ITEM 1. BUSINESS
Our Company Overview
Health Discovery Corporation (“HDC” or the “Company”) is a machine learning company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that may play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“SVM”) assets in particular have broad applicability in many other fields. Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery. A good example of this is the Company’s joint venture SVM Capital, LLC (“SVM Capital”) that applies SVM technology to the financial markets.
Our Company’s principal asset is its intellectual property, which includes advanced mathematical algorithms called SVM and Fractal Genomic Modeling (“FGM”), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by over 60 patents that have been issued or are currently pending around the world.
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities. In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM and FGM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
Our Technology
HDC owns a patent portfolio of machine learning technology, including certain pioneer patents on SVM. We also have consulting arrangements with clinical specialists and mathematicians responsible for developing our SVM patents for the analysis of data.
The Company’s SVM technology is commonly considered within the context of artificial intelligence. This is a branch of computer science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development of algorithms and techniques that allow computers to learn. Pattern recognition is machine learning with a wide spectrum of applications including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object recognition in computer vision, and robotics.
Support Vector Machines Overview
SVMs are mathematical algorithms that allow computers to sift through large, complex datasets to identify patterns. SVMs are known for their ability to discover hidden relationships in these complex datasets. With the ability to handle what is known as infinite dimensional space, SVMs are broadly considered to be an improvement to neural networks and other mathematical techniques. SVM is a core machine learning technology with strong theoretical foundations and excellent empirical successes.
With their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the Statistical Learning Theory developed by Professor Vladimir Vapnik, SVMs quickly gained attention from the math and science communities due to a number of theoretical and computational merits. This development advanced a new framework for modeling learning algorithms. Within this framework, the fields of machine learning and statistics were merged introducing powerful algorithms designed to handle the difficulties of prior computational techniques.
The generation of learning algorithms that were developed based on this theory have proved to be resistant to the problems imposed by noisy data and high dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization ability. SVMs have been validated in numerous independent academic publications and presentations.
SVMs have become widely established as one of the leading approaches to pattern recognition and machine learning worldwide and have replaced other technologies in a variety of fields, including engineering, information retrieval and bioinformatics. This technology has been incorporated into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies. Educational and research institutions throughout the world have applied SVMs to a wide array of applications, including gene and protein expression analysis, medical image analysis, flow cytometry, and mass spectrometry.
Recursive Feature Elimination - Support Vector Machine Overview
Recursive Feature Elimination (“RFE-SVM”) is an application of SVM that was created by members of HDC’s science team to find discriminate relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns - for instance, a biomarker/genetic expression signature of a disease. The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute most to the desired results. The Company believes that its RFE-SVM patents are currently the only properly issued RFE patents in the world.
Using RFE-SVM, we have been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed. In one micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence. It has been shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool. The Company believes that these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with the pharmacogenetic and toxicological profiling of patients. The RFE-SVM method is also capable of finding those specific genes and proteins that are unhindered by ever-increasing patent protection.
Fractal Genomic Modeling Overview
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software. The fractal technology is used to find discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease versus normal tissues.
The Fractal Genomic Modeling (“FGM”) data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis and prevention of certain diseases. HDC scientists believe that these analytic methods are effective for finding genes implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a host of other diseases, as well as the pharmacogenetic profiling of patients.
FGM technology is designed to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM uses an approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction and analysis of the process, which is the particular object of a study.
Our Business Activity
NeoGenomics License
On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”). Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (“IVD”) test kit development.
Upon execution of the NeoGenomics License, NeoGenomics paid us $1,000,000 in cash and issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012. In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License. Milestone payments will be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics derives from any sublicensing arrangements it may put in place for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System.
NeoGenomics agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetic Interpretation System”, and a “Flow Cytometry Interpretation System.” NeoGenomics has completed both of its one-year extension terms of the license. While those one-year extension terms are complete, the Company and NeoGenomics continue to collaborate on efforts to commercialize the licensed technologies.
If NeoGenomics has not generated $5.0 million of net revenue from products, services and sublicensing arrangements by January 2017, we may, at our option, revoke the exclusivity with respect to any one or more of the initial licensed products, subject to certain conditions.
The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development. We further believe the majority, if not all, of our applications in the medical field will be implemented in conjunction with NeoGenomics.
Plasma Test for Prostate Cancer
NeoGenomics is developing a Blood Test for Prostate Cancer under the direction of Dr. Maher Albitar using the genes patented by HDC. The test is performed on blood plasma and urine rather than only prostate tissue biopsies. NeoGenomics completed Phase I of their research and published the results in 2014. Additionally, NeoGenomics completed Phase II of their prostate test validation in 2014. The results were largely the same as those published regarding Phase I. NeoGenomics is currently conducting a clinical trial for this test, named NeoLAB™ Prostate - Liquid Alternative to Biopsy. NeoGenomics has announced their expectation is to commercially launch this test in 2015.
Cytogenetic Analysis
Cytogenetic analysis is the science of studying chromosomes. Microscopic evaluation of individual chromosomes remains the first step in the evaluation of the human genome. Cytogenetic analysis is performed on almost all patients with hematopoietic diseases (blood cancers such as leukemia and lymphoma) and on a significant number of patients with solid tumors. The collected data is useful for diagnosis, prognosis and monitoring of diseases. Currently, specially trained technicians perform most of the analysis manually. The work is labor-intensive and subjective. Computer automation of this work could significantly reduce cost and improve the quality of the test.
NeoGenomics is currently working on development, validation and commercialization of this new image analysis tool for cytogenetic analysis under the direction of Dr. Maher Albitar. The Company and NeoGenomics have spent a considerable amount of time using SVM Technology to create significant improvement in cytogenetic analysis. NeoGenomics is currently beta testing this co-developed technology within their facilities. One of the goals with this technology is for NeoGenomics to sub-license this technology after successful internal testing and validation. Per the license agreement, HDC will receive a portion of the sub-license revenue generated by NeoGenomics.
Flow Cytometry
Management believes that our efforts to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company, along with NeoGenomics, is now capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data. This test has been licensed to NeoGenomics for final development and work has begun on the further development of this technology.
SVM Capital, LLC
In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.
In November 2012, Atlantic Alpha began auditable formal live trading by applying SVM technology to quarterly fundamental corporate data such as sales, earnings and projected earnings. The SVM algorithm is utilized to select U.S. stocks which are expected to outperform or underperform in the next quarter based on current data while at the same time rendering superior portfolio risk metrics. This application of SVM technology allows the creation of a variety of equity portfolios. SVM Capital has been pleased with the results of the application of the SVM technology.
SVM Capital’s immediate goal is to secure a “seed investor”, i.e. an “anchor tenant” for whom to manage money, which may then lead to capital inflow from other investors. The seed investor may be an institution, family office or individual. To this end, SVM Capital is working both independently and with one or more intermediaries. The long-term strategy is to form hedge funds in other financial markets such as foreign stock markets, debt instruments and commodities. SVM Capital may also consider licensing its technology or using other methods that may lead to monetization.
A thorough exposition of SVM Capital may be found on the appropriate link in HDC’s web page.
Retinalyze
On February 17, 2012, the Company announced the commercial launch of Retinalytics SVMTM, to assist Ophthalmologists and Optometrists in the Detection of Macular Degeneration. The Retinalytics SVMTM product released focuses on age-related macular degeneration (“AMD”).
The volume of images processed were significantly less than were promised by the Company’s partner in the Retinalyze, LLC joint venture and revenues to date from Retinalytics SVMTM have been zero. Due to the failure to market the product by the Company’s partner in Retinalyze, LLC, the Company has ceased it efforts with the product in its current state and does not anticipate revenue from this venture in the future. Additionally, the Company is following the process outlined in the organizational documents for Retinalyze, LLC to dissolve the organization.
Employees
On December 31, 2014, we had 3 executive officers and 2 consultants.
Website Address
Our corporate website address is www.HealthDiscoveryCorp.com. To view our public filings from the home page, select the “Display SEC Filings” tab followed by “SEC Filings.” This is a direct link to our filings with the Securities and Exchange Commission (“SEC”), including but not limited to our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports. These reports are accessible soon after we file them with the SEC.
Governmental Regulation
Our business plan involves discovery in the field of molecular diagnostics. This early discovery process does not involve any governmental regulations or approvals. If we are successful in licensing our discoveries to other companies, FDA approvals may be required before the ultimate product may be sold to consumers. Our current plan is to require the companies licensing our discoveries or technologies to be responsible for the costs involved in such approvals. If we are not successful in licensing these discoveries on these terms or choose to take these discoveries to market ourselves, we may then be subject to applicable FDA regulations and would then bear the costs of such approvals.
We know of no current governmental regulations that will materially affect the Company’s current operations or products. However, if the FDA changes its current position, and decides to regulate laboratory-developed tests (LDT’s) currently regulated by CLIA certification, this could materially affect the development costs and commercialization timelines for our products.
Research and Development
Research and development fees were $99,200 during 2014 and $115,934 for the same period in 2013. The research and development fees in 2014 were related primarily to fees paid to consultants relating to the development work completed as a part of our NeoGenomics License.
Intellectual Property
The Company holds rights to the intellectual property within the “SVM portfolio” that currently consists of fifty-one (51) issued patents along with ten (10) 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 are:
Patent/Application No.
Title
Expiration
Date
U.S. Patent No. 6,128,608
Enhancing Knowledge Discovery Using Multiple Support Vector Machines
05/01/2019
U.S. Patent No. 6,157,921
Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment
05/01/2019
U.S. Patent No. 6,658,395
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/01/2019
U.S. Patent No. 6,714,925
System for Identifying Patterns in Biological Data Using a Distributed Network.
05/01/2019
U.S. Patent No. 6,760,715
Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.
05/01/2019
U.S. Patent No. 6,789,069
Method of Identifying Patterns in Biological Systems and Method of Uses.
05/01/2019
U.S. Patent No. 6,882,990
Method of Identifying Biological Patterns Using Multiple Data Sets.
05/01/2019
U.S. Patent No. 6,944,602
Spectral Kernels for Learning Machines
02/19/2023
U.S. Patent No. 6,996,549
Computer-Aided Image Analysis
04/21/2021
U.S. Patent No. 7,117,188
Methods of Identifying Patterns in Biological Systems and Uses Thereof
05/01/2019
U.S. Patent No. 7,299,213
Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset
03/01/2022
U.S. Patent No. 7,318,051
Methods for Feature Selection in a Learning Machine
02/25/2021
U.S. Patent No. 7,353,215
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
05/07/2022
U.S. Patent No. 7,383,237
Computer-Aided Image Analysis
11/04/2019
U.S. Patent No. 7,444,308
Data Mining Platform for Bioinformatics
08/07/2020
U.S. Patent No. 7,475,048
Pre-Processed Feature Ranking for a Support Vector Machine
08/07/2020
U.S. Patent No. 7,542,947
Data Mining Platform for Bioinformatics and Other Knowledge Discovery
08/07/2020
U.S. Patent No. 7,542,959
Feature Selection Using Support Vector Machine Classifier
05/01/2019
U.S. Patent No. 7,617,163
Kernels and Kernel Methods for Spectral Data
11/9/2021
Patent/Application No.
Title
Expiration
Date
U.S. Patent No. 7,624,074
Methods for Feature Selection in a Learning Machine
08/07/2020
U.S. Patent No. 7,921,068
Data Mining Platform for Knowledge Discovery from Heterogeneous Data Types and/or Heterogeneous Data Sources
05/20/2022
U.S. Patent No. 7,970,718
Feature Selection and for Evaluating Features Identified as Significant for Classifying Data
08/07/2020
U.S. Patent No. 8,008,012
Biomarkers Downregulated in Prostate Cancer
01/24/2022
U.S. Patent No. 8,095,483
Support Vector Machine-Recursive Feature Elimination (SVM-RFE)
08/07/2020
U.S. Patent No. 8,126,825
Method for Visualizing Feature Ranking of a Subset of Features for Classifying Data Using a Support Vector
05/20/2022
U.S. Patent No. 8,209,269
Kernels for Identifying Patterns in Datasets Containing Noise or Transformation Invariance
05/07/2022
U.S. Patent No. 8,275,723
System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source
05/01/2019
U.S. Patent No. 8,293,461
Biomarkers Downregulated in Prostate Cancer
01/24/2022
U.S. Patent No. 8,463,718
Support Vector Machine-Based Method for Analysis of Spectral Data
08/07/2020
U.S. Patent No. 8,489,531
Identification of Co-Regulation Patterns by Unsupervised Cluster Analysis of Gene Expression Data
05/17/2022
U.S. Patent No. 8,543,519
System and Method for Remote Melanoma Screening
05/01/2019
U.S. Patent No. 8,682,810
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2029
Australian Patent No. 764897
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
05/01/2019
Canadian Patent No. 2,330,878
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
European Patent No. 1082646
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
European Patent No. 2296105
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
South African Patent No. 00/7122
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
05/01/2019
European Patent No. 1192595
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/24/2020
Australian Patent No. 779635
Method of Identifying Patterns in Biological Systems and Method of Uses.
10/27/2020
Canadian Patent No. 2,388,595
Method of Identifying Patterns in Biological Systems and Method of Uses
08/07/2020
Japanese Patent No. 506462
Method of Identifying Patterns in Biological Systems and Methods of Uses
08/07/2020
Australian Patent No. 2002243783
Computer Aided Image Analysis
01/23/2022
Canadian Patent No. 2,435,290
Computer Aided Image Analysis
01/23/2022
Patent/Application No.
Title
Expiration
Date
European Patent No.1356421
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
Canadian Patent No. 2,435,254
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
Japanese Patent No. 4138486
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
European Patent No. 1459235
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
Japanese Patent No. 5425814
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2029
European Patent No. 2373816
Methods for Screening, Predicting and Monitoring Prostate Cancer
12/04/2029
European Publication No. 2357582
Method of Identifying Patterns in Biological Systems and Method of Uses
08/07/2020
U.S. Patent Publication No. 2011/0106735
Recursive Feature Elimination Method Using Support Vector Machines
05/01/2019
U.S. Patent Publication No. 2009/0226915
Methods for Screening, Predicting and Monitoring Prostate Cancer
01/24/2022
U.S. Patent Publication No. 2013/0297607
Identification of Pattern Similarities by Unsupervised Cluster Analysis
05/17/2022
Australian Application No. 2009212193
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2029
Chinese Application No. 200980110847.2
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2029
European Publication No. 22528889
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2029
Indian Application No. 5526/CHENP/2010
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2029
U.S. Patent Publication No. 2014/0016843
Computer-Assisted Karyotyping
06/19/2033
European Publication No. 2862113
Computer-Assisted Karyotyping
06/19/2033
HDC also owns intellectual property rights in U.S. patents covering the FGM technology. The FGM portfolio includes two issued patents, which are:
Patent/Application No.
Title
Expiration
Date
U.S. Patent No. 6,920,451
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
01/19/2021
U.S. Patent No. 7,366,719
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets
01/19/2021
Our Competition
HDC conducts its business principally in the diagnostics industry in the field of biomarker discovery and image analysis. The diagnostics industry is highly fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics companies attempting to discover potential new diagnostic products. These companies may:
●
develop new diagnostic products before we or our collaborators are able to;
●
develop diagnostic products that are more effective or cost-effective than those developed by us or our collaborators; or
●
patent protect other intellectual property rights that would limit our ability to develop and commercialize our technology by limiting the ability to use, ours, or our collaborators’, diagnostic products.
The Company competes with companies in the United States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize biomarker discovery and image analysis techniques. These companies may develop products that are competitive with and/or perform the same or similar to the products offered by our collaborators or us. Also, clinical laboratories may offer testing services that are competitive with the products sold by our collaborators or us. The testing services offered by clinical laboratories may be easier to develop and market than test kits developed by us or our collaborators because the testing services are not subject to the same clinical validation requirements that are applicable to FDA-cleared or approved diagnostic test kits.
While a number of companies perform biomarker discovery, we believe that our SVM and SVM-RFE technologies give us a distinct advantage over competing technologies. Neither classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs necessary to produce fully validated biomarkers like the Company’s technology.
Customers and Licensees
On January 6, 2012, we entered into the NeoGenomics License pursuant to which we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding our activities with NeoGenomics.
ITEM 1A.
ITEM 1A. RISK FACTORS
This annual report on Form 10-K 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 but not limited to statements regarding the successful implementation of our services, business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and operations, references to future success, the ability of the Company to utilize its SVM and FGM assets and other intellectual property to identify biomarkers which can be used in diagnostic tests, the ability to enter into agreements with strategic partners for the development and commercialization of diagnostic tests, the ability of the Company to develop a product line, the ability to achieve profitability, about anticipated size of the market for diagnostic tests, the capabilities of molecular diagnostic tests, regarding working with our collaborators resulting in revenue for the Company, the sufficiency of our liquidity and capital resources, and other such matters. All such statements are forward-looking statements and are based on the beliefs of, assumptions made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause the actual results and performance of our company to be materially different from future results or performance expressed or implied by such statements.
The cautionary statements set forth in this “Risk Factors” section and elsewhere in this annual report identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Among others, factors that could adversely affect actual results and performance include failure to successfully develop a profitable business, delays in identifying and enrolling customers, the inability to retain a significant number of customers, effectiveness and execution of licensing efforts, our ability to employ and retain key employees and experienced scientists, our access to tissue samples, loss of the ability to use certain patent rights, the inability to continue to protect our proprietary information, competitive conditions, our ability to remain competitive in a rapidly changing technological environment, acceptance of our products by the market, volatility in U.S. and global stock markets generally and in our stock price specifically, potential shareholder claims which could result in substantial dilution to our shareholders, economic conditions generally, the effect of current difficulties in the credit markets on our business, factors beyond our control, including, but not limited to, catastrophes (both natural and man-made), earthquakes, floods, fires, explosions, acts or terrorism or war, and the risks identified elsewhere in this report. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. All forward looking statements and cautionary statements included in this report are made as of the date hereof based on information available to us, and we assume no obligation to update any forward looking statement or cautionary statement.
Risks Related to Our Business
Our financial statements have been prepared on a going concern basis.
We have prepared our financial statements on a “going concern” basis, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.
Our ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing our technologies to the market. The outcome of these matters cannot be predicted at this time. Our financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.
If the going concern assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments may be material.
At December 31, 2014 we had $7,642 cash on hand along with NeoGenomics Stock for sale worth $362,373. As a result, the Company estimates cash will be depleted by the fourth quarter of 2015 unless the Company is able to raise additional equity capital. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding our liquidity and capital resources.
We are a developing business and a high-risk company.
We are a high-risk company in a volatile industry. Investors should recognize that an investment in our company is risky and highly speculative. We are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development. Failure to implement and execute our business and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We must successfully overcome these and other business risks.
We may incur future losses, and we may never achieve or sustain profitability.
Our expenses are expected to exceed our income until we successfully complete transactions resulting in significant revenue. Accordingly, our capital will be decreased to pay these operating expenses. If we ever become profitable, of which there is no assurance that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these operating expenses. We may never achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
We will need additional financing.
We will be required to raise additional capital to finance our activities. We cannot assure prospective investors that we will not need to raise additional capital or that we would be able to raise sufficient additional capital on favorable terms, if at all. There can be no assurance that additional financing will be available, if required, on terms acceptable to us. If we fail to raise sufficient funds or do not increase our revenues from licensing our technology or performing services, we may have to cease operations or materially curtail our business operations. If we raise additional capital by issuing equity securities, our stockholders may experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
Our operating results may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and acceptance of our services. Factors that may cause our results to vary by period include:
· payments of milestones, license fees or research payments under the terms of our increasing number of external alliances;
· changes in the demand for our products and services;
· the nature, pricing and timing of products and services provided to our collaborators;
· acquisition, licensing and other costs related to the expansion of our operations;
· reduced capital investment for extended periods;
· losses and expenses related to our investments in joint ventures and businesses;
· regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information; and
· changes in intellectual property laws that affect our rights in genetic information that we sell and license.
Advisory and personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Some of these expenses cannot be adjusted quickly in the short term. If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular period.
Because we do not intend to pay dividends on our Common Stock, holders of our Common Stock will benefit from an investment in our Company only if it appreciates in value.
We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain the Company’s future earnings, if any, to finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which its investors purchased their shares.
Our stock price has been, and is likely to continue to be, highly volatile.
Our stock price has, since September 1, 2003, traded as high as $0.60 and as low as $0.01. Our stock price could fluctuate significantly due to a number of factors beyond our control, including:
· variations in our actual or anticipated operating results;
· sales of substantial amounts of our stock;
· announcements about us or about our competitors, including technological innovation or new products or services;
· litigation and other developments related to our patents or other proprietary rights or those of our competitors;
· conditions in the life sciences, pharmaceuticals or genomics industries; and
· Governmental regulation and legislation.
In addition, the stock market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our actual operating performance.
In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation. If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could affect our profitability.
Our approach of incorporating ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively new and may not be accepted by our potential customers or collaborators.
We intend to create a fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically relevant and economically significant biomarkers. Our potential customers and collaborators may be reluctant to accept our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove to be ineffective or not as effective as other methods. For example, our products and technologies may prove to be ineffective if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model. If our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective, our business may fail or we may never become profitable.
Even if our computational technologies are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products based on them.
Even if our computational technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting from them to produce new drugs, therapies, diagnostic products or other life science products. Despite recent scientific advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement in diseases and in other life processes is not well understood. Only a few therapeutic products based on the study of and discoveries relating to genes or proteins have been developed and commercialized. If our customers are unable to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.
The industries in which we are active are evolving rapidly, and we may be unable to keep pace with changes in technology.
The pharmaceutical and biotechnology industries are characterized by rapid technological change. This is especially true of the data-intensive areas of such technologies. Our future success will largely depend on maintaining a competitive position in the field of drug, therapeutics and diagnostic products discovery. If we fail to keep pace with changes in technology, our business will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products and technologies. Products or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics discovery technologies. We may not be able to make the necessary enhancements to our technologies to compete successfully with newly emerging technologies.
We face intense competition, and if we are unable to compete successfully we may never achieve profitability.
The markets for our products and services are very competitive, and we expect our competition to increase in the future. Although we have not identified specific companies that provide the full suite of services that we do, we compete with entities in the U.S. and worldwide that provide products and services for the analysis of genomic information and information relating to the study of proteins (proteomic information) or that commercializes novel genes and proteins. These include genomics, pharmaceutical and biotechnology companies, academic and research institutions and government and other publicly funded agencies. We may not be able to successfully compete with current and future competitors. Many of our competitors have substantially greater capital resources, research and development staff, facilities, manufacturing and marketing experience, distribution channels and human resources than we do. This may allow these competitors to discover or to develop products in advance of us or of our customers.
Some of our competitors, especially academic and research institutions and government and other publicly funded agencies, may provide for free services or data similar to the services and data that we provide for a fee. Moreover, our competitors may obtain patent and other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or commercialize our discoveries, products and services. If we are unable to compete successfully against existing or potential competitors, we may never achieve profitability.
Our management may be unable to address future growth.
We anticipate that if we experience a period of growth in our customer base and market opportunities, a period of significant expansion of the Company will be required. This expansion will place a significant strain on our management, operational and financial resources. To manage future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
If our business does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share or recover investments in our technologies.
Technologies in the biomarker industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors, limit our growth and damage our reputation and business.
The future success of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial selection. However, our business or others may make rapid technological developments, which could result in our technologies, products or services becoming obsolete before we are able to recover the expenses incurred to develop them.
If our business cannot enter into strategic alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services or continue to commercialize existing products or services.
We may be unable to maintain or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.
We also depend on collaborators for the development and manufacture of complex instrument systems and chemicals and other materials that are used in laboratory experiments. We cannot control the amount and timing of resources our collaborators devote to our products. We may not be able to enter into or satisfactorily retain these research, development and manufacturing collaborations and licensing agreements, which could reduce our growth and harm our competitive position.
We may not be able to find business partners to develop and commercialize product candidates derived from our discovery activities.
Our strategy for the development and commercialization of diagnostic biomarkers and therapeutic proteins depends on the formation of collaborations or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities. We cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.
Our dependence on licensing and other collaboration agreements makes us heavily dependent on our collaborators.
We may not be able to enter into licensing or other collaboration agreements on terms favorable to us. Even if we do enter into an acceptable agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities. In most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
In addition, we may not be able to control the amount and timing of resources our collaborators devote to the product candidates and collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s business strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us. Furthermore, our rights in any intellectual property or products that may result from our collaborations may depend on additional investment of money that we may not be able or willing to make.
Potential or future collaborators may also pursue alternative technologies, including those of our competitors. Disputes may arise with respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be significantly harmed.
If we are unable to hire or retain key personnel or sufficient qualified employees, we may be unable to successfully operate our business.
Our business is highly dependent upon the continued services of our executive team and board of directors. While certain members of our senior management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability to compete. The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse effect upon our business, as well as our relationships with our potential customers. We do not carry key person life insurance on any member of our senior management. Furthermore, competition for highly qualified personnel in our industry and geographic locations is intense. Our business would be seriously harmed if we were unable to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.
We may not be able to employ and retain experienced scientists, mathematicians and management.
Technologies in our industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected revenues and earnings.
If our access to tissue samples or to genomic data or other information is restricted, or if this data is faulty, our business may suffer.
To continue to build our technologies and related products and services, we need access to third parties’ scientific and other data and information. We also need access to normal and diseased human and other tissue samples and biological materials. We may not be able to obtain or maintain such access on commercially acceptable terms. Some of our suppliers could become our competitors and discontinue selling supplies to us. Information and data from these suppliers could contain errors or defects that could corrupt our databases or the results of our analysis of the information and data. In addition, government regulation in the United States and other countries could result in restricted access to, or use of, human and other tissue samples. Although currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may suffer.
The sales cycle for some of our products and services is lengthy. We expend substantial funds and management effort with no assurance of successfully selling our products or services.
Our ability to obtain customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate their efforts in drug and diagnostics discovery. Our ability to obtain customers for our therapeutic or diagnostic product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed therapeutic or diagnostic purposes. Our ability to obtain customers will also depend on our ability to successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is typically lengthy and may take more than 12 months.
An inability to protect our proprietary data, technology or products may harm our competitive position.
If we do not adequately protect the intellectual property underlying our products and services, competitors may be able to develop and market the same or similar products and services. This would erode our competitive advantage. In addition, the laws of some countries do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.
We use contractual obligations to protect a significant portion of our confidential and proprietary information and know-how. This includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and services. However, these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how. Customers, employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.
In addition, we have applied for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have discovered using these technologies. We plan to continue to apply for patents covering parts of our technologies and discoveries, as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will be upheld if challenged. The patent positions of biotechnology related companies are generally uncertain and involve complex legal and factual questions. Legislative changes and/or changes in the examination guidelines of governmental patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In contrast to recent court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed to identifying relationships between small groups of genes and proteins that are useful for diagnosing, treating and prognosing diseases and other conditions.
Our success depends in large part on our ability to patent our discoveries.
Our success depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize. We face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries. We cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered or may discover in the future. Our patent applications may conflict with prior applications of third parties or with prior publications. They may not result in issued patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any competitive advantages. U.S. and other patent applications ordinarily remain confidential for 18 months from the date of filing. As a result, patent applications that we file which we believe are novel at the time of filing may be determined at a later stage to be inconsistent with earlier applications. Additionally, the scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our competitive position. Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to the business. The issuance of a patent is not conclusive as to its validity or its enforceability. Federal courts may invalidate these patents or find them unenforceable. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies. Any of these events could materially harm our business or financial results.
Litigation or other proceedings or third party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or require us to spend time and money to modify our operations.
The technology that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies engage in other genomic-related businesses. If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies and products, we could experience serious harm. If litigation is commenced against us alleging intellectual property rights infringement or if we initiate a lawsuit to assert claims of infringement, protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others, we may incur significant costs in litigating, whether or not we prevail in such litigation. Regardless of the outcome, litigation can be very costly. These costs would also include diversion of management and technical personnel to defend us against third parties or to enforce our patents (once issued) or other rights against others. In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could prevent us from being able to further develop or commercialize. Further, these lawsuits could result in the invalidation or limitation of the scope of our patents or the forfeiture of the rights associated with these patents. This could also result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. If we are not able to obtain these licenses at a reasonable cost, if at all, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products, all of which could negatively impact our business, financial condition or results of operations. Moreover, during the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be negative, which could cause the market price of our common stock to decline.
Many of our services will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation and licensing. If we are found to be infringing the intellectual property of others, we could be required to stop the infringing activity, or we may be required to design around or license the intellectual property in question. If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our services, which could result in reduced revenue.
We may acquire or make strategic investments in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.
If opportunities arise, we may consider making acquisitions of or investments in businesses, technologies, services or products. These activities may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material adverse effect on the operating results of our business. Moreover, even if we acquire complementary businesses or technologies, we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.
Difficulties in integrating an acquired business or managing an investment could disrupt our business, distract our management and employees and increase our expenses. Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating to intangible assets. Sizable acquisitions or investments may also divert senior management from focusing on our existing business plan. Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders may be diluted, which could affect the market price of our stock.
We have identified a material weakness in our internal accounting control over financial reporting.
Management has concluded that our internal control over financial reporting was not effective as of December 31, 2014. Our Chief Executive Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.
All internal control systems no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Risks Related to Our Industry
There are many risks of failure in the development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development and commercialization of these types of products.
Risks of failure are inseparable from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These risks include the possibility that any of these products will:
· be found to be toxic or ineffective;
· fail to receive necessary regulatory approvals;
· be difficult or impossible to manufacture on a large scale;
· be uneconomical to market;
· fail to be developed prior to the successful marketing of similar products by competitors; or
· be impossible to market because they infringe on the proprietary rights of third parties or compete with superior products marketed by third parties.
We are dependent on our customers’ commercialization of our discoveries. Any of these risks could materially harm our business and financial results.
The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.
The trend towards consolidation in the pharmaceutical and biotechnology industries may negatively affect us in several ways. These consolidations usually involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources and technological capabilities, thus strengthening competition in the industry. In addition, continued consolidation may result in fewer customers for our products and services.
We may be subject to product liability claims if products derived from our products or services harm people.
We may be held liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise unsuitable. These risks are inherent in the development of genomics, functional genomics and pharmaceutical products. If we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total assets. In addition, such claims could cause us to incur substantial costs, divert management’s attention from executing the Company’s business plan and subject us to negative publicity even if we prevail in our defense of such claims.
Our business and the products developed by our collaborators may be subject to governmental regulation.
New therapeutic or diagnostic products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process in the United States and other countries before it can be marketed. It may be several years, or longer, before any therapy or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues. This may delay or prevent us from becoming profitable. Changes in policies of regulatory bodies in the United States and in other countries could increase the delay for each new therapy and diagnostic products.
Even if regulatory approval is obtained, a product on the market and its manufacturer are subject to continuing review. Discovery of previously unknown problems with a product may result in withdrawal of the product from the market.
Although we intend to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities to file regulatory approval applications and generally direct the regulatory review process. We cannot be certain whether they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all. If they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until clearance can be obtained, if at all. This will in turn reduce our chances of receiving various forms of payments, including those relating to sales of marketed therapeutic or diagnostic products by them.
The law applicable to us may change in a manner that negatively affects our prospects.
We must comply with various legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements, which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, would result in adverse consequences.
If ethical and other concerns surrounding the use of genetic information become widespread, there may be less demand for our products and services.
Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to various conditions, particularly for those that have no known cure. Any of these scenarios could reduce the potential markets for our technologies in the field of predictive drug response, which could materially harm our business and financial results.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES
We do not own any real property. We lease 350 square feet of office space in Atlanta, Georgia, pursuant to a month-to-month lease dated April 1, 2013. We currently pay base rent in the amount of $600 per month. Our principal executive office is located at 4243 Dunwoody Club Drive, Suite 202, Atlanta, Georgia, and our telephone number is (678) 336-5300.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 17, 2013, the Company received a Civil Investigative Demand (the “Demand”) from the Federal Trade Commission of the United States of America (the “FTC”) relating to the Company’s MelApp software application. In the Demand, the FTC has requested information relating to potentially unfair or deceptive acts or practices related to (i) false advertising and (ii) consumer privacy and data security, in violation of Trade Commission Act, 15 U.S.C. Sections 45 and 42.
On February 23, 2015, the FTC notified the Company of its approval, by a vote of 4-1, to accept an Agreement Containing Consent Order (“Agreement”). This Agreement is for settlement purposes only. The Company neither admits nor denies any of the allegations, except as specifically stated in the Agreement. The Company believes the effort to contest this matter with the FTC would require funds greater than the Company has at its disposal.
The Agreement will, among other things, bar the Company from claiming that any device detects or diagnoses melanoma or its risk factors, or increases users’ chances of early detection, unless the representation is not misleading and supported by competent and reliable scientific evidence in the form of human clinical testing of the device. The Agreement also prohibits the Company from making any other misleading or unsubstantiated claims about a device’s health benefits or efficacy, unless the representation is not misleading and supported by competent and reliable scientific evidence in the form of human clinical testing of the device. Finally, the Company must pay $17,963 to the FTC.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Bulletin Board under the symbol HDVY. The range of closing prices for our common stock, as reported on Bloomberg.com during each quarter of the last two fiscal years was as follows. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
Holders of Record
As of March 31, 2015, there were approximately 290 holders of record of our common stock.
Dividends
We have not paid any cash dividends for common shares since inception, and we do not anticipate paying any in the foreseeable future on common shares. We intend to retain future earnings, if any, to support the development and growth of our business. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends. If the Company were to pay dividends, the holders of the shares of the Series C Preferred Stock have a right to first receive, or simultaneously receive, a dividend on each outstanding share of Series C Preferred Stock on an as if converted to common stock basis.
The Company has had limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital investment in order to fund operations. Accordingly, depending on the Company’s financial condition, it may not be able to pay any dividends on any shares of its Capital Stock. For further discussion of the Company’s liquidity and capital resources, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Sales of Unregistered Securities
In connection with their appointment to the Board of Directors, on July 25, 2013 the Company granted to Mr. Henry Kaplan, Mr. Kevin Kowbel, and Mr. Eric R. Winger, each an option to purchase 1,500,000 shares of the Company’s common stock. The options vested 250,000 shares every six months, have an exercise price of $0.03, and expire on July 25, 2023. The fair value of each option granted is $0.02 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.91%, an expected life of 5 years, and volatility of 98%. The aggregate computed value of these options is $60,124, and this amount will be charged as an expense over the three-year vesting period. Upon Mr. Kowbel’s subsequent appointment as Interim CEO, Mr. Kowbel voluntarily returned his options to the Company and agreed to accept no compensation for his service as CEO until the Company is financially stable.
In connection with his appointment to the Board of Directors, on October 21, 2013, the Company granted to Mr. William F. Quirk, Jr. an option to purchase 1,500,000 shares of the Company’s common stock. This option grant is consistent with what has been granted to other board members. The options vest 250,000 shares every six months, have an exercise price of $0.036, and expire on October 21, 2023. The fair value of each option granted is $0.0267 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.91%, an expected life of 5 years, and volatility of 96%.
Also, on October 21, 2013, the Company granted options to purchase 6,000,000 shares of the Company’s common stock to a group of employees and consultants in recognition of their efforts to lower the Company’s monthly expenditures and compensation and their continuing contributions to the Company. The options vest over a three-year period, have an exercise price of $.036, and expire on October 21, 2023. Within the group of 6,000,000 options, the Company’s Vice President, Mark A. Moore, Ph.D., received an option to purchase 1,000,000 shares of the Company’s common stock and the Company’s Senior Vice President, Hong Zhang, Ph.D., received an option to purchase 750,000 shares of the Company’s common stock. The non-cash charge of $203,931 for the fair value of these options will be recognized as an expense over the three-year vesting period.
All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate Overview
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our SVM assets in particular have broad applicability in many other fields. Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by over 60 patents that have been issued or are currently pending around the world.
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities. In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM and FGM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
Operational Activities
The Company markets its technology and related developmental expertise to prospects in the healthcare, biotech, and life sciences industries. Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts may produce favorable results in the future.
NeoGenomics License
On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”). Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (IVD) test kit development.
Upon execution of the NeoGenomics License, NeoGenomics paid us $1,000,000 in cash and issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012. In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License. Milestone payments will be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics derives from any sublicensing arrangements it may put in place for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System.
NeoGenomics agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetic Interpretation System”, and a “Flow Cytometry Interpretation System.” NeoGenomics has completed both of its one-year extension terms of the license. While those one-year extension terms are complete, the Company and NeoGenomics continue to collaborate on efforts to commercialize the licensed technologies.
If NeoGenomics has not generated $5.0 million of net revenue from products, services and sublicensing arrangements by January 2017, we may, at our option, revoke the exclusivity with respect to any one or more of the initial licensed products, subject to certain conditions.
The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development. We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with NeoGenomics.
Plasma Test for Prostate Cancer
NeoGenomics is developing a Blood Test for Prostate Cancer under the direction of Dr. Maher Albitar using the genes patented by HDC. The test is performed on blood plasma and urine rather than only prostate tissue biopsies. NeoGenomics completed Phase I of their research and published the results in 2014. Additionally, NeoGenomics completed Phase II of their prostate test validation in 2014. The results were largely the same as those published regarding Phase I. NeoGenomics is currently conducting a clinical trial for this test. NeoGenomics has announced their expectation is to launch this test in 2015.
Cytogenetic Analysis
Cytogenetic analysis is the science of studying chromosomes. Microscopic evaluation of individual chromosomes remains the first step in the evaluation of the human genome. Cytogenetic analysis is performed on almost all patients with hematopoietic diseases (blood cancers such as leukemia and lymphoma) and on a significant number of patients with solid tumors. The collected data is useful for diagnosis, prognosis and monitoring of diseases. Currently, specially trained technicians perform most of the analysis manually. The work is labor-intensive and subjective. Computer automation of this work could significantly reduce cost and improve the quality of the test.
NeoGenomics is currently working on development, validation and commercialization of this new image analysis tool for cytogenetic analysis under the direction of Dr. Maher Albitar. The Company and NeoGenomics have spent a considerable amount of time using SVM Technology to create significant improvement in cytogenetic analysis. NeoGenomics is currently beta testing this co-developed technology within their facilities. One of the goals with this technology is for NeoGenomics to sub-license this technology after successful internal testing and validation. Per the license agreement, HDC will receive a portion of the sub-license revenue generated by NeoGenomics.
Flow Cytometry
Management believes that our efforts to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company, along with NeoGenomics, is now capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data. This test has been licensed to NeoGenomics for final development and work has begun on the further development of this technology.
SVM Capital, LLC
In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.
In November 2012, Atlantic Alpha began auditable formal live trading by applying SVM technology to quarterly fundamental corporate data such as sales, earnings and projected earnings. The SVM algorithm is utilized to select U.S. stocks which are expected to outperform or underperform in the next quarter based on current data while at the same time rendering superior portfolio risk metrics. This application of SVM technology allows the creation of a variety of equity portfolios. SVM Capital has been pleased with the results of the application of the SVM technology.
SVM Capital’s immediate goal is to secure a “seed investor”, i.e. an “anchor tenant” for whom to manage money, which may then lead to capital inflow from other investors. The seed investor may be an institution, family office or individual. To this end, SVM Capital is working both independently and with one or more intermediaries. The long-term strategy is to form hedge funds in other financial markets such as foreign stock markets, debt instruments and commodities. SVM Capital may also consider licensing its technology or using other methods that may lead to monetization.
A thorough exposition of SVM Capital may be found on the appropriate link in HDC’s web page.
Retinalyze
On February 17, 2012, the Company announced the commercial launch of Retinalytics SVMTM, to assist Ophthalmologists and Optometrists in the Detection of Macular Degeneration. The Retinalytics SVMTM product released focuses on age-related macular degeneration (“AMD”).
The volume of images processed were significantly less than were promised by the Company’s partner in the Retinalyze, LLC joint venture and revenues to date from Retinalytics SVMTM have been zero. Due to the failure to market the product by the Company’s partner in Retinalyze, LLC, the Company has ceased it efforts with the product in its current state and does not anticipate revenue from this venture in the future. Additionally, the Company is following the process outlined in the organizational documents for Retinalyze, LLC to dissolve the organization.
Intellectual Property Developments
In May 2014, the European Patent Office granted a European patent to the Company for its method for screening for prostate cancer using urine or prostate tissue based on four genes identified using the Company’s proprietary RFE algorithm.
In July 2014, U.S. Patent No. 5,649,068, the original patent covering support vector machines (SVM), which the Company had licensed from Lucent Technologies GRL Corporation, expired. The expiration of the patent terminated the license as well as the Company’s obligation to pay any further license fees for use of the basic SVM technology.
The Company now holds the exclusive rights to 53 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets. The Company also has 10 pending U.S. and foreign patent applications covering uses of the SVM technology as well as diagnostic methods that have been discovered using the SVM technology. The reduction in the total number of issued and pending patents during 2014 resulted from the Company’s decision to allow certain foreign patents issued and/or filed in countries that were deemed to have lower strategic value to lapse. In addition, a few U.S. patents that were either near the ends of their terms and/or had parallel applications with broader claims in force were allowed to expire. In addition, significant changes in the U.S. Patent Laws relating to the eligibility of certain subject matter for patent protection influenced the Company’s decision to abandon a few of its pending U.S. applications. This in turn reduced the Company’s total expenses for patent maintenance.
Intel Update
The Company’s patent application that was submitted to provoke an interference with Intel’s Patent No. 7,685,077 remains pending. The application file was transferred to the U.S. Patent Office’s Interference Division in December 2014 and is awaiting further action.
Inflation
The Company does not expect that inflation or changing prices will have a material effect on revenues or income.
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
Revenue
Since December 31, 2005, the Company has received cash from revenue generating activities totaling $3,974,928, which consists of recorded revenue of $3,783,300 through December 31, 2014 and deferred revenue yet to be recognized of $191,628 at December 31, 2014.
For the year ended December 31, 2014, revenue was $1,032,127 compared with $1,053,607 in revenue for the year ended December 31, 2013. Revenue is recognized for licensing and development fees over the period earned, which in most cases is the length of the license. The revenue recognized in 2014 was primarily the recognition of revenue of $981,600 associated with our NeoGenomics License, which also contributed to revenue recorded in 2013. As of December 31, 2014, the Company had deferred revenue of $191,628, which includes cash received but not yet recognized as revenue. Deferred revenue was $1,216,616 at December 31, 2013. The decrease in revenue recognized is due to the revenue recognition of the license agreement with NeoGenomics.
Operating and Other Expenses
Amortization expense, which is the amortization of costs of acquiring or filing of patents over their estimated useful lives, was $262,719 for the twelve months ended December 31, 2014 and 2013.
Professional and consulting fees totaled $161,600 for 2014 compared with $714,701 for 2013. These fees consist primarily of patent filing and maintenance costs, consulting fees, and accounting fees. The substantial decrease was due to a decrease in consulting services provided to the Company, specifically consulting fees paid to a former officer of the Company and a management consultant.
Legal fees were considerably lower in 2014 with fees of $58,950 during the year ended December 31, 2014, versus $269,961 during the same period 2013. This decrease was a result of costs during 2013 associated with the Company’s response to the Federal Trade Commission’s Civil Investigative Demand and other legal matters incurred during by previous management teams.
Research and development fees were $99,200 during 2014 and $115,934 for 2013. The research and development fees in 2014 and 2013 were related primarily to fees paid to consultants for the development work completed as a part of our NeoGenomics License.
Compensation expense of $249,475 for the twelve months ended December 31, 2014 was significantly lower than the $524,144 reported for the comparable period of 2013. The decrease is attributed to the departure of a highly compensated former officer of the Company.
Other general and administrative expenses decreased from $418,221 in 2013 to $161,735 in 2014. This decrease was due to the elimination of excessive and non-essential expenses by the new leadership beginning in August 2013.
Income (Loss) from Operations
The income from operations for the twelve months ended December 31, 2014 was $38,448 compared to a loss from operations of $1,252,073 for the prior year. This significant swing to profitability was due to a disciplined approach by the new leadership team beginning in August 2013 to reduce spending.
Other Income and Expense
The Company received a portion of the NeoGenomics license fee in NeoGenomics stock. The Company has chosen to measure the gain or loss on the value of this asset using the fair value option method. For the year ended December 31, 2014, the unrealized loss on NeoGenomics stock held at the end of the reporting period was $199,894, which is recorded as other expense in the statements of operations. In addition, the Company realized a gain on the sale of NeoGenomics stock of $338,087 in 2014. During the same period in 2013, the Company reported an unrealized loss of $288,600 and realized a gain on the sale of NeoGenomics stock of $815,753.
The previous Board of Directors negotiated a settlement agreement in July 2013 with Mr. Steve Barnhill, the former Chairman and Chief Executive Officer of the Company. Under the terms of the Settlement Agreement, (i) the Company paid $50,000 to, or for the benefit of, Mr. Barnhill. As a result, the Company recognized a settlement expense of $50,000 in 2013. For the period ending December 31, 2014, there were no settlement expenses.
Net Income (Loss)
The net income for the twelve months ended December 31, 2014 was $176,641 compared to a net loss of $774,920 for the twelve months ended December 31, 2013. This first ever annual net income in 2014 compared to the significant loss in 2013 was due primarily to the elimination of excessive compensation and unnecessary expenditures beginning in August 2013.
Net income per share attributable to common shareholders was $0.0004 versus a net loss per share of $0.0040 for twelve months ended December 31, 2014 and 2013, respectfully.
Liquidity and Capital Resources
At December 31, 2014, the Company had $7,642 in cash and total current liabilities of $656,644. The primary amount of current liabilities relates to $613,256 in dividends payable and accounts payable. Additionally, we continue to sell our NeoGenomics Stock in order to fund operations. Although the NeoGenomics Stock has increased in value since the initial acquisition date, the number of shares and amount of cash we can generate from the sale of NeoGenomics Stock is subject to fluctuating market and price conditions. As a result we will not have sufficient resources to meet all of our current obligations unless the Company is able to secure funds via licensing activity or other forms of fund raising either in the debt or equity markets. None of these options are definitive and there is no guarantee the Company will be successful in these fund raising efforts. The Company estimates cash will be depleted by the fourth quarter of 2015 unless the Company is able to raise additional capital.
At December 31, 2014, the Company had no contractual obligations relating to accrued liabilities or office lease.
The Company has relied primarily on equity and debt financing for liquidity. The Company produced sales, licensing, and developmental revenue starting in late 2005 and must increase revenues in order to generate sufficient cash to continue operations. The Company's plan to have sufficient cash to support operations is comprised of selling its NeoGenomics Stock, generating revenue through licensing its patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing. The Company has been unable to generate significant revenue, as further described above. As a result, the Company has implemented a cash conservation program. Specifically, the Company has eliminated several highly compensated former employees and consultants. The new management team has significantly reduced their compensation. Our Interim Chief Executive Officer, who receives no salary or compensation for his work on behalf of the Company, leads this effort. This effort has reduced the monthly expenditures or "burn rate". In comparison, the previous management teams’ monthly burn rates were as high as $235,000 per month in 2012 and early 2013.
Cash Flow from Operating Activities
For the year ended December 31, 2014, the Company had a net income of $176,641 with $736,169 of cash being used by operating activities. During 2014, $499,820 was provided by investment activities solely from the sale of 113,100 NeoGenomics shares that were received as a part of the NeoGenomics License signed in January 2012. In addition, there was $172,000 provided by financing activities during 2014 resulting from proceeds received from Series C Preferred Stock issuance. As a result, the Company realized a net decrease of cash of $64,349 during the year ended December 31, 2014.
The Company has taken steps to reduce the Company's expenditures in order to considerably reduce the monthly "burn rate". These steps included reducing expenses and allocating our remaining cash reserves for our operational requirements at a reduced level.
Cash Flow from Financing Activities
In the fourth quarter of 2013, the Board of Directors authorized issuing Series C Preferred Shares. As of December 31, 2014, the Company issued 6,640,000 preferred shares at $0.05 for a total of $332,000. The Series C Preferred Shares feature $0.03 warrants and $0.03 contingency warrants. The contingency warrants will be issued only if the company has not attained profitability by the end of the first quarter 2016. This funding is anti-dilutive because the purchase price is significantly higher than the current 180-day average share price.
The Series B Preferred Stock accrued dividends at the rate of 10% of the Series B Original Issue Price per year, and was to be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion.
No dividend payment will be made if, after the payment of such dividend, the Company would not be able to pay its debts as they become due in the usual course of business, or the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved, to satisfy the preferential rights upon the dissolution to shareholders whose preferential rights are superior to those receiving the dividend.
Dividends have been accrued for the Series B Preferred Stock in the amount of $373,346 as of December 31, 2014 and $308,724 as of December 31, 2013. The Company has given the Series B holders the choice of either (1) Common Stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to defer payment of the dividend in cash until the Company is able to, at the sole discretion of the Company. At December 31, 2014, the entire accrued dividend is recorded as a current liability in the amount of $373,346.
Per the agreement for the Series B Preferred Stock, the Company converted 8,827,500 shares of Series B Preferred Stock to Common Stock during the fourth quarter 2014. The Company also gave the Series B holders the choice to receive their accrued dividend paid in common stock at value of $.05 per share or delay payment of their accrued dividend paid in cash when the Company is able to at the Company’s discretion.
The Company has relied primarily on equity funding plus debt financing for liquidity. In the longer term, the Company plans to generate additional cash from its licensing arrangement with NeoGenomics. While the Company has produced limited revenue, it must continue to do so in order to generate sufficient cash to continue operations. The Company does not have sufficient cash to support operations until it is able to generate revenue through royalty payments from licensing deals from its patent portfolio and development fees for providing services related to those patents. There can be no assurance that the Company will be able to fully implement its cash conservation program, sell sufficient number of NeoGenomics shares to fund ongoing operations, or generate sufficient revenues from the NeoGenomics License that would permit funding of ongoing operations. In such event, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings. There can be no assurance that the Company will be able to secure such funding.
Critical Accounting Policies, Estimates and Assumptions
We consider our accounting policies related to revenue recognition, impairment of intangible assets and stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which 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 events or changes in circumstances such as:
· the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
· loss of legal ownership or title to the asset;
· significant changes in our strategic business objectives and utilization of the asset(s); and
· the impact of significant negative industry or economic trends.
If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
Revenue Recognition
We recognize revenue principally from license and royalty fees for intellectual property and from development agreements with research partners. Each element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; (iv) collectability is reasonably assured, and (v) both title and the risks and rewards of ownership are transferred to the buyer. We are required to make significant estimates involving our recognition of revenue from license and royalty fees. Our license and royalty fees revenue estimates depend upon our interpretation of the specific terms of each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period of time to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received. Changes to these assumptions or market conditions could cause changes in revenues.
Share-Based Compensation
Share-based compensation expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe it is important for investors to be aware of the high degree of subjectivity involved when using option-pricing models to estimate share-based compensation. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and we employ different assumptions in future periods, the compensation expense that we record could differ significantly from what we have recorded in the current period.
For share-based awards, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise, and post-employment termination behavior; however, due to the limited history of our Company, such data is limited. We estimated the expected life will be substantially longer than the vesting period given the early stage 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. For criteria share based award with vesting contingent upon meeting a market condition, we also make assumptions as to the probability of the market condition being met.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The following financial statements are included beginning on page of this report:
Page
Reports of Independent Registered Public Accounting Firms
Balance Sheets as of December 31, 2014 and 2013
Statements of Operations for the years ended December 31, 2014 and 2013
Statements of Stockholders’ Equity for the years ended December 31, 2014 and 2013
Statements of Cash Flows for the years ended December 31, 2014 and 2013
Notes to Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective December 19, 2014, the Company approved the dismissal of Hancock Askew & Co., LLP (“Hancock Askew”) as the Company’s independent registered public accounting firm. Hancock Askew had been the Company’s independent registered public accounting firm since September 21, 2006.
Hancock Askew’s report on the financial statements of the Company as of and for the fiscal years ended December 31, 2012 and 2013 did not contain any adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except their report dated March 31, 2014 on the Company’s consolidated financial statements as of December 31, 2013 which contained an explanatory paragraph regarding the substantial doubt about the Company’s ability to continue as a going concern.
During the Company’s two most recent fiscal years and through December 19, 2014 (i) there were no disagreements with Hancock Askew on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Hancock Askew’s satisfaction, would have caused Hancock Askew to make reference to the subject matter in connection with their reports on the Company’s financial statements for such years; and (ii) there were no reportable events, within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
On December 19, 2014, the Company approved the engagement of Frazier & Deeter, LLC (“Frazier & Deeter”), to serve as the Company’s independent registered public accounting firm for the 2014 fiscal year. As a result, effective December 22, 2014 (the “Engagement Date”), the Company engaged Frazier & Deeter as the Company’s independent registered public accounting firm and formally engaged Frazier & Deeter as the Company’s independent public accountant on the Engagement Date.
During the years ended December 31, 2012 and December 31, 2013, and during the subsequent interim period through December 19, 2014, the Company did not consult with Frazier & Deeter regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by Frazier & Deeter, in either case where written or oral advice provided by Frazier & Deeter would be an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Items 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively).
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Management’s Annual Report on Internal Controls over Financial Reporting
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the framework in Internal Control-Integrated Framework (“1992 Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, under that framework, management has concluded that our internal control over financial reporting was not effective as of December 31, 2014. Our Chief Executive Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes In Internal Controls over Financial Reporting
No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Our executive officers, directors are:
Name
Age
Position
Henry S. Kaplan
Director
Kevin Kowbel
Chairman and Interim Chief Executive Officer
Mark A. Moore, Ph.D. Vice President, Product Development
William F. Quirk, Jr.
Director
Eric R. Winger
Director
Hong Zhang, Ph.D.
Senior Vice President, Computational Medicine
The following sets forth the biographical information for our executive officers:
Henry S. Kaplan is a retired attorney with extensive experience. Specifically, Mr. Kaplan was a patent examiner with the United States Patent and Trademark Office, Chemical Arts, as well as partner and/or shareholder in Dressler Goldsmith et. al.; the Law Office of Henry S. Kaplan, Chicago, Illinois; Miller Ciresi et al, Minneapolis, Minnesota; and Shutts & Bowen, Miami, Florida.
Mr. Kaplan has experience as a principal patent attorney in complex patent and trademark litigation; principal attorney in a number of complex mergers and/or acquisitions; principal counselor for numerous patent and/or trademark license matters. In addition, he has represented a number of public companies as patent and trademark counsel. Mr. Kaplan is a former faculty member of American Law Institute and lecturer for symposiums held by the American Bar Association and the Minnesota Bar.
Mr. Kaplan earned his bachelor degree from the City University of New York in 1963 and his Juris Doctorate from the Washington College of Law at American University in 1967. He is a retired member of the Bar of the State of Illinois and Registered Patent Attorney with the United States Patent and Trademark Office.
Kevin Kowbel is a Professional Engineer and Vice President Drilling & Completions for Canadian Natural Resources. Mr. Kowbel is a 1992 Geological Engineering Graduate from the University of Saskatchewan and is experienced as a Drilling & Completions Engineering Specialist with expertise in well design, operations, out-of-the-box problem solving, well control and tool development. Mr. Kowbel is experienced in problem solving, process optimization and tool development. His current role involves managing a yearly capital budget exceeding $1 billion. Mr. Kowbel has been an investor in Health Discovery Corporation since 2005 when he purchased common stock at $0.16 per share. He is fully committed to helping current shareholders realize the highest value for their investment. As such, he plans to remain off the payroll and pay for his own expenses related to his work with the Company until the Company is no longer under a going concern warning.
Mark A. Moore, Ph.D., was appointed interim Chief Operating Officer of the Company on November 16, 2012. Dr. Moore has subsequently taken the role of Vice President, Product Development on a permanent basis. In addition to his role with HDC, Dr. Moore serves as Chairman and Chief Executive Officer of SVM Capital, LLC (“SVM Capital”). SVM Capital was formed as a joint venture between the Company and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”), an absolute return hedge fund, to explore and exploit the potential applicability of the Company’s SVM technology to quantitative investment management techniques. Dr. Moore received a B.A. degree in Science and Philosophy from Florida Atlantic University in 1966. He received a Ph.D. in Philosophy with an emphasis on Value Theory and Logic from the University of Tennessee, Knoxville in 1973. Currently, Dr. Moore is also Chairman of Atlantic Alpha. In addition, Dr. Moore has served as Treasurer and Chairman of Memorial Health University Hospital Foundation as well as a member of the Board of Directors of Memorial Health University, where he was a member of the Investment and Finance Committee.
William F. Quirk, Jr., was the first outside director to join the Board in October 2005 and served until June 2008, during which time he provided critical financial and business resources to the Company. Mr. Quirk is a private investor who purchased a significant equity stake in the company in its private placement in July 2005. Prior to his retirement in 1996, he held a variety of senior executive positions in finance and management including: Fidelity Management & Research in the mutual fund industry; the investment banking firm Peterson, Diehl, Quirk & Company; leveraged buyout firm Kelso & Company; and auto parts supplier Inline Brake Manufacturing. Mr. Quirk earned his B.S. from the U.S. Naval Academy and an MBA from the Harvard Business School.
Eric R. Winger is an experienced business executive currently serving as Chairman of the Board of Trustees for South University, a for-profit university that is nationally recognized for its College of Health Professions and School of Pharmacy. His prior experience includes CEO of the Savannah Economic Development Authority at which he was one of the founding directors of the Arial Savannah Angel Partners. He was three times named one of Georgia’s 100 most influential people by Georgia Trend Magazine.
For over 25 years, Mr. Winger held various senior management positions with Wachovia Bank including large corporate accounts and southeast regional responsibilities. He has served on many boards and was Vice Chairman of Memorial Health University Medical Center and chair of its finance committee.
Earlier in his distinguished career, Mr. Winger held various posts at IBM and Merrill Lynch. In addition, Mr. Winger received his B.A. from College of William and Mary as well as a Masters from the Thunderbird School of Global Management.
Hong Zhang, Ph.D., has been our Senior Vice President, Computational Medicine since 2004. 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.
The directors named above will serve until the next annual meeting of our stockholders. As there are no employment agreements with anyone at the Company, officers hold their positions at the pleasure of the Board of Directors
Nominees for Directors
In filling vacancies and otherwise identifying candidates for our Board of Directors, we seek individuals who will 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 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 Executive Vice President 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 applicable provisions of the Company’s Bylaws.
Code of Ethics
The Company has adopted a Code of Ethics applicable to our Chief Executive Officer and Principal Financial Officer. The Code of Ethics is available without charge upon request directed to Investor Relations, Health Discovery Corporation, 4243 Dunwoody Club Drive, Suite 202, Atlanta, Georgia 30350. The Company intends to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth various elements of compensation for our Named Executive Officers for each of the last two fiscal years:
Employment Agreements
There are no Employment Agreements with any officer or employee of the Company. All officers, employees, and consultants serve at the discretion of the Board of Directors.
Outstanding Equity Awards at Fiscal Year-End
Director Compensation
Outside directors receive no cash fees for their service. Each outside director was awarded options in 2013 to purchase shares of the Company’s Common Stock as described below.
(1)
1,500,000 options granted on July 25, 2013.
(2)
1,500,000 options granted on July 25, 2013 and returned August 2, 2013
(3)
1,500,000 options granted on October 21, 2013.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information concerning the beneficial ownership of our Common Stock as of March 31, 2015 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 March 31, 2015, there were 261,384,810 shares of Common Stock outstanding, no shares of Series A Preferred Stock outstanding, no shares of Series B Preferred Stock outstanding and 6,640,000 shares of Series C Preferred Stock outstanding. Unless otherwise noted, the address of each beneficial owner below is 4243 Dunwoody Club Drive, Suite 202, Atlanta, Georgia 30350.
*
Less than 1%
(1)
The percentage assumes the exercise by the stockholder or group named in each row of all options or warrants for the purchase of our Common Stock held by such stockholder or group and exercisable within 60 days as of March 31, 2015.
(2)
Includes 500,000 options granted in July 2013, which are exercisable within 60 days of March 31, 2015
(3)
Includes 333,334 options granted in October 2013, which are exercisable within 60 days of March 31, 2015.
(4)
Includes 500,000 options granted in October 2013, which are exercisable within 60 days of March 31, 2015.
(5)
Includes 250,000 options granted in October 2013, which are exercisable within 60 days of March 31, 2015
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the equity securities of the Company which are authorized for issuance to employees, directors and consultants in consideration for services as of December 31, 2014:
Equity Compensation Plan Information
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company has adopted the independence standards promulgated by the New York Stock Exchange and has made a determination that, as of March 31, 2015, the following directors are independent according to those standards: Mr. Kaplan, Mr. Quirk and Mr. Winger. Mr. Kowbel was not independent according to the New York Stock Exchange independence standards.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the fees billed by Hancock Askew & Co. LLP for 2014 and 2013. There were no fees billed by Frazier & Deeter, LLC for 2014 or 2013.
Audit Fees. This category includes aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements for the years ended December 31, 2014 and 2013, review for the annual report on Form 10-K and for the limited reviews of quarterly condensed financial statements (Forms 10-Q) included in periodic reports filed with the Securities and Exchange Commission during 2014 and 2013, including out of pocket expenses.
Audit-Related Fees. This category includes fees billed for professional services associated with consultation concerning financial accounting and reporting standards.
Tax Fees. This category includes the aggregate fees billed or to be billed for tax services for the years ended December 31, 2014 and 2013.
All Other Fees. This category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered to the Company.
The services provided by the independent auditors were pre-approved by the Board of Directors of the Company to the extent required under applicable law. The Board of Directors of the Company requires pre-approval of all audit and allowable non-audit services.
Effective December 19, 2014, the Company approved the dismissal of Hancock Askew & Co., LLP (“Hancock Askew”) as the Company’s independent registered public accounting firm. Hancock Askew had been the Company’s independent registered public accounting firm since September 21, 2006.
Hancock Askew’s report on the financial statements of the Company as of and for the fiscal years ended December 31, 2012 and 2013 did not contain any adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except their report dated March 31, 2014 on the Company’s consolidated financial statements as of December 31, 2013 which contained an explanatory paragraph regarding the substantial doubt about the Company’s ability to continue as a going concern.
During the Company’s two most recent fiscal years and through December 19, 2014 (i) there were no disagreements with Hancock Askew on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Hancock Askew’s satisfaction, would have caused Hancock Askew to make reference to the subject matter in connection with their reports on the Company’s financial statements for such years; and (ii) there were no reportable events, within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
On December 19, 2014, the Company approved the engagement of Frazier & Deeter, LLC (“Frazier & Deeter”), to serve as the Company’s independent registered public accounting firm for the 2014 fiscal year. As a result, effective December 22, 2014 (the “Engagement Date”), the Company engaged Frazier & Deeter as the Company’s independent registered public accounting firm and formally engaged Frazier & Deeter as the Company’s independent public accountant on the Engagement Date.
During the years ended December 31, 2012 and December 31, 2013, and during the subsequent interim period through December 19, 2014, the Company did not consult with Frazier & Deeter regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by Frazier & Deeter, in either case where written or oral advice provided by Frazier & Deeter would be an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Items 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively).
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report:
(1) Financial Statements - all financial statements of the Company as set forth under Item 8 of this Report.
(2) Financial Statement Schedules - As a smaller reporting company we are not required to provide the information required by this item.
(3) Exhibits
(b)
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(b) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-K:
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.
3.1(b)
Articles of Amendment to Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1(b) to Form 10-K filed March 31, 2009.
3.1(c)
Amended and Restated Articles of Amendment to Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 10-Q filed November 16, 2009.
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-K filed March 31, 2008.
4.1(c)
Copy of Specimen Certificate for shares of Series B Preferred Stock. Registrant incorporates by reference Exhibit 4.1(c) to Form 10-K filed March 31, 2009.
10.1
License Agreement, dated January 6, 2012, between Health Discovery Corporation and NeoGenomics Laboratories, Inc. Registrant incorporates by reference Exhibit 10.27 to Form 8-K filed on January 12, 2012.
23.1
Consent of Frazier & Deeter, LLC. Filed herewith.
23.2
Consent of Hancock Askew & Co. LLP. Filed herewith.
31.1
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer. Filed herewith.
32.1
Section 1350 Certification of Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer. Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Kevin Kowbel
Chairman, Interim Chief Executive Officer, Principal Financial
March 31, 2015
Kevin Kowbel
Officer, and Principal Accounting Officer
/s/ Henry S. Kaplan
Director
March 31, 2015
Henry S. Kaplan
/s/ William F. Quirk, Jr.
Director
March 31, 2015
William F. Quirk, Jr.
/s/ Eric R. Winger
Director
March 31, 2015
Eric R. Winger
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Health Discovery Corporation
We have audited the accompanying balance sheets of Health Discovery Corporation (the “Company”) as of December 31, 2014, and the related statements of operations, changes in stockholders' equity, and cash flows for the year then ended. 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 audit 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 express 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, 2014, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note L to the financial statements, the Company has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note L. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
March 31, 2015
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Health Discovery Corporation
Atlanta, Georgia
We have audited the accompanying balance sheets of Health Discovery Corporation as of December 31, 2013 and, the related statements of operations, changes in stockholders' equity, and cash flows for the year then ended. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 express 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health Discovery Corporation as of December 31, 2013 and the results of its operations and its cash flows for the year ended December 31, 2013, 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 described in Note L to the financial statements, the Company has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note L. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
/s/ Hancock Askew & Co., LLP
Savannah, Georgia
March 31, 2014
HEALTH DISCOVERY CORPORATION
Balance Sheets
See accompanying notes to financial statements.
HEALTH DISCOVERY CORPORATION
Statements of Operations
For the Years Ended December 31, 2014 and 2013
See accompanying notes to financial statements.
HEALTH DISCOVERY CORPORATION
Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2014 and 2013
Issued and Outstanding
See accompanying notes to financial statements.
HEALTH DISCOVERY CORPORATION
Statements of Cash Flows
For the Years Ended December 31, 2014 and 2013
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 patent protected technology and may provide services to develop specific learning tools under development agreements or to sell to third parties.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Accordingly, actual results could differ from those estimates. Significant estimates that are particularly susceptible to change in the near-term include the valuation of share-based compensation and consideration for services and the recoverability of the patents.
REVENUE RECOGNITION
Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements. These arrangements are generally governed by contracts that dictate responsibilities and payment terms. The Company recognizes revenues as they are earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled. If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.
CASH
Cash and cash equivalents include cash and funds invested in money market accounts with financial institutions.
ACCOUNTS RECEIVABLE
Trade accounts receivable for licensing fees and development services are recorded at net contract value based upon the written agreement with the customer. In certain cases, accounts receivable may include royalties receivable from customers based upon those customers estimated sales of the products or diagnostic tests containing patented processes and technologies. The Company considers amounts past due based on the related terms of the agreement and reviews its exposure to amounts receivable based upon collection history and specific customer credit analysis. The Company provides an allowance for doubtful amounts if collectability is no longer reasonably assured. As of December 31, 2014 and 2013, all amounts receivable are considered fully collectable and no allowance for doubtful accounts was recorded.
EQUIPMENT
Equipment, which consists of office furniture, computer equipment, and leasehold improvements, are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
PATENTS
Initial costs paid to purchase patents are capitalized and amortized using the straight line method over the remaining life of the patent. The Company capitalizes the external costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs. If the applied for patents are abandoned or are not issued, the Company will expense the capitalized costs to date in the period of abandonment or earlier if abandonment appears probable. The carrying value of patents is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of December 31, 2014, the Company does not believe there has been any impairment of its patents.
INVESTMENTS
The Company uses the equity method to account for its equity investments in ventures for which it has 50% or less ownership and the ability to exercise significant influence over operating and financial policies, but does not control. The Company uses the cost method to account for its investments in companies that it does not control and for which it does not have the ability to exercise significant influence over operating and financial policies.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax benefits and expenses or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income for the years in which those temporary differences are expected to be recovered or settled.
In the event the future tax consequences of differences between the financial reporting bases and tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation is made of the probability of being able to realize the future benefits indicated by such assets 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 probability of realizing the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.
STOCK-BASED COMPENSATION
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.
Valuation and Amortization Method - The fair value awards of stock that do not contain a market condition target are estimated on the grant date using the Black-Scholes option-pricing model. The fair value of options that contain a market condition, such as a specified hurdle price, is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model. Both the Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected life, expected dividend yield and expected risk-free interest rates.
Expected Term - The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and forfeitures due to departure prior to the end of the vesting schedule.
Expected Volatility - Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent to the expected term to estimate expected volatility.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.
RESEARCH AND DEVELOPMENT EXPENSE
The Company’s research and development costs are expensed as incurred and consist of expenses paid to consultants and external laboratories and related primarily to the costs of co-development studies, clinical trials, and projects undertaken. The R&D costs were $99,200 in 2014 and $115,934 in 2013.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash, available for sale securities, accounts receivable, accounts payable and accrued expenses. The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short-term nature of such items. Refer to Note J for discussion regarding the valuation of the Company’s investment in available for sale securities.
NET INCOME (LOSS) PER SHARE
Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity.
Due to the net loss for the twelve-month period ended December 31, 2013, the calculation of diluted per share amounts would create an anti-dilutive result and therefore are not presented in the following table. Potentially dilutive shares at December 31, 2013, include options and warrants outstanding of 13,500,000.
The following is an analysis of the basic and diluted earnings per common share computations for the year ended December 31, 2014:
During the twelve-month period ended December 31, 2014, 19,390,000 outstanding stock options and warrants were not included in the computation of diluted earnings per common share because to do so would have an antidilutive effect. Please refer to Note H regarding detail for outstanding stock options.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
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 $250,000 per account. From time-to-time, the Company’s cash balances exceed the amount insured by the FDIC. Management believes the risk of loss of cash balances in excess of the insured limit to be low.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the FASB issued an amendment, which requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This guidance is effective prospectively for annual and interim periods beginning after December 15, 2012. The adoption of this guidance did not have a material impact on our financial results.
Note B - DEFERRED REVENUE
Deferred revenue represents the unearned portion of payments received in advance for licensing or service agreements.
The Company received $2,944,800 as a part of the NeoGenomics license agreement in January 2012. Deferred revenue of $2,944,800 was recorded and recognized as income over the three years of the term of the license agreement.
The Company had total unearned revenue of $191,628 as of December 31, 2014. The long-term portion of unearned revenue represents the remaining term of the agreements or the remaining lives of the underlying patents, as appropriate, and ranges from one to seven years.
The expected future annual recognition of revenue is as follows:
Note C - PATENTS
The Company has acquired a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery.
The cost and accumulated amortization as of December 31, 2014 and 2013 are as follows:
Amortization charged to operations for each of the years ended December 31, 2014 and 2013 was $262,719. The weighted average remaining amortization period for patents at December 31, 2014 is 4.50 years. Estimated amortization expense for the next four years is $260,603 per year.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note D - INVESTMENTS
On March 27, 2007, the Company and an investment partner formed SVM Capital, LLC (“SVM Capital) as an equity investment for purposes of utilizing SVM as a quantitative investment management technique. The Company owns 45% of the membership interest and has significant influence with the operation of the entity but does not have control over the entity. The Company does not have any obligation to fund or provide support to SVM Capital. Accordingly, the investment is accounted for using the equity method of accounting. The Company’s initial investment was $5,000 and the license to use the SVM technology applied to financial markets. The carrying value of this investment was zero as of December 31, 2014 and 2013.
In August 2008, pursuant to a license agreement, as amended, we contributed a license to Smart Personalized Medicine, LLC (“SPM”) in return for a 20% equity interest. SPM is a company founded by a former director to develop a breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. The only activity for this entity was the Quest license and development agreements of 2010 for which there was an allocation of 50% to the Company and 50% to the other partner. The Company does not have any contractual obligation to provide any funds to this venture. The net value of the investment was zero as of December 31, 2014 and 2013. The Company does not anticipate the relationship with SPM will generate any revenue.
Note E - LICENSE FEES EXPENSE - LUCENT AGREEMENT
Effective September 26, 2004, the Company was assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement was associated with the patents acquired July 30, 2004. The Company agreed to pay royalty fees to Lucent in the amount of the greater of an annual fee of $10,000 or at the rate of five percent (5%) on each licensed product which is sold, leased, or put into use by the Company, until cumulative royalties equal $40,000 and at the rate of one percent (1%) subsequently. The license granted will continue for the entire unexpired term of Lucent’s patents. During 2014, the Company paid $6,095 in royalty fees to Lucent compared to $10,536 paid during 2013. The Lucent patents expired in July 2014, and therefore the license agreement with Lucent expired. The Company is no longer required to make royalty payments to Lucent.
Note F - INCOME TAXES
The Company has incurred net losses since inception, and we have determined that it is more likely than not we will be unable to benefit in the future from the accumulated net operating loss. Consequently, we have not recorded any U.S. federal or state income tax expense or benefit. We have not recorded income tax expense or benefit for the fiscal years ending December 31, 2014 or 2013.
The following items comprise the Company’s net deferred tax assets (liabilities) as of December 31, 2014 and 2013:
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note F - INCOME TAXES, continued
For the year ended December 31, 2014, a decrease in the valuation allowance of $84,859 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, 2014 and 2013, as follows:
The Company has unused net operating loss carry-forwards of approximately $23.2 million that are available to offset future income taxes payable. The net operating losses will begin to expire in 2020.
Based in its evaluation of tax positions, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company’s evaluation was performed for all tax years, which remain subject to examination and adjustment, by major tax jurisdictions as of December 31, 2014. The Company is generally no longer subject to U.S. federal, state, and local, or non-US income tax examinations for the years before 2011.
Note G - COMMITMENTS AND CONTINGENCIES
Operating Lease
We do not own any real property. We lease 350 square feet of office space in Atlanta, Georgia, pursuant to a month-to-month lease dated April 1, 2013. We currently pay base rent in the amount of $600 per month. Our principal executive office is well maintained and is suitable for the business conducted in this location.
Settlements
The previous Board of Directors negotiated a settlement agreement in July 2013 with Stephen Barnhill, the former Chairman and Chief Executive Officer of the Company. Under the terms of the Settlement Agreement, (i) the Company paid $50,000 to, or for the benefit of, Mr. Barnhill and (ii) Mr. Barnhill executed a general release in favor of the Company, subject to any indemnification rights that Mr. Barnhill may have under any agreement, law, or insurance policy maintained by the Company. As a result, the Company recognized a settlement expense of $50,000 in 2013.
Legal Issues
On July 17, 2013, the Company received a Civil Investigative Demand (the “Demand”) from the Federal Trade Commission of the United States of America (the “FTC”) relating to the Company’s MelApp software application. In the Demand, the FTC has requested information relating to potentially unfair or deceptive acts or practices related to (i) false advertising and (ii) consumer privacy and data security, in violation of Trade Commission Act, 15 U.S.C. Sections 45 and 42.
On February 23, 2015, the FTC notified the Company of its approval, by a vote of 4-1, to accept an Agreement Containing Consent Order (“Agreement”). This Agreement is for settlement purposes only. The Company neither admits nor denies any of the allegations, except as specifically stated in the Agreement. The Company believes the effort to contest this matter with the FTC would require funds greater than the Company has at its disposal.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note G - COMMITMENTS AND CONTINGENCIES, continued
The Agreement will, among other things, bar the Company from claiming that any device detects or diagnoses melanoma or its risk factors, or increases users’ chances of early detection, unless the representation is not misleading and supported by competent and reliable scientific evidence in the form of human clinical testing of the device. The Agreement also prohibits the Company from making any other misleading or unsubstantiated claims about a device’s health benefits or efficacy, unless the representation is not misleading and supported by competent and reliable scientific evidence in the form of human clinical testing of the device. Finally, the Company must pay $17,963 to the FTC.
The Company is subject to various claims primarily arising in the normal course of business. Although the outcome of these matters cannot be determined, the Company does not believe it is probable that any such claims will result in material costs and expenses.
Note H - STOCK COMPENSATION AND EQUITY BASED PAYMENTS
Information about options and warrants outstanding for 2014 and 2013 is summarized below:
December 31, 2014
As of December 31, 2014, there was $120,175 of unrecognized cost related to stock option and warrant grants. The cost is to be recognized over the remaining vesting periods that average approximately 1.5 years. The weighted average remaining life of all outstanding warrants and options at December 31, 2014 are 8.5 years. The aggregate intrinsic value of all options and warrants outstanding and exercisable as of December 31, 2014 was zero, based on the market closing price of $0.02 on December 31, 2014, less exercise prices.
While no options were issued in 2014, the Company recognizes the cost of options awarded in earlier years over the vesting period. As a result, stock-based expense included in the 2014 net income consisted of $73,766. Specifically, director option expenses were $33,199 and option expenses related to employees and consultants were $40,567.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note H - STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued
The following table reflects stock-based compensation and expense recorded in 2014 and 2013:
In connection with their election to the Board of Directors, on July 25, 2013, the Company granted to Mr. Henry Kaplan, Mr. Kevin Kowbel, and Mr. Eric Winger each an option to purchase 1,500,000 shares of the Company’s common stock. Upon his appointment to Interim Chief Executive Officer, Mr. Kowbel returned his options back to the Company. As a result, only the options for Messrs. Kaplan and Winger vest 250,000 shares every six months, have an exercise price of $0.027, and expire on July 25, 2023. The fair value of each option granted is $0.020 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.91%, an expected life of 5 years, and volatility of 98%. The aggregate computed value of these options is $60,124, and this amount will be charged as an expense over the three-year vesting period. There is no expense related to Mr. Kowbel as he returned all of the options granted to him back to the Company.
In connection with his appointment to the Board of Directors in July 2013, on October 21, 2013, Mr. William F. Quirk, Jr. was granted an option to purchase 1,500,000 shares of the Company’s common stock. This option grant is consistent with what has been granted to other board members. The options vest 250,000 shares every six months, have an exercise price of $0.036, and expire on October 21, 2023.
Also, on October 21, 2013, the Company granted options to purchase 6,000,000 shares of the Company’s common stock to a group of employees and consultants in recognition of their efforts to lower the Company’s monthly expenditures and compensation and their continuing contributions to the Company. The options vest over a three-year period, have an exercise price of $.036, and expire on October 21, 2023. Within the group of 6,000,000 options, the Company’s Vice President, Mark A. Moore, Ph.D., received an option to purchase 1,000,000 shares of the Company’s common stock and the Company’s Senior Vice President, Hong Zhang, Ph.D., received an option to purchase 750,000 shares of the Company’s common stock. The non-cash charge of $203,931 for the fair value of these options will be recognized as an expense over the three-year vesting period.
Note I - STOCKHOLDERS’ EQUITY
Series B Preferred Stock
During the first quarter of 2009, the Board of Directors authorized the designation of Series B Preferred Stock. The number of shares originally constituting the Series B Preferred Stock was 13,750,000; however, during the fourth quarter of 2009 the Board of Directors authorized the increase in the number of shares constituting the Series B Preferred Stock to 20,625,000. The Company sold to individual investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses, in 2009. The Series B Preferred Stock has not been registered under either federal or state securities laws and must be held until a registration statement covering such securities is declared effective by the Securities and Exchange Commission or an applicable exemption applies.
The Series B Preferred Stock was converted into Common Stock of the Company in the fourth quarter of 2014, which was the fifth anniversary of the date of issuance as outlined in the original purchase agreement.
The Series B Preferred Stock accrued dividends at the rate of 10% of the Series B Original Issue Price per year, and was to be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note I - STOCKHOLDERS’ EQUITY, continued
No dividend payment will be made if, after the payment of such dividend, the Company would not be able to pay its debts as they become due in the usual course of business, or if the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved, to satisfy the preferential rights upon the dissolution to shareholders whose preferential rights are superior to those receiving the dividend.
Dividends have been accrued for the Series B Preferred Stock in the amount of $373,346 as of December 31, 2014 and $308,724 as of December 31, 2013. The Company has given the Series B holders the choice of either (1) Common Stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to defer payment of the dividend in cash until the Company is able to pay, at the sole discretion of the Company. At the period ended December 31, 2014, the entire accrued dividend is recorded as a current liability in the amount of $373,346.
Series C Preferred Stock
In the fourth quarter of 2013, the Board of Directors authorized the issuance of Series C Preferred Shares in private placement transactions. As of December 31, 2013 2,000,000 shares had been issued and the Company received net proceeds of $160,000. As of December 31, 2014 the Company had issued a total of 6,640,000 preferred shares and received total net proceeds of $332,000. The Series C Preferred Shares are accompanied by $0.03 warrants and $0.03 contingency warrants. The contingency warrants will be issued only if the company has not attained profitability by the end of the first quarter 2016. The holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days. The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days. The warrants were valued at $0.025 each using the Black Scholes Method.
This funding is anti-dilutive because the purchase price is significantly higher than the current 180-day average share price. The Series C Preferred Stock has not been registered under either federal or state securities laws and must be held until a registration statement covering such securities is declared effective by the Securities and Exchange Commission or an applicable exemption applies.
The Series C Preferred Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding warrants and options. The Shares of Series C Preferred Stock must be converted into Common Stock of the Company either by the demand by the shareholder or at the fifth anniversary of the date of issuance. If the Company were to be dissolved, the Series C Preferred Stock receives preferential treatment over Common Stock.
Note J - INVESTMENT IN AVAILABLE FOR SALE SECURITIES
The Company has elected the fair value option in accordance with ASC 825, Financial Instruments, as it relates to its shares held in NeoGenomics’ common stock that were acquired resulting from the NeoGenomics Master License Agreement executed on January 6, 2012. Management made the election for the fair value option related to this investment because it believes the fair value option for the NeoGenomics common stock provides a better measurement from which to compare financial statements from reporting period to reporting period. No other financial assets or liabilities are fair valued using the fair value option.
The Company’s investment in NeoGenomics’ common stock is recorded on the accompanying balance sheets under the caption Investment in Available for Sale Securities. The carrying value of this investment on the date of acquisition approximated $1,945,000. The change in fair value from the December 31, 2013 to December 31, 2014 is an unrecognized loss of $199,894 for the remaining 86,900 shares held and is classified as other expense under the caption Unrealized Loss on Available for Sale Securities in the accompanying statements of operations. The Company classifies its investment as an available for sale security presented as a trading security on the balance sheet and the fair value is considered a Level 1 investment in the fair value hierarchy. The December 31, 2014 fair value of the investment of $362,373 is for the remaining shares held and is calculated using the closing stock price of the NeoGenomics common stock at the end of the reporting period.
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements, continued
Note J - INVESTMENT IN AVAILABLE FOR SALE SECURITIES, continued
During 2014, the Company sold 113,100 shares of NeoGenomics and received proceeds in the amount of $499,820. These transactions resulted in the Company recognizing a Realized Gain on the Sale of Available for Sale Securities in the accompanying statements of operations in the amount of $338,087 in the current period.
As of December 31, 2014, the Company held 86,900 shares of NeoGenomics stock as compared to 200,000 shares as of December 31, 2013. The initial 1,360,000 shares were acquired in January 2012 as a result of the NeoGenomics Master License Agreement.
Note K - SUBSEQUENT EVENTS
None.
Note L - FINANCIAL CONDITION AND GOING CONCERN
We have prepared our financial statements on a “going concern” basis, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.
Our ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing our technologies to the market. The outcome of these matters cannot be predicted at this time. Our financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.
If the going concern assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments may be material.
At December 31, 2014 we had $7,642 cash on hand along with its NeoGenomics Stock available for sale worth $362,373. As a result, the Company estimates cash will be depleted by the fourth quarter of 2015 if no additional capital raise is undertaken.
The Company’s plan to have sufficient cash to support operations is comprised of selling its NeoGenomics Stock, generating revenue through its relationship with NeoGenomics, providing services related to those patents, and obtaining additional equity or debt financing.
As a result, the Company is focusing its efforts to secure funds via licensing activity or other forms of fund raising either in the debt or equity markets. The Company has begun raising capital through the Series C Preferred Stock offering. The Company believes the Series C Preferred Stock offering, along with disciplined expense management, will allow the Company to maintain operations until the fourth quarter 2015. In addition, the Company believes the NeoGenomics relationship will provide revenue the Company in 2016. While the Company believes these efforts will create a profitable future, there is no guarantee the Company will be successful in these efforts.