mathematical algorithms called Support Vector Machines (SVM)
and Fractal Genomic
Modeling (FGM), as well as biomarkers that we discovered
by applying our SVM and FGM techniques to complex genetic and proteomic
data. Biomarkers are biological indicators or genetic expression
signatures of certain disease states. Our intellectual property is
protected by 69 patents that have been issued or are currently pending around
the world.
Our
business model has evolved over time to respond to business trends that
intersect with our technological expertise and our capacity to professionally
manage these opportunities. In the beginning, we sought only to use
our SVMs internally in order to discover and license our biomarker signatures to
various diagnostic and pharmaceutical companies. Today, our
commercialization efforts include: utilization of our discoveries and knowledge
to help develop biomarkers for use as companion diagnostics, surrogate
biomarkers, and diagnostic and prognostic predictive tests; licensure of the SVM
and FGM technologies directly to diagnostic and pharmaceutical companies; and,
the formation of new ventures with domain experts in other fields where our
pattern recognition technology holds commercial promise.
Our
Principal Market
The
principal healthcare market for our pattern recognition technology and biomarker
discoveries is medical diagnostics, particularly the rapidly growing field of
molecular diagnostics. The market consists of two basic types of
diagnostic procedures: in
vitro tests performed on a patient’s fluid or tissue samples and in vivo tests performed
directly on the body, including blood pressure monitoring and imaging analysis
such as x-rays. In
vitro diagnostics (IVD) can be
further divided into several major segments including clinical chemistry,
immunochemistry, hematology/cytometry, microbiology, and molecular
diagnostics.
The IVD
portion of the diagnostics market currently accounts for over $31 billion in
sales worldwide. Today, the molecular diagnostics segment represents
a fraction of the IVD revenues with about $2.5 billion in sales, but it is
widely considered to be the fastest growing segment, estimated at a 20-25%
compounded annual growth rate, mainly in the U.S. and EU markets, versus 6-7%
for IVD as a whole. It is difficult to accurately assess the size of
this segment since many countries do not have reference laboratories external to
hospitals. Areas of particular growth include infectious diseases,
oncology, genetic diseases, and pharmacogenetic analyses. Companies
involved in this space include several major pharmaceutical and diversified
corporations. Roche, Abbott, and Johnson & Johnson have
diagnostics divisions, while Siemens and General Electric operate medical
imaging segments that are expanding in diagnostics. Other market
players include large technology companies like Becton-Dickinson, Beckman
Coulter, and Bio-Rad.
IVDs have
been established as effective tools for all aspects of disease management,
especially in areas of unmet clinical need. Such tests have been
developed for screening and prognosis as well as for applications, such as
determination of genetic predisposition to disease, detection of presymptomatic
disease, and prediction of individual drug response.
Molecular
Diagnostics
Within
the overall IVD market, the molecular diagnostics segment is expected to expand
dramatically, largely attributable to advances in genomics and proteomics. Primary market drivers
include the addition of new diagnostic tests in high volume testing areas
coupled with the introduction of new instrumentation that provide greater ease,
speed, and quality in test performance. Given its annualized growth
rate, the potential for molecular diagnostics is particularly impressive in the
U.S. which represents the largest commercial market with the most favorable
conditions for entry and marketing.
Borrowing
from the two disciplines of genomics and proteomics, molecular diagnostics
categorizes cancer and other diseases using technology such as mass spectrometry
and gene chips. Genomics is the study of all the genes in a cell or
organism, and proteomics is the study of all the proteins. Molecular
diagnostics determines how these genes and proteins interact in patients by
focusing on patterns – gene and protein patterns – in different types of healthy
and diseased patient cells. Molecular diagnostics uncover these
genomic and proteomic changes and capture this information as expression
patterns. Also called molecular signatures, these
expression patterns improve clinicians’ ability to diagnose cancer earlier,
predict which patients will respond to certain treatments, predict cancer
recurrence risk, and select appropriate treatment for individual
patients.
Molecular
diagnostics can facilitate early, accurate screening and prediction of diseases
in their asymptomatic stages, years before symptoms manifest or diseases
actually begin. This allows intervention to begin earlier, perhaps
preventing the disease entirely. Early intervention will allow the
healthcare system to encompass both preventative and reactive medicine,
improving overall healthcare efficiency and possibly reducing systemic
healthcare expenditures.
The
molecular diagnostics industry is an increasingly powerful health care
participant with tremendous potential. It is characterized by a very
diverse, constantly changing technology base that continuously produces new
opportunities and applications. Advances in polymerase chain reaction
(“PCR”), multiplexing, sequencing and other technologies are propelling both new
and old companies forward with novel capabilities. Similarly, a growing
understanding of the molecular basis of cancer and other chronic diseases has
awakened new realms of medicine to the possibilities of molecular diagnostic
testing.
Clinicians
have discovered that molecular diagnostics have many uses beyond just the
creation of new screening and diagnostic tools. Expression patterns
can also provide information for the design of new cancer treatments, monitor
the treatment’s effectiveness as it is studied in a clinical trial, and even
predict the patient’s response to a new treatment. In addition to its
importance in addressing the many kinds of cancer, molecular diagnostics will
likely become an important technology for detecting resistance to antibiotics, a
major hazard in the hospital setting. In the future, molecular tests
should be able to determine within two to three hours not only the nature of an
infection, but also therapeutic selection and any potential
resistance.
The
molecular diagnostics market is a rapidly growing and rapidly changing market
with explosive potential, multiple opportunities for entry and growth, and
intensifying competition. New tests and new instruments to perform
automated analysis continue to expand the capabilities of companies in this
segment. The identification and validation of novel genes, gene
products, and biomarkers makes it possible to develop and introduce even more
tests. The market includes sales of reagents, instruments, and kits
to clinical laboratories and research reagents that can be used by labs to
develop their own in-house procedures. It also includes testing
services by those clinical labs that have developed their own products, plus
diagnostics companies that operate their own branded, certified testing
services.
Molecular
diagnostic tests typically analyze DNA, RNA, or protein biomarkers (analytes) to
identify a disease, determine its course, evaluate response to therapy, or
predict individual predisposition to a disease. The techniques
applied involve analysis of DNA sequences, DNA methylation patterns, gene
expression profiles, proteins, protein expression, or combinations of these
biomarkers. Such biomarkers provide direct information about
genotypic and/or phenotypic changes associated with specific diseases or
responses to treatment. Biomarker analysis has also become an
important tool in drug discovery, preclinical drug development, and patient
monitoring during clinical trials.
Most
molecular diagnostics currently on the market are primarily single-analyte tests
involving the detection of a single gene or protein. However, many
disease-related processes are multifactorial, involving the abnormal expression
of multiple genes or proteins. Second-generation molecular
diagnostics are anticipated to utilize novel detection technologies and
multiplexing platforms to allow the measurement of a large number of analytes
simultaneously. These innovations will increasingly utilize
multiplexing platforms such as DNA microarrays that perform parallel biomarker
analysis.
The
market has been driven by transition to fully automated systems, real time
amplification, and growing development of point-of-care
platforms. Industry experts estimate that future growth will stem
from emerging applications like genotyping for identifying drug resistant
strains; bioterrorism testing applications within infectious disease; disease
diagnostics and prognostic assays for disease applications like sepsis and
nosocomial infections, such as MRSA, cancer, cardiovascular disease, and
Alzheimer’s disease; diagnosis of inherited disorders; and theranostics
companion diagnostics.
Genomic
testing to determine diagnosis, therapeutic selection and response, and
preventative measures is an important segment of the overall IVD
market. Although this segment is small today, it is an extremely
fast-growing component. Today, genomic testing is responsible for
driving growth of the overall market, currently constituting approximately 7%–8%
of the clinical testing service market. In the service segment,
genomic testing is growing by about 60%–75% per year.
Other
market segments include traditional genomics, personalized medicine, and cancer
with 13%, 9%, and 8% of the U.S. clinical lab services market,
respectively. Experts predict that the cancer segment is growing at
20% a year, traditional genomics about 15% a year, and personalized medicine
about 20% a year, compared to the 5-10% growth rate for infectious
diseases.
From a
demographic standpoint, 12% of the U.S. population was 65 years old or older in
2000. By 2030, that segment is anticipated to grow to 20% of the population,
burdening the healthcare system with increased numbers of cardiovascular,
neurological, and other age-related diseases. Age-related
conditions are expected to contribute to the health care market that will
require greater product development and marketing of assays, including molecular
tests.
Diagnostics
addressing the pharmacogenetic testing segment (i.e. companion diagnostics and
surrogate biomarkers) are expected to drive market growth in the years
ahead. Pharmacogenetics broadly relates to the study of genetic
variations and their application to drug discovery to provide personalized
therapy. Currently the second largest market sector behind
diagnostics for infectious diseases, the pharmacogenetic sector of the molecular
diagnostics market is projected to grow rapidly.
The
Role of HDC’s Technology in Molecular Diagnostics
Our SVM
technology offers pharmaceutical companies a key tool as they approach drug
discovery in this new era of personalized medicine. Accordingly, our
marketing efforts are focused on utilizing our technology in partnership with
many of the world’s leading pharmaceutical and life-sciences
companies. Our primary commercialization pathway for our technology
and discoveries is to enter into both licensing agreements and joint development
opportunities that feature up-front license fees, fee-for-service development
revenue, milestone payments, and royalty streams. We believe the
pharmaceutical segment offers us an excellent commercial opportunity for the
application of our technology, as the pharmaceutical industry is characterized
by costly R&D efforts to create new patent-protected products, fierce
competition for products that are not so well protected, and ongoing
consolidation as major companies acquire smaller players to add new products to
existing pipelines.
The use
of HDC’s SVM technology and our discovered biomarkers may help pharmaceutical
companies develop and evaluate new drugs and medical therapies in less time and
at lower cost. According to the lobby group PhRMA, only 1 of every
10,000 potential medicines investigated by America’s drug companies survives the
research and development process and is approved for patient use by the U.S.
Food and Drug Administration (FDA). On average, the drug
developmental process can take up to 15 years in research and development, with
costs approaching many hundreds of millions of dollars. This extended timeframe
and enormous expense has led to an emphasis on the development of “blockbuster”
drugs.
Within
the drug discovery R&D process, biomarkers like ours can help pharmaceutical
companies identify disease targets and pathways and validate mechanisms of drug
action. They may also serve as pharmacodynamic indicators of drug
activity, drug response, and drug toxicity in clinical
development. Biomarkers may also be used to help avoid new drug
failures in late stage trials, earlier detection of disease, and improved
prognosis of therapeutic outcome.
We
consistently work to influence the evolving relationship between diagnostics and
monitoring patients for therapeutic outcome. With its February 2007
approval of MammoPrint,
Agendia’s multi-gene expression breast cancer prognosis test, the FDA signaled
its acceptance of the field of molecular diagnostics and highlighted the growing
importance of personalized medicine. In particular, the advent of
molecular diagnostics has led to the promise of a completely new paradigm in the
care of patients suffering from cancer and other diseases.
Using
companion diagnostics in patient care can substantially improve patient outcomes
and pave the way for more personalized, targeted medicine by reducing both
misdiagnoses and adverse reactions, and by eliminating unnecessary and expensive
downstream tests. Today, patient dosage levels are based on age, sex,
and weight, as determined by empirical studies. However, specific drug
metabolism may be as individualized as one’s fingerprint. In the
future, molecular diagnostics may be able to direct physicians to the right
drugs for every patient, no matter what the illness.
This
trend towards personalized medicine may ultimately lead to the reduction of
overall healthcare expenditures. What is known as a surrogate molecular marker may now be
substituted for the lengthy process of comparing the effects of a prospective
new drug versus a placebo on the ultimate outcome of a disease. As a
result, a drug’s effectiveness against the disease process in question may be
monitored more efficiently by evaluating the presence or absence of a specific
biomarker, thereby avoiding failures late in the research and development
process as well as the threat of recalls. One example of the
successful application of biomarker data to therapeutic evaluation is the use of
blood cholesterol levels to evaluate the effectiveness of cholesterol lowering
drugs. This
approach has the potential for creating a revolutionary new paradigm in the
conduct of clinical trials worldwide.
Current
diagnostic tools, such as blood marker-based immunoassays, imaging techniques,
and biopsy analyses, provide valuable information and have played an important
role in increasing survival rates of cancer patients. However, these
tools have inherent limitations in accuracy (i.e. sensitivity and specificity)
and remain quite expensive. There is a significant need for advanced
diagnostic and prognostic tests that can provide meaningful information, screen
for cancer, detect early recurrence, and monitor progression and therapeutic
response in real time. HDC’s pattern recognition technology can play
a critical role in the development of these tests because an advanced pattern
recognition technique is
required for this type of discovery. SVM technology is
recognized as a superior pattern recognition tool available today as evidenced
in hundreds of scientific papers worldwide.
Working
with recognized diagnostic and pharmaceutical partners, our goal is to develop a
product line of newly discovered biomarker signatures and pathways that can be
found in human genes and genetic variations, as well as gene, protein and
metabolite expression differences. In addition, we market our
expertise in the design of clinical trials for companion diagnostics to
substantiate the clinical validity and commercial utility of those
biomarkers. We also market the potent combination of our intellectual
property and intellectual prowess to our prospective collaborative
partners. As inventors of the SVM technology, our world renowned
mathematicians offer these companies the strongest possible development team for
their drug discovery, diagnostic test, or other applications.
Our
Technologies and Discoveries
HDC owns
a patent portfolio of machine learning technology, including certain pioneer
patents on SVM. We also have consulting arrangements with many of the
physicians, clinical specialists and mathematicians responsible for developing
and filing the pioneer neural network and SVM patents for the analysis of
clinical data.
The
Company’s SVM technology is commonly considered within the context of artificial
intelligence. This is a branch of computer science concerned
with giving computers the ability to perform functions normally associated with
human intelligence, such as reasoning and optimization through experience.
Machine learning is a type of artificial intelligence that enables the
development of algorithms and techniques that allow computers to
learn. Pattern recognition is machine learning with a wide spectrum
of applications including medical diagnosis, bioinformatics, classifying DNA
sequences, detecting credit card fraud, stock market analysis, object
recognition in computer vision, and robot locomotion.
SVM
Overview
SVMs are
mathematical algorithms that allow computers to sift through large, complex
datasets to identify patterns. SVMs are widely acknowledged for their
ability to discover hidden relationships in these complex
datasets. With the ability to handle what is known as infinite dimensional space,
SVMs are broadly considered to be superior to neural networks and other
mathematical techniques. SVM is a core machine learning technology
with strong theoretical foundations and excellent empirical
successes.
Since
their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples
paradigm in artificial intelligence. Rooted in the Statistical Learning Theory
developed by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory
Board, SVMs quickly gained attention from the math and science communities due
to a number of theoretical and computational merits. This development
advanced a new framework for modeling learning algorithms. Within
this framework, the fields of machine learning and statistics were merged,
introducing powerful algorithms designed to handle the difficulties of prior
computational techniques.
The new
generation of learning algorithms that were developed based on this theory has
proved to be remarkably resistant to the problems imposed by noisy data and high
dimensionality. They are computationally efficient, have an inherent modular
design that simplifies their implementation and analysis and allows the
insertion of domain knowledge, and, more importantly, they have theoretical
guarantees about their generalization ability. SVMs have been
validated in hundreds of independent academic publications and
presentations. In recognition for his work, Professor Vapnik received
the prestigious Alexander von Humboldt Prize from the German government honoring
foreign scientists and scholars for lifetime achievement.
SVMs have
become widely established as one of the leading approaches to pattern
recognition and machine learning worldwide and are replacing neural networks in
a variety of fields, including engineering, information retrieval and
bioinformatics. This technology has been incorporated into product
and research applications by many biomedical, pharmaceutical, software, computer
and financial companies. Educational and research institutions
throughout the world have successfully applied SVMs to a wide array of
applications, including gene and protein expression analysis, medical image
analysis, flow cytometry, and mass spectrometry.
Recursive
Feature Elimination - Support Vector Machine Overview
Recursive
Feature Elimination (RFE-SVM) is an application of SVM that was created by
members of HDC’s science team to find discriminate relationships within clinical
datasets, as well as within gene expression and proteomic datasets created from
micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns
– for instance, a biomarker/genetic expression signature of a
disease. The RFE-SVM utilizes this pattern recognition capability to
identify and rank order the data points that contribute most to the desired
results based on specificity or sensitivity. The Company believes
that its three RFE-SVM patents are currently the only RFE patents issued in the
world.
Using
RFE-SVM, we have been able to access information in micro-array datasets that
the most advanced bioinformatics techniques missed. In one
micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific
genes from those related to the malignancy. RFE-SVM has also been used to
determine gene expression patterns that correlate to the severity of a disease,
not just its existence. It has been shown to improve both diagnosis
and prognosis by providing physicians with an enhanced decision
tool. HDC scientists believe that these analytic methods are
effective for finding genes and proteins implicated in several cancers, as well
as in assisting with the pharmacogenetic and toxicological profiling of
patients. The RFE-SVM method is also capable of finding those
specific genes and proteins that are unhindered by ever-increasing patent
protection.
Fractal
Genomic Modeling Overview
On
September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company
with patented FGM software. The fractal technology is used to find
discriminate relationships within clinical datasets as well as within gene
expression datasets created from micro-arrays of disease versus normal
tissues.
The FGM
data analysis technique has been shown to improve the mapping of genetic
pathways involved in the diagnosis and prevention of certain diseases. HDC
scientists feel that these analytic methods are effective for finding genes
implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a
host of other diseases, as well as the pharmacogenetic profiling of
patients.
FGM
technology is designed to study complex networks. A complex network can be made
up of genes inside a living organism, web pages on the Internet, stocks within a
financial market, or any group of objects or processes that appear to be
connected together in some intricate way. FGM uses 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.
Our
Scientific Achievements
HDC’s
world renowned scientific team is uniquely experienced in the design, analysis
and application of machine learning technology, having invented the concepts and
many of the methodologies used to exploit domain knowledge. In
addition, through pattern recognition, our science team has identified and
patent-protected biomarkers as possible treatment advances for several diseases,
including Benign Prostatic Hyperplasia (BPH), prostate cancer, leukemia, colon
cancer, and AIDS.
Benign
Prostatic Hyperplasia (BPH)
HDC has identified and
patent-protected a subset of genes that separates benign prostatic
hyperplasia (BPH) from prostate cancer with a high degree of
accuracy. This same set of genes also separated BPH from normal
tissue patterns, indicating that BPH is a disease with molecular characteristics
of its own. This discovery could be used to develop a new
non-invasive diagnostic test for BPH, which does not currently exist, as well as
a completely new type of therapy for patients with this disease. This
patent-protected gene set is the subject of discussions with an international
pharmaceutical company to be used as a surrogate biomarker for their clinical
trial evaluating a new BPH drug.
BPH is a
non-cancerous enlargement of the prostate gland that occurs as men
age. The enlargement often leads to obstruction in the flow of urine
through the urethra that passes through the prostate gland. BPH is a common
condition, representing a global treatment market of almost $4 billion annually
growing by 12% per year in fixed-rate US dollar terms. According to
the National Institutes of Health, BPH affects more than 50% of men over age 60
and as many as 90% of men over the age of 70. While BPH does not
cause prostate cancer, both may be found together.
Prostate
Cancer
HDC has identified, patent-protected
and recently licensed a genetic biomarker signature that identifies
clinically significant high grade prostate cancer cells based on analysis of
tissue samples. More than one million men a year undergo biopsies of
the prostate gland after a cancer-screening test reveals moderately elevated
levels of prostate specific antigen (PSA) in the blood. Upon the
achievement of successful validation, the Company’s test will be used to analyze
patients with elevated PSA or abnormal rectal exams, with negative biopsy
results to determine if there is genomic evidence of grade three or higher
cancer cells present in biopsy tissue, indicating the presence of a cancer
missed by the biopsy. We and Clarient have successfully completed all
phases of the clinical trial process with the hope of achieving the statistical
significance necessary to validate the ability to commercialize a
test. Results from both the Phase I, Phase II and Phase III
double-blinded clinical validation studies now completed at Clarient
demonstrated a very high success rate for identifying the presence of Grade 3 or
higher prostate cancer cells (clinically significant cancer), as well as normal
BPH (benign prostatic hyperplasia) cells. Combining all of the patients from all
three Phases of the clinical trials, the new gene-based molecular diagnostic
test achieved a Sensitivity rate of 90% for correctly identifying the presence
of Grade 3 or higher prostate cancer cells, a Specificity rate of 97% for
correctly identifying normal prostate cells and a Specificity rate of 90% for
identifying BPH cells, representing an overall test accuracy of
93%. With the completion of the clinical trial, HDC’s new gene-based
molecular diagnostic test is now ready for commercialization to be used by
physicians on their patients at risk of having prostate
cancer.
Prostate
cancer is the second-leading cause of cancer death in men, after lung cancer.
The National Cancer Institute estimates that more than 186,000 new cases of
prostate cancer will be diagnosed in the U.S. in 2008, with more than 28,660
deaths.
Leukemia
HDC has identified and
patent-protected a set of leukemia genes that can separate ALL-T-cell
leukemia from ALL-B-cell leukemia with a high degree of accuracy. The
Company collaborated with the University of Texas M.D. Anderson Cancer Center to
analyze a gene expression database to identify new biomarkers and pathways
involved in leukemia. The Company intends to further validate this
finding in anticipation of developing a molecular diagnostic product for
commercialization.
Leukemia
is a type of cancer that originates in the bone marrow. The accumulation of
malignant cells interferes with the body’s production of healthy blood cells and
makes the body unable to protect itself against infections. The National Cancer
Institute estimates that more than 44,000 new cases will be diagnosed in the
U.S. in 2008, with almost 22,000 deaths.
Colon
Cancer
HDC has identified and
patent-protected colon cancer-specific biomarkers that can be used in the
development of diagnostic assays for cancer detection, disease discrimination,
and even a potential vaccine. The aim of this early biomarker
discovery project was to define the gene expression patterns associated with
colon cancer. Our RFE-SVM served as an effective tool for sifting
through the noise of thousands of measurements to highlight only those genes
that optimally contributed to the study focus. The Company is
currently validating these findings in anticipation of developing a molecular
diagnostic product for commercialization.
In the
United States, colorectal cancer is the third most common cancer in men and
women. The National Cancer Institute (NCI) estimates that more than 108,000 new
cases of colon and rectal cancer will be diagnosed in the U.S. in 2008, with
nearly 50,000 deaths.
AIDS
HDC identified and
patent-protected an AIDS expression signature that separated AIDS brain
cells from non-AIDS brain cells with a high degree of accuracy.
This
biomarker discovery was accomplished in conjunction with Dr. Paul Shapshak,
Director of the Dementia/HIV Laboratory at the University of Miami Medical
School, and a group of leading scientists using HDC’s proprietary FGM analysis
technique. HDC sold the biomarker discovery to the University of
Miami in November 2005.
HIV-related
dementia occurs in 40-60% of all cases of HIV infection that are left untreated.
Even when treated, dementia occurs in 10 percent of all cases of HIV infection,
with the number continuing to rise as the virus becomes resistant to treatment.
The dementia is related to inflammation in the brain caused by HIV infection, a
problem whose underlying genetic causes are complex and largely
unknown.
Breast
Cancer
HDC is
developing two breast cancer diagnostic technologies; one for detecting
malignancy in mammograms (MammoSIGHT) and another for
identifying circulating tumor cells in the blood (MetastaSIGHT). The detection
component of these technologies finds the areas of particular interest in the
image and separates these objects from the background. The feature
extraction component formulates numerical values relevant to the classification
task from the segmented objects. HDC’s patented technology can be
used within all diagnostic imaging radiology techniques, including PET scans, CT
scans, and MRIs.
For
women, breast cancer is the most common non-skin cancer and the second leading
cause of cancer-related death in the United States. However, death
rates from breast cancer have been declining since 1990, and these decreases are
believed to be the result, in part, of earlier detection and improved
treatment. Mammography remains the best method of early breast cancer
detection. According to studies cited by the National Cancer
Institute, 10-20% of breast cancers detected by a physical exam were missed by a
film mammogram. For this reason, there have been extensive research
efforts to improve mammography.
The FDA
reports that there are about 33.5 million mammography procedures performed each
year in the United States. Data from 2000-2002 show that about 70
percent of all mammograms that are performed annually are for screening purposes
(to detect cancer as opposed to following cancer once it has been diagnosed).
This translates to about 23.5 million screening procedures every
year.
Studies
have shown that among newly diagnosed breast cancer cases in which the patients
have previous mammograms, 75% of the cases will have abnormality detectable in
the old films. In fact, missed cancer reading in mammography is a major source
of lawsuits in radiology. Detecting malignancy in mammograms can be
very difficult. Individual mammograms are unique and there can be great
variation within “normal” images. Unlike CT and MRI, mammograms are
not cross-sectional images. Basically, a mammogram produces a
two-dimensional picture of a three-dimensional object. The projection
from 3D to 2D and the resulting overlaps on the images may interfere with the
recognition of the distinguishing features. The features are often
very subtle. The rules for differentiating the benign and malignant
cases are vague and not easily formulated.
One way
to reduce reading errors is to have two radiologists read the same mammograms
independently. However, in most health care systems, it is not feasible to
implement such a two-radiologist reading process. A computer-assisted
detection (CAD) system serving as a second reader is therefore an attractive
option and CAD is currently reimbursed by both insurance companies and
Medicare.
Both
digital and film mammography use X-rays to produce an image of the
breast. In film mammography, which has been used for over thirty-five
years, the image is created directly on a film. While standard film
mammography is very good, it is less sensitive for women who have dense
breasts. A major limitation of film mammography is the film
itself. Once a film mammogram is obtained, it cannot be significantly
altered; if the film is underexposed, for example, contrast is lost and cannot
be regained.
Digital
mammography takes an electronic image of the breast and stores it directly in a
computer. Digital mammography uses less radiation than film mammography and
allows for improvement in image storage and transmission because images can be
stored and sent electronically. Radiologists can use software to help
interpret digital mammograms.
MammoSIGHT
HDC’s
MammoSIGHT technology
introduces the use of SVMs in detecting malignancy in mammograms. The SVM
classifier produces an index discriminating between the benign and malignant
cases. The individual components can be developed in parallel because of the
modular structure. In developing the calcification segmentation component, a
selected set of malignant, benign and normal cases representing a wide range of
images was used to guide and test the design in order to produce a general,
robust and accurate algorithm. At the same time, the SVM classifier was
developed and tested with manually prepared input data. A set of 300 images (150
benign and 150 malignant cases) was used in training the SVM. An independent set
of 328 images was used for testing. High dimensional input features were used to
ensure a sufficient capacity for automatically extracted features.
Clusters
of micro calcifications are characterized by their relatively small sizes and
high densities. The algorithm combines a recursive peak seeking technique with
morphological operations to achieve a highly accurate calcification detection
and segmentation.
MetastaSIGHT
Cancer
cells have the ability to migrate from the organ of its origin to any distant
organ throughout the body. This is known as metastasis, the hallmark of
malignant cancers. During metastasis, cancerous cells break through barriers to
travel through the body’s circulatory system to invade other organs. These cells
form new cells in vital organs throughout the body, becoming secondary tumors
that destroy normal cells by depriving them of nutrition.
Even with
today’s best treatment when the cancer is forced into remission, metastasis will
not necessarily leave the body. Metastasis cannot be eliminated by surgery.
Often, malignant cells circulate in the blood before detection by clinical
examination. MetastaSIGHT uses an
SVM-based approach to introduce new cellular imaging technology that identifies
circulating tumor cells in the blood.
Employees
On
September 15 , 2008, we had 3 full time employees. We do
not expect any significant change in the number of employees over the next 12
months.
Website Address
Our
corporate website address is www.HealthDiscoveryCorp.com. To view our
public filings from the home page, select the “Display SEC Filings” tab followed
by “SEC Filings.” This is a direct link to our filings with the
Securities and Exchange Commission (“SEC”), including but not limited to our
Annual Report 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 Biomarker Discovery in the
field of molecular diagnostics. This early discovery process does not
involve any governmental regulations or approvals. If we are
successful in licensing our discoveries to other companies, FDA approvals may be
required before the ultimate product may be sold to
consumers. 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 Company’s current operations
or products.
Intellectual
Property
In
connection with the SVM Acquisition, we obtained rights to the intellectual
property within the “SVM portfolio” that currently consists of twenty-nine
patents which were or have since issued as well as thirty-five other patent
applications that are pending in the U.S. and elsewhere in the
world. The issued patents and pending applications in the SVM
portfolio to date, including new applications that we have filed since acquiring
the original IP, HDC are:
Patent/Application
No.
|
Title
|
Expiration
Date
|
|
|
|
U.S.
Patent No. 6,128,608
|
Enhancing
Knowledge Discovery Using Multiple Support Vector Machines
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,157,921
|
Enhancing
Knowledge Discovery Using Support Vector Machines in a Distributed Network
Environment
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,427,141
|
Enhancing
Knowledge Discovery Using Multiple Support Vector
Machines.
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,658,395
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines.
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,714,925
|
System
for Identifying Patterns in Biological Data Using a Distributed
Network.
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,760,715
|
Enhancing
Biological Knowledge Discovery Using Multiple Support Vector
Machines.
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,789,069
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses.
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,882,990
|
Method
of Identifying Biological Patterns Using Multiple Data
Sets.
|
05/01/2019
|
|
|
|
U.S.
Patent No. 6,944,602
|
Spectral
Kernels for Learning Machines
|
02/19/2023
|
|
|
|
U.S.
Patent No. 6,996,542
|
Computer-Aided
Image Analysis
|
04/21/2021
|
|
|
|
U.S.
Patent No. 7,117,188
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
05/01/2019
|
|
|
|
U.S.
Patent No. 7,299,213
|
Method
of Using Kernel Alignment to Extract Significant Features from a Large
Dataset
|
03/01/2022
|
U.S.
Patent No. 7,318,051
|
Methods
for Feature Selection in a Learning Machine
|
02/25/2021
|
|
|
|
U.S.
Patent No. 7,353,215
|
Kernels
and Methods for Selecting Kernels for Use in a Learning
Machine
|
05/07/2022
|
|
|
|
U.S.
Patent No. 7,383,237
|
Computer-Aided Image
Analysis
|
11/04/2019
|
|
|
|
Australian
Patent No. 764897
|
Pre-processing
and Post-processing for Enhancing Knowledge Discovery Using Support Vector
Machines.
|
05/01/2019
|
|
|
|
South
African Patent No. 00/7122
|
Pre-processing
and Post-processing for Enhancing Knowledge Discovery Using Support Vector
Machines.
|
05/01/2019
|
|
|
|
Australian
Patent No. 780050
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines.
|
05/24/2020
|
|
|
|
Chinese
Patent No. ZL00808062.3
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines.
|
05/24/2020
|
|
|
|
European
Patent No. 1192595
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines.
|
05/24/2020
|
|
|
|
German
Patent No. DE60024452.0-08
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines.
|
05/24/2020
|
|
|
|
Israeli
Patent No. 146705
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines
|
05/24/2020
|
|
|
|
Norwegian
Patent No. 319,838
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines.
|
05/24/2020
|
|
|
|
South
Korean Patent No. 724104
|
Enhancing
Knowledge Discovery from Data Sets Using Multiple Support Vector
Machines
|
05/24/2020
|
|
|
|
Australian
Patent No. 779635
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses.
|
10/27/2020
|
|
|
|
Australian
Patent No. 2002243783
|
Computer
Aided Image Analysis
|
01/23/2022
|
|
|
|
Japanese
Patent No. 3947109
|
Computer
Aided Image Analysis
|
01/23/2022
|
|
|
|
Australian
Patent No. 2002253879
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
01/24/2022
|
|
|
|
Japanese Patent No.
4138486
|
Methods of Identifying Patterns in
Biological Systems and Uses Thereof
|
01/24/2022
|
|
|
|
Canadian
Application No. 2,330,878
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
European
Publication No. 1082646
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
Hong
Kong Application No. 011065063
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
Indian
Application No. 2000/00580
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
Machines
|
05/01/2019
|
|
|
|
Canadian
Application No. 2,371,240
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines
|
05/24/2020
|
|
|
|
Indian
Application No. 2001/01329
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines
|
05/24/2020
|
|
|
|
Japanese
Application No. 2000-620577
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
Machines
|
05/24/2020
|
|
|
|
Canadian
Application No. 2,388,595
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses
|
08/07/2020
|
European
Publication No. 1236173
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses
|
08/07/2020
|
|
|
|
Japanese
Application No. 2001-534088
|
Method
of Identifying Patterns in Biological Systems and Methods of
Uses
|
08/07/2020
|
|
|
|
U.S.
Patent Publication No. 2005/0165556
|
Colon
Cancer-Specific Markers
|
05/01/2019
|
|
|
|
U.S.
Patent Publication No. 2007/0092917
|
Biomarkers
for Screening, Predicting, and Monitoring Prostate Disease
|
05/01/2019
|
|
|
|
U.S.
Application No. 11/926,129
|
System
for Providing Data Analysis Services Using a Support Vector Machine for
Processing Data Received from a Remote Source
|
05/01/2019
|
|
|
|
U.S.
Patent Publication No. 2008/0033899
|
Feature
Selection Using Support Vector Machine Classifier
|
05/01/2019
|
|
|
|
European
Publication No. 1828917
|
Biomarkers
for Screening, Predicting, and Monitoring Prostate Disease
|
11/14/2025
|
|
|
|
Canadian
Application No. 2,435,254
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
01/24/2022
|
|
|
|
European
Publication No. 1459235
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
01/24/2022
|
|
|
|
U.S.
Application No. 11/929,354
|
Kernels
and Methods for Selecting Kernels for Use in a Learning
Machine
|
05/07/2022
|
|
|
|
Canadian
Application No. 2,435,290
|
Computer
Aided Image Analysis
|
01/23/2022
|
|
|
|
European
Publication No. 1356421
|
Computer
Aided Image Analysis
|
01/23/2022
|
|
|
|
U.S.
Application No. 11/929,213
|
Methods
for Feature Selection in a Learning Machine
|
08/07/2020
|
|
|
|
U.S.
Patent Publication No. 2005/0071140
|
Model
Selection for Cluster Data Analysis
|
05/17/2022
|
|
|
|
U.S.
Application No. 11/929,522
|
Model
Selection for Cluster Data Analysis
|
05/17/2022
|
|
|
|
U.S.
Patent Publication No. 2006/0064415
|
Data
Mining Platform for Bioinformatics
|
08/07/2020
|
|
|
|
U.S.
Patent Publication No. 2008/0097938
|
Data
Mining Platform for Knowledge Discovery from Heterogeneous Data Types
and/or Heterogeneous Data Sources
|
08/07/2020
|
|
|
|
U.S.
Patent Publication No. 2008/0097939
|
Data
Mining Platform for Bioinformatics
|
08/07/2020
|
U.S.
Patent Publication No. 2005/0228591
|
Kernels
and Kernel Methods for Spectral Data
|
08/07/2020
|
|
|
|
U.S.
Patent Publication No. 2008/0097940
|
Kernels
and Kernel Methods for Spectral Data
|
08/07/2020
|
|
|
|
U.S.
Patent Publication No. 2005/0131847
|
Pre-Processed
Feature Ranking for a Support Vector Machine
|
08/07/2020
|
|
|
|
U.S.
Application No. 11/928,784
|
Pre-Processed
Feature Ranking for a Support Vector Machine
|
08/07/2020
|
|
|
|
European
Publication No. 1449108
|
Pre-Processed
Feature Ranking for a Support Vector Machine
|
11/07/2022
|
|
|
|
U.S.
Patent Publication No. 2008/0050836
|
Biomarkers
for Screening, Predicting, and Monitoring Benign Prostate
Hyperplasia
|
01/24/2022
|
|
|
|
U.S.
Application No. 12/025,724
|
Biomarkers
Upregulated in Prostate Cancer
|
01/24/2022
|
|
|
|
U.S.
Provisional Application No. 60/976,791
|
Biomarkers
for Screening, Predicting, and Monitoring Prostate Disease
|
01/24/2022
|
|
|
|
U.S.
Provisional Application No. 61/027,416
|
Analysis
of Flow Cytometry Data Using Support Vector Machines
|
02/08/2028
|
HDC also
owns intellectual property rights in U.S. and foreign patents and pending patent
applications covering the FGM technology. The FGM portfolio includes
two issued patents and three pending patent applications, which
are:
Patent/Application
No.
|
Title
|
Expiration
Date
|
|
|
|
U.S.
Patent No. 6,920,451
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets.
|
01/19/2021
|
U.S.
Patent No. 7,366,719
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets
|
01/19/2021
|
European
Patent No.: 1252588
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets.
|
01/19/2021
|
U.S.
Patent Publication No.: 2005/0079524
|
Method
for Identifying Biomarkers Using Fractal Genomics
Modeling.
|
01/19/2021
|
U.S.
Patent Publication No.: 2005/0158735
|
Method
for Studying Cellular Chronomics and Causal Relationships of Genes Using
Fractal Genomics Modeling.
|
01/19/2021
|
Our
Competition
HDC’s
main service/product is Biomarker
Discovery. While a number of companies perform Biomarker Discovery, we feel
that our SVM and FGM technologies 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.
Customers
and Licensees
We
have produced sales, licensing, and developmental revenue since 2005 through
agreements with a few customers and licensees. We have a strategic alliance and
licensing agreement with Clarient, Inc. for commercialization of a new molecular
diagnostic test for prostate cancer based on our discovered prostate cancer
biomarker signature. Pursuant to our agreement, Clarient, Inc.
obtained an exclusive license to the prostate cancer test in exchange for our
30% royalty interest from all reimbursements of the test once
commercialized. We and Clarient have successfully completed all
phases of the clinical trial process with the hope of achieving the statistical
significance necessary to validate the ability to commercialize a
test. Results from both the Phase I, Phase II and Phase III
double-blinded clinical validation studies now completed at Clarient
demonstrated a very high success rate for identifying the presence of Grade 3 or
higher prostate cancer cells (clinically significant cancer), as well as normal
BPH (benign prostatic hyperplasia) cells. Combining all of the patients from all
of the Phases of the clinical trials, the new gene-based molecular diagnostic
test achieved a Sensitivity rate of 90% for correctly identifying the presence
of Grade 3 or higher prostate cancer cells, a Specificity rate of 97% for
correctly identifying normal prostate cells and a Specificity rate of 90% for
identifying BPH cells representing an overall test accuracy of
93%. We also received our first royalty proceeds related to our
licensing agreement with Bruker Daltonics in December 2007. These
royalties relate to Bruker Daltonics’ sales of its ClinProToolsTM
clinical proteomics product line for its mass spectrometers, which contains our
SVM technology. While the initial royalty was relatively small, it
represented HDC’s first royalty check from this relationship and offered the
opportunity of future royalties for the life of the patents related to future
sales of the Bruker product. We have also been and continue to
be in meaningful discussions with a variety of parties, which, if successful,
may result in additional customers and licensees, and as a result, additional
revenue.
In May
2008, we entered into a letter of intent with DCL Medical
Laboratories LLC, a full-service clinical reference laboratory focused on
women’s health, for the joint development of an SVM-based computer assisted
diagnostic test for the analysis of cervical cells. Through the
application of the advancing technology of pattern recognition, this new
SVM-based system is intended to further improve the sensitivity of the Pap test
and augment the recent improvements in computer guided screening that have
already significantly improved detection rates. In addition, images and
interpretative data from this new SVM-based system may now be transmitted
electronically, thus allowing remote review and collaborative
interpretation. In July 2008, the Company and DCL Medical
Laboratories, LLC entered into a Development and License Agreement for the
collaborative development and commercialization of SVM-based computer assisted
diagnostic tests for the independent detection of ovarian, cervical and
endometrial cancers, which expands the scope of the joint development
efforts. Pursuant to the Development and License Agreement, HDC will
own any developed intellectual property and DCL Medical Laboratories will have a
sole use license relating to applications and new mathematical tools developed
during the course of the Development and License Agreement. Dr.
Hanbury, one of the Company’s directors, is currently President, CEO and a
shareholder of DCL Medical Laboratories.
While we
have a number of negotiations in process with potential licensing partners,
including in the field of anatomic pathology imaging (which includes such things
as PAP smear tests, biopsies, surgical specimens, and cytology specimens), there
is a possibility that we will be unable to reach agreement with any party, that
the negotiations continue but are not finalized, or that those that may be
finalized do not provide the economic returns that we expect.
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, and Dr. Guyon. These
fees consisted of $46,432 in cash for 2007 and $70,734 in cash for
2006.
Description
of Property
We do not
own any real property. We lease 908 square feet of office space in
Savannah, Georgia, pursuant to a three year lease dated July 1, 2007 for a cost
of $1,770 per month. Our principal executive office is located at 2
East Bryan Street, Suite #601, Savannah, Georgia 31401, and our telephone number
is (912) 443-1987. Our principal executive office is well maintained
and suitable for the business conducted in it.
Legal
Proceedings
There are
no material pending legal proceedings to which the Company is a party or to
which any of its properties are subject; nor are there material proceedings
known to us to be contemplated by any governmental authority; nor are there
material proceedings known to us, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of the Company
or any associate of any of the foregoing, is a party or has an interest adverse
to the Company.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Overview
Our
Company is a pattern recognition company that uses advanced mathematical
techniques to analyze large amounts of data to uncover patterns that might
otherwise be undetectable. Our Company operates primarily in the
emerging field of molecular diagnostics where such tools are critical to
scientific discovery. Our primary business consists of licensing our
intellectual property and working with prospective customers on the development
of varied products that utilize pattern recognition tools. We also
endeavor to develop our own product line of newly discovered biomarker-based
diagnostic tests that include human genes and genetic variations, as well as
gene, protein, and metabolite expression differences and image
analysis. 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 have
partnered and intend to continue partnering with clinical laboratories to
commercialize our clinical diagnostic tests and to provide pharmaceutical and
diagnostic companies with all aspects of all phases of 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 derive relevant and accurate clinical data, producing
accurate biomarker and pathway discoveries, resulting in patent protection of
our biomarker discoveries for future development.
Our
business 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 process includes several
critical levels of decision-making - all of which are part of our business
strategy. We intend 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.
Operational
Activities
The
Company actively markets its technology and related developmental expertise to
several prospects in the healthcare field, including some of the world’s largest
corporations in the pharmaceutical, biotech, and life sciences
industries. Given the scope of some of these prospects, the sales
cycle can be quite long, but management believes that these marketing efforts
will produce favorable results.
In August
2008, we announced the signing of an Agreement with Patent Profit
International (“PPI”), a Silicon Valley-based patent brokerage firm, with the
goal of marketing our patent portfolio and exclusive rights to SVM techniques
and applications beyond biomarker discovery and the healthcare field, to
prospective buyers/licensees in a wide range of technologies, including, but not
limited to, information technology such as Internet browsers and search engines,
spam mail detection, oil exploration, homeland security, and the automotive
industry. As a requirement of any potential sale of the patent
portfolio, HDC expects to retain a royalty-free, worldwide, exclusive license,
with the right to grant sublicenses, in the entire field of healthcare to enable
our continued research, development, licensing and commercialization activities
in diagnostic and prognostic areas such as prostate cancer, ovarian cancer,
breast cancer, endometrial cancer, colon cancer, leukemia and other healthcare
arenas.
In May 2008 we entered into a letter of
intent with DCL Medical Laboratories LLC, a full-service clinical laboratory
focused on women’s health, for the joint development of an SVM-based computer
assisted diagnostic test for the analysis of cervical cells. Through
the application of the advanced technology of pattern recognition, this new
SVM-based system is intended to further improve the sensitivity of the Pap test
and augment the recent improvements of computer guided screening that have
already significantly improved detection rates. In addition, images
and interpretative data from this new SVM-based system may now be transmitted
electronically, thus allowing remote review and collaborative
interpretation. In July 2008, the Company and DCL Medical
Laboratories LLC entered into a Development and License Agreement for the
collaborative development and commercialization of SVM-based computer assisted
diagnostic tests for the independent detection of ovarian, cervical and
endometrial cancers, which expands the scope of the joint development
efforts. Pursuant to the Development and License Agreement, HDC will
own any developed intellectual property and DCL Medical Laboratories LLC will
have a sole use license relating to applications and new mathematical tools
developed during the course of the Development and License
Agreement. Dr. Hanbury, our new director, is currently President, CEO
and a shareholder of DCL Medical Laboratories.
The U.S.
Patent and Trademark Office issued one new patent to the Company in April 2008,
which covers the use of FGM technology for visualization of data
patterns. In May, 2008, the Company announced that the U.S. Patent
and Trademark Office issued two new patents to the Company. One of
the patents claims a method for analysis of any type of data that has a
structure. The second patent covers additional feature selection
techniques that can be used to successfully identify the most important pieces
of information needed to solve complex pattern-recognition
problems. The U.S. Patent and Trademark Office issued one new patent
to the Company in June 2008, which covers the use of SVMs for computer-aided
analysis of medical images, with particular applications in cytology and
pathology. Also in June 2008, the Company was issued a patent in
Japan, which covers recursive feature elimination (RFE) using SVMs for selection
and ranking of the most important features within large
datasets. With the issuance of these patents, the Company now holds
the exclusive rights to 32 issued U.S. and foreign patents covering uses of SVM
and FGM technology for discovery of knowledge from large data
sets.
On July
31, 2007, we announced our alliance and licensing agreement with Clarient, Inc.
for development of a new molecular diagnostic test for prostate cancer based on
our discovered prostate cancer biomarker signature. Under the terms
of that agreement, Clarient, Inc. obtained an exclusive license to the biomarker
signature in exchange for HDC’s 30% royalty interest from all reimbursements of
the test once commercialized. We and Clarient have successfully
completed all phases of the clinical trial process with the hope of achieving
the statistical significance necessary to validate the ability to commercialize
a test. Results from both the Phase I, Phase II and Phase
III double-blinded clinical validation studies now completed at Clarient
demonstrated a very high success rate for identifying the presence of
Grade 3 or higher prostate cancer cells (clinically significant cancer), as
well as normal BPH (benign prostatic hyperplasia) cells. Combining
all of the patients from all three phases of the clinical trials, the new
gene-based molecular diagnostic test achieved a Sensitivity rate of 90% for
correctly identifying the presence of Grade 3 or higher prostate cancer
cells, a Specificity rate of 97% for correctly identifying normal prostate cells
and a Specificity rate of 90% for identifying BPH cells, representing an overall
test accuracy of 93%. With the completion of the clinical trial,
HDC’s new gene-based molecular diagnostic test is now ready for
commercialization to be used by physicians on their patients at risk of having
prostate cancer. The new prostate cancer test will be performed at Clarient’s
Clinical Laboratory in Aliso Viejo, CA. HDC will receive 30% royalty on each
test performed.
In
December 2007, we received our first royalty proceeds related to our licensing
agreement with Bruker Daltonics, which was originally announced in August,
2006. The royalties relate to Bruker Daltonics’ sales of its
ClinProToolsTM
clinical proteomics product line for its mass spectrometers, which contains
HDC’s SVM technology. Bruker launched its ClinProToolsTM at
approximately the same time as the license with HDC. While the
initial royalty was relatively small, it represents HDC’s first royalty check
from this relationship and offers the opportunity of future royalties for the
life of the patents related to future sales of the Bruker product.
Management
believes that our research agreement with a leading biotech company to develop
an SVM-based diagnostic test to help interpret flow cell cytometry data for a
particular medical condition has resulted in a successful proof of
concept. These findings were presented during the first quarter of
2008 and the due diligence process has accelerated to confirm our findings for
that particular condition and determine other applications within flow
cytometry.
We have
advanced discussions with two large international healthcare companies with
respect to diagnostic imaging opportunities. Our objective is
licensing and product development using SVMs and FGMs in diagnostic radiology,
including mammography, PET scans, CT scans, MRI and other radiological
images. In addition, given the scope of these two prospects, we
believe we can demonstrate the computational power of our SVM technology
analyzing combined data from imaging, proteomics, and genomics. We
own a number of SVM and FGM patents in this field that we believe are very
important.
Negotiations
with a large European pharmaceutical company to develop a companion diagnostic
test using our discovered biomarkers as surrogates in the last phase of a
clinical trial for its new drug to treat BPH (enlarged prostate) remain delayed
due to the prospect’s post-acquisition integration issues. Based on
the prospect’s representations, we believe that discussions regarding this
prospective opportunity will resume sometime in 2008. We have also initiated
discussions to bring this opportunity to other pharmaceutical companies with new
BPH drugs in clinical development.
We have
advanced our dialogue with several other important industry players in the
healthcare field and, in certain situations, related to the field of pathology
imaging and genomics, including a proposed project with one of the world’s
largest diagnostic/pharmaceutical companies, a marketing arrangement with one of
the world’s largest generic drug manufacturers, and other prospective
partnership opportunities with additional companies and research
institutions. We also continue to pursue development opportunities
with our existing licensing customers.
We have
also advanced discussions with a company regarding the use of the SVM patents,
patent applications and all other technology that the Company has or has rights
to, which can be used for breast cancer diagnosis and treatment. We
remain engaged in discussions related to this development effort with one of our
former directors. If we reach an agreement, we anticipate that
research and development will result in the creation and commercialization of
tests that will be used in the diagnosis and treatment of breast
cancer.
In
January 2007, SVM Capital, LLC was formed as a joint venture between HDC and
Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the
potential applicability of our SVM technology to quantitative investment
management techniques. Atlantic Alpha has over thirty years of
experience in commodity and futures trading. SVM Capital has made
significant progress since the formation of the joint venture. The
SVM technology is now working well with dynamic time series for S&P data
accumulated over the past fifty-eight years. The latest SVM-derived
models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in
increased returns as well as in reduced risk. Once the stability of
these models is confirmed, SVM Capital intends to apply the models to a wide
range of financial asset classes such as interest rates, currencies, metals and
petroleum products. The joint venture partners plan to apply the
investment model either in a single fund or a fund of funds. SVM
Capital will charge a management fee and a performance fee for managing client
assets. Depending on the level of its success, this venture can be
profitable given its reliance on cost effective use of computer technology and
ready access to efficient trading platforms. The initial investment
was $5,000 and was subsequently written off as the Company recorded its share of
the losses of this venture. The Company has no further funding
commitment for this venture.
Since
December 2005, the total value of licenses and development contracts signed is
approximately $1,362,500.
While we
have a number of negotiations in process with potential licensing partners,
there is a possibility that we will be unable to
reach agreement with any party, that the negotiations continue but are not
finalized, or that those that may be finalized do not provide the economic
returns that we expect.
Year
Ended December 31, 2007 Compared with Year Ended December 31, 2006
Revenue
For the
year ended December 31, 2007, revenue was $57,905 compared with $203,889 in
revenue for the year ended December 31, 2006. Revenue is recognized
for licensing and development fees over the period earned. The
decrease of revenue in 2007 was due largely to the fact that the contracts
finalized in 2007 required recognition of the revenue generated be deferred and
recognized over the contractual period rather than immediately
recorded. As of December 31, 2007, the Company had deferred revenue
of $516,424. This deferred revenue includes $291,424 of cash received
but not yet recognized as revenue and $225,000 in accounts
receivable. Deferred revenue was $101,111 at December 31,
2006.
Cost
of Revenue and Gross Margin
Cost of
revenues for 2007 was $21,300. Cost of revenues includes all direct
costs associated with the acquisition and development of patents and processes
sold. All direct costs, primarily professional fees associated with
licensing negotiations, are also included in cost of revenues. Cost
of revenues was $28,671 in 2006.
Operating
and Other Expenses
Amortization
expense was $262,719 for the twelve months ended December 31, 2007 and
2006.
Professional
and consulting fees totaled $980,833 for 2007 compared with $1,123,498 for
2006. These fees, related to legal, accounting and scientific
activities, were reduced because of fewer warrants issued to service providers
and continued cost containment efforts.
Compensation
of $783,721 for the twelve months ended December 31, 2007 was slightly higher
than the $770,000 reported for the comparable period of 2006.
Other
general and administrative expenses decreased from $542,710 in 2006 to $459,064
in 2007. This decrease was largely due to expense reduction efforts
throughout the fiscal year.
Loss
from Operations
The loss
from operations for the twelve months ended December 31, 2007 was $2,449,737
compared to $2,523,709 for the prior year. The decreased loss was due
to the factors enumerated above.
Other
Income and Expense
Interest
income was $39,614 for the twelve months ended December 31, 2007 compared to
$21,008 in 2006. Increased interest income was due to the higher
average cash available to invest throughout 2007.
A gain on
the restructuring of accounts payable of $44,594 was recorded in 2007 to reflect
common stock warrants issued in payment of liabilities compared to $97,864 in
2006.
The
Company also recognized a $5,000 loss related to its investment in SVM Capital
LLC.
The
Company recorded an expense of approximately $42,000, which was associated with
the settlement of litigation.
Interest
expense was $286,398 in 2007 compared with $190,922 in 2006. This
increase was due to the higher interest rate associated with the renegotiated
promissory notes, and interest related to the promissory note executed in the
third quarter of 2006.
Net
Loss
The net
loss for the twelve months ended December 31, 2007 was $2,698,927 compared to
$2,595,759 for the twelve months ended December 31, 2006. The
increased loss was due to increased net other expense, which unfavorably offset
the reduced 2007 loss from operations
Net loss
per share was $0.02 for the twelve months ended December 31, 2007 and
2006. A larger net loss in 2007 was favorably offset by increased
number of average shares outstanding.
Liquidity
and Capital Resources
At
December 31, 2007, the Company had $1,648,439 in available cash. Cash
used by operating activities was $1,467,118. This was due primarily
to the net loss of $2,698,927; however, net non-cash charges and adjustments of
$1,231,809 favorably impacted the computation of the net cash
used. Cash used by investment activities was $998 due to the
acquisition of assets. Net cash provided by financing activities was
$2,442,189 due to the cash received from the sale of common stock and the
exercise of warrants offset by the repayment of debt totaling
$49,351.
The
following table summarizes the due dates of our contractual
obligations.
|
|
Total
|
|
|
Less
than
1 Year
|
|
|
1-3
Years
|
|
Deferred
Compensation
|
|
|
66,500 |
|
|
|
66,500 |
|
|
|
- |
|
Corporate
Office Lease
|
|
|
50,340 |
|
|
|
20,136 |
|
|
|
30,204 |
|
Total
|
|
$ |
116,840 |
|
|
$ |
86,636 |
|
|
$ |
30,204 |
|
The
Company continues to expend capital to maintain its patent
portfolio.
In
January 2007, the Company issued 100,000 shares of stock for warrants exercised
at $0.01 each. Proceeds of $1,000 were recorded in capital
stock. In February 2007, the Company granted warrants to purchase
15,235,000 restricted shares of Company stock at a fixed price of $0.35 per
share, exercisable until November 1, 2007. These warrants expired in
November 2007. Also in February 2007, the Company issued warrants to
purchase up to 500,000 shares of Company common stock to consultants, which
vested immediately, and have an exercise price of
$0.14. Additionally, the Company issued a warrant to purchase up to
100,000 shares of Company common stock to a consultant, which vests over ten
months, and has an exercise price of $0.14.
During
the second quarter of 2007, the Company issued warrants to purchase up to
500,000 shares of Company common stock to consultants, which vested immediately
and had an exercise price of $0.11.
In July
2007, the Company issued 575,000 shares of common stock valued at $46,000 to a
former employee as part of a termination agreement. In connection
with that termination agreement, the Company also issued to the former employee
a warrant to purchase 300,000 shares of Company common stock with an exercise
price of $0.08. These warrants vested immediately and expire in three
years. The Company also issued 400,000 shares of common stock valued
at $32,000 as part of a litigation settlement in July 2007.
During
the third quarter of 2007, the Company issued warrants to purchase 60,750 shares
of Company common stock to a vendor as payment for professional
services. These warrants expire on December 31, 2008, vested
immediately, and have an exercise price of $0.10.
Two new
directors were each awarded warrants to purchase 1,500,000 shares of Company
common stock, which vest over three years and expire in six
year. These warrants have an exercise price of $0.08, and will be
charged as directors’ fees over the vesting period. One director
subsequently forfeited his warrant upon his resignation as a
director.
Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million in cash. The stock is restricted
from resale as the stock has not been registered. Each purchaser of
common stock also received one warrant to acquire an equal number of shares at
$0.14 and one warrant to acquire an equal number of shares at
$0.19. The common shares were valued at $0.07 each and the warrants
were valued at $0.005 each for a total of $0.08.
The
Company also issued 19,601,323 shares of common stock and 7,437,184 shares of
Series A Preferred Stock in a conversion of secured debt to
equity. The amount of debt converted to common stock and warrants was
$1.6 million and the amount of debt converted to Series A Preferred Stock was
$594,975. Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common stock
at $0.14 and one warrant to acquire an equal number of shares of common stock at
$0.19.
The
shares of Series A Preferred Stock may be converted into common stock of the
Company at any time without the payment of additional
consideration. The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days. The holder of the Series A Preferred Stock has the right to
receive dividends, the right to vote on matters presented to the common
shareholders, and a preference right in the event of liquidation in an amount
equal to $594,975, which is the amount of debt converted, plus any declared but
unpaid dividends. The Company has a right to redeem the shares of
Series A Preferred stock upon the fifth anniversary of the issue date at a
redemption price of $0.08 per share.
The
Company has relied primarily on equity funding plus debt financing for liquidity
during its developmental phase that ended in 2004. The Company
produced sales, licensing, and developmental revenue since 2005 and must
continue to do so in order to generate sufficient cash to continue
operations. The Company’s plan to have sufficient cash to support
operations is comprised of generating revenue through licensing its significant
patent portfolio, providing services related to those patents, and obtaining
additional equity or debt financing. The Company has been and
continues to be in meaningful discussions with a variety of parties, which if
successful, may result in significant revenue. The Company has
implemented a cash conservation plan that includes a reduction in consulting
payments, negotiated settlements with creditors whereby the Company substituted
equity instruments for amounts owed, and a heightened scrutiny of all potential
expenditures.
Should it
prove necessary, the Company may also consider such alternatives as raising
additional equity through private placements and/or debt
offerings. Although this raises doubt with respect to our ability to
operate as a going concern, the Company believes that it has sufficient
capability to operate through the next twelve months.
Six
Months Ended June 30, 2008 Compared with Six Months Ended June 30,
2007
Revenue
For the
six months ended June 30, 2008, revenue was $31,354 compared with $21,667 for
the six months ended June 30, 2007. Revenue is recognized for
licensing and development fees over the period earned.
Cost
of Revenues and Gross Margin
Internal
development costs of $6,600 were recorded as cost of sales for the six months
ended June 30, 2008 compared with $11,400 for the comparable 2007
period. Cost of revenues includes all direct costs, primarily wages
and research fees, associated with the acquisition and development of patents
and processes sold. All direct costs, including some professional
fees associated with licensing negotiations, are also included in cost of
revenues.
Operating
and Other Expenses
Amortization
expense was $131,360 for both the six months ended June 30, 2008 and
2007. Amortization expense relates primarily to the costs associated
with filing patent application and acquiring rights to the patents.
Professional
and consulting fees totaled $324,999 for the six months ended June 30, 2008
compared with $492,309 for the six months ended June 30,
2007. The decrease is due to lower fees, primarily legal, incurred
for 2008.
Compensation
of $393,840 for the six months ended June 30, 2008 was higher than the
$321,710 reported for the
comparable 2007 period. Compensation increased because of the
restoration of salary decreases and increased medical insurance
costs.
Other
general and administrative expenses increased to $262,587 for the six months
ended June 30, 2008 compared to $233,735 for the six months ended
June 30, 2007. This increase was due to the accelerated vesting
of a former director’s warrants.
Loss
from Operations
The loss
from operations for the six months ended June 30, 2008 was $1,088,032
compared to $1,168,847 for the comparable 2007 period. This decreased
loss was due to decreased costs as discussed previously.
Other
Income and Expense
Interest
income was $29,524 for the six months ended June 30, 2008 compared to
$9,976 for the six months ended June 30, 2007. Interest income
increased because the Company had more cash on hand to invest throughout
2008.
Interest
expense was $480 in the six months ended June 30, 2008 compared with
$204,114 in the six months ended June 30, 2007. This decrease
reflects the elimination of debt in the fourth quarter of 2007.
Net
Loss
The net
loss for the six months ended June 30, 2008 was $1,058,990 compared to
$1,318,391 for the six months ended June 30, 2007. The decreased
loss was due to the smaller net loss from operations and the decrease in
interest expense.
Net loss
per share was $0.01 for both six months ended June 30, 2008 and
2007.
Liquidity
and Capital Resources
At June
30, 2008, the Company had $818,483 in available cash. Cash used by
operating activities year to date was $829,946. This was due
primarily to the net loss of $1,058,990; however, net non-cash charges and
adjustments of $229,044 favorably impacted the computation of the net cash
used. Cash used by investment activities was zero. Net
cash provided by financing activities was zero.
The
following table summarizes the due dates of our contractual
obligations.
|
|
Total
|
|
|
1
Year
Or Less
|
|
|
More than 1 Year
|
|
Deferred
Compensation
|
|
$ |
60,500 |
|
|
$ |
60,500 |
|
|
$ |
- |
|
Office
Lease
|
|
|
42,492 |
|
|
|
21,246 |
|
|
|
21,246 |
|
Total
|
|
$ |
102,992 |
|
|
$ |
81,746 |
|
|
$ |
21,246 |
|
The
Company has relied primarily on equity funding plus debt financing for
liquidity. The Company produced sales, licensing, and developmental
revenue starting in late 2005 and must continue to do so in order to generate
sufficient cash to continue operations. The Company’s plan to have
sufficient cash to support operations is comprised of generating revenue through
licensing its significant patent portfolio, providing services related to those
patents, and obtaining additional equity or debt financing. The
Company has been and continues to be in meaningful discussions with a variety of
parties, which if successful, may result in significant revenue, as further
described above. In the meantime, the Company maintains a vigilant
cash conservation program.
Critical Accounting Policies,
Estimates and Assumptions
We
consider our accounting policies related to revenue recognition, impairment of
intangible assets and stock based compensation to be critical accounting
policies. A number of significant estimates, assumptions, and judgments are
inherent in our determination of when to recognize revenue, how to evaluate our
intangible assets, and stock-based compensation expense. These estimates,
assumptions and judgments include deciding whether the elements required to
recognize revenue from a particular arrangement are present, estimating the fair
value of an intangible asset, which represents the future undiscounted cash
flows to be derived from the intangible asset, and estimating the useful life
and volatility of stock awards granted. We base our estimates and judgments on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could differ materially from
these estimates.
Valuation of intangible and other
long-lived assets.
We assess
the carrying value of intangible and other long-lived assets at least annually,
which requires us to make assumptions and judgments regarding the future cash
flows related to these assets. The assets are considered to be impaired if we
determine that the carrying value may not be recoverable based upon our
assessment of the following events or changes in circumstances such
as:
|
§
|
the
asset’s ability to continue to generate income from operations and
positive cash flow in future periods;
|
|
|
|
|
§
|
loss
of legal ownership or title to the asset;
|
|
|
|
|
§
|
significant
changes in our strategic business objectives and utilization of the
asset(s); and
|
|
|
|
|
§
|
the
impact of significant negative industry or economic
trends.
|
If the
assets are considered to be impaired, the impairment we recognize is the amount
by which the carrying value of the assets exceeds the fair value of the assets.
In addition, we base the useful lives and related amortization or depreciation
expense on our estimate of the period that the assets will generate revenues or
otherwise be used by us. We also periodically review the lives assigned to our
intangible assets to ensure that our initial estimates do not exceed any revised
estimated periods from which we expect to realize cash flows from the
technologies. If a change were to occur in any of the above-mentioned factors or
estimates, the likelihood of a material change in our reported results would
increase.
Revenue
Recognition
We
recognize revenue principally from license and royalty fees for intellectual
property and from development agreements with research partners. Each element of
revenue recognition requires a certain amount of judgment to determine if the
following criteria have been met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the
seller’s price to the buyer is fixed or determinable; (iv) collectability is
reasonably assured, and (v) both title and the risks and rewards of ownership
are transferred to the buyer. We are required to make more significant estimates
involving our recognition of revenue from license and royalty fees. Our license
and royalty fees revenue estimates depend upon on our interpretation of the
specific terms of each individual arrangement and our judgment to determine if
the arrangement has more than one deliverable and how each of these deliverables
should be measured and allocated to revenue. In addition, we have to make
significant estimates about the useful life of the technology transferred to
determine when the risk and rewards of ownership have transferred to the buyer
to decide the period of time to recognize revenue. In certain circumstances we
are required to make judgments about the reliability of third party sales
information and recognition of royalty revenue before actual cash payments for
these royalties have been received.
Share-Based
Compensation
Share-based
compensation expense is significant to our financial position and results of
operations, even though no cash is used for such expense. In determining the
period expense associated with unvested options, we estimate the fair value of
each option at the date of grant. We believe it is important for investors to be
aware of the high degree of subjectivity involved when using option pricing
models to estimate share-based compensation under SFAS No. 123R. The
determination of the fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, our valuation methodology, the
expected term, expected stock price volatility over the term of the awards, the
risk-free interest rate, expected dividends and pre-vesting forfeitures. If any
one of these factors changes and we employ different assumptions in the
application of SFAS No. 123R in future periods, the compensation expense
that we record under SFAS No. 123R will differ significantly from what we
have recorded in the current period.
For
share-based awards issued during the year ended December 31, 2007, we
estimated the expected term by considering various factors including the vesting
period of options granted, employees’ historical exercise and post-employment
termination behavior; however, due to the limited history of our Company, such
data is limited. We estimated the expected life will be substantially
longer than the vesting period given the start-up nature of our operations and
accordingly have used the contractual life as the expected term. Our estimated
volatility was derived using our historical stock price volatility. We have
never declared or paid any cash dividends on our common stock and currently do
not anticipate paying such cash dividends. The risk-free interest rate is based
upon U.S. Treasury securities with remaining terms similar to the expected term
of the share-based awards.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that provide financing, liquidity, market or
credit risk support or involve leasing, hedging or research and development
services for our business or other similar arrangements that may expose us to
liability that is not expressly reflected in the financial
statements.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the Company’s directors and executive
officers.
Name
|
|
Age
|
|
Position
|
Stephen
D. Barnhill, M.D.
|
|
49
|
|
Chief
Executive Officer and Chairman of the Board
|
Hong
Zhang, Ph.D.
|
|
46
|
|
Senior
Vice President
|
Michael
Hanbury
|
|
45
|
|
Director
|
Stephen D.
Barnhill, M.D., is currently our Chief
Executive Officer and Chairman of the Board. He has been 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 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.
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 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.
Michael Hanbury
is a member of the Board of Directors and has been a director since June
27, 2008. Dr. Hanbury has over 25 years professional and associated
corporate management experience in medical diagnostic and clinical laboratory
sectors with a diverse experience base including successful tenures in research
and direct patient care in nationally renowned academic medical centers;
operations management in public and private clinical laboratories; and
concept-to-market design, development, customer support, engineering, compliance
and regulatory management in in-vitro diagnostic
manufacturing companies. In addition to substantial academic research
experience, he has directed all US operations for an international in-vitro diagnostics company
and managed regulatory affairs for Roche Molecular Systems, where his efforts
were instrumental in obtaining the first FDA clearances for some of the most
widely used commercial molecular diagnostic products on the
market. Before its acquisition by Quest Diagnostics, he was Chief
Operating Officer of Unilab Corporation, formerly the third largest reference
laboratory in the country operating 51 laboratories with revenue exceeding $600
million annually. He also remains operating Principal at HCC Consulting
providing operating and regulatory services to a number of recognized clinical
laboratories and IVD clients and he continues to serve on the Board of Alexeter
Technologies. Dr. Hanbury is currently President, CEO and a shareholder of
DCL Medical Laboratories in Indianapolis, Indiana. Dr. Hanbury completed
his undergraduate studies at the University of Virginia in Biochemistry and
Economics and graduate studies at the Medical College of Virginia where he also
completed his clinical training. He also holds Masters Degrees in Clinical
Chemistry and a MBA from ODU/Eastern Virginia Medical School and the University
of Michigan, respectively.
The
directors named above will serve until the next annual meeting of our
shareholders. Absent an employment agreement, officers hold their
positions at the pleasure of the Board of Directors.
Corporate
Governance
Audit
Committee
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.” Given the
development stage and size of the Company and the difficulty in attracting
additional directors, the Board does not have an audit committee financial
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.
Shareholder Nomination of
Candidates for Board of Directors
Nominations
of persons for election to the Board of Directors may be made by any shareholder
who complies with the notice provisions set forth in Section 3.8 of the Bylaws,
which provides that a shareholder’s notice must be delivered or mailed and
received at the principal executive office of the Company not less than thirty
days before the date of the meeting; provided, however, that in the event that
less than forty days’ notice or prior public disclosure of the date is given,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which the public
announcement of the meeting date was made. Such shareholder’s notice
shall set forth (i) as to each person whom the shareholder proposes to nominate
for election or reelection as a Director, all information relating to such
person as required to be disclosed in solicitation of proxies for election of
Directors made in compliance with Regulation 14A under the Securities and
Exchange Act of 1934, as amended (including such person’s written consent to
being named in a proxy statement as a nominee and to serving as a Director if
elected); and (ii) as to the shareholder giving the notice (A) the name and
address, as they appear on the books of the Company, of such shareholder and (B)
the class and number of shares of the Company’s capital stock that are
beneficially owned by such shareholder. At the request of the Board
of Directors, any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Company that information required
to be set forth in a shareholder’s notice of nomination which pertains to the
nominee. No person shall be eligible for election as a Director of
the Company unless nominated in accordance with the provisions of Section 3.8 of
the Company’s Bylaws.
Code
of Ethics
The
Company has adopted a Code of Ethics applicable to its Chief Executive Officer
and Executive Vice President. This Code of Ethics is posted on our
website at www.HealthDiscoveryCorp.com. These codes are also
available without charge upon request directed to Investor Relations, Health
Discovery Corporation, 2 East Bryan Street, Suite #601, Savannah,
GA 31401. The Company intends to disclose amendments or
waivers of the Code of Ethics required to be disclosed by posting such
information on its website.
Director
Compensation
Outside
directors are paid $1.00 each year. Each outside director is awarded
a warrant to purchase 1,500,000 shares of Company common stock, which vest over
three years and expire in six year. The following table sets forth
director compensation for 2007.
Name
|
|
Fees
Earned or Paid in Cash
($)
|
|
|
Option
Awards
($)
|
|
|
Total
($)
|
|
Stephen
D. Barnhill, M.D.
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
William
F. Quirk, Jr.
|
|
$ |
1.00 |
|
|
$ |
59,250 |
|
|
$ |
59,251 |
|
William
M. Goldstein
|
|
$ |
1.00 |
|
|
$ |
59,250 |
|
|
$ |
59,251 |
|
Richard
E. Caruso
|
|
$ |
1.00 |
|
|
$ |
10,967 |
|
|
$ |
10,968 |
|
Richard
Caruso was awarded warrants to purchase 1,500,000 shares of Company common
stock, which vest over three years and expire in six years. These
warrants have an exercise price of $0.08, and will be charged as directors’ fees
over the vesting period. Dr. Caruso resigned as a director effective
August 15, 2008. Dr. Caruso’s warrants will continue to
vest as compensation for his services as an advisor so long as Dr. Caruso
serves as an advisor to the Company.
Michael
Hanbury was awarded warrants to purchase 1,500,000 shares of Company common
stock, which vest over three years and expire in six years. These
warrants have an exercise price of $0.06, and will be charged as directors’ fees
over the vesting period.
William
M. Goldstein resigned as a director on April 11, 2008. William F.
Quirk resigned as a director on June 21, 2008.
Summary
Compensation Table
The following table sets forth various
elements of compensation for our Named Executive Officers for each of the last
two calendar years:
Name
and Principal
Position
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Option
Awards
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
|
|
Stephen
D. Barnhill, M. D.
|
2007
|
|
$ |
196,875 |
|
|
$ |
50,000 |
|
|
—
|
|
|
$ |
3,719 |
(1) |
|
$ |
250,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer
|
2006
|
|
$ |
125,000 |
|
|
|
|
|
|
|
|
|
$ |
6,000 |
(1) |
|
$ |
131,000 |
|
Daniel
R. Furth
|
2007
|
|
$ |
91,500 |
|
|
|
|
|
|
—
|
|
|
$ |
5,969 |
(1) |
|
$ |
97,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Vice President
|
2006
|
|
$ |
71,000 |
|
|
|
|
|
|
—
|
|
|
$ |
5,069 |
(1) |
|
$ |
76,069 |
|
(1)
represents health insurance premiums
Outstanding
Equity Awards at Fiscal Year-end
|
Option
Awards
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
|
Option
Expiration Date
|
Daniel
R. Furth
|
1,250,000(1)
|
250,000(1)
|
$0.10
|
December
5, 2015
|
(1)
Warrants will expire on September 30, 2008 due to employee’s termination of his
Employment Agreement.
(2)
Warrants will not vest due to employee’s termination of his Employment
Agreement.
Employment
Agreements
On August
15, 2008, the Company entered into a new employment agreement with Dr. Stephen
Barnhill for his employment as Chief Executive Officer, which is attached to
this registration statement as Exhibit 10.1. Dr. Barnhill’s
existing employment agreement was scheduled to expire by its terms on September
15, 2008. The employment agreement has a term of two
years. Under the terms of the employment agreement, Dr. Barnhill will
receive a one-time retention signing bonus of $50,000 and an annual base salary
of $300,000. Dr. Barnhill will also be eligible to receive a cash
bonus equal to 10% of the Company’s revenue received during the term of the
employment agreement; but such cash bonus cannot exceed 300% of his annual base
salary. Dr. Barnhill was also granted an option to purchase an
aggregate of 6,000,000 shares of the Company’s common stock at an exercise price
of $0.08; the options vest over a two year period, assuming a minimum share
price, and with respect to a portion of the options, the Company attaining
certain performance metrics, as more fully described in the Option Award, which
is attached to this registration statement as Exhibit 10.16. Dr.
Barnhill is eligible to be reimbursed monthly for reasonable and necessary
business expenses and to receive health insurance benefits and other benefits
maintained by us for our executives. Dr. Barnhill will be entitled to
twenty paid vacation days during the calendar year. If Dr. Barnhill’s
employment is terminated without Cause, as that term is defined in the
employment agreement, or if Dr. Barnhill terminates the employment agreement for
Good Reason, as that term is defined in the employment agreement, then Dr.
Barnhill will receive as severance the amount of his base salary for the
remainder of the term and an amount equal to the actual cost of ninety days of
his COBRA premium payments. If the employment agreement is terminated
for any other reason than for Cause or for Good Reason, Dr. Barnhill is not
eligible to receive severance. The employment 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.
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, reviewed each year for potential
increase. Effective as of September 10, 2007, Mr. Furth’s annual
salary was increased to $108,000. Mr. Furth received 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 the Company terminates the
employment agreement for cause or if the agreement is terminated by Mr. Furth
without 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 or, if the employment agreement is terminated
without cause, he will be entitled to receive his salary for a period of three
months from 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. On June 30, 2008, Mr. Furth notified the Company of his
resignation. As a result of his resignation, his employment agreement
terminated.
Scientific
Advisory Board
The
Company continues to perform under an oral agreement with two members of its
Scientific Advisory Board wherein they are entitled to receive 100,000 shares
each of the Company’s common stock upon satisfactory completion of one year of
service. The arrangement with the Scientific Advisory Board members
can be terminated at any time by either party.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets
forth information concerning the beneficial ownership of our common stock as
of September 15 , 2008 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. At September
15 , 2008, there were 169,522,590 shares
outstanding.
|
Name and Address of Beneficial
Owner
|
|
Amount
and Nature of Beneficial
Owner
|
Percent of Class (1)
|
|
Dr.
Stephen D. Barnhill
Chairman
of the Board and Chief Executive Officer
2
East Bryan Street, Suite #601
Savannah,
GA 31401
|
|
22,181,522
(2)
|
13.08 %
|
|
Dr.
Richard Caruso
795
East Lancaster Avenue, Suite #200
Villanova,
PA 19085
|
|
9,906,250
(3)
|
5.62%
|
|
William
Quirk
2
East Bryan Street, Suite #601
Savannah,
GA 31401
|
|
75,024,302
(4)
|
34.19%
|
|
Micro
Capital Fund, LP
623
Fifth Avenue
Suite
2502
New
York, NY 10022
|
|
13,733,124
(5)
|
7.69 %
|
|
Prime
Mover Capital Partners
767
Third Avenue
New
York, NY 10007
|
|
20,693,750
(6)
|
11.29%
|
|
Curtis
G. Anderson
44
Delegal Road
Savannah,
GA 31411
|
|
14,248,915
(7)
|
7.96%
|
|
Stephen
M. Grosberg
201
East 20th
Street, #8C
New
York, NY 10010
|
|
12,040,000
(8)
|
6.78%
|
|
Frank
T. Nickell
320
Park Ave.
24th
Floor
New
York, NY 10027
|
|
9,406,250
(9)
|
5.35%
|
|
All
executive officers and directors as a group (one person)
|
|
22,181,522
|
13.08 %
|
|
(1)
|
The
percentage assumes the exercise by the shareholder or group named in each
row of all options or warrants for the purchase of our common stock held
by such shareholder or group and exercisable within 60 days as of
September 15 , 2008. On September 8, 2008, the Company
received notice, claiming that certain anti-dilution rights had been
triggered under the terms of the Private Placement. See Item 15,
Recent Sales of Unregistered Securities on page
II-3.
|
|
|
|
|
(2)
|
These
shares are held by The Barnhill Group LLC, which is wholly owned by Dr.
Barnhill.
|
|
(3)
|
Consists
of 3,125,000 shares and 6,250,000 vested warrants held by Athena Venture
Partners LP, a limited partnership in which Dr. Caruso’s children are
limited partners, and 500,000 vested warrants held
individually. Dr. Caruso resigned as a director on August 15,
2008.
|
|
|
|
|
(4)
|
Includes
49,927,776 vested warrants.
|
|
|
|
|
(5)
|
Includes
the holdings of MicroCapital Fund Ltd. and a combined 9,125,000 vested
warrants.
|
|
|
|
|
(6)
|
Includes
13,750,000 vested warrants.
|
|
|
|
|
(7)
|
Includes
9,467,718 vested warrants.
|
|
|
|
|
(8)
|
Includes
8,000,000 vested warrants.
|
|
|
|
|
(9)
|
Includes
6,250,000 vested warrants.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On August 14, 2008, the Company and Dr.
Richard Caruso entered into an Amendment to Stock Purchase
Warrant. The Amendment permits Dr. Caruso’s warrants, which were
previously granted to Dr. Caruso in 2007 for his services as a director, to
continue to vest so long as he serves the Company as an
advisor.
In May
2008, we entered into a letter of intent with DCL Medical
Laboratories LLC, a full-service clinical reference laboratory focused on
women’s health, for the joint development of an SVM-based computer assisted
diagnostic test for the analysis of cervical cells. Through the
application of the advancing technology of pattern recognition, this new
SVM-based system is intended to further improve the sensitivity of the Pap test
and augment the recent improvements in computer guided screening that have
already significantly improved detection rates. In addition, images and
interpretative data from this new SVM-based system may now be transmitted
electronically, thus allowing remote review and collaborative
interpretation. In July 2008, the Company and DCL Medical
Laboratories, LLC entered into a Development and License Agreement for the
collaborative development and commercialization of SVM-based computer assisted
diagnostic tests for the independent detection of ovarian, cervical and
endometrial cancers, which expands the scope of the joint development
efforts. Pursuant to the Development and License Agreement, HDC will
own any developed intellectual property and DCL Medical Laboratories will have a
sole use license relating to applications and new mathematical tools developed
during the course of the Development and License Agreement. Dr.
Hanbury, one of the Company’s directors, is currently President, CEO and a
shareholder of DCL Medical Laboratories.
We
previously sub-leased our principle executive office space from a company owned
by the wife of Dr. Stephen D. Barnhill. Our rent was $1,036.00 per
month. This lease was terminated June 30, 2007.
On
September 1, 2006, we issued a note (the “Promissory Note”) to William F. Quirk,
Jr., a director of the Company, for $1,000,000. The Promissory Note
contains a 5% annual interest rate and is due on September 1,
2008. The proceeds of the Promissory Note will be used for general
working capital purposes. The Promissory Note is completely repayable
by the Company at any time without any related fees or penalties. In connection
with the issuance of the Promissory Note, Mr. Quirk was granted warrants to
purchase 10,000,000 shares of Company common stock at $0.16 per
share. The promissory note was converted to common stock on September
7, 2007 in connection with the Private Placement.
On May 6,
2005, we acquired the remaining 7% of the SVM Patent Portfolio from unaffiliated
third parties for an aggregate cash payment of approximately $270,863, the
issuance of the promissory notes totaling $37,872 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.
The
Company has adopted the independence standards promulgated by the New York Stock
Exchange and has made a determination that, as of August 22, 2008 the following
directors are independent according to those standards: Michael
Hanbury.
DESCRIPTION
OF CAPITAL STOCK
The
following information concerning our capital stock summarizes certain provisions
of our Articles of Incorporation, commonly referred to as our Charter, and
Bylaws, as well as certain statutes regulating the rights of holders of our
common stock. The information does not purport to be a complete description of
such matters and is qualified in all respects by the provisions of the Charter,
the Bylaws and the Georgia Business Corporation Code.
Common
Stock
General. We
are authorized to issue 300,000,000 shares of common stock, no par
value. As of September 15 , 2008, there were
169,522,590 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 shareholders. Subject to any
preferences for preferred shares then outstanding, 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. On September 8, 2008, the
Company received notice claiming that certain anti-dilution rights had been
triggered under the terms of the Private Placement. See Item 15, Recent
Sales of Unregistered Securities on page II-3.
Assessment and
Redemption. The shares of common stock presently
outstanding are, and the shares that will be issued in connection with this
offering will be, fully paid and non-assessable. There is no provision for
redemption or conversion of our common stock.
Liquidation
Rights. In the event of our liquidation,
dissolution or winding up, whether voluntarily or involuntarily, the holders of
our common stock (and the holders of any class or series of preferred stock
entitled to participate with our common stock in the distribution of assets)
will be entitled to share ratably in any of the net assets or funds which are
available for distribution to shareholders, after the satisfaction of all
liabilities or after adequate provision is made therefor and after distribution
to holders of any class of stock having preference over our common stock in the
case of liquidation.
Our Transfer Agent is Corporate Stock
Transfer, 3200 Cherry Creek Drive South, Denver, Colorado 80209; telephone (303)
282-48700.
Preferred
Stock
We are
authorized to issue 30,000,000 shares of preferred stock. The Board
of Directors has the authority to issue classes or series of preferred stock in
the future having designations, rights, preferences and relative, participating,
option or other special rights of the shares of each such class or series,
including such things as voting rights, dividend rights, redemption rights, and
other restrictions and features. The Board of Directors has
authorized the designation of Series A Preferred Stock. The number of
shares constituting the Series A Preferred Stock is 7,437,184 and such shares
have a stated value of $0.08 per share. The rights associated with
the Series A Preferred Stock include the right to receive dividends, the right
to vote on matters presented to holders of common stock, a preference right in
the event of liquidation, and the right to convert the Series A Preferred Stock
into Common Stock. The shares of Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of thirty (30) consecutive calendar
days. As of September 15 , 2008, there were 7,437,184 shares of
Series A Preferred Stock outstanding. The Company has the right to
redeem all of the outstanding shares of Series A Preferred Stock following the
fifth anniversary of the first issue date at a redemption price of $0.08 per
share.
Any
amendment to the Charter authorizing an increase in the number of authorized
shares of preferred stock will require the prior approval of the holders of a
majority of our common stock and Series A Preferred Stock then issued and
outstanding. Although we do not have any present plans to issue any additional
preferred stock, the ownership and control of Health Discovery Corporation by
the holders of our common stock and Series A Preferred Stock would be diluted if
we were to issue additional preferred stock that had voting rights.
Private
Placement Warrants
In connection with the Company’s
private placement on September 7, 2007, the Company issued warrants to acquire a
total of 51,538,822 shares of common stock at $0.14 (the “Tranche 1 Warrants”)
and warrants to acquire a total of 51,538,822 shares common stock at $0.19 (the
“Tranche 2 Warrants”). The Tranche 1 Warrants and the Tranche 2
Warrants expire on September 7, 2010. With respect to both the
Tranche 1 Warrants and the Tranche 2 Warrants, the number of shares issuable
upon exercise and the exercise price will be automatically adjusted equitably
and proportionately to reflect any stock dividend, stock split, reverse stock
dividend or reverse stock split, or any capital reorganization or
recapitalization of the Company, or any similar event affecting the Company’s
common stock. The Tranche 1 Warrants and the Tranche 2 Warrants will
also be adjusted to prevent anti-dilution if (i) the Company issues rights,
options or warrants to all holders of common stock (but not to the holders of
the Tranche 1 Warrants or the Tranche 2 Warrants) entitling them to subscribe
for or purchase shares of common stock at a price per share less than the
current market price or (ii) the Company distributed to all holders of common
stock (but not to the holders of the Tranche 1 Warrants or the Tranche 2
Warrants) evidences of its indebtedness or assets, including cash and cash
dividends, or rights or warrants to subscribe for or purchase any security other
than common stock. The holders must exercise fifty percent of the
Tranche 1 Warrants if the market price for the Company’s common stock is $0.17
for a period of thirty consecutive calendar days. The holders must
exercise fifty percent of the Tranche 2 Warrants if the market price for the
Company’s common stock is $0.24 for a period of thirty consecutive calendar
days. As of September 15 , 2008, all of the Tranche 1 Warrants
and Tranche 2 Warrants are outstanding.
Certain
Takeover Considerations
If the
Company were to pursue a merger or share exchange of the Company with or into
any other corporation, or any sale, lease, exchange or other disposition of all
or substantially all of the assets of the Company to any other corporation,
person or other entity, the Articles of Incorporation of the Company require
that the Board of Directors recommend the plan of merger, plan of conversion or
share exchange to the shareholders, unless the Board of Directors elects,
because of conflict of interest or other special circumstances, to make no
recommendation to the shareholder, and that two-thirds of all of the votes
entitled to be cast on the plan approve such plan.
Change in Number
of Directors. Our bylaws provide that any change in the number
of directors requires the affirmative vote of at least a majority of the entire
Board of Directors or the affirmative vote of the holders of at least a majority
of the outstanding shares of common stock.
LEGAL
MATTERS
Certain
legal matters in connection with this offering will be passed upon for us by
Powell Goldstein LLP, Atlanta, Georgia.
EXPERTS
Hancock
Askew & Co., LLP audited our balance sheet as of December 31, 2007 and 2006
and the related statements of operations, changes in stockholder’s equity, and
cash flows for the years then ended, and stated in their report appearing
herein, which report expressed an unqualified opinion and includes an
explanatory paragraph referring to the Company’s ability to continue as a going
concern, and are included in reliance upon their report given their authority as
experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and
other information 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.E, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 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.
We have
filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-1
under the Securities Act of 1933, as amended, with respect to our common stock
issuable upon the exercise of warrants 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 our 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.
Hancock
Askew & Co LLP
100
Riverview Drive
Savannah,
GA 31404
Report of
Independent Registered Public Accounting Firm
Board of
Directors
Health
Discovery Corporation
Savannah,
Georgia
We have
audited the accompanying balance sheets of Health Discovery Corporation as of
December 31, 2007 and 2006, the related statements of operations, changes in
stockholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2007. These financial statements are the responsibility
of the management of Health Discovery Corporation. Our responsibility is
to express an opinion on these financial statements based on our
audits.
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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we expressed no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, 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 Health Discovery Corporation as of
December 31, 2007 and 2006 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note N, the Company has
had limited revenue since inception, has incurred recurring losses from
operations, and has had to continually seek additional capital investment in
order to fund operations. These factors, among others, raise substantial
doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note
N. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
Hancock Askew & Co., LLP
Savannah,
Georgia
March 20,
2008
HEALTH
DISCOVERY CORPORATION
Balance
Sheets
December
31, 2007 and 2006
Assets
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$ |
1,648,439 |
|
|
$ |
674,366 |
|
Accounts
Receivable
|
|
|
112,500 |
|
|
|
20,000 |
|
Prepaid
Expense and Other Current Assets
|
|
|
33,829 |
|
|
|
55,188 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
1,794,768 |
|
|
|
749,554 |
|
|
|
|
|
|
|
|
|
|
Equipment,
Less Accumulated Depreciation of $22,402 and $14,257
|
|
|
7,596 |
|
|
|
14,743 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Accounts
Receivable – Long Term
|
|
|
112,500 |
|
|
|
- |
|
Patents,
Less Accumulated Amortization of $942,974 and $680,255
|
|
|
3,042,820 |
|
|
|
3,305,540 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
4,957,684 |
|
|
$ |
4,069,837 |
|
Liabilities and
Stockholders’ Equity
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
Payable – Trade
|
|
$ |
61,173 |
|
|
$ |
237,928 |
|
Accrued
Liabilities
|
|
|
239,589 |
|
|
|
150,520 |
|
Deferred
Revenue
|
|
|
62,708 |
|
|
|
101,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
363,470 |
|
|
|
489,559 |
|
|
|
|
|
|
|
|
|
|
Accrued
Interest Payable
|
|
|
- |
|
|
|
140,875 |
|
Convertible
Notes Payable
|
|
|
- |
|
|
|
665,643 |
|
Long-Term
Debt, Less Current Portion
|
|
|
- |
|
|
|
321,911 |
|
Notes
Payable (net of unamortized discount of $461,667 in 2006)
|
|
|
- |
|
|
|
538,333 |
|
Deferred
Revenue – Long Term
|
|
|
453,715 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
817,185 |
|
|
|
2,156,321 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock, Convertible, Stated Value of $0.08 per
Share
|
|
|
|
|
|
|
|
|
7,437,184
Shares Authorized, Issued and Outstanding
|
|
|
594,975 |
|
|
|
- |
|
Common
Stock, No Par Value, 300,000,000 Shares Authorized,
|
|
|
|
|
|
|
|
|
Issued
and Outstanding 169,007,206 and 116,393,384 Shares,
respectively
|
|
|
15,390,609 |
|
|
|
11,059,674 |
|
Accumulated
Deficit
|
|
|
(11,845,085 |
) |
|
|
(9,146,158 |
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
4,140,499 |
|
|
|
1,913,516 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
4,957,684 |
|
|
$ |
4,069,837 |
|
See
accompanying notes to financial statements.
HEALTH
DISCOVERY CORPORATION
Statements
of Operations
For the
Years Ended December 31, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Licensing
and Development
|
|
$ |
57,905 |
|
|
$ |
203,889 |
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
Licensing
and Development
|
|
|
21,300 |
|
|
|
28,671 |
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
36,605 |
|
|
|
175,218 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
262,719 |
|
|
|
262,719 |
|
Professional
and Consulting Fees
|
|
|
980,833 |
|
|
|
1,123,498 |
|
Compensation
|
|
|
783,726 |
|
|
|
770,000 |
|
Other
General and Administrative Expenses
|
|
|
459,064 |
|
|
|
542,710 |
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
2,486,342 |
|
|
|
2,698,927 |
|
|
|
|
|
|
|
|
|
|
Net
Loss from Operations
|
|
|
(2,449,737 |
) |
|
|
(2,523,709 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
39,614 |
|
|
|
21,008 |
|
Gains
on Restructuring of Accounts Payable
|
|
|
44,594 |
|
|
|
97,864 |
|
Loss
from Unconsolidated Joint Venture
|
|
|
(5,000 |
) |
|
|
- |
|
Litigation
Settlement
|
|
|
(42,000 |
) |
|
|
- |
|
Interest
Expense
|
|
|
(286,398 |
) |
|
|
(190,922 |
) |
|
|
|
|
|
|
|
|
|
Total
Other (Expense) Income
|
|
|
(249,190 |
) |
|
|
(72,050 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(2,698,927 |
) |
|
$ |
(2,595,759 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Outstanding Shares
|
|
|
132,718,789 |
|
|
|
115,895,692 |
|
|
|
|
|
|
|
|
|
|
Loss
Per Share
|
|
$ |
(.02 |
) |
|
$ |
(.02 |
) |
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
HEALTH
DISCOVERY CORPORATION
Statements
of Changes in Stockholders’ Equity
For the
Year Ended December 31, 2007 and 2006
|
|
ISSUED
AND OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
Preferred
Amount
|
|
|
Common
Amount
|
|
|
Accumulated Deficit
|
|
|
|
|
Balance
– January 1, 2006
|
|
|
- |
|
|
|
114,363,384 |
|
|
$ |
- |
|
|
$ |
9,522,961 |
|
|
$ |
(6,550,399 |
) |
|
$ |
2,972,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued for Cash
|
|
|
- |
|
|
|
1,000,000 |
|
|
|
- |
|
|
|
100,000 |
|
|
|
- |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued upon Exercise of Options and Warrants
|
|
|
- |
|
|
|
1,030,000 |
|
|
|
- |
|
|
|
26,400 |
|
|
|
- |
|
|
|
26,400 |
|
Warrants
Issued in Connection with Debt Agreement
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
554,000 |
|
|
|
- |
|
|
|
554,000 |
|
Warrants
Issued for Settlement of Liability
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
72,326 |
|
|
|
- |
|
|
|
72,326 |
|
Warrants
Issued for Services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
504,091 |
|
|
|
- |
|
|
|
504,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Compensation Expense for Compensatory Options and Warrants
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
279,896 |
|
|
|
- |
|
|
|
279,896 |
|
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,595,759 |
) |
|
|
(2,595,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2006
|
|
|
- |
|
|
|
116,393,384 |
|
|
$ |
- |
|
|
$ |
11,059,674 |
|
|
$ |
(9,146,158 |
) |
|
$ |
1,913,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued for Cash
|
|
|
- |
|
|
|
31,937,500 |
|
|
|
- |
|
|
|
2,490,540 |
|
|
|
- |
|
|
|
2,490,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued upon Exercise of Options and Warrants
|
|
|
- |
|
|
|
100,000 |
|
|
|
- |
|
|
|
1,000 |
|
|
|
- |
|
|
|
1,000 |
|
Stock
Issued in Connection with Debt Conversion
|
|
|
7,437,184 |
|
|
|
19,601,322 |
|
|
|
594,975 |
|
|
|
1,298,800 |
|
|
|
- |
|
|
|
1,893,775 |
|
Stock
Issued for Settlement of Litigation
|
|
|
- |
|
|
|
400,000 |
|
|
|
- |
|
|
|
32,000 |
|
|
|
- |
|
|
|
32,000 |
|
Stock
Issued in Severance Agreement
|
|
|
- |
|
|
|
575,000 |
|
|
|
- |
|
|
|
46,000 |
|
|
|
- |
|
|
|
46,000 |
|
Warrants
Issued for Services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
320,570 |
|
|
|
- |
|
|
|
320,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Compensation Expense for Compensatory Options and Warrants
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
142,025 |
|
|
|
- |
|
|
|
142,025 |
|
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,698,927 |
) |
|
|
(2,698,927 |
) |
Balance
- December 31, 2007
|
|
|
7,437,184 |
|
|
|
169,007,206 |
|
|
$ |
594,975 |
|
|
$ |
15,390,609 |
|
|
$ |
(11,845,085 |
) |
|
$ |
4,140,499 |
|
See
accompanying notes to financial statements.
HEALTH
DISCOVERY CORPORATION
Statements
of Cash Flows
For the
Years Ended December 31, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(2,698,927 |
) |
|
$ |
(2,595,759 |
) |
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
|
Used
by Operating Activities:
|
|
|
|
|
|
|
|
|
Stock
Issued in Settlement of Litigation
|
|
|
32,000 |
|
|
|
- |
|
Non-cash
Compensation
|
|
|
188,025 |
|
|
|
279,896 |
|
Accretion
of Debt Discount
|
|
|
192,361 |
|
|
|
92,333 |
|
Services
Exchanged for Common Stock or Warrants
|
|
|
286,814 |
|
|
|
504,091 |
|
Issuance
of Warrants
|
|
|
33,756 |
|
|
|
- |
|
Gain
on Restructuring Accounts Payable
|
|
|
(44,594 |
) |
|
|
(97,864 |
) |
Depreciation
and Amortization
|
|
|
270,865 |
|
|
|
270,316 |
|
|
|
|
|
|
|
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Increase
in Accounts Receivable
|
|
|
(205,000 |
) |
|
|
(20,000 |
) |
(Increase)
Decrease in Prepaid Expense & Other Assets
|
|
|
21,358 |
|
|
|
(37,480 |
) |
(Decrease)
Increase in Accounts Payable – Trade
|
|
|
(132,161 |
) |
|
|
140,145 |
|
Increase
in Deferred Revenue
|
|
|
415,312 |
|
|
|
101,111 |
|
Increase
in Accrued Liabilities
|
|
|
173,073 |
|
|
|
228,077 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used by Operating Activities
|
|
|
(1,467,118 |
) |
|
|
(1,135,134 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of Equipment
|
|
|
(998 |
) |
|
|
(9,287 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Used by Investing Activities
|
|
|
(998 |
) |
|
|
(9,287 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment
of Notes Payable
|
|
|
(49,351 |
) |
|
|
(26,780 |
) |
Proceeds
from Issuance of Common Stock
|
|
|
2,491,540 |
|
|
|
126,400 |
|
Proceeds
from Borrowing
|
|
–
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
2,442,189 |
|
|
|
1,099,620 |
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
974,073 |
|
|
|
(44,801 |
) |
|
|
|
|
|
|
|
|
|
Cash,
at Beginning of Period
|
|
|
674,366 |
|
|
|
719,167 |
|
|
|
|
|
|
|
|
|
|
Cash,
at End of Period
|
|
$ |
1,648,439 |
|
|
$ |
674,366 |
|
|
|
|
|
|
|
|
|
|
Stock-Based
Investing and Financing Transactions:
|
|
|
|
|
|
|
|
|
Debt
Discount in exchange for Warrants
|
|
$ |
- |
|
|
|
554,000 |
|
Common
Stock, Series A Preferred Stock, and Warrants
|
|
|
|
|
|
|
|
|
Issued
in Settlement of Promissory Notes
|
|
$ |
1,893,775 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
$ |
10,084 |
|
|
$ |
3,242 |
|
See
accompanying notes to financial statements.
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements
Note A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION
OF BUSINESS
Health
Discovery Corporation (the “Company”) is a biotechnology-oriented company that
has acquired patents and has patent pending applications for certain machine
learning tools, primarily pattern recognition techniques using advanced
mathematical algorithms to analyze large amounts of data thereby uncovering
patterns that might otherwise be undetectable. Such machine learning
tools are currently in use for diagnostics and drug discovery, but are also
marketed for other applications. The Company licenses the use of its
patented protected technology or may develop specific learning tools to sell to
third parties.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the period. Accordingly, actual results could differ from those
estimates. Significant estimates that are particularly suspectible to
change in the near-term include the valuation of non-cash consideration for
services and the recoverability of the patents.
REVENUE
RECOGNITION
Revenue
is generated through the sale or license of patented technology and processes
and from services provided through development agreements. These
arrangements are generally governed by contracts that dictate responsibilities
and payment terms. The Company recognizes revenues as they are earned
over the duration of a license agreement or upon the sale of any owned patent
once all contractual obligations have been fulfilled. Revenue is
recognized under development agreements in the period the services are
performed.
COST
OF REVENUE
Cost of
revenue includes the acquisition cost less accumulated amortization of patents
sold, plus internal development costs and fees directly associated with sales
contracts.
Cost of
revenue for licensing and development revenue includes fees directly asssociated
with the contracts and salary expense based upon the estimated amount of time
worked on the licensing or development contract.
CASH
AND CASH EQUIVALENTS
Cash and
cash equivalents include cash and monies invested in overnight funds with our
bank.
ACCOUNTS
RECEIVABLE
Trade
accounts receivable for licensing fees and development services are recorded at
net contract value based upon the written agreement with the customer. In
certain cases, accounts receivable may include royalties receivable from our
customers based upon those customers estimated sales of the products or
diagnostic tests containing our patented processes and technologies. The Company
considers amounts past due based on the related terms of the agreement and
reviews its exposure to amounts receivable based upon collection history and
specific customer credit analysis. The Company provides an allowance for
doubtful amounts if collectability is no longer reasonably assured. As of
December 31, 2007 and 2006, all amounts receivable were considered fully
collectable.
Note A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, continued
PROPERTY
AND EQUIPMENT
Property
and equipment, which consists of office furniture, computer equipment and
leasehold improvements, are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 10 years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
PATENTS
Initial
costs paid to purchase patents are capitalized and amortized using the straight
line method over the remaining license period. The Company capitalizes the
external and in-house legal costs and filing fees associated with obtaining
patents on its new discoveries and amortizes these costs using the straight-line
method over the shorter of the legal life of the patent or its economic life,
generally 17 years, beginning on the date the patent is issued. If the
applied for patents are abandoned or are not issued, the Company will expense
the capitalized costs to date in the period of abandonment. 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, 2007, the Company does not believe there has been any impairment of
its intangible assets.
INCOME
TAXES
The
Company accounts for income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax benefits and expenses
or consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income for the
years in which those temporary differences are expected to be recovered or
settled.
In the
event the future tax consequences of differences between the financial reporting
bases and tax bases of the Company’s assets and liabilities result in deferred
tax assets, an evaluation 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 when it 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.
STOCK-BASED
COMPENSATION
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS
No. 123(R)”) using the modified prospective transition method provided for under
the standard. Under the Standard, stock-based compensation cost is
measured at grant date, based on the fair value of the award, and is recognized
as expense over the employee’s requisite service period.
Stock-based
expense included in the 2007 net loss consisted of $540,595 in compensatory
warrants, options, and stock for professional consulting services, and
compensation. Stock-based expense included in the net loss for 2006
consisted of $783,987 for the issuance of common stock, warrants, and
options.
DETERMINING
FAIR VALUE UNDER SFAS 123R:
Valuation and Amortization
Method – The Company estimates the fair value of stock options and
warrants granted using the Black-Scholes option-pricing formula and a single
option award approach. This fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is generally the
vesting period.
Note A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, continued
Expected Term – The expected
term of the award represents the period that the Company’s stock-based awards
are expected to be outstanding and was determined based on historical
experience, giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior. Given the lack of historical data and start-up nature of
the company’s operations, the expected term is estimated as the contractual
term.
Expected Volatility –
Volatility is a measure of the amounts by which a financial variable such
as stock price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. The Company uses the historical
volatility to estimate expected volatility.
Risk-Free Interest Rate – The
Company bases the risk-free interest rate used in the Black-Scholes valuation
method on the implied yield currently available on U.S. Treasury
zero-coupon issues with a remaining term equivalent to the expected term of a
stock award.
Estimated Forfeitures – When
estimating forfeitures, the Company considers voluntary termination behavior as
well as analysis of actual option forfeitures.
Estimated Dividend yield –
The Company has not paid any dividends and has no current plans to do so
therefore dividend rate is assumed to be zero.
The
adoption of SFAS 123R also requires additional accounting related to income
taxes. Due to the full valuation allowance provided on its net
deferred tax assets, the Company has not recorded any tax benefit attributable
to stock-based compensation expense.
RESEARCH
AND DEVELOPMENT EXPENSE
The
Company’s 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 members of our scientific advisory
board. These fees consisted of $46,432 in cash for 2007 and $70,734
in cash for 2006.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company’s financial instruments consist of cash, accounts receivable, accounts
payable and accrued expenses. 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 due to the short term nature of such
items.
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 cause an anti-dilutive result and therefore is
not presented. Potentially dilutive shares at December 31, 2007 and 2006 include
the following:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
3,500,000 |
|
|
|
3,500,000 |
|
Warrants
|
|
|
159,099,644 |
|
|
|
68,796,250 |
|
Convertible
notes
|
|
|
- |
|
|
|
3,915,547 |
|
|
|
|
162,599,644 |
|
|
|
76,211,797 |
|
Note A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, continued
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.
RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109, (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This pronouncement is effective
for fiscal years beginning after December 15, 2006. We adopted FIN 48
effective January 1, 2007. This adoption has not had a material
impact on our financial statements.
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements,
(“Statement No. 157”). This statement provides a single definition of
fair value, a framework for measuring fair value, and expanded disclosures
concerning fair value. Previously, different definitions of fair
value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. This pronouncement is
effective for fiscal years beginning after November 15, 2007. We do
not expect the adoption of Statement No. 157 to have a material impact on our
financial position, results of operations, or cash flows.
Note B – DEFERRED
REVENUE
Deferred
revenue represents the unearned portion of payments received in advance for
licensing or service agreements.
The
Company had total unearned revenue of $516,423 as of December 31, 2007.
Unearned revenue of $62,708 is recorded as current and $453,715 is classified as
long-term. The long term portion of unearned revenue is being amortized
over the remaining term of the agreements or the remaining lives of the
underlying patents, as appropriate, and ranges from one to sixteen
years.
Deferred
revenue was $101,111 as of December 31, 2006. Of this amount, $40,000
was recognized as income in 2007.
The
expected future annual recognition of revenue is as follows (in
thousands):
For the Year Ending December 31,
2008
|
|
$ |
62,708 |
|
2009
|
|
|
57,153 |
|
2010
|
|
|
29,375 |
|
2011
|
|
|
29,375 |
|
2012
|
|
|
29,375 |
|
Thereafter
|
|
|
308,437 |
|
Total
expected future annual amortization
|
|
$ |
516,423 |
|
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 patent costs. The Company has recorded $3,042,820
and $3,305,540 in patents and patent related costs, net of accumulated
amortization, at December 31, 2007 and 2006.
Amortization
charged to operations for the years ended December 31, 2007 and 2006 was
$262,719. The weighted average amortization period for patents is 14
years. Estimated amortization expense for the next five years is
$262,719 per year.
Note D –
INVESTMENTS
On March
27, 2007, the Company and an investment partner formed SVM Capital LLC as an
equity investment for purposes of utilizing SVMs as a quantitative investment
management technique. The Company owns 45% of the membership interest
and has significant influence with the operation of the entity but is not
considered the primary beneficiary. Accordingly, the investment is
presented using the equity method of accounting. The Company’s
initial investment was $5,000. Equity in the loss of SVM Capital LLC
for 2007 was $5,000. The resultant net value was of December 31, 2007
is zero. The Company has no contractual obligation to fund this
venture.
Note E – LITIGATION
SETTLEMENT
Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the pending
litigation styled Health
Discovery Corporation v. Ciphergen Biosystems, Inc. Case No. 07-00285-CRB
before the United States District Court for the Northern District of California
(“The Agreement”). The Agreement provides Ciphergen a license to use
certain patents. In consideration for entering into the Agreement,
Ciphergen agreed to pay the Company $600,000 over a two-year
period. The revenue associated with this settlement was recorded net
of $130,000 in contingently payable attorney fees as deferred revenue in the
amount of $470,000 and will be recognized over the sixteen year remaining life
of the subject patents.
On June
19, 2007, the Company entered into a settlement agreement (the “Settlement
Agreement”) among Bill G. Williams, Shirley K. Williams, and Automated Shrimp
Corporation (collectively, the “Defendants”), Stephen Barnhill as Third-Party
Defendant, and Baptist Community Services, Tim Holloway, Guadalupe Family
Limited Partnership, and Gerald Easterling as Intervenors in connection with the
pending litigation styled Health Discovery Corporation v.
Williams et al., filed in the District Court of McLennan County, State of
Texas, Civil Action File No. 10-04-00012-CV. Pursuant to the terms of
the Settlement Agreement, each party agreed to voluntarily dismiss with
prejudice any and all claims it has against each and every other
party. In consideration for entering into the Settlement Agreement,
the Company agreed to issue in the aggregate 400,000 shares of Company common
stock valued at $32,000 to the Defendants and pay the defendants an aggregate
$10,000.
Note F – LICENSE FEES
EXPENSE - LICENSE AGREEMENT
Effective
September 26, 2004, the Company was assigned a patent license agreement with
Lucent Technologies GRL Corporation (“Lucent”). The patent license
agreement was associated with the patents acquired July 30, 2004. The Company
agreed to pay royalty fees to Lucent in the amount of the greater of an annual
fee of $10,000 or at the rate of five percent (5%) on each licensed product
which is sold, leased, or put into use by the Company, until cumulative
royalties equal $40,000 and at the rate of one percent (1%)
subsequently. The license granted will continue for the entire
unexpired term of Lucent’s patents. During both 2007 and 2006, the
Company paid approximately $10,000 in royalty fees to Lucent.
Note G – INCOME
TAXES
The
Company has incurred net losses since inception and, consequently, we have not
recorded any U.S. federal or state income taxes. We have no recorded
income tax provision or benefit for the fiscal years ending December 31, 2007 or
2006.
The
following items comprise the Company’s net deferred tax assets (liabilities) as
of December 31, 2007.
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carry-forward
|
|
$ |
2,975,861 |
|
|
$ |
2,487,117 |
|
Deferred
revenue
|
|
|
175,584 |
|
|
|
34,378 |
|
Contributions
|
|
|
2,474 |
|
|
|
1,794 |
|
Depreciation
and amortization
|
|
|
1,724 |
|
|
|
901 |
|
Warrants
and options granted
|
|
|
783,341 |
|
|
|
605,536 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,938,984 |
|
|
|
3,129,726 |
|
Less
valuation allowance
|
|
|
(3,938,984 |
) |
|
|
(3,129,726 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred asset
|
|
|
- |
|
|
|
- |
|
Note G – INCOME TAXES,
continued
As of
December 31, 2007, a valuation increase of $809,258 has been recorded for the
deferred tax asset, as management has determined that it is more likely than not
that the deferred tax asset will not be realized.
Total
income tax expense (benefit) differed from the amounts computed by applying the
U.S. Federal statutory tax rates to pre-tax loss for the fiscal years ending
December 31, 2007 and 2006 as follows:
|
|
2007
|
|
|
2006
|
|
Total
expense (benefit) computed by:
|
|
|
|
|
|
|
Applying
the U.S. Federal statutory rate
|
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
State
income taxes, net of federal tax benefit
|
|
|
(3.0 |
) |
|
|
(3.0 |
) |
Valuation
allowance
|
|
|
37.0 |
|
|
|
37.0 |
|
Effective
tax rate (benefit)
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
The
Company has unused net operating loss carry-forward of approximately $8.8
million that are available to offset future income taxes. The net
operating loss will expire beginning in 2021.
Note H – NOTES PAYABLE AND
CONVERTIBLE NOTES PAYABLE
Notes
payable consist of the following:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Term
promissory notes payable to individuals and institutions. Principal and
interest at 18% is payable in common stock on September 1,
2008.
|
|
$ |
- |
|
|
$ |
321,911 |
|
|
|
|
|
|
|
|
|
|
Note
payable to shareholder/director net of $461,667 unamortized discount due
September 1, 2008 with interest payable at 5% due at
maturity.
|
|
$ |
- |
|
|
$ |
538,333 |
|
|
|
$ |
- |
|
|
$ |
860,244 |
|
|
|
|
|
|
|
|
|
|
Less
current maturities
|
|
|
- |
|
|
|
- |
|
|
|
$ |
- |
|
|
$ |
860,244 |
|
The
Company eliminated all notes payable and convertible debt in 2007 through the
conversion of debt to equity.
The
Company issued 19,601,323 shares of common stock and 7,437,184 shares of Series
A Preferred Stock in a conversion of secured debt to equity. The
amount of debt converted to common stock and warrants was $1.6 million and the
amount of debt converted to Series A Preferred Stock was
$594,975. Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common stock
at $0.14 and one warrant to acquire an equal number of shares of common stock at
$0.19.
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
Converted
|
|
|
Common
Stock
19,601,323
|
|
|
Stock
Warrants
@0.14
|
|
|
Stock
Warrants
@$0.19
|
|
|
Common
Stock
|
|
|
Preferred
Stock
7,437,184
|
|
|
|
Debt
|
|
|
Shares
|
|
|
19,601,323
|
|
|
19,601,323
|
|
|
Total
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Debt
|
|
$ |
321,911 |
|
|
$ |
157,167 |
|
|
|
11,226 |
|
|
|
11,226 |
|
|
|
179,619 |
|
|
|
142,292 |
|
Convertible
Debt
|
|
$ |
616,292 |
|
|
$ |
220,068 |
|
|
|
15,719 |
|
|
|
15,719 |
|
|
|
251,506 |
|
|
|
364,786 |
|
Promissory
Note Payable
|
|
$ |
1,000,000 |
|
|
$ |
875,000 |
|
|
|
62,500 |
|
|
|
62,500 |
|
|
|
1,000,000 |
|
|
|
- |
|
Accrued
Interest
|
|
$ |
224,878 |
|
|
$ |
119,859 |
|
|
|
8,561 |
|
|
|
8,561 |
|
|
|
136,981 |
|
|
|
87,896 |
|
Total
Debt
|
|
$ |
2,163,081 |
|
|
$ |
1,372,094 |
|
|
|
98,006 |
|
|
|
98,006 |
|
|
|
1,568,106 |
|
|
|
594,974 |
|
Promissory
Note Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
Unaccreted
|
|
$ |
(269,307 |
) |
|
$ |
(235,644 |
) |
|
|
(16,832 |
) |
|
|
(16,832 |
) |
|
|
(269,308 |
) |
|
|
- |
|
Increase
in Equity
|
|
$ |
1,893,774 |
|
|
$ |
1,136,450 |
|
|
|
81,174 |
|
|
|
81,174 |
|
|
|
1,298,798 |
|
|
|
594,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
$49,351 debt remaining after the conversion was paid in cash along with interest
accrued of $6,374.
Note H – NOTES PAYABLE AND CONVERTIBLE NOTES
PAYABLE, continued
On
September 1, 2006, the Company obtained a $1,000,000 loan from a
director. The loan had interest at 5%, all interest and principal was
due at maturity on September 1, 2008. The outstanding balance of this
loan was converted to common stock in September 2007. The Company
also issued 10,000,000 warrants to this director with an exercise price of $0.16
in connection with the promissory note dated September 1, 2006.
The
warrants vested over ten months because the note remained unpaid during that
period. The warrants were assigned a value of $554,000 and recorded
as additional paid-in capital. A discount of the loan was recorded in
the amount of $554,000 and was accreted through interest expense over the period
the loan was outstanding.
Note I –
COMMITMENTS
The
Company has entered into agreements with certain members of its Scientific
Advisory Board wherein they are each entitled to receive 100,000 shares of the
Company’s common stock annually upon satisfactory completion of one year of
service. The Company is accruing an expense for the anticipated
issuance over the service period. At December 31, 2007, the Company
has recorded $38,500 of consultant expense for anticipated issuances of the
shares.
The
Company signed a three year lease on July 1, 2007 at $1,678 per month for the
corporate office. Future lease payments will be $20,136, $20,136, and
$10,068 in 2008, 2009, and 2010 respectively.
Note J – STOCK
OPTIONS
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, 2007 and 2006, options to purchase shares of common stock outstanding were
as follows:
|
|
Number
of
|
|
|
Exercise
|
|
|
Grant Date
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
January
2006
|
|
|
1,500,000 |
|
|
$ |
0.11 |
|
Immediate
vesting
|
January
2006
|
|
|
500,000 |
|
|
$ |
0.11 |
|
125,000
shares every six months
|
December
2005
|
|
|
1,500,000 |
|
|
$ |
0.10 |
|
250,000
shares every six months
|
|
|
|
|
|
|
|
|
|
|
The 2006
options were awarded to employees and expire January 2016. The 2005
options were awarded to an employee and expire in December 2015.
The
following schedule summarizes stock option activity for 2007 and
2006:
|
|
2007
|
|
|
2006
|
|
|
|
Option
|
|
|
Weighted
Avg.
|
|
|
Option
|
|
|
Weighted
Avg.
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
Beginning of Year
|
|
|
3,500,000 |
|
|
$ |
0.11 |
|
|
|
2,500,000 |
|
|
$ |
0.08 |
|
Granted,
During the Year
|
|
|
- |
|
|
|
- |
|
|
|
2,000,000 |
|
|
|
0.11 |
|
Exercised
During the Year
|
|
|
- |
|
|
|
- |
|
|
|
(600,000 |
) |
|
|
0.01 |
|
Forfeited,
During the Year
|
|
|
- |
|
|
|
- |
|
|
|
(400,000 |
) |
|
|
0.10 |
|
Outstanding,
End of the Year
|
|
|
3,500,000 |
|
|
$ |
0.11 |
|
|
|
3,500,000 |
|
|
$ |
0.11 |
|
There
were 2,875,000 and 2,125,000 options exercisable at December 31, 2007 and 2006,
respectively. The weighted average exercise prices of those options
are $0.11 at December 31, 2007 and 2006. The weighted average
remaining life of all exercisable and non-vested options at December 31, 2007 is
8 years.
Note J – STOCK OPTIONS,
continued
As of
December 31, 2007, there was approximately $88,924 of unrecognized cost related
to stock option grants. The cost is to be recognized over the
remaining vesting periods that average approximately 1 year. There
were no options exercised during 2007, so there is no intrinsic value for
options exercised. The aggregate intrinsic value of options
outstanding and exercisable as of December 31, 2007 was zero.
The
Company granted 2,000,000 options during the first quarter of
2006. The fair value of each option granted in 2006 was $0.11 and was
estimated on the date of grant using the Black-Scholes pricing model with the
following assumptions: dividend yield at 0%, risk-free interest rate of 5.00%,
an expected life of 10 years, and volatility of 133%.
Note K –
WARRANTS
Information
about warrants outstanding at December 31, 2007 and 2006 is summarized
below:
Number
of warrants issued
|
|
2007
|
|
|
2006
|
|
Outstanding
beginning of year
|
|
|
68,796,250 |
|
|
|
50,931,250 |
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
122,773,394 |
|
|
|
18,865,000 |
|
Exercised
|
|
|
(100,000 |
) |
|
|
(430,000 |
) |
Expired
un-exercised
|
|
|
(32,370,000 |
) |
|
|
(570,000 |
) |
|
|
|
|
|
|
|
|
|
Outstanding
end of the year
|
|
|
159,099,644 |
|
|
|
68,796,250 |
|
Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
Number
Exercisable
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
of
Exercisable
Warrants
|
$0.01
|
|
500,000
|
|
0.5
|
|
500,000
|
|
0.5
|
$0.08
|
|
1,800,000
|
|
4.2
|
|
300,000
|
|
4.2
|
$0.10
|
|
1,425,750
|
|
1.3
|
|
1,375,750
|
|
1.3
|
$0.11
|
|
1,500,000
|
|
1.5
|
|
1,500,000
|
|
1.5
|
$0.12
|
|
150,000
|
|
1.0
|
|
150,000
|
|
1.0
|
$0.13
|
|
5,500,000
|
|
2.3
|
|
4,000,000
|
|
2.3
|
$0.14
|
|
52,138,822
|
|
2.6
|
|
52,138,822
|
|
2.6
|
$0.15
|
|
1,000,000
|
|
1.0
|
|
1,000,000
|
|
1.0
|
$0.16
|
|
10,000,000
|
|
1.4
|
|
10,000,000
|
|
1.4
|
$0.19
|
|
51,538,822
|
|
2.8
|
|
51,538,822
|
|
2.8
|
$0.20
|
|
500,000
|
|
1.0
|
|
500,000
|
|
1.0
|
$0.22
|
|
500,000
|
|
0.7
|
|
500,000
|
|
0.7
|
$0.24
|
|
32,546,250
|
|
1.0
|
|
32,546,250
|
|
1.0
|
Total
|
|
159,099,644
|
|
|
|
156,049,644
|
|
|
Note K – WARRANTS,
continued
During
January 2006, the Company issued 3,400,000 warrants to consultants and other
service providers with a weighted-average exercise price of $0.12 per
share. A total of $290,000 was charged to expense for Compensatory
Warrants. The warrants became exercisable upon issuance.
The
Company also issued 3,000,000 warrants to two directors in January 2006 with an
exercise price of $0.13 per share. The grant date fair value of these
warrants was $355,500. The warrants vest at a rate of 500,000
warrants (250,000 warrants for each director) after satisfactory completion of
each 6 months of service until 3 years of service has been
completed. The expense is being recorded over the service
period.
In
January 2006, the Company issued 1,000,000 warrants to a director with an
exercise price of $0.15 per share in connection with a common stock
sale. The Company has ascribed no value to the warrants associated
with the common stock sale.
During
the second quarter of 2006, the Company issued 500,000 warrants to two members
of its Scientific Advisory Board. The grant date fair value of these
warrants was $35,000. These warrants vest over a one-year period and
have an exercise price of $0.11. The Company also issued 200,000
warrants to a service provider in exchange for professional
services. The grant date fair value of these warrants was
$14,000. These warrants vest over a two-year period and have an
exercise price of $0.10.
On
September 1, 2006, the Company issued 10,000,000 warrants with an exercise price
of $0.16 to a director in connection with a $1,000,000 promissory
note. The warrants expire September 1, 2008. The fair
value of these warrants was recorded as additional paid-in capital and a debt
discount that was amortized as interest expense over the term of the
debt.
During
the third quarter of 2006, the Company issued 300,000 warrants to service
providers. The grant date fair value of these warrants was
$16,872. These warrants vested immediately and have an exercise price
of $0.10. The Company also issued 500,000 warrants to a member of the
Scientific Advisory Board for providing advisory services to the Company beyond
which was expected in his capacity as a Scientific Advisory Board
member. The grant date fair value of these warrants was
$15,115. These warrants vested immediately and have an exercise price
of $0.10.
On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants to
purchase common stock of the Company (the “Warrants”) to certain institutional
investors and individual accredited investors. The Warrants vested
immediately and had an exercise price of $0.35 per share. The
Warrants expired on November 1, 2007. On February 1, 2007, an equal
number of warrants issued to the same institutional and individual investors and
with substantially similar terms expired. The fair value of the
warrants issued was approximately $33,755 and they were recorded as expense on
the issue date.
Also on
February 1, 2007, the Company issued 500,000 warrants to consultants, which
vested immediately, and have an exercise price of
$0.14. Additionally, the Company issued 100,000 warrants to a
consultant, which vest over a period of ten months, and have an exercise price
of $0.14. Together, these warrants were valued at $49,068 and expire
on December 31, 2009.
During
the second quarter of 2007, the Company issued 500,000 immediately vesting
warrants to consultants with an exercise price of $0.11. These
warrants expire on December 31, 2009, and were valued at
$19,815. They were charged to expense upon issuance.
During
the third quarter of 2007, the Company issued 60,750 warrants, which expire on
December 31, 2008, to a vendor as payment for professional services
rendered. These warrants had an exercise price of $0.10 and were
fully vested upon issuance. The fair value of $1,719 was recorded as
expense. The Company also issued 300,000 warrants with an exercise
price of $0.08 to a former employee as part of a termination
agreement. These warrants, which expire after three years, vested
immediately and had a fair value of $13,869. This amount was recorded
as compensation expense. Two new directors were each awarded
1,500,000 warrants which vest over three years and expire in six
years. These warrants have an exercise price of $0.08 and had an
aggregate fair market value of $197,374. These warrants will be
charged as directors’ fees over the vesting period. One director
subsequently forfeited his 1,500,000 warrants upon his resignation as a
director.
The
Company also issued warrants in connection with the sale of common stock
effective September 7, 2007. Each purchaser of common stock received
one warrant exercisable at $0.14 (the “Tranche 1 Warrants”) and one warrant
exercisable at $0.19 (the “Tranche 2 Warrants”) for each share of common stock
purchased or converted from debt. All these warrants vested
immediately, expire three years from the date of issuance, and are subject to
call rights based upon the trading value of the Company’s stock. With
respect to the Tranche 1 Warrants, if the Company’s stock trades for an amount
in excess of $0.17 for thirty (30) consecutive days, then 50% of the warrants
may be called by the Company.
Note K – WARRANTS,
continued
With
respect to the Tranche 2 Warrants, if the Company’s stock trades for an amount
in excess of $0.24 for thirty (30) consecutive days, then 50% of the warrants
may be called by the Company. The Tranche 1 warrants, if exercised,
may result in the issuance of up to 51,538,832 shares of the Company’s common
stock, at an exercise price of $0.14 per share, and the Tranche 2 warrants, if
exercised, may result in the issuance of up to 51,538,832 shares of Company
common stock at an exercise price of $0.19 per share. These warrants
were valued at $0.005 each resulting in $515,388 of common stock proceeds being
allocated to the fair value of the warrants. As of December 31, 2007
there was approximately $210,200 in unrecognized cost related to warrants
granted.
Note L - STOCKHOLDERS’
EQUITY
In the
first quarter of 2006, the Company sold 1,000,000 shares of its common stock to
one of its directors for $100,000. The shares were sold for $0.10 per
share which was the closing price of the stock on the date of the
sale. As part of the purchase, the director also received warrants to
purchase an additional 1,000,000 shares of the Company’s common stock at a fixed
price of $0.15 per share until December 2008. No portion of the
proceeds was assigned to the value of the warrants because the exercise price of
the warrants exceeded the market value of the underlying common stock on the
date of purchase.
In July
2007, the Company issued 575,000 shares of common stock valued at $46,000 to a
former employee as part of a termination agreement. The Company also
issued 400,000 shares of common stock valued at $32,000 as part of a litigation
settlement in July 2007.
Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million. The stock is restricted from
resale as the stock has not been registered. Each purchaser of common
stock also received one warrant to acquire an equal number of shares at $0.14
and one warrant to acquire an equal number of shares at $0.19. The
common shares were valued at $0.07 each and the warrants were valued at $0.005
each for a total of $0.08.
The
Company also issued 19,601,323 shares of common stock and 7,437,184 shares of
Series A Preferred Stock in a conversion of secured debt to
equity. The amount of debt converted to common stock and warrants was
$1.6 million and the amount of
debt converted to Series A Preferred Stock was $594,975. Each share
of common stock issued in the conversion was accompanied by one warrant to
acquire an equal number of shares of common stock at $0.14 and one warrant to
acquire an equal number of shares of common stock at $0.19.
Series
A Preferred Stock
The
shares of Series A Preferred Stock may be converted into common stock of the
Company at any time without the payment of additional
consideration. The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days. The holder of the Series A Preferred Stock has the right to
receive dividends, the right to vote on matters presented to the common
shareholders, and a preference right in the event of liquidation in an amount
equal to $594,975, which is the amount of debt converted, plus any declared but
unpaid dividends. The Company has a right to redeem the shares of
Series A Preferred stock upon the fifth anniversary of the issue date at a
redemption price of $0.08 per share.
Note M - RELATED PARTY
TRANSACTIONS
The
Company previously leased the location used as the principle executive office
from a company owned by the wife of the Company’s Chief Executive
Officer. The term of the principle executive office lease was
month-to-month and the rent expense associated with this lease was $1,036 per
month. This arrangement terminated in June 2007. Rent
expense under this lease arrangement amounted to approximately $6,644 and
$12,432 in 2007 and 2006, respectively.
Note N – 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. Limited 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 and obtain
additional revenues to eventually attain a profitable level of
operations.
Note N – GOING CONCERN,
continued
The
Company initiated licensing the technology underlying several of its patents and
is providing supporting services related to the application of such technology
that is resulting in ongoing revenue. In addition, management has
successfully raised additional equity investment and negotiated agreements with
its debt holders, which resulted in the conversion of this debt to
equity. Based on these developments, management believes revenue
generation will continue, additional licensing agreements will be obtained in
the near-term, and non-revenue generating costs will be
controlled. There are no assurances that management will be able to
successfully generate revenue or reduce expenses, attain profitability, or
continue to attract the capital necessary to support the business.
HEALTH
DISCOVERY CORPORATION
Balance
Sheet
Assets
|
|
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2008
(unaudited)
|
|
|
2007
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$ |
818,493 |
|
|
|
1,648,439 |
|
Accounts
Receivable
|
|
|
112,500 |
|
|
|
112,500 |
|
Prepaid
Expenses and Other Assets
|
|
|
36,476 |
|
|
|
33,829 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
967,469 |
|
|
|
1,794,768 |
|
|
|
|
|
|
|
|
|
|
Equipment,
Less Accumulated Depreciation of $22,992 and $22,402
|
|
|
5,123 |
|
|
|
7,596 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Accounts
Receivable – Long Term
|
|
|
112,500 |
|
|
|
112,500 |
|
Patents,
Less Accumulated Amortization of $1,074,334 and $942,974
|
|
|
2,911,460 |
|
|
|
3,042,820 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
3,996,552 |
|
|
|
4,957,684 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable – Trade
|
|
$ |
11,948 |
|
|
|
61,173 |
|
Accrued
Liabilities
|
|
|
219,946 |
|
|
|
239,589 |
|
Deferred
Revenue
|
|
|
62,708 |
|
|
|
62,708 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
294,602 |
|
|
|
363,470 |
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue – Long Term
|
|
|
422,361 |
|
|
|
453,715 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
716,963 |
|
|
|
817,185 |
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock, Convertible, Stated Value of $0.08 per
Share,
|
|
|
|
|
|
|
|
|
7,437,184 Shares
Authorized, Issued and Outstanding
|
|
|
594,975 |
|
|
|
594,975 |
|
Common
Stock, No Par Value, 300,000,000 Shares Authorized
|
|
|
|
|
|
|
|
|
169,007,206 Shares Issued
and Outstanding
|
|
|
15,588,689 |
|
|
|
15,390,609 |
|
Accumulated
Deficit
|
|
|
(12,904,075 |
) |
|
|
(11,845,085 |
) |
Total
Stockholders’ Equity
|
|
|
3,279,589 |
|
|
|
4,140,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
3,996,552 |
|
|
|
4,957,684 |
|
See
accompanying notes to financial statements.
HEALTH
DISCOVERY CORPORATION
Statements
of Operations
(unaudited)
|
|
Three
Months
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
Six
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
$ |
15,677 |
|
|
$ |
10,834 |
|
|
$ |
31,354 |
|
|
$ |
21,667 |
|
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
Development
|
|
|
3,000 |
|
|
|
3,900 |
|
|
|
6,600 |
|
|
|
11,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
12,677 |
|
|
|
6,934 |
|
|
|
24,754 |
|
|
|
10,267 |
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
65,681 |
|
|
|
65,680 |
|
|
|
131,360 |
|
|
|
131,360 |
|
Professional
and Consulting Fees
|
|
|
171,149 |
|
|
|
322,077 |
|
|
|
324,999 |
|
|
|
492,309 |
|
Compensation
|
|
|
196,654 |
|
|
|
157,555 |
|
|
|
393,840 |
|
|
|
321,710 |
|
Other
General and Administrative Expenses
|
|
|
93,044 |
|
|
|
101,831 |
|
|
|
262,587 |
|
|
|
233,735 |
|
Total
Operating Expenses
|
|
|
526,528 |
|
|
|
647,143 |
|
|
|
1,112,786 |
|
|
|
1,179,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(513,851 |
) |
|
|
(640,209 |
) |
|
|
(1,088,032 |
) |
|
|
(1,168,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
11,782 |
|
|
|
2,989 |
|
|
|
29,524 |
|
|
|
9,976 |
|
Gains
on Restructuring of Accounts Payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
44,594 |
|
Interest
Expense
|
|
|
(170 |
) |
|
|
(102,070 |
) |
|
|
(482 |
) |
|
|
(204,114 |
) |
Total
Other Income (Expense)
|
|
|
11,612 |
|
|
|
(99,081 |
) |
|
|
29,042 |
|
|
|
(149,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(502,239 |
) |
|
$ |
(739,290 |
) |
|
$ |
(1,058,990 |
) |
|
$ |
(1,318,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Outstanding Shares
|
|
|
169,007,206 |
|
|
|
116,493,384 |
|
|
|
169,007,206 |
|
|
|
116,479,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Per Share
|
|
$ |
(.00 |
) |
|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
HEALTH
DISCOVERY CORPORATION
Statements
of Cash Flows
(unaudited)
For
the Six Months Ended June 30, 2008 and 2007
|
|
Six
Months
|
|
|
Six
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(1,058,990 |
) |
|
$ |
(1,318,391 |
) |
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
|
Used
by Operating Activities:
|
|
|
|
|
|
|
|
|
Stock-based
Compensation
Services
Exchanged for Warrants
|
|
|
46,338
151,741 |
|
|
|
68,462
167,545 |
|
Issuance
of Warrants
Accretion
of Debt Discount
|
|
|
-
- |
|
|
|
33,756
138,500 |
|
Gains
on Restructuring of Accounts Payable
|
|
|
- |
|
|
|
(44,594 |
) |
Depreciation
and Amortization
|
|
|
133,833 |
|
|
|
135,918 |
|
Increase
in Interest Receivable
|
|
|
(412 |
) |
|
|
- |
|
Decrease
in Accounts Receivable
|
|
|
- |
|
|
|
20,000 |
|
Decrease
in Deferred Revenue
|
|
|
(31,354 |
) |
|
|
(21,667 |
) |
Increase
in Prepaid Expenses and Other Assets
|
|
|
(2,234 |
) |
|
|
(22,110 |
) |
(Decrease)
Increase in Accounts Payable – Trade
|
|
|
(49,225 |
) |
|
|
125,320 |
) |
(Decrease)
Increase in Accrued Liabilities
|
|
|
(19,643 |
) |
|
|
113,451 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used by Operating Activities
|
|
|
(829,946 |
) |
|
|
(603,810 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of Equipment
|
|
|
- |
|
|
|
(998 |
) |
Investment
in Joint Venture
|
|
|
- |
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Used by Investing Activities
|
|
|
- |
|
|
|
(5,998 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Sales of Common Stock, Net of Fees
|
|
|
- |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
- |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash
|
|
|
(829,946 |
) |
|
|
(608,808 |
) |
|
|
|
|
|
|
|
|
|
Cash,
at Beginning of Period
|
|
|
1,648,439 |
|
|
|
674,366 |
|
|
|
|
|
|
|
|
|
|
Cash,
at End of Period
|
|
$ |
818,493 |
|
|
$ |
65,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
$ |
482 |
|
|
$ |
1,125 |
|
See accompanying notes to financial
statements.
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements
Note A -
BASIS OF PRESENTATION
Health
Discovery Corporation (the “Company”) is a biotechnology-oriented company that
has acquired certain patents and has patent pending applications for certain
machine learning tools used for diagnostic and drug discovery. The
Company licenses the use of its patent protected technology and utilizes such
technology internally to develop diagnostic tests, drug monitoring tests and
drug targets for therapeutic use, and sells or licenses such discoveries to
diagnostic or pharmaceutical companies worldwide.
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 June 30,
2008 are not necessarily indicative of the results of a full year’s operations
and should be read in conjunction with the financial statements and footnotes
included in the Company’s annual report on Form 10-KSB for the year ended
December 31, 2007.
Recent Accounting
Pronouncements
In September 2006, the FASB issued
Statement No. 157, Fair Value
Measurements, (“Statement
No. 157”). This statement provides a single definition of fair value,
a framework for measuring fair value, and expanded disclosures concerning fair
value. Previously, different definitions of fair value were contained
in various accounting pronouncements creating inconsistencies in measurement and
disclosures. This pronouncement is effective for fiscal years
beginning after November 15, 2007. Certain provisions of SFAS No. 157
are effective for the Company beginning in the first quarter of
2008. The adoption of SFAS No. 157 for financial assets and
liabilities in the first quarter of 2008 did not have a material effect on the
Company’s results of operations and financial position.
In February 2007, FASB issued Statement
of Financial Accounting Standards No. 159, “Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits
entities to choose to measure many financial instruments and certain other items
at fair value that were not currently required to be measured at fair
value. The objective of SFAS No. 159 is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS No.
159 was effective for the Company beginning in the first quarter of
2008. The adoption of SFAS No. 159 did not have a material impact in
the Company’s financial position.
In December 2007, FASB issued Statement
of Financial Accounting Standards No. 141 (revised 2007), “Business
Combinations” (“SFAS No.
141(R)”), which continues the evolution toward fair value reporting and
significantly changes the accounting for acquisitions that close beginning in
2009, both at the acquisition date and in subsequent periods. SFAS
No. 141(R) is not expected to have a material impact on the Company’s financial
statements.
Note A -
BASIS OF PRESENTATION, continued
In December 2007, FASB issued Statement
of Financial Accounting Standards No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51” (“SFAS No. 160”), which
requires companies to measure an acquisition of noncontrolling (minority)
interest at fair value in the equity section of the acquiring entity’s balance
sheet. The objective of SFAS No. 160 is to improve the comparability
and transparency of financial data as well as to help prevent manipulation of
earnings. The changes introduced by the new standards are likely to
affect the planning and execution, as well as the accounting and disclosure, of
merger transactions. The effective date to adopt SFAS No. 160 for the
Company is January 1, 2009. The adoption of SFAS No. 160 is not
expected to have a material effect on its results of operations and financial
position.
Note B – REVENUE
RECOGNITION
Revenue
is generated through the sale or license of patented technology and processes
and from services provided through development agreements. These
arrangements are controlled by contracts that dictate responsibilities and
payment terms. The Company recognizes revenues as they are earned
over the duration of a license agreement or upon the sale of any owned patent
once all contractual obligations have been fulfilled. Revenue is
earned under development agreements in the period the services are
performed.
Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the pending
litigation styled Health
Discovery Corporation v. Ciphergen Biosystems, Inc. Case No. 07-00285-CRB
before the United States District Court for the Northern District of
California. The agreement provides Ciphergen a license to use certain
patents. In consideration for entering into the Agreement, Ciphergen
agreed to pay the Company $600,000 over a two-year period. The
revenue associated with this settlement was recorded net of $130,000 in
contingently payable attorney fees as deferred revenue in the amount of $470,000
and will be recognized over the sixteen year remaining life of the subject
patents. Deferred revenue represents the unearned portion of payments
received in advance for licensing agreements. The Company had total
unearned revenue of $485,069 as of June 30, 2008. Unearned revenue of
$62,708 is recorded as current and $422,361 is classified as
long-term.
Note C - NET LOSS PER
SHARE
Basic
Earnings Per Share (“EPS”) includes no dilution and is computed by dividing
income or loss available to common 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 create an anti-dilutive result
and therefore is not presented.
Note D - STOCK-BASED
EXPENSE
Stock-based
expense included in our net loss for the three months and six months ended June
30, 2008 consisted of $69,122 and $198,079 respectively in compensatory warrants
and options for professional consulting services, directors fees and
compensation. Stock-based expense included in our net loss for the
three months and six months ended June 30, 2007 was $145,527 and $269,753
respectively.
As of June 30, 2007 and June 30, 2008,
there was approximately $356,918 and $214,840, respectively, of unrecognized
cost related to stock option and warrant grants. The cost is to be
recognized over the remaining vesting periods that average approximately 2.4
years.
Note D - STOCK-BASED EXPENSE,
continued
The
following schedule summarizes stock option activity for the six months ended
June 30, 2008 and the twelve months ended December 31, 2007:
|
|
Option
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding,
January 1, 2007
|
|
|
3,500,000 |
|
|
$ |
0.11 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
|
3,500,000 |
|
|
$ |
0.11 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2008
|
|
|
3,500,000 |
|
|
$ |
0.11 |
|
The
weighted average remaining life of the outstanding options at June 30, 2008 is
7.56 years.
There
were 3,250,000 options exercisable at June 30, 2008. The exercisable
options have a weighted average exercise price of $0.11 and a weighted average
remaining life of 7.56 years. The aggregate intrinsic value of
options outstanding is zero at June 30, 2008.
Information
about warrants outstanding at June 30, 2008 is summarized below:
|
|
Six
Months Ended
|
|
|
Twelve
Months Ended
|
|
|
|
June
30
|
|
|
December
31
|
|
Number
of warrants issued
|
|
2008
|
|
|
2007
|
|
Outstanding
beginning of period
|
|
|
159,099,644 |
|
|
|
68,796,250 |
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
1,500,000 |
|
|
|
122,773,394 |
|
Exercised
|
|
|
- |
|
|
|
(100,000 |
) |
Expired
un-exercised
|
|
|
(300,000 |
) |
|
|
(32,370,000 |
) |
|
|
|
|
|
|
|
|
|
Outstanding
end of the period
|
|
|
160,299,644 |
|
|
|
159,099,644 |
|
Note D - STOCK-BASED EXPENSE,
continued
|
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
of
Exercisable
Warrants
|
|
|
$ |
0.01 |
|
|
|
200,000 |
|
|
|
0.5
|
|
|
|
200,000 |
|
|
|
0.5
|
|
|
$ |
0.06 |
|
|
|
1,500,000 |
|
|
|
6.0
|
|
|
|
0 |
|
|
|
6.0
|
|
|
$ |
0.08 |
|
|
|
1,800,000 |
|
|
|
3.7
|
|
|
|
800,000 |
|
|
|
3.7
|
|
|
$ |
0.10 |
|
|
|
1,425,750 |
|
|
|
0.8
|
|
|
|
1,425,750 |
|
|
|
0.8
|
|
|
$ |
0.11 |
|
|
|
1,500,000 |
|
|
|
1.0
|
|
|
|
1,500,000 |
|
|
|
1.0
|
|
|
$ |
0.12 |
|
|
|
150,000 |
|
|
|
1.0
|
|
|
|
150,000 |
|
|
|
1.0
|
|
|
$ |
0.13 |
|
|
|
5,500,000 |
|
|
|
1.8
|
|
|
|
5,125,000 |
|
|
|
1.8
|
|
|
$ |
0.14 |
|
|
|
52,138,822 |
|
|
|
2.1
|
|
|
|
52,138,822 |
|
|
|
2.1
|
|
|
$ |
0.15 |
|
|
|
1,000,000 |
|
|
|
0.9
|
|
|
|
1,000,000 |
|
|
|
0.9
|
|
|
$ |
0.16 |
|
|
|
10,000,000 |
|
|
|
0.9
|
|
|
|
10,000,000 |
|
|
|
0.9
|
|
|
$ |
0.19 |
|
|
|
51,538,822 |
|
|
|
2.3
|
|
|
|
51,538,822 |
|
|
|
2.3
|
|
|
$ |
0.20 |
|
|
|
500,000 |
|
|
|
0.1
|
|
|
|
500,000 |
|
|
|
0.1
|
|
|
$ |
0.22 |
|
|
|
500,000 |
|
|
|
0.2
|
|
|
|
500,000 |
|
|
|
0.2
|
|
|
$ |
0.24 |
|
|
|
32,546,250 |
|
|
|
0.5
|
|
|
|
32,546,250 |
|
|
|
0.5
|
|
|
Total
|
|
|
|
160,299,644 |
|
|
|
|
|
|
|
157,424,644 |
|
|
|
|
|
In June
2008, a warrant to purchase 1,500,000 shares of Company common stock at an
exercise price of $0.06, vesting over three years and expiring in six years, was
issued by the Company to a new director. The value of $74,136 will be
charged as directors’ fees over the vesting period.
During
the first six months of 2008, 300,000 unexercised warrants
expired.
In the
first quarter of 2008, the Company fully vested a 1,500,000 warrant grant for a
retiring director by accelerating the vesting of 375,000 warrants exercisable at
$0.13. A charge of $44,438 was recorded as directors’
fees.
On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants to
purchase common stock of the Company (the “Warrants”) to certain institutional
investors and individual accredited investors. The Warrants vested
immediately and had an exercise price of $0.35 per share. The
Warrants expired on November 1, 2007. On February 1, 2007, an equal
number of warrants issued to the same institutional and individual investors and
with substantially similar terms expired. The fair value of these
warrants was approximately $33,755 and they were recorded as expense on the
issue date.
Also on
February 1, 2007, the Company issued 500,000 warrants to consultants, which
vested immediately, and have an exercise price of
$0.14. Additionally, the Company issued 100,000 warrants to a
consultant, which vested over a period of ten months, and have an exercise price
of $0.14. Together, these warrants were valued at $49,068 and expire
on December 31, 2009. The expense was recorded over the vesting
period.
Note E – GAIN ON
RESTRUCTURING OF ACCOUNTS PAYABLE
On March
1, 2007, the Company recorded a gain on accounts payable restructuring of
$44,594 pursuant to the agreement made in the third quarter of 2006 deferring
some payments until certain conditions were met or eliminating the liability if
these conditions did not occur.
Note F -
PATENTS
The
Company has acquired a group of patents related to biotechnology and certain
machine learning tools used for diagnostic and drug discovery. Legal costs
associated with patent acquisitions and the application
process for new patents are also capitalized as patent assets. The Company has
recorded as other assets $2,911,460 in patents and patent related costs, net of
$1,074,334 in accumulated amortization, at June 30, 2008.
Amortization
charged to operations for the three months and six months ended June 30, 2008
and 2007 was approximately $65,680 and $131,360 for both years. The
weighted average amortization period for patents is 14
years. Estimated amortization expense for the next five years is
$262,720 per year.
Note G –
INVESTMENTS
On March
27, 2007, the Company and an investment partner formed SVM Capital LLC as an
equity investment for purposes of utilizing SVMs as a quantitative investment
management technique. The Company owns 45% of the membership interest
and has significant influence with the operation of the entity but it not
considered the primary beneficiary. Accordingly, the investment is
presented using the equity method of accounting. The Company’s
initial investment was $5,000. Equity in the loss of SVM Capital LLC
for 2007 was $5,000. The resultant net value was zero at June 30,
2008. The Company has no contractual obligation to fund this
venture.
Note H – STOCKHOLDERS’
EQUITY
In
January 2007, the Company issued 100,000 shares of stock for warrants exercised
at $0.01 each. Proceeds of $1,000 were recorded in capital
stock. No capital stock has been issued in 2008.
Note I – 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. Limited 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 control certain costs and
obtain new contracts to eventually attain a profitable level of
operations.
The Company is licensing the technology
underlying several of its patents and providing supporting services related to
the application of such technology that is resulting in ongoing
revenue. The Company raised $2.55 million in cash through a common
stock offering and additionally converted $2.2 million of secured debt to equity
in the third quarter of 2007. Based on these developments, management
believes revenue generation will continue, additional licensing agreements will
be obtained in the near-term, and non-revenue generating costs will be
controlled.
Note J – SUBSEQUENT EVENTS
AND DEVELOPMENTS
In July
2008, HDC entered into a Development and License Agreement with DCL Medical
Laboratories LLC, a full-service clinical reference laboratory focused on
women’s health, for the joint development of SVM-based computer assisted
diagnostic tests for the independent detection of ovarian, cervical and
endometrial cancers. There was no initial investment by the
Company. Future investment will be limited to certain administrative
costs. Pursuant to the Development and License Agreement, HDC will
own any developed intellectual property and DCL Medical Laboratories LLC will
have a sole use license relating to applications and new mathematical tools
developed during the course of the Development and License
Agreement.
On July
15, 2008, the Company received $112,500 due from Ciphergen Biosystems, Inc. in
accordance with a patent license and settlement agreement.
70,549,868 Shares of
Common
Stock To Be Issued Upon Exercise Of Warrants
352,746 Shares of Common Stock
HEALTH
DISCOVERY CORPORATION
PROSPECTUS
September , 2008
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid in connection with the sale of shares of
our common stock being registered, all of which will be paid by
us. All amounts are estimates except the registration
fee.
Securities
and Exchange Commission registration fee
|
|
$ |
668.41 |
|
Legal
fees and expenses
|
|
|
+ |
|
Accounting
fees and expenses
|
|
|
+ |
|
Transfer
Agent and Registrar fees
|
|
|
+ |
|
Blue
Sky fees and expenses
|
|
|
+ |
|
Printing
and engraving expenses
|
|
|
+ |
|
Miscellaneous
|
|
|
+ |
|
Total
|
|
$ |
+ |
|
____________
+ To be
filed by amendment.
Item
14. Indemnification of Directors and Officers
Our articles of incorporation provide
that we will indemnify, to the fullest extent permitted by the Georgia Business
Corporation Code, our directors and officers against expenses and liabilities
arising from such director or officer being named as an individual party to a
proceeding by reason of having served in the role of director or
officer. Our bylaws provide that advances against expenses shall be
made so long as the person seeking indemnification gives the Company a written
affirmation that he or she in good faith believes that he or she has met the
standard of conduct for indemnification and agrees to refund the advances if it
is ultimately determined that he or she is not entitled to indemnification. A
determination of whether indemnification of a director or officer is proper
because he or she met the applicable standard of conduct shall be made (1) by
our board of directors or a committee duly designated thereby, (2) in particular
circumstances, by independent legal counsel in a written opinion or (3) by the
affirmative vote of a majority of the shares entitled to vote.
In addition, Article 7 of our
articles of incorporation, subject to limited exceptions, eliminates the
potential personal liability of a director for monetary damages to Health
Discovery Corporation and to our shareholders for breach of duty as a director,
except for liability for (1) breach of duty involving appropriation of business
opportunity of Health Discovery Corporation, (2) an act of omission not in good
faith or involving intentional misconduct or a knowing violation of law, (3) a
transaction from which the director derives an improper material tangible
personal benefit or (4) the types of liability set forth in Section 14-2-832 of
the Georgia Business Corporation Code dealing with unlawful distributions of
corporate assets to shareholders.
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission 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 us of
expenses incurred or paid by a director, officer or controlling person of our
company in the successful defense of any action, suit or proceeding) is asserted
by that director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether this indemnification by us is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
Item
15. Recent Sales of Unregistered Securities
On March
9, 2005, we completed the private sale of 30,703,125 shares of restricted common
stock to certain institutional investors and individual accredited investors at
an offering price of $0.16 per share for a total of $4,912,500. For
every share of common stock purchased, each investor received warrants to
purchase one share of the Company’s common stock at $0.24 per share, exercisable
until December 31, 2008. This could result in the issuance of up to 30,703,125
additional restricted common shares upon exercise. We entered into
purchase agreements with each of the investors. 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 by July 6,
2005. Shares totaling 540,000 were issued in 2005 under
the terms of the agreement. The securities issued in the
private placement were not registered under the Securities Act of 1933, as
amended, and until they were registered the securities could not be offered or
sold in the United States absent registration or the availability of an
applicable exemption from registration. On March 10, 2005, we filed
registration statement No. 333-124750 for 18,609,375 shares of restricted common
stock and the equivalent number of warrants. On December 14, 2005,
the Company filed registration statement 333-124750 wherein 31,622,749 shares of
stock and 32,638,436 warrants were registered with the Securities and Exchange
Commission. On July 12, 2007, we filed a Post-Effective Amendment to
Form SB-2 to deregister the shares registered on registration statement No.
333-124750.
Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million in cash to certain institutional investors and
individual accredited investors. Each purchaser of common stock also
received one warrant to acquire an equal number of shares at $0.14 (the “Tranche
1 Warrants”) and one warrant to acquire an equal number of shares at $0.19 (the
“Tranche 2 Warrants”). The holders must exercise fifty percent of the
Tranche 1 Warrants if the market price for the Company’s common stock is $0.17
for a period of thirty consecutive calendar days. The holders must
exercise fifty percent of the Tranche 2 Warrants if the market price for the
Company’s common stock is $0.24 for a period of thirty consecutive calendar
days. The common shares were valued at $0.07 each, and the warrants
were valued at $0.005 each for a total of $0.08. Under the securities
purchase 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 15, 2008, and to
use its best efforts to cause the registration statement to be declared
effective by August 28, 2008. Shares totaling 515,384 were issued in
2008 under the terms of the agreement . 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 could not be offered or
sold in the United States absent registration or the availability of an
applicable exemption from registration.
The
Company also issued 19,601,322 shares of common stock and 7,437,184 shares of
Series A Preferred Stock in a conversion of secured debt to equity to certain
institutional investors and individual accredited investors. The
amount of debt converted to common stock and warrants was approximately $1.6
million and the amount of debt converted to Series A Preferred Stock was
$594,975. Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common stock
at $0.14 and one warrant to acquire an equal number of shares of common stock at
$0.19. The holders must exercise fifty percent of the Tranche 1
Warrants if the market price for the Company’s common stock is $0.17 for a
period of thirty consecutive calendar days. The holders must exercise
fifty percent of the Tranche 2 Warrants if the market price for the Company’s
common stock is $0.24 for a period of thirty consecutive calendar
days.
The
shares of Series A Preferred Stock may be converted into common stock of the
Company at any time without the payment of additional
consideration. The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days. The holder of the Series A Preferred Stock has the right to
receive dividends, the right to vote on matters presented to the common
shareholders, and a preference right in the event of liquidation in an amount
equal to $594,975, which is the amount of debt converted, plus any declared but
unpaid dividends. The Company has a right to redeem the shares of
Series A Preferred Stock upon the fifth anniversary of the issue date at a
redemption price of $0.08 per share.
The
shares and the warrants were offered and sold in each of the Company’s private
placements 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). There were no
underwriters in connection with either of these transactions, and there were no
underwriting discounts or commissions.
On
September 8, 2008, the Company received a letter from an investor in the
Company’s 2007 private placement, claiming that it is entitled to receive
additional shares of Company common stock. Pursuant to the terms of
the securities purchase agreement in the 2007 private placement, the investors
are entitled to receive shares of Company common stock in certain dilutive
events, including extending the exercise period of warrants. The
investor claims that its anti-dilution protections were triggered as a result of
the amendment to an outstanding warrant, which amended the condition upon which
the warrants would continue to vest. The investor asserts that this
amendment was an extension of the exercise period of the warrant. The
Company believes that the amendment was not an extension of the exercise period
but rather a change to the condition on vesting, which would trigger
anti-dilution protections under the securities purchase
agreement. Notwithstanding the Company’s belief that the investor’s
claim is without merit, the Company rescinded the amendment. If the
investor’s position is correct, the Company may be required under the terms of
the securities purchase agreement to issue approximately 43,000,000 shares to
the investor, and, if all of the other investors sought the same remedy as a
result of the amendment to the warrant, the Company may be required to issue
approximately 360,000,000 shares in the aggregate, which would exceed the number
of shares the Company is authorized to issue.
Additional Issuance of
Securities
During
the first quarter of 2006, Mr. David Cooper was issued 600,000 shares of the
Company’s common stock in exchange for exercising his options, which had an
exercise price of $0.01. On March 31, 2006, Mr. William F. Quirk, Jr.
purchased 1,000,000 shares of the Company’s common stock with accompanying
warrants to acquire an equal number of shares. The purchase price for
the common shares was $0.10 per share, and the exercise price of the warrants is
$0.15 per share.
During
January 2006, the Company issued 3,400,000 warrants to consultants and other
service providers with a weighted-average exercise price of $0.12 per
share. A total of $290,000 was charged to expense for Compensatory
Warrants. The warrants became exercisable upon issuance.
The
Company also issued 3,000,000 warrants to two directors in January 2006 with an
exercise price of $0.13 per share. The grant date fair value of these
warrants was $355,500. The warrants vest at a rate of 500,000
warrants (250,000 warrants for each director) after satisfactory completion of
each 6 months of service until 3 years of service has been
completed. The expense is being recorded over the service
period.
During
the second quarter of 2006, the Company issued 500,000 warrants to two members
of its Scientific Advisory Board. These warrants vest over a one-year
period and have an exercise price of $0.11. The Company also issued
200,000 warrants to a service provider in exchange for professional
services. These warrants vest over a two-year period and have an
exercise price of $0.10. During the second quarter of 2006, the Company issued
200,000 shares of stock for warrants exercised at $0.01
each. Proceeds of $2,000 were recorded in capital stock.
During
the third quarter of 2006, the Company issued 10,000,000 warrants to purchase an
equal number of shares of the Company’s common stock to Mr. Quirk in connection
with the loan Mr. Quirk made to the Company. These warrants vest over
a period of nine months and have an exercise price of $0.16 per
share. During the third quarter of 2006, the Company also issued
300,000 warrants to purchase an equal number of shares of the Company’s common
stock in exchange for legal services provided to the Company. These
warrants vest immediately and have an exercise price of $0.10 per
share.
In
addition, during the third quarter of 2006, the Company issued a warrant to
purchase 500,000 shares of the Company’s common stock to a member of the
Company’s Scientific Advisory Board for providing advisory services to the
Company beyond which was expected in his capacity as a Scientific Advisory Board
member. These warrants vest immediately and have an exercise price of
$0.10 per share.
During
the third quarter of 2006, the Company issued 230,000 shares of stock for
warrants exercised at $0.08 each. Proceeds of $18,400 were recorded
in capital stock.
In
January 2007, the Company issued 100,000 shares of stock for warrants exercised
at $0.01 each. Proceeds of $1,000 were recorded in capital
stock. In February 2007, the Company granted warrants to purchase
15,235,000 restricted shares of Company stock at a fixed price of $0.35 per
share, exercisable until November 1, 2007. These warrants expired in
November 2007. Also in February 2007, the Company issued warrants to
purchase up to 500,000 shares of Company common stock to consultants, which
vested immediately, and have an exercise price of
$0.14. Additionally, the Company issued a warrant to purchase up to
100,000 shares of Company common stock to a consultant, which vests over ten
months, and has an exercise price of $0.14.
During
the second quarter of 2007, the Company issued warrants to purchase up to
500,000 shares of Company common stock to consultants, which vested immediately
and had an exercise price of $0.11.
In July
2007, the Company issued 575,000 shares of common stock valued at $46,000 to a
former employee as part of a termination agreement. In connection
with that termination agreement, the Company also issued to the former employee
a warrant to purchase 300,000 shares of Company common stock with an exercise
price of $0.08. These warrants vested immediately and expire in three
years. The Company also issued 400,000 shares of common stock valued
at $32,000 as part of a litigation settlement in July 2007.
During
the third quarter of 2007, the Company issued warrants to purchase 60,750 shares
of Company common stock to a vendor as payment for professional
services. These warrants expire on December 31, 2008, vested
immediately, and have an exercise price of $0.10.
Two new
directors were each awarded warrants to purchase 1,500,000 shares of Company
common stock, which vest over three years and expire in six
year. These warrants have an exercise price of $0.08, and will be
charged as directors’ fees over the vesting period. One director
subsequently forfeited his warrant upon his resignation as a
director.
In June
2008, our new director was awarded warrants to purchase 1,500,000 shares of
Company common stock, which vest over three years and expire in six
years. These warrants have an exercise price of $0.06, and will be
charged as directors’ fees over the vesting period.
In August
2008, in connection with entering into his employment agreement, Dr. Barnhill
was also granted an option to purchase an aggregate of 6,000,000 shares of the
Company’s common stock at an exercise price of $0.08. The options
vest over a two year period, assuming a minimum share price, and with respect to
a portion of the options, the Company attaining certain performance metrics, as
more fully described in the Option Award.
All of
these issuances of equity securities in 2006, 2007 and 2008 were made in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended.
Item
16. Exhibits and Financial Statement Schedules
The
following exhibits are filed as part of this registration
statement:
Exhibit
|
|
Number
|
Description
|
|
|
3.1
|
Articles
of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form
8-K filed July 18, 2007.
|
|
|
3.1(a)
|
Articles
of Amendment to Articles of Incorporation. Registrant
incorporates by reference Exhibit 99.1 to Form 8-K filed October 10,
2007.
|
|
|
3.2
|
By-Laws.
Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July
18, 2007.
|
|
|
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(a)
|
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.
|
|
|
4.1(b)
|
Copy
of Specimen Certificate for shares of Series A Preferred
Stock. Registrant incorporates by reference Exhibit 4.1(b) to
Form 10-KSB, filed March 31, 2008.
|
|
|
5.1
|
Opinion
of Powell Goldstein LLP
|
|
|
10.1
|
Employment
Agreement with Stephen Barnhill dated August 15,
2008. Registrant incorporates by reference Exhibit 10.2 to Form
8-K, filed August 18, 2008.*
|
|
|
10.1(a)
|
Employment
Agreement with Stephen Barnhill. Registrant incorporates by reference
Exhibit 10.1 to Form 10-KSB, filed March 31, 2008.* |
|
|
10.1(b)
|
First
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.2 to
Form 8-K, filed January 3, 2006.*
|
|
|
10.1(c)
|
Second
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.3 to
Form 8-K, filed September 1, 2006.*
|
|
|
10.1(d)
|
Third
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 10.1(c)
to Form 10-QSB filed August 16, 2007.*
|
|
|
10.1(e)
|
Fourth
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.1 to
Form 8-K filed September 10, 2007.*
|
|
|
10.1(f)
|
Fifth
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.1 to
Form 8-K filed November 6, 2007.*
|
|
|
10.2
|
Employment
Agreement with David Cooper. Registrant incorporates by reference Exhibit
10.4 to Form 10-KSB, filed April 19, 2005.*
|
|
|
10.3
|
Form
of Securities Purchase Agreement. Registrant incorporates by reference
Exhibit 10.6 to Form 10-KSB, filed April 19, 2005.
|
|
|
10.4
|
Form
of Warrant. Registrant incorporates by reference Exhibit 10.7
to Form 10-KSB, filed April 19,
2005.
|
10.5
|
Form
of Securities Purchase Agreement. Registrant incorporates by
reference Exhibit 10.8 to Form 10-KSB, filed April 19,
2005.
|
|
|
10.6
|
Form
of Warrant. Registrant incorporates by reference Exhibit 10.9
to Form 10-KSB, filed April 19, 2005.
|
|
|
10.7
|
Form
of Amendment to Securities Purchase Agreement. Registrant incorporates by
reference Exhibit 10.10 to Form SB-2/A, filed December 14,
2005.
|
|
|
10.8
|
Employment
Agreement with Daniel R. Furth, dated as of December 5,
2005. Registrant incorporates by reference Exhibit 10.11 to
Form SB-2/A, filed December 14, 2005.*
|
|
|
10.8(a)
|
First
Amendment to Employment Agreement with Daniel R.
Furth. Registrant incorporates by reference Exhibit 10.4(a) to
Form 10-QSB filed August 16, 2007.*
|
|
|
10.8(b)
|
Second
Amendment to Employment Agreement with Daniel R.
Furth. Registrant incorporates by reference Exhibit 99.2 to
Form 8-K filed September 10, 2007.*
|
|
|
10.9
|
Employment
Agreement with Robert S. Braswell IV, dated as of January 1,
2006. Registrant incorporates by reference Exhibit 99.1 to Form
8-K, filed February 2, 2006.*
|
|
|
10.10
|
Warrant
Agreement by and between Registrant and William F. Quirk, Jr., dated as of
September 1, 2006. Registrant incorporates by reference Exhibit
99.2 to Form 8-K, filed September 5, 2006.
|
|
|
10.11
|
License
Agreement between the Company and Clarient, Inc. dated July 31,
2007. Registrant incorporates by reference Exhibit 10.1 to Form
8-K filed August 3, 2007.
|
|
|
10.12
|
Patent
License and Settlement Agreement with Ciphergen Biosystems,
Inc. Registrant incorporates by reference Exhibit 10.10 to Form
10-QSB filed August 16, 2007.
|
|
|
10.13
|
Securities
Purchase Agreement by and among the Company, the Cash Purchasers and the
Lender Purchasers. Registrant incorporates by reference Exhibit
10.11 to Form 10-QSB filed August 16, 2007.
|
|
|
10.14
|
Form
of Warrant to Cash and Lender Purchasers. Registrant
incorporates by reference Exhibit 10.14 to Form 10-KSB, filed March 31,
2008.
|
|
|
10.15
|
Amendment
to Stock Purchase Warrant with Dr. Richard Caruso. Registrant
incorporates by reference Exhibit 10.1 to Form 8-K filed August 18,
2008.
|
|
|
10.16
|
Option
Award to Stephen D. Barnhill, M.D., dated August 15,
2008. Registrant incorporates by reference Exhibit 10.3 to Form
8-K filed August 18, 2008.*
|
|
|
10.17 |
License
and Development Agreement by and between the Company and DCL Medical
Laboratories, LLC dated July 14, 2008. |
|
|
16.1
|
Letter
from Porter Keadle Moore LLP regarding change in certifying
accountant. Registrant incorporates by reference Exhibit 16.1
to Form 8-K, filed September 27, 2006.
|
|
|
21.1
|
Subsidiaries
of the Registrant. Registrant incorporates by reference Exhibit
21.1 to Form 10-KSB, filed March 31, 2008.
|
|
|
23.1
|
Consent
of Hancock Askew & Co. LLP
|
|
|
23.2
|
Consent
of Powell Goldstein LLP (contained in Exhibit 5.1)
|
|
|
24.1
|
Power
of Attorney (included with signature pages to this Registration
Statement)
|
_____________________
* |
Indicates management
contract or compensatory plan or arrangement. |
** |
Previously
filed. |
The
undersigned registrant hereby undertakes that:
(1) 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 the registration
statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in
the effective registration statement.
|
|
|
|
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any
material change to such information in the registration
statement.
|
(2) That,
for purposes 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 therein, 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 which remain unsold at the termination of the
offering.
(4) That each prospectus filed
pursuant to Rule 424(b) 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 (§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.
(5) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 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 Securities and Exchange Commission 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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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 September 19 , 2008
|
HEALTH
DISCOVERY CORPORATION |
|
|
|
|
|
By:
|
/s/ Stephen D.
Barnhill
|
|
|
|
Stephen
D. Barnhill, M.D.
|
|
|
|
Chief
Executive Officer
|
|
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that each of the persons whose signature appears below
appoints and constitutes Stephen D. Barnhill his or her true and lawful
attorney-in-fact and agent, acting alone, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to execute any and all amendments (including post-effective
amendments) to the within registration statement (as well as any registration
statement for the same offering covered by this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933), and to file the same, together with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange Commission
and such other agencies, offices and persons as may be required by applicable
law, granting unto said attorney-in-fact and agent, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, acting alone may lawfully do or cause to be
done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities stated and on
the 19th day of September,
2008.
Signature
|
|
Capacity
|
|
|
|
/s/
Michael
Hanbury
|
|
Director
|
|
|
|
II-7