As filed with the Securities and Exchange Commission on May 1, 2006.
REGISTRATION NO. 333-124750
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
----------------------------
HEALTH DISCOVERY CORPORATION
(Name of Small Business Issuer in Its Charter)
TEXAS 74-3002154
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8731
----------------------------
(Primary Standard Industrial Classification Code Number)
5501 1/2 ABERCORN STREET,
SAVANNAH, GA 31405
(912) 352-7488
(Address and Telephone Number
of Principal Executive Offices)
----------------------------
DR. STEPHEN D. BARNHILL
5501 1/2 ABERCORN STREET,
SAVANNAH, GA 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 any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -------------------------------------- ----------------- ------------------------ ------------------------- -----------------------
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT PRICE REGISTRATION FEE
- -------------------------------------- ----------------- ------------------------ ------------------------- -----------------------
Common Stock, no par value 30,093,999 $0.33 (1) $ 9,931,020 $ 1,062.62 (2)
- -------------------------------------- ----------------- ------------------------ ------------------------- -----------------------
Common Stock, no par value, to be
issued upon the exercise of warrants 31,209,686 $0.33 (1) $ 10,299,196 $ 1,102.01 (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) Amounts previously submitted. Fees for original share amount were paid
with initial filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED MAY 1, 2006
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to our registration Statement on Form SB-2
amends our Registration Statement No. 333-124750 declared effective on December
20, 2005 to include information from our Form 10-KSB, filed with the Commission
on March 30, 2006, and to update our financial information to include its
December 31, 2005 results.
PROSPECTUS
61,303,685 SHARES
HEALTH DISCOVERY CORPORATION
This prospectus relates to the resale of up to 61,303,685 shares of our
common stock, no par value, which are being offered for resale from time to time
by the stockholders named in the section entitled "Selling Stockholders" on page
14. The number of shares the selling stockholders may offer and sell under this
prospectus includes common shares:
o the selling stockholders currently hold; and
o issuable to them upon the exercise of warrants previously issued
by us. The selling stockholders may also offer additional shares
of common stock acquired upon the exercise of the warrants and our
issuance of stock as a result of anti-dilution provisions, stock
splits, stock dividends or similar transactions.
We are registering these shares to satisfy registration rights of the
selling stockholders.
We will not receive any of the proceeds from any resales by the selling
stockholders. We will, however, receive the proceeds from the exercise of the
warrants issued to the selling stockholders. The selling stockholders may sell
the shares of common stock from time to time in various types of transactions,
including on the Over-the-Counter Bulletin Board and in privately negotiated
transactions. For additional information on methods of sale, you should refer to
the section entitled "Plan of Distribution" on page 17.
On April 27, 2006, the last sales price of the common stock quoted on
the Over-the-Counter Bulletin Board was $0.11 per share. Our company's common
stock is quoted on the Over-the-Counter Bulletin Board under the symbol
"HDVY.OB."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The 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.
The date of this prospectus is _________________-
TABLE OF CONTENTS
Prospectus Summary...........................................................1
Risk Factors.................................................................4
Use of Proceeds.............................................................14
Price Range of Our Common Stock.............................................14
DIVIDEND POLICY.............................................................14
Selling Stockholders........................................................14
Plan of Distribution........................................................17
Legal Proceedings...........................................................29
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................29
Significant Accounting Policies and Estimates...............................31
Management..................................................................32
Executive Compensation......................................................35
Principal Stockholders......................................................37
Certain Relationships and Related Party Transactions........................38
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................................38
Description of Capital Stock................................................38
Legal Matters...............................................................39
Experts.....................................................................39
Available Information.......................................................39
-----------------------------
ABOUT THIS PROSPECTUS
This prospectus is a part of a registration statement that we have
filed with the Securities and Exchange Commission. You should read this
prospectus and any accompanying prospectus supplement, as well as any
post-effective amendments to the registration statement of which this prospectus
is a part, together with the additional information described under "Available
Information" before you make any investment decision.
The terms "Health Discovery," "Company," "we," "our" and "us" refer to
Health Discovery Corporation unless the context suggests otherwise. The term
"you" refers to a prospective purchaser of our common stock.
You should rely only on the information contained in this prospectus or
any accompanying prospectus supplement. We have not authorized anyone to provide
you with information different from that contained in this prospectus or any
accompanying prospectus supplement. These securities are being offered for sale
and offers to buy these securities are only being solicited in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus and any accompanying prospectus supplement is accurate only as of the
date on their respective covers, regardless of the time of delivery of this
prospectus or any accompanying prospectus supplement or any sale of the
securities.
i
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, including
or related to our future results, certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this prospectus, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this prospectus, you should not regard the inclusion of
such information as our representation that we will achieve any strategy,
objective or other plans. The forward-looking statements contained in this
prospectus speak only as of the date of this prospectus as stated on the front
cover, and we have no obligation to update publicly or revise any of these
forward-looking statements. These and other statements, which are not historical
facts are based largely on management's current expectations and assumptions and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those contemplate by such forward-looking
statements. These risk and uncertainties include, among others, the risks and
uncertainties described in "Risk Factors", beginning on page 4.
ii
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS,
BEFORE MAKING AN INVESTMENT DECISION.
OUR MISSION
Our mission is three-fold. First, we plan to identify new biomarkers
and patterns of biomarkers to create non-invasive, patient specific diagnostics
for the early detection of disease. Second, we will attempt to identify
biomarkers that will provide potential drug targets for such devastating
diseases as prostate cancer, breast cancer, leukemia, and obesity, among others.
Finally, we will focus on identifying patients at risk for certain adverse drug
reactions thereby identifying patients who should or should not be given certain
drugs.
Our vision is to reshape the delivery of medicine in order to redefine
the relationship between diagnostics, therapeutics and treatment by delivering
personalized medicine that incorporates patient-specific information from gene
expression, metabolic indicators and therapeutic response.
OUR BUSINESS
Health Discovery Corporation was established in September 2003 to
become the world's first fully integrated biomarker discovery company. We are
positioning ourselves to provide pharmaceutical and diagnostic companies with
all aspects of "first phase" diagnostic and drug discovery from expert
assessment of the clinical dilemma through proper selection and procurement of
high quality specimens. In addition, we aim to provide proprietary analytical
evaluation methods and state-of-the-art computational analysis to produce
relevant and accurate clinical data, producing accurate biomarker and pathway
discoveries, resulting in patent protection of our biomarker discoveries for
future development and commercialization. We also intend to continue licensing
aspects of our patent portfolio for both medical and non-medical applications.
MARKET OPPORTUNITY
The market for post-genomic biomarker-based diagnostic products is
expected to grow from $100 million in 2003 to $2 billion by 2008, according to
Ken Rubenstein, Ph.D., in his publication REVOLUTIONIZING DRUG DEVELOPMENT AND
DIAGNOSTICS published in September 2003. Using our technologies, we intend to
become the first company to perform the total process of identifying a
particular clinical medical problem to be solved and performing the entire
process leading to the identification of the genes or proteins (called
biomarkers), and the relationships among them (called pathways), that are
relevant to the solution of the medical problem. This process will consist of an
assessment of the clinical problem, the determination of the clinical trial
set-up (the number of patients and what medical conditions they represent), the
proper selection and procurement of high quality specimens for analysis, an
analytical evaluation of the specimens through laboratory tests to produce the
clinical data, and the mathematical evaluation of the data using pattern
recognition techniques such as Support Vector Machines (SVM) and Fractal
Geometric Modeling (FGM) to produce an accurate determination of the relevant
genes and proteins and the manners in which they interact.
Biomarkers and pathways represent the products of our company. As of
November 2005, our intellectual property portfolio consisted of ownership and/or
rights to use 61 issued and pending patents worldwide. We intend to sell or
license all newly-discovered biomarkers and pathways to diagnostic companies for
development into diagnostic assays and to pharmaceutical companies for further
development as potential drug targets or to solve drug safety issues. In
addition, we intend to grant non-exclusive licenses, with exclusive licenses in
a few selected fields, for use of technology covered by our intellectual
property portfolio for third party discovery applications as well as for signal
and/or data processing applications.
1
STRATEGIC AGREEMENTS AND PARTNERSHIPS
In October 2003, we signed our first agreement with M.D. Anderson
Cancer Center in Houston Texas ("M.D. Anderson Cancer Center"). For the third
time in four years, M.D. Anderson Cancer Center is ranked the nation's top
cancer hospital in U.S. News and World Report's "America's Best Hospitals"
survey, published in the magazine's July 28, 2003 issue. Under this agreement we
will analyze a gene expression database to identify new biomarkers and pathways
involved in leukemia. Under the terms of the agreement, M.D. Anderson Cancer
Center, has granted us a first option to obtain an exclusive worldwide
royalty-bearing commercial license to commercialize any discovered biomarkers or
pathways we identify.
In January 2004, we entered into our second Biomarker and Pathway
Discovery Agreement with M.D. Anderson Cancer Center. This second collaboration
will give us access to already collected clinical specimens for new biomarker
and pathway discovery in prostate cancer. We intend to use the findings of this
study to develop new diagnostic approaches for prostate cancer and improve the
clinical management of these patients. Under the terms of this agreement, M.D.
Anderson Cancer Center, has granted Health Discovery Corporation a first option
to obtain an exclusive, worldwide, royalty-bearing commercial license to
commercialize any discovered prostate cancer biomarkers or pathways identified
by us utilizing our patent protected computational techniques.
In March 2004, we entered into an agreement with Stanford University to
use our patent protected computational techniques to identify new patterns of
biomarkers in lymphatic insufficiency and its response to therapeutic
lymphangiogenesis. According to the agreement, ownership of Research Program
Inventions conceived, discovered or reduced to practice under the Research
Program will be determined based on inventorship. As such, any invention
discovered using our analytical tools on this Stanford database would be jointly
owned by Stanford and Health Discovery. In addition, Health Discovery has first
option for exclusive worldwide licensing for commercialization of all
discoveries.
In March 2004, we signed an agreement with The University of Miami to
use our patent protected computational techniques to identify new patters of
biomarkers in AIDS Related Dementia. It is hoped that this newly discovered
information will allow physicians to better understand the pathogenesis of AIDS
Related dementia and will assist in the diagnosis and treatment of this
devastating disease. In November 2005, we sold to The University of Miami full
ownership of the recent AIDS Biomarker Signature discovered by our scientists.
The University of Miami agreed to an upfront cash payment and continuing royalty
payments for any future commercial sales related to this new discovery.
In September of 2004, we entered into an agreement with Dr. Thomas
Stamey of Stanford University Medical Center to analyze what is thought by Dr.
Stamey to be the most comprehensive prostate cancer gene chip database in the
world. This database consists of Affymetrix gene chips containing 25,000
prostate related genes. This data is from 92 patients representing 9 classes of
prostate disease - from BPH through all grades of prostate cancer. Using this
database, Health Discovery hopes to identify new biomarkers for prostate cancer.
We will also use our patent protected computational techniques such as Support
Vector Machine and Fractal Genomics Modeling to analyze this data to determine
the most relevant proteins to be used for diagnostics and drug targets. All
discoveries will be jointly owned by Health Discovery and Dr. Stamey with Health
Discovery having a worldwide exclusive license for commercialization.
In addition, as a result of the Fractal Genomics acquisition, we are
preparing to begin validation studies of the recently discovered and patent
protected set of leukemia genes, discovered using our FGM technique, which was
shown to separate ALL-T-cell leukemia from ALL-B-cell leukemia with 100%
accuracy. This gene set, now intellectual property of Health Discovery, was
originally presented to the medical and scientific world by Dr. Herbert
Fritsche, Chairman of our Scientific Advisory Board, a world-renowned expert in
cancer markers and Professor at MD Anderson Cancer Center, at the 31st Meeting
of the International Society for Oncodevelopmental Biology and Medicine (ISOBM)
in Edinburgh, United Kingdom.
On November 22, 2005, we entered into a licensing agreement with
Clarient, Inc. a technology and services resource for pathologists, oncologists
and the pharmaceutical industry, in which Clarient will utilize our Support
Vector Machine (SVM) intellectual property. Under the terms of the agreement,
Clarient will pay us an upfront licensing fee, a monthly expert development fee,
and future royalties for any Clarient product developed using the licensed SVM
technology. We hope this will allow Clarient to develop applications to detect
cancer cells in peripheral blood and bone marrow.
2
THE OFFERING
We are registering up to 61,303,685 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 30,093,999 shares of our issued common stock
plus an additional 31,209,686 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 and
principal executive office is located at 5501 1/2 Abercorn Street, Savannah,
Georgia 31406. Our telephone number is (912) 352-7488 and our web site is
located at www.HealthDiscoveryCorp.com. Information contained on our web site is
not a part of this prospectus.
3
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE SPECIFIC FACTORS LISTED BELOW TOGETHER WITH THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE WHETHER TO PURCHASE
SHARES OF OUR COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE
THAT ARE NOT YET IDENTIFIED OR THAT WE CURRENTLY THINK ARE IMMATERIAL, MAY ALSO
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS,
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE A DEVELOPING BUSINESS AND A HIGH-RISK COMPANY.
We are a high-risk company in a volatile industry. In September 2003, we
completely changed the focus of our business from wireless telecommunications to
biotechnology. Consequently, we have no history on which to base an evaluation
of our business and prospects. Thus, investors should recognize that an
investment in our company is risky and highly speculative. We are a developing
business, and our prospects must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development. Failure to implement and execute our business
and marketing strategy successfully, to provide superior customer service, to
respond to competitive developments and to integrate, retain and motivate
qualified personnel could have a material adverse effect on our business,
results of operations and financial condition. We must successfully overcome
these and other business risks. If our efforts are unsuccessful or other
unexpected events occur, purchasers of the common stock offered hereby could
lose their entire investment.
WE EXPECT TO INCUR FUTURE LOSSES, AND WE MAY NEVER ACHIEVE OR SUSTAIN
PROFITABILITY.
We 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 our reorganization in 2003, our focus and our business model have been
continually evolving. Accordingly, we have a history of operations in which
there is insufficient information to identify any historical pattern. Even if we
could discern such a pattern, the rapidly evolving nature of the biotechnology
and pharmaceutical industries would make it very difficult to identify any
meaningful information in such short a history. Therefore, it is also difficult
to make any projections about the future of our operations. This difficulty may
result in our shares trading below their value.
WE WILL HAVE NEGATIVE OPERATING INCOME AND MAY NEVER BECOME PROFITABLE.
Our operating expenses are expected to exceed our income for the next six to
nine months and thus our capital will be decreased to pay these operating
expenses. If we ever become profitable, of which there is no assurance that we
can, from time to time our operating expenses could exceed our income and thus
our capital will be decreased to pay these operating expenses.
WE MAY NEED ADDITIONAL FINANCING.
Additional proceeds may be required to finance our activities. We cannot assure
prospective investors that we will not need to raise additional capital or that
we would be able to raise sufficient additional capital on favorable terms, if
at all. No binding arrangements have been made to secure such financing, and
there can be no assurance that such additional financing will be available when
required on terms acceptable to us. If we fail to raise sufficient funds, we may
have to cease operations, which would materially harm our business and financial
results. If we raise additional capital by issuing equity securities, our
stockholders may experience dilution. If we raise additional funds through
collaboration and licensing arrangements, we may be required to relinquish some
rights to our technologies or product candidates, or grant licenses on terms
that are not favorable to us.
4
OUR OPERATING RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE SIGNIFICANTLY FROM
PERIOD TO PERIOD, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE AND RESULT IN
LOSSES TO INVESTORS.
Our operating results may vary from period to period due to numerous factors,
many of which are outside our control, including the number, timing and
acceptance of our services. Factors that may cause our results to vary by period
include:
o changes in the demand for our products and services;
o the nature, pricing and timing of products and services provided to
our collaborators;
o acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
o reduced capital investment for extended periods;
o losses and expenses related to our investments in joint ventures and
businesses;
o regulatory developments or changes in public perceptions relating to
the use of genetic information and the diagnosis and treatment of
disease based on genetic information;
o changes in intellectual property laws that affect our rights in
genetic information that we sell; and
o payments of milestones, license fees or research payments under the
terms of our increasing number of external alliances.
Research and development costs associated with our technologies and services, as
well as personnel costs, marketing programs and overhead, account for a
substantial portion of its operating expenses. These expenses cannot be adjusted
quickly in the short term. If revenues of the business decline or do not grow as
anticipated, we may not be able to reduce our operating expenses accordingly.
Failure to achieve anticipated levels of revenue could therefore significantly
harm our operating results for a particular period.
WE MAY FAIL TO MEET OUR DEBT OBLIGATIONS.
If our cash flow and capital resources are insufficient to fund our debt
obligations incurred in connection with recent acquisitions, we may be forced to
sell assets, seek additional equity or debt capital or restructure our debt. In
addition, any failure to make scheduled payment of interest and principal on our
outstanding notes or any other indebtedness could result in our creditors
exercising remedies on the notes and taking some or all of our assets or could
otherwise harm our ability to incur additional indebtedness on acceptable terms.
We cannot assure you that our cash flow and capital resources will be sufficient
for payment of interest and principal on our debt in the future, including
payments on any outstanding notes, or that any alternative methods would be
successful or would permit us to meet our debt obligations.
OUR STOCK PRICE HAS BEEN, AND IS LIKELY TO CONTINUE TO BE, HIGHLY VOLATILE.
Our stock price has, since September 1, 2003, traded as high as $0.60 and as low
as $0.06. Our stock price could fluctuate significantly due to a number of
factors beyond our control, including:
o variations in our actual or anticipated operating results;
o sales of substantial amounts of our stock;
o announcements about us or about our competitors, including
technological innovation or new products or services;
o litigation and other developments related to our patents or other
proprietary rights or those of our competitors;
o conditions in the life sciences, pharmaceuticals or genomics
industries; and
o governmental regulation and legislation.
In addition, the stock market in general, and the market for life sciences and
technology companies in particular, have experienced extreme price and volume
fluctuations recently. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. These broad
market and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance.
5
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.
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 cu
stomers.
6
Some of our competitors, especially academic and research institutions and
government and other publicly funded agencies, may provide for free services or
data similar to the services and data that we provide for a fee. Moreover, our
competitors may obtain patent and other intellectual property protection that
would limit our rights or our customers' and partners' ability to use or
commercialize our discoveries, products and services. If we are unable to
compete successfully against existing or potential competitors, we may never
achieve profitability.
OUR MANAGEMENT MAY BE UNABLE TO ADDRESS OUR POTENTIAL GROWTH.
We anticipate that once operations commence, a period of significant expansion
will be required to address potential growth in our customer base and market
opportunities. This expansion will place a significant strain on our management,
operational and financial resources. To manage the expected growth of our
operations, we will be required to improve existing and implement new
operational systems, procedures and controls, and to expand, train and manage
our employee base. There can be no assurance that our current and planned
personnel, systems, procedures and controls will be adequate to support our
future operations, that management will be able to hire, train, retain, motivate
and manage the required personnel or that we will be able to identify, manage
and exploit existing and potential strategic relationships and market
opportunities. Our failure to manage growth effectively could have a material
adverse effect on our business, results of operations and financial condition.
IF OUR BUSINESS DOES NOT KEEP UP WITH RAPID TECHNOLOGICAL CHANGE OR CONTINUE TO
INTRODUCE NEW PRODUCTS, WE MAY BE UNABLE TO MAINTAIN MARKET SHARE OR RECOVER
INVESTMENTS IN OUR TECHNOLOGIES.
Technologies in the biomarker industry have undergone, and are expected to
continue to undergo, rapid and significant change. We may not be able to keep
pace with the rapid rate of change and introduce new products that will
adequately meet the requirements of the marketplace or achieve market
acceptance. If we fail to introduce new and innovative products, we could lose
market share to our competitors and experience a reduction in our growth rate
and damage to our reputation and business.
The future success of our business will depend in large part on our ability to
maintain a competitive position with respect to these technologies. We believe
that successful new product introductions provide a significant competitive
advantage because customers make an investment of time in selecting and learning
to use a new product, and are reluctant to switch to a competing product after
making their initial selection. However, our business or others may make rapid
technological developments, which could result in our technologies, products or
services becoming obsolete before we are able to recover the expenses incurred
to develop them.
IF OUR BUSINESS CANNOT ENTER INTO STRATEGIC ALLIANCES OR LICENSING AGREEMENTS,
WE MAY BE UNABLE TO DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES INTO NEW PRODUCTS
AND SERVICES OR CONTINUE TO COMMERCIALIZE EXISTING PRODUCTS OR SERVICES.
We may be unable to maintain or expand existing strategic alliances or establish
additional alliances or licensing arrangements necessary to continue to develop
and commercialize products, and any of those arrangements may not be on terms
favorable to the business. In addition, current or any future arrangements may
be unsuccessful. If we are unable to obtain or maintain any third party license
required to sell or develop our products or product enhancements, we may choose
to obtain substitute technology either through licensing from another third
party or by developing the necessary technology ourselves. Any substitute
technology may be of lower quality or may involve increased cost, either of
which could adversely affect our ability to provide our products competitively
and harm our business.
We also depend on collaborators for the development and manufacture of complex
instrument systems and chemicals and other materials that are used in laboratory
experiments. We cannot control the amount and timing of resources our
collaborators devote to our products. We may not be able to enter into or
satisfactorily retain these research, development and manufacturing
collaborations and licensing agreements, which could reduce our growth and harm
our competitive position.
7
WE MAY NOT BE ABLE TO FIND BUSINESS PARTNERS TO DEVELOP AND COMMERCIALIZE
PRODUCT CANDIDATES DERIVING FROM OUR DISCOVERY ACTIVITIES.
Our strategy for the development and commercialization of diagnostic markers and
therapeutic proteins depends on the formation of collaborations or licensing
relationships with third parties that have complementary capabilities in
relevant fields. Potential third parties include pharmaceutical and
biotechnology companies, diagnostic companies, academic institutions and other
entities. We cannot assure you that we will be able to form these collaborations
or license our discoveries or that these collaborations and licenses will be
successful.
OUR DEPENDENCE ON LICENSING AND OTHER COLLABORATION AGREEMENTS WITH THIRD
PARTIES SUBJECTS US TO A NUMBER OF RISKS.
We may not be able to enter into licensing or other collaboration agreements on
terms favorable to us. Collaborators may typically be afforded significant
discretion in electing whether to pursue any of the planned activities. In most
cases, our collaborators or licensees will have responsibility for formulating
and implementing key strategic or operational plans. Decisions by our
collaborators or licensees on these key plans, which may include development,
clinical, regulatory, marketing (including pricing), inventory management and
other issues, may prevent successful commercialization of the product or
otherwise affect our profitability.
In addition, we may not be able to control the amount and timing of resources
our collaborators devote to the product candidates, and collaborators may not
perform their obligations as expected. Additionally, business combinations or
changes in a collaborator's or a licensee's business strategy may negatively
affect its willingness or ability to complete its obligations under the
arrangement with us. Furthermore, our rights in any intellectual property or
products that may result from our collaborations may depend on additional
investment of money that we may not be able or willing to make.
Potential or future collaborators may also pursue alternative technologies,
including those of our competitors. Disputes may arise with respect to the
ownership of rights to any technology or product developed with any future
collaborator. Lengthy negotiations with potential collaborators or disagreements
between us and our collaborators may lead to delays or termination in the
research, development or commercialization of product candidates or result in
time-consuming and expensive litigation or arbitration. If our collaborators
pursue alternative technologies or fail to develop or commercialize successfully
any product candidate to which they have obtained rights from us, our business,
financial condition and results of operations may be significantly harmed.
IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL OR SUFFICIENT QUALIFIED
EMPLOYEES, WE MAY BE UNABLE TO SUCCESSFULLY OPERATE OUR BUSINESS.
Our business is highly dependent upon the continued services of our Chief
Executive Officer, Board of Directors, and Scientific Advisory Board. While
members of our senior management are parties to employment or consulting
agreements and non-competition and non-disclosure agreements, we cannot assure
you that these key personnel and others will not leave us or compete with us,
which could materially harm our financial results and our ability to compete.
The loss, incapacity or unavailability for any reason of any of these
individuals could have a material adverse effect upon our business, as well as
our relationships with our potential customers. We do not carry key person life
insurance on any member of our senior management. Furthermore, competition for
highly qualified personnel in our industry and geographic locations is intense.
Our business would be seriously harmed if we were unable to retain our key
employees, or to attract, integrate or retain other highly qualified personnel
in the future.
WE MAY NOT BE ABLE TO EMPLOY AND RETAIN EXPERIENCED SCIENTIST, MATHEMATICIANS
AND MANAGEMENT.
Technologies in our industry have undergone, and are expected to continue to
undergo, rapid and significant change. A highly skilled staff is integral to
developing, marketing and supporting new products that will meet or exceed the
expectations of the marketplace and achieve market acceptance. Without
experienced staff, our business may be unable to maintain or grow market share,
which could result in lower than expected revenues and earnings.
8
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.
9
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:
o assert claims of infringement;
o enforce our patents as they are granted;
o protect our trade secrets or know-how; or
o determine the enforceability, scope and validity of the proprietary
rights of others.
We may be unsuccessful in defending or pursuing these lawsuits. Regardless of
the outcome, litigation can be very costly and can divert management's efforts.
An adverse determination may subject us to significant liabilities or require us
to seek licenses to other parties' patents or proprietary rights. We may also be
restricted or prevented from licensing or selling our products and services.
Further, we may not be able to obtain any necessary licenses on acceptable
terms, if at all.
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.
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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:
o be found to be toxic or ineffective;
o fail to receive necessary regulatory approvals;
o be difficult or impossible to manufacture on a large scale;
o be uneconomical to market;
o fail to be developed prior to the successful marketing of similar
products by competitors; or
o be impossible to market because they infringe on the proprietary
rights of third parties or compete with superior products marketed by
third parties.
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.
11
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF PRODUCTS DERIVED FROM OUR
PRODUCTS OR SERVICES HARM PEOPLE.
We may be held liable if any product that is made with the use, or incorporation
of, any of our technologies or data causes harm or is found otherwise
unsuitable. These risks are inherent in the development of genomics, functional
genomics and pharmaceutical products. If we are sued for any harm or injury
caused by products derived from our services or products, our liability could
exceed our total assets. In addition, such claims could cause us to incur
substantial costs and subject us to negative publicity even if we prevail in our
defense of such claims.
OUR BUSINESS AND THE PRODUCTS DEVELOPED BY OUR COLLABORATORS AND LICENSEES MAY
BE SUBJECT TO GOVERNMENTAL REGULATION.
Any new therapy or diagnostic product that may be developed by our collaborators
or by our licensees will have to undergo a lengthy and expensive regulatory
review process in the United States and other countries before it can be
marketed. It may be several years, or longer, before any therapy or diagnostic
product that is developed by using our technologies, will be sold or will
provide us with any revenues. This may delay or prevent us from becoming
profitable. Changes in policies of regulatory bodies in the United States and in
other countries could increase the delay for each new therapy and diagnostic
product. Even if regulatory approval is obtained, a product on the market and
its manufacturer are subject to continuing review. Discovery of previously
unknown problems with a product may result in withdrawal of the product from the
market.
Although we intend to become involved in the clinical phases in the future, we
still expect to rely mainly on collaborators or licensees of our discovery
activities to file regulatory approval applications and generally direct the
regulatory review process. We cannot be certain whether they will be able to
obtain marketing clearance for any product that may be developed on a timely
basis, if at all. If they fail to obtain required governmental clearances, it
will prevent them from marketing therapeutic or diagnostic products until
clearance can be obtained, if at all. This will in turn reduce our chances of
receiving various forms of payments, including those relating to sales of
marketed therapeutic or diagnostic products by them.
THE LAW APPLICABLE TO US MAY CHANGE IN A MANNER THAT NEGATIVELY AFFECTS OUR
PROSPECTS.
We must comply with various legal requirements, including requirements imposed
by federal and state securities and tax laws. Should any of those laws change
over the term of our existence, the legal requirements to which we may be
subject could differ materially from current requirements, which could increase
the cost of doing business or preclude us from undertaking certain parts of our
business plan, would result in adverse consequences.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME
WIDESPREAD, THERE MAY BE LESS DEMAND FOR OUR PRODUCTS AND SERVICES.
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to various conditions,
particularly for those that have no known cure. Any of these scenarios could
reduce the potential markets for our technologies in the field of predictive
drug response, which could materially harm our business and financial results.
RISKS RELATED TO THIS OFFERING
THE SO-CALLED "PENNY STOCK RULE" COULD MAKE IT CUMBERSOME FOR BROKERS AND
DEALERS TO TRADE IN OUR COMMON STOCK, MAKING THE MARKET FOR OUR COMMON STOCK
LESS LIQUID WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Trading of our common stock on the OTC Bulletin Board may be subject to certain
provisions of the Securities Exchange Act of 1934, commonly referred to as the
"penny stock" rule. A penny stock is generally defined to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker-dealer to:
o make a special suitability determination for purchasers of our shares;
o receive the purchaser's written consent to the transaction prior to
the purchase; and
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o deliver to a prospective purchaser of our stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of
broker-dealers to trade and/or maintain a market in our common stock. Also,
prospective investors may not want to get involved with the additional
administrative requirements, which may have a material adverse effect on the
trading of our shares.
ANY PROJECTIONS AND FORECASTS INCLUDED IN THIS PROSPECTUS WERE PREPARED BASED ON
ASSUMPTIONS REGARDING FACTS AND FUTURE EVENTS WHICH MAY OR MAY NOT MATERIALIZE.
Many factors influencing the operation of our business are beyond management's
control. There can be no assurance that the actual operation of our company's
business will correspond with any projections and the forecasts included in this
prospectus. No representation or warranty of any kind is made by us, management,
our accountant, attorneys or any other person associated with our company, that
the projections made by us will correspond with future events.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS.
As of March 31, 2006, executive officers and directors collectively controlled
approximately 38.75% 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.
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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.
PRICE RANGE OF OUR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
HDVY.OB. The range of bids for our common stock, as reported on Bloomberg.com
during each quarter of the last two fiscal years was as follows. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
HIGH BID LOW BID
First Quarter 2004 $ .48 $ .15
Second Quarter 2004 $ .30 $ .11
Third Quarter 2004 $ .22 $ .145
Fourth Quarter 2004 $ .45 $ .17
First Quarter 2005 $ .40 $ .20
Second Quarter 2005 $ .41 $ .21
Third Quarter 2005 $ .25 $ .145
Fourth Quarter 2005 $ .24 $ .07
First Quarter 2006 $ .15 $ .10
The closing price of our common stock on April 27, 2006 was $0.11 per share. At
April 27, 2006, there were approximately 474 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., William Goldstein 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.
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NUMBER OF SHARES
BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
NAME BEFORE OFFERING (1) BEING OFFERED AFTER OFFERING (3)
-------------------------------------------------------------------
Richard B. Aronson 312,500 (2) 312,500 (2) 0
Frank Brenton 156,250 (2) 156,250 (2) 0
Alpha Capital 3,375,000 (2) 3,375,000 (2) 0
Uriel Cohen 312,500 (2) 312,500 (2) 0
Congregation Darkei Tshivo of Dinov 312,500 (2) 312,500 (2) 0
Andrew Coulton 1,500,000 (2) 1,500,000 (2) 0
Mark D'Andrea 312,500 (2) 312,500 (2) 0
Kenneth Daniel 312,500 (2) 312,500 (2) 0
Pauline Daniel 312,500 (2) 312,500 (2) 0
Glen Davis 625,000 (2) 625,000 (2) 0
John Docherty 312,500 (2) 312,500 (2) 0
Domaco Venture Capital 312,500 (2) 312,500 (2) 0
Double U Master Fund LP 312,500 (2) 312,500 (2) 0
James Field 156,250 (2) 156,250 (2) 0
Jeffrey Fleeman 156,250 (2) 156,250 (2) 0
Alan Friedman 125,000 (2) 125,000 (2) 0
Stephen Fryer 156,250 (2) 156,250 (2) 0
L. George Elias 156,250 (2) 156,250 (2) 0
William Goldstein 625,000 (2) 625,000 (2) 0
Jimmie T. Hadley 312,500 (2) 312,500 (2) 0
Hillcrest R.V. Park Resort Inc. 625,000 (2) 625,000 (2) 0
Progressive Insurance 312,500 (2) 312,500 (2) 0
Ellis International 2,633,000 (2) 2,633,000 (2) 0
Iroquois Capital, LP 1,300,000 (2) 1,300,000 (2) 0
Ming Jaw 312,500 (2) 312,500 (2) 0
Thomas Kendall 156,250 (2) 156,250 (2) 0
Kevin Kowbel 1,300,000 (2) 1,300,000 (2) 0
Michael Kramm 312,500 (2) 312,500 (2) 0
Frank Lamond 156,250 (2) 156,250 (2) 0
Ronald Lazar 312,500 (2) 312,500 (2) 0
Little Gem Life Science Fund, LLC 2,550,000 (2) 2,550,000 (2) 0
William Lobel 125,000 (2) 125,000 (2) 0
John Madden IV 312,500 (2) 312,500 (2) 0
Kevin Maloney 1,000,000 (2) 1,000,000 (2) 0
Maryann Cawthorne Davis Irrevocable Trust 312,500 (2) 312,500 (2) 0
McCullough Family Trust 437,500 (2) 437,500 (2) 0
Kristina Mellen 312,500 (2) 312,500 (2) 0
Sharon Mills 312,500 (2) 312,500 (2) 0
David Minkoff 312,500 (2) 312,500 (2) 0
Charles Newman 400,000 (2) 400,000 (2) 0
Allen Notowitz 156,250 (2) 156,250 (2) 0
15
NUMBER OF SHARES
BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
NAME BEFORE OFFERING (1) BEING OFFERED AFTER OFFERING (3)
-------------------------------------------------------------------
Platinum Partners 1,357,000 (2) 1,357,000 (2) 0
Michael Pisani 500,000 (2) 500,000 (2) 0
Anthony Polak 312,500 (2) 312,500 (2) 0
Risner Millennium Trust 125,000 (2) 125,000 (2) 0
RL Capital Partners 625,000 (2) 625,000 (2) 0
Gary Roberts 375,000 (2) 375,000 (2) 0
Ronald Sheldon Trust 625,000 (2) 625,000 (2) 0
James Royal 937,500 (2) 937,500 (2) 0
Ronald & Juanita Royal 312,500 (2) 312,500 (2) 0
Barry Saxe 1,250,000 (2) 1,250,000 (2) 0
Ben-Zion Schneider 1,280,000 (2) 1,280,000 (2) 0
Seaside Partners, LP 1,875,000 (2) 1,875,000 (2) 0
Robert Smith 312,500 (2) 312,500 (2) 0
South Ferry LP 2,700,000 (2) 2,700,000 (2) 0
Lawrence Starr 312,500 (2) 312,500 (2) 0
Michael Unrein 156,250 (2) 156,250 (2) 0
John Wechsler 625,000 (2) 625,000 (2) 0
Jon White 625,000 (2) 625,000 (2) 0
James C. Yadgir 200,000 (2) 200,000 (2) 0
Isabelle Guyon 200,000 200,000 0
Westrock Advisors 325,782 (4) 325,782 (4) 0
Ana Maria Melo 15,626 (5) 15,626 (5) 0
Edward Taylor 953,903 (6) 953,903 (6) 0
Joe McKenzie 2,301,688 (7) 379,624 (7) 1,922,064
Roger S. Brown 125,000 (2) 125,000 (2) 0
James D. Bond 62,500 (2) 62,500 (2) 0
Ron Vogel 4,000,000 (2) 4,000,000 (2) 0
Harry Snow 312,500 (2) 312,500 (2) 0
Trevor Colby IRA 1,000,000 (2) 1,000,000 (2) 0
Trevor Colby 990,000 (2) 990,000 (2) 0
William Quirk Jr. 10,500,000 (2) 10,500,000 (2) 0
Landsberger Family Trust 3,375,000 (2) 3,375,000 (2) 0
Rosemary G. Nelson 750,000 (2) 750,000 (2) 0
----------------- --------------------- ----------------------
TOTAL: 63,125,749 61,303,685 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 325,782 shares of common stock at an
exercise price of $0.24 per share.
(5) Comprised of warrants to acquire 15,626 shares of common stock at an
exercise price of $0.24 per share.
(6) Comprised of warrants to acquire 953,903 shares of common stock at an
exercise price of $0.24 per share.
(7) Does not include warrants.
16
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. All costs, expenses and fees in connection with the registration
of the shares offered by this prospectus will be borne by us, other than
brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares which will be borne by the selling stockholders. We have agreed
to indemnify the selling stockholders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act. Sales of shares
may be effected by selling stockholders from time to time in one or more types
of transactions (which may include block transactions) in the over-the-counter
market, any exchange or quotation system, in negotiated transactions, through
put or call options transactions relating to the shares, through short sales of
shares, or a combination of any such methods of sale, and any other method
permitted pursuant to applicable law, at market prices prevailing at the time of
sale, or at negotiated prices. Such transactions may or may not involve brokers
or dealers.
The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of the shares or of securities convertible into or exchangeable for the
shares in the course of hedging positions they assume with selling stockholders.
The selling stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as amended or supplemented to reflect such
transaction). The selling stockholders may pledge and/or loan these shares to
broker-dealers who may borrow the shares against their hedging short position
and in turn sell these shares under the prospectus to cover such short position.
The selling stockholders may make these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer is not expected to be in excess of customary commissions).
The selling stockholders and any broker-dealers that act in connection
with the sale of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.
Because selling stockholders may be deemed "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders may be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
Selling stockholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act
provided they meet the criteria and conform to the requirements of Rule 144.
BUSINESS
OUR HISTORY
We were organized under the name Direct Wireless Communications, Inc.,
in April 2001 by Direct Wireless Corporation, which licensed to us its
technology for a wireless telephone. In October 2001, Direct Wireless
Corporation, then our sole stockholder, pursuant to an effective registration
statement under the Securities Act of 1933, distributed its entire holdings of
our common stock as a stock dividend to its stockholders. As a result of the
dividend, Direct Wireless Corporation ceased to own any of our equity
securities. The negative events that occurred over the next several years in the
communications industry made it difficult for us to fund the advancement of our
communication platform. As a result, we made the decision to strategically
change the overall direction of our intended business activities.
17
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 Barnhill
Group and the change in strategic direction of the Company, our licensing rights
to the telecommunications technology previously granted by Direct Wireless
Corporation were terminated and all payments due to Direct Wireless Corporation
were terminated.
Subsequently, we amended our charter to change our name to Health
Discovery Corporation. Direct Wireless Communications (DWCM) officially became
Health Discovery Corporation on November 6, 2003, at which time the new trading
symbol (HDVY) became effective.
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC,
a company with patented Fractal Genomics Modeling software, through the issuance
of 3,825,000 common shares of the Company. In addition to the common stock
shares issued for the acquisition of Fractal Genomics, LLC's assets, the Company
agreed to execute a note for $500,000 payable in $62,500 quarterly installments
to the seller beginning on January 1, 2004 with the final payment being made in
October 2005. Fractal Genomics utilized its technology to find, link and model
patterns of similarity hidden in large amounts of information, such as the
clinical databases used for diagnostic and drug discovery. Fractal Genomics has
applied its technology to protein and pathway discovery in leukemia and lung
development, which could lead to the identification of novel proteins that could
be used to develop diagnostic markers and drug targets. Our acquisition of
Fractal Genomics was completed December 30, 2003.
On July 30, 2004, we began purchasing rights to a portfolio of 71
patents and pending patent applications, including patents on the use of Support
Vector Machines, or SVMs, and other machine learning tools useful for diagnostic
and drug discovery (the "SVM Portfolio"). On May 6, 2005, the Company acquired
the remaining interest in the SVM Portfolio from a group of unrelated third
parties.
Effective September 26, 2004, we were assigned a patent license
agreement with Lucent Technologies GRL Corporation ("Lucent"). The patent
license agreement was associated with the patents acquired July 30, 2004. We
agreed to pay minimum royalty fees to Lucent, which 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.
The SVM is a data-driven mathematical program that uses machine
learning to find otherwise hidden relationships in data and has been
successfully used for colon cancer gene selection, breast cancer diagnosis,
leukemia classification, genomic analysis, proteomic research and drug
discovery. The patents for the SVM also cover applications in a wide variety of
research endeavors unrelated to drug discovery. One of the issued patents
includes a description of a set of colon cancer genes and prostate cancer genes
which could be used for diagnostic testing and drug target identification. One
of the genes represents a potential vaccine for colon cancer.
The acquisition of rights to the patent portfolio brought together Dr.
Stephen Barnhill, our Chairman and CEO, and three members of our Scientific
Advisory Board ("SAB") who are pioneers of SVM: Prof. Dr. Vladimir Vapnik, and
Drs. Isabelle Guyon and Bernhard Schoelkopf. Prof. Dr. Vapnik was recently
awarded the Humboldt Prize for developing Statistical Learning Theory, the
cornerstone behind the original SVM. Dr. Guyon was the co-inventor with Prof.
Dr. Vapnik on the original SVM patent, which is currently owned by Lucent
Technologies, Inc. - GRL Corp (and licensed to Health Discovery). Dr.
Schoelkopf, who is the director of the Max Plank Institute for Biological
Cybernetics in Tubingen, Germany, won the annual dissertation prize of the
German Association for Computer Science for his work on Support Vector learning.
OUR MARKET
We are positioning ourselves to provide pharmaceutical and diagnostic
companies with all aspects of FIRST PHASE BIOMARKER DISCOVERY, from expert
assessment of the clinical dilemma through proper selection and procurement of
high quality specimens. In addition, we aim to provide proprietary analytical
evaluation methods and state-of-the-art computational analysis to produce
relevant and accurate clinical data, producing accurate biomarker and pathway
discoveries, resulting in patent protection of our biomarker discoveries for
future development and commercialization.
18
Developing and evaluating new drugs and medical therapies in less time
and at lower cost is of enormous potential benefit for modern healthcare.
Genuinely new products must pass a series of both in-vitro and in-vivo testing
in order to demonstrate their safety and effectiveness for a specific clinical
application. Historically, the endpoints of these trials were "traditional" ones
tied to the actual disease being evaluated, such as a decrease in mortality or
an objective/semi-objective decrease in clinical symptoms associated with the
condition. In the last 10 to 15 years, there has been a move by the U.S. Food
and Drug Administration (FDA) to incorporate other endpoints, including genes
that are biomarkers for the existence or absence of a particular disease, which
are nontraditional findings that are related to the presence or absence of
disease. Examples of successful application of biomarker data to therapeutic
evaluation include the drugs Betaseron for use against multiple sclerosis and
Herceptin in the treatment of breast cancer.
The FDA began an initiative in 1987 designed to expedite approval for
drugs. Initially utilized for drugs that would combat the devastating AIDS
epidemic, these initiatives measured alternative factors such as biomarkers to
essentially evaluate the effectiveness of new therapeutics for diseases such as
AIDS.
Our goal is to leverage the FDA's expedited approval process by
producing more relevant and predictable biomarkers for drug discovery. By
speeding up approval, new and better medicines and diagnostic markers can be
developed for patients worldwide.
Biomarkers have long played a significant role in drug discovery and
development, but recent advances have signaled the potential for significant
deepening of their role in terms of both broader application within particular
stages of the process and application across a broader spectrum of functions.
Even before the recent resurgence of interest in the subject, single-analyte
biomarkers had already made significant impacts on clinical studies as
surrogates for clinical endpoints. Recent advances in discovery of
multi-component biomarkers and single-molecule markers derived from them show
promise of providing greatly improved clinical sensitivity and specificity over
their pre-genomic forbearers.
One major difficulty with biomarker discovery relates to the
accessibility of patient samples. Whereas tissues from animal models are usually
readily available, human tumor specimens and human body fluid specimens are
often unavailable or inaccessible for most common diseases of major commercial
interest.
Another major difficulty is developing new mathematical tools capable
of handling the analysis of the terabytes of information being generated by gene
and protein analysis of clinical specimens that must be sifted through to
identify the key biomarkers that will provide important clues leading to the
identification of new diagnostic and drug targets, not only for cancer but for
other medically and commercially important diseases as well.
An additional difficulty in commercialization of newly discovered
biomarkers is establishing relationships at large U.S. medical and cancer
centers to validate the results in a clinical setting. Validation studies are
required to ensure that the markers are valid for a large population. The
validation process is characterized by proving the efficacy of the newly
discovered biomarkers in larger sample sets. Access to these prestigious
institutions for validation studies can often be difficult to arrange.
Using our established relationships with top U.S. medical and cancer
centers and our computational technologies, our goal is to overcome the
difficulties encountered with biomarker discovery and become the first company,
to our knowledge, to perform the total process of first-phase discovery by
identifying a particular clinical problem to be solved and performing the entire
process leading to the identification of the genes or proteins (called
biomarkers), and the relationships among them (called pathways) that are
relevant to the solution of the medical problem as described below. This process
will consist of an assessment of the clinical problem, the determination of the
clinical trial set-up (the number of patients and what medical conditions they
represent), the proper selection and procurement of high quality specimens for
analysis, an analytical evaluation of the specimens through laboratory tests to
produce the clinical data, and the mathematical evaluation of the data using our
proprietary pattern recognition techniques such as fractal geometric modeling to
produce an accurate determination of the relevant genes and proteins and the
manners in which they interact. Once we discover these new biomarkers and
pathways, we intend to immediately file patent applications to protect the
discoveries such as with the patents filed for our Prostate cancer and Leukemia
discovery.
These patent-protected biomarkers and pathways represent the products
of our Company. After our discovery is patent protected, the process of selling
or licensing the newly discovered biomarkers and pathways will begin. The
information will then be sold or licensed to diagnostic companies for
development into new state-of-the-art diagnostic assays and the same information
will be sold or licensed to pharmaceutical companies for further development
into the next generation of therapeutic targets or to solve drug safety issues.
19
Intellectual property is a key asset in diagnostic and drug discovery.
Our products will be based on intellectual property, which includes the
discovered biomarkers and pathways produced through our own internal research
programs, as well as joint discovery efforts with academic institutions,
diagnostic and pharmaceutical companies worldwide.
Our discovery process has already been shown to lead to the
identification of biomarkers and pathways in leukemia and lung cancer
development and we hope it will be instrumental in diagnosing and treating
patients with devastating diseases like cancer, heart disease, obesity and AIDS.
OUR TECHNOLOGIES
Our goal is to develop a product line of newly discovered biomarkers
and pathways, which will include human genes and genetic variations, as well as
gene, protein, and metabolite expression differences. In drug discovery,
biomarkers can help elicit disease targets and pathways and validate mechanisms
of drug action. They may also be pharmacodynamic indicators of drug activity,
response and toxicity for use in clinical development.
We will provide pharmaceutical and diagnostic companies with all
aspects of first phase diagnostic and drug discovery, beginning with expert
assessment of the clinical dilemma through proper selection and procurement of
high quality specimens. We will then apply our proprietary analytical evaluation
methods and state-of-the-art computational analysis to produce relevant and
accurate clinical data, producing accurate biomarker and pathway discoveries,
resulting in patent protection of our biomarker discoveries for future
development.
Support Vector Machines (SVMs)
- ------------------------------
Since their introduction in 1995, SVMs marked the beginning of a new
era in the "learning-from-examples" paradigm in artificial intelligence. Rooted
in the Statistical Learning Theory developed by Vladimir Vapnik, a member of our
SAB, SVMs quickly gained attention from the pattern recognition community due to
a number of theoretical and computational merits.
The capability of SVMs to discover hidden relationships in a dataset
and to exploit them in order to make informed extrapolations about future or
unseen data holds a tremendous potential for modern applications of computer
technology, particularly as large amounts of data are generated faster than
current analysis techniques can process them. The field of machine learning has
traditionally been a branch of artificial intelligence, dealing with the problem
of extracting relevant knowledge from data. Statistics has played a similar role
within mathematics. Not surprisingly, both fields have encountered the same
difficulties when analyzing complex datasets: nonlinear relations are hard to
learn, high dimensional spaces carry a high risk of detecting spurious relations
(relations that are just the effect of chance), and the computational cost is
often prohibitive. Previous generation computational technologies such as neural
networks, decision trees and other systems all try to deal with such limitations
by introducing several approximations and therefore usually produce sub-optimal
solutions.
Statistical Learning Theory, the backbone of SVMs, provides a new
framework for modeling learning algorithms, merges the fields of machine
learning and statistics, and inspires algorithms that overcome all of the above
difficulties. A new generation of learning algorithms - or equivalently of
statistical methods - has recently been developed, based on this theory. Such
methods prove remarkably resistant to the problems imposed by "noisy" data and
high dimensionality. They are computationally efficient. The optimal solution
can always be found. These methods have an inherent modular design that
simplifies their implementation and analysis and allows the insertion of domain
knowledge. More importantly, they come with theoretical guarantees about their
generalization ability.
Creation of the Support Vector Machine
- --------------------------------------
In the mid-1990s, Vladimir Vapnik, together with Bernhard Boser and
Isabelle Guyon, also a member of our SAB, discovered a new algorithm for
implementing inductive inferences associated with Statistical Learning Theory:
the Support Vector Machine. The key idea was to map input vectors into a high
dimensional space and to construct in that space hyperplanes with a large margin
(and hence with low capacity).
20
The seminal idea for the theory of statistical learning began in the
1960's with the prominent work of Professors Vapnik and Chevronenkis with the
discovery of the VC dimension. The technology for mapping input vectors into a
high dimensional space was realized by the so-called kernel trick, which in many
cases avoids the need to manipulate data in the high dimensional space. By 1995,
these ideas had been extended to all of the main function estimation problems:
pattern classification, regression estimation, density estimation, and finding
solutions to equations. Statistical Learning Theory and SVMs are now widely
accepted and described in international research journals and frequently
presented at major scientific meetings around the world.
There are several reasons for this popularity:
o Most importantly, in ALL benchmark problems, SVM solutions were among
the winners.
o These methods do not rely on heuristics, but rather on solid
mathematical foundations. Therefore, one can use mathematical tools to
understand the behavior of existing methods, to improve them, and to
design new methods.
o SVM methods are very well suited to the analysis of high dimensional
(even infinite dimensional) spaces. It appears that high dimensional
analysis will be crucial in the challenging problems that are emerging
in areas such as bioinformatics, image analysis, and information
retrieval.
Significant Advantages of Support Vector Machines
- -------------------------------------------------
Bioinformatics is facing new challenges as the amount of available data
increases exponentially. Data is valuable only if it can be understood and can
help in making predictions, in the form, for instance, of early detection
diagnostics or minimizing new drug failure in late stage trials. Computer
algorithms have a critical role to play in annotating data, organizing it,
drawing attention to entries of particular interest, and proposing tentative
data explanations. It has always been tempting to seek a universal tool that,
much like the brain, has very broad data processing capabilities.
Clearly, there is a need not only for data analysis tools that are
powerful, but that can also be used effortlessly by a wider range of people who
do not necessarily have a strong background in statistics or computer science.
There is also a need for tools that can be used in a fast, flexible and evolving
fashion, such that new problems can be treated with previously developed tools.
The race to a real breakthrough is measured not only in accuracy, but also in
development time, cost and ease of next generation improvements.
We believe that this is why SVMs represent a significant solution to
the challenges of interpreting diagnostic and drug development data. They hold
the promise that other techniques, including artificial neural networks, have
failed to provide: optimal and reliable performance with easy implementation.
PREDICTION ACCURACY: Given examples of inputs and outputs, a SVM takes
a previously unseen input (e.g. measurements of a new patient) and predicts the
output (e.g. disease state). Statistical learning theory provides estimates of
the predictive accuracy, and SVMs work by directly optimizing these estimates.
As well as having these performance guarantees, the predictions of SVMs are
typically more accurate, in some cases very significantly, than those of other
methods.
HIGH-DIMENSIONAL DATA: SVMs can cope with very large numbers of input
variables. In processing the output of a mass spectrometer, for example, SVMs
can use the full spectrum directly, without having to first manually extract
relevant peaks. Many other techniques (such as parametric statistics and neural
networks) cannot cope with so many input variables.
DATA UNDERSTANDING: SVMs have the unique property that they
automatically extract SUPPORT VECTORS, which are the borderline cases.
Exhibiting such borderline cases allows us to identify outliers, to perform data
cleaning, to find flaws in experimental design, and to detect confounding
factors. In addition, the MARGINS of training examples (how far they are from
the decision boundary) provide useful information about the relevance of input
variables and allow the selection of the most predictive variable.
COMPUTATIONAL EFFICIENCY: Unlike many other machine learning and
statistical methods (such as neural networks, decision trees, and Bayesian
methods), learning with SVMs involves a convex optimization, which is
computationally efficient, and leads to a unique optimum solution. The
predictions made by SVM algorithms are also easy to compute because they involve
only the comparison of the novel pattern with a small subset of the training
patterns (the support vectors).
21
DECISION UNDERSTANDING: Unlike other nonlinear multivariate techniques
such as neural networks, the predictions made by SVMs are often easily
understood since they involve comparisons with the support vectors.
MODULARITY: Separate components of SVMs can be designed separately and
can easily be combined with other techniques. For instance, the kernel in a SVM
can be designed to incorporate expert knowledge about a problem domain, which
often significantly improves performance.
ROBUSTNESS: SVMs are often successful even with sparse data (few
examples), unbalanced data (more examples of one category), redundant data (many
similar examples), and heterogeneous data (examples coming from different
sources).
Recursive Feature Elimination - Support Vector Machine ("RFE-SVM")
- ------------------------------------------------------------------
The RFE method was first reported in 2002 in an article entitled "Gene
Selection for Cancer Classification Using Support Vector Machines", co-authored
by HDC scientific team members Dr. Isabelle Guyon, co-inventor of SVMs, Vladimir
Vapnik, recent Humboldt prize winner for the development of the theory behind
SVMs, and Dr. Stephen Barnhill. The article describing the initial discovery was
published in the journal MACHINE LEARNING and is widely cited in subsequent
publications recognizing the significance of the RFE method within the SVM
field.
RFE is a powerful tool for achieving feature reduction because it takes
into account dependencies between features and, therefore, is considered more
sophisticated than other methods that evaluate and eliminate features
independently. This technology has gained wide acceptance in both academia and
commercial applications and is utilized by many top tier institutions and
corporations. Some examples of academic success with the use of RFE include The
University of California for diagnostic markers of cardiovascular illness,
Columbia University for genomic analysis, MIT for epileptic seizure detection
using EEG's, University of Oviedo, Spain, for assessing beef quality, University
of Trento, Italy, for molecular profiling of DNA microarray data, classification
of heart arrhythmias and digital mammogram analysis, Vanderbilt University for
mass spectroscopy data, Stanford University for gene microarray analysis and
many others. Additionally, corporate scientists from Intel (INTC:NASDAQ),
Microsoft (MSFT:NASDAQ), Hoffman LaRoche (ROG:SWX), and others have incorporated
RFE into their research on data mining, gene expression, and other machine
learning applications.
Fractal Genomics Modeling
- -------------------------
Fractal Genomics Modeling (FGM) technology is designed to study complex
networks. A complex network can be made up of genes inside a living organism,
web pages on the Internet, stocks within a financial market, or any group of
objects or processes that appear to be connected together in some intricate way.
Fractal Genomics uses a new approach toward modeling network behavior to rapidly
generate diagrams and software simulations that facilitate prediction and
analysis of whatever process is your particular object of study. Two important
concepts behind FGM technology are the notions of self-similarity and scale free
networks.
Self-Similar (Fractal) Structure
- --------------------------------
If it were possible to look at a section of a network in detail, it
would be possible to find an even smaller section that resembles the entire
network. This structural property, where the parts can resemble the whole, is
referred to as self-similarity and structures of this sort are sometimes called
fractals. Self-similar structures have been found to exist in many complex
networks.
Scale-Free Networks
- -------------------
The structural property of self-similarity does not mean that hubs or
nodes in networks will all look basically the same. Some nodes have a single
branch leading to another node, while other nodes have branches into a large
number of other nodes. Using the example of an airline routing network, many
more links (branches) will connect to a large city that is a major hub than to a
minor, small town airport.
So, although there may be structural similarities between the parts and
the whole, the individual nodes can be quite different. This has been found to
be a common trait in many complex networks. Because of this feature, it is very
difficult to measure or assign a "scale" to what a typical node looks like in
these networks.
22
For the most part, this is not the case in the mathematical world of
complex networks. There may be a few nodes with a thousand links, several with a
hundred links, and many with only one. In comparison, if human height were
distributed in a similar way, it would not be uncommon to see people over 100
feet tall in everyday life and people over a mile high would exist. Because it
is difficult to assign a single scale to look at nodes with links distributed in
this way, these kinds of networks they are called scale-free.
The acquisition of Fractal Genomics brought us a fully functional
patent protected computational tool, now known as the Health Discovery Fractal
Genomics Modeling (FGM) technology. This is designed to study complex biological
networks such as genomic and proteomic pathways in disease. A complex network
can be made up of genes or proteins inside a living organism. FGM uses this new
approach toward modeling network behavior to rapidly generate diagrams and
software simulations that facilitate prediction and analysis of genomic and
proteomic data for diagnostic and drug discovery.
The FGM modeling process starts out by creating a special mathematical
surface (the FGM surface) where every point on the surface can be used to
generate a network model with varying degrees of scale-free and fractal
properties. With user-supplied clinical data, models which best match the
behavior of each node are selected and represented by a point on the FGM
surface. These point-models are then linked, compared, and combined to generate
diagrams, which reflect the behavior of genes or proteins in the entire network.
The end result of the FGM modeling process is biomarker and pathway
discovery diagrams that represent nodes in the network and directions of
causality or "flow" through the network such as which genes or proteins are
"turning-on" or "turning-off" other precursor and successor genes or proteins in
the biological system. FGM-derived diagrams expedite forecasting, analysis, and
study of complex system behavior by clearly displaying all hubs, links, and flow
in the network. With this knowledge, diagnostic companies can use the newly
identified biomarkers to create state-of-the-art tests to identify key genes and
proteins involved in certain diseases and pharmaceutical companies can explore
new therapeutic drug targets designed to interrupt ("turn-off") genes or
proteins with undesirable effects or promote ("turn-on") genes or proteins with
desirable effects.
Therefore, as a result of our Fractal Genomics acquisition, we are
preparing to begin validation studies, at M.D. Anderson Cancer Center, of the
recently discovered and patent protected set of leukemia genes, discovered using
the newly acquired FGM technique, which was shown to separate ALL-T-cell
leukemia from ALL-B-cell leukemia with 100% accuracy. This gene set, now our
intellectual property, was originally presented to the medical and scientific
world by Dr. Herbert Fritsche, Chairman of our Scientific Advisory Board, a
world-renowned, expert in cancer markers and Professor at M.D. Anderson Cancer
Center, at the 31st Meeting of the International Society for Oncodevelopmental
Biology and Medicine (ISOBM) in Edinburgh, United Kingdom.
To date, our FGM technology has been successfully used to analyze
databases from M.D. Anderson Cancer Center, St. Jude Children's Hospital,
Stanford University, the University of Miami and the Alvin J. Siteman Cancer
Center at Washington University.
OUR CORPORATE STRATEGY
Our goal is to develop a product line of newly discovered biomarkers
and pathways, which will include human genes and genetic variations, as well as
gene, protein, and metabolite expression differences. In drug discovery,
biomarkers can help elicit disease targets and pathways and validate mechanisms
of drug action. They may also be pharmacodynamic indicators of drug activity,
response and toxicity for use in clinical development.
We intend to provide pharmaceutical and diagnostic companies with all
aspects of first phase diagnostic and drug discovery from expert assessment of
the clinical dilemma through proper selection and procurement of high quality
specimens. We will then apply our proprietary analytical evaluation methods and
state-of-the-art computational analysis to produce relevant and accurate
clinical data, producing accurate biomarker and pathway discoveries, resulting
in patent protection of our biomarker discoveries for future development.
FIRST PHASE BIOMARKER DISCOVERY is based on the proposition that in
order to discover the most clinically relevant biomarkers, the computational
component must begin at the inception of the clinical dilemma to be solved. This
pathway includes six critical levels of decision-making - all of which are part
of our business strategy.
23
1. FIRST LEVEL OF DISCOVERY - ASSESS THE CLINICAL DILEMMA
Is the desired biomarker or pathway to be identified related to early
diagnosis, metastasis, treatment response or some other aspect of a given
disease process? Based on the clinical question to be answered along with the
incidence, prevalence and nature of the particular disease, we will establish a
clinical study with the appropriate number of necessary specimens. We expect
that these studies will provide statistically significant results once the
biomarker and pathway discovery is completed.
2. SECOND LEVEL OF DISCOVERY - PROPERLY IDENTIFY AND PROCURE THE MOST RELEVANT
AND PROFESSIONALLY COLLECTED SPECIMENS
Based on the clinical dilemma to be solved, does the appropriate
clinical trial require blood, serum, aspirate fluid, tissue or some other
clinically relevant specimen? Once the correct decision is made, we will
contractually procure the specimens necessary for the discovery from highly
reputable institutions, where we believe proper collection and informed consent
are completed under the strictest scientific protocol.
3. THIRD LEVEL OF DISCOVERY - ANALYZE THE SPECIMENS
The clinical specimens must then be analyzed and converted into
relevant clinical data. We will determine which analytical method is appropriate
for the most successful biomarker and pathway discovery. The techniques we
currently expect to use include mass spectroscopy, MALDI, SELDI, DNA
methylation, gene chip analysis, 2-D Gel Electrophoresis, as well as other
proprietary techniques developed by companies and academic institutions with
which we have relationships. We will constantly monitor improvements in these
techniques worldwide.
4. FOURTH LEVEL OF DISCOVERY - ANALYZE THE DATA
The data generated from the analytical component must then be
computationally analyzed for the discovery of new biomarkers, patterns among
those biomarkers and causality pathways. We will decide which of the current
leading computational algorithms, such as our FGM and SVM techniques, are best
suited to solve the particular clinical dilemma in question. The data is then
computationally analyzed, and the new biomarkers and pathways are discovered and
patent protected.
5. FIFTH LEVEL OF DISCOVERY - PROTECT THE DISCOVERY
When a biomarker is discovered, we will immediately file a provisional
patent to protect the discovery for future licensing. Some of these discoveries
will be licensed to diagnostic companies for use in the diagnosis of diseases or
for measuring the state or status of a disease. Other discoveries will be
licensed to pharmaceutical companies to be used for discovering or evaluating
new drug targets.
6. SIXTH LEVEL OF DISCOVERY - EVALUATE THE CLINICAL AND UTILITY OF DISCOVERED
BIOMARKERS
Biomarkers uncovered through the first five stages of discovery will be
subsequently validated independently in larger, clinically relevant populations.
Clinical validity of a biomarker is confirmed by its presence in the clinical
condition in question and its ability to differentiate one disease state from
another, or a diseased state from a healthy state. We believe that markers
validated by our processes will provide: vastly improved diagnostic
capabilities; may identify potential therapeutic targets for pharmaceutical
intervention (e.g. membrane signaling proteins and inhibitors); and markers
suitable for monitoring disease progression following therapeutic intervention.
Application of clinically validated biomarkers in such a manner will result in
improved individual patient care and the advancement of the field of
personalized medicine. This unique approach to biomarker discovery and its
additional validation in relevant clinical samples advances the commercial
potential of biomarkers we uncover to diagnostic and therapeutic partners.
Integration of the six levels of biomarker discovery results in improved
efficiencies in translation of this information into commercial and medically
valuable products.
OUR STRATEGIC AGREEMENTS
In keeping with our corporate goal of building strong partnerships for
biomarker discovery, we have signed several biomarker discovery agreements with
strong academic centers of excellence in the United States, including M.D.
Anderson Cancer Center and Stanford University. All of these agreements include
either joint ownership in any biomarker or pathway discovered or rights to an
exclusive worldwide license to our discovery. Once we secure a contract with an
academic institution for biomarker and pathway discovery with commercialization
rights and/or generate preliminary results, we begin negotiating these
commercialization rights to our discoveries with diagnostic and pharmaceutical
companies worldwide.
24
In October 2003, we signed our first Agreement with M.D. Anderson
Cancer Center. With this agreement we will analyze a gene expression database to
identify new biomarkers and pathways involved in leukemia. Under the terms of
the agreement, M.D. Anderson has granted us a first option to obtain an
exclusive worldwide royalty-bearing commercial license to commercialize any
discovered biomarkers or pathways we identify.
In January 2004, we entered into our second Biomarker and Pathway
Discovery Agreement with the University of Texas, M.D. Anderson Cancer Center in
Houston Texas. Under the terms of the agreement, the University of Texas, M.D.
Anderson Cancer Center, has again granted us a first option to obtain an
exclusive worldwide royalty-bearing commercial license to commercialize any
discovered prostate cancer biomarkers or pathways identified by us utilizing our
proprietary FGM computational techniques. This second collaboration with M.D.
Anderson Cancer Center will give us access to a new systems biology approach for
data analysis for new biomarker and pathway discovery in prostate cancer. We
intend to use the findings of this study to develop new diagnostic approaches
for prostate cancer and improve the clinical management of these patients. U.S.
CANCER STATISTICS: 2000 INCIDENCE recently released by the Department of Health
and Human Services shows that prostate cancer is the leading cancer overall in
men in the United States and according to the National Institutes of Health, in
1997, the estimated number of new cases of prostate cancer in the United States
is 209,900, and the estimated number of deaths from the disease is 41,800. The
current market for prostate cancer testing with PSA, the biomarker currently
used to diagnose prostate cancer, is estimated to be approximately $350 million
annually around the world.
In March 2004, we entered into an agreement with Stanford University to
use our proprietary and patent protected FGM computational techniques to
identify new patterns of biomarkers in lymphatic insufficiency and its response
to therapeutic lymphangiogenesis. According to the agreement, ownership of
Research Program Inventions conceived, discovered or reduced to practice under
the Research Program will be determined based on inventorship. As such, any
invention discovered using our analytical tools on this Stanford database would
be jointly owned by Stanford and us. According to the World Health Organization,
lymphedema affects 250 million people worldwide. Others estimate that one in
every twenty-five will suffer from some form of lymphedema during their
lifetime. The M.D. Anderson Cancer Center in Houston, Texas reports that
approximately 15% of all women with breast cancer will develop lymphedema over
the course of their lifetime and that lymphedema resulting from prostate cancer
is on the rise.
In March 2004, we signed an agreement with the University of Miami to
use our patent-protected computational techniques to identify new patterns of
biomarkers in AIDS Related Dementia. It is hoped that this newly discovered
information will allow physicians to better understand the pathogenesis of AIDS
Related Dementia and will assist in the diagnosis and treatment of this
devastating disease. On November 16, 2005, we announced that the University of
Miami would acquire full ownership of the recent AIDS Biomarker Signature
discovered by our scientists using the Company's patent-protected FGM
Technology. The University of Miami agreed to an upfront cash payment and
continuing royalty payments for any future commercial sales related to this new
discovery.
In September of 2004, we entered into an agreement with Dr. Thomas
Stamey of Stanford University Medical Center to analyze what is thought by Dr.
Stamey to be the most comprehensive prostate cancer gene chip database in the
world. This database consists of Affymetrix gene chips containing 25,000
prostate related genes. This data is from 92 patients representing 9 classes of
prostate disease - from BPH through all grades of prostate cancer. Using this
database, HDC hopes to identify new biomarkers for prostate cancer. We will also
use our patent-protected computational techniques such as Support Vector Machine
and Fractal Genomics Modeling to analyze this data to determine the most
relevant proteins to be used for diagnostics and drug targets. All discoveries
will be jointly owned by the Company and Dr. Stamey with HDC having a worldwide
exclusive license for commercialization.
On November 22, 2005, we entered into a licensing agreement with
Clarient, Inc. a technology and services resource for pathologists, oncologists
and the pharmaceutical industry, in which Clarient will utilize our SVM
intellectual property. Under the terms of the Agreement, Clarient paid us an
upfront licensing fee, a monthly expert development fee, and future royalties
for any Clarient product developed using the licensed SVM technology. We hope
this will allow Clarient to develop applications to detect cancer cells in
peripheral blood and bone marrow.
25
EMPLOYEES
On March 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.
WEBSITE ADDRESS
Our corporate website address is www.HealthDiscoveryCorp.com. From the
home page, select the "Display SEC Filings" tab followed by "SEC Filings." This
is a direct link to our filings with the Securities and Exchange Commission
("SEC"), including but not limited to our Annual Report of Form 10-KSB,
quarterly reports on Form 10-QSB and current reports on Form 8-K, and any
amendments to these reports. These reports are accessible soon after we file
them with the SEC.
GOVERNMENTAL REGULATION
Our business plan involves FIRST PHASE BIOMARKER DISCOVERY. This early
discovery process does not involve any governmental regulations or approvals. If
we are successful in licensing our discoveries to other companies, FDA approvals
may be required before the ultimate product may be sold to consumers. Companies
licensing our discoveries or technologies will be responsible for all costs
involved in such approvals. If we are not successful in licensing these
discoveries and choose to take these discoveries to market ourselves, we may
then be subject to applicable FDA regulations and would then bear the costs of
such approvals.
We know of no governmental regulations that will affect the 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
seventeen 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 to date are:
U.S. Patent No. 6,128,608: Enhancing Knowledge Discovery Using Multiple Support
Vector Machines.
U.S. Patent No. 6,157,921: Enhancing Knowledge Discovery Using Support Vector
Machines in a Distributed Network Environment.
U.S. Patent No. 6,427,141: Enhancing Knowledge Discovery Using Multiple Support
Vector Machines.
U.S. Patent No. 6,658,395: Enhancing Knowledge Discovery from Multiple Data Sets
Using Multiple Support Vector Machines.
U.S. Patent No. 6,714,925: System for Identifying Patterns in Biological Data
Using a Distributed Network.
U.S. Patent No. 6,760,715: Enhancing Biological Knowledge Discovery Using
Multiple Support Vector Machines.
U.S. Patent No. 6,789,069: Method of Identifying Patterns in Biological Systems
and Method of Uses.
U.S. Patent No. 6,882,990: Method of Identifying Biological Patterns Using
Multiple Data Sets.
U.S. Patent No. 6,944,602: Spectral Kernels for Learning Machines
U.S. Patent No. 6,996,542: Computer-Aided Image Analysis
Australian Patent No. AU 764897: Pre-processing and Post-processing for
Enhancing Knowledge Discovery Using Support Vector Machines.
South African Patent No. ZA 00/7122: Pre-processing and Post-processing for
Enhancing Knowledge Discovery Using Support Vector Machines.
26
Australian Patent No. AU 780050: Enhancing Knowledge Discovery from Multiple
Data Sets Using Multiple Support Vector Machines.
Chinese Patent No. ZL00808062.3: Enhancing Knowledge Discovery from Multiple
Data Sets Using Multiple Support Vector Machines.
European Patent No. 1192595: Enhancing Knowledge Discovery from Multiple Data
Sets Using Multiple Support Vector Machines.
Norwegian Patent No. 319,838: Enhancing Knowledge Discovery from Multiple Data
Sets Using Multiple Support Vector Machines.
Australian Patent No. AU 779635: Method of Identifying Patterns in Biological
Systems and Method of Uses.
Canadian Application No. 2,330,878: Pre-Processing and Post-Processing for
Enhancing Knowledge Discovery Using Support Vector Machines
European Publication No. 1082646: Pre-Processing and Post-Processing for
Enhancing Knowledge Discovery Using Support Vector Machines
Hong Kong Application No. 011065063: Pre-Processing and Post-Processing for
Enhancing Knowledge Discovery Using Support Vector Machines
Indian Application No. 2000/00580: Pre-Processing and Post-Processing for
Enhancing Knowledge Discovery Using Support Vector Machines
Canadian Application No. 2,371,240: Enhancing Knowledge Discovery from Multiple
Data Sets Using Multiple Support Vector Machines
Indian Application No. 2001/01329: Enhancing Knowledge Discovery from Multiple
Data Sets Using Multiple Support Vector Machines
Israeli Application No. 146746: Enhancing Knowledge Discovery from Multiple Data
Sets Using Multiple Support Vector Machines
Japanese Application No. 2000-620577: Enhancing Knowledge Discovery from
Multiple Data Sets Using Multiple Support Vector Machines
South Korean Application No. 7015064/2001: Enhancing Knowledge Discovery from
Data Sets Using Multiple Support Vector Machines
Canadian Application No. 2,388,595: Method of Identifying Patterns in Biological
Systems and Method of Uses
European Publication No. 1236173: Method of Identifying Patterns in Biological
Systems and Method of Uses
Japanese Application No. 2001-534088: Method of Identifying Patterns in
Biological Systems and Methods of Uses
U.S. Patent Publication No. 2005/0165556: Colon Cancer-Specific Markers
U.S. Patent Publication No. 2003/0172043: Methods of Identifying Patterns in
Biological Systems and Uses Thereof
U.S. Application No. 11/274,931: Biomarkers for Screening, Predicting, and
Monitoring Prostate Disease
PCT Application No. PCT/US2005/041442: Biomarkers for Screening, Predicting, and
Monitoring Prostate Disease
Australian Application No. 2002253879: Methods of Identifying Patterns in
Biological Systems and Uses Thereof
Canadian Application No. 2,435,254: Methods of Identifying Patterns in
Biological Systems and Uses Thereof
27
European Publication No. 1459235: Methods of Identifying Patterns in Biological
Systems and Uses Thereof
Japanese Application No. 2002-560076: Methods of Identifying Patterns in
Biological Systems and Uses Thereof
U.S. Application No. 11/225,251: Spectral Kernels for Learning Machines
European Publication No. 1384155: Spectral Kernels for Learning Machines
U.S. Patent Publication No. 2005/0071300: Kernels and Methods for Selecting
Kernels for Use in a Learning Machine
European Publication No. 1393196: Kernels and Methods for Selecting Kernels for
Use in a Learning Machine
U.S. Application No. 11/349,542: Computer-Aided Image Analysis
Australian Application No. 2002243783: Computer Aided Image Analysis
Canadian Application No. 2,435,290: Computer Aided Image Analysis
European Publication No. 1356421: Computer Aided Image Analysis
Japanese Application No. 2002-560082: Computer Aided Image Analysis
U.S. Patent Publication No. 2005/0216426: Methods for Feature Selection in a
Learning Machine
U.S. Patent Publication No. 2005/0071140: Model Selection for Cluster Data
Analysis
U.S. Patent Publication No. 2006/0064415: Data Mining Platform for
Bioinformatics
U.S. Patent Publication No. 2005/0228591: Kernels and Kernel Methods for
Spectral Data
U.S. Patent Publication No. 2005/0131847: Pre-Processed Feature Ranking for a
Support Vector Machine
European Publication No. 1449108: Pre-Processed Feature Ranking for a Support
Vector Machine
COMPETITION
Health Discovery Corporation's main service/product is FIRST-PHASE
BIOMARKER DISCOVERY. While there are numerous companies that perform individual
steps in this process, we know of no other company that performs all steps in
FIRST-PHASE BIOMARKER DISCOVERY. Competing companies in the biomarker discovery
arena have made numerous promising discoveries but have failed to bring fully
validated biomarkers to market. We feel that by performing and controlling all
steps of this process, we can eliminate the problems these companies have had in
validating their findings, and thus, produce fully validated, marketable
biomarkers.
Our SVM technology and FGM technology give us a distinct advantage over
competing technologies. Neither classical statistical analysis nor neural
networks (the two competing technologies) can handle the large amounts of inputs
necessary to produce fully validated biomarkers.
RESEARCH AND DEVELOPMENT
Our past Research and Development costs have been minimal due to the
unique relationships we have maintained with the members of our scientific team
and their institutions. Our total R&D costs have consisted solely of the
consultant fees paid to Dr. Stamey, Dr. Vapnik, Dr. Zhang, and Dr. Guyon. These
fees consisted of $404,421 in cash for 2005 and $202,460 in cash and $100,000 in
stock for a total 2004 R&D cost of $302,460. There were no R&D costs in 2003.
28
PROPERTIES
We do not own any real property. We do lease 1,554 square feet of
office space in Savannah, Georgia, on a month-to-month basis for a cost of
$1,036.00 per month. Our administrative and principal executive office is
located at 5501 1/2 Abercorn Street, Savannah, Georgia 31405, telephone no.
(912) 352-7488.
LEGAL PROCEEDINGS
On May 25, 2004, we filed suit in the District Court of McLennan
County, Texas, against Bill G. Williams, Shirley K. Williams, W. Steven Walker,
Jerry W. Petermann and a company controlled by Mr. Williams. In this action we
allege that an aggregate of 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 sought monetary
damages, attorney's fees and costs of the action.
In June 2004, Jerry W. Petermann agreed to return to the Company
1,000,000 shares of the Company stock, which were canceled upon return to the
company as full and final settlement of the claims brought in the aforementioned
lawsuit. In addition, in June 2004, Robert S. Braswell IV agreed to return to
the Company 2,100,000 shares of the company stock, all of which were canceled
upon return to the Company.
In July 2004, W. Steven Walker Esq., former general counsel, an
officer and director of the company, agreed to settle with the company and
return 366,036 shares of our common stock, which was all of the shares then
owned by him, and he will no longer be a party to the suit. Accordingly, only
the shares originally issued to Mr. Williams are subject to the suit, and the
Company believes he controls approximately 2.1 million shares of our common
stock.
After several rulings at the District Court, on August 25, 2004 the
Court of Appeals for the Tenth District of the State of Texas granted our appeal
and entered an order, remanding the case to the original trial judge with
instructions to issue a temporary injunction to preserve the status quo. The
injunction will remain until a judgment in the case becomes final or the court
otherwise instructs. The injunction requires the remaining defendants, their
agents, employees, affiliates, any person or entity they control, and any person
acting in concert with them to (i) stop and refrain from selling or otherwise
disposing of any share of our common stock; and (ii) deposit into the registry
of the District Court all shares of our common stock they now own or hold. Costs
of the appeal were assessed against the Respondents. The defendants have
asserted several counter claims against the company, including a derivative
action, and have brought third-party claims against several current officers of
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CORPORATE OVERVIEW
Our Company is uniquely positioned in the field of pattern recognition
technology. Through the application of our patent protected technology, HDC is a
biology-oriented biomarker and pathway discovery company providing all aspects
of FIRST-PHASE BIOMARKER DISCOVERY. Our primary business consists of licensing
that 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.
29
FIRST PHASE BIOMARKER DISCOVERY is based on the belief that in order to
discover the most clinically relevant biomarkers, the computational component
must begin at the inception of the clinical dilemma to be solved. This 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 the Company plans to begin to license the use of this
technology.
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
REVENUE
For the year ended December 31, 2005, revenue was $226,998 compared
with no revenue for the year ended December 31, 2004, which was the last year
reported as a developmental stage company. Revenue was recognized for both
licensing and sale of patent rights plus development fees.
COST OF SALES AND GROSS MARGIN
Cost of sales was $33,536 for the twelve months ended December 31, 2005
resulting in a gross profit of $193,462 or 85.23%. 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. No cost of sales
occurred in 2004.
OPERATING AND OTHER EXPENSES
Amortization expense was $251,097 in 2005 compared with $142,607 in
2004. This increase was due to a full year's amortization being charged in 2005
for intangibles acquired during 2004.
Interest expense was $55,406 in 2005 compared with $46,691 in 2004.
This increase was due to a full year's interest being charged in 2005 for the
debt obtained in 2004 as well as additional debt obtained in 2005.
Professional and consulting fees totaled $1,567,500 in 2005 compared
with $830,835 in 2004. These fees, related to legal, accounting and scientific
activities, were higher in 2005 because of increased regulatory filing activity,
patent protection, and general corporate legal and accounting work.
Compensation of $822,261 in 2005 was slightly lower that the $862,560
reported for 2004. This decrease was due to the reduction in the number of
employees that was part of an overall cost reduction program.
Other General and Administrative expense increased from $322,410 in
2004 to $656,214 in 2005. This increase is largely due to the extensive sales,
marketing, and promotional efforts throughout 2005.
NET LOSS
The net loss for 2005 was $3,159,016 compared to a net loss of
$2,205,088 for 2004. The increased net loss was due to the factors enumerated
above. Net loss per share was $.03 for both 2005 and 2004. The larger net loss
in 2005 was offset by the increased average number of shares outstanding in
2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, the Company had $719,167 in available cash. Cash
used by operating activities was $2,421,070. This was due primarily to the net
loss of $3,159,016. Cash used by investment activities was $305,367 due to the
acquisition of patents. Net cash provided by financing activities was $3,282,127
due to the proceeds from the sale of common stock totaling $3,842,375 less debt
retirement of $560,248.
A portion of our cash will be used to satisfy the Company's outstanding
debt obligations related to the acquisition of the SVM assets and fees due to
professionals for services performed. Scheduled payments of $26,780 on notes
resulting from the acquisition of the SVM Portfolio will be due on May 1, 2006.
30
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, 2005.
Less than 1-3
Total 1 Year Years
----------- ----------- -----------
Convertible Notes Payable $ 665,643 $ 0 $ 665,643
Term Debt 348,691 26,780 321,911
----------- ----------- -----------
Total $ 1,014,334 $ 26,780 $ 987,554
=========== =========== ===========
The Company has relied primarily on equity funding plus debt financing
for liquidity during its developmental phase that ended in 2005. The Company
produced sales, licensing, and developmental revenue in 2005 and must continue
to do so in order to generate sufficient cash to continue operations. Our plan
to have sufficient cash to support operations is comprised of generating revenue
through licensing our significant patent portfolio, providing services related
to those patents, and obtaining additional equity or debt financing. We have
been and continue to be in meaningful discussions with a variety of parties,
which if successful, will result in significant revenue. We have implemented a
cash conservation plan that includes salary deferrals and a reduction in
consulting payments, along with heightened scrutiny of all potential
expenditures.
Should it prove necessary, the Company may also consider such
alternatives as raising additional equity through private placement, debt
offerings, and/or negotiating with creditors to substitute an equity instrument
for amounts owed. 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.
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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
NATURE OF OPERATIONS AND DESCRIPTION OF DEVELOPMENT STAGE ACTIVITIES
Health Discovery Corporation (formerly known as Direct Wireless
Communications, Inc.) has been in the development stage since the date of
incorporation on April 6, 2001. The Company was primarily engaged in the
activity of developing technology for a wireless telephone system until 2003,
when it decided to abandon its efforts in the telecommunications industry and
acquired new technologies in the biotechnology industry. During 2003, the
Company acquired the assets of the Barnhill Group, LLC and Fractal Genomics, LLC
in pursuit of its biotechnology focus. During 2004 and 2005, the Company
continued pursuit of its biotechnology focus by acquiring certain rights to
patents and patent pending applications for certain machine learning tools used
for diagnostic and drug discovery.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Accordingly, actual results could differ from those
estimates. Significant estimates that are particularly suspectible to change in
the near-term include the valuation of non-cash consideration for services and
the recoverability of the patents.
PATENTS
Patents are recorded at cost, less accumulated amortization. Patents
are amortized over their remaining legal lives, that range from 15 to 20 years,
from the date they are acquired or approved. Management believes the remaining
legal lives approximates the patents economic lives. 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, not
issued, or otherwise impaired, the Company will expense the capitalized legal
costs as an impairment charge.
31
The carrying value of patents is reviewed for impairment at least
annually and whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. As of December 31, 2005, the Company
does not believe there has been any impairment of its patents.
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. 47 Chief Executive Officer and Chairman
of the Board
Daniel R. Furth 42 Principal Financial Officer,
Executive Vice President
Robert S. Braswell IV 50 Senior Vice President
Hong Zhang, Ph.D. 44 Senior Vice President
William F. Quirk, Jr. 63 Director
William M. Goldstein 70 Director
STEPHEN D. BARNHILL, M.D., is currently our Chief Executive Officer and
Chairman of the Board. He has been a member of the Board of Directors since
November 2003. He is a physician trained in laboratory medicine and clinical
pathology. He has developed and used artificial intelligence,
pattern-recognition and computational techniques in Medicine, Genomics,
Proteomics, Diagnostics and Drug Discovery.
Dr. Barnhill is or has been a Fellow of the American College of
Physician Inventors, the American College of International Physicians, the
American Medical Association, the American College of Physician Executives, the
American Association of Artificial Intelligence, the American College of Managed
Care Medicine, the Association of Clinical Scientists, the American Society of
Contemporary Medicine and Surgery, the American Society of Law, Medicine and
Ethics, the Southern Medical Society, the American Federation for Clinical
Research, and the National Federation of Catholic Physicians.
Dr. Barnhill founded the Barnhill Clinical Laboratories in 1988 and
served as Chairman, CEO, President and Medical Director. This laboratory was
later acquired by Corning-Metpath in 1989 and after the acquisition he served as
Medical Director of this clinical laboratory until 1992. This clinical
laboratory, now owned by Quest Diagnostics, continues to be the largest and
busiest clinical laboratory in the Savannah, Georgia area.
32
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.
DANIEL R. FURTH is our Principal Financial Officer, Executive Vice
President, Secretary and Treasurer. Mr. Furth is an experienced executive with a
proven track record in diverse industries for both private and public
corporations. Since October 2000, he served as a corporate communications
consultant for several private clients. During that same period, he also served
as a managing member and equity partner of Purple Shamrock LLC, a privately held
investment group. From 1994 to 2000, he served as Senior Director of Marketing &
Communications for Quality Distribution, Inc., North America's largest bulk
transportation services company, where he managed corporate communications,
marketing communications, investor relations, and public affairs. During that
time, he was chief of staff to QD's Chairman/CEO and played an instrumental role
in the company's initial public offering in 1994 and its subsequent leveraged
buyout in 1998. From 1986 to 1994, 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 its President, he guided the
creation of Direct Wireless Communications Inc. (DWCI) and oversaw all
administrative functions for both DWCI and Direct Wireless Corporation. Mr.
Braswell served as President of Direct Wireless Corporation since December 1999
and a member of its Board of Directors since January 1999. Prior to holding
these positions, Mr. Braswell was an independent businessman engaged in business
evaluations, real estate development, and home construction while running a
working ranch operation. His administrative experience comes from eighteen years
experience in the common carrier freight business, working for Central Freight
Lines, Inc. from 1974-1992. Mr. Braswell graduated from the University of
Houston in 1983 with a Bachelor of Business Administration in Organizational
Behavior Management.
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.
33
WILLIAM F. QUIRK, JR. is a member of the Board of Directors. Mr. Quirk
is the first outside director to join our board, succeeding Dr. David Cooper,
the Company's former president and chief medical officer who recently resigned
his positions to pursue other interests. Mr. Quirk is a private investor who
purchased a significant equity stake in the company in its successful private
placement in July 2005. Prior to his retirement in 1996, he held a variety of
senior executive positions in finance and management including: Fidelity
Management & Research in the mutual fund industry; the investment banking firm
Peterson, Diehl, Quirk & Company; leveraged buyout firm Kelso & Company; and
auto parts supplier Inline Brake Manufacturing. 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. Mr.
Goldstein is currently a partner with Philadelphia-based Drinker Biddle & Reath
LLP. He succeeds 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.
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 Chief Administrative Officer. This Code of Ethics is
posted on our website at www.HealthDiscoveryCorp.com.
34
EXECUTIVE COMPENSATION
The following table sets forth various elements of compensation for our Named
Executive Officers for each of the last three calendar years:
Name and Principal Year Salary ($) Securities
Position Underlying Options
(#)
- ---------------------- --------------- -------------------- --------------------
Stephen D. Barnhill, 2005 $300,000
M.D. 2004 $337,500
Chief Executive 2003 $50,000
Officer
- ---------------------- --------------- -------------------- --------------------
Daniel R. Furth 2005 $22,500 1,500,000
Executive Vice
President
- ---------------------- --------------- -------------------- --------------------
Robert S. Braswell, 2005 $70,000
IV 2004 $81,666
Senior Vice 2003 $11,666
President
- ---------------------- --------------- -------------------- --------------------
David Cooper 2005 $97,742
Former President and 2004 $110,000 3,000,000
Chief Medical Officer 2003 111
- ---------------------- --------------- -------------------- --------------------
DIRECTOR COMPENSATION
Outside Directors are compensated $1.00 per year and they are granted
150,000 warrants annually.
EMPLOYMENT AGREEMENTS
We entered into a five-year employment agreement with Dr. Stephen
Barnhill on September 15, 2003, regarding Dr. Barnhill's employment as President
and Medical Director. The agreement will automatically renew for successive
one-year terms unless either party gives notice to the other party of its intent
not to renew within a thirty-day period prior to the end of the then current
term. Under the terms of the agreement, Dr. Barnhill receives an initial base
salary of $25,000 per month, which is subject to adjustment at least annually.
Dr. Barnhill is eligible to be reimbursed monthly for reasonable and necessary
business expenses, to participate in an Incentive Stock Option Plan (as defined
in the agreement) and for other benefits maintained by us. Dr. Barnhill will be
entitled to 10 paid vacation days during the calendar year. Dr. Barnhill's
employment may be terminated without prior written notice for cause, in which
case we will make a lump sum payment equal to the sum of (i) accrued unpaid
wages, (ii) unreimbursed expenses properly incurred prior to the date of
termination and (iii) the value of all accrued unpaid vacation pay, less any
amounts he owes to us. If Dr. Barnhill terminates the Barnhill Agreement, then
he will receive the same benefits as if he was terminated for cause. If Dr.
Barnhill terminates the Barnhill Agreement, other than for cause, then we will
give two (2) weeks notice of termination, or in our sole discretion, two (2)
weeks wages in lieu of notice. The agreement also generally provides that Dr.
Barnhill will keep confidential information confidential and that he will not
compete with us in our business nor solicit our customers or employees for a
period of 12 months following termination of employment.
35
We entered into an employment agreement with Dr. David Cooper on
November 1, 2003 regarding Dr. Cooper's employment as President and Chief
Medical Officer. The employment commenced at signing and terminated on October
24, 2005, when Dr. Cooper resigned. As compensation for his employment, Dr.
Cooper was issued non-qualified stock options to acquire 3,000,000 shares of our
common stock, of which options to acquired 600,000 shares of our common stock
vested immediately while options to acquire the remaining 2,400,000 shares
vested over time or upon certain accomplishments of Dr. Cooper. At the time of
Dr. Cooper's resignation, options to acquire 400,000 shares had vested and the
remaining options terminated. Upon termination of his employment, Dr. Cooper
agreed to observe all post-employment covenants set forth in his agreement. Dr.
Cooper's agreement also generally provided that he will not compete with us in
our business nor solicit our customers or employees for a period of one year
following termination of his employment.
We entered into an employment agreement with Mr. Daniel R. Furth
effective November 18, 2005 regarding Mr. Furth's employment as Executive Vice
President. The term of the employment is for three years, with compensation of
$60,000, which is to be reviewed after the first year for potential increase.
Mr. Furth will also receive options to acquire 1,500,000 shares of our common
stock. Mr. Furth is eligible to be reimbursed monthly for reasonable and
necessary business expenses and for other benefits maintained by us. If we
terminate the employment agreement for cause, Mr. Furth will be entitled to
receive his salary only through the date such termination is effective. If Mr.
Furth terminates the employment agreement for cause, he will be entitled to
receive his salary for a period of three months from the date such termination
is effective. If the employment agreement is terminated by us without cause, Mr.
Furth will be entitled to receive his salary for a period of three months from
the date such termination is effective. If the agreement is terminated by Mr.
Furth without cause, he will be entitled to receive his salary only through the
date such termination is effective. The agreement also generally provides that
Mr. Furth will keep confidential information confidential and that he will not
compete with us in our business nor solicit our customers or employees for a
period of 12 months following termination of employment.
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, of which 50% of such amount 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 terminate 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.
SCIENTIFIC ADVISORY BOARD
The Company has entered into 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. The members are entitled to receive the
shares upon satisfactory completion of one year of service. The one year terms
end in 2006.
36
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the
beneficial ownership of our common stock as of March 31, 2006 by (i) each of our
directors, (ii) each of our executive officers, (iii) each person who is known
to US to be the beneficial owner of more than five percent of our common stock,
and (iv) all of our executive officers and directors as a group. At March 31,
2006, there were 114,963,384 shares outstanding.
NAME AND POSITION NUMBER OF SHARES PERCENT OF
BENEFICIALLY OWNED CLASS (1)
- ------------------------------------- ------------------------- ----------------
Dr. Stephen D. Barnhill 28,575,564 (2) 24.86%
Chairman of the Board,
Chief Executive Officer and Chief
Medical Officer, Director
2 Springfield Place
Savannah, GA 37411
- ------------------------------------- ------------------------- ----------------
Daniel R. Furth 250,000 *
Executive Vice President
101 Bartram Road
Savannah, GA 31411
- ------------------------------------- ------------------------- ----------------
William Quirk 12,000,000 10.44%
Director
10 Water Witch Crossing
Savannah, GA 31411
- ------------------------------------- ------------------------- ----------------
William Goldstein 625,000 *
Director
787 Trephanny Lane
Wayne, PA 19087
- ------------------------------------- ------------------------- ----------------
All executive officers and
directors as a group (four persons) 44,543,827 38.75%
- ------------------------------------- ------------------------- ----------------
(1) The percentage of our common stock beneficially owned was calculated
based on 114,963,384 shares of common stock issued and outstanding as of
March 31, 2006. The percentage assumes the exercise by the stockholder or
group named in each row of all options or warrants for the purchase of
our common stock held by such stockholder or group and exercisable within
60 days as of March 31, 2006.
(2) These shares are held by Barnhill Group LLC, which is wholly owned by Dr.
Barnhill.
37
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On May 6, 2005, we acquired the remaining 7% of the SVM Patent Portfolio 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 12, 2005, the Company was informed by Clyde Bailey, P.C.
("Bailey") that it was no longer providing audit services to any company in any
capacity. Accordingly, Bailey resigned and withdrew its audit as the Company's
independent auditor for fiscal year 2003 and the related statements of
operations, statements of stockholders' equity, and the statements of cash flows
for the years ended December 31, 2003 and 2002 and for the period from inception
(April 6, 2001) to December 31, 2003. Thereby, the engagement of Bailey as the
Company's independent auditor has terminated.
Bailey submitted audit reports on the Company's financial statements
for fiscal year 2003 and the related statements of operations, statements of
stockholders' equity, and the statements of cash flows for the years ended
December 31, 2003 and 2002 and for the period from inception (April 6, 2001) to
December 31, 2003. The submitted audit reports did not contain any adverse
opinions, disclaimers of opinions or other modifications or qualifications.
Bailey did not, during the applicable periods, advise the Company of any of the
enumerated items described in Item 304(a)(1) of Regulation S-B.
On August 2, 2004, the Company engaged Porter Keadle Moore, LLP, the
current independent auditor ("Porter Keadle Moore"), to audit all successive
periods beginning January 1, 2004. As a result, the Company's financial
statements covering periods beginning January 1, 2004 are not affected by
Bailey's withdrawal and were not re-audited. The decision to change accountants
was recommended and approved by the Board of Directors of the Company.
There were no disagreements with Bailey on any matter of accounting
principles or practices, financial statement disclosures, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Bailey,
would have caused Bailey to make reference thereto in, or in connection with,
its reports on financial statements for the periods covered by Bailey's audit.
On August 11, 2005, the Company engaged Porter Keadle Moore to perform
a re-audit of the Company's financial statements for fiscal year 2003. Darilek &
Butler, CPA ("Darilek & Butler") issued its audit of the Company's financial
statements for fiscal year 2002, and for the period between the Company's
inception and December 31, 2002. Darilek & Butler is the Company's original
auditor for such time periods.
The Company did not consult Porter Keadle Moore or Darilek & Butler
prior to their engagement regarding (i) the application of accounting principles
to a specified transaction, either completed or proposed nor (ii) any matter
that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
of Regulation S-B and the related instructions to that Item).
We have had no disagreements with our former certifying accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 200,000,000 shares of common stock, no par
value. As of March 31, 2006, there were 114,963,384 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.
38
Our Transfer Agent is Corporate Stock Transfer, 3200 Cherry Creek Drive
South, Denver, Colorado 80209; telephone (303) 282-4800.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
We do not have any provision of our Articles of Incorporation or
By-Laws that require us to indemnify our officers and directors on account of
any liability they incur as a result of their actions as officers or directors.
However, Section 2.02-1 of the Texas Business Corporation Act permits the
indemnification of directors, officers, agents and employees of a corporation if
the person seeking indemnity acted in good faith and reasonably believed, if a
director, that his conduct was in the corporation's best interests, and, if not
a director, that his conduct was not opposed to the corporation's best
interests, and in the case of a criminal proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnity is not permitted if a person is
found liable to the corporation and is limited to expenses actually incurred in
the case of a person found liable on the basis of personal benefit improperly
received by him. Section 2.02-1 also provides that a corporation shall indemnify
directors and officers against reasonable expenses incurred in connection with a
proceeding if they are wholly successful, on the merits or otherwise, in the
defense of the proceeding.
A determination whether to pay indemnity in any preceding may be made
by a majority of a quorum of the board of directors, or a by committee of the
board of directors appointed for such purpose, or by special legal counsel, or
by a vote of the stockholders, but directors who are defendants or respondents
in a proceeding may not vote on the matter.
Section 2.02-1 also authorizes a corporation to purchase insurance on
behalf of directors, officers and employees against liability asserted against
them as a result of their capacities as such. The Company currently has such
insurance on behalf of directors, officers or employees.
We have been informed that in the opinion of the Securities and
Exchange Commission indemnification for liabilities arising under the Securities
Act of 1933, which may be permitted to our officers and directors or control
persons pursuant to the provisions of the Texas Business Corporation Act, is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LEGAL MATTERS
Certain legal matters in connection with the shares of common stock
offered by this prospectus have been passed on for Health Discovery Corporation
by Powell Goldstein LLP, Atlanta, Georgia.
EXPERTS
Porter Keadle Moore, LLP audited our balance sheets as of December 31,
2005 and 2004 and the related statements of operations, changes in stockholders'
equity, and cash flows for the years then ended. Porter Keadle Moore, LLP's
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
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We file annual, quarterly and special reports with the SEC pursuant to
the information requirements of the Securities Exchange Act of 1934. You can
read and copy these reports, proxy statements, and other information concerning
us at the SEC's Public Reference Room at 100 F Street, N.., Washington, D.C.
20549. Please call the SEC at (202) 942-8090 for further information on the
Public Reference Room. You can review our electronically filed reports, proxy
and information statements on the SEC's internet site at http://www.sec.gov. Our
filings are also available on our website at http://www.HealthDiscoryCorp.com.
We are not required to deliver an annual report to our stockholders, and we do
not intend to do so for the foreseeable future.
We have filed with the SEC, a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
hereby. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. Certain items are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to our company and
the common stock, reference is made to the registration statement and the
exhibits and any schedules filed with the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. You
can obtain a copy of the full registration statement, including the exhibits and
schedules thereto, from the SEC as indicated above.
39
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS
We do not have any provision of our Articles of Incorporation or
By-Laws that require us to indemnify our officers and directors on account of
any liability they incur as a result of their actions as officers or directors.
However, Section 2.02-1 of the Texas Business Corporation Act permits the
indemnification of directors, officers, agents and employees of a corporation if
the person seeking indemnity acted in good faith and reasonably believed, if a
director, that his conduct was in the corporation's best interests, and, if not
a director, that his conduct was not opposed to the corporation's best
interests, and in the case of a criminal proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnity is not permitted if a person is
found liable to the corporation and is limited to expenses actually incurred in
the case of a person found liable on the basis of personal benefit improperly
received by him. Section 2.02-1 also provides that a corporation shall indemnify
directors and officers against reasonable expenses incurred in connection with a
proceeding if they are wholly successful, on the merits or otherwise, in the
defense of the proceeding.
A determination whether to pay indemnity in any preceding may be made
by a majority of a quorum of the board of directors, or a by committee of the
board of directors appointed for such purpose, or by special legal counsel, or
by a vote of the stockholders, but directors who are defendants or respondents
in a proceeding may not vote on the matter.
Section 2.02-1 also authorizes a corporation to purchase insurance on
behalf of directors, officers and employees against liability asserted against
them as a result of their capacities as such. Direct Wireless Communications,
Inc. does not have any insurance on behalf of directors, officers or employees.
We have been informed that in the opinion of the Securities and
Exchange Commission indemnification for liabilities arising under the Securities
Act of 1933, which may be permitted to our officers and directors or control
persons pursuant to the provisions of the Texas Business Corporation Act, is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses to be paid in
connection with the common stock being registered, all of which will be paid by
Health Discovery Corporation (on behalf of itself and the selling stockholders)
in connection with this offering. All amounts are estimates except for the
registration fee.
SEC Registration Fee....................... $ 2,511.93
Legal and Accounting Fees and Expenses..... $ 40,000.00
Printing and filing........................ $ 1,500.00
Miscellaneous.............................. $ 500.00
-----------
Total...................................... $ 44,511.93
===========
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
During 2003, the Company offered for sale of restricted stock to
qualified investors through a private placement offering. A total of 2,750,000
shares were sold for $.02 per share. The securities issued in the private
placement were not registered under the Securities Act of 1933, as amended, and
until they are registered the securities may not be offered or sold in the
United States absent registration or the availability of an applicable exemption
from registration. The shares were offered and sold in reliance upon exemptions
from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. Based on the information
provided by each of the investors, all investors qualify as accredited investors
(as defined by Rule 501 under the Securities Act of 1933, as amended). The
company filed a registration statement on September 15, 2003 and agreed that
should the company, before September 15, 2005, propose for itself or any other
person, the registration under the Act of any securities of the company on Form
S-1, S-2 or S-3, the company shall include in any such Registration Statement
and in any related underwriting agreements, if the qualified investors so
requests, such securities of the investors.
40
PRIVATE PLACEMENT - ROUND 1
From February through July 2004, the Company offered for sale shares of
restricted stock to accredited investors through a private offering. The price
of the restricted stock was $.10 per share. A total of 15,235,000 restricted
common shares were issued to accredited investors for $1,499,900, net of
issuance cost of $23,600. The issuance cost consisted of $22,400 in cash and
3,429 in common shares valued at $1,200, paid to consultants for assistance in
selling the Company's common stock. The value of Company stock was based on a
contractual agreement of $.35 per share. In addition, each purchaser of shares
of common stock was granted a warrant to acquire an equal number of restricted
common shares at a fixed price of $0.35 per share until February 2007. No
portion of the proceeds was assigned to the value of the warrants because the
exercise price of the warrant exceeded the market value of the underlying common
stock on the date of purchase.
PRIVATE PLACEMENT - ROUND 2
From November 2004 through March 2005, the Company offered for sale
shares of restricted stock to accredited investors through a private offering.
The price of the restricted stock was $.16 per share. In addition, each
purchaser of shares of common stock was granted a warrant to acquire an equal
number of restricted common shares at a fixed price of $0.24 per share until
December 2008. No portion of the proceeds 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 are
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 $1,952,675, net of issuance costs of $162,569. The
issuance cost consisted of $157,000 in cash 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. In addition, the Company issued
806,250 warrants, each entitling the holder to buy one share of the Company's
common stock for $0.24 per share. The value of the warrants totaled $120,938 and
had no net impact on common stock. 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 $1,889,700, net of cash issuance cost of
$70,300. In addition, the Company issued 278,125 in warrants, each entitling the
holder to buy one share of the Company's common stock for $0.24 per share. The
value of the warrants totaled $41,719 and had no net impact on common stock.
41
Under the Round 2 Private Placements, the Company agreed to use its
best efforts to file a registration statement to register the shares of common
stock and the shares underlying the warrants issued and sold to the investors by
May 9, 2005, and to use its best efforts to cause the registration statement to
be declared effective within 120 days of March 10, 2005. As a result of
provisions in certain of the Round 2 Private Placement documents, on August 7
and September 6, 2005, 68,125 shares of the Company's common stock and 68,125
warrants to purchase the Company's common stock were issued to certain
shareholders who acquired in the aggregate 6,812,500 shares in Round 2 Private
Placement for each date as a result of the registration statement not becoming
effective by such date. The additional number of shares and warrants is based
upon one percent of the number of shares and warrants purchased by such
participants for each 30-day period beginning on the 121st day until the
registration statement 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 is declared
effective. On October 6, 2005, November 9, 2005, and December 9, 2005, an
additional 136,250, 136,250, and 131,250, respectively, in penalty shares and
warrants were issued. In addition, certain shareholders who purchased 6,812,500
shares of the Company's common stock have anti-dilution rights until the
registration statement has been effective for 365 days. If the Company sells
shares of the Company's common stock at a price less than $.16 per share or
issues warrants to purchase the Company's common stock at an exercise price less
than $.24 per share, certain shareholders will receive an amount of shares or
warrants at no cost so that those shareholders have no diluted effect from the
sales of common stock or warrant issuances. Shares, options or warrants issued
to employees, consultants and directors are excluded from the anti-dilutive
clause. No expense has been recorded upon the issuance of the additional shares.
SHARES ISSUED IN EXCHANGE FOR SERVICES
During 2004, the Company issued 222,372 common stock shares to
consultants for services and 53,561 shares to settle accrued liabilities for
services. The shares were granted at the fair market value of the services
provided. Total consultant expense of $41,800 was recorded for the issuance. In
addition, under a consulting agreement, the Company was obligated to issue an
additional $60,000 of shares (amounting to 254,572 shares) to consultants at
December 31, 2004. The expense is accrued for at December 31, 2004 in accrued
expenses on the Company's balance sheet and a corresponding charge to consultant
expense in the statement of operations. Warrants with a fair value of $117,000
were issued to consultants and others for services performed on behalf of the
Company, and are included in the Statement of Changes in Stockholders' Equity.
The Company issued 200,000 shares of the Company's common stock in 2004
to two individuals who have agreed to serve on the Company's Scientific Advisory
Committee. The market value of the shares at the time of issuance was $37,000
and was recorded as compensation expense in the statement of operations.
During 2005, the Company issued 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 consultant expense
of $381,876 was recorded for the issuances in 2005.
STOCK CANCELLATION
During 2004, certain officers and former officers and former directors of the
Company surrendered 3,466,036 shares of the Company's common stock because the
issuance of the shares was not properly authorized. The shares were immediately
cancelled, and the Company gave no consideration for these shares.
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.
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.
42
EXHIBITS
The following exhibits are attached hereto or incorporated by reference
herein (numbered to correspond to Item 601(a) of Regulation S-B, as promulgated
by the Securities and Exchange Commission) and are filed as part of this Form
SB-2:
3.1 Articles of Incorporation. Registrant incorporates by reference
Exhibit 3.1 to Registration Statement on Form SB-2, filed June 4,
2001.
3.1(a) Articles of Amendment to Articles of Incorporation Registrant
incorporates by reference Exhibit 2.2 to Form10-QSB, filed
November 14, 2001.
3.1(b) Articles of Amendment to Articles of Incorporation changing
Registrant name from Direct Wireless Communications, Inc., to
Health Discovery Corporation. Registrant incorporates by reference
Exhibit 3.1 (b) to form 10-KSB, filed March 3, 2004.
3.2 By-Laws. Registrant incorporates by reference Exhibit 3.2 to
Registration Statement on Form SB-2, filed June 4, 2001.
4.1 Copy of Specimen Certificate for shares of common stock.
Registrant incorporates by reference Exhibit 4.1 to Registration
Statement on Form SB-2, filed June 4, 2001.
4.1(b) Copy of Specimen Certificate for shares of common stock.
Registrant incorporates by reference Exhibit 4.1 (b) to form
10-KSB, filed March 30, 2004.
4.2 Excerpt from By-Laws. Registrant incorporates by reference Exhibit
4.2 to Registration Statement on Form SB-2, filed June 4, 2001.
4.2(A) Corrected Article 3.02 of By-Laws. Registrant incorporates by
reference Exhibit 4.2(A) to Amendment No. 2 to Registration
Statement on Form SB-2, filed August 15, 2001.
4.3(a) Non Qualified stock option agreements dated October 30, 2003
between registrant and David Cooper. Registrant incorporates by
reference Exhibit 4.3(a) to form 10-KSB, filed March 30, 2004.
5.1 Opinion of Powell Goldstein LLP on the legality of the securities
being registered.+
5.2 Opinion of Powell Goldstein LLP on the legality of the additional
securities being registered.+
5.3 Opinion of Powell Goldstein LLp on the legality of the additional
securities being registered.
10.1 Asset purchase agreement between registrant dated September 15,
2003 and Barnhill Group LLC. Registrant incorporates by reference
Exhibit 10.2 to form 10-KSB, filed March 30, 2004.
10.2 Asset purchase agreement between registrant dated December 30,
2003 and Fractal Genomics LLC. Registrant incorporates by
reference Exhibit 10.3 to form 10-KSB, filed March 30, 2004.
10.3 Employment Agreement with Stephen Barnhill. Registrant
incorporates by reference Exhibit 10.3 to form 10-KSB, filed April
19, 2005. *
10.4 Employment Agreement with David Cooper. Registrant incorporates by
reference Exhibit 10.4 to form 10-KSB, filed April 19, 2005. *
10.5 Form of Asset Purchase agreement between the registrant and the
sellers of the SVM Portfolio and related assets. Registrant
incorporates by reference Exhibit 10.5 to form 10-KSB, filed March
30, 2004.
10.6 Form of Securities Purchase Agreement. Registrant incorporates by
reference Exhibit 10.6 to form 10-KSB, filed April 19, 2005.
10.7 Form of Warrant. Registrant incorporates by reference Exhibit 10.7
to form 10-KSB, filed April 19, 2005.
10.8 Form of Securities Purchase Agreement. Registrant incorporates by
reference Exhibit 10.8 to form 10-KSB, filed April 19, 2005.
10.9 Form of Warrant. Registrant incorporates by reference Exhibit 10.9
to form 10-KSB, filed 4/19/2005.
10.10 Form of Amendment to Securities Purchase Agreement. Registrant
incorporates by reference Exhibit 10.10 to form SB-2/A, filed
December 14, 2005.
43
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.
23.1 Consent of Powell Goldstein LLP (included in Exhibits 5.1, 5.2
and 5.3.
23.2 Consent of Porter Keadle Moore, LLP.
* Management contract or compensatory agreement.
* Previously filed with Form SB-2.
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.
44
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) (Section 230.424(b) of
this chapter) as part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A (Section 230.430A of this chapter), shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. PROVIDED, HOWEVER, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
45
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Savannah,
State of Georgia, on May 1, 2006.
HEALTH DISCOVERY CORPORATION
By: /s/ Stephen D. Barnhill, M.D., Chief Executive Officer
------------------------------------------------------
Stephen D. Barnhill, M.D., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---------------------------------------- -------------------------------------- --------------------------------------
/S/Stephen D. Barnhill M.D. Chief Executive Officer, Chairman May 1, 2006
- --------------------------------
Stephen D. Barnhill M.D.
- ---------------------------------------- -------------------------------------- --------------------------------------
/S/Daniel R. Furth Principal Financial Officer May 1, 2006
- -------------------------------- Executive Vice President
Daniel R. Furth
- ---------------------------------------- -------------------------------------- --------------------------------------
/S/William F. Quirk, Jr. Director May 1, 2006
- --------------------------------
William F. Quirk, Jr.
- ---------------------------------------- -------------------------------------- --------------------------------------
/S/William M. Goldstein Director May 1, 2006
- --------------------------------
William M. Goldstein
- ---------------------------------------- -------------------------------------- --------------------------------------
Index to Financial Statements
Independent Auditors' Report................................................F-2
Audited Financial Statements................................................F-3
Notes to Audited Financial Statements.......................................F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Health Discovery Corporation
We have audited the accompanying balance sheets of Health Discovery Corporation
as of December 31, 2005 and 2004, and the related statements of operations,
changes in stockholders' equity, and the cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004 and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. 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-2
HEALTH DISCOVERY CORPORATION
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
Assets
------
2005 2004
----------- -----------
Current Assets
Cash $ 719,167 163,477
Prepaid Expense 17,708 --
----------- -----------
Total Current Assets 736,875 163,477
Equipment, Less Accumulated Depreciation of $6,660 and $1,719 13,053 6,371
Other Assets
Patents, Less Accumulated Amortization of $417,535 and $166,438 3,568,259 3,340,339
----------- -----------
Total Assets $ 4,318,187 3,510,187
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Accounts Payable - Trade $ 267,972 234,685
Accrued Liabilities 63,319 183,797
Current Portion of Long-Term Debt 26,780 697,491
----------- -----------
Total Current Liabilities 358,071 1,115,973
Convertible Notes Payable 665,643 1,127,818
Long-Term Debt, Less Current Portion 321,911 173,576
----------- -----------
Total Liabilities 1,345,625 2,417,367
----------- -----------
Commitments
Stockholders' Equity
Common Stock, No Par Value, 200,000,000 Shares Authorized
Issued and Outstanding 114,363,384 and 78,767,464 Shares, Respectively 9,522,961 3,788,442
Paid for but Not Issued - 5,434,375 shares for 2004 -- 695,761
Accumulated Deficit (6,550,399) (3,391,383)
----------- -----------
Total Stockholders' Equity 2,972,562 1,092,820
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,318,187 3,510,187
=========== ===========
See accompanying notes to financial statements and independent auditors' reports.
F-3
HEALTH DISCOVERY CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
------------- -------------
Revenues:
Licensing $ 135,000 --
Patent Sales 89,000 --
Interest Income 2,998 15
------------- -------------
Total Revenues 226,998 15
------------- -------------
Cost of Sales:
Licensing 30,573 --
Patent Sales 2,963 --
------------- -------------
Total Cost of Sales 33,536 --
------------- -------------
Gross Profit 193,462 15
------------- -------------
Expenses:
Amortization 251,097 142,607
Interest 55,406 46,691
Professional and Consulting Fees 1,567,500 830,835
Compensation 822,261 862,560
Other General and Administrative Expenses 656,214 322,410
------------- -------------
Total Expenses 3,352,478 2,205,103
------------- -------------
Net Loss $ (3,159,016) (2,205,088)
============= =============
Weighted Average Outstanding Shares 103,566,777 73,950,073
Loss Per Share $ (.03) (.03)
See accompanying notes to financial statements and independent auditors' reports.
F-4
HEALTH DISCOVERY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common Stock
------------------------------------------------------------
Issued and Outstanding Paid for but Not Issued Total
---------------------------- ---------------------------- Accumulated Stockholders'
Shares Amount Shares Amount Deficit Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2003 66,576,128 $ 2,092,742 -- $ -- (1,186,295) 906,447
Stock Issued for Cash 15,235,000 1,499,900 -- -- -- 1,499,900
Stock Issued for Services 422,372 78,800 -- -- -- 78,800
Cancellation of Common Stock (3,466,036) -- -- -- -- --
Paid in Capital for
Compensatory Warrants -- 117,000 -- -- -- 117,000
Stock Paid for but Not Issued -- -- 5,434,375 695,761 -- 695,761
Net Loss -- -- -- -- (2,205,088) (2,205,088)
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2004 78,767,464 3,788,442 5,434,375 695,761 (3,391,383) 1,092,820
Stock Issued for Cash 25,268,750 3,842,375 -- -- -- 3,842,375
Issuance of Shares Previously
Paid for but not Issues 5,434,375 695,761 (5,434,375) (695,761) -- --
Stock Issued for Services 2,039,453 381,876 -- -- -- 381,876
Stock Issued for Settlement of
Liability 308,133 78,746 -- -- -- 78,746
Stock Issued for Conversion of
Debt 3,585,741 609,576 -- -- -- 609,576
Paid in Capital for
Compensatory Options and
Warrants -- 426,185 -- -- -- 426,185
Stock 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
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements and independent auditors' reports.
F-5
HEALTH DISCOVERY CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------- -----------
Cash Flows From Operating Activities:
Net Loss $(3,159,016) (2,205,088)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Noncash Compensation 426,185 117,000
Cancellation of Common Stock (300,000) --
Services Exchanged for Common Stock or Warrants 381,876 78,800
Depreciation and Amortization 256,038 144,326
Increase in Prepaid Expense (17,708) --
Increase in Accounts Payable - Trade 33,287 229,098
Increase (Decrease) in Accrued Liabilities (41,732) 132,313
----------- -----------
Net Cash Used by Operating Activities (2,421,070) (1,503,551)
----------- -----------
Cash Flows From Investing Activities:
Purchase of Equipment (11,623) (8,090)
Amounts Paid to Acquire Patents (293,744) (166,529)
----------- -----------
Net Cash Used by Investing Activities (305,367) (174,619)
----------- -----------
Cash Flows From Financing Activities:
Repayments of Notes Payable (560,248) (476,592)
Proceeds from Sales of Common Stock, Net 3,842,375 2,241,650
----------- -----------
Net Cash Provided by Financing Activities 3,282,127 1,765,058
----------- -----------
Net Increase in Cash 555,690 86,888
Cash, at Beginning of Period 163,477 76,589
----------- -----------
Cash, at End of Period $ 719,167 163,477
=========== ===========
Non-Cash Investing and Financing Transactions:
Patents Purchased Using Debt $ 185,273 1,975,477
Stock Issued for Professional and Consulting Services $ 381,876 78,800
Stock Issued in Exchange for Convertible Notes $ 609,576 --
Non-cash Compensation Warrants and Options $ 426,185 117,000
Rescission of Stock Issued for Compensation $ (300,000) --
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 $ 20,024 31,763
See accompanying notes to financial statements and independent auditors' reports.
F-6
HEALTH DISCOVERY CORPORATION
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 certain rights to 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. The Company was reported on as
a development stage corporation through December 31, 2004.
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
fair value of the patents.
REVENUE RECOGNITION
Revenue is generated through the sale or license of patented processes. 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.
COST OF SALES
Cost of patent sales includes the acquisition cost less accumulated amortization
of patents sold, plus any internal development costs and fees directly
associated with sales contracts.
Cost of sales for licensing revenue includes fees directly associated with sales
contracts and salary expense allocated to cost of sales based upon the amount of
estimated time worked on the licensing contract.
PATENTS
Patents are recorded at cost, less accumulated amortization. Patents are
amortized over their remaining legal lives, that range from 15 to 20 years, from
the date they are acquired or approved. Management believes the remaining legal
lives approximates the patents economic lives. 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, not issued, or
otherwise impaired, the Company will expense the capitalized legal costs as an
impairment charge.
The carrying value of patents is reviewed for impairment at least annually and
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. As of December 31, 2005, the Company does not believe
there has been any impairment of its patents.
INCOME TAXES
The Company accounts for income using the liability method. Deferred tax assets
and liabilities are recognized for future tax benefits or consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income for the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be realized through future operations.
F-7
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- --------------------------------------------------------------
INCOME TAXES, CONTINUED
In the event the future tax consequences of differences between the financial
reporting basis and tax basis of the Company's assets and liabilities result in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such assets is made. A valuation allowance is
provided for the portion of the deferred tax asset whenit is more likely than
not that some portion or all of the deferred tax asset will not be realized. In
assessing the realizabilty of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies.
STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation under the intrinsic value
method prescribed in Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees." Had the Company used the fair-value-based method of
accounting for the stock option plan prescribed by SFAS No. 123 and charged
compensation expense against income over the vesting period based on the fair
value of options at the date of grant, net loss and loss per share for the years
ended December 31, 2005 and 2004:
2005 2004
----------- -----------
Net loss as reported $(3,159,016) (2,205,088)
Deduct: Stock-based Expense
Determined Under Fair Value Based Method
for Employee Stock Options (7,723) (32,000)
----------- -----------
Proforma Net Loss $(3,166,739) (2,237,088)
=========== ===========
Stock-based Expense Included in Net Loss $ 508,061 195,800
=========== ===========
Loss Per Share:
Basic - As Reported $ (.03) (.03)
Basic - Proforma $ (.03) (.03)
Stock-based expense included in the 2005 net loss consists of $426,185 in
compensatory warrants and options and $81,876 in compensatory stock issued to
consultants for services. Stock-based expense included in the 2004 net loss
includes $117,000 in compensatory warrants and $78,800 in stock issued to
consultants for services.
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%. No options were granted in 2004.
F-8
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- --------------------------------------------------------------
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.
NET LOSS PER SHARE
Basic Earnings Per Share ("EPS") includes no dilution and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings or losses of
the entity. Due to the net loss in all periods presented, the calculation of
diluted per share amounts would result in an anti-dilutive result and therefore
is not presented. Potentially dilutive shares at December 31, 2005 and 2004
include the following:
2005 2004
----------- -----------
Stock options 2,500,000 3,000,000
Warrants 50,931,250 21,369,375
Convertible notes 3,915,547 6,634,224
----------- -----------
57,346,797 28,303,599
=========== ===========
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 the fair value of the shares issued,
based upon quoted market prices. The fair value of warrants granted is estimated
on the date of grant using the Black-Scholes pricing model.
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 provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Early application is permitted, and companies must apply the standard
prospectively. The Company adopted this statement on January 1, 2006. The
adoption of the statement should not cause a significant change in the current
manner in which the Company accounts for its exchanges of non-monetary assets.
F-9
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- --------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED
The FASB has issued SFAS No. 123(R), "Share-Based Payment." The new rule
requires that the compensation cost relating to share-based payment transactions
be recognized in the financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. This statement
precludes the recognition of compensation expense under APB Opinion No. 25's
intrinsic value method. The Company will be required to apply SFAS No. 123(R)
beginning January 1, 2006. The Company does not believe that the impact of SFAS
No. 123(R) will be materially different from the amounts presented in the pro
forma disclosures.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which changes the requirements for the accounting for
and reporting of a change in accounting principle. We are required to adopt the
provisions of SFAS 154 effective January 1, 2006; however, early adoption is
permitted. We will follow the provisions of this statement in the event of any
future accounting changes.
RECLASSIFICATIONS
Certain amounts from 2004 have been reclassified to conform to the presentation
used in 2005.
NOTE B - RELATED PARTY TRANSACTIONS
- -----------------------------------
As a result of the agreements between Barnhill, LLC and Fractal Genomics, LLC,
the company's Chief Executive Officer receives 49% of each note payment, or
$30,625 plus interest per payment, made to Fractal Genomics, LLC from Health
Discovery Corporation that is more fully described in Note D. Total payments to
the Company's Chief Executive Officer were $91,875 and $153,125 in 2005 and
2004, respectively, as a result of these agreements.
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 space 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 $11,000 and $10,000 in 2005 and 2004,
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 a part of patents. The Company has recorded $3,568,259 and
$3,340,339 in patents and patent related costs, net of accumulated amortization,
at December 31, 2005 and 2004.
Amortization charged to operations for the years ended December 31, 2005 and
2004 was $251,097 and $142,607, 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, 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.
F-10
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE D - ACQUISITIONS, CONTINUED
- --------------------------------
On July 30, 2004, the Company acquired certain rights to patents and patents
pending applications for certain machine learning tools used for diagnostic and
drug discovery. The rights to these assets were purchased from unrelated third
parties for a combination of non-interest bearing notes payable and interest
bearing notes payable that are convertible to common stock. Under the
non-interest bearing note payable, an initial cash payment of $175,394 was paid
to the sellers on December 30, 2004 and four additional payments of $175,394
will be made four months from the date of the initial payment and every fourth
month thereafter until $876,970 has been paid. The Company has imputed interest
on the non-interest bearing note payments using a rate of 3.16 %, which resulted
in a liability that amounts to $847,659. For the interest bearing notes payable
that are convertible to common stock, the sellers received notes payable
amounting to $1,127,818 that bear interest at 3.16 % and are convertible into
6,634,221 shares of common stock (at $.17 per share) until maturity on July 28,
2009. The agreements place certain limitations on the selling of the common
stock shares during certain periods after conversion. The purchase of these
patents and patents pending applications was recorded at $1,975,477, which was
the estimated present value of the notes issued at the date of acquisition.
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 the 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.
During 2005 and 2004, fees totaling $22,881 and $18,886, respectively, were
capitalized as part of the cost of the patents acquired.
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 on 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 2005 and 2004, the Company paid approximately $10,000 and $20,000,
respectively, in royalty fees to Lucent.
NOTE F - INCOME TAXES
- ---------------------
The Company's effective tax rate differs from the federal and state statutory
rates due primarily 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, 2005, the Company had net operating
loss carryforwards totaling approximately $5,696,000 that will expire in various
years beginning in 2021. The net operating loss carryforwards are the Company's
primary deferred tax attribute.
F-11
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE G - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
- ----------------------------------------------------
Notes payable consist of the following: 2005 2004
---------- ----------
Notes payable to individuals, bearing interest
at 6% payable in quarterly installments of
$62,500. The final payment was made in 2005. $ -- 187,500
Term promissory notes payable to individuals and
institutions. The current portion with imputed
interest at 3.16%. The long-term portion with
interest at 18% is payable in common stock
maturing October 31, 2007. 348,691 683,567
---------- ----------
348,691 871,067
Less current maturities (26,780) (697,491)
---------- ----------
$ 321,911 173,576
========== ==========
Convertible notes outstanding at December 31, 2005 and 2004 totaled $665,643 and
$1,127,818, respectively. 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 bare interest at a
rate of 3.16%.
In 2005, convertible notes totaling $609,576 were converted by the debt holders
in exchange for the issuance of 3,585,741 shares of common stock.
All of the Company's debt is collateralized by specific patents in the Company's
patent portfolio.
On December 28, 2005, certain holders of term promissory notes agreed to defer
the balance due to them in 2006 until October 31, 2007. The deferred portion of
the term notes will bear interest at a rate of 18%, payable with issuance of
Company's common stock. The Company was previously imputing interest on the
unpaid amount at 3.16% annually. The principal payment deferred until 2007 is
$321,911.
NOTE H - COMMITMENTS
- --------------------
The Company entered into an employment agreement with its Chief Executive
Officer. The employment agreement is for a term of five years beginning
September 15, 2003. The employment agreement will continue until terminated,
which can occur at any time by notice, provided that the Company's Chief
Executive Officer will not terminate his employment upon less than sixty (60)
days' prior written notice. 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 or upon a change in control.
The Company entered into an employment agreement with its Director of
Operations. The employment agreement commenced on June 16, 2004 and ended on
August 1, 2005, when the parties elected to terminate the agreement.
The Company entered into an employment agreement with its Chief Financial
Officer. 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 three members of its
Scientific Advisory Board wherein they are entitled to receive 100,000 shares
each of the Company's common stock. The members are entitled to receive the
shares upon satisfactory completion of one year of service. The one-year terms
end in 2006. The Company is accruing an expense for the anticipated issuance
over the service period. At December 31, 2005, the Company has recorded $14,667
of consultant expense for anticipated issuances of the shares.
F-12
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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, 2005 and 2004, the Company has options to purchase shares of
common stock outstanding as follows:
NUMBER OF EXERCISE
2005 GRANT DATE SHARES 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
NUMBER OF EXERCISE
2004 GRANT DATE SHARES PRICE
---- ---------- ------ -----
Vesting
-------
October 2003 600,000 $.01 October 2003
October 2003 2,400,000 $.10 400,000 shares each in November 2004, 2005 and 2006 with
the remaining balance based on performance.
The 2005 options were awarded to an employee of the Company and expire in
December 2015.
The following schedule summarizes stock option activity for 2005 and 2004:
2005 2004
------------------------------------- -----------------------------------
Weighted Weighted
Option Average Option Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding, Beginning of Year 3,000,000 $ 0.08 5,500,000 $ 0.08
Granted, During the Year 1,500,000 0.10 - -
Forfeited, During the Year (2,000,000) 0.10 (2,500,000) 0.08
--------- ---- --------- ----
Outstanding, End of the Year 2,500,000 $ 0.08 3,000,000 $ 0.08
========= ==== ========= ====
Two former employees forfeited 2,000,000 and 2,500,000 during 2005 and 2004,
respectively. The weighted average remaining life of the outstanding options at
December 31, 2005 is 9 years.
There were 1,000,000 and 1,250,000 options exercisable at December 31, 2005 and
2004, respectively. The weighted average exercise prices of those options are
$0.05 and $0.06 at December 31, 2005 and 2004 respectively. The weighted average
remaining life of the exercisable options at December 31, 2005 is 8 years.
F-13
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE J - WARRANTS
- -----------------
Information about warrants outstanding at December 31, 2005 and 2004 is
summarized below:
DECEMBER 31, 2005
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
REMAINING REMAINING CONTRACTUAL
NUMBER CONTRACTUAL NUMBER LIFE (YEARS) OF
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE 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
DECEMBER 31, 2004
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
REMAINING REMAINING CONTRACTUAL
NUMBER CONTRACTUAL NUMBER LIFE (YEARS) OF
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE EXERCISABLE WARRANTS
--------------- ----------- ------------ ----------- --------------------
$0.01 100,000 3 100,000 3
$0.08 600,000 2 600,000 2
$0.24 5,434,375 4 5,434,375 4
$0.35 15,235,000 2 15,235,000 2
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 $245,584 was
recorded as Paid in Capital for Compensatory Warrants in the Statement of
Stockholders' Equity. 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 Paid in Capital for Compensatory Warrants in
the Statement of Stockholders' Equity.
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 Paid in
Capital for Compensatory Warrants in the Statement of Stockholders' Equity.
The $0.35 per share warrants were issued in conjunction with Round 1 Private
Placement. The $0.24 per share warrants relate to the Round 2 Private Placement.
The Company has ascribed no value to the warrants associated with the Private
Placements that are described in Note K.
During 2004, the Company issued 100,000 warrants to consultants and others for
services with an exercise price of $0.01 per share. A total of $39,000 was
recorded as Paid in Capital for Compensatory Warrants in the Statement of
Stockholders' Equity.
During 2004, the Company issued 600,000 warrants to consultants and others for
services with an exercise price of $0.01 per share. A total of $78,000 was
recorded as Paid in Capital for Compensatory Warrants in the Statement of
Stockholders' Equity.
F-14
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 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 are
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 $1,952,675, net of issuance costs of $162,569. The
issuance cost consisted of $157,000 in cash 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. In addition, the Company issued
806,250 warrants, each entitling the holder to buy one share of the Company's
common stock for $0.24 per share. The value of the warrants totaled $120,938 and
had no net impact on common stock. 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 $1,889,700, net of cash issuance cost of $70,300. In
addition, the Company issued 278,125 in warrants, each entitling the holder to
buy one share of the Company's common stock for $0.24 per share. The value of
the warrants totaled $41,719 and had no net impact on common stock.
F-15
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE K - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
PRIVATE PLACEMENT - ROUND 2, 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 is based upon one percent of
the number of shares and warrants purchased by such participants for each 30-day
period beginning on the 121st day until the registration statement 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 is declared effective. On October 6, 2005, November
9, 2005, and December 9, 2005, an additional 136,250, 136,250, and 131,250,
respectively, in penalty shares and warrants were issued. In addition, certain
shareholders who purchased 6,812,500 shares of the Company's common stock have
anti-dilution rights until the registration statement has been effective for 365
days. If the Company sells shares of the Company's common stock at a price less
than $.16 per share or issues warrants to purchase the Company's common stock at
an exercise price less than $.24 per share, certain shareholders will receive an
amount of shares or warrants at no cost so that those shareholders have no
diluted effect from the sales of common stock or warrant issuances. Shares,
options or warrants issued to employees, consultants and directors are excluded
from the anti-dilutive clause. No expense has been recorded upon the issuance of
the additional shares.
SHARES ISSUED IN EXCHANGE FOR SERVICES
During 2004, the Company issued 222,372 common stock shares to consultants for
services and 53,561 shares to settle accrued liabilities for services. The
shares were granted at the fair market value of the services provided. Total
consultant expense of $41,800 was recorded for the issuance. In addition, under
a consulting agreement, the Company was obligated to issue an additional $60,000
of shares (amounting to 254,572 shares) to consultants at December 31, 2004. The
expense is accrued for at December 31, 2004 in accrued expenses on the Company's
balance sheet and a corresponding charge to consultant expense in the statement
of operations. Warrants with a fair value of $117,000 were issued to consultants
and others for services performed on behalf of the Company, and are included in
the Statement of Changes in Stockholders' Equity.
The Company issued 200,000 shares of the Company's common stock in 2004 to two
individuals who have agreed to serve on the Company's Scientific Advisory
Committee. The market value of the shares at the time of issuance was $37,000
and was recorded as compensation expense in the statement of operations.
During 2005, the Company issued 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 consultant expense of $381,876
was recorded for the issuances in 2005.
STOCK CANCELLATION
During 2004, certain officers and former officers and former directors of the
Company surrendered 3,466,036 shares of the Company's common stock because the
issuance of the shares was not properly authorized. The shares were immediately
cancelled, and the Company gave no consideration for these shares.
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-16
HEALTH DISCOVERY CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE L - GOING CONCERN
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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 has begun 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 with its debt holders, which resulted in the deferment of cash
payments on debt until October 2007. In late 2005, management has instituted a
cost reduction program whereby the salaries of company employees, including
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.
F-17