Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant:
(1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020, the aggregate market
value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4.5 million based on the
closing sale price.
Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable date:
PART
I
ITEM 1. BUSINESS
Business Overview
Health Discovery
Corporation (the “Company”) is a pattern recognition company that uses advanced mathematical techniques to analyze
large amounts of data to uncover patterns that might otherwise be undetectable. We operate primarily in the field of molecular
diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence (“AI”) and machine
learning are sometimes used to describe pattern recognition tools.
Our principal asset is our intellectual
property, which includes advanced mathematical algorithms called Support Vector Machines (“SVM”), as well as biomarkers
that we discovered by applying our SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or
genetic expression signatures of certain disease states. While our historical foundation lies in the molecular diagnostics field,
where we have made a number of discoveries that play a role in developing more personalized approaches to the diagnosis and treatment
of certain diseases, our SVM assets in particular have broad applicability in many other fields. Intelligently applied, our pattern
recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
Our business model has evolved over time
to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.
Today, our commercialization efforts include utilization of our discoveries and knowledge to help develop diagnostic and prognostic
predictive tests; licensing of the SVM technologies directly to diagnostic companies; the potential formation of new ventures with
domain experts in other fields where our pattern recognition technology holds commercial promise; and protecting our proprietary
technology against infringement from others.
COVID-19
The
COVID-19 pandemic continues to have widespread, evolving and unpredictable impacts on global society, economies, financial markets
and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social
distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of non-essential
businesses. The COVID-19 pandemic has impacted and may continue to impact our business operations, including our employees, customers,
and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.
The
intense focus on COVID-19 has also led to the suspension of some research projects, which may impact our ability to form
new contractual arrangements to exploit our technology. While the full potential economic impact brought by and the duration of
the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption
of our business. In addition, a recession, depression or other sustained adverse market event resulting from the coronavirus could
materially and adversely affect our business and the value of our common stock.
The
extent to which the COVID-19 pandemic continues to impact our business going forward will depend on numerous evolving factors which
we cannot reasonably predict, including, but not limited to, the duration and scope of the pandemic. These factors may materially
and adversely affect our business and financial condition.
Intellectual Property Developments and
Patent Defense Matters
As previously disclosed in our 2019 Form 10-K,
we submitted Patent Application Number 14/754,434 (the “Biomarker Patent”) to the United States Patent and Trademark
Office (“USPTO”).
We subsequently announced that the USPTO
has issued a Notice of Allowance of this Biomarker Patent covering the four-gene prostate cancer test developed using our proprietary
SVM-RFE technology. The allowed claims cover a method for screening for and treating prostate cancer by measuring expression
levels of the four genes within a patient sample compared to one or more reference genes and generating a prediction score based
on the averaged relative expression levels. This Notice of Allowance is important after encountering the significant barriers to
patenting of biomarkers that had been raised by the U.S. Supreme Court’s controversial decisions in Mayo Collaborative
Services v. Prometheus Laboratories and Association for Molecular Pathology v. Myriad Genetics. This
Biomarker Patent complements the Company’s already issued European Biomarker Patent that covers similar claims.
We believe that this Biomarker Patent demonstrates
the ability of the Company’s proprietary technology in the discovery and validation of biomarkers for diseases. We believe
this same method can be applied to numerous different diseases and will explore opportunities with partners to deploy these same
methods using our proprietary technology in biomarker discovery.
We hold the exclusive rights to 21 issued
U.S. patents covering uses of SVM technology for discovery of knowledge from large data sets. The Company also has 1 pending
U.S. patent application covering uses of the SVM technology as well as diagnostic methods that have been discovered using the SVM
technology.
The following represents a listing of our
patents as of December 31, 2020:
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Patent/Application No.
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Title
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Expiration Date
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U.S. Patent No. 6,996,549
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Computer-Aided Image Analysis
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04/21/2021
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U.S. Patent No. 7,117,188
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Methods of Identifying Patterns in Biological Systems and Uses Thereof
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03/09/2022
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U.S. Patent No. 7,299,213
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Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset
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03/01/2022
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U.S. Patent No. 7,353,215
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Kernels and Methods for Selecting Kernels for Use in a Learning Machine
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05/07/2022
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U.S. Patent No. 7,444,308
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Data Mining Platform for Bioinformatics
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06/25/2022
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U.S. Patent No. 7,617,163
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Kernels and Kernel Methods for Spectral Data
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02/10/2023
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U.S. Patent No. 7,970,718
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Feature Selection and for Evaluating Features Identified as Significant for Classifying Data
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01/24/2022
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U.S. Patent No. 8,008,012
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Biomarkers Downregulated in Prostate Cancer
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01/24/2022
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U.S. Patent No. 8,126,825
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Method for Visualizing Feature Ranking of a Subset of Features for Classifying Data Using a Support Vector
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05/20/2022
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U.S. Patent No. 8,209,269
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Kernels for Identifying Patterns in Datasets Containing Noise or Transformation Invariance
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05/07/2022
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U.S. Patent No. 8,293,469
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Biomarkers Downregulated in Prostate Cancer
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01/24/2022
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U.S. Patent No. 8,682,810
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Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
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02/08/2029
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U.S. Patent No. 9,336,430
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Computer-Assisted Karyotyping
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06/19/2033
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U.S. Patent No. 9,952,221
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Methods for Screening, Predicting and Monitoring Prostate Cancer
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01/24/2022
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U.S. Patent No. 10,402,685
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Recursive Feature Elimination Method Using Support Vector Machines
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06/07/2025
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U.S. Patent Publication No. 2018/0321245
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Methods for Screening, Predicting and Monitoring Prostate Cancer
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01/24/2022
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European Patent No. 1356421
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Computer Aided Image Analysis
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01/23/2022
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European Patent No. 1459235
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Methods of Identifying Patterns in Biological Systems and Uses Thereof
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01/24/2022
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Japanese Patent No. 5425814
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Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
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02/08/2029
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European Patent No. 2373816
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Methods for Screening, Predicting and Monitoring Prostate Cancer
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12/04/2029
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European Patent No. 2252889
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Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
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02/08/2029
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European Patent No. 2862113
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Computer-Assisted Karyotyping
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06/19/2033
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We also own intellectual property rights
in U.S. patents covering Fractal Genomic Modeling (“FGM”) technology. The FGM portfolio includes one issued patent:
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Patent/Application No.
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Title
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Expiration Date
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U.S. Patent No. 7,366,719
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Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets
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01/19/2021
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Intel Matter
As previously disclosed in
September 2016, the USPTO had declared an Interference between the Company’s SVM-RFE Patent application and Intel
Corporation’s Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector
Machine”. The Interference was an administrative proceeding within the USPTO used to determine which party was the
first to invent an invention that was claimed in two (or more) independently owned patent applications. Subsequently, on
February 27, 2019, the USPTO ruled in favor of the Company on the SVM-RFE Patent application. The Patent Trial and
Appeal Board (“PTAB”) of the USPTO issued its decision, finding that the Company is entitled to claim exclusive
ownership rights to the SVM-RFE technology as set forth in the SVM-RFE Patent application that was filed to provoke the
Interference. The decision ordered Intel Corporation’s Patent No. 7,685,077 to be cancelled. The decision
also dismissed Intel Corporation’s motions challenging the validity of Health Discovery Corporation’s pending
claims and issued patents covering SVM-RFE.
In September 2019,
the USPTO issued U.S. Patent No. 10,402,685 (“SVM-RFE Patent”) for Health Discovery Corporation’s
patent application covering SVM-RFE. Health Discovery Corporation now owns four patents in the United States and five
international patents related to SVM-RFE and is the sole owner of all patents related to SVM-RFE. Furthermore, the USPTO,
granted a Patent Term Adjustment (“PTA”) to the SVM-RFE Patent. The PTA is 1,785 days (almost 5 years), which is
added to the normal 20-year-from-filing patent term. The USPTO granted this adjustment to offset delays that occurred within
the USPTO during the examination process and interference proceedings. This means the SVM-RFE Patent term has been
extended from August 7, 2020 to June 7, 2025.
As a result of the issuance of the SVM-RFE
Patent, the Company now has the right to exclude others from developing, commercializing or licensing this patented technology
without the uncertainty of the Interference or concerns over the ownership of the SVM-RFE patents. On July 23, 2020, the Company
filed a patent infringement lawsuit against Intel. This infringement suit pertains to our SVM-RFE. The lawsuit was filed in the
United States District Court for the Western District of Texas, Waco Division.
Our Competition
We conduct our business principally
in the diagnostics industry in the field of biomarker discovery and image analysis. The diagnostics industry is highly
fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics
companies attempting to discover potential new diagnostic products. These companies may:
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develop new diagnostic products before we or our collaborators are able to;
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develop diagnostic products that are more effective or cost-effective than those developed by us
or our collaborators; or
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patent protect other intellectual property rights that would limit our ability to develop and commercialize
our technology by limiting the ability to use, ours, or our collaborators’, diagnostic products.
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We compete with companies in the United
States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize biomarker discovery
and image analysis techniques. These companies may develop products that are competitive with and/or perform the same or similar
to the products offered by our collaborators or us.
Also, clinical laboratories may offer testing
services that are competitive with the products sold by our collaborators or us. The testing services offered by clinical laboratories
may be easier to develop and market than test kits developed by us or our collaborators because the testing services are not subject
to the same clinical validation requirements that are applicable to FDA-cleared or approved diagnostic test kits.
While a number of companies perform biomarker
discovery, we believe that our SVM and SVM-RFE technologies give us a distinct advantage over competing technologies. Neither
classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs
necessary to produce fully validated biomarkers and image analysis like our technology.
Governmental Regulation
Our business plan involves discovery
in the field of molecular diagnostics. This early discovery process does not involve any governmental regulations or
approvals. If we are successful in licensing our discoveries to other companies, FDA approvals may be required
before the ultimate product may be sold to consumers. Our current plan is to require the companies licensing our
discoveries or technologies to be responsible for the costs involved in such approvals. If we are not successful
in licensing these discoveries on these terms or choose to take these discoveries to market ourselves, we may then be subject
to applicable FDA regulations and would then bear the costs of such approvals.
We know of no current governmental regulations
that will materially affect the Company’s current operations or products. However, if the FDA changes its current position,
and decides to regulate laboratory-developed tests (LDT's) currently regulated by CLIA certification, this could materially affect
the development costs and commercialization timelines for our products.
Employees
On
December 31, 2020, we had three employees, two of which serve as executive officers.
Corporate Information
Our principal executive office is located
at 2002 Summit Blvd, NE, Suite 300, Atlanta, Georgia, and the telephone number is (404) 566-4865. Our corporate website address
is www.healthdiscoverycorp.com.
At our investor relations website, www.healthdiscoverycorp.com/news,
we make available free of charge a direct link to our filings with the SEC, including but not limited to our Annual Report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports. These reports
are accessible soon after we file them with the SEC.
The information contained in, or that can
be accessed through, our website is not a part of, and is not incorporated into, this or any other report we file with or furnish
to the Securities and Exchange Commission (“SEC”).
ITEM 1A. RISK FACTORS
Forward-Looking Statements
This annual report on Form 10-K (“Report”)
contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E
of the Securities Exchange Act of 1934, 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 Report, 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 Report, 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 Report speak only as of the date of this Report as stated on the front cover, and we have no obligation
to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts
are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers,
and the inability to retain a significant number of customers, as well as the risks and uncertainties described in “Risk
Factors” section below.
Risks Related to Our Business
Our financial statements have been prepared
on a going concern basis.
We have prepared our
financial statements on a “going concern” basis, which presumes that we will be able to realize our assets and discharge
our liabilities in the normal course of business for the foreseeable future.
Our ability to continue
as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining
additional financing and successfully bringing our technologies to the market. The outcome of these matters cannot be predicted
at this time. Our financial statements have been prepared on a going concern basis and do not include any adjustments to
the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.
If the going concern
assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets
and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments may be material.
At December 31, 2020,
we had approximately $917,000 cash on hand. The Company estimates cash will be depleted by the first quarter of 2022 unless the
Company is able to generate sufficient revenue from operations. See Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations for additional disclosure regarding our liquidity and capital resources.
We are likely to incur future
losses, and we may never sustain profitability.
Our expenses are expected
to exceed our income until we successfully complete transactions resulting in significant revenue. Accordingly, our
capital will be decreased to pay these operating expenses. If we ever become profitable, of which there is no assurance
that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these
operating expenses. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
We will need additional financing.
We will be required
to raise additional capital to finance our activities. We cannot assure prospective investors that we will not need to raise additional
capital or that we would be able to raise sufficient additional capital on favorable terms, if at all. There can be
no assurance that additional financing will be available, if required, on terms acceptable to us. If we fail to raise
sufficient funds or do not increase our revenues from licensing our technology or performing services, we may have to cease operations
or materially curtail our business operations. If we raise additional capital by issuing equity securities, our stockholders may
experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish
some rights to our technologies or product candidates or grant licenses on terms that are not favorable to us.
Our operating results are unpredictable
and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
Our operating results
may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and
acceptance of our services. Factors that may cause our results to vary by period include:
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payments of milestones, license fees or research payments under the terms of external alliances;
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changes in the demand for our products and services;
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the nature, pricing and timing of products and services provided to our collaborators;
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acquisition, licensing and other costs related to the expansion of our operations;
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reduced capital investment for extended periods;
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losses and expenses related to our investments in joint ventures and businesses;
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regulatory developments or changes in public perceptions relating to the use of genetic information
and the diagnosis and treatment of disease based on genetic information; and
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changes in intellectual property laws that affect our rights in genetic information that we sell
and license.
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Advisory and personnel
costs and legal fees account for a substantial portion of our operating expenses. Some of these expenses cannot be adjusted quickly
in the short term. If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our
operating expenses accordingly. Failure to achieve anticipated levels of revenue could therefore significantly harm
our operating results for a particular period.
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.
If our business does not keep up with
rapid technological change or continue to introduce new products, we may be unable to 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 limit our growth and damage our reputation
and business.
The future success
of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies.
We believe that successful new product introductions provide a significant competitive advantage because customers make an investment
of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial
selection. However, our business or others may make rapid technological developments, which could result in our technologies, products
or services becoming obsolete before we are able to recover the expenses incurred to develop them.
If our business cannot enter into strategic
alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services
or continue to commercialize existing products or services.
We may be unable to enter into strategic
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.
Our strategy for the
development and commercialization of diagnostic biomarkers and therapeutic proteins depends on the formation of collaborations
or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties
include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities. We
cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and
licenses will be successful.
Our dependence on licensing and other
collaboration agreements makes us heavily dependent on our collaborators.
We may not be able
to enter into licensing or other collaboration agreements on terms favorable to us. Even if we do enter into an acceptable
agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities. In
most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions
by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory
management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
In addition, we
may not be able to control the amount and timing of resources our collaborators devote to the product candidates and
collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a
collaborator’s business strategy may negatively affect its willingness or ability to complete its obligations under the
arrangement with us. Furthermore, our rights in any intellectual property or products that may result from our collaborations
may depend on additional investment of money that we may not be able or willing to make.
Potential or future
collaborators may also pursue alternative technologies, including those of our competitors. Disputes may arise with
respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with
potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development
or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators
pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained
rights from us, our business, financial condition and results of operations may be significantly harmed.
Our approach of incorporating ideas
and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively
new and may not be accepted by our potential customers or collaborators.
We intend to create
a fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically
relevant and economically significant biomarkers. Our potential customers and collaborators may be reluctant to accept
our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove to
be ineffective or not as effective as other methods. For example, our products and technologies may prove to be ineffective
if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model. If
our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective, our
business may fail, or we may never become profitable.
If we are unable to hire or retain key
personnel or sufficient qualified employees, we may be unable to successfully operate our business.
Our business is
highly dependent upon the continued services of our executive team and board of directors. Members of our senior management
are not covered by employment, consulting agreements, or non-competition agreements, and we cannot assure you that these key
personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability
to compete. The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse
effect upon our business, as well as our relationships with our potential customers. We do not carry key person life
insurance on any member of our senior management. Furthermore, competition for highly qualified personnel in our
industry and geographic locations is intense. Our business would be seriously harmed if we were unable to retain
our key employees, or to attract, integrate or retain other highly qualified personnel in the future.
We may not be able to employ and retain
experienced scientists, mathematicians and management.
Technologies in our
industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral
to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market
acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower-than-expected
revenues and earnings.
The sales cycle for some of our products
and services is lengthy. We expend substantial funds and management effort with no assurance of successfully selling
our products or services.
Our ability to obtain
customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate
their efforts in drug and diagnostics discovery. Our ability to obtain customers for our therapeutic or diagnostic product
candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed
therapeutic or diagnostic purposes. Our ability to obtain customers will also depend on our ability to successfully
negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is
typically lengthy and may take more than 12 months.
We may be subject to product liability
claims if products derived from our products or services harm people.
We may be held
liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found
otherwise unsuitable. These risks are inherent in the development of genomics, functional genomics and
pharmaceutical products. If we are sued for any harm or injury caused by products derived from our services or products, our
liability could exceed our total assets. In addition, such claims could cause us to incur substantial costs, divert
management’s attention from executing the Company’s business plan and subject us to negative publicity even if we
prevail in our defense of such claims.
Recent litigation from shareholders
and others may have a material adverse effect on the Company.
We are subject to a
variety of claims and lawsuits. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive
relief that could adversely affect our ability to conduct our business. The litigation and other claims are subject to inherent
uncertainties and management’s view of these matters may change in the future. A material adverse impact in our financial
statements could occur in the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.
Our business may be adversely affected
by the ongoing coronavirus pandemic.
The outbreak of COVID-19 has
evolved into a global pandemic. The coronavirus has spread to many regions of the world, including the areas of the United States
where we operate. At this time, the United States and certain other countries are the subject
of lockdowns and self-isolation procedures, which have significantly limited business operations and restricted internal and external
meetings. Further, the outbreak and any preventative or protective actions that we or our customers may take in respect of COVID-19 may
result in a period of disruption to our work in progress. The extent to which the coronavirus impacts our business and operating
results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information
that may emerge concerning the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Should the coronavirus
pandemic continue, our business operations could be delayed or interrupted. For instance, our executive officers or directors may
become infected with the virus and become unable to fulfill their duties. We are taking precautionary steps to protect our executive
officers consistent with White House guidance and state and local orders.
The intense focus on
COVID-19 also has led to the suspension of some research projects, which may impact our ability to form new contractual arrangements
to exploit our technology. While the full potential economic impact brought by and the duration of the pandemic may be difficult
to assess or predict, it has already caused, and is likely to result in further, significant disruption of our business. In addition,
a recession, depression or other sustained adverse market event resulting from the coronavirus could materially and adversely affect
our business and the value of our common stock.
The ultimate impact
of the current pandemic, or any other health epidemic, is highly uncertain and subject to change. We do not yet know the full extent
of potential delays or impacts on our business, or the economy as a whole. However, these effects could have a material impact
on our operations, and we continue to monitor the situation closely.
Any
resulting financial impact cannot be reasonably estimated at this time but may materially affect our business and financial condition.
The extent to which COVID-19 impacts
our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which
may emerge concerning the severity of COVID-19 and
the actions to contain COVID-19 or
treat its impact, among others.
Risks Related to Our Intellectual Property
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. Furthermore, should we
be unsuccessful in regard to our recent patent infringement litigation against Intel, it may have a material impact on our ability
to continue operations.
We use
contractual obligations to protect a significant portion of our confidential and proprietary information and know-how. This
includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and
services. However, these measures may not provide adequate protection for our trade secrets or other proprietary information
and know-how. Customers, employees, scientific advisors, collaborators or consultants may still disclose our
proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade
secrets against this disclosure.
In addition, we have
applied for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have
discovered using these technologies. We plan to continue to apply for patents covering parts of our technologies and
discoveries, as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will
be upheld if challenged. The patent positions of biotechnology related companies are generally uncertain and involve
complex legal and factual questions. Legislative changes and/or changes in the examination guidelines of governmental
patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property,
especially with respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In
contrast to recent court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed
to identifying relationships between small groups of genes and proteins that are useful for diagnosing and treating diseases and
other conditions.
Our success depends in large part on
our ability to patent our discoveries.
Our success
depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are
attempting to commercialize. We face intense competition from other biotechnology and pharmaceutical companies. These include
customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or
identical to our discoveries. We cannot assure you that other parties have not sought patent protection relating
to the biomarkers and pathways that we discovered or may discover in the future. Our patent applications may
conflict with prior applications of third parties or with prior publications. They may not result in issued
patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any
competitive advantages. U.S. and other patent applications ordinarily remain confidential for 18 months from the
date of filing. As a result, patent applications that we file which we believe are novel at the time of filing may
be determined at a later stage to be inconsistent with earlier applications. Additionally, the scope of patents we
receive may not provide us with adequate protection of our intellectual property, which would harm our competitive
position. Any issued patents that cover our proprietary technologies may not provide us with substantial
protection or be commercially beneficial to the business. The issuance of a patent is not conclusive as to its
validity or its enforceability. Federal courts may invalidate these patents or find them
unenforceable. Competitors may also be able to design around our patents. If we are unable to protect
our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors
could commercialize our technologies. Any of these events could materially harm our business or financial results.
Litigation or other proceedings or third-party
claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or
require us to spend time and money to modify our operations.
The technology
that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that
they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics,
biotechnology and software industries expand, more patents are issued, and other companies engage in other genomic-related
businesses. If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with
regard to our technologies and products, we could experience serious harm. If litigation is commenced against us alleging
intellectual property rights infringement or if we initiate a lawsuit to assert claims of infringement, protect our trade
secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others, we may incur
significant costs in litigating, whether or not we prevail in such litigation. Regardless of the outcome,
litigation can be very costly. These costs would also include diversion of management and technical personnel to defend us
against third parties or to enforce our patents (once issued) or other rights against others. In addition, parties making
claims against us may be able to obtain injunctive or other equitable relief that could prevent us from being able to further
develop or commercialize. Further, these lawsuits could result in the invalidation or limitation of the scope of our patents
or the forfeiture of the rights associated with these patents. This could also result in the award of substantial damages
against us. In the event of a successful claim of infringement against us, we may be required to pay damages and
obtain one or more licenses from third parties. If we are not able to obtain these licenses at a reasonable cost,
if at all, we could encounter delays in product introductions while we attempt to develop alternative methods or products.
Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products,
all of which could negatively impact our business, financial condition or results of operations. Moreover, during
the course of these suits, there may be public announcements of the results of hearings, motions and other interim
proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be
negative, which could cause the market price of our common stock to decline.
Many of our services
will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third-party patents, these
products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect
of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation
and licensing. If we are found to be infringing the intellectual property of others, we could be required to stop the
infringing activity, or we may be required to design around or license the intellectual property in question. If we
are unable to obtain a required license on acceptable terms or are unable to design around any third-party patent, we may be unable
to sell some of our services, which could result in reduced revenue.
Breaches of our internal computer
systems, or those of our contractors, vendors, or consultants, may place our patents or proprietary rights at risk.
The
loss of clinical or preclinical data or data from any future clinical trial involving our technology, including therapeutic candidates
and products, could result in delays in our development and regulatory filing efforts and significantly increase our costs. In
addition, theft or other exposure of data may interfere with our ability to protect our intellectual property, including trade
secrets, and other information critical to our operations. Although to-date we have not experienced unauthorized intrusions into
our internal computer systems, including portions of our internal computer systems storing information related to our platform
technology, therapeutic candidates and products, in the past, we may experience such unauthorized intrusions in the future, and
we can provide no assurances that certain sensitive and proprietary information relating to one or more of our therapeutic candidates
or products has not been, or will not in the future be, compromised. There can be no assurances we will not experience unauthorized
intrusions into our computer systems, or those of our vendors, contractors, and consultants, that we will successfully detect future
unauthorized intrusions in a timely manner, or that future unauthorized intrusions will not result in material adverse effects
on our financial condition, reputation, or business prospects. Payments related to the elimination of ransomware may materially
affect our financial condition and results of operations.
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:
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·
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be found to be toxic or ineffective;
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|
·
|
fail to receive necessary regulatory approvals;
|
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|
·
|
be difficult or impossible to manufacture on a large scale;
|
|
|
·
|
be uneconomical to market;
|
|
|
·
|
fail to be developed prior to the successful marketing of similar products by competitors; or
|
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|
·
|
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.
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.
The industries in which we are active
are evolving rapidly, and we may be unable to keep pace with changes in technology.
The
pharmaceutical and biotechnology industries are characterized by rapid technological change. This is especially true of the
data-intensive areas of such technologies. Our future success will largely depend on maintaining a competitive position in
the field of drug, therapeutics and diagnostic products discovery. If we fail to keep pace with changes in technology, our
business will be materially harmed. Rapid technological development may result in our products or technologies becoming
obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products
and technologies. Products or services offered by us could become obsolete due to the development of less expensive or more
effective drug or diagnostics discovery technologies. We may not be able to make the necessary enhancements to our
technologies to compete successfully with newly emerging technologies.
We face intense competition, and if
we are unable to compete successfully, we may never achieve profitability.
The markets for our
products and services are very competitive, and we expect our competition to increase in the future. Although we have
not identified specific companies that provide the full suite of services that we do, we compete with entities in the U.S. and
worldwide that provide products and services for the analysis of genomic information and information relating to the study of proteins
(proteomic information) or that commercializes novel genes and proteins. These include genomics, pharmaceutical and
biotechnology companies, academic and research institutions and government and other publicly funded agencies. We may
not be able to successfully compete with current and future competitors. Many of our competitors have substantially
greater capital resources, research and development staff, facilities, manufacturing and marketing experience, distribution channels
and human resources than we do. This may allow these competitors to discover or to develop products in advance of us
or of our customers.
Some of our competitors,
especially academic and research institutions and government and other publicly funded agencies, may provide for free services
or data similar to the services and data that we provide for a fee. Moreover, our competitors may obtain patent and
other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or
commercialize our discoveries, products and services. If we are unable to compete successfully against existing or potential
competitors, we may never achieve profitability.
Risks Related to Our Common Stock
As an issuer of “penny stock,”
the protection provided by the federal securities laws relating to forward looking statements does not apply to the Company.
Although federal securities
laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities
laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this
safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained
a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any
statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
Because we do not intend to pay dividends
on our common stock, holders of our common stock will benefit from an investment in our Company only if it appreciates in
value.
We have never declared
or paid any cash dividends on our common stock. We currently intend to retain the Company’s future earnings, if any, to finance
the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future. As a result,
the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that
our common stock will appreciate in value or even maintain the price at which its investors purchased their shares.
Our stock price has been, and is likely to continue to be,
highly volatile.
Our stock price could
fluctuate significantly due to a number of factors beyond our control, including:
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·
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variations in our actual or anticipated operating results;
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·
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sales of substantial amounts of our stock;
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·
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announcements about us or about our competitors, including technological innovation or new products
or services;
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·
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litigation and other developments related to our patents or other proprietary rights or those of
our competitors;
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·
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conditions in the life sciences, pharmaceuticals or genomics industries; and
|
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·
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Governmental regulation and legislation.
|
In addition, the stock
market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and
volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance
of these companies. These broad market and industry factors may decrease the market price of our common stock, regardless of our
actual operating performance.
In the past, companies
that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation.
If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s
attention and resources, which could affect our profitability.
We have identified a material weakness
in our internal accounting control over financial reporting.
Management has concluded
that our internal control over financial reporting was not effective as of December 31, 2020. Our Chief Executive Officer,
who is also serving as our Principal Executive Officer and our President who is also serving as our Principal Financial Officer,
concluded that we have material weakness in our internal control over financial reporting because we do not have an adequate
segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties
is due to the limited nature and resources of the Company.
All internal control
systems no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Risks Related to Governmental Regulation
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, which in turn
would result in adverse consequences.
Our business and the products developed
by our collaborators may be subject to governmental regulation.
New therapeutic or
diagnostic products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process
in the United States and other countries before it can be marketed. It may be several years, or longer, before any therapy
or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues. This
may delay or prevent us from becoming profitable. Changes in policies of regulatory bodies in the United States and
in other countries could increase the delay for each new therapy and diagnostic products. Even if regulatory approval is obtained,
a product on the market and its manufacturer are subject to continuing review. Discovery of previously unknown problems
with a product may result in withdrawal of the product from the market.
Although we intend
to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities
to file regulatory approval applications and generally direct the regulatory review process. We cannot be certain whether
they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all. If
they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until
clearance can be obtained, if at all. This will in turn reduce our chances of receiving various forms of payments, including
those relating to sales of marketed therapeutic or diagnostic products by them.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company does not own any real
property. We currently lease approximately 300 square feet of office space in Atlanta, Georgia, pursuant to a short-term
lease as of January 2021. We currently pay base rent in the amount of $636 per month.
Through December 31, 2020, we leased approximately 600 square
feet of office space in Atlanta, Georgia, for $2,539 per month, pursuant to a short-term lease as of August 1, 2019. In 2020, we
also leased an office in Philadelphia, Pennsylvania for $1,078 per month until June 30, 2020, pursuant to a short-term lease as
of November 1, 2019. The lease for the office in Philadelphia, Pennsylvania was renewed for a six-month period from July 1, 2020
through December 31, 2020 at a rate of $1,540 per month. That lease has expired and not been renewed.
ITEM
3. LEGAL PROCEEDINGS
Refer to Note 10 – Commitments and Contingencies to the
financial statements for discussion about current and ongoing legal proceedings.
ITEM
4. MINE SAFETY DISCLOSURES
Not Applicable.
PART III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Our executive officers and directors are:
|
Name
|
|
Age
|
|
Position
|
|
Executive Officers
|
|
|
|
|
|
George H. McGovern, III
|
|
74
|
|
Chairman and Chief Executive Officer
|
|
Hong Zhang, Ph.D.
|
|
57
|
|
Chief Science Officer
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Marty Delmonte
|
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53
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|
President, Chief Operating Officer and Director
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Non-Employee Directors
|
|
|
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William F. Fromholzer
|
|
75
|
|
Director
|
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Colleen M. Hutchinson
|
|
46
|
|
Director
|
|
Edward Morrison
|
|
48
|
|
Director
|
|
James Murphy
|
|
65
|
|
Director
|
The following sets forth the biographical information for our
executive officers and directors:
George H. McGovern, III has
been a shareholder of Health Discovery Corporation since 2008. He is currently our Chairman and Chief Executive Officer. He has
leadership experience in various industries including Internet services, health care, real estate, cellular communications and
casino hotels and gaming. He was co-founder and CEO of Laser Link.Net, Inc. until its acquisition by Covad, Inc. He was president
and CEO of Block B Cellular Corp. until its acquisition by Telephone and Data Services, Inc. He was financial adviser and board
member of American Cellular Network Corp. until its acquisition by Comcast. He has been a member of the CFA Society Philadelphia
since 1975.
Hong Zhang, Ph.D., has
been our Senior Vice President, Computational Medicine since 2004 and currently serves as our Chief Science
Officer. 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 Professor at Georgia Southern
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.
Marty Delmonte has been involved
with the Company since July 2010. On April 6, 2020, Mr. Delmonte was appointed President and Chief Operating Officer of the Company.
Mr. Delmonte has served in various capacities in his work with the Company, most recently as a member of the Board since February
2017. He will continue to serve as a member of the Board in addition to his new position. Mr. Delmonte is an accomplished
senior financial executive with over 25 years of comprehensive experience in multiple aspects of finance, accounting and treasury.
Prior to joining Health Discovery Corporation, he worked in strategic financial advisory and operational roles at several companies
and served as an executive at several major financial institutions including Bank of America, JP Morgan Chase, and SunTrust Capital
Markets. His functional areas include accounting, treasury, risk management, investments, international, compliance, tax, investor
relations, capital planning, mergers & acquisitions, debt management and financial strategies.
Mr. Delmonte has successfully passed the
National Association for Securities Dealers’ Series 7, 6, and 63 exams. In addition, the Association for Financial Professionals
recognized him as a Certified Cash Manager. He is also a frequent and highly regarded advisor on industry related topics. Mr. Delmonte
holds a Bachelor of Science degree from the Georgia Institute of Technology with a focus in Finance along with a certificate in
Economics.
William F. Fromholzer is
a retired executive with global work experience with both public and private companies. Among his positions he served as Senior
Vice President and Corporate officer of Indium Corporation of America (ICA). His primary responsibility was to expand the national
footprint to a global sales, marketing, distribution and manufacturing company serving the electronics industry. Today ICA is recognized
as a global leader in its space. Also, he was Vice President of Sales for DUSA Pharmaceuticals, a public dermatology company, whose
main drug Levulan is used to treat precancerous Actinic Keratosis. In addition, he served as a director of LaserLink.Net,
an Internet services company that was acquired by Covad Communications.
Colleen M. Hutchinson is
founder and CEO of CMH Media, LLC, a full-service medical media company that provides turn-key publishing, writing, editing, and
project management services, as well as overall communications strategies to medical associations, medical education companies,
healthcare products companies, and medical institutions. Her work includes publication management, clinical reviews, educational
enduring materials, meeting reports and summit guidelines/recommendations, consensus panel statements, and association strategic
initiatives development. Ms. Hutchinson is the daughter of George McGovern.
Recognized as a medical publishing
expert, Ms. Hutchinson has presented at national and international meetings on the subjects of medical writing and
publication. Ms. Hutchinson also produces her On the Spot columns in General Surgery News, Clinical
Oncology News, and Gastroenterology & Endoscopy News.
Edward Morrison has been
a shareholder of Health Discovery Corporation since 2009. Mr. Morrison has over twenty years’ experience as an attorney,
senior executive, and owner in privately held companies in the legal and healthcare industries. Mr. Morrison is an owner of MDA
Management, Inc. which provides management services to Morrison Dental Associates, P.C. which serves tens of thousands of patients
through locations in Georgia and South Carolina. Mr. Morrison oversees the operations of MDA Management, Inc. and Morrison Dental
Associates, P.C.
Mr. Morrison earned his undergraduate degree
in History from Boston College and his JD from Emory University School of Law. Mr. Morrison was admitted to the state bar of Georgia
in 1998, where he remains a member in good standing.
James Murphy has over 25
years’ experience as a senior financial executive in public and privately held companies in the life sciences and the media
and technology industries. Mr. Murphy holds a Bachelor of Science in Accounting with Honors from Villanova University and is a
Certified Public Accountant (active in Pennsylvania).
The directors named above will serve until
the next annual meeting of our stockholders. As there are no employment agreements with anyone at the Company, officers
hold their positions at the pleasure of the Board of Directors.
Code of Ethics
The Company has adopted a Code of Ethics
applicable to our Chief Executive Officer and President. The Code of Ethics is available without charge upon request directed to
Investor Relations, Health Discovery Corporation, 2002 Summit Blvd, NE, Suite 300, Atlanta, Georgia 30319. The Company intends
to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth various elements of compensation
for our Named Executive Officers:
|
Name and Principal Position
|
|
Year
|
|
Salary (1)
($)
|
|
|
Option Awards (3)
($)
|
|
|
Non-equity Incentive Plan Compensation ($)
|
|
|
All Other
Compensation ($)
|
|
|
Total
|
|
|
George H. McGovern, III
|
|
2020
|
|
$
|
150,000
|
|
|
$
|
62,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
232,500
|
|
|
Chairman & Chief Executive Officer
|
|
2019
|
|
$
|
150,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Zhang, Ph.D.
|
|
2020
|
|
$
|
25,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
25,500
|
|
|
Chief Science Officer
|
|
2019
|
|
$
|
25,500
|
|
|
$
|
–
|
|
|
$
|
25,000
|
|
|
$
|
–
|
|
|
$
|
50,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marty Delmonte
|
|
2020
|
|
$
|
150,000
|
(2)
|
|
$
|
56,250
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
206,250
|
|
|
President, Chief Operating Officer & Director
|
|
2019
|
|
$
|
125,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
125,000
|
|
|
(1)
|
Includes accrued wages.
|
|
(2)
|
On April 6, 2020, Mr. Delmonte was appointed President and Chief Operating Officer of the Company,
and the Company agreed to increase Mr. Delmonte’s salary by $25,000 to $150,000, retroactive to January 1, 2020.
|
|
(3)
|
Amounts shown for Mr. McGovern and Mr. Delmonte are compensation for their service as members of
the Company’s board of directors. On June 1, 2020, the Company granted to Mr. McGovern and Mr. Delmonte each an option to
purchase 5,000,000 shares and 4,500,000, respectively, of the Company’s common stock.
|
Amounts shown in this column do not reflect
dollar amounts actually received by our named executive officers. Instead, these amounts reflect the aggregate grant-date fair
value of the stock options granted, computed in accordance with the provisions of FAB ASC Topic 719. For additional details regarding
the assumptions and methodologies used to calculate the amounts reported, please see the discussion of equity awards contained
in the financial statements included elsewhere in this Annual Report on Form 10-K.
Employment Agreements
There are no Employment Agreements with
any officer or employee of the Company. All officers, employees, and consultants serve at the discretion of the Board of Directors.
Outstanding Equity Awards at Year End
The following table provides information
regarding the equity awards outstanding at December 31, 2020 held by each of our named executive officers:
|
Name
|
|
|
Vesting
Commencement
Date
|
|
|
|
Grant
Date
|
|
|
|
Number of
Securities
Underlying
Unexercised Options (#)
Exercisable
|
|
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(1)
(#)
|
|
|
|
Option
Exercise
Price ($)
|
|
|
|
Option
Expiration
Date
|
|
|
George H. McGovern, III
|
|
|
05/17/2016
|
|
|
|
05/17/2016
|
|
|
|
1,500,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.035
|
|
|
|
10/23/2027
|
|
|
|
|
|
10/23/2017
|
|
|
|
10/23/2017
|
|
|
|
3,500,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.003
|
|
|
|
05/17/2026
|
|
|
|
|
|
06/01/2020
|
|
|
|
06/01/2020
|
|
|
|
5,000,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.014
|
|
|
|
06/01/2030
|
|
|
Marty Delmonte
|
|
|
10/21/2013
|
|
|
|
10/21/2013
|
|
|
|
2,000,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.036
|
|
|
|
10/21/2023
|
|
|
|
|
|
10/23/2017
|
|
|
|
10/23/2017
|
|
|
|
3,500,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.003
|
|
|
|
10/23/2017
|
|
|
|
|
|
06/01/2020
|
|
|
|
06/01/2020
|
|
|
|
4,500,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.014
|
|
|
|
06/01/2030
|
|
|
Hong Zhang
|
|
|
10/21/2013
|
|
|
|
10/21/2013
|
|
|
|
750,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.036
|
|
|
|
10/21/2023
|
|
|
|
|
|
02/08/2016
|
|
|
|
02/08/2016
|
|
|
|
1,250,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.030
|
|
|
|
02/08/2026
|
|
|
|
(1)
|
Amounts shown in this column do not reflect dollar amounts actually received by our named executive
officers. Instead, these amounts reflect the aggregate grant-date fair value of the stock options granted, computed in accordance
with the provisions of FAB ASC Topic 719. For additional details regarding the assumptions and methodologies used to calculate
the amounts reported, please see the discussion of equity awards contained in the financial statements included elsewhere in this
Annual Report on Form 10-K.
|
Director Compensation
In connection with their election to the
Company’s Board of Directors at the Shareholder Meeting and in recognition of their continuing contributions to the Company,
on June 1, 2020, the Company granted to Mr. William Fromholzer, Ms. Colleen Hutchinson, Mr. Ed Morrison, and Mr. James Murphy each
a one-time cash payment of $20,000 as well as an option to purchase 3,000,000 shares of the Company’s common stock. These
option grants are consistent with what has been granted to other board members and management of the Company. The options immediately
vest, have an exercise price of $0.0138 and expire on June 1, 2030. The exercise price is based upon the closing price of the Company’s
common stock on the date of the option grant. The fair value of each option granted is $0.0125 and was estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.84%,
an expected life of 5 years, and volatility of 147%.
Outside directors each received a
one-time bonus of $20,000 in June of 2019 for their efforts in the success of the NeoGenomics and Intel
matters. Additionally, each outside director was awarded 2,000,000 options in June 2019 to purchase shares of the
Company’s common stock. The options fully vested on the grant date, have an exercise price of $0.07, and expire on
June 10, 2029. The fair value of each option granted is $0.0636 and was estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.84%, an
expected life of 5 years, and volatility of 149%.
Nominees for Directors
In filling vacancies and otherwise identifying
candidates for our Board of Directors, we seek individuals who will be able to guide our operations based on their
business experience, both past and present, or their education. Responsibility for our operations is centralized
within management.
Nominations of persons for election to
the Board of Directors may be made by any shareholder who complies with the notice provisions set forth in the Bylaws, which provides
that a shareholder’s notice must be delivered or mailed and received at the principal executive office of the Company not
less than thirty days before the date of the meeting; provided, however, that in the event that less than forty days’ notice
or prior public disclosure of the date is given, notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which the public announcement of the meeting date was made. Such shareholder’s
notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director,
all information relating to such person as required to be disclosed in solicitation of proxies for election of Directors made in
compliance with Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person’s written
consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder
giving the notice (A) the name and address, as they appear on the books of the Company, of such shareholder and (B) the
class and number of shares of the Company’s capital stock that are beneficially owned by such shareholder. At the request
of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Chief
Executive Officer of the Company that information required to be set forth in a shareholder’s notice of nomination which
pertains to the nominee. No person shall be eligible for election as a Director of the Company unless nominated in accordance with
the applicable provisions of the Company’s Bylaws.
2020 Director Compensation Table
The following table shows certain information
with respect to the compensation of our non-employee directors who served on our board during any part of 2020:
|
Name
|
|
Fees Earned
or Paid
in Cash
($)
|
|
|
Option
Awards ($) (1)
|
|
|
Total
|
|
|
William Fromholzer (2)
|
|
$
|
20,000
|
|
|
$
|
37,500
|
|
|
$
|
57,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colleen Hutchinson (3)
|
|
$
|
20,000
|
|
|
$
|
37,500
|
|
|
$
|
57,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward Morrison (4)
|
|
$
|
20,000
|
|
|
$
|
37,500
|
|
|
$
|
57,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Murphy (5)
|
|
$
|
20,000
|
|
|
$
|
37,500
|
|
|
$
|
57,500
|
|
|
(1)
|
Amounts shown in this column do not reflect dollar amounts actually received by our non-employee
directors. Instead, these amounts reflect the aggregate grant date fair value of the stock options granted, computed in accordance
with the provisions of FASB ASC Topic 718.
|
|
(2)
|
As of December 31, 2020, Mr. Fromholzer held outstanding options to purchase 7,000,000 shares of
our common stock.
|
|
(3)
|
As of December 31, 2020, Ms. Hutchinson held outstanding options to purchase 7,000,000 shares of
our common stock.
|
|
(4)
|
As of December 31, 2020, Mr. Morrison held outstanding options to purchase 7,000,000 shares of
our common stock.
|
|
(5)
|
As of December 31, 2020, Mr. Murphy held outstanding options to purchase 7,000,000 shares of our
common stock.
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Company does not have a stock incentive plan but rather
grants stock-based awards on an ad hoc basis as approved by the Company’s board of directors and management. These grants
are consistent with what has been granted to other board members and management of the Company.
Principal Stockholders
The following table sets forth information
concerning the beneficial ownership of our common stock as of March 19, 2021 for:
|
|
(i)
|
each person who is known to us to be the beneficial owner of more than five percent of our common
stock;
|
|
|
(ii)
|
each of our directors;
|
|
|
(iii)
|
each of our executive officers;
|
|
|
(iv)
|
all of our executive officers and directors as a group.
|
The percentage of beneficial ownership
shown in the table is based upon 404,044,937 shares of common stock outstanding as of March 19, 2021. We have determined beneficial
ownership in accordance with the rules of the Securities and Exchange Commission. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power
with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, we take into account shares of common stock issuable pursuant to
stock options or warrants that may be exercised or that are subject to vest on or before the 60th day after March 19,
2021. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for purposes
of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
Except as otherwise noted below, the address
for each person or entity listed in the table is c/o Health Discovery Corporation, 2002 Summit Blvd, NE, Suite 300, Atlanta, Georgia.
|
Name of Beneficial Owner
|
|
Shares
|
|
|
Percentage
|
|
|
George McGovern, III (1)
|
|
|
111,975,086
|
|
|
|
25.3%
|
|
|
James Dengler (2)
|
|
|
86,576,535
|
|
|
|
19.6%
|
|
|
Edward Morrison (3)
|
|
|
13,500,000
|
|
|
|
3.3%
|
|
|
Marty Delmonte (4)
|
|
|
10,000,000
|
|
|
|
2.4%
|
|
|
William F. Fromholzer (3)
|
|
|
7,000,000
|
|
|
|
1.7%
|
|
|
Colleen M. Hutchinson (3)
|
|
|
7,000,000
|
|
|
|
1.7%
|
|
|
James Murphy (3)
|
|
|
7,000,000
|
|
|
|
1.7%
|
|
|
Hong Zhang (5)
|
|
|
2,000,000
|
|
|
|
*
|
|
|
All current executive officers and directors as a group (7 persons)
|
|
|
158,475,086
|
|
|
|
32.2%
|
|
(*) Less than 1%
|
(1)
|
Includes 63,487,250 shares of the Company’s common stock; 10,495,946 shares of common stock issuable pursuant to
conversion rights of the Company’s Series D convertible preferred stock; 27,991,891 shares of common stock issuable
pursuant to warrants; and 10,000,000 shares of common stock issuable subject to options.
|
|
(2)
|
Includes 48,088,699 shares of the Company’s common stock; 10,495,946 shares of common stock issuable pursuant to
conversion rights of the Company’s Series D convertible preferred stock; and 27,991,891 shares of common stock issuable
pursuant to warrants.
|
|
(3)
|
Includes 7,000,000 shares of the Company’s common stock issuable subject to options.
|
|
(4)
|
Includes 10,000,000 shares of the Company’s common stock issuable subject to options.
|
|
(5)
|
Includes 2,000,000 shares of the Company’s common stock issuable subject to options.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company has adopted the independence
standards promulgated by the New York Stock Exchange and has made a determination that, as of December 31, 2020, the following
directors are independent according to those standards: Mr. William Fromholzer, Mr. Edward Morrison, and Mr. James Murphy.
Mr. George McGovern, Mr. Marty Delmonte and Ms. Colleen Hutchinson were not independent according to the New York Stock Exchange
independence standards.
On June 1, 2020, the Chairman of the
Board and the Company entered into an agreed upon settlement whereby accrued wages of $212,500 were immediately converted into
15,398,551 shares of the Company’s common stock at a conversion price of $0.0138.
Indemnification Agreements
The
Articles of Incorporation of the Company (the ''Articles") require the Company to indemnify its directors and officers. Therefore,
we have entered into indemnification agreements with each of our directors and with each of our executive officers. Pursuant to
the indemnification agreements, we have agreed to indemnify and hold harmless these directors and officers to the fullest extent
permitted by applicable law. The agreements generally cover expenses that a director or officer incurs or amounts that a director
or officer becomes obligated to pay because of any proceeding to which he or she is made or threatened to be made a party or participant
by reason of his or her service as a current or former director, officer, employee or agent of the Company. The agreements also
provide for the advancement of expenses to the directors and executive officers subject to specified conditions. There are certain
exceptions to our obligation to indemnify the directors and officers, including any intentional misconduct or act where the director
or officer did not in good faith believe he or she was acting in our best interests, with respect to “short-swing”
profit claims under Section 16(b) of the 1934 Act and, with certain exceptions, with respect to proceedings that he or she
initiates.
Other Transactions
We have granted stock options and/or warrants
to our named executive officers and our directors.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the fees billed by Frazier &
Deeter, LLC in 2020 and 2019:
|
Category
|
|
2020
|
|
|
2019
|
|
|
Audit fees (1)
|
|
$
|
179,500
|
|
|
$
|
–
|
|
|
Audit-related fees (2)
|
|
|
–
|
|
|
|
–
|
|
|
Tax fees (3)
|
|
|
3,000
|
|
|
|
–
|
|
|
All other fees (4)
|
|
|
–
|
|
|
|
–
|
|
|
Total fees
|
|
$
|
182,500
|
|
|
$
|
–
|
|
Audit Fees. This category
includes aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements,
review for the annual report on Form 10-K and for the limited reviews of quarterly condensed financial statements included in periodic
reports filed with the Securities and Exchange Commission, including out of pocket expenses.
Audit-Related Fees. This
category includes fees billed for professional services associated with consultation concerning financial accounting and reporting
standards.
Tax Fees. This category
includes the aggregate fees billed or to be billed for tax services, including tax compliance, tax advice and tax planning fees.
All Other Fees. This
category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered to the Company.
The services provided by the independent
auditors were pre-approved by the Board of Directors of the Company to the extent required under applicable law. The
Board of Directors of the Company requires pre-approval of all audit and allowable non-audit services.
Notes to Financial
Statements
Note 1 - BASIS OF PRESENTATION
Health Discovery Corporation (the “Company”)
is a machine learning company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that
might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical
to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition
tools. Our mission is to use our patents and clinical partnerships principally to identify patterns that can advance the science
of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech,
financial, and healthcare technology markets.
Our historical foundation lies in the molecular
diagnostics field where we have made a number of discoveries that may play a role in developing more personalized approaches to
the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“SVM”) assets in particular
have broad applicability in many other fields. Intelligently applied, our pattern recognition technology can be a portal between
enormous amounts of otherwise undecipherable data and truly meaningful discovery.
Our principal asset is our intellectual
property, which includes advanced mathematical algorithms called SVM, as well as biomarkers that we discovered by applying our
SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of
certain disease states. Our intellectual property is protected by 22 patents that have been issued or are currently pending around
the world. During the year ended December 31, 2020, nine patents expired per the terms of the original issuance.
Our business model has evolved over time
to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.
In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various
diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge
to help develop diagnostic and prognostic predictive tests; licensing of the SVM technologies directly to diagnostic companies;
and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds
commercial promise.
The accounting principles followed by the
Company and the methods of applying these principles conform with accounting principles generally accepted in the United States
of America (“GAAP”).
Liquidity and Going Concern
The Company has prepared its financial
statements on a “going concern” basis, which presumes that it will be able to realize our assets and discharge our
liabilities in the normal course of business for the foreseeable future.
The Company’s ability to continue
as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining
additional financing, successfully bringing the Company’s technologies to the market and successfully pursuing infringement
opportunities. The outcome of these matters cannot be predicted at this time. The Company’s financial statements
have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets
and liabilities that might be necessary should the Company be unable to continue in business.
If the going concern assumption was not
appropriate for the Company’s financial statements then adjustments would be necessary in the carrying value of assets and
liabilities, the reported expenses and the balance sheet classifications used. Such adjustments may be material.
At December 31, 2020, the Company had approximately
$917,000 and on March 19, 2021, the Company had approximately $750,000 cash on hand. As a result, the Company estimates cash will
be depleted in less than one year from the date that these financial statements are available to be issued, if the Company does
not generate sufficient cash to support operations.
The Company’s plan to have sufficient
cash to support operations is comprised of generating revenue through providing services related to those patents, pursuing infringement
opportunities and obtaining additional equity or debt financing. While the Company believes these efforts may increase the value
of the Company, there is no guarantee the Company will be successful in these efforts.
Estimates and assumptions
In preparing financial statements in conformity
with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements.
Actual results could differ significantly from those estimates due to risks and uncertainties, including uncertainty in the current
economic environment due to the outbreak of a novel strain of the coronavirus (“COVID-19”).
Segments
Our chief executive officer and president,
in making decisions regarding resource allocation and assessing performance, views our operations and manages our business as one
operating segment.
Note 2 – SIGNIFICANT ACCOUNTING
POLICIES
Patents
Initial costs paid to purchase patents
are capitalized and amortized using the straight-line method over the remaining life of the patent, generally 17 years, beginning
on the date the patent is issued. Annual patent maintenance costs and annual license and renewal registration fees are expensed
as period costs. If the applied for patents are abandoned or are not issued, the Company will expense the costs capitalized to
date in the period of abandonment or earlier if abandonment appears probable. The carrying value of patents is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
There was no amortization charged to operations
for the year ended December 31, 2020. As of December 31, 2020, and 2019, there were no impairments to the Company’s patent
assets, which are fully amortized. The Company has analyzed the respective carrying value of our patent portfolio at December 31,
2020 and 2019 and has concluded that the portfolio was properly valued during these periods.
Common Stock Warrants Liability
The Company has, from time to time beginning
in 2014, issued convertible preferred stock, preferred stock warrants, common stock, common stock warrants, and fully vested options
to purchase shares of common stock in excess of its available shares of underlying stock to be issued.
In the event the number of shares or warrants
of common stock granted exceeds the number of shares available if the holders exercised all of the previously issued outstanding
options and warrants, the Company accounts for this excess as a derivative which is recorded as a common stock warrants liability,
which is adjusted to fair value at the end of each reporting period. If and when the Company
authorizes sufficient shares of common stock and preferred stock, the common stock warrants liability is reclassified to equity
at the fair value of the liability at the date of reclassification. The Company accounts for the reclassification from equity
to liability (or vice versa) similar to a modification of a share-based payment award.
See further discussion in Note 6 –
Statement of Stockholders’ Equity (Deficit) and Note 7– Common Stock Warrants Liability.
Stock-based Compensation
Stock-based compensation cost is measured
at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period using the straight-line
method.
Valuation and Amortization Method
– The fair value of stock awards that do not contain a market condition target are estimated on the grant date using the
Black-Scholes option-pricing model. The fair value of options that contain a market condition, such as a specified hurdle price,
is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model. Both the
Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected
life, expected dividend yield and expected risk-free interest rates.
Expected Term – The expected
term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined
based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and
forfeitures due to departure prior to the end of the vesting schedule.
Expected Volatility – Volatility
is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected
to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent
to the expected term to estimate expected volatility
Risk-Free Interest Rate –
The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available
on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.
Cash
Cash includes cash deposited with financial institutions. Periodically,
we maintain deposits in financial institutions in excess of government-insured limits. We believe we are not exposed to significant
credit risk and to date, we have not realized any losses on these deposits.
Fair value measurement
The carrying values of our prepaid expenses,
accounts payable, accrued wages, and accrued liabilities approximate their recorded values due to the short-term nature of these
instruments.
The common stock warrants liability is
recorded based upon the number of warrants which exceed the number of common shares available to meet the exercised options and
warrants using the Black-Scholes option-pricing model.
Income Taxes
The Company accounts for income taxes using
the asset and liability method. Deferred tax assets and liabilities are recognized for future tax benefits and expenses or consequences
attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income for the years in which those temporary differences are expected to be recovered or settled.
In the event the future tax consequences
of differences between the financial reporting bases and tax bases of the Company’s assets and liabilities result in deferred
tax assets, an evaluation is made of the probability of being able to realize the future benefits indicated by such assets. A valuation
allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In assessing the probability of realizing the deferred tax assets, management considers
the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.
Revenue
Revenue is generated through the sale or
license of patented technology and processes and from services provided through development agreements. These arrangements
are generally governed by contracts that dictate responsibilities and payment terms. The Company recognizes revenues
as they are earned over the duration of a license agreement once all contractual obligations have been fulfilled. If
a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents.
Revenue is recognized under development agreements in the period the services are performed.
Under ASC 606, the Company recognizes revenue
when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects
to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines
are within the scope of ASC 606, the entity performs the following five-step analysis: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The Company only applies the five-step analysis to contracts when it is probable that the entity will collect the consideration
to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract
is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines
those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes
as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
Note 3 – NET INCOME (LOSS)
PER SHARE
Basic earnings per share (“EPS”)
is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive
potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include
outstanding stock options, convertible promissory notes payable, convertible preferred stock, and warrants.
The computation of basic and diluted earnings
per share was as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net (loss) income, in thousands
|
|
$
|
(759
|
)
|
|
$
|
1,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
397,632,390
|
|
|
|
294,642,078
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options and warrants
|
|
|
–
|
|
|
|
55,968,330
|
|
|
Convertible debt
|
|
|
–
|
|
|
|
19,306,253
|
|
|
Series D convertible preferred
stock
|
|
|
–
|
|
|
|
–
|
|
|
Weighted average shares outstanding - diluted
|
|
|
397,632,390
|
|
|
|
369,916,661
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.002
|
)
|
|
$
|
0.005
|
|
|
Diluted
|
|
$
|
(0.002
|
)
|
|
$
|
0.004
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded:
|
|
|
|
|
|
|
|
|
|
Shares issuable on conversion of options and warrants
|
|
|
47,192,095
|
|
|
|
–
|
|
|
Shares issuable on conversion of convertible debt
|
|
|
16,117,431
|
|
|
|
–
|
|
|
Shares issuable on conversion of Series D convertible
preferred stock
|
|
|
20,991,891
|
|
|
|
–
|
|
The dilutive effect of 21,300,683 and 1,382,545
options and warrants were excluded from diluted weighted average shares during years ended December 31, 2020 and 2019, respectively,
because the strike or conversion price was below the average share price during the related period.
Note 4 – STOCK-BASED COMPENSATION and
other EQUITY BASED PAYMENTS
In connection with their election to the
Company’s Board of Directors at the Annual Shareholder Meeting and in recognition of their continuing contributions to the
Company, in June 2020, the Company granted to certain of the directors each a one-time cash payment of $20,000 as well as an option
to purchase 3,000,000 shares of the Company’s common stock. Additionally, the Chairman of the Board and the President and
Chief Operating Officer were each granted an option to purchase 5,000,000 shares and 4,500,000, respectively, of the Company’s
common stock. The option grants are consistent with what has been granted to other board members and management of the Company.
The options immediately vested, have an exercise price of $0.0138 and expire on June 1, 2030. The exercise price was based
upon the closing price of the Company’s common stock on the date of the option grant. The fair value of each option granted
was $0.0125 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend
yield at 0%, risk-free interest rate of 1.84%, an expected life of 5 years, and volatility of 147%. The aggregate value of $268,000
related to the options granted was charged to stock-based compensation expense during the second quarter of 2020.
As of December 31, 2020, there was no unrecognized
cost related to stock option grants because the outstanding option awards either completed their vesting schedule or the option
awards immediately vested. As the market closing price was $0.0452 on December 31, 2020, there was $4.0 million aggregate
intrinsic value of all options and warrants outstanding and exercisable as of that date.
Stock-based compensation expense recorded
in the financial statements was the following (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Stock-based compensation
|
|
$
|
268
|
|
|
$
|
513
|
|
The following schedule summarizes stock
option information as of December 31, 2020 and 2019:
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Outstanding, December 31, 2018
|
|
|
34,375,000
|
|
|
$
|
0.0300
|
|
|
Granted
|
|
|
8,000,000
|
|
|
|
0.0700
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding, December 31, 2019
|
|
|
42,375,000
|
|
|
$
|
0.0308
|
|
|
Granted
|
|
|
21,500,000
|
|
|
|
0.0138
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding and exercisable, December 31, 2020
|
|
|
63,875,000
|
|
|
$
|
0.0245
|
|
The Company has outstanding the following
common stock warrants:
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Outstanding, December 31, 2018
|
|
|
74,000,000
|
|
|
$
|
0.0328
|
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding, December 31, 2019
|
|
|
74,000,000
|
|
|
$
|
0.0328
|
|
|
Granted
|
|
|
41,983,781
|
|
|
|
0.0103
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding, December 31, 2020
|
|
|
115,983,781
|
|
|
$
|
0.0247
|
|
Note 5 – PATENTS
The Company’s principal asset is
its intellectual property, which includes advanced mathematical algorithms called Support Vector Machines (“SVM”),
as well as biomarkers that we discovered by applying its SVM techniques to complex genetic and proteomic data. Biomarkers are biological
indicators or genetic expression signatures of certain disease states. The Company’s intellectual property is protected by
22 patents that have been issued or are currently pending around the world. During the year ended December 31, 2020, nine patents
expired per the terms of the original issuance. The remaining 22 patents have expirations ranging from 2021 to 2032.
Initial costs paid to purchase patents
are capitalized and amortized using the straight-line method over the remaining life of the patent. Amortization charged to operations
for the year ended December 31, 2019 totaled $153,000. There was no amortization charged to operations for the year ended December
31, 2020. Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs.
Note 6 – STOCKHOLDERS’ EQUITY (DEFICIT)
Authorized capital
At December 31, 2020, the Company’s
authorized capital consisted of 450,000,000 shares of common stock and 45,000,000 shares of preferred stock. In May 2020, the Company’s
Articles of Incorporation were amended to increase the number of authorized shares of common stock to 900,000,000 and to increase
the number of authorized shares of preferred stock to 90,000,000.
Series B Preferred Stock
The Company sold to individual investors
a total of 19,402,675 shares of Series B preferred stock for $1,490,015, net of associated expenses, in 2009. The
Series B preferred stock was converted into common stock of the Company in the fourth quarter of 2014, which was the fifth anniversary
of the date of issuance as outlined in the original purchase agreement.
Dividends have been accrued for the Series
B preferred stock in the amount of $373,346 as of December 31, 2014. The Company gave the Series B holders the choice of either
(1) common stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to defer payment of the
dividend in cash until the Company is able to pay, at the sole discretion of the Company. During the first quarter of 2015, $166,709
in dividends were paid with the issuance of 3,334,179 shares of common stock. The remaining accrued dividend is recorded as a current
liability in the amount of $206,637 as of December 31, 2020.
Series C Preferred Stock
In the fourth quarter of 2013, the Board
of Directors authorized the issuance of Series C preferred shares in private placement transactions. As of December 31, 2014,
and 2015, the Company had issued a total of 6,640,000 and 30,000,000 preferred shares, respectively. The Series C preferred shares
were fully subscribed in the third quarter 2015. The Company received total net proceeds of $900,000, of which $568,000 was received
during the year ended December 31, 2015. The Series C preferred shares were accompanied by $0.03 warrants and $0.03 contingency
warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first
quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were
issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock
is $0.20 for a period of thirty consecutive calendar days. The holders must also exercise fifty percent of the
warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days. The
warrants were valued at $0.022 each using the Black Scholes Method.
The Series C preferred stock were to be
converted into common stock of the Company at the option of the holder, without the payment of additional consideration by the
holder. The shares of Series C preferred stock must be converted into common stock of the Company either by the demand by the
shareholder or at the fifth anniversary of the date of issuance. During the first quarter of 2019, the Series C preferred stock
was converted to common stock.
Series D Preferred Stock
The Company’s Series D preferred
stock has the following rights and preferences:
Dividend rights: The holders of
Series D preferred stock shares pari passu with the holders of common stock in dividends payable to stockholders.
Voting rights: Each share of Series D
preferred stock is entitled to vote on all matters submitted to stockholder vote and each share has a number of votes equal to
ten votes for the same number of shares of common stock into which it is then convertible.
Conversion rights: Each share of
Series D preferred stock is convertible into shares of the Company’s common stock at a 1:1 ratio at the option of the
holder or on the ten-year anniversary of issuance, whichever occurs first.
Liquidation rights: In the event
of voluntary or involuntary liquidation, dissolution or winding up of the Company, the Series D holders receive distribution
on a pari passu basis with the holders of other preferred stockholders after payment of the preferred stock dividends payable
to the Series A preferred stockholders and before any payments to common stockholders.
In February 2020, the Company effected
the conversion of its $200,000 outstanding promissory note, plus accrued interest of $16,688, into shares of its Series D
convertible preferred stock. The note holders retain their outstanding warrants to purchase an aggregate of 41,983,781 shares of
the Company’s common stock at a weighted average price of $0.0103. Each warrant expires on July 31, 2029.
Common Stock
In June 2020, the Chairman of the Board
and the Company entered into an agreed upon settlement whereby accrued wages of $212,500 were immediately converted into 15,398,551
shares of the Company’s common stock at a conversion price of $0.0138.
All of these issuances of equity securities
were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended.
As of December 31, 2020, the Company had
179,858,781 options and warrants outstanding with exercise prices ranging from $0.003 to $0.070. In comparison, as of December
31, 2019, the Company had 116,375,000 options and warrants outstanding with exercise prices ranging from $0.003 to $0.070.
Note 7 – COMMON STOCK WARRANTS LIABILITY
The common stock warrants liability is
recorded based upon the vested number of warrants or other equity-linked instruments outstanding which exceed the number of authorized
shares available to meet the assumed exercise or conversion of such instruments at each reporting period.
The common stock warrants liability is
recorded based upon the number of warrants which exceed the number of common shares available to meet the exercised options and
warrants using the Black-Scholes option-pricing model.
In the year ended December 31, 2020, the
Company recorded other income of $992,000 related to the change in fair value of the common stock warrants liability. At December
31, 2020, the common stock warrants liability is zero as the Company has adequate authorized shares available to meet the assumed
exercise or conversion of its issued options, warrants, convertible debt and convertible preferred stock.
The following table presents a reconciliation of the Company’s
common stock warrants liability for the year ended December 31, 2020 (in thousands):
|
|
|
Common Stock Warrants Liability
|
|
|
Balance, December 31, 2018
|
|
$
|
–
|
|
|
Common stock warrants liability
|
|
|
1,898
|
|
|
Balance, December 31, 2019
|
|
$
|
1,898
|
|
|
Change in fair value of common stock warrants liability
|
|
|
(992
|
)
|
|
Reclassification of common stock warrants liability to equity
|
|
|
(906
|
)
|
|
Balance, December 31, 2020
|
|
$
|
–
|
|
The Company has determined that the common stock warrants liability
is a Level 3 measurement within the fair value hierarchy.
Note 8 – CONVERTIBLE DEBT
In October 2017, the Company issued a convertible
promissory note to Mr. George McGovern, the Chairman and CEO of the Company, and Mr. James Dengler, a Company shareholder (the
“Note Holders”), for $300,000. The promissory note contained an 8% annual interest rate, and the Note Holders had the
right to convert the principal and unpaid accrued interest of the promissory note into shares of the Company’s common stock
at a conversion price of $0.004 (“the 2017 Convertible Promissory Notes”).
In April 2019, the Company issued an additional
convertible promissory note in the amount of $200,000 to the same Note Holders for funds advanced to the Company. The promissory
note was approved by the Company’s board of directors in 2018, for funds were advanced to the Company from August 2018 through
March 2019 and the promissory note was executed in April 2019 by the Company. The additional promissory note contained an 8% annual
interest rate, and the Note Holders had the right to convert the principal and unpaid accrued interest of the promissory note
(the “2019 Convertible Promissory Note”) into shares of the Company’s Series D convertible preferred stock at
a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the
“Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending
upon the price of the Company’s common stock on the date of advancement of the loan amount. The right of conversion (optional)
was solely at the Note Holders’ discretion.
On December 31, 2019, the Note Holders
notified the Company of their election to convert both the 2017 8% Convertible Promissory Note and the 2019 Convertible Promissory
Note into shares of the Company’s common stock and Series D convertible preferred stock, respectively. As a result, the Note
Holders received 86,927,397 shares of the Company’s common stock on December 31, 2019 and 20,991,891 shares of Series D convertible
preferred stock in February 2020.
In June 2020, an additional $212,000 in
accrued wages was converted into a convertible promissory note in the same amount with our chief executive officer. The promissory
note and accrued interest are convertible into common stock of the Company at a conversion price of $0.0138. The conversion price
is based upon the closing price of the Company’s common stock on June 1, 2020. The promissory note bears interest at an annual
rate of 8%.
Note 9 – INCOME TAXES
The Company has incurred net losses since
inception leading to significant net operating loss ("NOL") carryforwards. Because we have determined that it is more
likely than not we will be unable to realize the benefit of any deferred tax assets ("DTAs"), we have recorded a full
valuation allowance against those DTA’s. Consequently, we have not recorded income tax expense or benefit for the years ending
December 31, 2020 and 2019.
The Company has unused net operating loss
carryforwards of approximately $26.6 million as of December 31, 2020 that are available to offset future income tax expense. The
net operating losses will begin to expire in 2021.
Based on our evaluation of tax
positions, we have concluded that there are no significant uncertain tax positions requiring recognition in its financial
statements. The Company’s evaluation was performed for all tax years, which remain subject to examination and
adjustment, by major tax jurisdictions as of December 31, 2020. The Company is generally no longer subject to U.S. federal,
state, and local, or non-US income tax examinations for the years before 2013.
Note 10 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company does not own any real
property. The Company leases approximately 300 square feet of office space in Atlanta, Georgia, pursuant to a short-term
lease as of January 2021. The Company currently pays base rent in the amount of $636 per month.
Through December 31, 2020, we leased approximately
600 square feet of office space in Atlanta, Georgia, for $2,539 per month, pursuant to a short-term lease as of August 1, 2019.
In 2020, we also leased an office in Philadelphia, Pennsylvania for $1,078 per month until June 30, 2020, pursuant to a short-term
lease as of November 1, 2019. The lease for the office in Philadelphia, Pennsylvania was renewed for a six-month period from July
1, 2020 through December 31, 2020 at a rate of $1,540 per month. That lease has expired and not been renewed.
Legal Proceedings
Intel Matter
In September 2016, the Company initiated
an Interference proceeding between the Company and Intel Corporation (“Intel”) with United States Patent and Trademark
Office (“USPTO”) for Interference between the Company’s pending patent application covering SVM-Recursive Feature
Elimination (“SVM-RFE”) and Intel’s Patent No. 7,685,077, entitled “Recursive Feature Eliminating
Method based on a Support Vector Machine”.
On February 27, 2019, the USPTO ruled
in favor of the Company on the SVM-RFE Patents. The Patent Trial and Appeal Board of the USPTO issued its decision, finding that
the Company is entitled to claim exclusive rights to the SVM-RFE technology. The decision, issued by Administrative Patent Judge
James Moore, ordered Intel’s patent to be cancelled. The decision also dismissed Intel’s motions challenging the validity
of the Company’s pending claims and issued patents covering SVM-RFE.
On July 23, 2020, the Company filed
an infringement lawsuit against Intel. This infringement suit pertains to the Company’s SVM-RFE. The lawsuit was filed in
the United States District Court for the Western District of Texas, Waco Division. On February 27, 2021, Intel filed a Petition
for Inter Partes Review (“IPR”) of HDC’s SVM-RFE with The Patent Trial and Appeal Board of the USPTO.
The Company is currently in the process of evaluating the IPR and formulating a response.
The Company recorded $139,000 in legal
costs related to this matter in 2020 and none in 2019.
Quirk and Bear Matter
On February 7, 2020, two shareholders
of the Company, William Quirk (“Quirk”) and Cindy Bear (“Bear”), filed a motion for a temporary restraining
order and preliminary injunction in DeKalb County Superior Court. Among the items in the motion, Quirk and Bear requested to have
a special meeting of the shareholders and Quirk and Bear alleged misconduct by the Company and its directors.
On March 2, 2020, Quirk and Bear filed
a notice of dismissal in DeKalb County. Quirk and Bear subsequently filed a new lawsuit in Fulton County Superior Court based on
substantially similar allegations and seeking similar relief. On March 4, 2020, the Fulton County court ordered a hearing on the
emergency motion for a temporary restraining order against the Company for the following day.
At the hearing on March 5, 2020, Quirk
and Bear presented their version of the facts through affidavits submitted by both Quirk and Bear, arguing that the affidavits
supported the emergency relief they sought. The judge denied the motion and did not enter a temporary restraining order. The court
set an evidentiary hearing on Quirk and Bear’s motion for a preliminary injunction for March 27, 2020. Due to the COVID-19
pandemic and multiple requests by Quirk and Bear, the scheduling of the hearing was cancelled and has never taken place.
On September 2, 2020, the Company moved
to dismiss the complaint on the grounds that Quirk and Bear lacked standing and failed to state claims for relief. Facing the Company’s
motion to dismiss, on September 23, 2020, Quirk voluntarily dismissed the Fulton County case—his second dismissal of these
claims.
On September 25, 2020, the Company filed,
among other documents, a Motion for Attorney’s Fees and Expenses. The Company’s motion is made pursuant to O.C.G.A.
§ 9-11-41(a)(3), which states “the filing of a second notice of dismissal operates as an adjudication upon the merits.”
Additionally, the Company noted in its motion that Mr. Quirk’s claims lacked substantial justification, were commenced and
maintained without reasonable cause or for an improper purpose, and the Company’s 2020 attorneys’ fees and expenses
of litigation in the amount of $216,000 are reasonable. For strategic purposes, in November 2020, the Company elected to withdraw
this motion against Quirk, without prejudice to renew as may be appropriate.
Bear remains a plaintiff in the case. The
Company firmly denies Bear’s claims and will continue to vigorously defend itself against these unsubstantiated and unjustified
claims. Additionally, Bear has been notified of the Company’s intent to pursue abusive litigation claims against Bear as
a result of these claims.
Due to Bear’s non-compliance with
court-ordered discovery, the Company filed a Motion for Involuntary Dismissal of Plaintiff’s Complaint with Prejudice and
Incorporated Memorandum of Law on March 2, 2021. Among the requests in the motion, the Company asked the court to award HDC its
attorneys’ fees and costs against Bear as a result of what the Company believes is a wasteful, baseless lawsuit that is a
clear example of abusive litigation.
The Company denies all allegations of improper
conduct in the complaint and will continue to defend itself against all allegations. Although the Company believes that it
will ultimately be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should
Bear be successful, the outcome could have a material adverse effect on the Company.
The Company recorded $216,000 in legal costs related to this matter in 2020
and none in 2019. The Company has not recorded a liability for this matter as of December 31, 2020.
Venning Matter
On September 24, 2020, the Company accepted
service of a lawsuit filed by Laurie Venning (“Venning”) and one of his companies, Vennwest Global Technologies, Inc.
(“Vennwest”) from Alberta, Canada. According to recent publications, Venning is involved in additional lawsuits, one
of which is against his formal legal counsel, Dentons, who has countersued Venning.
The Vennwest lawsuit contains virtually
identical claims against the Company that Quirk and Bear have alleged. In addition, Vennwest is represented by the same law firm
that previously withdrew its representation of Bear and Quirk in their lawsuits. As Quirk’s dismissal reflects, the Company
believes these claims are without merit and serve only to deplete the Company’s resources to the detriment of its shareholders.
Similar to the Bear matter, the Company will vigorously defend itself against these baseless claims and evaluate all options against
the plaintiffs including, but not limited to, pursuing counterclaims.
On November 2, 2020, HDC moved to dismiss
the complaint or stay the action pending the conclusion of the Quirk and Bear case, on the grounds that the first-filed derivative
case would serve as res judicata to preclude the later-filed case. On November 30, Vennwest filed its response and on December
15, HDC filed its reply. The motion remains pending.
The Company denies all allegations of improper
conduct in the complaint and will continue to defend itself against all allegations. Although the Company believes that it
will ultimately be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should
Venning and Vennwest be successful, the outcome could have a material adverse effect on the Company.
The Company recorded $20,000 in legal costs
related to this matter in 2020 and none in 2019.
Note 11 – RECENT ACCOUNTING PRONOUNCEMENTS
Financial Instruments – Credit Losses
In November 2019, the FASB issued
ASU No. 2019-10 which provides a framework to stagger effective dates for future major accounting standards and amends the
effective dates for certain new accounting standards, including ASU No. 2016-13, “Credit Losses,” to give implementation
relief. The new standard, as amended, will replace the incurred loss impairment methodology under current GAAP with a methodology
that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivable,
loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through
an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted
upon the effective date for the Company beginning January 1, 2023. Adoption of the standard will be applied using a modified
retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align the Company’s
credit loss methodology with the new standard. The Company is currently evaluating the effects this standard will have, if any,
on its financial position, results of operations, and cash flows.
Income Taxes
On December 18, 2019, the FASB issued
ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This new guidance simplifies
the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intra period
tax allocation when there is a loss from continuing operations and income/gain from other items; and the exception to the general
methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The new guidance also simplifies the accounting for income taxes under certain circumstances such as requiring that an entity recognize
a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based
tax; requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination
in which the book goodwill was originally recognized and when it should be considered a separate transaction; and requiring that
an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim
period that includes the enactment date. This standard will be effective for the Company on January 1, 2021. Based on the
Company’s evaluation, this standard will not have a material impact on its financial position, results of operations, and
cash flows.
Note 12 – SUBSEQUENT EVENTS AND COVID-19
The
Company has evaluated subsequent events occurring through the date that the financial statements were available to be issued,
for events requiring recording or disclosure in the December 31, 2020 financial statements. Other than disclosed earlier in
this Annual Report on Form 10-K, there were no material events or transactions occurring during this period requiring
recognition or disclosure.
In
March 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a pandemic and the President of the
United States declared it a national emergency. The COVID-19 pandemic remains a rapidly evolving situation. The extent
of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and
spread of the outbreak within the markets in which we operate, government actions and programs, and the related impact on consumer
confidence and spending, all of which are highly uncertain.