As
filed
with the Securities and Exchange Commission on May 2, 2007.
Registration
No. 333-124750
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES
ACT OF 1933
(Amendment
No. 3)
HEALTH
DISCOVERY CORPORATION
(Name
of
Small Business Issuer in Its Charter)
|
TEXAS
|
74-3002154
|
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
Number)
|
8731
(Primary
Standard Industrial Classification Code Number)
5501
½ Abercorn Street
Savannah,
Georgia 31405
(912)
352-7488
(Address
and Telephone Number
of
Principal Executive Offices)
Daniel
R. Furth
5501
½ Abercorn Street
Savannah,
Georgia 31405
(912)
352-7488 (Name,
Address and Telephone Number
of
Agent
for Service)
Copies
to:
Todd
Wade, Esq.
Powell
Goldstein LLP
1201
West Peachtree Street
Fourteenth
Floor
Atlanta,
Georgia 30309
(404)
572-6600
Approximate
Date of
Commencement of Proposed Sale to the Public: From time to time or at
one time after the effective date of this registration statement as determined
by the selling stockholders.
If
this form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If
this form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the
earlier effective registration statement for the same offering. o
If
this form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the
earlier effective registration statement for the same offering. o
If
delivery of the prospectus is
expected to be made pursuant to Rule 434, please check the following box. o
CALCULATION
OF REGISTRATION FEE
|
TITLE
OF EACH CLASS OF
SECURITIES
TO BE REGISTERED
|
AMOUNT
TO BE
REGISTERED
|
PROPOSED
MAXIMUM
OFFERING
PRICE
PER UNIT
|
PROPOSED
MAXIMUM
AGGREGATE
OFFERING
PRICE
|
AMOUNT
OF
REGISTRATION
FEE
|
||||
|
Common
Stock, no par value
|
26,845,799
|
$0.33
(1)
|
$
10,435,507
|
(2)
|
||||
|
Common
Stock, no par value, to be issued upon the exercise of warrants
|
32,638,436
|
$0.33
(1)
|
$
10,770,684
|
(2)
|
|
(1)
|
Estimated
solely for the purpose of computing the registration fee pursuant
to Rule
457 under the Securities Act of 1933, as
amended.
|
|
(2)
|
Fees
paid with prior filings.
|
|
The
registrant hereby amends this registration statement on such date
or dates
as may be necessary to delay its effective date until the registrant
shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section
8(a) of the Securities Act of 1933, or until the registration statement
shall become effective on such date as the Commission, acting pursuant
to
said Section 8(a), may determine.
|
The information contained in this prospectus is not complete
and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective.
This
prospectus is not an offer to sell these securities and it is not soliciting
an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED
MAY 2,
2007
PROSPECTUS
61,406,299
Shares
HEALTH
DISCOVERY CORPORATION
This
prospectus relates to the resale of up to 61,406,299 shares
of
our common stock, no par value, which are being offered for resale from time
to
time by the stockholders named in the section entitled “Selling Stockholders” on
page 12.
The
number of shares the selling stockholders may offer and sell under this
prospectus includes common shares:
|
·
|
the
selling stockholders currently hold; and
|
|
·
|
issuable
to them upon the exercise of warrants previously issued by us. The
selling
stockholders may also offer additional shares of common stock acquired
upon the exercise of the warrants and our issuance of stock as a
result of
anti-dilution provisions, stock splits, stock dividends or similar
transactions.
|
We
are
registering these shares to satisfy registration rights of the selling
stockholders.
We
will
not receive any of the proceeds from any resales by the selling stockholders.
We
will, however, receive the proceeds from the exercise of the warrants issued
to
the selling stockholders. The selling stockholders may sell the shares of
common
stock from time to time in various types of transactions, including on the
Over-the-Counter Bulletin Board and in privately negotiated transactions.
For
additional information on methods of sale, you should refer to the section
entitled “Plan of Distribution” on page 15.
On
April
30, 2007, the last sales price of the common stock quoted on the
Over-the-Counter Bulletin Board was $0.12 per share. Our Company’s common stock
is quoted on the Over-the-Counter Bulletin Board under the symbol “HDVY.OB.”
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 2.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is ____________, 2007
TABLE
OF CONTENTS
|
1
|
||
|
2
|
||
|
11
|
||
|
12
|
||
|
12
|
||
|
12
|
||
|
15
|
||
|
16
|
||
|
27
|
||
|
27
|
||
|
28
|
||
|
32
|
||
|
34
|
||
|
36
|
||
|
39
|
||
|
39
|
||
|
40
|
||
|
40
|
||
|
40
|
||
|
41
|
||
|
41
|
||
|
41
|
ABOUT
THIS PROSPECTUS
This
prospectus is a part of a registration statement that we have filed with the
Securities and Exchange Commission. You should read this prospectus and any
accompanying prospectus supplement, as well as any post-effective amendments
to
the registration statement of which this prospectus is a part, together with
the
additional information described under “Available Information” before you make
any investment decision.
The
terms
“Health Discovery,” “Company,” “we,” “our” and “us” refer to Health Discovery
Corporation unless the context suggests otherwise. The term “you” refers to a
prospective purchaser of our common stock.
You
should rely only on the information contained in this prospectus or any
accompanying prospectus supplement. We have not authorized anyone to provide
you
with information different from that contained in this prospectus or any
accompanying prospectus supplement. These securities are being offered for
sale
and offers to buy these securities are only being solicited in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus and any accompanying prospectus supplement is accurate only as of
the
date on their respective covers, regardless of the time of delivery of this
prospectus or any accompanying prospectus supplement or any sale of the
securities.
i
SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements, including or related
to
our future results, certain projections and business trends. Assumptions
relating to forward-looking statements involve judgments with respect to,
among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. When used in this
prospectus, the words “estimate,” “project,” “intend,” “believe,” “expect” and
similar expressions are intended to identify forward-looking statements.
Although we believe that assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate, and we may
not
realize the results contemplated by the forward-looking statement. Management
decisions are subjective in many respects and susceptible to interpretations
and
periodic revisions based on actual experience and business developments,
the
impact of which may cause us to alter our business strategy or capital
expenditure plans that may, in turn, affect our results of operations. In
light
of the significant uncertainties inherent in the forward-looking information
included in this prospectus, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objective
or other plans. The forward-looking statements contained in this prospectus
speak only as of the date of this prospectus as stated on the front cover,
and
we have no obligation to update publicly or revise any of these forward-looking
statements. These and other statements, which are not historical facts are
based
largely on management’s current expectations and assumptions and are subject to
a number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, the risks and uncertainties
described in “Risk Factors”, beginning on page 2.
ii
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including “Risk Factors” and the financial statements, before making an
investment decision.
Our
Company Overview
HDC
is a
pattern recognition company that uses advanced mathematical techniques
to
analyze large amounts of data to uncover patterns that might otherwise
be
undetectable. The Company operates primarily in the emerging field of molecular
diagnostics where such tools are critical to scientific discovery. The
terms
artificial
intelligence
and
machine
learning
are
sometimes used to describe pattern recognition tools.
HDC’s
mission is to use its patents, intellectual prowess, and clinical partnerships
principally to identify patterns that can advance the science of medicine,
as
well as to advance the effective use of our technology in other diverse
business
disciplines, including the high-tech, financial, and homeland security
markets.
Our
historical foundation lies in the molecular diagnostics field where we
have made
a number of important discoveries that may play a critical role in developing
more personalized approaches to the diagnosis and treatment of certain
diseases.
However, our SVM assets in particular have broad applicability in many
other
fields. Intelligently applied, HDC’s pattern recognition technology can be a
portal between enormous amounts of otherwise undecipherable data and truly
meaningful discovery.
Our
Company’s principal asset is its intellectual property which includes advanced
mathematical algorithms called Support
Vector Machines
(SVM)
and Fractal
Genomic Modeling
(FGM),
as well as biomarkers
that we
discovered by applying our SVM and FGM techniques to complex genetic and
proteomic data. Biomarkers are biological indicators or genetic expression
signatures of certain disease states. Our
intellectual property is protected by more than 50 patents that have been
issued
or are currently pending around the world.
Our
business model has evolved over time to respond to business trends that
intersect with our technological expertise and our capacity to professionally
manage these opportunities. In the beginning, we sought only to use our
SVMs
internally in order to discover and license our biomarker signatures to
various
diagnostic and pharmaceutical companies. Today, our commercialization efforts
include: utilization of our discoveries and knowledge to help develop biomarkers
for use as companion diagnostics, surrogate biomarkers, and diagnostic
and
prognostic predictive tests; licensure of the SVM and FGM technologies
directly
to diagnostic and pharmaceutical companies; and, the formation of new ventures
with domain experts in other fields where our pattern recognition technology
holds commercial promise.
The
Offering
We
are
registering up to 61,406,299 shares
of
our common stock for the sale by the selling stockholders identified in
the
section of this prospectus entitled “Selling Stockholders.” The shares included
in the table identifying the selling stockholders include 28,767,863 shares
of
our issued common stock plus an additional 32,638,436
shares
of
common stock that have not yet been, but that may be, issued to the selling
stockholder should they exercise their warrants. Information regarding
our
common stock and the warrants is included in the section of this prospectus
entitled “Description of Capital Stock.”
We
were
incorporated in Texas on April 6, 2001. Our administrative office is located
at
5501 1/2 Abercorn Street, Savannah, Georgia 31405. Our telephone number
is (912)
352-7488 and our web site is located at www.HealthDiscoveryCorp.com.
Information contained on our web site is not a part of this
prospectus.
1
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the specific factors listed below together with the other
information included in this prospectus before you decide whether to purchase
shares of our common stock. Additional risks and uncertainties, including those
that are not yet identified or that we currently think are immaterial, may
also
adversely affect our business, results of operations and financial condition.
The market price of our common stock could decline due to any of these risks,
and you could lose all or part of your investment.
Risks
Related to Our Business
We
are a developing business and a high-risk company.
We
are a
high-risk company in a volatile industry. In
September 2003, we completely changed the focus of our business from wireless
telecommunications to biotechnology. Consequently, we
have no
history on which to base an evaluation of our business and prospects. Thus,
investors should recognize that an investment in our company is risky and highly
speculative. We are a developing business, and our prospects must be considered
in light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development. Failure to
implement and execute our business and marketing strategy successfully, to
provide superior customer service, to respond to competitive developments and
to
integrate, retain and motivate qualified personnel could have a material adverse
effect on our business, results of operations and financial condition. We must
successfully overcome these and other business risks. If our efforts are
unsuccessful or other unexpected events occur, purchasers of the common stock
offered hereby could lose their entire investment.
We
expect
to incur future losses, and we may never achieve or sustain
profitability.
We
expect
to continue to incur net losses and have negative cash flows in the future
due
in part to high research and development expenses, including enhancements
to our
technologies and investments in new technologies. We cannot assure you that
we
will ever achieve profitability. Even if we do achieve profitability, we
may not
be able to sustain or increase profitability.
Our
business is difficult to evaluate because we have a limited history of
operations.
Since
reorganizing in 2003, our focus and our business model have been continually
evolving. Accordingly, we have a history of operations in which there is
insufficient information to identify any historical pattern. Even if we could
discern such a pattern, the rapidly evolving nature of the biotechnology
and
pharmaceutical industries would make it very difficult to identify any
meaningful information in such short a history. Therefore, it is also difficult
to make any projections about the future of our operations. This difficulty
may
result in our shares trading below their value.
We
will have negative
operating income and may never become profitable.
Our
operating expenses are expected to exceed our income for the next six to nine
months and thus our capital will be decreased to pay these operating expenses.
If we ever become profitable, of which there is no assurance that we can, from
time to time our operating expenses could exceed our income and thus our capital
will be decreased to pay these operating expenses.
We
may need additional financing.
Additional
proceeds may be required to finance our activities. We
cannot
assure prospective investors that we will not need to raise additional capital
or that we would be able to raise sufficient additional capital on favorable
terms, if at all. No
binding arrangements have been made to secure such financing, and there can
be
no assurance that such additional financing will be available when required
on
terms acceptable to us. If
we
fail to raise sufficient funds, we may have to cease operations, which would
materially harm our business and financial results. If we raise additional
capital by issuing equity securities, our stockholders may experience dilution.
If we raise additional funds through collaboration and licensing arrangements,
we may be required to relinquish some rights to our technologies or product
candidates, or grant licenses on terms that are not favorable to us.
2
Our
operating results are unpredictable and may fluctuate significantly from period
to period, which may cause our stock price to decline and result in losses
to
investors.
Our
operating results may vary from period to period due to numerous factors, many
of which are outside our control, including the number, timing and acceptance
of
our services. Factors that may cause our results to vary by period include:
|
·
|
changes
in the demand for our products and
services;
|
|
·
|
the
nature, pricing and timing of products and services provided to
our
collaborators;
|
|
·
|
acquisition,
licensing and other costs related to the expansion of our operations,
including operating losses of acquired businesses;
|
|
·
|
reduced
capital investment for extended
periods;
|
|
·
|
losses
and expenses related to our investments in joint ventures and
businesses;
|
|
·
|
regulatory
developments or changes in public perceptions relating to the use
of
genetic information and the diagnosis and treatment of disease
based on
genetic information;
|
|
·
|
changes
in intellectual property laws that affect our rights in genetic
information that we sell; and
|
|
·
|
payments
of milestones, license fees or research payments under the terms
of our
increasing number of external
alliances.
|
Research
and development costs associated with our technologies and services, as well
as
personnel costs, marketing programs and overhead, account for a substantial
portion of our operating expenses. These expenses cannot be adjusted quickly
in
the short term. If revenues of the business decline or do not grow as
anticipated, we may not be able to reduce our operating expenses accordingly.
Failure to achieve anticipated levels of revenue could therefore significantly
harm our operating results for a particular period.
We
may fail to meet our debt obligations.
If
our
cash flow and capital resources are insufficient to fund our debt obligations
incurred in connection with recent acquisitions, we may be forced to sell
assets, seek additional equity or debt capital or restructure our debt. In
addition, any failure to make scheduled payment of interest and principal on
our
outstanding notes or any other indebtedness could result in our creditors
exercising remedies on the notes and taking some or all of our assets or could
otherwise harm our ability to incur additional indebtedness on acceptable terms.
We cannot assure you that our cash flow and capital resources will be sufficient
for payment of interest and principal on our debt in the future, including
payments on any outstanding notes, or that any alternative methods would be
successful or would permit us to meet our debt obligations.
Our
stock price has been, and is likely to continue to be, highly
volatile.
Our
stock
price has, since September 1, 2003, traded as high as $0.60 and as low as
$0.06.
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.
|
3
In
addition, the stock market in general, and the market for life sciences and
technology companies in particular, have experienced extreme price and volume
fluctuations recently. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. These broad
market and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance.
In
the
past, companies that have experienced volatility in the market prices of
their
stock have been the objects of securities class action litigation. If we
became
the object of securities class action litigation, it could result in substantial
costs and a diversion of management’s attention and resources, which could
affect our profitability.
Our
approach of incorporating ideas and methods from mathematics, computer science
and physics into the disciplines of biology, organic chemistry and medicine
is
novel and may not be accepted by our potential customers or
collaborators.
We
intend
to create a fully integrated biomarker discovery company to provide
pharmaceutical and diagnostic companies worldwide with new, clinically relevant
and economically significant biomarkers. We
are a
drug and diagnostic discovery company, which incorporates ideas and methods from
mathematics, computer science and physics into the disciplines of biology,
organic chemistry and medicine. Our objective is to significantly increase
the
probability of success of drug discovery and diagnostic development. Our
approach and the products and technologies derived from our approach are novel.
Our
potential customers and
collaborators
may be
reluctant to accept our new, unproven technologies, and our customers may prefer
to use traditional services. In addition, our approach may
prove
to be ineffective or not as effective as other methods. Our products and
technologies may prove to be ineffective if, for instance, they fail to account
for the complexity of the life processes that we are now attempting to model.
If
our customers or collaborators do not accept our products or technologies and/or
if our technologies prove to be ineffective our business may fail or we may
never become profitable.
Even
if our computational technologies are effective as research tools, our customers
or we may be unable to develop or commercialize new drugs, therapies or other
products based on them.
Even
if
our computational technologies perform their intended functions as research
tools, our customers may be unable to use the discoveries resulting from them
to
produce new drugs, therapies, diagnostic products or other life science
products. Despite recent scientific advances in the life sciences and our
improved understanding of biology, the roles of genes and proteins and their
involvement in diseases and in other life processes is not well understood.
Only
a few therapeutic products based on the study of and discoveries relating to
genes or proteins have been developed and commercialized. If our customers
are
unable to use our discoveries to make new drugs or other life science products,
our business may fail or we may never become profitable.
Our
acquired SVM Portfolio utilizes technology covered by an earlier-issued
patent, and if we lose the rights to use that patent, our ability to exploit
certain aspects of our SVM technology will be impaired.
Our
acquired SVM Portfolio utilizes technology covered by the original hyperplane
patent (Pat. No. 5,649,068) invented by members of our Scientific Advisory
Board
and owned by Lucent Technologies, Inc. - GRL Corp. (“Lucent”). We have
obtained an assignment of a pre-existing patent license from Lucent.
If Lucent were to terminate the license, it is possible that we would not
be able to use portions of the Support Vector Machine technology.
The
industries in which we are active are evolving rapidly, and we may be unable
to
keep pace with changes in technology.
The
pharmaceutical and biotechnology industries are characterized by rapid
technological change. This is especially true of the data-intensive areas of
such technologies. Our future success will largely depend on maintaining a
competitive position in the field of drug, therapeutics and diagnostic products
discovery. If we fail to keep pace with changes in technology, our business
will
be materially harmed. Rapid technological development may result in our products
or technologies becoming obsolete. This may occur even before we recover the
expenses that we incurred in connection with developing those products and
technologies. Products or services offered by us could become obsolete due
to
the development of less expensive or more effective drug or diagnostics
discovery technologies. We may not be able to make the necessary enhancements
to
our technologies to compete successfully with newly emerging technologies.
4
We face
intense competition and if we are unable to compete successfully we may never
achieve profitability.
The
markets for our products and services are very competitive, and we expect
our
competition to increase in the future. Although
we have not identified one company that provides the full suite of services
that
we do, we
compete
with entities in the U.S. and elsewhere that provide products and services
for
the analysis of genomic information and information relating to the study
of
proteins (proteomic information) or that commercializes novel genes and
proteins. These include genomics, pharmaceutical and biotechnology companies,
academic and research institutions and government and other publicly funded
agencies. We may not be able to successfully compete with current and future
competitors. Many of our competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than we do.
This
may allow these competitors to discover or to develop products in advance
of us
or of our customers.
Some
of
our competitors, especially academic and research institutions and government
and other publicly funded agencies, may provide for free services or data
similar to the services and data that we provide for a fee. Moreover, our
competitors may obtain patent and other intellectual property protection that
would limit our rights or our customers’ and partners’ ability to use or
commercialize our discoveries, products and services. If we are unable to
compete successfully against existing or potential competitors, we may never
achieve profitability.
Our
management may be unable to address our potential growth.
We
anticipate that once operations commence, a period of significant expansion
will
be required to address potential growth in our customer base and market
opportunities. This expansion will place a significant strain on our management,
operational and financial resources. To manage the expected growth of our
operations, we will be required to improve existing and implement new
operational systems, procedures and controls, and to expand, train and manage
our employee base. There can be no assurance that our current and planned
personnel, systems, procedures and controls will be adequate to support our
future operations, that management will be able to hire, train, retain, motivate
and manage the required personnel or that we will be able to identify, manage
and exploit existing and potential strategic relationships and market
opportunities. Our failure to manage growth effectively could have a material
adverse effect on our business, results of operations and financial
condition.
If
our business does not keep up with rapid technological change or continue
to introduce
new products, we may be unable to maintain market share or recover investments
in our technologies.
Technologies
in the biomarker industry have undergone, and are expected to continue to
undergo, rapid and significant change. We may not be able to keep pace with
the
rapid rate of change and introduce new products that will adequately meet the
requirements of the marketplace or achieve market acceptance. If we fail to
introduce new and innovative products, we could lose market share to our
competitors and experience a reduction in our growth rate and damage to our
reputation and business.
The
future success of our business will depend in large part on our ability to
maintain a competitive position with respect to these technologies. We believe
that successful new product introductions provide a significant competitive
advantage because customers make an investment of time in selecting and learning
to use a new product, and are reluctant to switch to a competing product after
making their initial selection. However, our business or others may make rapid
technological developments, which could result in our technologies, products
or
services becoming obsolete before we are able to recover the expenses incurred
to develop them.
If
our business cannot enter into strategic alliances or licensing agreements,
we
may be unable to develop and commercialize our technologies into new products
and services or continue to commercialize existing products or
services.
We
may be
unable to maintain or expand existing strategic alliances or establish
additional alliances or licensing arrangements necessary to continue to develop
and commercialize products, and any of those arrangements may not be on terms
favorable to the business. In addition, current or any future arrangements
may
be unsuccessful. If we are unable to obtain or maintain any third party license
required to sell or develop our products or product enhancements, we may choose
to obtain substitute technology either through licensing from another third
party or by developing the necessary technology ourselves. Any substitute
technology may be of lower quality or may involve increased cost, either of
which could adversely affect our ability to provide our products competitively
and harm our business.
We
also
depend on collaborators for the development and manufacture of complex
instrument systems and chemicals and other materials that are used in laboratory
experiments. We cannot control the amount and timing of resources our
collaborators devote to our products. We may not be able to enter into or
satisfactorily retain these research, development and manufacturing
collaborations and licensing agreements, which could reduce our growth and
harm
our competitive position.
5
We
may not be able to find business partners to develop and commercialize product
candidates deriving from our discovery activities.
Our
strategy for the development and commercialization of diagnostic markers and
therapeutic proteins depends on the formation of collaborations or licensing
relationships with third parties that have complementary capabilities in
relevant fields. Potential third parties include pharmaceutical and
biotechnology companies, diagnostic companies, academic institutions and other
entities. We cannot assure you that we will be able to form these collaborations
or license our discoveries or that these collaborations and licenses will be
successful.
Our
dependence on licensing and other collaboration agreements with third parties
subjects us to a number of risks.
We
may
not be able to enter into licensing or other collaboration agreements on terms
favorable to us. Collaborators may typically be afforded significant discretion
in electing whether to pursue any of the planned activities. In most cases,
our
collaborators or licensees will have responsibility for formulating and
implementing key strategic or operational plans. Decisions by our collaborators
or licensees on these key plans, which may include development, clinical,
regulatory, marketing (including pricing), inventory management and other
issues, may prevent successful commercialization of the product or otherwise
affect our profitability.
In
addition, we may not be able to control the amount and timing of resources
our
collaborators devote to the product candidates, and collaborators may not
perform their obligations as expected. Additionally, business combinations
or
changes in a collaborator’s or a licensee’s business strategy may negatively
affect its willingness or ability to complete its obligations under the
arrangement with us. Furthermore, our rights in any intellectual property or
products that may result from our collaborations may depend on additional
investment of money that we may not be able or willing to make.
Potential
or future collaborators may also pursue alternative technologies, including
those of our competitors. Disputes may arise with respect to the ownership
of
rights to any technology or product developed with any future collaborator.
Lengthy negotiations with potential collaborators or disagreements between
us
and our collaborators may lead to delays or termination in the research,
development or commercialization of product candidates or result in
time-consuming and expensive litigation or arbitration. If our collaborators
pursue alternative technologies or fail to develop or commercialize successfully
any product candidate to which they have obtained rights from us, our business,
financial condition and results of operations may be significantly harmed.
If
we are unable to hire or retain key personnel or sufficient qualified employees,
we may be unable to successfully operate our business.
Our
business is highly dependent upon the continued services of our Chief
Executive Officer, Board of Directors, and Scientific Advisory Board.
While
members of our senior management are parties to employment or consulting
agreements and non-competition and non-disclosure agreements, we cannot assure
you that these key personnel and others will not leave us or compete with us,
which could materially harm our financial results and our ability to compete.
The
loss,
incapacity or unavailability for any reason of any of these individuals could
have a material adverse effect upon our business, as well as our relationships
with our potential customers. We
do not
carry key person life insurance on any member of our senior management.
Furthermore, competition for highly qualified personnel in our industry and
geographic locations is intense. Our business would be seriously harmed if
we
were unable to retain our key employees, or to attract, integrate or retain
other highly qualified personnel in the future.
We
may not be able to employ and retain experienced 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.
6
We
may acquire or make strategic investments in other businesses and technologies
in the future, and these could prove difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating
results.
If
opportunities arise, we may consider making acquisitions of businesses,
technologies, services or products. Acquisitions
may involve significant cash expenditures, debt incurrence, additional operating
losses and expenses that may have a material adverse effect on the operating
results of our business. Moreover,
even if we acquire complementary businesses or technologies, we may be unable
to
successfully integrate any additional personnel, operations or acquired
technologies into our business. Difficulties in integrating an acquired business
could disrupt our business, distract our management and employees and increase
our expenses. Future
acquisitions could expose us to unforeseen liabilities and result in significant
charges relating to intangible assets. Sizable acquisitions may also divert
senior management from focusing on our existing business plan. Finally,
if we make acquisitions using convertible debt or equity securities, existing
stockholders may be diluted, which could affect the market price of our
stock.
If
our access to tissue samples or to genomic data or other information is
restricted, or if this data is faulty, our business may suffer.
To
continue to build our technologies and related products and services, we need
access to third parties’ scientific and other data and information. We also need
access to normal and diseased human and other tissue samples and biological
materials. We may not be able to obtain or maintain such access on commercially
acceptable terms. Some of our suppliers could become our competitors and
discontinue selling supplies to us. Information and data from these suppliers
could contain errors or defects that could corrupt our databases or the results
of our analysis of the information and data. In addition, government regulation
in the United States and other countries could result in restricted access
to,
or use of, human and other tissue samples. Although currently we do not face
significant problems in obtaining access to tissues, if we lose access to
sufficient numbers or sources of tissue samples, or if tighter restrictions
are
imposed on our use of the information generated from tissue samples, our
business may suffer.
The
sales cycle for some of our products and services is lengthy. We expend
substantial funds and management effort with no assurance of successfully
selling our products or services.
Our
ability to obtain customers for our platforms, tools and services depends in
large upon the perception that our technologies can help accelerate their
efforts in drug and diagnostics discovery. Our ability to obtain customers
for
our therapeutic or diagnostic product candidates significantly depends on our
ability to validate and prove that each such product candidate is suitable
for
our claimed therapeutic or diagnostic purposes. Our ability to obtain customers
will also depend on our ability to successfully negotiate terms and conditions
for such arrangements. The sales cycle for our therapeutic and diagnostic
product candidates is typically lengthy and may take more than 12 months.
An
inability to protect our proprietary data, technology or products may harm
our
competitive position.
If
we do
not adequately protect the intellectual property underlying our products and
services, competitors may be able to develop and market the same or similar
products and services. This would erode our competitive advantage. In addition,
the laws of some countries do not protect or enable the enforcement of
intellectual property to the same extent as the laws of the United
States.
We
use
contractual obligations to protect a significant portion of our confidential
and
proprietary information and know-how. This includes a substantial portion of
the
knowledge base from which we develop a large portion of our proprietary products
and services. However, these measures may not provide adequate protection for
our trade secrets or other proprietary information and know-how. Customers,
employees, scientific advisors, collaborators or consultants may still disclose
our proprietary information in violation of their agreements with us, and we
may
not be able to meaningfully protect our trade secrets against this
disclosure.
In
addition, we have applied for patents covering some aspects of some of our
technologies and predicted genes and proteins we have discovered using these
technologies. We plan to continue to apply for patents covering parts of our
technologies and discoveries as we deem appropriate, but cannot assure you
that
we will be able to obtain any patents. The patent positions of biotechnology
companies are generally uncertain and involve complex legal and factual
questions. Legislative changes and/or changes in the examination guidelines
of
governmental patents offices may negatively affect our ability to obtain patent
protection for certain aspects of our intellectual property, especially with
respect to genetic discoveries.
7
Our
success depends in large part on our ability to patent our discoveries.
Our
success depends, in large part, on our ability to obtain patents on biomarkers
and pathways that we have discovered and are attempting to commercialize. We
face intense competition from other biotechnology and pharmaceutical companies.
These include customers who use our products and technologies and are pursuing
patent protection for discoveries, which may be similar or identical to our
discoveries. We cannot assure you that other parties have not sought patent
protection relating to the biomarkers and pathways that we discovered or may
discover in the future. Our patent applications may conflict with prior
applications of third parties or with prior publications. They may not result
in
issued patents and, even if issued, our patents could be invalidated or may
not
be sufficiently broad to provide us with any competitive advantages. U.S. and
other patent applications ordinarily remain confidential for 18 months from
the
date of filing. As a result, patent applications that we file which we believe
are novel at the time of filing, may be determined at a later stage to be
inconsistent with earlier applications. Any of these events could materially
harm our business or financial results.
Litigation
or other proceedings or third party claims of intellectual property infringement
could prevent us, or our customers or collaborators, from using our discoveries
or require us to spend time and money to modify our operations.
If
we
infringe patents or proprietary rights of third parties, or breach licenses
that
we have entered into with regard to our technologies and products, we could
experience serious harm. If litigation is commenced against us for intellectual
property rights infringement, we may incur significant costs in litigating,
whether or not we prevail in such litigation. These costs would also include
diversion of management and technical personnel to defend us against third
parties or to enforce our patents (once issued) or other rights against others.
In addition, parties making claims against us may be able to obtain injunctive
or other equitable relief that could prevent us from being able to further
develop or commercialize. This could also result in the award of substantial
damages against us. In the event of a successful claim of infringement against
us, we may be required to pay damages and obtain one or more licenses from
third
parties. If we are not able to obtain these licenses at a reasonable cost,
if at
all, we could encounter delays in product introductions while we attempt
to
develop alternative methods or products. Defense of any lawsuit or failure
to
obtain any of these licenses could prevent us from commercializing available
products.
The
technology that we use to develop our products, and the technology that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend
to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies engage in other genomic-related
businesses.
As
is
typical in the genomics, biotechnology and software industries, we will probably
receive in the future notices from third parties alleging patent infringement.
We believe that we are not infringing the patent rights of any third parties.
No
third party has filed a patent lawsuit against us. We may, however, be involved
in future lawsuits alleging patent infringement or other intellectual property
rights violations. In addition, litigation may be necessary to:
|
·
|
assert
claims of infringement;
|
|
·
|
enforce
our patents as they are
granted;
|
|
·
|
protect
our trade secrets or know-how;
or
|
|
·
|
determine
the enforceability, scope and validity of the proprietary rights
of
others.
|
We
may be
unsuccessful in defending or pursuing these lawsuits. Regardless of the outcome,
litigation can be very costly and can divert management’s efforts. An adverse
determination may subject us to significant liabilities or require us to seek
licenses to other parties’ patents or proprietary rights. We may also be
restricted or prevented from licensing or selling our products and services.
Further, we may not be able to obtain any necessary licenses on acceptable
terms, if at all.
8
The
scope of patents we receive may not provide us with adequate protection of
our
intellectual property, which would harm our competitive position.
Any
issued patents that cover our proprietary technologies may not provide us with
substantial protection or be commercially beneficial to the business. The
issuance of a patent is not conclusive as to its validity or its enforceability.
Federal courts may invalidate these patents or find them unenforceable.
Competitors may also be able to design around our patents. If we are unable
to
protect our patented technologies, we may not be able to commercialize our
technologies, products or services and our competitors could commercialize
our
technologies.
Our
business also relies on a combination of trade secrets, copyrights and
trademarks, non-disclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights. While we
generally require employees, collaborators, consultants and other third parties
to enter into confidentiality agreements where appropriate, it is not always
possible to enforce these arrangements.
Monitoring
the unauthorized use of our technology is difficult, and the steps we have
taken
may not prevent unauthorized use of our technology. The disclosure or
misappropriation of our intellectual property for any of the above reasons
could
harm our ability to protect our rights and our competitive position.
We
may become involved in disputes regarding our patents and other intellectual
property rights, which could result in the forfeiture of these rights, expose
the business to significant liability and divert management’s
focus.
In
order
to protect or enforce our patent rights, our business may need to initiate
patent litigation against third parties. In addition, we may be sued by third
parties alleging that we are infringing their intellectual property rights.
These lawsuits are expensive, take significant time and divert management’s
focus from other business concerns. These lawsuits could result in the
invalidation or limitation of the scope of our patents, forfeiture of the rights
associated with these patents or an injunction preventing Health Discovery
from
selling any allegedly infringing product. In addition, we may not prevail or
a
court may find damages or award other remedies in favor of the opposing party
in
any of these suits. During the course of these suits, there may be public
announcements of the results of hearings, motions and other interim proceedings
or developments in the litigation. Securities analysts or investors may perceive
these announcements to be negative, which could cause the market price of our
common stock to decline.
Many
of
our services will be based on complex, rapidly developing technologies. Although
we will try to identify all relevant third party patents, these products could
be developed by the business without knowledge of published or unpublished
patent applications that cover some aspect of these technologies. The biomarker
industry has experienced intensive enforcement of intellectual property rights
by litigation and licensing. If we are found to be infringing the intellectual
property of others, we could be required to stop the infringing activity, or
we
may be required to design around or license the intellectual property in
question. If we are unable to obtain a required license on acceptable terms,
or
are unable to design around any third party patent, we may be unable to sell
some of our services, which could
result in reduced revenue.
Risks
Related to Our Industry
There
are many risks of failure in the development of drugs, therapies, diagnostic
products and other life science products. These risks are inherent to the
development and commercialization of these types of products.
Risks
of
failure are inseparable from the process of developing and commercializing
drugs, therapies, diagnostic products and other life science products. These
risks include the possibility that any of these products will:
|
·
|
be
found to be toxic or
ineffective;
|
|
·
|
fail
to receive necessary regulatory
approvals;
|
|
·
|
be
difficult or impossible to manufacture on a large scale;
|
|
·
|
be
uneconomical to market;
|
|
·
|
fail
to be developed prior to the successful marketing of similar products
by
competitors; or
|
|
·
|
be
impossible to market because they infringe on the proprietary rights
of
third parties or compete with superior products marketed by third
parties.
|
9
We
are
dependent on our customers’ commercialization of our discoveries. Any of these
risks could materially harm our business and financial results.
The
trend towards consolidation in the pharmaceutical and biotechnology industries
may adversely affect us.
The
trend
towards consolidation in the pharmaceutical and biotechnology industries may
negatively affect us in several ways. These consolidations usually involve
larger companies acquiring smaller companies, which results in the remaining
companies having greater financial resources and technological capabilities,
thus strengthening competition in the industry. In addition, continued
consolidation may result in fewer customers for our products and services.
We
may be subject to product liability claims if products derived from our products
or services harm people.
We
may be
held liable if any product that is made with the use, or incorporation of,
any
of our technologies or data causes harm or is found otherwise unsuitable. These
risks are inherent in the development of genomics, functional genomics and
pharmaceutical products. If we are sued for any harm or injury caused by
products derived from our services or products, our liability could exceed
our
total assets. In addition, such claims could cause us to incur substantial
costs
and subject us to negative publicity even if we prevail in our defense of such
claims.
Our
business and the products developed by our collaborators and licensees may
be
subject to governmental regulation.
Any
new
therapy or diagnostic product that may be developed by our collaborators or
by
our licensees will have to undergo a lengthy and expensive regulatory review
process in the United States and other countries before it can be marketed.
It
may be several years, or longer, before any therapy or diagnostic product that
is developed by using our technologies, will be sold or will provide us with
any
revenues. This may delay or prevent us from becoming profitable. Changes in
policies of regulatory bodies in the United States and in other countries could
increase the delay for each new therapy and diagnostic product. Even if
regulatory approval is obtained, a product on the market and its manufacturer
are subject to continuing review. Discovery of previously unknown problems
with
a product may result in withdrawal of the product from the market.
Although
we intend to become involved in the clinical phases in the future, we still
expect to rely mainly on collaborators or licensees of our discovery activities
to file regulatory approval applications and generally direct the regulatory
review process. We cannot be certain whether they will be able to obtain
marketing clearance for any product that may be developed on a timely basis,
if
at all. If they fail to obtain required governmental clearances, it will
prevent
them from marketing therapeutic or diagnostic products until clearance can
be
obtained, if at all. This will in turn reduce our chances of receiving various
forms of payments, including those relating to sales of marketed therapeutic
or
diagnostic products by them.
The
law applicable to us may change in a manner that negatively affects our
prospects.
We
must
comply with various legal requirements, including requirements imposed by
federal and state securities and tax laws. Should any of those laws change
over
the term of our existence, the legal requirements to which we may be subject
could differ materially from current requirements, which could increase the
cost
of doing business or preclude us from undertaking certain parts of our business
plan, would result in adverse consequences.
If
ethical and other concerns surrounding the use of genetic information become
widespread, there may be less demand for our products and services.
Genetic
testing has raised ethical issues regarding confidentiality and the appropriate
uses of the resulting information. For these reasons, governmental authorities
may call for limits on or regulation of the use of genetic testing or prohibit
testing for genetic predisposition to various conditions, particularly for
those
that have no known cure. Any of these scenarios could reduce the potential
markets for our technologies in the field of predictive drug response, which
could materially harm our business and financial results.
10
Risks
Related to this Offering
The
so-called “penny stock rule” could make it cumbersome for brokers and dealers to
trade in our common stock, making the market for our common stock less liquid
which could cause the price of our stock to decline.
Trading
of our common stock on the OTC Bulletin Board may be subject to certain
provisions of the Securities Exchange Act of 1934, commonly referred to as
the
“penny stock” rule. A penny stock is generally defined to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker-dealer to:
|
·
|
make
a special suitability determination for purchasers of our
shares;
|
|
·
|
receive
the purchaser’s written consent to the transaction prior to the purchase;
and
|
|
·
|
deliver
to a prospective purchaser of our stock, prior to the first transaction,
a
risk disclosure document relating to the penny stock
market.
|
Consequently,
penny stock rules may restrict the ability of broker-dealers to trade and/or
maintain a market in our common stock. Also, prospective investors may not
want
to get involved with the additional administrative requirements, which may
have
a material adverse effect on the trading of our shares.
Any
projections and forecasts included in this prospectus were prepared based on
assumptions regarding facts and future events which may or may not
materialize.
Many
factors influencing the operation of our business are beyond management’s
control. There can be no assurance that the actual operation of our company’s
business will correspond with any projections and the forecasts included in
this
prospectus. No representation or warranty of any kind is made by us, management,
our accountant, attorneys or any other person associated with our company,
that
the projections made by us will correspond with future events.
Some
of our existing stockholders can exert control over us and may not make
decisions that are in the best interests of all stockholders.
As
of
April 16, 2007, executive officers and directors collectively controlled
approximately 40.58% of our outstanding shares. As a result, these stockholders,
if they act together, would be able to exert a significant degree of influence
over matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Accordingly, this
concentration of ownership may harm the market price of our shares by delaying
or preventing a change in control of us, even if a change is in the best
interests of our company. In addition, the interests of this concentration
of
ownership may not always coincide with our interests or the interests of
other
stockholders, and accordingly, they could cause us to enter into transactions
or
agreements that we would not otherwise consider.
Investors
must rely on our management.
Holders
of the common stock will have very limited rights or powers to participate
in
the management of Health Discovery. Accordingly, no potential investor should
purchase the common stock unless he or she is willing to entrust all aspects
of
day-to-day management and operations to our management. Investors will be
relying on the expertise and experience of our management to identify and
administer the business. Past experience and performance by our Board of
Directors, Scientific Advisory Board and employees provides no assurance of
future results.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of shares by the selling stockholders
in
this offering but will receive proceeds from the exercise of warrants held
by
the selling stockholders. We expect to use any proceeds we receive for working
capital and for other general corporate purposes, including research and product
development.
11
PRICE
RANGE OF OUR COMMON STOCK
Our
common stock is traded on the OTC Bulletin Board under the symbol HDVY.OB.
The
range of closing prices for our common stock, as reported on
Bloomberg.com during each quarter of the last two fiscal years was as follows.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
|
High
|
Low
|
||
|
First
Quarter 2005
|
$
.40
|
$
.20
|
|
|
Second
Quarter 2005
|
$
.41
|
$
.21
|
|
|
Third
Quarter 2005
|
$
.25
|
$
.20
|
|
|
Fourth
Quarter 2005
|
$
.24
|
$
.07
|
|
|
First
Quarter 2006
|
$
.15
|
$
.10
|
|
|
Second
Quarter 2006
|
$
.12
|
$
.06
|
|
|
Third
Quarter 2006
|
$
.13
|
$
.07
|
|
|
Fourth
Quarter 2006
|
$
.17
|
$
.08
|
|
|
First
Quarter 2007
|
$
.16
|
$
.09
|
The
closing price of our common stock on April 30, 2007 was $0.12 per share.
At
April 30, 2007, there were approximately 511 holders of record of our common
stock.
DIVIDEND
POLICY
We
have
not paid any cash dividends since inception, and we do not anticipate paying
any
cash dividends in the foreseeable future. We currently intend to retain future
earnings, if any, to support the development and growth or our business. Payment
of future dividends, if any, will be at the discretion of our board of directors
and will depend upon our earnings, our financial condition, and opportunities
for growth and expansion.
SELLING
STOCKHOLDERS
Our
shares of common stock to which this prospectus relates are being registered
for
resale by the selling stockholders. The following shows the name and number
of
shares of our common stock owned by the selling stockholders who may sell shares
covered by this prospectus.
The
selling stockholders may resell all, a portion or none of such shares of common
stock from time to time. The table below sets forth with respect to each selling
stockholder, based upon information available to us as the date of this
prospectus, the number of shares of common stock beneficially owned, the number
of shares of common stock registered by this prospectus and the number and
percent of outstanding common stock that will be owned after the sale of the
registered shares of common stock assuming the sale of all of the registered
shares of common stock under this prospectus. Because the selling stockholders
may offer all, some or none of their respective shares of common stock, no
definitive estimate as to the number of shares thereof that will be held by
the
selling stockholders after such offering can be provided. Therefore, we have
prepared the table below on the assumption that the selling stockholders will
sell all shares covered by this prospectus. With the exception of Double U
Master Fund LP, Westrock Advisors, Isabelle Guyon, Ana Maria Melo, William
Quirk, Jr. and Ed Taylor, none of the selling stockholders are affiliates of
Health Discovery, have had a material relationship with Health Discovery during
the past three years or are or were affiliates with registered
broker-dealers.
12
|
Name
|
Beneficially
Owned Before Offering (1)
|
Number
of Shares Being Offered
|
Number
of Shares Beneficially Owned After Offering
(3)
|
||
|
Richard
B. Aronson
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Frank
Brenton
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
Alpha
Capital
|
3,375,000
(2)
|
3,375,000
(2)
|
0
|
||
|
Uriel
Cohen
|
156,250
(4)
|
156,250
(4)
|
0
|
||
|
Congregation
Darkei Tshivo of Dinov
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Andrew
Coulton
|
1,500,000
(2)
|
1,500,000
(2)
|
0
|
||
|
Mark
D’Andrea
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Kenneth
Daniel
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Pauline
Daniel
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Glen
Davis
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
John
Docherty
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Domaco
Venture Capital
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Double
U Master Fund LP
|
312,500
(4)
|
312,500
(4)
|
0
|
||
|
James
Field
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
Jeffrey
Fleeman
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
Alan
Friedman
|
125,000
(2)
|
125,000
(2)
|
0
|
||
|
Stephen
Fryer
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
L.
George Elias
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
William
Goldstein
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
Jimmie
T. Hadley
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Hillcrest
R.V. Park Resort Inc.
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
Progressive
Insurance
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Ellis
International
|
2,385,500
(5)
|
2,385,500
(5)
|
0
|
||
|
Iroquois
Capital, LP
|
1,350,000
(4)
|
1,350,000
(4)
|
0
|
||
|
Ming
Jaw
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Thomas
Kendall
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
Kevin
Kowbel
|
1,300,000
(2)
|
1,300,000
(2)
|
0
|
||
|
Michael
Kramm
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Frank
Lamond
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
Ronald
Lazar
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Little
Gem Life Science Fund, LLC
|
2,550,000
(2)
|
2,550,000
(2)
|
0
|
||
|
William
Lobel
|
125,000
(2)
|
125,000
(2)
|
0
|
||
|
John
Madden IV
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Kevin
Maloney
|
1,000,000
(2)
|
1,000,000
(2)
|
0
|
||
|
Maryann
Cawthorne Davis Irrevocable Trust
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
McCullough
Family Trust
|
437,500
(2)
|
437,500
(2)
|
0
|
||
|
Kristina
Mellen
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Sharon
Mills
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
David
Minkoff
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Charles
Newman
|
400,000
(4)
|
400,000
(4)
|
0
|
||
|
Allen
Notowitz
|
156,250
(2)
|
156,250
(2)
|
0
|
13
|
Name
|
Beneficially
Owned Before Offering (1)
|
Number
of Shares Being Offered
|
Number
of Shares Beneficially Owned After Offering
(3)
|
||
|
Platinum
Partners
|
1,012,500
(4)
|
1,012,500
(4)
|
0
|
||
|
Michael
Pisani
|
500,000
(2)
|
500,000
(2)
|
0
|
||
|
Anthony
Polak
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Risner
Millennium Trust
|
125,000
(2)
|
125,000
(2)
|
0
|
||
|
RL
Capital Partners
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
Gary
Roberts
|
375,000
(2)
|
375,000
(2)
|
0
|
||
|
Ronald
Sheldon Trust
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
James
Royal
|
937,500
(2)
|
937,500
(2)
|
0
|
||
|
Ronald
& Juanita Royal
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Barry
Saxe
|
1,250,000
(2)
|
1,250,000
(2)
|
0
|
||
|
Ben-Zion
Schneider
|
640,000
(4)
|
640,000
(4)
|
0
|
||
|
Seaside
Partners, LP
|
1,875,000
(2)
|
1,875,000
(2)
|
0
|
||
|
Robert
Smith
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
South
Ferry LP
|
2,700,000
(2)
|
2,700,000
(2)
|
0
|
||
|
Lawrence
Starr
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Michael
Unrein
|
156,250
(2)
|
156,250
(2)
|
0
|
||
|
John
Wechsler
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
Jon
White
|
625,000
(2)
|
625,000
(2)
|
0
|
||
|
James
C. Yadgir
|
200,000
(4)
|
200,000
(4)
|
0
|
||
|
Isabelle
Guyon
|
200,000
(4)
|
200,000
(4)
|
0
|
||
|
Westrock
Advisors
|
325,782
(7)
|
325,782
(7)
|
0
|
||
|
Ana
Maria Melo
|
15,626
(8)
|
15,626
(8)
|
0
|
||
|
Edward
Taylor
|
953,903
(9)
|
953,903
(9)
|
0
|
||
|
Joe
McKenzie
|
2,301,688
(10)
|
379,624
(10)
|
1,922,064
|
||
|
Roger
S. Brown
|
125,000
(2)
|
125,000
(2)
|
0
|
||
|
James
D. Bond
|
62,500
(2)
|
62,500
(2)
|
0
|
||
|
Ron
Vogel
|
4,000,000
(2)
|
4,000,000
(2)
|
0
|
||
|
Harry
Snow
|
312,500
(2)
|
312,500
(2)
|
0
|
||
|
Trevor
Colby IRA
|
770,000
(6)
|
770,000
(6)
|
0
|
||
|
Trevor
Colby
|
738,800
(6)
|
738,800
(6)
|
0
|
||
|
William
Quirk Jr.
|
10,500,000
(2)
|
10,500,000
(2)
|
0
|
||
|
Landsberger
Family Trust
|
3,375,000
(2)
|
3,375,000
(2)
|
0
|
||
|
Rosemary
G. Nelson
|
750,000
(2)
|
750,000
(2)
|
0
|
||
|
Total:
|
61,406,299
|
59,484,235
|
1,922,064
|
|
(1)
|
The
number of shares beneficially owned is determined in accordance with
Rule
13(d)-3 of the Securities Exchange Act of 1934, and the information
is not
necessarily indicative of beneficial ownership for any other purpose.
Under such rule, beneficial ownership includes any shares as to which
each
selling stockholder has sole or shared voting power or investment
power
and also any shares that the selling stockholder has the right to
acquire
within 60 days.
|
|
(2)
|
Includes
warrants to acquire half the number of shares listed at an exercise
price
of $0.24 per share and expiring on December 31,
2008.
|
|
(3)
|
Assumes
that all shares covered by this prospectus will be resold by the
selling
stockholders in this offering.
|
|
(4)
|
Comprised
of warrants to acquire the shares of common stock at an exercise
price of
$0.24 per share and expiring on December 31,
2008.
|
|
(5)
|
Includes
warrants to acquire 1,350,000 shares of common stock at an exercise
price
of $0.24 and expiring on December 31,
2008.
|
14
|
(6)
|
Includes
warrants to acquire 500,000 shares of common stock at an exercise
price of
$0.24 and expiring on December 31,
2008.
|
|
(7)
|
Comprised
of warrants to acquire 325,782 shares of common stock at an exercise
price
of $0.24 per share and expiring on December 31,
2008.
|
|
(8)
|
Comprised
of warrants to acquire 15,626 shares of common stock at an exercise
price
of $0.24 per share and expiring on December 31,
2008.
|
|
(9)
|
Comprised
of warrants to acquire 953,903 shares of common stock at an exercise
price
of $0.24 per share and expiring on December 31,
2008.
|
|
(10)
|
Does
not include warrants.
|
PLAN
OF DISTRIBUTION
We
are
registering the shares of common stock on behalf of the selling stockholders.
All costs, expenses and fees in connection with the registration of the shares
offered by this prospectus will be borne by us, other than brokerage commissions
and similar selling expenses, if any, attributable to the sale of shares which
will be borne by the selling stockholders. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act. Sales of shares may be effected
by selling stockholders from time to time in one or more types of transactions
(which may include block transactions) in the over-the-counter market, any
exchange or quotation system, in negotiated transactions, through put or call
options transactions relating to the shares, through short sales of shares,
or a
combination of any such methods of sale, and any other method permitted pursuant
to applicable law, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The
selling stockholders may enter into hedging transactions with broker-dealers
or
other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of
the
shares or of securities convertible into or exchangeable for the shares in
the
course of hedging positions they assume with selling stockholders. The selling
stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of shares offered by this
prospectus, which shares such broker-dealer or other financial institution
may
resell pursuant to this prospectus (as amended or supplemented to reflect such
transaction). The selling stockholders may pledge and/or loan these shares
to
broker-dealers who may borrow the shares against their hedging short position
and in turn sell these shares under the prospectus to cover such short position.
The
selling stockholders may make these transactions by selling shares directly
to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer is not expected to be in excess of customary
commissions).
The
selling stockholders and any broker-dealers that act in connection with the
sale
of shares may be deemed to be “underwriters” within the meaning of Section 2(11)
of the Securities Act, and any commissions received by such broker-dealers
or
any profit on the resale of the shares sold by them while acting as principals
might be deemed to be underwriting discounts or commissions under the Securities
Act. The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
Because
selling stockholders may be deemed “underwriters” within the meaning of Section
2(11) of the Securities Act, the selling stockholders may be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
selling stockholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the
market.
Selling
stockholders also may resell all or a portion of the shares in open market
transactions in reliance upon Rule 144 under the Securities Act provided they
meet the criteria and conform to the requirements of Rule 144.
15
BUSINESS
Our
History
We
were
organized under the name Direct Wireless Communications, Inc., in April 2001
by
Direct Wireless Corporation, which licensed to us its technology for a wireless
telephone. In October 2001, Direct Wireless Corporation, then our sole
stockholder, pursuant to an effective registration statement under the
Securities Act of 1933, distributed its entire holdings of our common stock
as a
stock dividend to its stockholders. As a result of the dividend, Direct Wireless
Corporation ceased to own any of our equity securities. The negative events
that
occurred over the next several years in the communications industry made it
difficult for us to fund the advancement of our communication platform. As
a
result, we made the decision to strategically change the overall direction
of
our intended business activities.
On
August
26, 2003, we acquired all of the assets of The Barnhill Group, LLC, which
was
owned by Stephen D. Barnhill, M.D. Dr.
Barnhill is a physician trained in laboratory medicine and clinical pathology.
He developed artificial intelligence and pattern recognition computational
techniques used in medicine, genomics, proteomics, diagnostics and drug
discovery. Following the acquisition, Dr. Barnhill became our Chief Executive
Officer and Chairman of our Board of Directors. Also, immediately following
our
acquisition of the assets of The Barnhill Group, LLC and the change in strategic
direction of the Company, our licensing rights to the telecommunications
technology previously granted by Direct Wireless Corporation were terminated
and
all payments due to Direct Wireless Corporation were terminated.
Subsequently,
we amended our charter to change our name to Health Discovery Corporation
(“HDC”
or the “Company”). Direct Wireless Communications (DWCM) officially became
Health Discovery Corporation on November 6, 2003, at which time the new trading
symbol (HDVY) became effective.
On
September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company
with patented Fractal Genomics Modeling software, through the issuance of
3,825,000 common shares of the Company. In addition to the shares of common
stock of the Company issued for the acquisition of Fractal Genomics, LLC’s
assets, the Company agreed to execute a note for $500,000 payable in $62,500
quarterly installments to the seller beginning on January 1, 2004 with the
final
payment being made in October 2005. Fractal Genomics’ technology finds, links
and models patterns of similarity hidden in large amounts of information,
such
as the clinical databases used for diagnostic and drug discovery. Fractal
Genomics has applied its technology to protein and pathway discovery in leukemia
and lung development, which could lead to the identification of novel proteins
that could be used to develop diagnostic markers and drug targets. Our
acquisition of Fractal Genomics’ assets was completed on December 30, 2003.
On
July
30, 2004, we began purchasing rights to a portfolio of 71 patents and pending
patent applications, including patents on the use of Support Vector Machines,
or
SVMs, and other machine learning tools useful for diagnostic and drug discovery
(the “SVM Portfolio”). On May 6, 2005, we acquired the remaining interest in the
SVM Portfolio from a group of unrelated third parties.
Effective
September 26, 2004, we were assigned a patent license agreement with Lucent
Technologies GRL Corporation (“Lucent”). The patent license agreement was
associated with the patents acquired July 30, 2004. We agreed to pay minimum
royalty fees to Lucent, which increases as a percentage of revenue based
on each
licensed product that is sold, leased, or put into use by the Company. The
license granted will continue for the entire unexpired term of Lucent’s patents.
Our
Principal Market
The
principal healthcare market for our pattern recognition technology and biomarker
discoveries is the growing field of molecular diagnostics. Borrowing from
the
two disciplines of genomics and proteomics, molecular diagnostics categorizes
cancer and other diseases using technology such as mass spectrometry and
gene
chips. Genomics is the study of all the genes in a cell or organism, and
proteomics is the study of all the proteins. Molecular diagnostics determines
how these genes and proteins interact in patients by focusing on patterns
– gene
and protein
patterns – in different types of healthy and diseased patient cells.
Molecular diagnostics uncovers these genomic and proteomic changes and captures
this information as expression patterns. Also called molecular
signatures,
these
expression patterns are improving clinicians’ ability to diagnose cancer
earlier, predict which patients will respond to certain treatments, predict
cancer recurrence risk, and select appropriate treatment for individual
patients.
16
Molecular
diagnostics can provide early, accurate screening and prediction of diseases
in
their asymptomatic stages, years before symptoms manifest or diseases actually
begin. This allows intervention to begin at that early point, perhaps preventing
the disease entirely. Early intervention will allow the healthcare system
to
encompass both reactive and preventive medicine, improving overall healthcare
efficiency and possibly reducing systemic healthcare expenditures.
The
molecular diagnostics industry is an increasingly powerful health care
participant with tremendous potential. It is characterized by a very diverse,
constantly changing technology base that continuously produces new opportunities
and applications. Advances in PCR (polymerase chain reaction), multiplexing,
sequencing and other technologies are propelling both new and old companies
forward with novel capabilities.
Similarly, a growing understanding of the molecular basis of cancer and
other
chronic diseases has awakened new realms of medicine to the possibilities
of
molecular diagnostic testing.
Clinicians
have discovered that molecular diagnostics have many uses beyond just the
creation of new screening and diagnostic tools. Expression patterns can
also
provide information for the design of new cancer treatments, monitor the
treatment’s effectiveness as it is studied in a clinical trial, and even predict
the patient’s response to a new treatment. In addition to its importance in
addressing the many kinds of cancer, molecular diagnostics will likely
become an
important technology for detecting resistance to antibiotics, a major hazard
in
the hospital setting. In the future, molecular tests should be able to
determine
within two to three hours not only the nature of an infection but also
any
potential resistance.
Today,
the molecular diagnostics market represents about $18 billion in revenue
per
year for both commercial and home-brew
molecular diagnostic tests, and it is expected to reach more than $92 billion
by
2016 according to a recent study. Primary market drivers include the addition
of
new diagnostic tests in high-volume testing areas coupled with the introduction
of new instrumentation that provide greater ease, speed, and quality in
test
performance. Now growing at an average annual rate of more than 40%, the
potential for molecular diagnostics is particularly impressive in the U.S.
which
represents the largest market with the most favorable conditions for molecular
diagnostics entry and marketing.
From
a
demographic standpoint, 12% of the U.S. population was 65 years old or
older in
2000. By 2030, that segment is anticipated to grow to 20% of the population,
burdening the healthcare system with increased numbers of cardiovascular,
neurological, and other age-related diseases. Age-related conditions are
expected to contribute to the health care market that will require greater
product development and marketing of assays, including molecular
tests.
Diagnostics
addressing the pharmacogenetic testing segment (i.e. companion diagnostics
and
surrogate biomarkers) are expected to drive market growth in the years
ahead.
Pharmacogenetics broadly relates to the study of genetic variations and
their
application to drug discovery to provide personalized therapy. Currently
the
second largest market sector behind diagnostics for infectious diseases,
the
pharmacogenetic sector of the molecular diagnostics market is projected
to
increase from its current $3 plus billion in revenues to more than $60
billion
of the overall forecasted market over the next ten years.
Our
SVM
technology offers pharmaceutical companies a key tool as they approach
drug
discovery in this new era of personalized medicine. Accordingly, our marketing
efforts are focused on utilizing our technology in partnership with many
of the
world’s leading pharmaceutical and life-sciences companies. Our primary
commercialization pathway for our technology and discoveries is to enter
into
both licensing agreements and joint development opportunities that feature
up-front license fees, fee-for-service development revenue, milestone payments,
and royalty streams. The pharmaceutical industry is characterized by costly
R&D efforts to create new patent-protected products, fierce competition for
products that are not so protected, and ongoing consolidation as major
companies
acquire smaller players to add new products to existing pipelines.
The
use
of HDC’s SVM technology and our discovered biomarkers may help pharmaceutical
companies develop and evaluate new drugs and medical therapies in less
time and
at lower cost. According to the lobby group PhRMA, only 1 of every 10,000
potential medicines investigated by America’s drug companies survives the
research and development process and is approved for patient use by the
U.S.
Food and Drug Administration (FDA). On average, the drug developmental
process
can take up to 15 years in research and development, with costs approaching
many
hundreds of millions of dollars. This extended timeframe and enormous expense
has led to an emphasis on the development of “blockbuster”
drugs.
17
Within
the drug discovery R&D process, biomarkers like ours can help pharmaceutical
companies identify disease targets and pathways and validate mechanisms
of drug
action. They may also serve as pharmacodynamic
indicators of drug activity, drug response, and drug toxicity in clinical
development. Biomarkers may also be used to help avoid new drug failures
in late
stage trials, earlier detection of disease, and improved prognosis of
therapeutic outcome.
We
consistently work to influence the evolving relationship between diagnostics
and
monitoring patients for therapeutic outcome. With its February 2007 approval
of
MammoPrint,
Agendia’s multi-gene expression breast cancer prognosis test, the FDA signaled
its acceptance of the field of molecular diagnostics and highlighted the
growing
importance of personalized medicine. In particular, the advent of molecular
diagnostics has led to the promise of a completely new paradigm in the
care of
patients suffering from cancer and other diseases.
Using
companion diagnostics in patient care can substantially improve patient
outcomes
and pave the way for personalized, targeted medicine by reducing both
misdiagnoses and adverse reactions, and by eliminating unnecessary and
expensive
downstream tests. Today, patient dosage levels are based on age, sex, and
weight, as determined by empirical studies. However, specific drug metabolism
may be as individualized as one’s fingerprint. In the future, molecular
diagnostics may be able to direct physicians to the right drugs for every
patient, no matter what the illness.
This
trend towards personalized medicine may lead to the reduction of overall
healthcare expenditures. What is known as a surrogate molecular
marker
may now
be substituted for the lengthy process of comparing the effects of a prospective
new drug versus a placebo on the ultimate outcome of a disease. As a result,
a
drug’s effectiveness against the disease process in question may be monitored
more efficiently by evaluating the presence or absence of a specific biomarker,
thereby avoiding failures late in the research and development process
as well
as the threat of recalls. One example of the successful application of
biomarker
data to therapeutic evaluation is the use of blood cholesterol levels to
evaluate the effectiveness of cholesterol lowering drugs. This
approach has the potential for creating a revolutionary new paradigm in
the
conduct of clinical trials worldwide.
Current
diagnostic tools, such as blood marker-based immunoassays, imaging techniques,
and biopsy analyses, provide valuable information and have played an important
role in increasing survival rates of cancer patients. However, these tools
have
inherent limitations in accuracy (i.e. sensitivity and specificity) and
remain
quite expensive. There is a significant need for advanced diagnostic and
prognostic tests that can provide meaningful information, screen for cancer,
detect early recurrence, and monitor progression and therapeutic response
in
real time. HDC’s pattern recognition technology can play a critical role in the
development of these tests because an advanced pattern recognition technique
is
required
for this
type of discovery. SVM technology is recognized as a superior pattern
recognition tool available today as evidenced in hundreds of scientific
papers
worldwide.
Working
with recognized diagnostic and pharmaceutical partners, our goal is to
develop a
product line of newly discovered biomarker signatures and pathways that
can be
found in human genes and genetic variations, as well as gene, protein and
metabolite expression differences. In addition, we market our expertise
in the
design of clinical trials for companion diagnostics to substantiate the
clinical
validity and commercial utility of those biomarkers. We also market the
potent
combination of our intellectual property and intellectual prowess to our
prospective collaborative partners. As inventors of the SVM technology,
our
world renowned mathematicians offer these companies the strongest possible
development team for their drug discovery, diagnostic test, or other
applications.
Our
Technologies and Discoveries
HDC
owns
a patent portfolio of machine learning technology, including certain pioneer
patents on SVM. We also have consulting arrangements with many of the
physicians, clinical specialists and mathematicians responsible for developing
and filing the pioneer neural network and SVM patents for the analysis
of
clinical data.
The
Company’s SVM technology is commonly considered within the context of
artificial
intelligence.
This is
a branch of computer science concerned with giving computers the ability
to
perform functions normally associated with human intelligence, such as
reasoning
and optimization through experience. Machine learning is a type of artificial
intelligence that enables the development of algorithms and techniques
that
allow computers to learn. Pattern recognition is machine learning with
a wide
spectrum of applications including medical diagnosis, bioinformatics,
classifying DNA sequences, detecting credit card fraud, stock market analysis,
object recognition in computer vision, and robot locomotion.
18
SVM
Overview
SVMs
are
mathematical algorithms that allow computers to sift through large, complex
datasets to identify patterns. SVM’s are widely acknowledged for their ability
to discover hidden relationships in these complex datasets. With the ability
to
handle what is known as infinite
dimensional space,
SVMs
are broadly considered to be superior to neural networks and other mathematical
techniques. SVM is a core machine learning technology with strong theoretical
foundations and excellent empirical successes.
Since
their introduction in 1992, SVMs marked the beginning of a new era in the
learning
from examples
paradigm
in artificial intelligence. Rooted in the Statistical Learning Theory developed
by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory Board, SVMs
quickly gained attention from the math and science communities due to a
number
of theoretical and computational merits. This development advanced a new
framework for modeling learning algorithms. Within this framework, the
fields of
machine learning and statistics were merged introducing powerful algorithms
designed to handle the difficulties of prior computational techniques.
The
new
generation of learning algorithms that were developed based on this theory
have
proved to be remarkably resistant to the problems imposed by noisy data
and high
dimensionality. They are computationally efficient, have an inherent modular
design that simplifies their implementation and analysis and allows the
insertion of domain knowledge, and, more importantly, they have theoretical
guarantees about their generalization ability. SVMs have been validated
in
hundreds of independent academic publications and presentations. In recognition
for his work, Professor Vapnik received the prestigious Alexander von Humboldt
Prize from the German government honoring foreign scientists and scholars
for
lifetime achievement.
SVMs
have
become widely established as one of the leading approaches to pattern
recognition and machine learning worldwide and are replacing neural networks
in
a variety of fields, including engineering, information retrieval and
bioinformatics. This technology has been incorporated into product and
research
applications by many biomedical, pharmaceutical, software, computer and
financial companies. Educational and research institutions throughout the
world
have successfully applied SVMs to a wide array of applications, including
gene
and protein expression analysis, medical image analysis, flow cytometry,
and
mass spectrometry.
Recursive
Feature Elimination - Support Vector Machine Overview
Recursive
Feature Elimination (RFE-SVM) is an application of SVM that was created
by
members of HDC’s science team to find discriminate relationships within clinical
datasets, as well as within gene expression and proteomic datasets created
from
micro-arrays of tumor versus normal tissues. In general, SVMs identify
patterns
- for instance, a biomarker/genetic expression signature of a disease.
The
RFE-SVM utilizes this pattern recognition capability to identify and rank
order
the data points that contribute most to the desired results based on specificity
or sensitivity. The Company believes that its two RFE-SVM patents are currently
the only RFE patents issued in the world.
Using
RFE-SVM, we have been able to access information in micro-array datasets
that
the most advanced bioinformatics techniques missed. In one micro-array
experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes
from
those related to the malignancy. RFE-SVM has also been used to determine
gene
expression patterns that correlate to the severity of a disease, not just
its
existence. It has been shown to improve both diagnosis and prognosis by
providing physicians with an enhanced decision tool. HDC scientists believe
that
these analytic methods are effective for finding genes and proteins implicated
in several cancers, as well as in assisting with the pharmacogenetic and
toxicological profiling of patients. The RFE-SVM method is also capable
of
finding those specific genes and proteins that are unhindered by ever-increasing
patent protection.
Fractal
Genomic Modeling Overview
On
September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a
company
with patented Fractal Genomic Modeling (“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.
19
The
FGM
data analysis technique has been shown to improve the mapping of genetic
pathways involved in the diagnosis and prevention of certain diseases.
HDC
scientists feel that these analytic methods are effective for finding genes
implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a
host of other diseases, as well as the pharmacogenetic profiling of
patients.
FGM
technology is designed to study complex networks. A complex network can
be made
up of genes inside a living organism, web pages on the Internet, stocks
within a
financial market, or any group of objects or processes that appear to be
connected together in some intricate way. FGM uses a new approach toward
modeling network behavior to rapidly generate diagrams and software simulations
that facilitate prediction and analysis of whatever process is your particular
object of study. Two important concepts behind FGM technology are the notions
of
scale-free networks and self-similarity.
The
FGM
process begins by creating a special mathematical surface (the FGM surface)
where every point on the surface can be used to generate a network model
with
varying degrees of scale-free and fractal properties. Utilizing user-supplied
data, models which best match the behavior of each node are selected and
represented by a point on the FGM surface. These point-models are then
linked,
compared, and combined to generate diagrams that reflect the behavior of
the
entire network.
The
end
result of the modeling process is a diagram where circles represent nodes
in the
network and arrows represent directions of causality or “flow” through the
network. FGM-derived diagrams expedite forecasting, analysis, and study
of
complex system behavior by clearly displaying all hubs, links, and flow
in the
network. These diagrams also serve as flow charts and schematics from which
to
build software simulations of the network. The FGM process can also be
used to
quickly search for networks and connections between processes and between
objects that appear to be unrelated.
Our
Scientific Achievements
HDC’s
world renowned scientific team is uniquely experienced in the design, analysis
and application of machine learning technology, having invented the concepts
and
many of the methodologies used to exploit domain knowledge. In addition,
through
pattern recognition, our science team has identified and patent-protected
biomarkers as possible treatment advances for several diseases, including
Benign
Prostatic Hyperplasia (BPH), prostate cancer, leukemia, colon cancer, and
AIDS.
Benign
Prostatic Hyperplasia
HDC
has identified and patent-protected
a subset
of genes that separates BPH from prostate cancer with a high degree of
accuracy.
This same set of genes also separated BPH from normal tissue patterns,
indicating that BPH is a disease with molecular characteristics of its
own. This
discovery could be used to develop a new non-invasive diagnostic test for
BPH,
which does not currently exist, as well as a completely new type of therapy
for
patients with this disease.
BPH
is a
non-cancerous enlargement of the prostate gland that occurs as men age.
The
enlargement often leads to obstruction in the flow of urine through the
urethra
that passes through the prostate gland. BPH is a common condition, representing
a global treatment market of almost $4 billion annually growing by 12%
per year
in fixed-rate US dollar terms. According to the National Institutes of
Health
(NIH), BPH affects more than 50% of men over age 60 and as many as 90%
of men
over the age of 70. While BPH does not cause prostate cancer, both may
be found
together.
Prostate
Cancer
HDC
has identified and patent-protected
a
genetic biomarker signature that identifies clinically significant high
grade
prostate cancer based on analysis of tissue samples. A logical next step
will be
to determine whether this same biomarker signature and the protein products
of
these genes exist in urine and other fluids that can be obtained non-invasively
in order to develop non-tissue based diagnostics.
Prostate
cancer is the second-leading cause of cancer death in men, after lung cancer.
The National Cancer Institute (NCI) estimates that more than 218,000 new
cases
of prostate cancer will be diagnosed in the U.S. in 2007, with more than
27,000
deaths.
20
More
than
one million men a year undergo biopsies of the prostate gland after a
cancer-screening test reveals moderately elevated levels of prostate specific
antigen (PSA) in the blood. Typically, a biopsy specimen is then used to
determine if the tissue is cancerous. If cancer is found, the Gleason scale
is
used to evaluate the patient’s prognosis. This scale ranges from 1 to 5, wherein
a higher Gleason score is given to cancer that is more aggressive.
Only
one
in four such biopsies reveals evidence of cancer. Many experts now believe
that
most of the prostate biopsies performed each year are unnecessary. According
to
a group of urologists led by Stanford University’s Dr. Thomas Stamey MD, a
member of HDC’s Scientific Advisory Board, the PSA test is now all but useless
for predicting the risk of prostate cancer since it indicates nothing more
than
whether the prostate gland is enlarged, a common condition called benign
prostatic hypertrophy which is associated with the normal aging process
for men.
The PSA can also be raised by benign prostatic hyperplasia, biopsy of the
prostate, transurethral prostatectomy, acute urinary retention, acute
prostatitis, and ejaculation.
The
Stamey study noted that tumors encountered twenty years ago were generally
so
large they generated PSA levels high enough to provide a reasonably good
measure
of cancer severity. Now that screening is more commonplace in this country,
many
cancers are being caught earlier and are usually smaller - not generating
enough
PSA to be a good indicator of severity. Given the importance of determining
severity, there remains an urgent need for serum markers that reflect the
size
and grade of this ubiquitous cancer. It is conceivable that developments
flowing
from HDC’s recent discoveries may ultimately displace Gleason score as an
indicator of prostate cancer severity.
Leukemia
HDC
has identified and patent-protected
a set of
leukemia genes that can separate ALL-T-cell leukemia from ALL-B-cell leukemia
with a high degree of accuracy. The Company collaborated with the University
of
Texas M.D. Anderson Cancer Center to analyze a gene expression database
to
identify new biomarkers and pathways involved in leukemia.
Leukemia
is a type of cancer that originates in the bone marrow. The accumulation
of
malignant cells interferes with the body’s production of healthy blood cells and
makes the body unable to protect itself against infections. The National
Cancer
Institute (NCI) estimates that more than 44,000 new cases will be diagnosed
in
the U.S. in 2007, with almost 22,000 deaths.
Colon
Cancer
HDC
has identified and patent-protected colon
cancer-specific biomarkers that can be used in the development of diagnostic
assays for cancer detection, disease discrimination, and even a potential
vaccine. The aim of this early biomarker discovery project was to define
the
gene expression patterns associated with colon cancer. Our RFE-SVM served
as an
effective tool for sifting through the noise of thousands of measurements
to
highlight only those genes that optimally contributed to the study
focus.
In
the
United States, colorectal cancer is the third most common cancer in men
and
women. The National Cancer Institute (NCI) estimates that more than 112,000
new
cases of colon and rectal cancer will be diagnosed in the U.S. in 2007,
with
more than 50,000 deaths.
When
colorectal cancer is detected early, survival rates are much higher. The
survival rate at five years is 91% for patients who receive early treatment.
When adjacent organs or lymph nodes are affected, the five-year survival
rate
drops to 66%. In cases where the cancer spreads to other organs, the survival
rate drops to only 8%. Thus, it is essential that all patients undergo
screening
for the early detection of pre-cancerous conditions.
Most
colon cancers can be detected early with routine colonoscopy, but only
a small
percentage of the at-risk population has this procedure. Fear of the procedure
and its complications along with its high cost have limited the potential
of
colonoscopy to be used as an acceptable screening tool for colon
cancer.
AIDS
HDC
has identified and patent-protected
an AIDS
expression signature that can separate AIDS brain cells from non-AIDS brain
cells with a high degree of accuracy.
21
This
biomarker discovery was accomplished in conjunction with Dr. Paul Shapshak,
Director of the Dementia/HIV Laboratory at the University of Miami Medical
School, and a group of leading scientists using HDC’s proprietary FGM analysis
technique. HDC sold the biomarker discovery to the University of Miami
in
November 2005.
HIV-related
dementia occurs in 40 to 60 percent of all cases of HIV infection that
are left
untreated. Even when treated, dementia occurs in 10 percent of all cases
of HIV
infection, with the number continuing to rise as the virus becomes resistant
to
treatment. The dementia is related to inflammation in the brain caused
by HIV
infection, a problem whose underlying genetic causes are complex and largely
unknown.
Breast
Cancer
HDC
is
developing two breast cancer diagnostic technologies; one for detecting
malignancy in mammograms (MammoSIGHT)
and
another for identifying circulating tumor cells in the blood (MetastaSIGHT).
The
detection component of these technologies finds the areas of particular
interest
in the image and separates these objects from the background. The feature
extraction component formulates numerical values relevant to the classification
task from the segmented objects. HDC’s patented technology can be used within
all diagnostic imaging radiology techniques, including PET scans, CT scans,
and
MRIs.
For
women, breast cancer is the most common non-skin cancer and the second
leading
cause of cancer-related death in the United States. However, death rates
from
breast cancer have been declining since 1990, and these decreases are believed
to be the result, in part, of earlier detection and improved treatment.
Mammography remains the best method of early breast cancer detection. According
to studies cited by the National Cancer Institute, 10 to 20 percent of
breast
cancers detected by a physical exam were missed by a film mammogram. For
this
reason, there have been extensive research efforts to improve mammography.
The
FDA
reports that there are about 33.5 million mammography procedures performed
each
year in the United States. Data from 2000-2002 show that about 70 percent
of all
mammograms that are performed annually are for screening purposes (to detect
cancer as opposed to following cancer once it has been diagnosed). This
translates to about 23.5 million screening procedures every year.
Studies
have shown that among newly diagnosed breast cancer cases in which the
patients
have previous mammograms, 75% of the cases will have abnormality detectable
in
the old films. In fact, missed cancer reading in mammography is a major
source
of lawsuits in radiology. Detecting malignancy in mammograms can be very
difficult. Individual mammograms are unique and there can be great variation
within “normal” images. Unlike CT and MRI, mammograms are not cross-sectional
images. Basically, a mammogram produces a two-dimensional picture of a
three-dimensional object. The projection from 3D to 2D and the resulting
overlaps on the images may interfere with the recognition of the distinguishing
features. The features are often very subtle. The rules for differentiating
the
benign and malignant cases are vague and not easily formulated.
One
way
to reduce reading errors is to have two radiologists read the same mammograms
independently. However, in most health care systems, it is not feasible
to
implement such a two-radiologist reading process. A computer-assisted detection
(CAD) system serving as a second reader is therefore an attractive option
and
CAD is currently reimbursed by both insurance companies and
Medicare.
One
of
the most recent advances in x-ray mammography
is
digital mammography. Digital (computerized) mammography is similar to standard
mammography in that x-rays are used to produce detailed images of the breast.
Digital mammography uses essentially the same mammography system as conventional
mammography, but the system is equipped with a digital receptor and a computer
instead of a film cassette. Several studies have demonstrated that digital
mammography is at least as accurate as standard mammography.
For
a
woman getting either a traditional film mammogram or the digital version,
the
experience of the exam is the same: each breast is compressed by a machine
between square plates, while a very low dose of radiation
is
passed through the tissue. The major difference comes in how the image
is viewed
and stored. Digital scans are stored in bits and bytes on a computer where,
theoretically, they can be enhanced for contrast if necessary, or otherwise
manipulated to improve the information provided.
22
Both
digital and film mammography use X-rays to produce an image of the breast.
In
film mammography, which has been used for over 35 years, the image is created
directly on a film. While standard film mammography is very good, it is
less
sensitive for women who have dense breasts. A major limitation of film
mammography is the film itself. Once a film mammogram is obtained, it cannot
be
significantly altered; if the film is underexposed, for example, contrast
is
lost and cannot be regained.
Digital
mammography takes an electronic image of the breast and stores it directly
in a
computer. Digital mammography uses less radiation than film mammography
and
allows for improvement in image storage and transmission because images
can be
stored and sent electronically. Radiologists can use software to help interpret
digital mammograms.
In
September 2006, digital mammograms received heightened attention when the
National Cancer Institute released details of the Digital Mammographic
Imaging
Screening Trial (DMIST), a $26 million study of 49,528 women at 33 sites
in the
United States. DMIST showed that, for the entire population of women studied,
digital and film mammography had very similar screening accuracy. However,
the
study concluded that the new digital technology was found to be better
than film
mammograms at detecting cancer among three groups of women: (1) those with
very
dense breasts, as determined by their doctors; (2) women under 50, whatever
their breast density; and, (3) women of any age who were premenopausal
or who
had had at least one menstrual period within 12 months of the last mammogram.
These results suggest that for women who fall into the three subgroups,
digital
mammography may be better at detecting breast cancer than traditional film
mammography. Approximately 65% of the women in DMIST fit into one of the
three
subsets that showed a benefit with digital mammography. Today, approximately
8%
of breast imaging units provide digital mammography.
MammoSIGHT
HDC’s
MammoSIGHT
technology introduces the use of SVMs in detecting malignancy in mammograms.
The
SVM classifier produces an index discriminating between the benign and
malignant
cases. The individual components can be developed in parallel because of
the
modular structure. In developing the calcification segmentation component,
a
selected set of malignant, benign and normal cases representing a wide
range of
images was used to guide and test the design in order to produce a general,
robust and accurate algorithm. At the same time, the SVM classifier was
developed and tested with manually prepared input data. A set of 300 images
(150
benign and 150 malignant cases) was used in training the SVM. An independent
set
of 328 images was used for testing. High dimensional input features were
used to
ensure a sufficient capacity for automatically extracted features.
Clusters
of micro calcifications are characterized by their relatively small sizes
and
high densities. The algorithm combines a recursive peak seeking technique
with
morphological operations to achieve a highly accurate calcification detection
and segmentation.
MetastaSIGHT
Cancer
cells have the ability to migrate from the organ of its origin to any distant
organ throughout the body. This is known as metastasis, the hallmark of
malignant cancers. During metastasis, cancerous cells break through barriers
to
travel through the body’s circulatory system to invade other organs. These cells
form new cells in vital organs throughout the body, becoming secondary
tumors
that destroy normal cells by depriving them of nutrition.
Even
with
today’s best treatment when the cancer is forced into remission, metastasis will
not necessarily leave the body. Metastasis cannot be eliminated by surgery.
Often, malignant cells circulate in the blood before detection by clinical
examination. MetastaSIGHT
uses an
SVM-based approach to introduce new cellular imaging technology that identifies
circulating tumor cells in the blood.
Employees
On
December 31, 2006, we had 5 full time employees. We do not expect any
significant change in the number of employees over the next 12 months.
We
consider our employee relations to be good, and we have no collective bargaining
agreements with any employees.
23
Website
Address
Our
corporate website address is www.HealthDiscoveryCorp.com. To view our public
filings from the home page, select the “Display SEC Filings” tab followed by
“SEC Filings.” This is a direct link to our filings with the Securities and
Exchange Commission (“SEC”), including but not limited to our Annual Report of
Form 10-KSB, quarterly reports on Form 10-QSB and current reports on Form
8-K,
and any amendments to these reports. These reports are accessible soon
after we
file them with the SEC.
Governmental
Regulation
Our
business plan involves First
Phase Biomarker Discovery in
the
field of molecular diagnostics. This early discovery process does not involve
any governmental regulations or approvals. If we are successful in licensing
our
discoveries to other companies, FDA approvals may be required before the
ultimate product may
be
sold to consumers. Companies licensing our discoveries or technologies
will be
responsible for all costs involved in such approvals. If we are not successful
in licensing these discoveries and choose to take these discoveries to
market
ourselves, we may then be subject to applicable FDA regulations and would
then
bear the costs of such approvals.
We
know
of no governmental regulations that will affect the Company’s current operations
or products.
Intellectual
Property
In
connection with the SVM Acquisition, we obtained rights to the intellectual
property within the “SVM portfolio” that currently consists of twenty patents
which were or have since issued as well as 35 other patent applications
that are
pending in the U.S. and elsewhere in the world. The issued patents and
pending
applications in the SVM portfolio to date, including new applications that
we
have filed since acquiring the original IP, HDC are:
|
Patent/Application
No.
|
Title
|
Expiration
Date
|
||
|
U.S.
Patent No. 6,128,608
|
Enhancing
Knowledge Discovery Using Multiple Support Vector Machines
|
05/01/2019
|
||
|
U.S.
Patent No. 6,157,921
|
Enhancing
Knowledge Discovery Using Support Vector Machines in a Distributed
Network
Environment
|
05/01/2019
|
||
|
U.S.
Patent No. 6,427,141
|
Enhancing
Knowledge Discovery Using Multiple Support Vector
Machines.
|
05/01/2019
|
||
|
U.S.
Patent No. 6,658,395
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines.
|
05/01/2019
|
||
|
U.S.
Patent No. 6,714,925
|
System
for Identifying Patterns in Biological Data Using a Distributed
Network.
|
05/01/2019
|
||
|
U.S.
Patent No. 6,760,715
|
Enhancing
Biological Knowledge Discovery Using Multiple Support Vector
Machines.
|
05/01/2019
|
||
|
U.S.
Patent No. 6,789,069
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses.
|
05/01/2019
|
||
|
U.S.
Patent No. 6,882,990
|
Method
of Identifying Biological Patterns Using Multiple Data
Sets.
|
05/01/2019
|
||
|
U.S.
Patent No. 6,944,602
|
Spectral
Kernels for Learning Machines
|
02/19/2023
|
||
|
U.S.
Patent No. 6,996,542
|
Computer-Aided
Image Analysis
|
04/21/2021
|
||
|
U.S.
Patent No. 7,117,188
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
05/01/2019
|
||
|
Australian
Patent No. AU 764897
|
Pre-processing
and Post-processing for Enhancing Knowledge Discovery Using Support
Vector
Machines.
|
05/01/2019
|
24
|
Patent/Application
No.
|
Title
|
Expiration
Date
|
||
|
Australian
Patent No. AU 780050
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines.
|
05/24/2020
|
||
|
Chinese
Patent No. ZL00808062.3
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines.
|
05/24/2020
|
||
|
European
Patent No. 1192595
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines.
|
05/24/2020
|
||
|
German
Patent No. DE60024452.0-08
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines.
|
05/24/2020
|
||
|
Israeli
Patent No. 146705
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines
|
05/24/2020
|
||
|
Norwegian
Patent No. 319,838
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines.
|
05/24/2020
|
||
|
Australian
Patent No. AU 779635
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses.
|
10/27/2020
|
||
|
Canadian
Application No. 2,330,878
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support
Vector
Machines
|
05/01/2019
|
||
|
European
Publication No. 1082646
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support
Vector
Machines
|
05/01/2019
|
||
|
Hong
Kong Application No. 011065063
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support
Vector
Machines
|
05/01/2019
|
||
|
Indian
Application No. 2000/00580
|
Pre-Processing
and Post-Processing for Enhancing Knowledge Discovery Using Support
Vector
Machines
|
05/01/2019
|
||
|
Canadian
Application No. 2,371,240
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines
|
05/24/2020
|
||
|
Indian
Application No. 2001/01329
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines
|
05/24/2020
|
||
|
Japanese
Application No. 2000-620577
|
Enhancing
Knowledge Discovery from Multiple Data Sets Using Multiple Support
Vector
Machines
|
05/24/2020
|
||
|
South
Korean Application No. 7015064/2001
|
Enhancing
Knowledge Discovery from Data Sets Using Multiple Support Vector
Machines
|
05/24/2020
|
||
|
Canadian
Application No. 2,388,595
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses
|
08/07/2020
|
||
|
European
Publication No. 1236173
|
Method
of Identifying Patterns in Biological Systems and Method of
Uses
|
08/07/2020
|
||
|
Japanese
Application No. 2001-534088
|
Method
of Identifying Patterns in Biological Systems and Methods of
Uses
|
08/07/2020
|
||
|
U.S.
Patent Publication No. 2005/0165556
|
Colon
Cancer-Specific Markers
|
05/01/2019
|
||
|
U.S.
Application No. 11/274,931
|
Biomarkers
for Screening, Predicting, and Monitoring Prostate Disease
|
05/01/2019
|
||
|
PCT
Application No. PCT/US2005/041442
|
Biomarkers
for Screening, Predicting, and Monitoring Prostate Disease
|
11/14/2025
|
||
|
Australian
Application No. 2002253879
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
01/24/2022
|
25
|
Patent/Application
No.
|
Title
|
Expiration
Date
|
||
|
European
Publication No. 1459235
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
01/24/2022
|
||
|
Japanese
Application No. 2002-560076
|
Methods
of Identifying Patterns in Biological Systems and Uses
Thereof
|
01/24/2022
|
||
|
U.S.
Patent Publication No. 2006/0074821
|
Spectral
Kernels for Learning Machines
|
02/19/2023
|
||
|
European
Publication No. 1384155
|
Spectral
Kernels for Learning Machines
|
02/19/2023
|
||
|
U.S.
Patent Publication No. 2005/0071300
|
Kernels
and Methods for Selecting Kernels for Use in a Learning
Machine
|
05/07/2022
|
||
|
European
Publication No. 1393196:
|
Kernels
and Methods for Selecting Kernels for Use in a Learning
Machine
|
05/07/2022
|
||
|
U.S.
Application No. 11/349,542
|
Computer-Aided
Image Analysis
|
05/01/2019
|
||
|
Canadian
Application No. 2,435,290
|
Computer
Aided Image Analysis
|
01/23/2022
|
||
|
European
Publication No. 1356421
|
Computer
Aided Image Analysis
|
01/23/2022
|
||
|
Japanese
Application No. 2002-560082
|
Computer
Aided Image Analysis
|
01/23/2022
|
||
|
U.S.
Patent Publication No. 2005/0216426
|
Methods
for Feature Selection in a Learning Machine
|
08/07/2020
|
||
|
U.S.
Patent Publication No. 2005/0071140
|
Model
Selection for Cluster Data Analysis
|
05/17/2022
|
||
|
U.S.
Application No. 10/481,068
|
Data
Mining Platform for Bioinformatics
|
08/07/2020
|
||
|
U.S.
Patent Publication No. 2005/0228591
|
Kernels
and Kernel Methods for Spectral Data
|
08/07/2020
|
||
|
U.S.
Patent Publication No. 2005/0131847
|
Pre-Processed
Feature Ranking for a Support Vector Machine
|
08/07/2020
|
||
|
European
Publication No. 1449108
|
Pre-Processed
Feature Ranking for a Support Vector Machine
|
11/07/2022
|
||
|
U.S.
Provisional Application No. 60/833,644
|
Biomarkers
for Screening, Predicting, and Monitoring Benign Prostate
Hyperplasia
|
N/A
|
||
|
U.S.
Provisional Application No. 60/888,070
|
Biomarkers
for Screening, Predicting, and Monitoring Prostate Disease
|
N/A
|
HDC
also
owns intellectual property rights in U.S. and foreign patents and pending
patent
applications covering the FGM technology. The FGM portfolio includes 1
issued
patent and 6 pending patent applications, which are:
|
U.S.
Patent No. 6,920,451
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets.
|
01/19/2021
|
||
|
U.S.
Patent Publication No. 2005/026199
|
Method
for Identifying Biomarkers Using Fractal Genomics
Modeling.
|
01/19/2021
|
26
|
Patent/Application
No.
|
Title
|
Expiration
Date
|
||
|
U.S.
Patent Publication No.: 2005/0158735
|
Method
for Studying Cellular Chronomics and Causal Relationships of
Genes Using
Fractal Genomics Modeling.
|
01/19/2021
|
||
|
U.S.
Patent Publication No.: 2005/0076190
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets.
|
01/19/2021
|
||
|
WIPO
Publication No. WO 2006/083330
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets.
|
05/05/2007
|
||
|
European
Publication No.: 1252588
|
Method
for the Manipulation, Storage, Modeling, Visualization and Quantification
of Datasets.
|
01/19/2021
|
Our
Competition
HDC’s
main service/product is First-Phase
Biomarker Discovery.
While
there are numerous companies that perform individual steps in this process,
we
know of no other company that performs all steps in First-Phase
Biomarker Discovery.
Competing companies in the biomarker discovery arena have made numerous
promising discoveries but have failed to bring fully validated biomarkers
to
market. We feel that by performing and controlling all steps of this process,
we
can eliminate the problems these companies have had in validating their
findings, and thus, produce fully validated, marketable biomarkers.
Our
SVM
and FGM technologies give us a distinct advantage over competing technologies.
Neither classical statistical analysis nor neural networks (the two competing
technologies) can handle the large amounts of inputs necessary to produce
fully
validated biomarkers.
Research
and Development
Our
past
Research and Development costs have been minimal due to the unique relationships
we have maintained with the members of our scientific team and their
institutions. Our total R&D costs have consisted solely of the consultant
fees paid to Dr. Stamey, Dr. Vapnik, and Dr. Guyon. These fees consisted
of
$70,734 in cash for 2006 and $404,421 in cash for 2005.
PROPERTIES
We
do not
own any real property. We lease 1,554 square feet of office space in
Savannah,
Georgia, on a month-to-month basis for a cost of $1,036 per month. Our
principal
executive office is located at 5501 ½ Abercorn Street, Savannah, Georgia 31405,
and our telephone number is (912) 352-7488. Our principal executive office
is
well maintained and suitable for the business conducted in it.
LEGAL
PROCEEDINGS
On
May
25, 2004, we filed suit in the District Court of McLennan County, Texas,
against
Bill G. Williams, Shirley K. Williams, W. Steven Walker, Jerry W. Petermann
and
a company controlled by Mr. Williams. In this action we allege that an
aggregate
of 700,000 shares of our common stock (4,900,000 after a 7-1 stock split)
issued
to Mr. Williams, Mr. Walker, Mr. Braswell and Mr. Petermann were not
issued in
compliance with Texas law and we sought to restrain the defendants and
persons
acting on their behalf or in concert with them from selling any shares
of our
stock. We also requested that the Court declare we were permitted to
cancel the
shares issued to the defendants and award monetary damages, attorney’s fees and
costs of the action.
In
June
2004, Jerry W. Petermann agreed to return to the Company 1,000,000 shares
of the
Company stock, which were cancelled upon return to the Company. In addition,
in
June 2004, Robert S. Braswell IV agreed to return to the Company 2,100,000
shares of the company stock, all of which were cancelled upon return
to the
Company. Cancellation of the returned stock certificates was considered
full and
final settlement of the claims brought against Mr. Petermann and Mr.
Braswell in
this lawsuit.
27
In
July
2004, W. Steven Walker Esq., former general counsel, an officer and director
of
the Company, agreed to settle with the Company and return 366,036 shares
of our
common stock, which were all of the shares then owned by him, and he
will no
longer be a party to the suit. At this time, only the shares originally
issued
to Mr. Williams are subject to the suit, and the Company believes he
controls
approximately 1.6 million shares of our common stock.
After
several rulings at the District Court, on August 25, 2004 the Court of
Appeals
for the Tenth District of the State of Texas granted our appeal and entered
an
order, remanding the case to the original trial judge with instructions
to issue
a temporary injunction to preserve the status quo. The injunction will
remain
until a judgment in the case becomes final or the court otherwise instructs.
The
injunction requires the remaining defendants, their agents, employees,
affiliates, any person or entity they control, and any person acting
in concert
with them to (i) stop and refrain from selling or otherwise disposing
of any
share of our common stock; and (ii) deposit into the registry of the
District
Court all shares of our common stock they now own or hold. Costs of the
appeal
were assessed against the Respondents. The defendants have asserted several
counter claims against the Company, including a derivative action, and
have
brought third-party claims against several current officers of the
Company.
On
June
26, 2006, we originally filed suit in the United States District Court
for the
Eastern District of Texas against Ciphergen Biosystems, Inc. (“Ciphergen”),
alleging claims for infringement of three patents related to support
vector
machine technology and seeking monetary and injunctive relief. Ciphergen
denied
infringement, challenged the validity of the patents, and alleged counterclaims
against us. We deny liability to Ciphergen under the alleged counterclaims.
Pursuant to a motion filed by Ciphergen, the litigation has been transferred
to
the United States District Court for the Northern District of
California.
On
June
26, 2006, we also filed suit in the United States District Court for
the Eastern
District of Texas against Equbits LLC (“Equbits”), alleging claims for
infringement of three of our patents related to Support Vector Machine
technology and seeking monetary and injunctive relief. On November 27,
2006, the
court entered a Consent Final Judgment permanently enjoining Equbits
from
making, using, selling, renting, leasing, or offering to sell in the
United
States, or from importing into the United States, any product that utilizes
support vector machine technology, with certain limited exceptions related
to
technical support for previously sold products to two third
parties.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Corporate
Overview
Our
Company is a pattern recognition company that uses advanced mathematical
techniques to analyze large amounts of data to uncover patterns that
might
otherwise be undetectable. Our Company operates primarily in the emerging
field
of molecular diagnostics where such tools are critical to scientific
discovery.
Our primary business consists of licensing our intellectual property
and working
with prospective customers on the development of varied products that
utilize
pattern recognition tools. We also endeavor to develop our own product
line of
newly discovered biomarkers and pathways that include
human genes and genetic variations, as well as gene, protein, and metabolite
expression differences. In drug discovery, biomarkers can help elicit
disease
targets and pathways and validate mechanisms of drug action. They may
also be
pharmacodynamic
indicators of drug activity, response and toxicity for use in clinical
development.
We
intend
to provide pharmaceutical and diagnostic companies with all aspects
of first
phase diagnostic and drug discovery, from expert assessment of the
clinical
dilemma through proper selection and procurement of high quality specimens.
We
will then apply our proprietary analytical evaluation methods and
state-of-the-art computational analysis to derive relevant and accurate
clinical
data, producing accurate biomarker and pathway discoveries, resulting
in patent
protection of our biomarker discoveries for future development.
Our
business is based on the belief that in order to discover the most
clinically
relevant biomarkers, the computational component must begin at the
inception of
the clinical dilemma to be solved. This process includes several critical
levels
of decision-making - all of which are part of our business strategy.
We intend
to produce more relevant and predictable biomarkers for drug discovery
so that
new and better medicines and diagnostic markers can be developed for
patients
worldwide. With the completion of the acquisition of the SVM portfolio
of
patents we plan to begin to license the use of this technology.
28
Year
Ended December 31, 2006 Compared with Year Ended December 31,
2005
Revenue
For
the
year ended December 31, 2006, revenue was $203,889 compared with $224,000
in
revenue for the year ended December 31, 2005. Revenue is recognized for
licensing and development fees over the period earned. As of December
31, 2006,
the Company had received cash of $101,111 which was not recognized as
revenue
and is reported as deferred revenue. No such amount was recorded as of
December
31, 2005.
Cost
of Sales and Gross Margin
Cost
of
sales for 2006 was $28,671.
Cost of
sales includes all direct costs associated with the acquisition and development
of patents and processes sold. All direct costs, primarily professional
fees
associated with licensing negotiations, are also included in cost of
sales. Cost
of sales was $33,536 in 2005.
Operating
and Other Expenses
Amortization
expense was $262,719 for the twelve months ended December 31, 2006 compared
with
$251,097 for the comparable period in 2005. This increase was due to
amortization being charged throughout all of 2006 for intangibles acquired
during 2005.
Professional
and consulting fees totaled $1,123,498 for 2006 compared with $1,567,500
for
2005. These fees, related to legal, accounting and scientific activities,
were
reduced by 28.3% in 2006 because of continued efforts to control costs
related
to regulatory filing activity, patent protection efforts, and general
corporate
legal and accounting work along with benefits achieved in restructuring
accounts
payable.
Compensation
of $770,000 for the twelve months ended December 31, 2006 was lower than
the
$822,261 reported for the comparable period of 2005. Compensation year
to date
benefited from implementation of a salary reduction plan in the third
quarter of
2006. However, this benefit was offset by increased expense for compensation
of
$279,896 for warrants and options charged as a result of the implementation
of
SFAS 123(R) effective January 1, 2006.
Other
general and administrative expenses decreased from $656,214 in 2005 to
$542,710
in 2006. This decrease was largely due to expense reduction efforts throughout
the entire 2006 period.
Loss
from Operations
The
loss
from operations for the twelve months ended December 31, 2006 was $2,523,709
compared to $3,106,608 for the prior year. The decreased loss was due
to the
factors enumerated above.
Other
Income and Expense
Interest
income was $21,008 for the twelve months ended December 31, 2006 compared
to
$2,998 in 2005. Increased interest income was due to the higher average
cash
available to invest throughout 2006.
A
gain on
the restructuring of accounts payable of $97,864 was recorded in 2006
to reflect
common stock warrants issued in payment of liabilities. No such amount
was
recorded in the comparable 2005 period.
Interest
expense was $190,922 in 2006 compared with $55,406 in 2005. This increase
was
due to the higher interest rate associated with the renegotiated promissory
notes, and interest related to the promissory note executed in the third
quarter
of 2006.
Net
Loss
The
net
loss for the twelve months ended December 31, 2006 was $2,595,759 compared
to
$3,159,016 for the twelve months ended December 31, 2005. The reduced
loss was
due to the smaller loss from operations offset by increased net other
expense,
as previously discussed.
Net
loss
per share was $0.02 and $0.03 for the twelve months ended December 31,
2006 and
2005, respectively. The smaller net loss per share in 2006 compared to
2005 was
due to the smaller net loss and the increased average number of shares
outstanding in 2006.
Liquidity
and Capital Resources
At
December 31, 2006, the Company had $674,366 in available cash. Cash used
by
operating activities was $1,135,134. This was due primarily to the net
loss of
$2,595,759; however, net non-cash charges and adjustments of $1,460,625
favorably impacted the computation of the net cash used. Cash used by
investment
activities was $9,287 due to the acquisition of assets. Net cash provided
by
financing activities was $1,099,620 due to the cash received from the
promissory
note, sale of common stock, and the exercise of stock options and warrants
offset by the repayment of debt totaling $26,780.
29
The
following table summarizes the due dates of our contractual obligations.
The
Company has no long term lease agreements in effect as of December 31,
2006.
|
Total
|
Less
than
1
Year
|
1-3
Years
|
||||||||
|
Accounts
Payable Deferred
|
$
|
170,966
|
$
|
170,966
|
$
|
—
|
||||
|
Deferred
Compensation
|
30,000
|
30,000
|
—
|
|||||||
|
Accrued
Interest
|
140,875
|
—
|
140,875
|
|||||||
|
Convertible
Notes Payable
|
665,643
|
—
|
665,643
|
|||||||
|
Term
Debt
|
321,911
|
—
|
321,911
|
|||||||
|
Promissory
Note
|
1,000,000
|
—
|
1,000,000
|
|||||||
|
Total
|
$
|
2,329,395
|
$
|
200,966
|
$
|
2,128,429
|
||||
On
September 1, 2006 the Company issued a promissory note in the amount of
$1,000,000 to one of our directors. The annual interest rate is 5%, and
the
entire amount including accrued interest is due 2 years from the date of
execution. The note may be repaid at any time prior to the due date with
no
penalty or additional fees. The Company intends to use the proceeds to
fund
general working capital requirements. The Company also issued 10,000,000
common
stock warrants with an exercise price of $0.16 in connection with the promissory
note. The warrants fully vest over ten months if the promissory note remains
unpaid during that period. The estimated value of these warrants of $554,000
was
recorded as additional paid in capital and debt discount and will be accreted
as
interest expense over the term of the promissory note.
Also,
on
September 1, 2006, the Company and an officer of the Company and an employee
of
the Company entered into amendments to each of the employment agreements
whereby
both waived receipt of compensation aggregating $143,200 deferred pursuant
to
such amended employment agreements in exchange for a one-time payment of
$6,000
and $1,460, respectively. The Company will also reimburse the officer and
the
employee for any adverse tax consequences associated therewith. As
a
result, the Company recorded a reduction in compensation expense during
the
quarter of $143,200. The amount had previously been accrued as compensation
to
the officers with deferred payment terms. Prior to the renegotiation, the
officers were receiving a portion of their salary in cash and deferring
the
remainder to be paid at a later date but agreed to
forfeit
$143,200 in their deferred salary for a one-time payment of $7,460.
Additionally, the officers received an increase of 25% of their current
salary
amount paid in cash beginning in November 2006.
In
addition, on September 1, 2006, the Company and certain holders of promissory
notes previously issued by the Company entered into amendments to extend
deferral of all remaining payments due under the notes until September
1, 2008.
The notes were issued by the Company in July 2004 as consideration for
the
purchase of interests in the support vector machine patent portfolio. As
of
September 1, 2006, the notes had aggregate remaining principal of approximately
$321,911 due in October 2007, with accrued interest of approximately $38,000.
The deferred amounts will continue to accrue interest at a rate of 18%,
which
will be paid in shares of the Company’s common stock valued at $0.24 per
share.
The
Company, in an effort to preserve cash, to enable the Company to continue
its
operations, and as a condition to the loan from the director, negotiated
a
restructuring of certain of its accounts payable with selected vendors,
primarily its legal and professional vendors. Two vendors reduced their
outstanding balances by $37,190, or 50%, in settlement of the full liability
for
a cash payment of $37,190. This settlement was recorded as a gain on
restructuring. Several other vendors agreed to extend the payment terms
and
defer collection on outstanding amounts for an indefinite period of time.
The
Company currently expects to pay such amounts in six to eight months upon
increases in revenues and or additional equity or debt financing, although
none
of those events is certain. The total amount of accounts payable deferred
was
$170,966. The Company also issued 300,000 warrants to these vendors with
an
exercise price of $0.10 per share. The fair value of these warrants on
the grant
date was $16,872 and was recorded as an expense in connection with the
restructuring. The amount was charged to expense in the quarter as the
warrants
vested immediately. The deferred payments to the vendors has not been discounted
as the date of payment is not certain.
30
The
Company has relied primarily on equity funding plus debt financing for
liquidity
during its developmental phase that ended in 2004. The Company produced
sales,
licensing, and developmental revenue in 2005 and 2006 and must continue
to do so
in order to generate sufficient cash to continue operations. The Company’s plan
to have sufficient cash to support operations is comprised of generating
revenue
through licensing its significant patent portfolio, providing services
related
to those patents, and obtaining additional equity or debt financing. The
Company
has been and continues to be in meaningful discussions with a variety of
parties, which if successful, will result in significant revenue.
We
are in
the final stages of negotiations with a large European pharmaceutical company
to
develop a companion diagnostic test using our discovered biomarkers as
surrogates in the last phase of a clinical trial for its new drug to treat
BPH
(enlarged prostate). If the negotiation results in an agreement, we believe
this
will be the first attempt to incorporate a custom-made surrogate biomarker
expression signature into a clinical trial for an existing drug. Working
together with seven corporations and universities we have selected as our
development partners, we believe that the Company can indeed build a successful
test. If the BPH drug ultimately receives FDA approval, the test, which
we
expect to own, could also be used to monitor patients after commercial
launch of
the drug. Such an undertaking has other advantages, as well. The methodology
we
develop might be a model for an important component in the conduct of future
clinical trials worldwide. The advantages of this novel approach could
include
reducing a trial’s duration and cost, providing more objective data, increasing
patient safety by potentially reducing or eliminating placebos, and expediting
the time to market for successful drugs. Almost as importantly, it may
be able
to provide information earlier in the trial process that a drug is not
working,
thus saving time, money and intellectual resources.
We
have
entered into an agreement with a leading biotech company to develop an
SVM-based
diagnostic test to help interpret flow cell cytometry data for a particular
medical condition. Our science team’s analysis of partial data provided to us
demonstrates a successful proof of concept. If our partner accepts our
conclusions, it opens a portal to similar work on diseases such as leukemia
and
lymphoma that are far more prevalent.
We
have
just entered discussions with the same biotechnology company and another
diagnostics firm to develop a breast cancer prognostic test similar to
the
Oncotype DX test from Genomic Health and the new FDA-approved MammaPrint
test
from Agendia, a European firm. If we can reach agreement with either party,
we
will lead the development of this project and own some or all of the final
FDA-approved product. We envision an exclusive relationship with only one
of
these firms, not both.
We
have
started discussions with a large international healthcare company we have
long
pursued. At stake is licensing and product development using SVMs in diagnostic
radiology, including mammography, PET scans, CT scans, MRI and other
radiological images. We own a number of SVM patents in this field that
we think
are very important.
We
are in
early talks with three companies about our recently-discovered 4-gene prostate
cancer biomarker signature, for which we have filed a patent application.
Given
the accuracy (95% AUC, as noted earlier) and disease-specific applicability
of
this biomarker, as well as the level of enthusiasm we discern at these
firms, it
is possible that discussions could progress at a much faster pace than
we have
experienced in the past.
We
have
received serious inquiry from a European molecular diagnostics company
about the
applicability of our RFE-SVM pattern recognition technology to MicroRNA
expression signature discovery and to circulating tumor cells to identify
micro-metastasis in blood.
Finally,
we have been in continuing but still embryonic discussions with a few clinical
labs to provide commercial outlets for biomarker-based clinical tests to
be
developed and wholly or partly owned by us. With one or more such partners,
we
may be able to market tests directly to physicians. The selection of any
particular clinical lab partner may be incorporated into a specific license
and
product development deal.
In
addition to traditional license and development agreements, we are expanding
our
approach to monetizing our intellectual property. In the first quarter
of 2007,
we formed a joint venture, SVM Capital, LLC, with Atlantic Alpha Strategies,
LLC
to apply our SVM pattern recognition tools to quantitative investment analysis.
We believe that research efforts to date show promise in developing
computer-based investment and hedging techniques. The specific goal is
to
substantially reduce investment risk while providing superior, but not
necessarily outsized, returns for comparable asset classes. If SVM Capital
can
advance the predictive art sufficiently, the ultimate business objective
is to
create one or more funds that would appeal to conservative and risk-averse
investors. We believe that there are many “quant funds” successfully using
different mathematics-based techniques, including neural networks, to assist
in
the investment decision-making process by uncovering patterns that might
otherwise be impossible or too time-consuming to discern. To the best of
our
knowledge, none use SVM-based models. In broad terms, if SVM Capital can
replicate in this arena the consistent superiority SVMs have shown, for
example,
over neural networks in hundreds of medical field studies, it could achieve
an
advantaged and patent-protected position in quantitative-based investments
in
equities, debt instruments, currencies and commodities.
31
While
we
have a lot of negotiations in process, there is a possibility that none
will be
finalized or that those that may be finalized do not provide the economic
returns that we expect. Accordingly, the Company has implemented a cash
conservation plan that includes salary deferrals and reductions, reduction
in
consulting payments, negotiated settlements with creditors whereby the
Company
substituted equity instruments for amounts owed, and a heightened scrutiny
of
all potential expenditures. Should it prove necessary, the Company may
also
consider such alternatives as raising additional equity through private
placements and/or debt offerings. Although this raises doubt with respect
to our
ability to operate as a going concern, the Company believes that it has
sufficient capability to operate through the next twelve months.
SIGNIFICANT
ACCOUNTING POLICIES AND
ESTIMATES
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 of these assets. The assets are considered to be impaired if we determine
that the carrying value may not be recoverable based upon our assessment
of the
following events or changes in circumstances such as:
|
·
|
the
asset’s ability to continue to generate income from operations and
positive cash flow in future
periods;
|
|
·
|
loss
of legal ownership or title to the
asset;
|
|
·
|
significant
changes in our strategic business objectives and utilization of
the
asset(s); and
|
|
·
|
the
impact of significant negative industry or economic
trends.
|
If
the
assets are considered to be impaired, the impairment we recognize is the
amount
by which the carrying value of the assets exceeds the fair value of the
assets.
In addition, we base the useful lives and related amortization or depreciation
expense on our estimate of the period that the assets will generate revenues
or
otherwise be used by us. We also periodically review the lives assigned
to our
intangible assets to ensure that our initial estimates do not exceed any
revised
estimated periods from which we expect to realize cash flows from the
technologies. If a change were to occur in any of the above-mentioned factors
or
estimates, the likelihood of a material change in our reported results
would
increase.
Revenue
Recognition
We
recognize revenue principally from license and royalty fees for intellectual
property and from development agreements with research partners. Each element
of
revenue recognition requires a certain amount of judgment to determine
if the
following criteria have been met: i) persuasive evidence of an arrangement
exists; ii) delivery has occurred or services have been rendered; iii)
the
seller’s price to the buyer is fixed or determinable; iv) collectibility is
reasonably assured, and v) both title and the risks and rewards of ownership
are
transferred to the buyer. We are required to make more significant estimates
involving our recognition of revenue from license and royalty fees. Our
license
and royalty fees revenue estimates depend upon on our interpretation of
the
specific terms of each individual arrangement and our judgment to determine
if
the arrangement has more than one deliverable and how each of these deliverables
should be measured and allocated to revenue. In addition, we have to make
significant estimates about the useful life of the technology transferred
to
determine when the risk and rewards of ownership have transferred to the
buyer
to decide the period of time to recognize revenue. In certain circumstances
we
are required to make judgments about the reliability of third party sales
information and recognition of royalty revenue before actual cash payments
for
these royalties have been received.
32
Share-Based
Compensation
Share-based
compensation expense is significant to our financial position and results
of
operations, even though no cash is used for such expense. In determining
the
period expense associated with unvested options, we estimate the fair value
of
each option at the date of grant. We believe it is important for investors
to be
aware of the high degree of subjectivity involved when using option pricing
models to estimate share-based compensation under SFAS No. 123R. The
determination of the fair value of share-based payment awards on the date
of
grant using an option-pricing model is affected by our stock price as well
as
assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, our valuation methodology, the
expected term, expected stock price volatility over the term of the awards,
the
risk-free interest rate, expected dividends and pre-vesting forfeitures.
If any
one of these factors changes and we employ different assumptions in the
application of SFAS No. 123R in future periods, the compensation expense
that we record under SFAS No. 123R will differ significantly from what we
have recorded in the current period.
For
share-based awards issued during the year ended December 31, 2006, we
estimated the expected term by considering various factors including the
vesting
period of options granted, employees’ historical exercise and post-employment
termination behavior, however due to the limited history of our Company,
such
data is limited. We estimated the expected life will be substantially
longer than the vesting period given the start-up nature of our operations
and
accordingly have used the contractual life as the expected term. Our estimated
volatility was derived using our historical stock price volatility. We
have
never declared or paid any cash dividends on our common stock and currently
do
not anticipate paying such cash dividends. The risk-free interest rate
is based
upon U.S. Treasury securities with remaining terms similar to the expected
term
of the share-based awards.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements that provide financing, liquidity, market
or
credit risk support or involve leasing, hedging or research and development
services for our business or other similar arrangements that may expose
us to
liability that is not expressly reflected in the financial
statements.
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 non-cash consideration for services
and the
recoverability of the patents.
Patents
Patents
are amortized over their remaining legal lives, that range from 15 to 20 years,
from the date they are acquired or approved. Legal costs directly associated
with the patent acquisitions and the application process for new patents are
capitalized when incurred and are being amortized over the remaining legal
life
of the related patent. If the applied for patents are abandoned or are not
issued, the Company will expense the capitalized legal costs as an impairment
charge.
The
carrying value of patents is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
As of
November 14, 2005, the Company does not believe there has been any impairment
of
its intangible assets.
33
Issuance
Of Equity Instruments For Non-Cash
Consideration
All
issuances of the Company’s equity instruments for non-cash consideration, which
primarily pertain to services rendered by consultants and others, have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable.
MANAGEMENT
Our
executive officers, directors and significant employees are:
|
Name
|
Age
|
Position
|
||
|
Stephen
D. Barnhill, M.D.
|
48
|
Chief
Executive Officer and Chairman of the Board
|
||
|
Daniel
R. Furth
|
43
|
Principal
Financial Officer, Executive Vice President
|
||
|
Robert
S. Braswell IV
|
51
|
Senior
Vice President
|
||
|
Hong
Zhang, Ph.D.
|
45
|
Senior
Vice President
|
||
|
William
F. Quirk, Jr.
|
64
|
Director
|
||
|
William
M. Goldstein
|
71
|
Director
|
Stephen
D. Barnhill, M.D., is
currently our Chief Executive Officer and Chairman of the Board. He has been
a
member of the Board of Directors since November 2003. He is a physician trained
in laboratory medicine and clinical pathology. He has developed artificial
intelligence, pattern-recognition, and computational techniques which are
used for Medicine, Genomics, Proteomics, Diagnostics and Drug
Discovery.
Dr.
Barnhill is or has been a Fellow of the American College of Physician Inventors,
the American College of International Physicians, the American Medical
Association, the American College of Physician Executives, the American
Association of Artificial Intelligence, the American College of Managed Care
Medicine, the Association of Clinical Scientists, the American Society of
Contemporary Medicine and Surgery, the American Society of Law, Medicine and
Ethics, the Southern Medical Society,
the American Federation for Clinical Research, and the National Federation
of
Catholic Physicians.
Dr.
Barnhill founded the Barnhill Clinical Laboratories in 1988 and served as
Chairman, CEO, President and Medical Director. This laboratory was later
acquired by Corning-Metpath in 1989 and after the acquisition he served as
Medical Director of this clinical laboratory until 1992. This clinical
laboratory, now owned by Quest Diagnostics, continues to be the largest and
busiest clinical laboratory in the Savannah, Georgia area.
In
1992,
Dr. Barnhill founded National Medical Specialty Laboratories and served
as
Chairman, CEO, President, and Medical Director. This research laboratory
was
founded to utilize pattern-recognition mathematics and artificial intelligence
techniques in cancer diagnosis. Dr. Barnhill is an inventor on the very
first
patents issued by the United States Patent and Trademark Office for the
use of
neural networks in medicine. This company was acquired by Horus Therapeutics,
a
New York based pharmaceutical company. Dr. Barnhill served as Executive
Vice-President and Chairman of the Scientific Advisory Board for Horus
Therapeutics until 1998. Johnson & Johnson later acquired the Horus patents
invented by Dr. Barnhill.
In
1999,
Dr. Barnhill founded and served as Chairman, President and CEO of Barnhill
BioInformatics, Inc. Barnhill BioInformatics, Inc. later became Barnhill
Genomics, Inc. and BioWulf Technologies, LLC and raised over $13.5 million
in
private placement funding. The primary focus of these companies was to
utilize
the next generation of artificial intelligence and pattern-recognition
techniques, known as support vector machines, to identify genes that cause
cancer. Dr. Barnhill is the sole inventor on the very first patents issued
by
the United States Patent and Trademark Office for the use of support vector
machines in medicine. From the summer of 2000 until he organized The Barnhill
Group L.L.C. in the summer of 2003, Dr. Barnhill was not engaged in any
professional activities as the result of a non-compete agreement signed
by Dr.
Barnhill when he left the employment of Barnhill Genomics, Inc.
34
Daniel
R. Furth is
our
Principal Financial Officer, Executive Vice President, Secretary and Treasurer.
Mr. Furth is an experienced executive with a proven track record in diverse
industries for both private and public corporations. Since October 2000,
he
served as a corporate communications consultant for several private clients.
During that same period, he also served as a managing member and equity
partner
of Purple Shamrock LLC, a privately held investment group. From 1994 to
2000, he
served as Senior Director of Marketing & Communications for Quality
Distribution, Inc., North America’s largest bulk transportation services
company, where he managed corporate communications, marketing communications,
investor relations, and public affairs. During that time, he was chief
of staff
to QD’s Chairman/CEO and played an instrumental role in the QD’s initial public
offering in 1994 and its subsequent leveraged buyout in 1998. From 1986
to 1994,
Mr. Furth held varied executive positions in both the public and private
sectors
including particular experience with early stage ventures. He earned his
BA
degree in government from Georgetown University in Washington, DC.
Robert
S. Braswell IV
is our
Senior Vice President. Mr. Braswell served as our President from April
2001
until the acquisition of The Barnhill Group LLC, when he assumed his current
position. As President, he guided the creation of Direct Wireless Communications
Inc. (DWCI) and oversaw all administrative functions for both DWCI and
Direct
Wireless Corporation (DWC). Mr. Braswell served as President of DWC since
December 1999 and a member of its Board of Directors since January 1999.
Prior
to holding these positions, Mr. Braswell was an independent businessman
engaged
in business evaluations, real estate development, and home construction
while
running a working ranch operation. His administrative experience comes
from 18
years experience in the common carrier freight business, working for Central
Freight Lines, Inc. from 1974-1992. Mr. Braswell graduated from the University
of Houston in 1983 with a Bachelor of Business Administration in Organizational
Behavior Management.
Hong
Zhang, Ph.D. is
our Senior
Vice President, Computational Medicine. As visiting faculty at Johns Hopkins
University, Dr. Zhang lectured at the Center for Biomarker Discovery on
Bioinformatics: Peak Detection Methods for Mass Spectral Data. Currently a
Yamacraw Associate Professor at Armstrong Atlantic University, Dr. Zhang was
the
Vice President and CIO for a neural network and computer assisted medical
diagnostic systems company that employs neural network and
mathematical/statistical preprocessing techniques. In this position, Dr. Zhang
was involved in digital image processing and pattern recognition for medical
image processing as well as software design and programming for support vector
machine applications. Dr. Zhang was a professor in the Department of
Mathematical Sciences at Purdue University from 1989 to 1996. He has held
numerous academic positions, including Adjunct Associate Professor, Associate
Professor with Tenure, and Assistant Professor. He was a visiting Associate
Professor in 1995 in the Department of Biometry at the Medical University of
South Carolina.
Throughout
his academic career, Dr. Zhang has consulted on many software and analytical
development projects for Union Switch and Signal, Inc., General Electric
Company, and the Department of Pharmacology at the University of Pittsburgh.
Dr.
Zhang has published numerous articles on the use of neural networks in the
detection of cancers. He has been published in more than twenty medical and
technical journals. Dr. Zhang received a Ph.D., Mathematics at the University
of
Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh, 1986, M.S.E.E.,
Electrical Engineering, University of Pittsburgh, 1984, B.S., Computer Science,
Fudan University, 1982. Dr. Zhang’s numerous awards and honors include: National
Cancer Institute SBIR Grant, 1999, 2000; Purdue Research Foundation Summer
Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew Mellon Fellowship,
1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place, Fudan University
Mathematics Competition, 1979.
William
F. Quirk, Jr. is
a
member of the Board of Directors and has been a director since October
25, 2005.
Mr. Quirk is the first outside director to join our board, succeeding Dr.
David
Cooper, the Company’s former president and chief medical officer who recently
resigned his positions to pursue other interests. Mr. Quirk is a private
investor who purchased a significant equity stake in the company in its
successful private placement in July 2005. Prior
to
his retirement in 1996, he held a variety of senior executive positions
in
finance and management including: Fidelity Management & Research in the
mutual fund industry; the investment banking firm Peterson, Diehl, Quirk
&
Company; leveraged buyout firm Kelso & Company; and auto parts supplier
Inline Brake Manufacturing. Mr. Quirk earned his B.S. from the U.S. Naval
Academy and an MBA from the Harvard Business School.
William
M. Goldstein is
a
member of the Board of Directors and has been a director since January
28, 2006.
Mr. Goldstein is currently a partner with
Philadelphia-based Drinker Biddle & Reath LLP. He succeeded Robert Braswell
IV, who resigned his Board seat, but remains a senior executive with the
Company. Since
1982, Mr. Goldstein has been a senior partner with Drinker Biddle & Reath
LLP and has served the firm as a managing partner, chairman of the firm’s
managing partners, and the chair of the Tax Practice Group. In the mid-70’s, Mr.
Goldstein served as Deputy Assistant Secretary for Tax Policy at the U.S.
Treasury Department where he worked directly with Secretary William E.
Simon in
determining the Treasury’s position on various tax and economic issues. He was
also a finalist candidate for Commissioner of the Internal Revenue Service.
Mr.
Goldstein earned his A.B. from Princeton University and his J.D. from Harvard
Law School.
35
The
directors named above will serve until the next annual meeting of our
stockholders. Absent an employment agreement, officers hold their positions
at
the pleasure of the Board of Directors.
We
do not
have a separately designated standing audit committee. The entire board
of
directors is acting as our audit committee, and no individual on our Board
of
Directors possesses all of the attributes of an “audit committee
expert.” In
forming our Board of Directors, we sought out individuals who
would
be able to guide our operations based on their business experience, both
past
and present, or their education. Responsibility for our operations
is centralized
within management, which is comprised of five people.
The
Board
of Directors does not have a policy with regard to the consideration of
candidates to the Board recommended by stockholders. The Board has made
no
determination as to whether or not such a policy should be adopted. The
Board of
Directors will consider candidates recommended by stockholders. To be considered
for
nomination by the Board of Directors at the next annual meeting of stockholders,
Chairman of the Board must receive stockholder recommendations at least
120
calendar days before the anniversary date of the Company’s proxy statement for
the previous year’s annual meeting. To recommend a candidate, a stockholder
should send the candidate’s name, age, credentials (including principal
occupation and employment), contact information and the candidate’s consent to
be considered to the Chairman of the Board in care of the Company at its
principal executive office address. The stockholder should also provide
the
stockholder’s contact information, describe the stockholder’s relationship with
the candidate, and include a statement as to the number of Common Shares
owned
by the stockholder and the length of time such Common Shares have been
owned.
Code
of Ethics
The
Company has adopted a Code of Ethics applicable to its Chief Executive
Officer
and Executive Vice President. This Code of Ethics is posted on our website
at
www.HealthDiscoveryCorp.com.
These
codes are also available without charge upon request directed to Investor
Relations, Health Discovery Corporation, 5501 ½ Abercorn Street, Savannah, GA
31405. The Company intends to disclose amendments or waivers of the Code
of
Ethics required to be disclosed by posting such information on its
website.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth various elements of compensation for our Named
Executive Officers for each of the last three calendar
years:
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Option
Awards ($)
|
All
Other
Compensation
($)
|
Total
|
|||||
|
Stephen
D. Barnhill, M.D.
Chief
Executive Officer
|
2006
2005
|
$125,000
$300,000
|
__
__
|
$6,000
__
|
$131,000
$300,000
|
|||||
|
Daniel
R. Furth
Executive
Vice President
|
2006
2005
|
$71,000
$22,500
|
__
$278,027
|
$5,069
(1)
__
|
$76,069
$300,527
|
| (1) |
health
insurance premiums
|
36
Outstanding
Equity Awards at Fiscal Year-end
|
Option
Awards
|
||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Option
Exercise Price
|
Option
Expiration Date
|
||||
|
Daniel
R. Furth
|
500,000
|
1,000,000
|
$0.10
|
December
5, 2015
|
||||
Director
Compensation
Outside
directors are paid $1.00 each year.
|
Name
|
Fees
Earned or Paid in Cash
($)
|
Total
($)
|
||
|
Stephen
D. Barnhill, M.D.
|
$0.00
|
$0.00
|
||
|
William
F. Quirk, Jr.
|
$1.00
|
$1.00
|
||
|
William
M. Goldstein
|
$1.00
|
$1.00
|
Employment
Agreements
We
entered into a five-year employment agreement with Dr. Stephen Barnhill
on
September 15, 2003, regarding Dr. Barnhill’s employment as President and Medical
Director. The agreement will automatically renew for successive one-year
terms
unless either party gives notice to the other party of its intent not to
renew
within a thirty-day period prior to the end of the then current term. Under
the
terms of the agreement, Dr. Barnhill receives an initial base salary of
$25,000
per month. Dr. Barnhill is eligible to be reimbursed monthly for reasonable
and
necessary business expenses, to participate in an Incentive Stock Option
Plan
(as defined in the agreement) and for other benefits maintained by us.
Dr.
Barnhill will be entitled to 10 paid vacation days during the calendar
year. Dr.
Barnhill’s employment may be terminated without prior written notice for cause,
in which case we will make a lump sum payment equal to the sum of (i) accrued
unpaid wages, (ii) unreimbursed expenses properly incurred prior to the
date of
termination and (iii) the value of all accrued unpaid vacation pay, less
any
amounts he owes to us. If Dr. Barnhill terminates the Barnhill Agreement,
then
he will receive the same benefits as if he was terminated for cause. If
Dr.
Barnhill terminates the Barnhill Agreement, other than for cause, then
we will
give two (2) weeks notice of termination, or in our sole discretion, two
(2)
weeks wages in lieu of notice. The agreement also generally provides that
Dr.
Barnhill will keep confidential information confidential and that he will
not
compete with us in our business nor solicit our customers or employees
for a
period of 12 months following termination of employment. Effective December
30,
2005, we entered into an amendment to the employment agreement with Dr.
Barnhill, under which Dr. Barnhill agreed to defer 60% of his gross annual
pay
until January 1, 2008, representing total deferred payments of $360,000.
The
agreement with Dr. Barnhill was further amended on September 1, 2006, whereby
Dr. Barnhill’s salary was changed to $10,000 per month, and he agreed to waive
the receipt of his deferred compensation for a one-time payment of $6,000
plus
the reimbursement for any negative tax consequences related to the
amendment.
We
entered into an employment agreement with Mr. Daniel R. Furth effective
November
18, 2005 regarding Mr. Furth’s employment as Executive Vice President. The term
of the employment is for three years, with compensation of $60,000, which
is to
be reviewed after the first year for potential increase. Effective as of
September 1, 2006, Mr. Furth’s annual salary was increased to $84,000. Mr. Furth
will also receive options to acquire 1,500,000 shares of our common stock.
Mr.
Furth is eligible to be reimbursed monthly for reasonable and necessary
business
expenses and for other benefits maintained by us. If the Company terminates
the
employment agreement for cause or if the agreement is terminated by Mr.
Furth
without cause, Mr. Furth will be entitled to receive his salary only through
the
date such termination is effective. If Mr. Furth terminates the employment
agreement for cause or, if the employment agreement is terminated without
cause,
he will be entitled to receive his salary for a period of three months
from the
date such termination is effective. The agreement also generally provides
that
Mr. Furth will keep confidential information confidential and that he will
not
compete with us in our business nor solicit our customers or employees
for a
period of 12 months following termination of employment.
37
We
entered into an employment agreement with Mr. Robert Braswell IV effective
as of
January 1, 2006 regarding Mr. Braswell’s employment as Senior Vice President.
Pursuant to his employment agreement, Mr. Braswell will be employed as
Senior
Vice President for a term of three years at an annual salary of $70,000,
fifty
percent of which will be deferred until January 1, 2008. In addition, we
awarded
Mr. Braswell options to acquire 1,500,000 shares of our common stock at
an
exercise price of $0.11 (which was the closing price of the common stock
on the
preceding day) that vested upon issuance, and options to acquire 500,000
shares
of our common stock at an exercise price of $0.11, which vest semi-annually
over
the next two years. Mr. Braswell’s compensation and all other rights under Mr.
Braswell’s employment agreement will terminate (a) upon the death of Mr.
Braswell, (b) upon the disability of Mr. Braswell, (c) for cause, or (d)
without
cause upon ninety days prior notice from either us or Mr. Braswell. If
we or Mr.
Braswell terminates his agreement for cause, Mr. Braswell will be entitled
to
receive his salary for a period of three months from the date such termination
is effective, and all outstanding options to acquire shares of our common
stock
shall vest immediately. If the employment agreement is terminated as a
result of
Mr. Braswell’s disability, we will pay Mr. Braswell’s salary through the date on
which such termination is effective and all outstanding options to acquire
shares of our common stock shall vest immediately. If the employment agreement
is terminated because of Mr. Braswell’s death, Mr. Braswell’s estate will be
entitled to receive his salary though the date on which such termination
is
effective. If the employment agreement is terminated by us without cause,
Mr.
Braswell will be entitled to receive, in a lump sum payment within 15 days
of
termination, his salary for the entire remaining term of the employment
agreement. In addition, all outstanding options to acquire shares of our
common
stock shall vest immediately, and Mr. Braswell will be awarded options
to
purchase additional 300,000 shares of our common stock with an exercise
price of
$0.11, fully vested. If the employment agreement is terminated by Mr. Braswell
without cause, Mr. Braswell will be entitled to receive his salary only
through
the date of such termination is effective, and all outstanding options
to
acquire shares of our common stock shall vest immediately. On September
1, 2006,
we and Mr. Braswell entered into an amendment of Mr. Braswell’s employment
agreement. Pursuant to the amendment, Mr. Braswell agreed to a decrease in his
annual salary to $35,000 and to waive all deferred compensation for a one-time
payment of $1,460.
We
entered into an employment agreement with Dr. David Cooper on November
1, 2003
regarding Dr. Cooper’s employment as President and Chief Medical Officer. The
employment commenced at signing and terminated on October 24, 2005, when
Dr.
Cooper resigned. As compensation for his employment, Dr. Cooper was issued
non-qualified stock options to acquire 3,000,000 shares of our common stock,
of
which options to acquired 600,000 shares of our common stock vested immediately
while options to acquire the remaining 2,400,000 shares vested over time
or upon
certain accomplishments of Dr. Cooper. At the time of Dr. Cooper’s resignation,
options to acquire 400,000 shares had vested and the remaining options
terminated. Upon termination of his employment, Dr. Cooper agreed to observe
all
post-employment covenants set forth in his agreement. Dr. Cooper’s agreement
also generally provided that he will not compete with us in our business
nor
solicit our customers or employees for a period of one year following
termination of his employment.
Scientific
Advisory Board
The
Company continues to perform under an oral agreement with three members
of its
Scientific Advisory Board wherein they are entitled to receive 100,000
shares
each of the Company’s common stock upon satisfactory completion of one year of
service. The arrangement with the Scientific Advisory Board members can
be
terminated at any time by either party.
38
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information concerning the beneficial ownership
of
our common stock as of April 30, 2007 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 April 30, 2007, there
were
116,493,384 shares outstanding.
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of
Beneficial Owner
|
Percent
of Class
|
|||
|
Common
Stock
|
Dr.
Stephen D. Barnhill
Chairman
of the Board, Chief Executive Officer and Chief Medical Officer,
Director
5501
½ Abercorn Street
Savannah,
GA 31405
|
26,230,722
(1)
|
19.36%
|
|||
|
Common
Stock
|
Daniel
R. Furth
Executive
Vice President
5501
½ Abercorn Street
Savannah,
GA 31405
|
750,000
(2)
|
0.55%
|
|||
|
Common
Stock
|
William
Quirk
Director
5501
½ Abercorn Street
Savannah,
GA 31405
|
22,820,002
(3)
|
16.85%
|
|||
|
Common
Stock
|
William
Goldstein
Director
One
Logan Square
18th
and Cherry Streets
Philadelphia,
PA 19103-6996
|
1,375,002
(4)
|
1.02%
|
|||
|
Common
Stock
|
All
executive officers and directors as a group (four persons)
|
51,175,726
|
37.78%
|
The
percentage of our common stock beneficially owned was calculated based
on
116,493,384 shares of common stock issued and outstanding as of April 30,
2007,
plus 18,962,504 warrants and options exercisable by the executive officers
and
directors group. 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
April 30, 2007.
|
(1)
|
These
shares are held by Barnhill Group LLC, which is wholly owned by
Dr.
Barnhill.
|
|
(2)
|
Consists
of vested options.
|
|
(3)
|
Includes
17,150,002 vested warrants.
|
|
(4)
|
Includes
1,062,502 vested warrants.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
On
May 6,
2005, we acquired the remaining 7% of the SVM Patent Portfolio from unaffiliated
third parties for an aggregate cash payment of approximately $270,863,
the
issuance of the promissory notes totaling $37,872 and convertible notes
totaling
$147,401, which were converted by the holders immediately upon issuance
in
exchange for 867,065 shares of our common stock. Approximately $175,000
of the
purchase price was used by the sellers to repay an outstanding obligation
of a
limited liability company of which our chief executive officer was a member.
We
currently sub-lease our principle executive office space from a company
owned by
the wife of Dr. Stephen D. Barnhill. Our rent on this 1,554 sq. ft. office
is
$1,036.00 per month and is rented on a month-to-month basis.
39
On
September 1, 2006, we issued a note (the “Promissory Note”) to William F. Quirk,
Jr., a director of the Company, for $1,000,000. The Promissory Note contains
a
5% annual interest rate and is due on September 1, 2008. The proceeds of
the
Promissory Note will be used for general working capital purposes. The
Promissory Note is completely repayable by the Company at any time without
any
related fees or penalties. In connection with the issuance of the Promissory
Note, Mr. Quirk was granted warrants to purchase 10,000,000 shares of Company
common stock at $0.16 per share. The warrants vest over the next ten months
based on the length of time the Promissory Note is outstanding, as
follows:
|
Total
Vested
|
Number
of Days to Vest
|
|
|
1
Million
|
Immediately
|
|
|
2
Million
|
46
days
|
|
|
3
Million
|
91
days
|
|
|
4
Million
|
121
days
|
|
|
5
Million
|
151
days
|
|
|
6
Million
|
181
days
|
|
|
7
Million
|
211
days
|
|
|
8
Million
|
241
days
|
|
|
9
Million
|
271
days
|
|
|
10
Million
|
300
days
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The
Company changed its accountants from Porter Keadle Moore LLP to Hancock
Askew
& Co., LLP during 2006.
DESCRIPTION
OF CAPITAL STOCK
We
are
authorized to issue 200,000,000 shares of common stock, no par value. As
of
April 30, 2007, there were 116,493,384
shares
of
common stock outstanding. Holders of the common stock are entitled to one
vote
per share for the election of directors and on all other matters submitted
to a
vote of stockholders. They are also entitled to dividends declared by the
directors out of funds legally available for payment of dividends. Holders
of
the common stock do not have any cumulative voting rights or any preemptive
or
similar rights.
Our
Transfer Agent is Corporate Stock Transfer, 3200 Cherry Creek Drive South,
Denver, Colorado 80209; telephone (303) 282-4800.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
We
do not
have any provision of our Articles of Incorporation or By-Laws that require
us
to indemnify our officers and directors on account of any liability they incur
as a result of their actions as officers or directors. However, Section 2.02-1
of the Texas Business Corporation Act permits the indemnification of directors,
officers, agents and employees of a corporation if the person seeking indemnity
acted in good faith and reasonably believed, if a director, that his conduct
was
in the corporation’s best interests, and, if not a director, that his conduct
was not opposed to the corporation’s best interests, and in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Indemnity is not permitted if a person is found liable to the
corporation and is limited to expenses actually incurred in the case of a person
found liable on the basis of personal benefit improperly received by him.
Section 2.02-1 also provides that a corporation shall indemnify directors and
officers against reasonable expenses incurred in connection with a proceeding
if
they are wholly successful, on the merits or otherwise, in the defense of the
proceeding.
A
determination whether to pay indemnity in any preceding may be made by a
majority of a quorum of the board of directors, or a by committee of the board
of directors appointed for such purpose, or by special legal counsel, or by
a
vote of the stockholders, but directors who are defendants or respondents in
a
proceeding may not vote on the matter.
Section
2.02-1 also authorizes a corporation to purchase insurance on behalf of
directors, officers and employees against liability asserted against them as
a
result of their capacities as such. The Company currently has such insurance
on
behalf of directors, officers or employees.
40
We
have
been informed that in the opinion of the Securities and Exchange Commission
indemnification for liabilities arising under the Securities Act of 1933, which
may be permitted to our officers and directors or control persons pursuant
to
the provisions of the Texas Business Corporation Act, is against public policy
as expressed in the Securities Act and is, therefore,
unenforceable.
Certain
legal matters in connection with the shares of common stock offered by this
prospectus have been passed on for Health Discovery Corporation by Powell
Goldstein LLP, Atlanta, Georgia.
Hancock
Askew & Co., LLP audited our balance sheet as of December 31, 2006 and the
related statements of operations, changes in stockholders’ equity, and cash
flows for the year then ended, as stated in their report appearing herein,
which
reports express an unqualified opinion and includes an explanatory paragraph
referring to the Company’s ability to continue as a going concern, and are
included in reliance upon their report given their authority as experts
in
accounting and auditing.
Porter
Keadle Moore audited our balance sheet as of December 31, 2005 and the
related
statements of operations, changes in stockholders’ equity, and cash flows for
the year then ended, as stated in their report appearing herein, which
report
includes an explanatory paragraph referring to the Company’s ability to continue
as a going concern, and is included in reliance upon the report of such
firms
given upon their authority as experts in accounting and auditing.
AVAILABLE
INFORMATION
We
file
annual, quarterly and special reports with the SEC pursuant to the information
requirements of the Securities Exchange Act of 1934. You can read and copy
these
reports, proxy statements, and other information concerning us at the SEC’s
Public Reference Room at 100 F Street, NW, Washington, D.C. 20549. Please
call
the SEC at (202) 942-8090 for further information on the Public Reference
Room.
You can review our electronically filed reports, proxy and information
statements on the SEC’s internet site at http://www.sec.gov.
Our
filings are also available on our website at http://www.HealthDiscoryCorp.com.
We are
not required to deliver an annual report to our stockholders, and we do not
intend to do so for the foreseeable future.
We
have
filed with the SEC, a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. Certain
items are omitted in accordance with the rules and regulations of the SEC.
For
further information with respect to our company and the common stock, reference
is made to the registration statement and the exhibits and any schedules filed
with the registration statement. Statements contained in this prospectus as
to
the contents of any contract or other document referred to are not necessarily
complete and in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or other documents
filed
as an exhibit to the registration statement, each statement being qualified
in
all respects by such reference. You can obtain a copy of the full registration
statement, including the exhibits and schedules thereto, from the SEC as
indicated above.
41
PART
II INFORMATION NOT REQUIRED IN PROSPECTUS
Item
24: Indemnification
of Directors and Officers
We
do not
have any provision of our Articles of Incorporation or By-Laws that require
us
to indemnify our officers and directors on account of any liability they incur
as a result of their actions as officers or directors. However, Section 2.02-1
of the Texas Business Corporation Act permits the indemnification of directors,
officers, agents and employees of a corporation if the person seeking indemnity
acted in good faith and reasonably believed, if a director, that his conduct
was
in the corporation’s best interests, and, if not a director, that his conduct
was not opposed to the corporation’s best interests, and in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Indemnity is not permitted if a person is found liable to the
corporation and is limited to expenses actually incurred in the case of a person
found liable on the basis of personal benefit improperly received by him.
Section 2.02-1 also provides that a corporation shall indemnify directors and
officers against reasonable expenses incurred in connection with a proceeding
if
they are wholly successful, on the merits or otherwise, in the defense of the
proceeding.
A
determination whether to pay indemnity in any proceeding may be made by a
majority of a quorum of the board of directors, or a by committee of the
board
of directors appointed for such purpose, or by special legal counsel, or
by a
vote of the stockholders, but directors who are defendants or respondents
in a
proceeding may not vote on the matter.
Section
2.02-1 also authorizes a corporation to purchase insurance on behalf of
directors, officers and employees against liability asserted against them as
a
result of their capacities as such. Direct Wireless Communications, Inc. does
not have any insurance on behalf of directors, officers or
employees.
We
have
been informed that in the opinion of the Securities and Exchange Commission
indemnification for liabilities arising under the Securities Act of 1933, which
may be permitted to our officers and directors or control persons pursuant
to
the provisions of the Texas Business Corporation Act, is against public policy
as expressed in the Securities Act and is, therefore,
unenforceable.
Item
25: Other
Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses to be paid in connection
with
the common stock being registered, all of which will be paid by Health Discovery
Corporation (on behalf of itself and the selling stockholders) in connection
with this offering. All amounts are estimates except for the registration
fee.
|
SEC
Registration Fee
|
$
|
2,511.93
|
|||
|
Legal
and Accounting Fees and Expenses
|
$
|
35,000.00
|
|||
|
Printing
and filing
|
$
|
1,500.00
|
|||
|
Miscellaneous
|
$
|
500.00
|
|||
|
Total
|
$
|
39,511.93
|
Item
26: Recent
Sales of Unregistered Securities
On
July
31, 2004, we completed the private sale of 15,235,000 shares of restricted
common stock to individual accredited investors at an offering price of
$0.10
per share for a total of $1,523,500. Under the terms of the sale, the Company
issued 15,235,000 restricted common shares. In addition, each purchaser
of
common shares was
granted a warrant to acquire an equal number of restricted common shares
at a
fixed price of $0.35 per share, which expired in February 2007. This could
result in the issuance of up to 15,235,000 additional restricted common
shares
upon exercise. The Company entered into purchase agreements with each of
the
investors, the form of which is attached as Exhibit 10.6. Neither the shares
sold pursuant to the private placement nor the shares issuable upon the
exercise
of the warrants will be registered under either federal or state securities
laws
and must be held for at least one year from the time they are issued. The
securities issued in the private placement were not registered under the
Securities Act of 1933, as amended, and until they are registered the securities
may not be offered or sold in the United States absent registration or
the
availability of an applicable exemption from registration. The shares and
the
warrants, the form of which is attached as Exhibit 10.7, were offered and
sold
in reliance upon exemptions from registration pursuant to Section 4(2)
under the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Based on the information provided by each of the investors, all investors
qualify as accredited investors (as defined by Rule 501 under the Securities
Act
of 1933, as amended).
42
On
March
9, 2005, we completed the private sale of 30,703,125 shares of restricted
common
stock to certain institutional investors and individual accredited investors
at
an offering price of $0.16 per share for a total of $4,912,500. For every
share
of common stock purchased, each investor received warrants to purchase
one share
of the Company’s common stock at $0.24 per share, exercisable until December 31,
2008. This could result in the issuance of up to 30,703,125 additional
restricted common shares upon exercise. We entered into purchase agreements
with
each of the investors, the form of which is attached as Exhibit 10.8. Under
each
agreement, the Company agreed to use its best efforts to file a registration
statement to register the shares of common stock and the shares underlying
the
warrants issued and sold to the investors by May 9, 2005, and to use its
best
efforts to cause the registration statement to be declared effective July
6,
2005. Shares
totaling 540,000 were issued in 2005 under the penalty provisions of the
agreement. The securities issued in the private placement were not registered
under the Securities Act of 1933, as amended, and until they were registered
the
securities could not be offered or sold in the United States absent registration
or the availability of an applicable exemption from registration. The
shares and the warrants, the form of which is attached as Exhibit 10.9,
were
offered and sold in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Regulation
D
promulgated thereunder. Based on the information provided by each of the
investors, all investors qualify as accredited investors (as defined by
Rule
501 under the Securities Act of 1933, as amended). On March 10, 2005, we
filed
registration statement No. 333-124750 for 18,609,375 shares of restricted
common
stock and the equivalent number of warrants.
On
December 14, 2005, the Company filed registration statement 333-124750
wherein
31,622,749 shares of stock and 32,638,436 warrants were registered with
the
Securities and Exchange Commission.
We
paid a
cash fee of approximately $356,250, agreed to issue warrants to acquire
1,303,121 shares of common stock and agreed to issue 50,132 shares of common
stock to placement agents for assisting us in these two private
sales.
Additional
Issuance of Securities
Two
members of the Company’s Scientific Advisory Board, Drs. Vapnik and Stamey, were
each issued our common stock, no par value, equal to $10,000 per month
beginning
in August 2004 and ending in the second quarter of 2006. For 2005, Drs.
Vapnik
and Stamey were each contractually entitled to stock grants equivalent
to
$140,000. Drs. Vapnik and Stamey forfeited 1,580,532
shares
in December 2005, and any shares issued pursuant to their agreements were
rescinded. No further shares have been issued in connection with these
agreements. In
2004,
the Company issued 422,372 shares for services, including members of the
Company’s Scientific Advisory Board. In 2005, the Company issued 2,039,453
shares to consultants and members of the Scientific Advisory Board, 308,133
shares in settlement of liabilities, 3,585,741 shares to noteholders who
exchanged their notes for stock and 540,000 shares in accordance with the
penalty provisions of the stock purchase agreement as amended February
25, 2005.
In December 2005, two consultants who had previously received shares for
work
performed rescinded 1,580,532 shares.
During
the first quarter of 2006, Mr. David Cooper was issued 600,000 shares of
the
Company’s common stock in exchange for exercising his options, which had an
exercise price of $0.01. On March 31, 2006, Mr. William F. Quirk, Jr. purchased
1,000,000 shares of the Company’s common stock with accompanying warrants to
acquire an equal number of shares. The purchase price for the common shares
was
$.10 per share, and the exercise price of the warrants is $0.15 per share.
During
the second quarter of 2006, the Company issued 500,000 warrants to two
members
of its Scientific Advisory Board. These warrants vest over a one-year period
and
have an exercise price of $0.11. The Company also issued 200,000 warrants
to a
service provider in exchange for professional services. These warrants
vest over
a two-year period and have an exercise price of $0.10. During the second
quarter
of 2006, the Company issued 200,000 shares of stock for warrants exercised
at
$0.01 each. Proceeds of $2,000 were recorded in capital stock.
During
the third quarter of 2006, the Company issued 10,000,000 warrants to purchase
an
equal number of shares of the Company’s common stock to Mr. Quirk in connection
with the loan Mr. Quirk made to the Company. These warrants vest over a
period
of nine months and have an exercise price of $0.16 per share. During the
third
quarter of 2006, the Company also issued 300,000 warrants to purchase an
equal
number of shares of the Company’s common stock in exchange for legal services
provided to the Company. These warrants vest immediately and have an exercise
price of $0.10 per share.
43
In
addition, during the third quarter of 2006, the Company issued 500,000
warrants
to purchase an equal number of shares of the Company’s common stock to a member
of the Company’s Scientific Advisory Board for providing advisory services to
the Company beyond which was expected in his capacity as a Scientific Advisory
Board member. These warrants vest immediately and have an exercise price
of
$0.10 per share.
During
the third quarter of 2006, the Company issued 230,000 shares of stock for
warrants exercised at $0.08 each. Proceeds of $18,400 were recorded in
capital
stock.
On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants
to
purchase common stock of the Company to certain institutional investors
and
individual accredited investors. The warrants vest immediately and have
an
exercise price of $0.35 per share. The warrants expire on November 1,
2007.
All
of
these issuances of equity securities in 2006 were made in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities
Act
of 1933, as amended.
Item
27:
Exhibits
and Financial Statement Schedule
FINANCIAL
STATEMENT SCHEDULES
All
other
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
EXHIBITS
The
following exhibits are attached hereto or incorporated by reference herein
(numbered to correspond to Item 601(a) of Regulation S-B, as promulgated by
the
Securities and Exchange Commission) and are filed as part of this Form
SB-2:
|
3.1
|
Articles
of Incorporation. Registrant incorporates by reference Exhibit
3.1 to
Registration Statement on Form SB-2, filed June 4, 2001.
|
|
|
3.1
(a)
|
Articles
of Amendment to Articles of Incorporation Registrant incorporates
by
reference Exhibit 2.2 to Form10-QSB, filed November 14, 2001.
|
|
|
3.1(b)
|
Articles
of Amendment to Articles of Incorporation changing Registrant name
from
Direct Wireless Communications, Inc., to Health Discovery Corporation.
Registrant incorporates by reference Exhibit 3.1 (b) to form 10-KSB,
filed
March 3, 2004.
|
|
|
3.2
|
By-Laws.
Registrant incorporates by reference Exhibit 3.2 to Registration
Statement
on Form SB-2, filed June 4, 2001.
|
|
|
4.1
|
Copy
of Specimen Certificate for shares of common stock. Registrant
incorporates by reference Exhibit 4.1 to Registration Statement
on Form
SB-2, filed June 4, 2001.
|
|
|
4.1
(b)
|
Copy
of Specimen Certificate for shares of common stock. Registrant
incorporates by reference Exhibit 4.1 (b) to form 10-KSB, filed
March 30,
2004.
|
|
|
4.2
|
Excerpt
from By-Laws. Registrant incorporates by reference Exhibit 4.2
to
Registration Statement on Form SB-2, filed June 4, 2001.
|
|
|
4.2(A)
|
Corrected
Article 3.02 of By-Laws. Registrant incorporates by reference Exhibit
4.2(A) to Amendment No. 2 to Registration Statement on Form SB-2,
filed
August 15, 2001.
|
|
|
4.3(a)
|
Non
Qualified stock option agreements dated October 30, 2003 between
registrant and David Cooper. Registrant incorporates by reference
Exhibit
4.3(a) to form 10-KSB, filed March 30,
2004.
|
44
|
5.1
|
Opinion
of Powell Goldstein LLP on the legality of the securities being
registered. Registrant incorporates by reference Exhibit 5.1
to Form SB-2,
filed May 10, 2005.
|
|
|
5.2
|
Opinion
of Powell Goldstein LLP on the legality of the additional securities
being
registered. Registrant incorporates by reference Exhibit 5.2
to Form
SB-2/A, file October 14, 2005.
|
|
|
5.3
|
Opinion
of Powell Goldstein LLP on the legality of the additional securities
being
registered. Registrant incorporates by reference Exhibit 5.2
to Form
SB-2/A, file December 14, 2005.
|
|
|
10.1
|
Asset
purchase agreement between registrant dated September 15, 2003
and
Barnhill Group LLC. Registrant incorporates by reference Exhibit
10.2 to
form 10-KSB, filed March 30, 2004.
|
|
|
10.2
|
Asset
purchase agreement between registrant dated December 30, 2003
and Fractal
Genomics LLC. Registrant incorporates by reference Exhibit 10.3
to form
10-KSB, filed March 30, 2004.
|
|
|
10.3
|
Employment
Agreement with Stephen Barnhill. Registrant incorporates by reference
Exhibit 10.3 to form 10-KSB, filed April 19, 2005. *
|
|
|
10.3(a)
|
Amendment
to Employment Agreement with Stephen Barnhill. Registrant incorporates
by
reference Exhibit 99.3 to Form 8-K, filed September 1,
2006.
|
|
|
10.4
|
Employment
Agreement with David Cooper. Registrant incorporates by reference
Exhibit
10.4 to form 10-KSB, filed April 19, 2005. *
|
|
|
10.5
|
Form
of Asset Purchase agreement between the registrant and the sellers
of the
SVM Portfolio and related assets. Registrant incorporates by
reference
Exhibit 10.5 to form 10-KSB, filed March 30, 2004.
|
|
|
10.6
|
Form
of Securities Purchase Agreement. Registrant incorporates by
reference
Exhibit 10.6 to form 10-KSB, filed April 19, 2005.
|
|
|
10.7
|
Form
of Warrant. Registrant incorporates by reference Exhibit 10.7
to form
10-KSB, filed April 19, 2005.
|
|
|
10.8
|
Form
of Securities Purchase Agreement. Registrant incorporates by
reference
Exhibit 10.8 to form 10-KSB, filed April 19, 2005.
|
|
|
10.9
|
Form
of Warrant. Registrant incorporates by reference Exhibit 10.9
to form
10-KSB, filed 4/19/2005.
|
|
|
10.10
|
Form
of Amendment to Securities Purchase Agreement. Registrant incorporates
by
reference Exhibit 10.10 to Form SB-2/A, filed December 14,
2005.
|
|
|
10.11
|
Employment
Agreement with Daniel R. Furth, dated as of December 5, 2005.*Registrant
incorporates by reference Exhibit 10.11 to Form SB-2/A, filed
December 14,
2005.
|
|
|
10.12
|
Employment
Agreement with Robert S. Braswell IV, dated as of January 1,
2006.
Registrant incorporates by reference Exhibit 99.1 to Form 8-K,
filed
February 2, 2006.
|
|
|
10.13
|
Form
of Amendment to Promissory Note. Registrant incorporates by reference
Exhibit 99.1 to Form 8-K, filed January 3, 2006.
|
|
|
10.14
|
Form
of Second Amendment to Promissory Note. Registrant incorporates
by
reference Exhibit 99.4 to Form 8-K, filed September 5,
2006.
|
|
|
10.15
|
Promissory
Note issued by Registrant on September 1, 2006 in favor of William
F.
Quirk, Jr. Registrant incorporates by reference Exhibit 99.1
to Form 8-K,
filed September 5, 2006.
|
|
|
10.16
|
Warrant
Agreement by and between Registrant and William F. Quirk, Jr.,
dated as of
September 1, 2006. Registrant incorporates by reference Exhibit
99.2 to
Form 8-K, filed September 5, 2006.
|
|
|
16.1
|
Letter
from Porter Keadle Moore LLP regarding change in certifying accountant.
Registrant incorporates by reference Exhibit 16.1 to Form 8-K,
filed
September 27, 2006.
|
45
|
23.1
|
Consent
of Hancock Askew &Co, LLP.
|
|
|
23.2
|
Consent
of Porter Keadle Moore, LLP.
|
|
|
23.3
|
Consent
of Powell Goldstein LLP (included in Exhibits 5.1, 5.2 and
5.3).
|
| * |
Management
contract or compensatory agreement.
|
Item
28: Undertakings
(a)
(1)
The undersigned registrant hereby undertakes to file, during any period in
which
offers or sales are being made, a post-effective amendment to this registration
statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement; and
(iii)
To
include any additional or changed material information on the plan of
distribution.
(2)
That
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered that remain unsold at the termination of the
offering.
(4)
For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering
of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424 (Section
230.424 of this chapter);
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
(iv)
Any
other communication that is an offer in the offering made by the undersigned
small business issuer to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be permitted to directors, officers and controlling persons of
the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the registrant of expenses incurred or paid by a director, officer
or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
46
Each
prospectus filed pursuant to Rule 424(b) (Section 230.424(b) of this chapter)
as
part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed
in
reliance on Rule 430A (Section 230.430A of this chapter), shall be deemed to
be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided,
however,
that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the
registration statement will, as to a purchaser with a time of contract of sale
prior to such first use, supersede or modify any statement that was made in
the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of first
use.
47
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Savannah, State of
Georgia, on May 2, 2007.
| HEALTH DISCOVERY CORPORATION | ||
| |
|
|
| By: | /s/ Stephen D. Barnhill, M.D., Chief Executive Officer | |
|
Stephen D. Barnhill, M.D., Chief Executive Officer |
||
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
|
Name
|
Title
|
Date
|
||
|
/S/Stephen
D. Barnhill M.D.
Stephen
D. Barnhill M.D.
|
Chief
Executive Officer, Chairman
|
May
2, 2007
|
||
|
/S/Daniel
R. Furth
Daniel
R. Furth
|
Principal
Financial Officer
|
May
2, 2007
|
||
|
/S/William
F. Quirk, Jr.
William
F. Quirk, Jr.
|
Director
|
May
2, 2007
|
||
|
/S/William
M. Goldstein
William
M. Goldstein
|
Director
|
May
2, 2007
|
48
Index
to
Financial Statements
|
F-2
& F-3
|
||
|
F-4
|
||
|
F-8
|
||
F-1
100
Riverview Drive
Savannah,
GA 31404
Report
of
Independent Registered Public Accounting Firm
Board
of
Directors
Health
Discovery Corporation
Savannah,
Georgia
We
have
audited the accompanying balance sheet of Health Discovery Corporation
as of
December 31, 2006 and the related statements of operations, changes in
stockholders’ deficit, and cash flows for the year ended December 31, 2006.
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 audit. The consolidated financial
statements as of December 31, 2005 and for the year then ended were audited
by
other auditors whose report dated March 30, 2006 included an explanatory
paragraph regarding substantial doubt about the Company’s ability to continue as
a going concern.
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 audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our 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 expressed no such opinion.
An audit also includes examining, on a test basis, evidence supporting
the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that
our 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, 2006 and the results of its operations and its cash flows
for the
year ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 1 to Financial Statements and in accordance with guidance
provided in Statement of Financial Accounting Standards No. 123R,
Share-Based Payment, in fiscal 2006 Health Discovery Corporation changed
its
method of accounting for stock-based compensation.
The
accompanying financial statements have been prepared assuming that the
Company
will continue as a going concern. As discussed in Note L, the Company has
had limited revenue since inception, has incurred recurring losses from
operations, and has had to extend the maturity of debt instruments. These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters
are also described in Note L. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Hancock Askew & Co., LLP
Savannah,
Georgia
March
20,
2007
F-2
Porter
Keadle Moore, LLP
Report
of
Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Health
Discovery Corporation
We
have
audited the accompanying balance sheet of Health Discovery Corporation
as of
December 31, 2005, and the related statements of operations, changes in
stockholders’ equity, and the cash flows for the year then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the 2005 financial statements referred to above present fairly,
in all
material respects, the financial position of the Company as of December
31, 2005
and the results of its operations and its cash flows for the year then
ended in
conformity with accounting principles generally accepted in the United
States of
America.
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. The Company has suffered recurring losses
from
operations and negative working capital that raise substantial doubt about
its
ability to continue as a going concern. Management’s plans in regard to these
matters are described in Note L. The financial statements do not include
any
adjustments relating to the recoverability of reported asset amounts or
the
amount of liabilities that might result from the outcome of this uncertainty.
| /s/ Porter Keadle Moore, LLP | ||
Atlanta,
Georgia
March
30,
2006
F-3
Balance
Sheets
December
31, 2006 and 2005
|
Assets
|
|||||||
|
2006
|
2005
|
||||||
|
Current
Assets
|
|||||||
|
Cash
|
$
|
674,366
|
719,167
|
||||
|
Accounts
Receivable
|
20,000
|
—
|
|||||
|
Prepaid
Expense and Other Current Assets
|
55,188
|
17,708
|
|||||
|
Total
Current Assets
|
749,554
|
736,875
|
|||||
|
Equipment,
Less Accumulated Depreciation of $14,257 and $6,660
|
14,743
|
13,053
|
|||||
|
Other
Assets
|
|||||||
|
Patents,
Less Accumulated Amortization of $680,255 and $417,535
|
3,305,540
|
3,568,259
|
|||||
|
Total
Assets
|
$
|
4,069,837
|
4,318,187
|
||||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
Liabilities
|
|||||||
|
Accounts
Payable –
Trade
|
$
|
237,928
|
267,972
|
||||
|
Accrued
Liabilities
|
150,520
|
63,319
|
|||||
|
Deferred
Revenue
|
101,111
|
—
|
|||||
|
Current
Portion of Long-Term Debt
|
—
|
26,780
|
|||||
|
Total
Current Liabilities
|
489,559
|
358,071
|
|||||
|
Accrued
Interest Payable
|
140,875
|
—
|
|||||
|
Convertible
Notes Payable
|
665,643
|
665,643
|
|||||
|
Long-Term
Debt, Less Current Portion
|
321,911
|
321,911
|
|||||
|
Notes
Payable, net of unamortized discount of $461,667
|
538,333
|
—
|
|||||
|
Total
Liabilities
|
2,156,321
|
1,345,625
|
|||||
|
Commitments
and Contingencies
|
|||||||
|
Stockholders’
Equity
|
|||||||
|
Common
Stock, No Par Value, 200,000,000 Shares Authorized
|
|||||||
|
Issued
and Outstanding 116,393,384 and 114,363,384 Shares,
Respectively
|
11,059,674
|
9,522,961
|
|||||
|
Accumulated
Deficit
|
(9,146,158
|
)
|
(6,550,399
|
)
|
|||
|
Total
Stockholders’ Equity
|
1,913,516
|
2,972,562
|
|||||
|
Total
Liabilities and Stockholders’ Equity
|
$
|
4,069,837
|
4,318,187
|
||||
See
accompanying notes to financial statements.
F-4
HEALTH
DISCOVERY CORPORATION
Statements
of Operations
For
the Years Ended December 31, 2006 and 2005
|
2006
|
2005
|
||||||
|
Revenues
|
|||||||
|
Licensing
and Development
|
$
|
203,889
|
135,000
|
||||
|
Patent
Sales
|
—
|
89,000
|
|||||
|
Total
Revenues
|
203,889
|
224,000
|
|||||
|
Cost
of Sales
|
|||||||
|
Licensing
and Development
|
28,671
|
30,573
|
|||||
|
Patent
Sales
|
—
|
2,963
|
|||||
|
Total
Cost of Sales
|
28,671
|
33,536
|
|||||
|
Gross
Profit
|
175,218
|
190,464
|
|||||
|
Expenses:
|
|||||||
|
Amortization
|
262,719
|
251,097
|
|||||
|
Professional
and Consulting Fees
|
1,123,498
|
1,567,500
|
|||||
|
Compensation
|
770,000
|
822,261
|
|||||
|
Other
General and Administrative Expenses
|
542,710
|
656,214
|
|||||
|
Total
Expenses
|
2,698,927
|
3,297,072
|
|||||
|
Net
Loss from Operations
|
(2,523,709
|
)
|
(3,106,608
|
)
|
|||
|
Other
Income (Expense):
|
|||||||
|
Interest
Income
|
21,008
|
2,998
|
|||||
|
Gains
on Restructuring of Accounts Payable
|
97,864
|
—
|
|||||
|
Interest
Expense
|
(190,922
|
)
|
(55,406
|
)
|
|||
|
Total
Other Income (Expense)
|
(72,050
|
)
|
(52,408
|
)
|
|||
|
Net
Loss
|
$
|
(2,595,759
|
)
|
(3,159,016
|
)
|
||
|
Weighted
Average Outstanding Shares
|
115,895,692
|
103,566,777
|
|||||
|
Loss
Per Share
|
$
|
(.02
|
)
|
(.03
|
)
|
||
See
accompanying notes to financial statements.
F-5
HEALTH
DISCOVERY CORPORATION
Statements
of Changes in Stockholders’ Equity
For
the
Year Ended December 31, 2006 and 2005
|
Common
Stock
|
|||||||||||||||||||
|
Issued
and Outstanding
|
Paid
for but Not Issued
|
|
|||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
|
|||||||||||||
|
Balance
–
January 1, 2005
|
78,767,464
|
$
|
3,788,442
|
5,434,375
|
$
|
695,761
|
$
|
(3,391,383
|
)
|
$
|
1,092,820
|
||||||||
|
Stock
Issued for Cash
|
25,268,750
|
3,842,375
|
—
|
—
|
—
|
3,842,375
|
|||||||||||||
|
Issuance
of Shares Previously Paid-for but not Issued
|
5,434,375
|
695,761
|
(5,434,375
|
)
|
(695,761
|
)
|
—
|
—
|
|||||||||||
|
Stock
Issued for Services
|
2,039,453
|
381,876
|
—
|
—
|
—
|
381,876
|
|||||||||||||
|
Stock
Issued in Settlement of Liability
|
308,133
|
78,746
|
—
|
—
|
—
|
78,746
|
|||||||||||||
|
Shares
Issued for Debt Conversion
|
3,585,741
|
609,576
|
—
|
—
|
—
|
609,576
|
|||||||||||||
|
Stock
Compensation Expense for Compensatory Options and Warrants
|
—
|
426,185
|
—
|
—
|
—
|
426,185
|
|||||||||||||
|
Shares
Issued for Delinquency Penalty
|
540,000
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Cancellation
of Common Stock
|
(1,580,532
|
)
|
(300,000
|
)
|
—
|
—
|
—
|
(300,000
|
)
|
||||||||||
|
Net
Loss
|
—
|
—
|
—
|
—
|
(3,159,016
|
)
|
(3,159,016
|
)
|
|||||||||||
|
Balance
- December 31, 2005
|
114,363,384
|
$
|
9,522,961
|
—
|
$
|
—
|
$
|
(6,550,399
|
)
|
$
|
2,972,562
|
||||||||
|
Stock
Issued for Cash
|
1,000,000
|
100,000
|
100,000
|
||||||||||||||||
|
Stock
Issued upon Exercise of Options and Warrants
|
1,030,000
|
26,400
|
—
|
26,400
|
|||||||||||||||
|
Warrants
Issued in Connection with Debt Agreement
|
—
|
554,000
|
—
|
554,000
|
|||||||||||||||
|
Warrants
Issued for Settlement of Liability
|
—
|
72,326
|
—
|
—
|
—
|
72,326
|
|||||||||||||
|
Warrants
Issued for Services
|
—
|
504,091
|
—
|
—
|
—
|
504,091
|
|||||||||||||
|
Stock
Compensation Expense for Compensatory Options and Warrants
|
—
|
279,896
|
—
|
—
|
—
|
279,896
|
|||||||||||||
|
Net
Loss
|
—
|
—
|
—
|
—
|
(2,595,759
|
)
|
(2,595,759
|
)
|
|||||||||||
|
Balance
- December 31, 2006
|
116,393,384
|
$
|
11,059,674
|
—
|
$
|
—
|
$
|
(9,146,158
|
)
|
$
|
1,913,516
|
||||||||
See
accompanying notes to financial statements.
F-6
HEALTH
DISCOVERY CORPORATION
Statements
of Cash Flows
For
the Years Ended December 31, 2006 and 2005
|
2006
|
|
2005
|
|||||
|
Cash
Flows From Operating Activities:
|
|||||||
|
Net
Loss
|
$
|
(2,595,759
|
)
|
$
|
(3,159,016
|
)
|
|
|
Adjustments
to Reconcile Net Loss to Net Cash
|
|||||||
|
Used
by Operating Activities:
|
|||||||
|
Non-cash
Compensation
|
279,896
|
426,185
|
|||||
|
Cancellation
of Common Stock Compensation
|
—
|
(300,000
|
)
|
||||
|
Accretion
of Debt Discount
|
92,333
|
—
|
|||||
|
Increase
in Accounts Receivable
|
(20,000
|
)
|
—
|
||||
|
Services
Exchanged for Common Stock or Warrants
|
504,091
|
381,876
|
|||||
|
Increase
in Deferred Revenue
|
101,111
|
—
|
|||||
|
Gain
on Restructuring Accounts Payable
|
(97,864
|
)
|
—
|
||||
|
Depreciation
and Amortization
|
270,316
|
256,038
|
|||||
|
Increase
in Prepaid Expense
|
(37,480
|
)
|
(17,708
|
)
|
|||
|
Increase
in Accounts Payable – Trade
|
140,145
|
33,287
|
|||||
|
Increase
in Accrued Liabilities
|
228,077
|
(41,732
|
)
|
||||
|
Net
Cash Used by Operating Activities
|
(1,135,134
|
)
|
(2,421,070
|
)
|
|||
|
Cash
Flows From Investing Activities:
|
|||||||
|
Purchase
of Equipment
|
(9,287
|
)
|
(11,623
|
)
|
|||
|
Amounts
Paid to Acquire Patents
|
—
|
(293,744
|
)
|
||||
|
Net
Cash Used by Investing Activities
|
(9,287
|
)
|
(305,367
|
)
|
|||
|
Cash
Flows From Financing Activities:
|
|||||||
|
Repayments
of Notes Payable
|
(26,780
|
)
|
(560,248
|
)
|
|||
|
Proceeds
from Sales of Common Stock, Net
|
126,400
|
3,842,375
|
|||||
|
Proceeds
from Borrowing
|
1,000,000
|
—
|
|||||
|
Net
Cash Provided by Financing Activities
|
1,099,620
|
3,282,127
|
|||||
|
Net
Increase (Decrease) in Cash
|
(44,801
|
)
|
555,690
|
||||
|
Cash,
at Beginning of Period
|
719,167
|
163,477
|
|||||
|
Cash,
at End of Period
|
$
|
674,366
|
$
|
719,167
|
|||
|
Non-Cash
Investing and Financing Transactions:
|
|||||||
|
Debt
Discount in exchange for Warrants
|
$
|
554,000
|
$
|
0
|
|||
|
Patents
Purchased Using Debt
|
$
|
—
|
$
|
185,273
|
|||
|
Stock
Issued in Exchange for Convertible Notes
|
$
|
—
|
$
|
609,576
|
|||
|
Issuance
of Shares Previously Paid For
|
$
|
—
|
$
|
695,761
|
|||
|
Stock
Issued in Settlement of Liability
|
$
|
—
|
$
|
78,746
|
|||
|
Supplemental
Disclosures of cash Flow Information:
|
|||||||
|
Cash
Paid for Interest
|
$
|
3,242
|
$
|
20,024
|
|||
See
accompanying notes to financial statements.
F-7
Notes
to Financial Statements
Note
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF OPERATIONS
Health
Discovery Corporation (the “Company”) is a biotechnology-oriented company that
has acquired patents and has patent pending applications for certain machine
learning tools used for diagnostic and drug discovery. The Company licenses
the
use of its patented protected technology or may develop specific learning
tools
to sell to third parties.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the
financial statements and the reported amounts of revenues and expenses during
the period. Accordingly, actual results could differ from those estimates.
Significant estimates that are particularly suspectible to change in the
near-term include the valuation of non-cash consideration for services and
the
recoverability of the patents.
RECLASSIFICATIONS
Certain
amounts from 2005 have been reclassified to conform to the presentation
used in
2006.
REVENUE
RECOGNITION
Revenue
is generated through the sale or license of patented technology and processes
and from services provided through development agreements. These arrangements
are controlled by contracts that dictate responsibilities and payment terms.
The
Company recognizes revenues as they are earned over the duration of a license
agreement or upon the sale of any owned patent once all contractual obligations
have been fulfilled. Revenue is earned under development agreements in
the
period the services are performed. Deferred revenue represents the unearned
portion of payments received in advance for licensing agreements. The Company
had unearned revenue of $101,111 as of December 31, 2006 and expects to
recognize $40,000 of that in 2007 and $61,111 thereafter.
COST
OF SALES
Cost
of
sales includes the acquisition cost less accumulated amortization of patents
sold, plus internal development costs and fees directly associated with
sales
contracts.
Cost
of
sales for licensing and development revenue includes fees directly asssociated
with the contracts and salary expense allocated to cost of sales based
upon the
amount of estimated time worked on the licensing or development
contract.
PROPERTY
AND EQUIPMENT
Property
and equipment, which consists of office furniture and computer equipment
and
leasehold improvements, are stated at cost. Depreciation is calculated
using the
straight-line method over the estimated useful lives of the assets, which
range
from 3 to 10 years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the
term
of the lease, whichever is shorter.
PATENTS
Patents
are amortized over their remaining legal lives, that range from 15 to 20
years,
from the date they are acquired or approved. Legal costs directly associated
with the patent acquisitions and the application process for new patents
are
capitalized when incurred and are being amortized over the remaining legal
life
of the related patent. If the applied for patents are abandoned or are
not
issued, the Company will expense the capitalized costs to date in the period
of
abandonment.
The
carrying value of patents is reviewed for impairment whenever events or
changes
in circumstances indicate that the carrying amount may not be recoverable.
As of
December 31, 2006, the Company does not believe there has been any impairment
of
its intangible assets.
F-8
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
INCOME
TAXES
The
Company accounts for income taxes using the asset and liability method.
Deferred
tax assets and liabilities are recognized for future tax benefits and expenses
or consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using
enacted tax rates expected to apply to taxable income for the years in
which
those temporary differences are expected to be recovered or
settled.
In
the
event the future tax consequences of differences between the financial
reporting
bases and tax bases of the Company’s assets and liabilities result in deferred
tax assets, an evaluation of the probability of being able to realize the
future
benefits indicated by such assets is made. A valuation allowance is provided
for
the portion of the deferred tax asset when it is more likely than not that
some
portion or all of the deferred tax asset will not be realized. In assessing
the
realizabilty of the deferred tax assets, management considers the scheduled
reversals of deferred tax liabilities, projected future taxable income
and tax
planning strategies.
STOCK-BASED
COMPENSATION
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Share-Based
Payment
(“SFAS
No. 123(R)”) using the modified prospective transition method provided for under
the standard. Under the Standard, stock-based compensation cost is measured
at
grant date, based on the fair value of the award, and is recognized as
expense
over the employee’s requisite service period. We had previously applied
Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations and provided the required pro forma disclosures
of SFAS
No. 123.
The
following table illustrates the effect on net loss and loss per share if
the
Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation,
to
stock-based compensation for periods presented prior to the Company’s adoption
of Statement 123(R):
|
2005
|
|||||
|
Net
loss as reported
|
$
|
(3,159,016
|
)
|
||
|
Deduct:
Stock-based expense determined under fair value based method
for employee
stock options
|
(7,723
|
)
|
|||
|
Proforma
Net Loss
|
$
|
(3,166,739
|
)
|
||
|
Loss
Per Share:
|
|||||
|
Basic
- As Reported
|
$
|
(.03
|
)
|
||
|
Basic
- Proforma
|
$
|
(.03
|
)
|
||
Stock-based
compensation expense included in the 2006 net loss consisted of $783,987
in
compensatory warrants, options, and stock for professional consulting services,
and compensation. Stock-based expense included in the net loss for 2005
consisted of $508,061 for the issuance of common stock, warrants, and
options.
F-9
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
DETERMINING
FAIR VALUE UNDER SFAS 123R:
Valuation
and Amortization Method
- The
Company estimates the fair value of stock options and warrants granted
using the
Black-Scholes option-pricing formula and a single option award approach.
This
fair value is then amortized on a straight-line basis over the requisite
service
periods of the awards, which is generally the vesting period.
Expected
Term
- The
expected term of the award represents the period that the Company’s stock-based
awards are expected to be outstanding and was determined based on historical
experience, giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee behavior.
Given
the lack of historical data and start-up nature of the company’s operations, the
expected term is estimated as the contractual term.
Expected
Volatility
-
Volatility
is a measure of the amounts by which a financial variable such as stock
price
has fluctuated (historical volatility) or is expected to fluctuate (expected
volatility) during a period. The Company uses the historical volatility
to
estimate expected volatility.
Risk-Free
Interest Rate
- The
Company bases the risk-free interest rate used in the Black-Scholes valuation
method on the implied yield currently available on U.S. Treasury
zero-coupon issues with a remaining term equivalent to the expected term
of a
stock award.
Estimated
Forfeitures
- When
estimating forfeitures, the Company considers voluntary termination behavior
as
well as analysis of actual option forfeitures.
Estimated
Dividend yield
-
The
Company has not paid any dividends and has no current plans to do so therefore
dividend rate is assumed to be zero.
The
adoption of SFAS 123R also requires additional accounting related to income
taxes. Due to the full valuation allowance provided on its net deferred
tax
assets, the Company has not recorded any tax benefit attributable to stock-based
compensation expense.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company’s financial instruments consist of cash, accounts payable, accrued
expenses and long-term debt. Pursuant to SFAS No. 107, Disclosures
about Fair Value of Financial Instruments,
the
Company is required to estimate the fair value of all financial instruments
at
the balance sheet date. The Company considers the carrying values of its
financial instruments in the financial statements to approximate their
fair
value due to the short term nature of such items.
NET
LOSS PER SHARE
Basic
Earnings Per Share (“EPS”) includes no dilution and is computed by dividing
income or loss available to common shareholders by the weighted average
number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the
entity.
Due to the net loss in all periods presented, the calculation of diluted
per
share amounts would cause an anti-dilutive result and therefore is not
presented. Potentially dilutive shares at December 31, 2006 and 2005 include
the
following:
|
2006
|
2005
|
|||||||
|
Stock
options
|
3,500,000
|
2,500,000
|
||||||
|
Warrants
|
68,796,250
|
50,931,250
|
||||||
|
Convertible
notes
|
3,915,547
|
3,915,547
|
||||||
|
76,211,797
|
57,346,797
|
|||||||
F-10
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 $100,000. From
time-to-time, the Company’s cash balances exceed the amount insured by the FDIC.
Management believes the risk of loss of cash balances in excess of the
insured
limit to be low.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2004, the FASB issued SFAS No. 153, Exchanges
of Non-Monetary Assets,
an
amendment of APB Opinion 29, Accounting
for Non-Monetary Transactions.
The
amendments made by SFAS No. 153 are based on the principle that exchanges
of
non-monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replaces it with
a
broader exception for exchanges of non-monetary assets that do not have
“commercial substance.” The Company adopted this statement on January 1, 2006.
The adoption of the statement did not have a material impact on the Company’s
financial statements.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections
(“SFAS
154”), which changes the requirements in the accounting for and reporting of
a
change in accounting principle. We were required to adopt the provisions
of SFAS
154 effective January 1, 2006. We will follow the provisions of this statement
in the event of any future accounting changes.
In
June
2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes,
an
interpretation of FASB Statement No. 109. This interpretation is effective
for
fiscal years beginning after December 15, 2006. This Interpretation clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB No. 109, Accounting
for Income Taxes.
This
Interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. This Interpretation also provides
guidance
on derecognition, classification, interest and penalties, accounting in
interim
periods, disclosure, and transition. FIN 48 is not expected to have a material
impact on the Company’s financial statements.
In
September 2006, FASB issued SFAS No. 157, Fair
Value Measurements.
This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under
other
accounting pronouncements that require or permit fair value measurements.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is not expected to have a material impact
on
the Company’s financial
statements.
Note
B - RELATED PARTY TRANSACTIONS
Payments
to the Company’s Chief Executive Officer of $91,875 were made in 2005 related to
the purchase of patents from Barnhill, LLC and Fractal Genomics,
LLC.
The
Company leases the location used as the principle executive office from
a
company owned by the wife of the Company’s Chief Executive Officer. The term of
the principle executive office lease is month-to-month and the rent expense
associated with this lease is $1,036 per month. Rent expense under this
lease
arrangement amounted to approximately $12,432 and $11,000 in 2006 and 2005,
respectively.
Note
C - PATENTS
The
Company has acquired a group of patents related to biotechnology and certain
machine learning tools used for diagnostic and drug discovery. Additionally,
legal costs associated with patent acquisitions and the application process
are
also capitalized as patent costs. The Company has recorded $3,305,540 and
$3,568,259 in patents and patent related costs, net of accumulated amortization,
at December 31, 2006 and 2005.
F-11
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
C - PATENTS, continued
Amortization
charged to operations for the years ended December 31, 2006 and 2005 was
$262,719 and $251,097, respectively. The weighted average amortization
period
for patents is 14 years. Estimated amortization expense for the next five
years
is $262,575 per year.
Note
D - ACQUISITIONS
On
August
26, 2003, the Company acquired the assets of Barnhill Group, LLC, which
consisted of patents and related rights, through the issuance of 29,825,564
common shares of the Company (then known as Direct Wireless Communications,
Inc.). The purchase of Barnhill Group, LLC’s assets was recorded at $596,511,
which was the market value of the shares issued at the date of
acquisition.
On
September 30, 2003, the Company acquired the patents, patent rights, and
all
pending intellectual property of Fractal Genomics, LLC through the issuance
of
3,825,000 common shares of the Company (then known as Direct Wireless
Communications, Inc.). The purchase of Fractal Genomics, LLC’s assets was
recorded at $767,750, which was the market value of the shares issued at
the
date of acquisition plus the amount of the note.
On
July
30, 2004, the Company acquired certain
rights to patents and patents pending applications for certain machine
learning
tools used for diagnostic and drug discovery.
The
rights to these assets were purchased from unrelated third parties for
a
combination of non-interest bearing notes payable and interest bearing
notes
payable that were convertible to common stock. Under the non-interest bearing
note payable, an initial cash payment of $175,394 was paid to the sellers
on
December 30, 2004 and four additional payments of $175,394 were made four
months
from the date of the initial payment and every fourth month thereafter
until
$876,970 had been paid. The Company has imputed interest on the non-interest
bearing note payments using a rate of 3.16 %. The sellers received interest
bearing notes convertible to common stock amounting to $1,127,818 that
bear
interest at 3.16% and were convertible into 6,634,221 shares of common
stock (at
$0.17 per share) until maturity on July 28, 2009. The agreements place
certain
limitations on the selling of the common stock shares during certain periods
after conversion. The purchase of these patents and patents pending applications
was recorded at $1,975,477, which was the estimated present value of the
notes
issued at the date of acquisition. During 2005, convertible notes totaling
$462,175 were converted by holders in exchange for 2,718,676 shares of
common
stock.
On
May 6,
2005 the Company acquired the remaining interest in a portfolio of patents
from
a group of unrelated third parties. The cost of this remaining interest
consisted of a cash payment of $270,863, the issuance of promissory notes
totaling $37,872, and convertible notes totaling $147,401. The convertible
notes
were converted by the holders immediately upon issuance in exchange for
867,065
shares of common stock.
The
entire purchase price of each of these acquisitions was assigned to the
acquired
patents since no other net assets were acquired and the patents were the
sole
interest of the Company.
No
acquisitions occurred in 2006.
During
2005, fees totaling $22,881 were capitalized as part of the cost of the
patents
acquired. No fees were capitalized in 2006.
Note
E - LICENSE FEES EXPENSE-LICENSE AGREEMENT
Effective
September 26, 2004, the Company was assigned a patent license agreement
with
Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement was
associated with the patents acquired July 30, 2004. The Company agreed
to pay
royalty fees to Lucent in the amount of the greater of an annual fee of
$10,000
or at the rate of five percent (5%) on each licensed product which is sold,
leased, or put into use by the Company, until cumulative royalties equal
$40,000
and at the rate of one percent (1%) subsequently. The license granted will
continue for the entire unexpired term of Lucent’s patents. During 2006 and 2005
each, the Company paid approximately $10,000 in royalty fees to Lucent.
F-12
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
F - INCOME TAXES
The
Company’s effective tax rate differs from the federal and state statutory rates
due to the valuation allowance recorded for the deferred tax asset due.
An
allowance has been provided for by the Company which reduced the tax benefits
accrued by the Company for its net operating losses and other deferred
tax
attributes to zero, as management cannot determine when, or if, the tax
benefits
derived from these operating losses and other deferred tax attributes will
materialize. At December 31, 2006, the Company had net operating loss carry
forwards totaling approximately $7,167,742 that will expire in various
years
beginning in 2021. The net operating loss carryforwards are the Company’s
primary deferred tax attribute.
Note
G - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
|
Notes
payable consist of the following:
|
2006
|
2005
|
|||||
|
Term
promissory notes payable to individuals and institutions. Principal
and
interest at 18% is payable in common stock on September 1,
2008.
|
$
|
321,911
|
$
|
348,691
|
|||
|
Note
payable to shareholder/director net of $461,667 unamortized discount
due
September 1, 2008 with interest payable at 5% due at
maturity.
|
$
|
538,333
|
—
|
||||
|
$
|
860,244
|
$
|
348,691
|
||||
|
Less
current maturities
|
—
|
(26,780
|
)
|
||||
|
|
$
|
860,244
|
$
|
321,911
|
|||
Convertible
notes outstanding at December 31, 2006 and 2005 totaled $665,643 both years.
The
notes mature on July 28, 2009, and may be converted at the election of
the
noteholders until that time into shares of the Company’s common stock at $0.17
per share. A total of 3,915,547 shares may be issued upon the conversion
of the
notes. In addition, the noteholders are further limited to not sell more
than
10% of such holder’s shares in any calendar quarter after the minimum holding
period has expired. The convertible notes accrue interest at a rate of
3.16%.
In
2005,
convertible notes totaling $609,576 were converted by the debt holders
in
exchange for 3,585,741 shares of common stock.
On
December 28, 2005, certain holders of term promissory notes totaling $321,911
agreed to defer the balance due in 2006 until October 31, 2007. The deferred
portion of the term notes accrues interest at a rate of 18%, payable with
issuance of the Company’s common stock. On September 1, 2006, the Company and
these holders of promissory notes entered into second amendments to extend
deferment of all remaining payments due under the notes until September
1, 2008,
all other terms remained in place. As of December 31, 2006, the notes had
aggregate remaining principal of $321,911, with accrued interest of
approximately $59,393. The deferred amounts will continue to accrue interest
at
a stated rate of 18%, which will be paid in shares of the Company’s common stock
valued at $0.24 per share at maturity.
On
September 1, 2006, the Company obtained a $1,000,000 loan from a director.
The
loan bears interest at 5%, all interest and principal is due at maturity
on
September 1, 2008. The Company also issued 10,000,000 warrants to this
director
with an exercise price of $0.16 in connection with the promissory note
dated
September 1, 2006. The warrants vest over ten months if the note remains
unpaid
during that period. The warrants were assigned a value of $554,000 and
recorded
as additional paid-in capital. A discount of the loan was recorded in the
amount
of $554,000 and is being accreted through interest expense over the 2-year
loan
period. The vesting period of these warrants may cease if certain conditions
related to new financing are met.
All
of
the Company’s debt is collateralized by specific patents in the Company’s patent
portfolio.
F-13
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
H - COMMITMENTS
The
Company entered into an employment agreement with its Chief Executive Officer
on
September 15, 2003. The employment agreement will automatically renew for
successive one-year terms unless either party gives notice to the other
party of
its intent not to renew within a thirty-day period prior to the end of
the
current term. The employment agreement provides for a base salary and other
perquisites commensurate with his employment. On December 30, 2005, the
Company
and the Company’s Chief Executive Officer agreed to amend the employment
agreement to defer a portion of his salary until January 1, 2008. The Company’s
Chief Executive Officer agreed to waive the receipt of this deferred
compensation pursuant to any amendment dated September 1, 2006.
The
Company entered into an employment agreement with its Executive Vice President.
The employment agreement is for a term of three years beginning November
14,
2005. The employment agreement provides for a base salary, issuance of
stock
options and other perquisites commensurate with his employment.
The
Company has also entered into agreements with members of its Scientific
Advisory
Board wherein they are entitled to receive 100,000 shares each annually
of the
Company’s common stock upon satisfactory completion of one year of service. The
Company is accruing an expense for the anticipated issuance over the service
period. At December 31, 2006, the Company has recorded $52,500 of consultant
expense for anticipated issuances of the shares.
Note
I - STOCK OPTIONS
The
Company approved 8,000,000 shares of common stock to be reserved solely
for
issuance and delivery upon the exercise of option grants. At December 31,
2006
and 2005, options to purchase shares of common stock outstanding were as
follows:
|
2006
|
Grant
Date
|
Number
of
Shares
|
Exercise
Price
|
Vesting
|
|||||
|
January
2006
|
1,500,000
|
$0.11
|
Immediate
|
||||||
|
January
2006
|
500,000
|
$0.11
|
125,000
shares every six months
|
||||||
|
December
2005
|
1,500,000
|
$0.10
|
250,000
shares every six months
|
||||||
|
2005
|
Grant
Date
|
Number
of
Shares
|
Exercise
Price
|
Vesting
|
|||||
|
October
2003
|
600,000
|
$0.01
|
October
2003
|
||||||
|
October
2003
|
400,000
|
$0.10
|
November
2004
|
||||||
|
December
2005
|
1,500,000
|
$0.10
|
250,000
shares every six months
|
The
2006
options were awarded to an employee and expire January 2016. The 2005 options
were awarded to an employee and expire in December 2015.
The
following schedule summarizes stock option activity for 2006 and
2005:
|
2006
|
2005
|
||||||||||||
|
|
Option
Shares
|
Weighted
Avg.
Exercise
Price
|
Option
Shares
|
Weighted
Avg.
Exercise
Price
|
|||||||||
|
Outstanding,
Beginning of Year
|
2,500,000
|
$
|
0.08
|
3,000,000
|
$
|
0.08
|
|||||||
|
Granted,
During the Year
|
2,000,000
|
0.11
|
1,500,000
|
0.10
|
|||||||||
|
Exercised
During the Year
|
(600,000
|
)
|
0.01
|
—
|
—
|
||||||||
|
Forfeited,
During the Year
|
(400,000
|
)
|
0.10
|
(2,000,000
|
)
|
0.10
|
|||||||
|
Outstanding,
End of the Year
|
3,500,000
|
$
|
0.11
|
2,500,000
|
$
|
0.08
|
|||||||
F-14
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
I - STOCK OPTIONS, continued
There
were 2,125,000 and 1,000,000 options exercisable at December 31, 2006 and
2005,
respectively. The weighted average exercise prices of those options are
$0.11
and $0.05 at December 31, 2006 and 2005, respectively. The weighted remaining
life of all exercisable and non-vested options at December 31, 2006 is
9
years.
As
of
December 31, 2006, there was approximately $822,441 of unrecognized cost
related
to stock option and warrant grants. The cost is to be recognized over the
remaining vesting periods that average approximately 3.25 years. The aggregate
intrinsic value of options exercised during 2006 was $60,000. The aggregate
intrinsic value of options outstanding and exercisable as of December 31,
2006
was $148,235 and $90,000 respectively.
The
Company granted 2,000,000 options during the first quarter of 2006. The
fair
value of each option granted in 2006 was $0.11 and was estimated on the
date of
grant using the Black-Scholes pricing model with the following assumptions:
dividend yield at 0%, risk-free interest rate of 5.00%, an expected life
of 10
years, and volatility of 133%. No other options were granted in
2006.
The
Company granted 1,500,000 options during 2005. The fair value of each option
granted in 2005 was $0.19 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 4.57%, an expected life of 10 years, and
volatility of 128%.
Note
J –
WARRANTS
Information
about warrants outstanding at December 31, 2006 and 2005 is summarized
below:
December
31, 2006
|
Exercise
Prices
|
Number
Outstanding
|
WeightedAverage
Remaining Contractual Life
(years)
|
Number
Exercisable
|
Weighted-Average
Remaining
Contractual
Life
(years)
of
Exercisable
Warrants
|
|||||||||
|
$0.01
|
1,000,000
|
1
|
1,000,000
|
1
|
|||||||||
|
$0.10
|
1,365,000
|
2
|
1,215,000
|
2
|
|||||||||
|
$0.11
|
1,000,000
|
1
|
800,000
|
1
|
|||||||||
|
$0.12
|
150,000
|
2
|
150,000
|
2
|
|||||||||
|
$0.13
|
5,500,000
|
3
|
3,500,000
|
3
|
|||||||||
|
$0.15
|
1,000,000
|
2
|
|
1,000,000
|
2
|
||||||||
|
$0.16
|
10,000,000
|
2
|
4,000,000
|
2
|
|||||||||
|
$0.20
|
500,000
|
1
|
500,000
|
1
|
|||||||||
|
$0.22
|
500,000
|
2
|
500,000
|
2
|
|||||||||
|
$0.24
|
32,546,250
|
2
|
32,546,250
|
2
|
|||||||||
|
$0.35
|
15,235,000
|
.2
|
15,235,000
|
2
|
|||||||||
|
TOTAL
|
68,796,250
|
60,446,250
|
|||||||||||
F-15
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
J – WARRANTS, continued
December
31, 2005
|
Exercise
Prices
|
Number
Outstanding
|
Weighted-Average
Remaining Contractual Life
(years)
|
Number
Exercisable
|
Weighted-Average
Remaining Contractual Life (years) of Exercisable
Warrants
|
|||||||||
|
$0.01
|
1,400,000
|
2
|
800,000
|
1
|
|||||||||
|
$0.08
|
600,000
|
1
|
600,000
|
1
|
|||||||||
|
$0.12
|
150,000
|
3
|
150,000
|
3
|
|||||||||
|
$0.20
|
500,000
|
2
|
500,000
|
2
|
|||||||||
|
$0.22
|
500,000
|
3
|
500,000
|
3
|
|||||||||
|
$0.24
|
32,546,250
|
|
3
|
32,546,250
|
3
|
||||||||
|
$0.35
|
15,235,000
|
1
|
15,235,000
|
1
|
|||||||||
|
TOTAL
|
50,931,250
|
50,331,250
|
|||||||||||
During
2005, the Company issued 1,300,000 warrants to consultants and others for
services with an exercise price of $0.01 per share. A total of $254,584
was
recorded as consulting expense related to these warrants. The warrants
vest
after satisfactory completion of one year of service. The expense is being
recorded over the service period.
In
addition, during 2005 the Company issued 1,000,000 warrants to consultants
for
services rendered on behalf of the Company at an exercise price of $0.20
per
share for 500,000 warrants and $0.22 per share for the remaining 500,000.
A
total of $164,560 was recorded as consulting expense related to these warrants.
The warrants vested immediately upon issuance.
In
December 2005, the Company issued 150,000 warrants to a director with an
exercise price of $0.12 per share. The Company recorded $12,291 as consulting
expense related to these warrants.
During
January 2006, the Company issued 3,400,000 warrants to consultants and
other
service providers with a weighted-average exercise price of $0.12 per share.
A
total of $290,000 was charged to expense for Compensatory Warrants. The
warrants
became exercisable upon issuance.
The
Company also issued 3,000,000 warrants to two directors in January 2006
with an
exercise price of $0.13 per share. The grant date fair value of these warrants
was $355,500. The warrants vest at a rate of 500,000 warrants (250,000
warrants
for each director) after satisfactory completion of each 6 months of service
until 3 years of service has been completed. The expense is being recorded
over
the service period.
In
January 2006, the Company issued 1,000,000 warrants to a director with
an
exercise price of $0.15 per share in connection with a common stock sale.
The
Company has ascribed no value to the warrants associated with the common
stock
sale described in Note K.
During
the second quarter of 2006, the Company issued 500,000 warrants to two
members
of its Scientific Advisory Board. The grant date fair value of these warrants
was $35,000. These warrants vest over a one-year period and have an exercise
price of $0.11. The Company also issued 200,000 warrants to a service provider
in exchange for professional services. The grant date fair value of these
warrants was $14,000. These warrants vest over a two-year period and have
an
exercise price of $0.10. The estimated value of all of these warrants is
being
charged as expense over the respective vesting periods.
On
September 1, 2006, the Company issued 10,000,000 warrants with an exercise
price
of $0.16 to a director in connection with a $1,000,000 promissory note.
The
warrants expire September 1, 2008. The fair value of these warrants was
recorded
as additional paid-in capital and a debt discount that is being amortized
as
interest expense over the term of the debt.
F-16
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
J – WARRANTS, continued
During
the third quarter of 2006, the Company issued 300,000 warrants to service
providers. The grant date fair value of these warrants was $16,872. These
warrants vested immediately and have an exercise price of $0.10. The Company
also issued 500,000 warrants to a member of the Scientific Advisory Board
for
providing advisory services to the Company beyond which was expected in
his
capacity as a Scientific Advisory Board member. The grant date fair value
of
these warrants was $15,115. These warrants vested immediately and have
an
exercise price of $0.10. In the fourth quarter of 2006 no warrants were
issued
and 570,000 warrants expired unexercised.
Note
K – STOCKHOLDERS’ EQUITY
Private
Placement – Round 1
From
February through July 2004, the Company offered for sale shares of restricted
stock to accredited investors through a private offering. The price of the
restricted stock was $.10 per share. A total of 15,235,000 restricted common
shares were issued to accredited investors for $1,499,900, net of issuance
cost
of $23,600. The issuance cost consisted of $22,400 in cash and 3,429 in common
shares valued at $1,200, paid to consultants for assistance in selling the
Company’s common stock. The value of Company’s stock was based on a contractual
agreement of $.35 per share. In addition, each purchaser of shares of common
stock was granted a warrant to acquire an equal number of restricted common
shares at a fixed price of $0.35 per share until February 2007. No portion
of
the proceeds was assigned to the value of the warrants because the exercise
price of the warrant exceeded the market value of the underlying common stock
on
the date of purchase.
Private
Placement – Round 2
From
November 2004 through March 2005, the Company offered for sale shares of
restricted stock to accredited investors through a private offering. The
price
of the restricted stock was $.16 per share. In addition, each purchaser
of
shares of common stock was granted a warrant to acquire an equal number
of
restricted common shares at a fixed price of $0.24 per share until December
2008. No portion of the proceeds was assigned to the value of the warrants
because the exercise price of the warrant exceeded the market value of
the
underlying common stock on the date of purchase. As of December 31, 2004,
a
total of 5,434,375 restricted common shares were sold to accredited investors
for $695,761, net of issuance costs of $173,739. The issuance cost consisted
of
$128,950 in cash, 218,746 warrants, each entitling the holder to buy one
share
of the Company’s common stock for $0.24 valued at $32,812 and 34,277 shares of
common stock valued at $11,977 which was paid or accrued to consultants
for
assistance in selling the Company’s common stock. As of December 31, 2004, the
common shares and related warrants had not been issued to the purchasers
and
were recorded as common shares purchased and not issued on the Company’s balance
sheet. As of December 31, 2005, all shares previously paid for and not
issued
had been issued. The
value
of Company stock was derived based on a contractual arrangement of $.35
per
share. The values of the warrants were calculated using the Black-Scholes
option-pricing model.
On
March
10, 2005, the Company finalized a sale of shares of restricted common stock
to
accredited investors through a private offering. The price of the restricted
stock was $.16 per share. In addition, each purchaser of the shares of
common
stock received a warrant to acquire an equal number of common shares at
a fixed
price of $0.24 per share until December 2008. No portion of the proceeds
was
assigned to the value of the warrants because the exercise price of the
warrant
exceeded the market value of the underlying common stock on the date of
purchase. A total of 13,018,750 restricted common shares were sold to accredited
investors for $1,799,493, net of
issuance costs of $283,507. The issuance cost consisted of $157,000 in
cash,
806,250 warrants, each entitling the holder to buy one share of the Company’s
common stock for $0.24 valued at $120,938, and 15,855 shares of common
stock
valued at $5,569 which was paid or accrued to consultants for assistance
in
selling the Company’s common stock. The value of Company stock was derived based
on a contractual arrangement of $.35 per share. The values of the warrants
were
calculated using the Black-Scholes option-pricing model.
During
2005, the Company extended its fundraising efforts through the sale of
common
stock to accredited investors through a private placement. The price of
the
restricted stock was $.16 per share. In addition, each purchaser of stock
shares
was granted a warrant to acquire an equal number of restricted common shares
at
a fixed price of $0.24 per share until December 2008. No portion of the
proceeds
was assigned to the value of the warrants because the exercise price of
the
warrant exceeded the market value of the underlying common stock on the
date of
purchase. A total
of
12,250,000 restricted common shares were sold to accredited investors for
$1,847,981, net of issuance costs of $112,019. The issuance cost consisted
of
$70,300 in cash, 278,125 warrants, each entitling the holder to buy one
share of
common stock for $0.24 valued at $41,719.
F-17
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
K - STOCKHOLDERS’ EQUITY, continued
Under
the
Round 2 Private Placements, the Company agreed to use its best efforts
to file a
registration statement to register the shares of common stock and the shares
underlying the warrants issued and sold to the investors by May 9, 2005,
and to
use its best efforts to cause the registration statement to be declared
effective within 120 days of March 10, 2005. As a result of provisions
in
certain of the Round 2 Private Placement documents, on August 7 and September
6,
2005, 68,125 shares of the Company’s common stock and 68,125 warrants to
purchase the Company’s common stock were issued to certain shareholders who
acquired in the aggregate 6,812,500 shares in Round 2 Private Placement
for each
date as a result of the registration statement not becoming effective by
such
date. The additional number of shares and warrants was based upon one percent
of
the number of shares and warrants purchased by such participants for each
30-day
period beginning on the 121st
day
until the registration statement was declared effective. Beginning September
7,
2005, the number of shares and warrants to be issued increased from one
percent
to two percent for each 30-day period until the registration statement
was
declared effective. On October 6, 2005, November 9, 2005, and December
9, 2005,
an additional 136,250, 136,250, and 131,250 in penalty shares and warrants
were
issued. The
registration statement was declared effective on December 20, 2005.
In
addition, certain shareholders who purchased 6,812,500 shares of the Company’s
common stock have anti-dilution rights until the registration statement
has been
effective for 365 days. If
the
Company sells shares of the Company’s common stock at a price less than $0.16
per share or issues warrants to purchase the Company’s common stock at an
exercise price less than $0.24 per share, certain shareholders will receive
an
amount of shares or warrants at no cost so that those shareholders have
no
diluted effect from the sales of common stock or warrant issuances.
Shares
Issued in 2006
During
the first quarter of 2006, the Company issued 600,000 shares of its common
stock
upon the exercise of stock options. Proceeds from the exercise totaled
$6,000.
In
addition, the Company sold 1,000,000 shares of its common stock to one
of its
directors for $100,000. The shares were sold for $0.10 per share which
was the
closing price of the stock on the date of the sale. As part of the purchase,
the
director also received warrants to purchase an additional 1,000,000 shares
of
the Company’s common stock at a fixed price of $0.15 per share until December
2008. No portion of the proceeds was assigned to the value of the warrants
because the exercise price of the warrants exceeded the market value of
the
underlying common stock on the date of purchase.
During
the second quarter of 2006, 200,000 warrants were exercised at $0.01 each.
The
Company issued 200,000 shares of stock and recorded the proceeds of $2,000
in
common stock.
During
the third quarter
of 2006, the Company issued 230,000 shares of stock for warrants exercised
at
$0.08 each. Proceeds of $18,400 were recorded in capital stock.
Shares
Issued in Exchange for Services
During
2005, the Company issued 2,039,453 common stock shares to consultants for
services and 308,133 shares to settle accrued liabilities for services
totaling
$78,746. The shares were granted at the fair market value of the services
provided as determined by the consultants. Total net consultant expense
of
$381,876 was recorded for the issuances in 2005. No shares of stock were
issued
to consultants in exchange for services in 2006.
Stock
Cancellation
In
2005,
consultants who had previously been issued shares of stock in return for
services provided rescinded 1,580,532 of these shares. The Company recorded
a
$300,000 credit to consulting expense as a result of this action.
F-18
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
K- STOCKHOLDERS’ EQUITY, continued
As
discussed in Note 1 to Financial Statements and in accordance with guidance
provided in Statement of Financial Accounting Standards No. 123R,
Share-Based Payment, in fiscal 2006 Health Discovery Corporation changed
its
method of accounting for stock-based compensation.
Note
L – GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates
the
realization of assets and the liquidation of liabilities in the normal
course of
business. Limited revenue has been derived since inception, and the Company
has
not yet generated sufficient working capital to support its operations.
The
Company’s ability to continue as a going concern is dependent, among other
things, on its ability to reduce certain costs and obtain new contracts
to
eventually attain a profitable level of operations.
The
Company initiated licensing the technology underlying several of its patents
and
providing supporting services related to the application of such technology
that
is resulting in ongoing revenue. In addition, management has successfully
negotiated agreements with its debt holders, which resulted in the deferral
of
cash payments on debt until September 2008. In late 2005, management instituted
a cost reduction program whereby the salaries of company employees, including
certain members of senior management, have been reduced or deferred. Based
on
these developments, management believes revenue generation will continue,
additional licensing agreements will be obtained in the near-term, and
non-revenue generating costs will be controlled.
Note
M – SUBSEQUENT EVENT
On
February 1, 2007, Health Discovery Corporation (the “Company”) issued in the
aggregate 15,235,000 warrants to purchase common stock of the Company (the
“Warrants”) to certain institutional investors and individual accredited
investors. The Warrants vest immediately and have an exercise price of
$.35 per
share. The Warrants expire on November 1, 2007. On February 1, 2007, an
equal
number of warrants issued to the same institutional and individual investors
and
with substantially similar terms expired. The aggregate value of these
warrants
is approximately $33,755 and they will be recorded as expense on the issue
date.
F-19