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EX-10.10(B) - EXHIBIT 10.10(B) - HEALTH DISCOVERY CORPex10-10b.htm
EX-10.10(A) - EXHIBIT 10.10(A) - HEALTH DISCOVERY CORPex10-10a.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2009
   
OR
   
o
TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                    to
 
Commission File No. 333-62216
 

 
HEALTH DISCOVERY CORPORATION
(Name of Registrant as Specified in its charter)
 
Georgia
 
74-3002154
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
2 East Bryan Street, Suite #601, Savannah, GA
 
31401
(Address of principal executive offices)
 
(Zip Code)
 
(912) 443-1987
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12 (b) of the Exchange Act:
None
 
Securities Registered Pursuant to Section 12 (g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
 
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
         
 
Large Accelerated Filer
o
Accelerated Filer o
 
 
Non-accelerated Filer
o
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No x
 
The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2009 was approximately $14,522,495.
 
As of March 22, 2010, there were 210,723,486 shares of common stock outstanding, no shares of Series A Preferred Stock outstanding, and 19,402,675 shares of Series B Preferred Stock are outstanding.
 


 
 
 
 
 
PART I
 
ITEM 1. BUSINESS
 
Our History
 
We were organized under the name Direct Wireless Communications, Inc. in April 2001 by Direct Wireless Corporation, which licensed to us its technology for a wireless telephone.  In October 2001, Direct Wireless Corporation, then our sole stockholder, pursuant to an effective registration statement under the Securities Act of 1933, distributed its entire holdings of our common stock as a stock dividend to its stockholders.  As a result of the dividend, Direct Wireless Corporation ceased to own any of our equity securities.  The negative events that occurred over the next several years in the communications industry made it difficult for us to fund the advancement of our communication platform.  As a result, we made the decision to strategically change the overall direction of our intended business activities.
 
On August 26, 2003, we acquired all of the assets of The Barnhill Group, LLC, which was owned by Stephen D. Barnhill, M.D.  Dr. Barnhill is a physician trained in laboratory medicine and clinical pathology.  He developed artificial intelligence and pattern recognition computational techniques today used in medicine, genomics, proteomics, diagnostics, drug discovery and other fields of scientific endeavor.  Following the acquisition, Dr. Barnhill became our Chief Executive Officer and Chairman of our Board of Directors.  Also, immediately following our acquisition of the assets of The Barnhill Group, LLC and the change in strategic direction of the Company, our licensing rights to the telecommunications technology previously granted by Direct Wireless Corporation were terminated and all payment obligations to Direct Wireless Corporation were terminated.
 
Subsequently, we amended our charter to change our name to Health Discovery Corporation (“HDC” or the “Company”) on November 6, 2003, at which time the new trading symbol (HDVY) became effective.
 
On December 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented Fractal Genomics Modeling (“FGM”) software, through the issuance of 3,825,000 common shares of the Company and the issuance of a $500,000 note payable, all of which has been paid.
 
On July 30, 2004, we began purchasing rights to a portfolio of 71 patents and pending patent applications, including patents on the use of Support Vector Machines, or SVMs, and other machine learning tools useful for diagnostic and drug discovery (the “SVM Portfolio”).  On May 6, 2005, we acquired the remaining interest in the SVM Portfolio from a group of unrelated third parties.
 
Effective September 26, 2004, we were assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement is associated with the SVM Portfolio. We agreed to pay minimum royalty fees to Lucent, which increases based on the revenue of each licensed product that is sold, leased, or put into use by the Company. The license granted will continue for the entire unexpired term of Lucent’s patents.
 
On July 12, 2007, we completed our reincorporation in Georgia by effecting a conversion in our legal domicile from Texas to Georgia.  Our business, assets, liabilities, net worth and headquarters were unchanged as a result of the conversion, and our directors and officers prior to the conversion continued to serve after the conversion.  In connection with the conversion, the Company’s shares were converted on a one-for-one basis.
 
On October 9, 2007, we amended our Articles of Incorporation to set forth the rights and preferences of the Series A Preferred Stock.  All outstanding shares of Series A Preferred Stock were converted on a one-for-one basis into shares of our Common Stock, no par value (the “Common Stock”) on November 4, 2009.
 
 
 

 
 
On March 4, 2008, we formed two wholly owned subsidiaries, SVM Technology Inc., a Georgia corporation, and SVM Technology Inc., a Delaware corporation.  We anticipate that we will use each of these subsidiaries to expand our business model by applying SVM technology outside of scientific discovery in the healthcare arena.
 
On March 30, 2009, we amended our Articles of Incorporation to provide the rights and preferences of the Series B Preferred Stock, including the right to receive dividends, including special dividends, the right to vote on matters presented to holders of Common Stock, a preference right in the event of liquidation, and the right to convert the Series B Preferred Stock into Common Stock.  On November 13, 2009 we further amended and restated our Articles of Incorporation to provide for the rights and preferences of the Series B Preferred Stock as more fully described on the Amended and Restated Articles of Amendment to Articles of Incorporation attached to this Form 10-K as Exhibit 3.1(c).
 
Our Company Overview
 
HDC is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the emerging field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.  With our historical foundation in the molecular diagnostics field, we have made a number of important discoveries that may play a critical role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular, have broad applicability in many other fields.  HDC’s assets, the pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
 
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and homeland security markets.
 
Our Company’s principal asset is its intellectual property, which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by more than 71 patents that have been issued or are currently pending around the world.
 
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.  In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies.  Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop biomarkers for use as companion diagnostics, surrogate biomarkers, and diagnostic and prognostic predictive tests; licensure of the SVM and FGM technologies directly to diagnostic and pharmaceutical companies; and, the formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
 
Our Principal Market
 
The principal healthcare market for our pattern recognition technology and biomarker discoveries is medical diagnostics, particularly the rapidly growing field of molecular diagnostics.  The market consists of two basic types of diagnostic procedures: in vitro tests performed on a patient’s fluid or tissue samples and in vivo tests performed directly on the body, including blood pressure monitoring and imaging analysis such as x-rays.  In vitro diagnostics (IVD) can be further divided into several major segments, including clinical chemistry, immunochemistry, hematology/cytometry, microbiology, and molecular diagnostics.
 
 
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The IVD portion of the diagnostics market currently accounts for over $31 billion in sales worldwide.  Today, the molecular diagnostics segment represents a fraction of the IVD revenues with about $2.5 billion in sales, but it is widely considered to be the fastest growing segment, estimated at a 20-25% compounded annual growth rate, mainly in the U.S. and EU markets, versus 6-7% for IVD as a whole.  It is difficult to accurately assess the size of this segment since many countries do not have reference laboratories external to hospitals.  Areas of particular growth include infectious diseases, oncology, genetic diseases, and pharmacogenetic analyses.  Companies involved in this space include several major pharmaceutical and diversified corporations, including Roche Holdings Ltd., Abbott Laboratories, Inc., and Johnson & Johnson. Siemens AG and General Electric Company operate medical imaging segments that are expanding in diagnostics.  Other market players include large technology companies like Becton, Dickinson and Company, Beckman Coulter, Inc. and Bio-Rad Laboratories, Inc.
 
IVDs have been established as effective tools for all aspects of disease management, especially in areas of unmet clinical need.  Such tests have been developed for screening and prognosis as well as for applications, such as determination of genetic predisposition to disease, detection of presymptomatic disease, and prediction of individual drug response.
 
Molecular Diagnostics
 
Within the overall IVD market, the molecular diagnostics segment is expected to expand dramatically, largely attributable to advances in genomics and proteomics. Primary market drivers include the addition of new diagnostic tests in high volume testing areas coupled with the introduction of new instrumentation that provide greater ease, speed, and quality in test performance.  Given its annualized growth rate, the potential for molecular diagnostics is particularly impressive in the U.S., which represents the largest commercial market with the most favorable conditions for entry and marketing.
 
Borrowing from the two disciplines of genomics and proteomics, molecular diagnostics categorizes cancer and other diseases using technology such as mass spectrometry and gene chips.  Genomics is the study of all the genes in a cell or organism, and proteomics is the study of all the proteins in a cell or organism.  Molecular diagnostics determines how these genes and proteins interact in patients by focusing on patterns in different types of healthy and diseased patient cells.  Molecular diagnostics uncover these genomic and proteomic changes and capture this information as expression patterns.  Also called molecular signatures, these expression patterns improve clinicians ability to diagnose cancer when it is less advanced, predict which patients will respond to certain treatments, predict cancer recurrence risk, and select appropriate treatment for individual patients.
 
Molecular diagnostics can facilitate early, accurate screening and prediction of diseases in their asymptomatic stages, years before symptoms manifest or diseases actually begin.  This allows intervention to begin earlier, perhaps preventing the disease entirely.  Early intervention will allow the healthcare system to encompass both preventative and reactive medicine, improving overall healthcare efficiency and possibly reducing systemic healthcare expenditures.
 
The molecular diagnostics industry is an increasingly powerful healthcare participant with tremendous potential.  It is characterized by a very diverse, constantly changing technology base that continuously produces new opportunities and applications.  Advances in polymerase chain reaction (“PCR”), multiplexing, sequencing and other technologies are propelling both new and old companies forward with novel capabilities. Similarly, a growing understanding of the molecular basis of cancer and other chronic diseases has awakened new realms of medicine to the possibilities of molecular diagnostic testing.
 
 
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Clinicians have discovered that molecular diagnostics have many uses beyond just the creation of new screening and diagnostic tools.  Expression patterns can also provide information for the design of new cancer treatments, monitor the treatment’s effectiveness as it is studied in a clinical trial, and even predict the patient’s response to a new treatment.  In addition to its importance in addressing the many kinds of cancer, molecular diagnostics will likely become an important technology for detecting resistance to antibiotics, a major hazard in the hospital setting.  In the future, molecular tests should be able to determine within two to three hours not only the nature of an infection, but also therapeutic selection and any potential resistance.
 
The molecular diagnostics market as a whole is experiencing growth, rapidly changing technology and intense competition.  New tests and new instruments to perform automated analysis continue to expand the capabilities of companies in this industry.  The identification and validation of novel genes, gene products, and biomarkers results in a potential market for diagnostic tests to identify such genes, gene products and biomarkers.  The market includes sales of reagents, instruments, and kits to clinical laboratories and research reagents that can be used by labs to develop their own in-house diagnostic tests.  It also includes testing services by those clinical labs that have developed their own products, plus diagnostics companies that operate their own branded, certified testing services.
 
Molecular diagnostic tests typically analyze DNA, RNA, or protein biomarkers (analytes) to identify a disease, determine its course, evaluate response to therapy, or predict individual predisposition to a disease.  The techniques applied involve analysis of DNA sequences, DNA methylation patterns, gene expression profiles, proteins, protein expression, or combinations of these biomarkers.  Such biomarkers provide direct information about genotypic and/or phenotypic changes associated with specific diseases or responses to treatment.  Biomarker analysis has also become an important tool in drug discovery, preclinical drug development, and patient monitoring during clinical trials.
 
Most molecular diagnostics currently on the market are primarily single-analyte tests involving the detection of a single gene or protein.  However, many disease-related processes are multifactorial, involving the abnormal expression of multiple genes or proteins.  Second-generation molecular diagnostics are anticipated to utilize novel detection technologies and multiplexing platforms to allow the measurement of a large number of analytes simultaneously.  These innovations within the industry will increasingly utilize multiplexing platforms such as DNA microarrays that perform parallel biomarker analysis.
 
The market has been driven by transition to fully automated systems, real time amplification, and growing development of point-of-care platforms.  Industry experts estimate that future growth will stem from emerging applications like genotyping for identifying drug resistant strains; bioterrorism testing applications within infectious disease; disease diagnostics and prognostic assays for disease applications like sepsis and nosocomial infections, such as MRSA, cancer, cardiovascular disease, and Alzheimer’s disease; diagnosis of inherited disorders; and theranostics companion diagnostics.
 
Genomic testing to determine diagnosis, therapeutic selection and response, and preventative measures is an important segment of the overall IVD market.  Although this segment is small today, it is an extremely fast-growing component.
 
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Using companion diagnostics in patient care can substantially improve patient outcomes and pave the way for more personalized, targeted medicine by reducing both misdiagnoses and adverse reactions, and by eliminating unnecessary and expensive downstream tests.  Today, patient dosage levels are based on age, sex, and weight, as determined by empirical studies. However, specific drug metabolism may be as individualized as one’s fingerprint.  In the future, molecular diagnostics may be able to direct physicians to the right drugs for every patient, no matter what the illness.
 
This trend towards personalized medicine may ultimately lead to the reduction of overall healthcare expenditures.  What is known as a surrogate molecular marker may now be substituted for the lengthy process of comparing the effects of a prospective new drug versus a placebo on the ultimate outcome of a disease.  As a result, a drug’s effectiveness against the disease process in question may be monitored more efficiently by evaluating the presence or absence of a specific biomarker, thereby avoiding failures late in the research and development process as well as the threat of recalls.  One example of the successful application of biomarker data to therapeutic evaluation is the use of blood cholesterol levels to evaluate the effectiveness of cholesterol lowering drugs.  This approach has the potential for creating a revolutionary new paradigm in the conduct of clinical trials worldwide.
 
From a demographic standpoint, 12% of the U.S. population was 65 years old or older in 2000. By 2030, that portion of the population is anticipated to grow to 20%, burdening the healthcare system with increased numbers of cardiovascular, neurological, and other age-related diseases.   Age-related conditions are expected to contribute to the health care market that may provide an opportunity to market greater product development and molecular tests.
 
Demand for diagnostics addressing the pharmacogenetic testing segment (i.e. companion diagnostics and surrogate biomarkers) are expected to drive market growth in the years ahead.  Pharmacogenetics broadly relates to the study of genetic variations and their application to drug discovery to provide personalized therapy.  Currently the second largest market sector behind diagnostics for infectious diseases, the pharmacogenetic sector of the molecular diagnostics market is projected to grow rapidly.
 
The Role of HDC’s Technology in Molecular Diagnostics
 
Our pattern recognition technology offers pharmaceutical companies a key tool as they approach drug discovery in this new era of personalized medicine.  Accordingly, our marketing efforts are focused on utilizing our technology in partnership with many of the world’s leading pharmaceutical and life-sciences companies.  Our primary commercialization strategy for our technology and discoveries is to enter into both licensing agreements and joint development opportunities that feature up-front license fees, fee-for-service development revenue, milestone payments, and royalty streams.  We believe the pharmaceutical market offers us a promising commercial opportunity for the application of our technology, as the pharmaceutical industry is characterized by costly R&D efforts to create new patent-protected products.
 
The use of HDC’s SVM technology and our discovered biomarkers may help pharmaceutical companies develop and evaluate new drugs and medical therapies in less time and at lower cost.  According to the lobby group PhRMA, only 1 of every 10,000 potential medicines investigated by America’s drug companies survives the research and development process and is approved for patient use by the U.S. Food and Drug Administration (FDA).  On average, the drug developmental process can take up to 15 years in research and development, with costs approaching many hundreds of millions of dollars. This extended timeframe and enormous expense has led to an emphasis on the development of “blockbuster” drugs.
 
 
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Within the drug discovery R&D process, biomarkers like ours can help pharmaceutical companies identify disease targets and pathways and validate mechanisms of drug action.  They may also serve as pharmacodynamic indicators of drug activity, drug response, and drug toxicity in clinical development.  Biomarkers may also be used to help avoid new drug failures in late stage trials.  Outside of the pharmaceutical market, the use of biomarkers can result in earlier detection of disease, and improved prognosis of therapeutic outcome.
 
We consistently work to influence the evolving relationship between diagnostics and monitoring patients for therapeutic outcome.  In February 2007, the FDA provided 510(k) clearance for MammoPrint, Agendia B.V.’s multi-gene expression breast cancer prognosis test.  We believe this indicates the acceptance of the field of molecular diagnostics and highlighted the growing importance of personalized medicine.  In particular, the advent of molecular diagnostics has led to the possibility of a completely new paradigm in the care of patients suffering from cancer and other diseases.
 
Current diagnostic tools, such as blood marker-based immunoassays, imaging techniques, and biopsy analyses, provide valuable information and have played an important role in the successful treatment of cancer patients, but are not without limitations. We believe there is a market for advanced diagnostic and prognostic tests that can provide meaningful information, screen for cancer, detect early recurrence, and monitor progression and therapeutic response in real time.  HDC’s pattern recognition technology can play a critical role in the development of these tests because an advanced pattern recognition technique such as SVM technology is required for this type of discovery.
 
Working with recognized diagnostic and pharmaceutical partners, our goal is to develop a product line of newly discovered biomarker signatures and pathways that can be found in human genes and genetic variations, as well as gene, protein and metabolite expression differences.  In addition, we market our expertise in the design of clinical trials for companion diagnostics to substantiate the clinical validity and commercial utility of those biomarkers.  We also market the potent combination of our intellectual property and intellectual prowess to our prospective collaborative partners.  As inventors of the SVM technology, our world renowned mathematicians offer these companies the strongest possible development team for their drug discovery, diagnostic test or other applications.
 
Our Technologies and Discoveries
 
HDC owns a patent portfolio of machine learning technology, including certain pioneer patents on SVM.  We also consult with many of the physicians, clinical specialists and mathematicians responsible for developing and filing the pioneer neural network and SVM patents for the analysis of clinical data.
 
The Company’s SVM technology is commonly considered within the context of artificial intelligence.  This is a branch of computer science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development of algorithms and techniques that allow computers to learn.  Pattern recognition is machine learning with a wide spectrum of applications including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object recognition in computer vision, and robot locomotion.
 
SVM Overview
 
SVMs are mathematical algorithms that allow computers to sift through large, complex datasets to identify patterns.  SVMs are widely acknowledged for their ability to discover hidden relationships in these complex datasets.  With the ability to handle what is known as infinite dimensional space, SVMs are broadly considered to be superior to neural networks and other mathematical techniques.  SVM is a core machine learning technology with strong theoretical foundations and excellent empirical successes.
 
 
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Since their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the Statistical Learning Theory developed by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory Board, SVMs quickly gained attention from the math and science communities due to a number of theoretical and computational merits.  This development advanced a new framework for modeling learning algorithms.  Within this framework, the fields of machine learning and statistics were merged, introducing powerful algorithms designed to handle the difficulties of prior computational techniques.
 
The new generation of learning algorithms that were developed based on this theory has proved to be remarkably resistant to the problems imposed by noisy data and high dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization ability.  SVMs have been validated in hundreds of independent academic publications and presentations.  In recognition for his work, Professor Vapnik received the prestigious Alexander von Humboldt Prize from the German government honoring foreign scientists and scholars for lifetime achievement.
 
SVMs have become widely established as one of the leading approaches to pattern recognition and machine learning worldwide and are replacing neural networks in a variety of fields, including engineering, information retrieval and bioinformatics.  This technology has been incorporated into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies.  Educational and research institutions throughout the world have successfully applied SVMs to a wide array of applications, including gene and protein expression analysis, medical image analysis, flow cytometry, and mass spectrometry.
 
Recursive Feature Elimination - Support Vector Machine Overview
 
Recursive Feature Elimination (RFE-SVM) is an application of SVM that was created by HDC’s Chief Executive Officer and members of its Scientific Advisory Board to find discriminate relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns – for instance, a biomarker/genetic expression signature of a disease.  The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute most to the desired results.  The Company believes that its four RFE-SVM patents are currently the only RFE patents issued in the world.
 
Using RFE-SVM, we have been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed. In one micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence.  It has been shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool.  HDC’s scientists believe that these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with the pharmacogenetic and toxicological profiling of patients.  The RFE-SVM method is also capable of finding those specific genes and proteins that are unhindered by ever-increasing patent protection.
 
 
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Fractal Genomic Modeling Overview
 
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software.  The fractal technology is used to find discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease versus normal tissues.
 
The Fractal Genomic Modeling (“FGM”) data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis and prevention of certain diseases. HDC scientists believe that these analytic methods are effective for finding genes implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a host of other diseases, as well as the pharmacogenetic profiling of patients.
 
FGM technology is designed to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM uses a new approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction and analysis of whatever process is the particular object of study. Two important concepts behind FGM technology are the notions of scale-free networks and self-similarity.
 
Our Scientific Advisory Board
 
Our Scientific Advisory Board is comprised of scientists with vast experience in the fields of mathematics and medicine.  The members of the Scientific Advisory Board are Kary Mullis, Ph.D., winner of the Nobel Prize for Chemistry for discovering PCR (1993), Vladmir Vapnik, Ph.D., creator of SVMs and winner of the Humboldt Research Award, Isabelle Guyon, Ph.D., co-inventor of the first patent for SVMs, Nitesh Chawla, Ph.D., Assistant Professor in the Department of Computer Science and Engineering and Co-Director of the Interdisciplinary Center for Network Science and Applications at the University of Notre Dame, Ramananda K. Madyastha, M.D., Ph.D, recipient of the Raja Ravi Sher Singh of Kalsia Memorial Cancer Research Prize for outstanding contributions in the field of cancer research,  and Bernhard Scholköpf, Ph.D., director at the Max Plank Institute for Biological Cybernetics in Tubingen, Germany and an elected member of the Max Plank Society.
 
Our Scientific Achievements
 
Our Chief Executive Officer and members of our Scientific Advisory Board are experienced in the design, analysis and application of machine learning technology, having invented many of the concepts and methodologies used to exploit domain knowledge.  In addition, through pattern recognition, our Chief Executive Officer and members of our Scientific Advisory Board have identified and patent-protected biomarkers as possible treatment advances for several diseases, including Benign Prostatic Hyperplasia (BPH), prostate cancer, leukemia, colon cancer and breast cancer.
 
Benign Prostatic Hyperplasia (BPH)
 
HDC has identified and patent-protected a subset of genes that separates benign prostatic hyperplasia (BPH) from prostate cancer with a high degree of accuracy.  This same set of genes also separated BPH from normal tissue patterns, indicating that BPH is a disease with molecular characteristics of its own.  This discovery could be used to develop a new non-invasive diagnostic test for BPH, which does not currently exist, as well as a completely new type of therapy for patients with this disease.  This patent-protected gene set was developed in association with an international pharmaceutical company to be used as a surrogate biomarker for their clinical trial evaluating a new BPH drug.
 
 
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BPH is a non-cancerous enlargement of the prostate gland that occurs as men age.  The enlargement often leads to obstruction in the flow of urine through the urethra that passes through the prostate gland. BPH is a common condition, representing a global treatment market of almost $4 billion annually growing by 12% per year in fixed-rate US dollar terms.  According to the National Institutes of Health (NIH), BPH affects more than 50% of men over age 60 and as many as 90% of men over the age of 70.  While BPH does not cause prostate cancer, both may be found together.
 
Prostate Cancer
 
HDC has identified, patent-protected and recently licensed a genetic biomarker signature that identifies clinically significant high grade prostate cancer cells based on analysis of tissue samples.  Upon the achievement of successful validation, the Company’s test may be used to analyze patients with elevated PSA or abnormal rectal exams, with negative biopsy results to determine if there is genomic evidence of grade three or higher cancer cells present in biopsy tissue, indicating the presence of a cancer potentially missed by the biopsy.  In 2008 we, Clarient, Inc. and an internationally renowned US academic cancer center successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test.  We were very pleased with the results of the clinical trial and our results were recently published in the respected peer-reviewed journal Uro Today International, and based on these results, the tissue-based prostate cancer test was made commercially available at Clarient. For additional developments on the prostate cancer test, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation, Operational Activities.
 
The National Cancer Institute (NCI) estimates that more than 186,000 new cases of prostate cancer will be diagnosed in the U.S. in 2008, with more than 28,660 deaths.  There are approximately 50 million PSA tests performed worldwide each year, half of which are performed in the U.S.  The PSA test sells in the U.S. national clinical laboratories for approximately $100 per test.  In a peer-reviewed paper recently published in the New England Journal of Medicine, the PSA test was shown to be an ineffective prostate cancer screening test, leaving open the opportunity for a better test to replace the PSA test as a screening tool for prostate cancer.  The Company’s prostate cancer test was the subject of a peer-reviewed paper published in the August 2009 edition of UroToday International, a respected international urology journal.
 
Leukemia
 
HDC has identified and patent-protected a set of leukemia genes that can separate ALL-T-cell leukemia from ALL-B-cell leukemia with a high degree of accuracy.  The Company collaborated with a prominent cancer research hospital to analyze a gene expression database to identify new biomarkers and pathways involved in leukemia.  The Company intends to further validate this finding in anticipation of developing a molecular diagnostic product for commercialization.  The Company hopes to complete validation of its test for leukemia in 2010.
 
Leukemia is a type of cancer that originates in the bone marrow. The accumulation of malignant cells interferes with the body’s production of healthy blood cells and makes the body unable to protect itself against infections. The National Cancer Institute (NCI) estimates that more than 44,000 new cases will be diagnosed in the U.S. in 2008, with almost 22,000 deaths.
 
Colon Cancer
 
HDC has identified and patent-protected colon cancer-specific biomarkers that can be used in the development of diagnostic assays for cancer detection, disease discrimination, and even a potential vaccine.  The aim of this early biomarker discovery project was to define the gene expression patterns associated with colon cancer.  Our RFE-SVM served as an effective tool for sifting through the voluminous data of thousands of measurements to highlight only those genes that optimally contributed to the study focus.  The Company is currently validating these findings with tissues from St. Vincent’s Medical Center in New York City in anticipation of developing a molecular diagnostic product for commercialization in the near future.
 
 
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In the United States, colorectal cancer is the third most common cancer in men and women. The National Cancer Institute (NCI) estimates that more than 108,000 new cases of colon and rectal cancer will be diagnosed in the U.S. in 2008, with nearly 50,000 deaths.
 
Breast Cancer
 
HDC licensed its two breast cancer diagnostic technologies (MammoSIGHT, for detecting malignancy in mammograms and MetastaSIGHT, for identifying circulating tumor cells in the blood) to Smart Personalized Medicine, LLC pursuant to an amended license agreement in exchange for a 20% ownership position in Smart Personalized Medicine, LLC and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test other than by Quest Diagnostics Incorporated.  The detection component of these technologies finds the areas of particular interest in the image and separates these objects from the background.  The feature extraction component formulates numerical values relevant to the classification task from the segmented objects.  HDC’s patented technology can be used within all diagnostic imaging radiology techniques, including PET scans, CT scans, and MRIs.  See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Operational Activities for additional information regarding recent developments with Smart Personalized Medicine and Quest.
 
For women, breast cancer is the most common non-skin cancer and the second leading cause of cancer-related death in the United States.  An estimated 221,000 women are diagnosed with breast cancer in the United States each year, and one in eight U.S. women will have breast cancer in her lifetime.  However, death rates from breast cancer have been declining since 1990, and these decreases are believed to be the result, in part, of earlier detection and improved treatment.  Mammography remains the best method of early breast cancer detection.  According to studies cited by the National Cancer Institute, 10-20% of breast cancers detected by a physical exam were missed by a film mammogram.  For this reason, there have been extensive research efforts to improve mammography.
 
The FDA reports that there are about 33.5 million mammography procedures performed each year in the United States.  Data from 2000-2002 show that about 70 percent of all mammograms that are performed annually are for screening purposes (to detect cancer as opposed to following cancer once it has been diagnosed). This translates to about 23.5 million screening procedures every year.  Currently, the breast cancer prognostic market is projected to be about $300 to $400 million.
 
Detecting malignancy in mammograms can be very difficult. Individual mammograms are unique and there can be great variation within “normal” images.  Unlike CT scans and MRIs, mammograms are not cross-sectional images.  Basically, a mammogram produces a two-dimensional picture of a three-dimensional object.  The projection from 3D to 2D and the resulting overlaps on the images may interfere with the recognition of the distinguishing features, which are often very subtle.  The rules for differentiating the benign and malignant cases are vague and not easily formulated.
 
 
10

 
 
One way to reduce reading errors is to have two radiologists read the same mammograms independently. However, in most health care systems, it is not feasible to implement such a two-radiologist reading process.  A computer-assisted detection (CAD) system serving as a second reader is therefore an attractive option, and CAD is currently reimbursed by both insurance companies and Medicare.
 
Both digital and film mammography use X-rays to produce an image of the breast.  In film mammography, which has been used for over thirty-five years, the image is created directly on a film.  While standard film mammography is very good, it is less sensitive for women who have dense breasts.  A major limitation of film mammography is the film itself.  Once a film mammogram is obtained, it cannot be significantly altered; if the film is underexposed, for example, contrast is lost and cannot be regained.
 
Digital mammography takes an electronic image of the breast and stores it directly in a computer. Digital mammography uses less radiation than film mammography and allows for improvement in image storage and transmission because images can be stored and sent electronically.  Radiologists can use software to help interpret digital mammograms.
 
MammoSIGHT
 
HDC’s MammoSIGHT technology introduces the use of SVMs in detecting malignancy in mammograms. The SVM classifier produces an index discriminating between the benign and malignant cases. The individual components can be developed in parallel because of the modular structure. In developing the calcification segmentation component, a selected set of malignant, benign and normal cases representing a wide range of images was used to guide and test the design in order to produce a general, robust and accurate algorithm. At the same time, the SVM classifier was developed and tested with manually prepared input data. A set of 300 images (150 benign and 150 malignant cases) was used in training the SVM. An independent set of 328 images was used for testing. High dimensional input features were used to ensure a sufficient capacity for automatically extracted features.
 
Clusters of micro calcifications are characterized by their relatively small sizes and high densities. The algorithm combines a recursive peak seeking technique with morphological operations to achieve a highly accurate calcification detection and segmentation.
 
MetastaSIGHT
 
Cancer cells have the ability to migrate from the organ of its origin to any distant organ throughout the body. This is known as metastasis, the hallmark of malignant cancers. During metastasis, cancerous cells break through barriers to travel through the body’s circulatory system to invade other organs. These cells form new cells in vital organs throughout the body, becoming secondary tumors that destroy normal cells by depriving them of nutrition.
 
Even with today’s best treatment when the cancer is forced into remission, metastasis will not necessarily leave the body. Metastasis cannot be eliminated by surgery. Often, malignant cells circulate in the blood before detection by clinical examination.  MetastaSIGHT uses an SVM-based approach to introduce new cellular imaging technology that identifies circulating tumor cells in the blood.  By identifying circulating tumor cells, patients and their doctors can take proactive measures to address therapeutic decisions.
 
HIV/AIDS
 
HDC identified and patent-protected an AIDS expression signature that separated AIDS brain cells from non-AIDS brain cells with a high degree of accuracy.  This biomarker discovery was accomplished in conjunction with Dr. Paul Shapshak, Director of the Dementia/HIV Laboratory at the University of Miami Medical School, and a group of leading scientists using HDC’s proprietary FGM analysis technique.  HDC sold the biomarker discovery to the University of Miami in November 2005.
 
 
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Employees
 
On December 31, 2009, we had 6 full time employees.
 
Website Address
 
Our corporate website address is www.HealthDiscoveryCorp.com.  To view our public filings from the home page, select the “Display SEC Filings” tab followed by “SEC Filings.”  This is a direct link to our filings with the Securities and Exchange Commission (“SEC”), including but not limited to our Annual Report of Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports.  These reports are accessible soon after we file them with the SEC.
 
Governmental Regulation
 
Our business plan involves Biomarker Discovery in the field of molecular diagnostics.  This early discovery process does not involve any governmental regulations or approvals.  If we are successful in licensing our discoveries to other companies, FDA approvals may be required before the ultimate product may be sold to consumers.  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 governmental regulations that will materially affect the Company’s current operations or products.
 
Intellectual Property
 
In connection with the SVM Acquisition, we obtained rights to the intellectual property within the “SVM Portfolio” that currently consists of thirty-eight patents which were or have since issued as well as thirty-one other patent applications that are pending in the U.S. and elsewhere in the world.  The issued patents and pending applications in the SVM portfolio to date, including new applications that we have filed since acquiring the original SVM Portfolio, HDC are:
 
Patent/Application No.
 
Title
 
Expiration Date
         
U.S. Patent No. 6,128,608
 
Enhancing Knowledge Discovery Using Multiple Support Vector Machines
 
05/01/2019
         
U.S. Patent No. 6,157,921
 
Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment
 
05/01/2019
         
U.S. Patent No. 6,427,141
 
Enhancing Knowledge Discovery Using Multiple Support Vector Machines.
 
05/01/2019
         
U.S. Patent No. 6,658,395
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/01/2019
 
U.S. Patent No. 6,714,925
 
System for Identifying Patterns in Biological Data Using a Distributed Network.
 
05/01/2019
         
U.S. Patent No. 6,760,715
 
Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.
 
05/01/2019
         
U.S. Patent No. 6,789,069
 
Method of Identifying Patterns in Biological Systems and Method of Uses.
 
05/01/2019
         
U.S. Patent No. 6,882,990
 
Method of Identifying Biological Patterns Using Multiple Data Sets.
 
05/01/2019
 
 
 
 
12

 
 
Patent/Application No.
 
Title
 
Expiration Date
 
U.S. Patent No. 6,944,602
 
Spectral Kernels for Learning Machines
 
02/19/2023
         
U.S. Patent No. 6,996,542
 
Computer-Aided Image Analysis
 
04/21/2021
         
U.S. Patent No. 7,117,188
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
05/01/2019
         
U.S. Patent No. 7,299,213
 
Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset
 
03/01/2022
         
U.S. Patent No. 7,318,051
 
Methods for Feature Selection in a Learning Machine
 
02/25/2021
         
U.S. Patent No. 7,353,215
 
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
 
05/07/2022
         
U.S. Patent No. 7,383,237
 
Computer-Aided Image Analysis
 
11/04/2019
         
U.S. Patent No. 7,444,308
 
Data Mining Platform for Bioinformatics
 
08/07/2020
         
U.S. Patent No. 7,475,048
 
Pre-Processed Feature Ranking for a Support Vector Machine
 
08/07/2020
         
U.S. Patent No. 7,542,947
 
Data Mining Platform for Bioinformatics and Other Knowledge Discovery
 
08/07/2020
         
U.S. Patent No. 7,542,959
 
Feature Selection Using Support Vector Machine Classifier
 
05/01/2019
         
U.S. Patent No. 7,617,163
 
Kernels and Kernel Methods for Spectral Data
 
11/09/2021
         
U.S. Patent No. 7,624,074
 
Methods for Feature Selection in a Learning Machine
 
08/07/2020
         
Australian Patent No.  764897
 
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
 
05/01/2019
         
Indian Patent No. 212978
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
South African Patent No. 00/7122
 
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
 
05/01/2019
         
Australian Patent No.  780050
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
Chinese Patent No. ZL00808062.3
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
European Patent No. 1192595
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
German Patent No. DE60024452.0-08
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
Indian Patent No. 223409
 
Enhancing Knowledge Discovery for Multiple Data Sets Using Multiple Support Vector Machines
 
05/24/2020
         
Israeli Patent No. 146705
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
 
05/24/2020
 
 
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Patent/Application No.  
Title
 
Expiration Date
         
Norwegian Patent No. 319,838
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
South Korean Patent No.  724104
 
Enhancing Knowledge Discovery from Data Sets Using Multiple Support Vector Machines
 
05/24/2020
         
Australian Patent No.  779635
 
Method of Identifying Patterns in Biological Systems and Method of Uses.
 
10/27/2020
         
Australian Patent No.  2002243783
 
Computer Aided Image Analysis
 
01/23/2022
         
European Patent No. 1356421
 
Computer Aided Image Analysis
 
01/23/2022
         
Japanese Patent No. 3947109
 
Computer Aided Image Analysis
 
01/23/2022
         
Australian Patent No. 2002253879
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
Japanese Patent No. 4138486
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
Canadian Application No. 2,330,878
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
European Publication No. 1082646
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
Hong Kong Application No. 011065063
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
Canadian Application No.  2,371,240
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
 
05/24/2020
         
Japanese Application No. 2000-620577
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
 
05/24/2020
         
Canadian Application No. 2,388,595
 
Method of Identifying Patterns in Biological Systems and Method of Uses
 
08/07/2020
         
European Publication No. 1236173
 
Method of Identifying Patterns in Biological Systems and Method of Uses
 
08/07/2020
         
Japanese Application No. 2001-534088
 
Method of Identifying Patterns in Biological Systems and Methods of Uses
 
08/07/2020
         
U.S. Patent Publication No. 2005/0165556
 
Colon Cancer-Specific Markers
 
05/01/2019
         
U.S. Application No. 11/926,129
 
System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source
 
05/01/2019
         
European Publication No.  1828917
 
Biomarkers for Screening, Predicting, and Monitoring Prostate Disease
 
11/14/2025
         
Canadian Application No. 2,435,254
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
European Publication No. 1459235
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
U.S. Application No. 11/929,354
 
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
 
05/07/2022
 
 
14

 
 
Patent/Application No.   Title  
Expiration Date
         
Canadian Application No. 2,435,290
 
Computer Aided Image Analysis
 
01/23/2022
         
U.S. Application No. 11/929,522
 
Model Selection for Cluster Data Analysis
 
05/17/2022
         
U.S. Patent Publication No. 2008/0097938
 
Data Mining Platform for Knowledge Discovery from Heterogeneous Data Types and/or Heterogeneous Data Sources
 
08/07/2020
         
U.S. Patent Publication No. 2005/0228591
 
Kernels and Kernel Methods for Spectral Data
 
08/07/2020
         
U.S. Patent Publication No. 2008/0097940
 
Kernels and Kernel Methods for Spectral Data
 
08/07/2020
         
U.S. Patent Publication No. 2008/0233576
 
Pre-Processed Feature Ranking for a Support Vector Machine
 
08/07/2020
         
European Publication No. 1449108
 
Pre-Processed Feature Ranking for a Support Vector Machine
 
11/07/2022
         
U.S. Patent Publication No. 2008/0050836
 
Biomarkers for Screening, Predicting, and Monitoring Benign Prostate Hyperplasia
 
01/24/2022
         
European Publication No. 1828917
 
Biomarkers for Screening, Predicting and Monitoring Prostate Disease
 
11/14/2025
         
U.S. Patent Publication No. 2009/0215024
 
Biomarkers Upregulated in Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0286240
 
Biomarkers Overexpressed in Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0305257
 
Biomarkers Downregulated in Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0215058
 
Methods for Screening, Predicting and Monitoring Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0226915
 
Methods for Screening, Predicting and Monitoring Prostate Cancer
 
01/24/2022
         
WIPO Application No. PCT/US09/66873
 
Methods of Screening, Predicting and Monitoring Prostate Cancer
 
12/04/2029
         
U.S. Patent Publication  No. 2009/0204557
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
WIPO Publication No. WO 2009/100410
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
U.S. Application No. 61/289,372
 
Remote Melanoma Diagnosis Using a Smart Phone
 
12/22/2010
 
HDC also owns intellectual property rights in U.S. and foreign patents and pending patent applications covering the FGM technology.  The FGM portfolio includes three issued patents, which are:
 
 
15

 
 
Patent/Application No.
 
Title
 
Expiration Date
         
U.S. Patent No. 6,920,451
 
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
 
01/19/2021
         
U.S. Patent No. 7,366,719
 
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets
 
01/19/2021
         
European Patent No. 1252588
 
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
 
01/19/2021
 
Our Competition
 
HDC conducts its business principally in the diagnostics industry in the field of Biomarker Discovery and image analysis.  The diagnostics industry is highly fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics companies attempting to discover potential new diagnostic products.  These companies may:
 
develop new diagnostic products before we or our collaborators; 
   
develop diagnostic products that are more effective or cost-effective than those developed by us or our collaborators; or 
   
obtain patent protection or other intellectual property rights that would limit the ability to develop and commercialize, or a customers’ ability to use, our or our collaborators’ diagnostic products.
 
The Company competes with companies in the United States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize biomarker discovery and CAD image analysis techniques. These companies may develop products that are competitive with and/or perform the same or similar to the products offered by us or our collaborators. Also, clinical laboratories may offer testing services that are competitive with the products sold by us or our collaborators. 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 FGM technologies give us a distinct advantage over competing technologies.  Neither classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs necessary to produce fully validated biomarkers like the Company’s technology.
 
Customers and Licensees
 
We have produced sales, licensing, and developmental revenue since 2005 through agreements with a few customers and licensees.  We have a strategic alliance and licensing agreement for commercialization of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  In July 2008, we entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests for the independent detection of ovarian, cervical and endometrial cancers.  However, in the first quarter of 2010, due to a shift in strategic direction involving the third party, we mutually terminated the license in February 2010, and are exploring other options to develop and commercialize such tests.  In August 2008, we licensed the use of our SVM technology to a third party to work to develop a superior breast cancer prognostic test.  See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding these licensing activities.
 
See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Subsequent Events for additional operational activities since December 31, 2009.
 
 
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Research and Development
 
Our past Research and Development costs have been minimal due to the unique relationships we have maintained with the members of our Scientific Advisory Board and their institutions.  Our total R&D costs have consisted mainly of the consultant fees paid to Dr. Stamey, Dr. Vapnik, and Dr. Guyon.  These fees consisted of $13,697 for 2009 and $14,160 for 2008.
 
ITEM 1A.  RISK FACTORS
 
This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, all statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including but not limited to statements regarding the successful implementation of our services, business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and operations, references to future success, the ability of the Company to utilize its SVM and FGM assets and other intellectual property to identify biomarkers which can be used in diagnostic tests, the ability to enter into agreements with strategic partners for the development and commercialization of diagnostic tests, the ability of the Company to develop a product line, the ability to achieve profitability, about anticipated size of the market for diagnostic tests, the capabilities of molecular diagnostic tests, regarding working with our collaborators resulting in revenue for the Company, the sufficiency of our liquidity and capital resources, and other such matters.  All such statements are forward-looking statements and are based on the beliefs of, assumptions made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause the actual results and performance of our company to be materially different from future results or performance expressed or implied by such statements.
 
The cautionary statements set forth in this “Risk Factors” section and elsewhere in this annual report identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Among others, factors that could adversely affect actual results and performance include failure to successfully develop a profitable business, delays in identifying and enrolling customers, the inability to retain a significant number of customers, effectiveness and execution of licensing efforts, our ability to employ and retain key employees and experienced scientists, our access to tissue samples, loss of the ability to use certain patent rights, the inability to continue to protect our proprietary information, competitive conditions, our ability to remain competitive in a rapidly changing technological environment, acceptance of our products by the market, volatility in U.S. and global stock markets generally and in our stock price specifically, potential shareholder claims which could result in substantial dilution to our shareholders, economic conditions generally, the effect of current difficulties in the credit markets on our business, factors beyond our control, including, but not limited to, catastrophes (both natural and man-made), earthquakes, floods, fires, explosions, acts or terrorism or war, and the risks identified elsewhere in this report. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement.  All forward looking statements and cautionary statements included in this document are made as of the date hereof based on information available to us, and we assume no obligation to update any forward looking statement or cautionary statement.
 
 
Risks Related to Our Business
 
We are a developing business and a high-risk company.
 
We are a high-risk company in a volatile industry.  In September 2003, we completely changed the focus of our business from wireless telecommunications to biotechnology.  Investors should recognize that an investment in our company is risky and highly speculative.  We are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development.  Failure to implement and execute our business and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We must successfully overcome these and other business risks.
 
 
17

 
 
We may incur future losses, and we may never achieve or sustain profitability.
 
While we expect to continue to maintain a positive cash balance during 2010,our expenses are expected to exceed our income until we successfully complete transactions resulting in significant revenue.  Accordingly, our capital will be decreased to pay these operating expenses.  If we ever become profitable, of which there is no assurance that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these operating expenses.  We cannot assure you that we will ever achieve profitability.  Even if we do achieve profitability, we may not be able to sustain or increase profitability.
 
Our business is difficult to evaluate because we have a limited history of operations.
 
Since reorganizing in 2003, our focus and our business model have been continually evolving.  Accordingly, we have a history of operations in which there is limited information to identify any historical pattern. Even if we could discern such a pattern, the rapidly evolving nature of the biotechnology and pharmaceutical industries would make it very difficult to identify any meaningful information in such a short history.  Therefore, it is also difficult to make any projections about the future of our operations.  This difficulty may result in our shares trading below or above their value.
 
We may need additional financing.
 
During 2009, we raised additional capital in the amount of $1,490,015 through the issuance of Series B Preferred Stock and received proceeds from the exercise of previously issued warrants to purchase our Common Stock of $2,450,430.  In addition, since January 1, 2010, we have received an additional $3,039,522 from the exercise of previously issued warrants to acquire our Common Stock.  If we are unable to generate sufficient revenue, additional proceeds may be required to finance our activities. We cannot assure prospective investors that we will not need to raise additional capital or that we would be able to raise sufficient additional capital on favorable terms, if at all.  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.
 
 
18

 
 
A significant portion of our net revenues will be paid as either a Special Dividend to the holders of the Series B Preferred Stock or to our senior management in bonuses.
 
Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock (the “Series B Preferred Stock”) remain outstanding, the Company must  pay the holders of the Series B Preferred Stock a special dividend (the “Special Dividend”) equal to 15% of Company “Net Revenue.”  Company Net Revenue will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC, but will not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company.  At any time following the issuance of the Series B Preferred Stock, the Company may satisfy the Special Dividend in its entirety if the aggregate payments made to the Series B Holders is equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Special Dividend to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. The shares of our Series B Preferred Stock also accrue dividends at the rate of $0.008 per year (as adjusted for changes in our capitalization), which must be paid by the fifth anniversary of the issuance of such shares either by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Further, pursuant to the terms of the employment agreement with our Chief Executive Officer, a cash bonus (subject to an annual cap specified in the employment agreement) of 10% of the Company’s Net Revenue received through August 15, 2010, will be paid as cash bonuses to our Chief Executive Officer.  Additionally, the Company may pay additional bonuses out of such revenue to other senior management.  See Item 5. - Market for Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities for further information on the terms of the Series B Preferred Stock.  The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our Common Stock and to otherwise distribute to holders of our Common Stock upon a sale or liquidation.
 
A private placement investor has demanded additional shares of Company Common Stock and if the investor brings suit against the Company and prevails, it would require the Company to expend substantial resources and could cause substantial dilution to existing shareholders.
 
The Company has received letters from an investor in the Company’s 2007 private placement (“2007 Private Placement”), claiming (a) that  certain rights to receive additional common stock of the Company for no additional consideration have been triggered by certain actions of the Company, (b) breaches of its contractual rights to approve certain issuances of derivative securities, (c) breaches of other covenants made by the Company in the 2007 Private Placement, (d) the Company had violated its SEC disclosure obligations, and (e) various breaches by the members of the Board of Directors of their fiduciary duties.  The Company denies the allegations and intends to vigorously defend these claims.  However, due to the uncertainties inherent in litigation, we cannot predict the outcome of this matter if the investor brings suit against the Company.  Such a lawsuit would be time consuming, distract our management from the business of the Company and result in substantial expenditures to defend the claim, each of which could have a material adverse impact on our business, financial condition and results of operations.  Moreover, if we are unsuccessful in defending against the claims, the Company may be required, among other things, to issue approximately 146,664,375 shares to such investor, and, if all of the other investors in the 2007 Private Placement sought the same remedy, the Company may be required to issue approximately 1,099,494,872 shares in the aggregate.  Issuing any significant portion of such shares of Common Stock would cause substantial dilution to existing shareholders.
 
Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
 
Our operating results may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and acceptance of our services. Factors that may cause our results to vary by period include:
 
payments of milestones, license fees or research payments under the terms of our increasing number of external alliances;
 
 
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changes in the demand for our products and services;
 
the nature, pricing and timing of products and services provided to our collaborators;
 
acquisition, licensing and other costs related to the expansion of our operations;
 
reduced capital investment for extended periods;
 
losses and expenses related to our investments in joint ventures and businesses;
 
regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information; and
 
changes in intellectual property laws that affect our rights in genetic information that we sell and license.
 
Advisory and personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Some of these expenses cannot be adjusted quickly in the short term.  If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly.  Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular period.
 
Because we do not intend to pay dividends on our Common Stock, holders of our Common Stock  will benefit from an investment in our Company only if it appreciates in value.
 
We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain the Company’s future earnings, if any, to finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future.  As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which its investors purchased their shares.
 
Our stock price has been, and is likely to continue to be, highly volatile.
 
Our stock price has, since September 1, 2003, traded as high as $0.60 and as low as $0.03.  Our stock price could fluctuate significantly due to a number of factors beyond our control, including:
 
variations in our actual or anticipated operating results;
 
sales of substantial amounts of our stock;
 
announcements about us or about our competitors, including technological innovation or new products or services;
 
litigation and other developments related to our patents or other proprietary rights or those of our competitors;
 
litigation and other developments related to (a) our patents or other proprietary rights or those of our competitors and (b) claims made by certain shareholders;
 
conditions in the life sciences, pharmaceuticals or genomics industries; and
 
governmental regulation and legislation.
 
In addition, the stock market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our actual operating performance.
 
 
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In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation. If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could affect our profitability.
 
Our approach of incorporating ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively new and may not be accepted by our potential customers or collaborators.
 
We intend to create a fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically relevant and economically significant biomarkers.  Our potential customers and collaborators may be reluctant to accept our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove to be ineffective or not as effective as other methods.  For example, our products and technologies may prove to be ineffective if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model.  If our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective, our business may fail or we may never become profitable.
 
Even if our computational technologies are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products based on them.
 
Even if our computational technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting from them to produce new drugs, therapies, diagnostic products or other life science products.  Despite recent scientific advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement in diseases and in other life processes is not well understood.  Only a few therapeutic products based on the study of and discoveries relating to genes or proteins have been developed and commercialized.  If our customers are unable to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.
 
Our SVM Portfolio utilizes technology that may be covered by an earlier-issued patent, and if we lose the rights to use that patent, our ability to exploit certain aspects of our SVM technology will be impaired.
 
Our SVM Portfolio utilizes technology that may be covered by the original hyperplane patent (Pat. No. 5,649,068) invented by members of our Scientific Advisory Board and owned by Lucent Technologies, Inc. GRL Corp. (“Lucent”).  We have obtained an assignment of a pre-existing patent license from Lucent. If Lucent were to terminate the license, it is possible that we would not be able to use portions of the SVM technology.
 
The industries in which we are active are evolving rapidly, and we may be unable to keep pace with changes in technology.
 
The pharmaceutical and biotechnology industries are characterized by rapid technological change.  This is especially true of the data-intensive areas of such technologies.  Our future success will largely depend on maintaining a competitive position in the field of drug, therapeutics and diagnostic products discovery.  If we fail to keep pace with changes in technology, our business will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products and technologies.  Products or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics discovery technologies.  We may not be able to make the necessary enhancements to our technologies to compete successfully with newly emerging technologies.
 
 
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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 provides 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 staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do.  This may allow these competitors to discover or to develop products in advance of us or of our customers.
 
Some of our competitors, especially academic and research institutions and government and other publicly funded agencies, may provide for free services or data similar to the services and data that we provide for a fee.  Moreover, our competitors may obtain patent and other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or commercialize our discoveries, products and services.  If we are unable to compete successfully against existing or potential competitors, we may never achieve profitability.
 
Our management may be unable to address future growth.
 
We anticipate that if we experience a period of growth in our customer base and market opportunities, a period of significant expansion of the Company will be required. This expansion will place a significant strain on our management, operational and financial resources. To manage future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
 
If our business does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share or recover investments in our technologies.
 
Technologies in the biomarker industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors, limit our growth and damage our reputation and business.
 
The future success of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial selection. However, our business or others may make rapid technological developments, which could result in our technologies, products or services becoming obsolete before we are able to recover the expenses incurred to develop them.
 
If our business cannot enter into strategic alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services or continue to commercialize existing products or services.
 
We may be unable to maintain or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.
 
 
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We also depend on collaborators for the development and manufacture of complex instrument systems and chemicals and other materials that are used in laboratory experiments.  We cannot control the amount and timing of resources our collaborators devote to our products. We may not be able to enter into or satisfactorily retain these research, development and manufacturing collaborations and licensing agreements, which could reduce our growth and harm our competitive position.
 
We may not be able to find business partners to develop and commercialize product candidates derived from our discovery activities.
 
Our strategy for the development and commercialization of diagnostic markers and therapeutic proteins depends on the formation of collaborations or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities.  We cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.
 
Our dependence on licensing and other collaboration agreements makes us heavily dependent on our collaborators.
 
We may not be able to enter into licensing or other collaboration agreements on terms favorable to us.  Even if we do enter into an acceptable agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities.  In most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
 
In addition, we may not be able to control the amount and timing of resources our collaborators devote to the product candidates, and collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s business strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us.  Furthermore, our rights in any intellectual property or products that may result from our collaborations may depend on additional investment of money that we may not be able or willing to make.
 
Potential or future collaborators may also pursue alternative technologies, including those of our competitors.  Disputes may arise with respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be significantly harmed.
 
If we are unable to hire or retain key personnel or sufficient qualified employees, we may be unable to successfully operate our business.
 
Our business is highly dependent upon the continued services of our Chief Executive Officer, Board of Directors, and Scientific Advisory Board.  While certain members of our senior management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability to compete.  The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse effect upon our business, as well as our relationships with our potential customers.  We do not carry key person life insurance on any member of our senior management.  Furthermore, competition for highly qualified personnel in our industry and geographic locations is intense.  Our business would be seriously harmed if we were unable to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.
 
 
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We may not be able to employ and retain experienced scientists, mathematicians and management.
 
Technologies in our industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected revenues and earnings.
 
If our access to tissue samples or to genomic data or other information is restricted, or if this data is faulty, our business may suffer.
 
To continue to build our technologies and related products and services, we need access to third parties’ scientific and other data and information.  We also need access to normal and diseased human and other tissue samples and biological materials.  We may not be able to obtain or maintain such access on commercially acceptable terms.  Some of our suppliers could become our competitors and discontinue selling supplies to us.  Information and data from these suppliers could contain errors or defects that could corrupt our databases or the results of our analysis of the information and data.  In addition, government regulation in the United States and other countries could result in restricted access to, or use of, human and other tissue samples.  Although currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may suffer.
 
The sales cycle for some of our products and services is lengthy.  We expend substantial funds and management effort with no assurance of successfully selling our products or services.
 
Our ability to obtain customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate their efforts in drug and diagnostics discovery.  Our ability to obtain customers for our therapeutic or diagnostic product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed therapeutic or diagnostic purposes.  Our ability to obtain customers will also depend on our ability to successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is typically lengthy and may take more than 12 months.
 
An inability to protect our proprietary data, technology or products may harm our competitive position.
 
If we do not adequately protect the intellectual property underlying our products and services, competitors may be able to develop and market the same or similar products and services. This would erode our competitive advantage.  In addition, the laws of some countries do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.
 
We use contractual obligations to protect a significant portion of our confidential and proprietary information and know-how.  This includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and services.  However, these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how.  Customers, employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.
 
 
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In addition, we have applied for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have discovered using these technologies.  We plan to continue to apply for patents covering parts of our technologies and discoveries as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will be upheld if challenged.  The patent positions of biotechnology related companies are generally uncertain and involve complex legal and factual questions.  Legislative changes and/or changes in the examination guidelines of governmental patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In contrast to recent court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed to identifying relationships between small groups of genes and proteins that are useful for diagnosing, treating and prognosing diseases and other conditions.
 
Our success depends in large part on our ability to patent our discoveries.
 
Our success depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize.  We face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries.  We cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered or may discover in the future.  Our patent applications may conflict with prior applications of third parties or with prior publications.  They may not result in issued patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any competitive advantages.  U.S. and other patent applications ordinarily remain confidential for 18 months from the date of filing.  As a result, patent applications that we file which we believe are novel at the time of filing may be determined at a later stage to be inconsistent with earlier applications.  Additionally, the scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our competitive position.  Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to the business.  The issuance of a patent is not conclusive as to its validity or its enforceability.  Federal courts may invalidate these patents or find them unenforceable.  Competitors may also be able to design around our patents.  If we are unable to protect our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies. Any of these events could materially harm our business or financial results.
 
Litigation or other proceedings or third party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or require us to spend time and money to modify our operations.
 
The technology that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies engage in other genomic-related businesses.  If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies and products, we could experience serious harm. If litigation is commenced against us alleging intellectual property rights infringement or if we initiate a lawsuit to assert claims of infringement, protect or 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.
 
 
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Many of our services will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation and licensing.  If we are found to be infringing the intellectual property of others, we could be required to stop the infringing activity, or we may be required to design around or license the intellectual property in question.  If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our services, which could result in reduced revenue.
 
We may acquire or make strategic investments in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.
 
If opportunities arise, we may consider making acquisitions of or investments in businesses, technologies, services or products.  These activities may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material adverse effect on the operating results of our business.  Moreover, even if we acquire complementary businesses or technologies, we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.
 
Difficulties in integrating an acquired business or managing an investment could disrupt our business, distract our management and employees and increase our expenses.  Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating to intangible assets.  Sizable acquisitions or investments may also divert senior management from focusing on our existing business plan.  Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders may be diluted, which could affect the market price of our stock.
 
Risks Related to Our Industry
 
There are many risks of failure in the development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development and commercialization of these types of products.
 
Risks of failure are inseparable from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These risks include the possibility that any of these products will:
 
be found to be toxic or ineffective;
 
fail to receive necessary regulatory approvals;
 
be difficult or impossible to manufacture on a large scale;
 
be uneconomical to market;
 
 
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fail to be developed prior to the successful marketing of similar products by competitors; or
 
be impossible to market because they infringe on the proprietary rights of third parties or compete with superior products marketed by third parties.
 
We are dependent on our customers’ commercialization of our discoveries.  Any of these risks could materially harm our business and financial results.
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may negatively affect us in several ways.  These consolidations usually involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources and technological capabilities, thus strengthening competition in the industry.  In addition, continued consolidation may result in fewer customers for our products and services.
 
We may be subject to product liability claims if products derived from our products or services harm people.
 
We may be held liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise unsuitable.  These risks are inherent in the development of genomics, functional genomics and pharmaceutical products.  If we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total assets.  In addition, such claims could cause us to incur substantial costs, divert management’s attention from executing the Company’s business plan and subject us to negative publicity even if we prevail in our defense of such claims.
 
Our business and the products developed by our collaborators may be subject to governmental regulation.
 
New therapeutic or diagnostic products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process in the United States and other countries before it can be marketed.  It may be several years, or longer, before any therapy or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues.  This may delay or prevent us from becoming profitable.  Changes in policies of regulatory bodies in the United States and in other countries could increase the delay for each new therapy and diagnostic products.
 
Even if regulatory approval is obtained, a product on the market and its manufacturer are subject to continuing review.  Discovery of previously unknown problems with a product may result in withdrawal of the product from the market.
 
Although we intend to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities to file regulatory approval applications and generally direct the regulatory review process.  We cannot be certain whether they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all.  If they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until clearance can be obtained, if at all.  This will in turn reduce our chances of receiving various forms of payments, including those relating to sales of marketed therapeutic or diagnostic products by them.
 
The law applicable to us may change in a manner that negatively affects our prospects.
 
We must comply with various legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements, which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, would result in adverse consequences.
 
 
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If ethical and other concerns surrounding the use of genetic information become widespread, there may be less demand for our products and services.
 
Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information.  For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to various conditions, particularly for those that have no known cure.  Any of these scenarios could reduce the potential markets for our technologies in the field of predictive drug response, which could materially harm our business and financial results.
 
ITEM 2. PROPERTIES
 
We do not own any real property.  We lease 908 square feet of office space in Savannah, Georgia, pursuant to a three year lease dated July 1, 2007. We currently pay base rent in the amount of $1,741 per month. Our principal executive office is located at 2 East Bryan Street, Suite #601, Savannah, Georgia 31401, and our telephone number is (912) 443-1987.  Our principal executive office is well maintained and suitable for the business conducted in it.
 
ITEM 3. LEGAL PROCEEDINGS
 
None.
 
ITEM 4. RESERVED
 
PART II
 
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our Common Stock is traded on the OTC Bulletin Board under the symbol HDVY.  The range of closing prices for our Common Stock, as reported on YahooFinance.com during each quarter of the last two fiscal years was as follows.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
   
High
   
Low
 
                 
First Quarter 2008
  $ 0.08     $ 0.03  
Second Quarter 2008
  $ 0.08     $ 0.03  
Third Quarter 2008
  $ 0.09     $ 0.03  
Fourth Quarter 2008
  $ 0.07     $ 0.04  
                 
First Quarter 2009
  $ 0.09     $ 0.04  
Second Quarter 2009
  $ 0.08     $ 0.03  
Third Quarter 2009
  $ 0.13     $ 0.03  
Fourth Quarter 2009
  $ 0.40     $ 0.09  
 
At March 22, 2010, there were approximately 319 holders of record of our Common Stock.
 
We have not paid any cash dividends on shares of our Common Stock since inception, and we do not anticipate paying any in the foreseeable future.  We intend to retain future earnings, if any, after the payment of the Series B Special Dividend described below to support the development and growth of our business.  Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
 
 
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The Series B Preferred Stock accrues dividends at the rate of 10% of the Series B Original Issue Price per year, which shall be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) either by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock remain outstanding, the Company also pays the holders of the Series B Preferred Stock a special dividend (the “Special Dividend”) equal to 15% of Company Net Revenue collected beginning with the Original Issue Date and ending on the date the Series B Preferred Stock cease to be outstanding.  Company Net Revenue will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC (each a “Revenue Contract”), but shall not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company.  At any time following the Original Issue Date, the Company may satisfy the Special Dividend in its entirety if the aggregate payments made to the Series B Holders is equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Special Dividend to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. On March 26, 2010, in accordance with the rights of the holders of the Series B Preferred Stock to receive Special Dividends, we paid an aggregate amount of $202.25 to the Series B holders whose subscriptions for shares of Series B Preferred Stock had been accepted by the Company as of October 23, 2009.
 
Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend on any share of its Capital Stock if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends.  The Company has had limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital investment in order to fund operations.  Accordingly, depending on the Company’s financial condition, it may not be able to pay any dividends on any shares of its Capital Stock.  For further discussion of the Company’s liquidity and capital resources, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following table sets forth the equity securities of the Company which are authorized for issuance to employees, directors and consultants in consideration for services as of December 31, 2009:
 
Equity Compensation Plan Information
 
   
Number of securities to be issued upon exercise of outstanding options, warrants and rights
   
Weighted-average exercise price of outstanding options, warrants and rights
 
Equity compensation plans approved by security holders
    0       0  
Equity compensation plans not approved by security holders
    16,500,000     $ 0.09  
Total
    16,500,000     $ 0.09  
 
 
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Private Placements
 
In 2007, the Company issued 51,538,822 shares of restricted Common Stock in return for $2.55 million in cash and the conversion of approximately $1.6 million in debt.  Proceeds from the private placement were used for general working capital purposes.  Each purchaser of Common Stock also received one warrant to acquire an equal number of shares at $0.14 (the “Tranche 1 Warrants”) and one warrant to acquire an equal number of shares at $0.19 (the “Tranche 2 Warrants”).  As a result of the Company’s Common Stock achieving minimum trading price thresholds, the Company elected to require the exercise or forfeiture of certain of the Tranche 1 Warrants in November, 2009, and of the Tranche 2 Warrants in March 2010.  As a result of the Company’s election of its rights and other voluntary exercises by the holders of the warrants, the Company issued 33,763,712 shares of Common Stock for gross proceeds of $5,489,952 and warrants to acquire 4,761,222 shares were forfeited.  Warrants to purchase 31,276,358 shares at $0.14 and 33,276,355 shares at $0.19 remain outstanding.
 
Also in 2007, the Company issued 7,437,184 shares of Series A Preferred Stock in a conversion of $594,975 of secured debt to equity.  On November 4, 2009, as a result of the trading value of the  Common Stock exceeding $0.12 per share for a period of 30 consecutive calendar days, all outstanding shares of Series A Preferred Stock converted by its terms into 7,437,184 shares of Common Stock.
 
The shares and warrants offered and sold in each of the Company’s private placements were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.  Based on information provided by each of the investors, all investors qualify as accredited investors (as defined by Rule 501 under the Securities Act of 1933, as amended).  There were no underwriters in connection with either of these transactions, and there were no underwriting discounts or commissions.
 
The Company has received letters from an investor in the Company’s 2007 private placement, (“2007 Private Placement”), claiming, among other things further described in Item 1A - Risk Factors to this Form 10-K, that the investor is entitled to receive additional shares of Common Stock for no additional consideration.  Pursuant to the terms of the securities purchase agreement in the 2007 Private Placement, the investors may be entitled to receive shares of Common Stock in certain circumstances.  The investor claims that the provision providing for the issuance of additional Common Stock was triggered as a result of certain actions taken by the Company.  The Company denies the investor’s allegations and intends to vigorously defend these claims.  If we are unsuccessful in our defense, the Company may be required under the terms of the securities purchase agreement to issue approximately 146,664,375 shares to the investor, and, if all of the other investors sought the same remedy as a result of the amendment to the warrant, the Company may be required to issue approximately 1,099,494,872 shares in the aggregate.  Issuing any significant portion of such shares of Common Stock would cause substantial dilution to existing shareholders.
 
As of December 31, 2009, pursuant to a Securities Purchase Agreement, as amended and restated (the Purchase Agreement), we completed the sale of Series B Preferred Stock for $1,490,015 in cash net of associated expenses.  The Series B Preferred Stock may be converted into Common Stock of the Company at the option of the holder, at a price of $0.08 per share (subject to adjustment) so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding derivative securities, and without the payment of additional consideration by the holder.  The Shares of Series B Preferred Stock must be converted into Common Stock of the Company upon the demand by the Company after the fifth anniversary of the date of issuance.  The Series B Preferred Stock will not be immediately registered under either federal or state securities laws and any may not be sold unless a registration statement covering such securities is declared effective by the Securities and Exchange Commission or an applicable exemption from registration applies.  In connection with the sale of the Series B Preferred Stock, we paid $51,748 in finder’s fees.
 
 
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Additional Issuance of Securities
 
In April 2009, in connection with the employment of the Company’s President and General Counsel, the Company granted to its President and General Counsel an option to purchase an aggregate of 4,500,000 shares of the Common Stock at an exercise price of $0.08.  One million of the options vested immediately, and one million five hundred thousand vested on January 1, 2010.  The remaining two million options vest on September 15, 2010.  The options expire on April 29, 2019.
 
Also during the second quarter of 2009, in connection with an appointment to the Company’s Board of Directors, the Company granted the new director an option to purchase 500,000 shares of the Common Stock. The options vest 250,000 shares every six months, have an exercise price of $0.08, and expire on April 29, 2015.
 
In February 2010, in connection with an appointment to the Company’s Board of Directors, the Company granted the new director an option to purchase 1,500,000 shares of Common Stock. The option vests 250,000 shares every six months, have an exercise price of $0.26, and expire on February 24, 2015.
 
All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
 
ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Corporate Overview
 
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  Our Company operates primarily in the emerging field of molecular diagnostics and imaging where such tools greatly enhance scientific discovery.  Our primary business consists of licensing our intellectual property and working with prospective customers on the development of varied products that utilize pattern recognition tools.  We also endeavor to develop our own product line of newly discovered biomarkers and pathways that include human genes and genetic variations, as well as gene, protein, metabolite expression differences and image analysis techniques.  In drug discovery, biomarkers can help elicit disease targets and pathways and validate mechanisms of drug action.  They may also be pharmacodynamic indicators of drug activity, response and toxicity for use in clinical development.
 
We partnered and intend to continue partnering with clinical laboratories to commercialize our clinical diagnostic tests and to provide pharmaceutical and diagnostic companies with all aspects of diagnostic and drug discovery, from expert assessment of the clinical dilemma through proper selection and procurement of high quality specimens.  We will then apply our proprietary analytical evaluation methods and state-of-the-art computational analysis to derive relevant and accurate clinical data, with the goal of producing new diagnostic and prognostic tests as well as image analysis techniques.
 
Our business is based on the belief that in order to discover the most clinically relevant biomarkers, the computational component must begin at the inception of the clinical dilemma to be solved.  This process includes several critical levels of decision-making - all of which are part of our business strategy.  We intend to produce more relevant and predictable biomarkers for drug discovery so that new and better medicines and diagnostic markers can be developed for patients worldwide.
 
 
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Operational Activities
 
The Company actively markets its technology and related developmental expertise to several prospects in the healthcare field, including some of the world’s largest corporations in the pharmaceutical, biotech, and life sciences industries.  Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts will produce favorable results in the future.  In 2010, we plan to focus on the development, consulting and licensing of our technology in various fields of use.
 
Licensing and Commercialization Developments
 
We previously announced that the RT-PCR assay for the four genes comprising the Company's recently commercialized gene-based molecular diagnostic test for prostate cancer can be successfully used in urine samples for gene testing. The study, completed in collaboration with a world renowned academic cancer research hospital, demonstrated that the gene expression of all four genes comprising the molecular signature for clinically significant prostate cancer could be detected in urine samples spiked with as few as 50 prostate cancer cells.
 
On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. (“Abbott”), pursuant to which, among other things, the Company granted Abbott a worldwide, exclusive, royalty-bearing license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests in both biopsy tissue and urine. We also granted Abbott a worldwide royalty bearing, co-exclusive license (co-exclusive with Quest) for developing and commercializing a Laboratory Developed urine based molecular diagnostic test ("LDT") for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients. Abbott paid to us a one-time initial signing fee of $100,000 and then reimbursed us $100,000 in development costs as required by the license agreement.  In addition, with respect to products subject to the license (the “Products”), Abbott will pay milestone payments to us upon achievement of the following events:  $250,000 upon completion of Phases 1 and 2 as described in the FDA Submission Plan; $250,000 upon completion of Phases 3 and 4 as described in the FDA Submission Plan; $500,000 upon submission of either a 510(k) or Pre Market Approval (“PMA”) submission to the FDA; and $500,000 upon the receipt of a written notification by the FDA of the approval of the applicable 510(k) or PMA submission. We will also receive royalty payments of 10% of Abbott’s Net Sales for the Products with medical utility claims for use on prostate biopsy tissue samples, and 5% of Abbott’s Net Sales for the Products with medical utility claims for use on urine samples. In addition to the royalty payments, with respect to the urine based products, Abbott will also pay us certain amounts upon the achievement of certain milestones as follows:  after the sale of 50,000 tests in a calendar year, a milestone payment of $200,000; after a sale of 200,000 tests in a calendar year, a milestone payment of $750,000; and after a sale of 500,000 tests in a calendar year, a milestone payment of $1,500,000.  “Net Sales” is equal to Abbott’s gross revenue less 5%, subject to adjustments as described in the license.
 
On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a urine-based LDT for clinically significant prostate cancer which could be commercialized and sold by Quest’s clinical laboratories directly to physicians for their patients.  In consideration of granting the license to Quest, Quest paid a license fee to the Company and will pay running royalty payments, certain milestone payments, and development fees.
 
The Company is continuing to advance the development of the urine based prostate cancer test. The Company is pleased with the data and results completed to date.  We continue to progress towards the goal of commercialization of the urine-based prostate cancer test at Quest and with Abbott as laboratory developed tests in the near future, as well as an in-vitro diagnostic test (IVD test kits) offered for sale by Abbott upon FDA approval of the test kits.   Upon regulatory approval, Abbott could begin commercialization and sale of the individual in-vitro diagnostic test kits to additional national, regional and local clinical laboratories, as well as hospital, academic and physician laboratories around the world.
 
On March 11, 2010, the Company, Quest Diagnostics Incorporated (“Quest”) and Smart Personalized Medicine, LLC (“SPM”) entered into a Development Agreement (the “Quest Development Agreement”) pursuant to which the Company and SPM will assist Quest in the development of new laboratory tests for aiding in the selection of breast cancer therapies. The Company, SPM and Quest also entered a related Licensing Agreement (the “Quest License”).
 
Pursuant to the Quest License, SPM granted a co-exclusive (with SPM) sublicense to utilize the Licensed Patent Rights to the extent necessary to enable Quest to develop Products and perform the Validation Work under the Quest Development Agreement. Quest has the right to use SPM’s Breast Cancer Database developed in association with a world renowned academic cancer center (the “Database”).
 
 
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In consideration for the license, Quest will separately make payments to SPM and us. Such payments to us will include a $500,000 up front “Development License Fee,” monthly “License Maintenance Fees” equal to $8,750 for the first year and $17,500 for each year thereafter (with such fees being credited against the “Royalty Payments” described below), upon the publication of a study performed for the Validation Work an “Initial Product License Fee” of $125,000 for each of the first two Products, and “Royalty Payments” equal to 2.45% of the Net Sales of each Licensed Product (i.e., each breast cancer test) sold by Quest. Quest will reimburse SPM and us for costs incurred related to any Validation Work done with respect to a Product.
 
Pursuant to the Quest Development Agreement, we are required to use the support vector machine technology and other intellectual property licensed to SPM to analyze data for the development and/or validation of applications of clinical laboratory services, In Vitro Diagnostic kits, clinical trial services and the other elements of “Field” (collectively, the “Products”). In consideration for our efforts under the Quest Development Agreement, Quest will pay us $375,000 (in addition to the $500,000 described above), which payments shall be made in equal monthly installments over the next nine months.
 
Effective March 11, 2010, the Company and SPM amended (the “Amendment”) the original License Agreement, dated August 22, 2008 (the “SPM License Agreement”), pursuant to which we had licensed our intellectual property to SPM for use in the development of breast cancer products. As amended, we will receive all payments under the Quest Development Agreement and License Agreement directly from Quest, and SPM will not be required to make any additional payments to the Company related to either such agreement.  With respect to SPM proceeds received unrelated to the arrangement with Quest, we will receive a per test royalty up to 7.5% based on net proceeds received from a Test (as defined in the SPM License Agreement) and such additional allocation and distribution of license fees and royalties received from future sublicenses with third parties as may be agreed.  In addition, our equity percentage interest in SPM was increased from 15% to 20%, and such equity percentage interest may be diluted only to the same extent and in the same manner as each other initial equity percentage interest holder; provided, however, that when raising additional equity, SPM must obtain our prior written approval of the terms and conditions of such equity offering.  SPM expects that once the laboratory test is developed with Quest, it can provide physicians and their patients a way to better determine the probability of relapse, allowing patients with good prognosis results an opportunity to avoid unnecessary expensive and traumatic chemotherapy treatments.
 
On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  During 2008, we and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test.  Results from both the Phase I, Phase II and Phase III double-blinded clinical validation studies now completed at Clarient demonstrated a very high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells.   Although Clarient has not yet reported any commercial sales to us, the prostate gene expression test is available through Clarient’s PATHSiTETM virtual reporting tool and accessible to Clarient’s entire pathology network.
 
 
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In July 2008, the Company and DCL Medical Laboratories LLC (“DCL”) entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests for the independent detection of ovarian, cervical and endometrial cancers.  Due to a change in the strategic direction involving DCL, we mutually terminated the development and license agreement in January 2010.  The Company is pleased with the development progress to date of its Pap Smear image analysis technique and is currently seeking a strategic partnership with a clinical laboratory capable of completing development, final validation and commercialization of this computer assisted diagnostic (CAD) test.
 
In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.  SVM Capital has made significant progress since the formation of the joint venture.  Atlantic Alpha reports that the SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years as well as a limited pilot program of real-time trading activity, and that the latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk.  Once the stability of these models is confirmed, SVM Capital intends to apply the models to a wide range of financial asset classes such as interest rates, currencies, metals and petroleum products.  SVM Capital plans to apply the investment model either in a single fund or a series of related funds.  SVM Capital expects to charge a management fee and a performance fee related to its investment activities. HDC owns a 45% equity position in SVM Capital.
 
In August 2008, we entered into an agreement with Patent Profit International, a Silicon Valley-based patent brokerage firm, with the goal of marketing our patent portfolio and exclusive rights to SVM techniques and applications outside of biomarker discovery and the healthcare field, to prospective buyers/licensees.  In December 2009, the Company terminated the arrangement in favor of establishing internal resources to pursue the monetization of our intellectual property portfolio in non-healthcare fields using our own resources, including the hiring of our Executive Vice President and Managing Director of Global IP Strategies.  Our goal remains to monetize our significant intellectual property through non-medical licenses and development agreements such as we have accomplished in the healthcare space.
 
Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept The Company is pleased with the development progress to date, and the Company is now seeking a strategic partnership with a clinical laboratory capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data.
 
We have developed, in association with a large international pharmaceutical company, a diagnostic test for use as a surrogate biomarker to determine treatment success in the clinical trial for its new drug to treat BPH (enlarged prostate).  This international pharmaceutical company was acquired by a larger pharmaceutical company during our final contract discussions, and the acquiring company has now subsequently been acquired by an even larger international pharmaceutical company. After the successful integration of these companies, we hope to renew interest in the BPH test that we developed for them. If the new pharmaceutical company chooses not to continue development of its BPH drug, then we intend to seek another strategic pharmaceutical partner, which has BPH drugs either in the market currently or under development to finish development, final validation and commercialization of our new molecular diagnostic test for BPH.
 
We have advanced our dialogue with other important industry players in the healthcare field and, in certain situations, related to the field of molecular diagnostics.  We will also continue to pursue development opportunities with our existing licensing customers.
 
 
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While we have a number of negotiations in process with potential licensing partners, there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized, or that those that may be finalized do not provide the economic returns that we expect.
 
Intellectual Property Developments
 
The U.S. Patent and Trademark Office issued a new patent to the Company in January 2009, which covers a feature ranking technique for use with support vector machines.  In June 2009, the U.S. Patent and Trademark Office issued two new patents to the Company, one of which includes expanded claims to the Company’s proprietary RFE-SVM method for feature selection.  The second patent covers a web-based data mining system that utilizes multiple support vector machine models to analyze combinations of biological data of many different types, for example, genomic, proteomic, and clinical data, from many different sources, including measurement instruments, clinical databases, on-line databases and on-line journals to produce ranked lists of genes or proteins that may be used as biomarkers..  The U.S. Patent and Trademark Office issued another new patent to the Company in November 2009 covering an alternative method of feature selection that reduces the number of support vectors to create a sparse-SVM that can be used to generate a codebook for identifying patterns in data, including applications to signal compression. Also in November 2009, the U.S. Patent and Trademark Office issued the Company’s first patent covering a pre-processing method to greatly improve the effectiveness of SVMs for the analysis of mass spectrometry data for protein biomarker discovery.  Finally, in December 2009, the European Patent Office granted a patent on the Company’s claims covering the use of SVMs for computer-aided analysis of digitized images.  With the issuance of these patents, the Company now holds the exclusive rights to 41 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.
 
In December 2009, the decision was made to allow the two remaining pending patent applications covering methods using Fractal Genomic Modeling to be abandoned following repeated rejections by the U.S. Patent and Trademark Office.  These rejections were based on a change in patentability criteria that was set forth in a 2008 decision by the U.S. Supreme Court in a case known as In re Bilski.  The applications, which had been filed prior to the ruling, did not contain certain descriptive material that would have been necessary to overcome a patentable subject matter rejection pursuant to Bilski.
 
On October 16, 2009, the U.S. Patent and Trademark Office issued a notice of allowance for the Company’s pending patent application entitled “Kernels and Kernel Methods for Spectral Data.”  This application includes claims covering an alternative pre-processing method for enhancing the analysis of protein expression data obtained using a mass spectrometer.   In December 2009, the Company filed a provisional application covering its new smart phone application for melanoma screening.   Also in December 2009, the Company filed an international patent application through the World Intellectual Property Organization (WIPO) with claims covering the four gene prostate cancer test and algorithm using tissue or urine specimens.  This application will allow further coverage of the prostate cancer test to be sought via foreign patent offices including Europe, China and Japan, among over one hundred other countries.
 
In October 2008, an Indian patent was issued to the Company covering the use of SVMs for knowledge discovery from multiple data sets.  Also that month, the U.S. Patent and Trademark Office issued a new patent to the Company covering a data mining platform with multiple SVM modules for use in analyzing bioinformatics data.
 
In August 2008, the U.S. Patent and Trademark Office granted a patent to us covering the use of SVMs in computer-aided image analysis of digitized microscopic images of medical specimens.  This patent focuses on a method and computer system for analyzing medical images generated during microscopic evaluation of cytology specimens and tissue samples.  SVM-aided image analysis using this patented method could permit automated and rapid analysis of a series of sample images that are typically examined visually by a technologist or pathologist, greatly increasing the sensitivity and accuracy of tests.
 
 
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The U.S. Patent and Trademark Office issued a new patent to the Company in June 2008, which covers the use of SVMs for computer-aided analysis of medical images, with particular applications in cytology and pathology.  Also in June 2008, the Company was issued a patent in Japan, which covers recursive feature elimination (RFE) using SVMs for selection and ranking of the most important features within large datasets. In May 2008, the U.S. Patent and Trademark Office issued two new patents to the Company, one of which claims a method for analysis of any type of data that has a structure.  The second patent covers additional feature selection techniques that can be used to successfully identify the most important pieces of information needed to solve complex pattern-recognition problems.  The U.S. Patent and Trademark Office issued one new patent to the Company in April 2008, which covers the use of FGM technology for visualization of data patterns.
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
Revenue
 
Since December 31, 2005, the Company has received cash from operating activities totaling $1,157,263, which consists of recorded revenue of $613,328 through December 31, 2009 and has deferred revenue yet to be recognized of $543,935 at December 31, 2009.
 
For the year ended December 31, 2009, revenue was $61,803 compared with $65,731 in revenue for the year ended December 31, 2008.  Revenue is recognized for licensing and development fees over the period earned, which in most cases is the length of the license.  The revenue recognized in 2009 was primarily the recognition of deferred revenue.  As of December 31, 2009, the Company had deferred revenue of $543,935, which includes $431,435 of cash received but not yet recognized as revenue and $112,500 in accounts receivable.  Deferred revenue was $453,715 at December 31, 2008, which has been reduced because we recognize the revenue over the life of the contract.
 
Operating and Other Expenses
 
Amortization expense, which is the amortization of costs of acquiring or filing of patents over their estimated useful lives, was $262,719 for the twelve months ended December 31, 2009 and 2008.
 
Professional and consulting fees totaled $406,786 for 2009 compared with $757,748 for 2008.  These fees, related primarily to legal, accounting, and scientific activities, decreased principally due to the change in accounting estimate related to equity grants for Scientific Advisory Board members.  A credit of $325,676 was recorded to reflect this change.
 
Compensation expense of $939,029 for the twelve months ended December 31, 2009 was higher than the $745,918 reported for the comparable period of 2008. This increase is due to additional compensation expense related to employees hired in 2009 to manage the business and to develop and nurture new strategic partnerships and the charge for employee options granted in 2009.
 
Other general and administrative expenses decreased from $484,806 in 2008 to $461,257 in 2009.  This decrease principally was due to reduced costs related to options granted to directors.  A charge of $49,375 was recorded in 2008 related to vesting of a director’s warrants.  No similar charge occurred in 2009.
 
Loss from Operations
 
The loss from operations for the twelve months ended December 31, 2009 was $2,007,988 compared to a loss from operations of $2,185,460 for the prior year.  The decreased loss was due to the decrease in expenses as previously discussed.
 
 
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Other Income and Expense
 
Interest income was $6,393 for the twelve months ended December 31, 2009 compared to $39,160 in 2008.  Decreased interest income was due to the lower average cash available to invest throughout 2009 and the decreasing interest rates available.
 
Interest expense was $15,276 in 2009 compared with $1,161 in 2008.  This increase relates to the $14,437 in interest paid to the holder of the $500,000 promissory note in 2009.  See Liquidity and Capital Resources – Cash Flow from Financing Activities for additional information regarding the issuance of the promissory note.
 
Net Loss
 
The net loss for the twelve months ended December 31, 2009 was $2,016,871 compared to a net loss of $2,147,460 for the twelve months ended December 31, 2008.  The decreased loss was due to the overall decrease in expenses as previously discussed.
 
Net loss per share attributable to common shareholders was $0.01 for both the twelve months ended December 31, 2009 and 2008.
 
Liquidity and Capital Resources
 
At December 31, 2009, the Company had $2,951,270 in cash and cash equivalents and total current liabilities of $824,334.  Additionally, during the first quarter of 2010, we received approximately $3,150,000 in cash from the exercise of warrants and from the receipt of a final payment under the settlement agreement with Vermillion.  On March 29, 2010, our total cash and cash equivalents was approximately $5,200,000.  As a result of the proceeds from the exercise of our warrants and the sale of the Series B Preferred Stock, we believe we have sufficient resources to meet all of our current obligations.  Our net loss for the twelve months ended December 31, 2009 was $2,016,871.  However, cash used by operating activities for the twelve months ended December 31, 2009 was $1,298,940. The net loss is favorably offset by net non-cash charges to operations and adjustments of $717,931, which did not require the use of cash.  Cash used by investment activities was $638,480 due to the acquisition of fixed assets and the addition of $622,358 in certificates of deposit.   Cash provided by financing activities was $3,940,445, comprised of the sale of Series B Preferred Stock for $1,490,015 and $2,450,430 from the issuance of Common Stock as a result of warrant exercises.
 
The Company has no future commitments for capital expenditures and anticipates no changes of circumstances likely to require material demands on liquidity.
 
Cash Flow from Operating Activities
 
In February 2009 in connection with the licensing agreement, Abbott paid to us a one-time initial signing fee of $100,000.  In addition, with respect to the Products, Abbott may be obligated to pay milestone payments outlined above if certain targets are met.  On August 7, 2009, Abbott reimbursed the Company $100,000 in development costs as required by the license agreement.
 
On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a urine-based LDT for clinically significant prostate cancer which could be commercialized and sold by Quest’s clinical laboratories directly to physicians for their patients.  In consideration of granting the license to Quest, Quest paid a license fee to the Company and will pay running royalty payments, and certain milestone payments.
 
 
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In September 2009 and September 2008, we received royalty proceeds related to our licensing agreement with Bruker Daltonics.  The royalties relate to Bruker Daltonics’ sales of its ClinProTools™ clinical proteomics product line for its mass spectrometers, which contains HDC’s SVM technology.
 
Cash Flow from Financing Activities
 
Pursuant to the Company’s rights under certain warrants to acquire shares of Company Common Stock at an exercise price of $0.19 (the “Tranche 2 Warrants”), as a result of the Company’s stock achieving minimum trading price thresholds, in March 2010 the Company elected to require the exercise or forfeiture of certain of the Tranche 2 Warrants (the “Tranche 2 Call Right”).  As a result of the Company’s election with respect to its Tranche 2 Call Right and other voluntary exercises by holders of the Tranche 2 Warrants, the Company issued 11,729,390 shares of Common Stock for gross proceeds of $2,228,584 and warrants to acquire 3,001,827 shares were forfeited.  See Note L – Subsequent Events to our financial statement for the fiscal year ended December 31, 2009 for further information on the Company’s call of the Tranche 2 Warrants.
 
Pursuant to the Company’s rights under certain warrants to acquire shares of Company Common Stock at an exercise price of $0.14 (the “Tranche 1 Warrants”), as a result of the Company’s stock achieving minimum trading price thresholds, in November 2009, the Company elected to require the exercise or forfeiture of certain of the Tranche 1 Warrants (the “Tranche 1 Call Right”).  As a result of the Company’s election with respect to its Tranche 1 Call Right and other voluntary exercises by holders of the Tranche 1 Warrants, the Company issued 15,878,073 shares of Common Stock for gross proceeds of $2,222,930 and warrants to acquire 1,759,394 shares were forfeited.
 
In 2009, the Company, pursuant to the Purchase Agreement, sold 19,402,675 shares of Series B Preferred Stock for an aggregate purchase price of $1,490,015, net of associated expenses.  
 
On June 30, 2009, we issued a promissory note for $500,000 to a director and long-term shareholder.  The promissory note contained an 8% annual interest rate and was due on January 4, 2010.  The promissory note was secured by certain intellectual property and other assets of the Company.  The proceeds from the promissory note were used for general working capital purposes.  This short term debt financing was intended to serve as a bridge to anticipated future licensing revenues in a manner which is not dilutive to shareholders.  On November 11, 2009, the Company paid in full the outstanding balance of $500,000, with a total payment, including interest, of $514,437, thus eliminating this debt and any collateral obligations on the Company’s intellectual property or other assets.
 
The Company continues to incur maintenance fees (fees to various governmental patent offices on previously filed patents) for its patent portfolio and expects those fees to be approximately $250,000 during 2010.
 
The Company has relied primarily on equity funding plus debt financing for liquidity.  While the Company has produced limited revenue, it must continue to do so in order to generate sufficient cash to continue operations.  The Company believes it currently has sufficient cash to support operations until it is able to generate revenue through royalty payments from the molecular diagnostic deals signed, revenue generation from the melanoma risk assessment and additional new licensing fees from its significant patent portfolio and additional new licensing fees from its significant patent portfolio and development fees for providing services related to those patents.  The Company expects to receive the $500,000 License Fee and the additional $375,000 development fees from Quest this year from the breast cancer molecular diagnostic test.  In addition, the Company has been and continues to be in meaningful discussions with a variety of parties related to the commercialization efforts discussed above, which if successful, may result in significant revenue.  Should it prove necessary, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings.
 
 
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Subsequent Events
 
On March 11, 2010, the Company, SPM and Quest entered into a Development Agreement (the “Quest Development Agreement and related License Agreement related to the development of new laboratory tests for aiding in the selection of breast cancer therapies.  In consideration for the license, Quest will separately make payments to SPM and us. Such payments to us will include a $500,000 up front “Development License Fee,” monthly “License Maintenance Fees” equal to $8,750 for the first year and $17,500 for each year thereafter (with such fees being credited against the “Royalty Payments” described below), upon the publication of a study performed for the Validation Work an “Initial Product License Fee” of $125,000 for each of the first two Products, and “Royalty Payments” equal to 2.45% of the Net Sales of each Licensed Product (i.e., each breast cancer test) sold by Quest. Quest will reimburse SPM and us for costs incurred related to any Validation Work done with respect to a Product.  Pursuant to the Quest Development Agreement, we are required to use the support vector machine technology and other intellectual property licensed to SPM to analyze data for the development and/or validation of applications of clinical laboratory services, In Vitro Diagnostic kits, clinical trial services and the other elements of “Field” (collectively, the “Products”).  In consideration for our efforts under the Quest Development Agreement, Quest will pay us $375,000 (in addition to the $500,000 described above), which payments shall be made in equal monthly installments over the next nine months.
 
In February 2010, we announced that we are developing a melanoma/skin cancer mobile phone application which will enable customers to take a picture of a mole, lesion or birthmark, send it to us, and receive a risk assessment for melanoma and other skin cancer on their mobile phone.  This first-ever melanoma/skin cancer mobile phone application using our SVM technology will employ sophisticated image analysis techniques using patent protected algorithms for evaluating moles, lesions and birthmarks.  Since mid-February 2010, Health Discovery Corporation has made significant progress on our melanoma risk management mobile phone application.  We have selected Apple’s iPhone as our initial mobile platform and have been focused on tuning image capture and analysis capabilities for skin lesions and moles for that platform.  In addition, we have initiated discussions with potential U.S. and non-U.S. laboratory partners, dermatologists and marketing partners.  Discussions have also begun with the research arm of a major medical center expert in skin cancer for joint research opportunities.  We anticipate a limited beta release of the iPhone application around Memorial Day, 2010.  This release will enable us to optimize and refine the application prior to a subsequent public launch of the risk assessment tool. The application will combine free skin health educational and research services with the melanoma risk assessment available for a charge.  The retail price for a melanoma risk assessment will be competitive and reasonable for the service provided.   We expect to generate revenues from the iPhone application and website services in the third quarter 2010.
 
In February 2010, the Company entered into an exclusive agreement with the Pancreas, Biliary and Liver Surgery Center of New York at Saint Vincent Catholic Medical Centers in New York City to develop new molecular diagnostic tests for the early detection of pancreatic cancer. The Pancreas, Biliary and Liver Surgery Center is under the leadership of Drs. Michael Wayne, Franklin Kassim and Avram Cooperman.  Under the terms of the agreement, the Pancreas, Biliary and Liver Surgery Center will provide all specimens from their collected specimen banks, specimens on all new patients and all associated clinical and outcomes data. The specimens will include tissue, blood and urine.  The Company will use its patent protected SVM-based discovery technology and science team in an attempt to develop these new molecular diagnostic tests for pancreatic cancer in a similar fashion to the urine-based prostate cancer test developed by the Company and licensed for development and commercialization to Quest Diagnostics and Abbott on a royalty-based, world-wide co-exclusive basis.  The Company will own all of the intellectual property and commercialization rights to these newly discovered molecular diagnostic tests for pancreatic cancer, and the Company intends to partner with a large clinical laboratory for development, marketing and commercialization of these new pancreatic cancer tests.
 
 
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Also in February 2010, the Company entered into an exclusive agreement with the Pancreas, Biliary and Liver Surgery Center of New York to provide clinical specimens to be utilized to complete the final validation of HDC’s molecular diagnostic test for colon cancer. Under the terms of the agreement, the Pancreas, Biliary and Liver Surgery Center of New York will provide specimens from its collected specimen banks, as well as blood and tissue specimens on all new patients along with all associated clinical and outcomes data.  The Company owns all of the intellectual property and commercialization rights to this molecular diagnostic test for colon cancer, and HDC intends to partner with a large clinical laboratory for development, marketing and commercialization of this new colon cancer test.
 
In January 2010, the Company received the final payment of $150,000 that was due under an agreement that settled the Company’s patent infringement lawsuit against Vermillion, Inc. (formerly known as Ciphergen Biosystems, Inc.).
 
In February 2010, the Company appointed D. Paul Graham to the Board to fill the vacancy created by the resignation of Dr. Michael Hanbury, who resigned due to his acceptance of new senior executive responsibilities with Spectrum Laboratory Network in Greensboro, North Carolina. Dr. Hanbury will continue to assist the Company as an unpaid advisor.
 
On January 11, February 15 and February 26, 2010, three new provisional applications were filed in the U.S. Patent and Trademark Office covering stages in the Company’s development of the smart phone application for melanoma screening.  Also in January 2010, a new continuation application was filed in the U.S. Patent and Trademark Office seeking expanded claims covering the use of SVMs for analysis of spectral data.  With these new filings, the Company now has 33 pending U.S. and foreign patent applications.
 
In March 2010, the U.S. Patent and Trademark Office issued the Company’s second patent covering the use of SVMs for analysis of protein mass spectrometry data for using in biomarker discovery. With the issuance of this patent, the Company now holds the exclusive rights to 42 issued U.S. and foreign patents.
 
The Company has been selected by MDB Capital Group as one of its Top 50 “Best and Brightest” companies that will present at the invitation-only, 1st Annual Bright Lights Conference on May 10-12, 2010.  This will be the first public company conference to focus exclusively on companies with disruptive and market changing intellectual property.   The Company was selected to present on the basis of ranking in the top 10th percentile for IP leadership from over 1,600 small cap companies with U.S. patents granted, as rated by PatentVest, MDB Capital Group’s proprietary IP intelligence platform.  In addition, The Company is a nominee for MDB Capital Group’s first-ever “Provectus Award” to be handed-out at the conference.  The term “provectus” is Latin for “most advanced.”  This award will be presented to the top 5 companies across all industries with the highest combined Tech Score, Patent Application CAGR and number of patent grants.  The Provectus Award will recognize the strength of IP process and given to the “Best of the Best”.
 
Critical Accounting Policies, Estimates and Assumptions
 
We consider our accounting policies related to revenue recognition, impairment of intangible assets and stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which represents the future undiscounted cash flows to be derived from the intangible asset, and estimating the useful life and volatility of stock awards granted. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.
 
 
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Valuation of intangible and other long-lived assets.
 
We assess the carrying value of intangible and other long-lived assets at least annually, which requires us to make assumptions and judgments regarding the future cash flows related to these assets.  The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of events or changes in circumstances such as:
 
the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
 
loss of legal ownership or title to the asset;
 
significant changes in our strategic business objectives and utilization of the asset(s); and 
 
the impact of significant negative industry or economic trends.
 
If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
 
Revenue Recognition
 
We recognize revenue principally from license and royalty fees for intellectual property and from development agreements with research partners. Each element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; (iv) collectability is reasonably assured, and (v) both title and the risks and rewards of ownership are transferred to the buyer. We are required to make significant estimates involving our recognition of revenue from license and royalty fees. Our license and royalty fees revenue estimates depend upon our interpretation of the specific terms of each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period of time to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received.  Changes to these assumptions or market conditions could cause changes in revenues.
 
Share-Based Compensation
 
Share-based compensation expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and we employ different assumptions in future periods, the compensation expense that we record could differ significantly from what we have recorded in the current period.
 
 
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For share-based awards, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise and post-employment termination behavior; however, due to the limited history of our Company, such data is limited.  We estimated the expected life will be substantially longer than the vesting period given the early stage nature of our operations and accordingly have used the contractual life as the expected term. Our estimated volatility was derived using our historical stock price volatility. We have never declared or paid any cash dividends on our Common Stock and currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
 
ITEM 8. FINANCIAL STATEMENTS.
 
Financial statements appear beginning on page F1 of this Report.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
We have had no disagreements with our certifying accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
 
ITEM 9A(T).  DISCLOSURE CONTROLS AND PROCEDURES.
 
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation regarding the fiscal quarter and year ended December 31, 2009, under the supervision and with the participation of our management, including our Chief Executive Officer and our President and General Counsel, who is also serving as our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon this evaluation, our management concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
 
 
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The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
 
Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2009.  Our Chief Executive Officer and our President and General Counsel, who is also serving as our Principal Financial Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
ITEM 9B.  OTHER INFORMATION  -   None.
 
 
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PART III
 
ITEM 10. 
DIRECTORS, EXECUTIVE OFFICERS, CORPORATE GOVERNANCE, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
 
Our executive officers, directors and significant employees are:
 
Name
 
Age
 
Position
Stephen D. Barnhill, M.D.
 
51
 
Chief Executive Officer and Chairman of the Board
R. Scott Tobin
 
55
 
President, General Counsel,  Principal Financial Officer and Director
Thomas L. Gallagher
 
47
 
Executive Vice President and Managing Director of Global IP Strategies
D. Paul Graham
 
47
 
Director
Joseph McKenzie
 
60
 
Director
Ramananda K. Madyastha, M.D., Ph.D
 
73
 
Senior Vice President
John A. Norris
 
63
 
Chief Operating Officer
Hong Zhang, Ph.D.
 
48
 
Senior Vice President
 
In addition to the information presented in the biographical details below regarding each director’s specific experience, qualifications, attributes and skills that led us to conclude that he should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards.  They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Company and our Board.
 
Stephen D. Barnhill, M.D., is currently our Chief Executive Officer and has been since September 2003. He also serves as our Chairman of the Board and has been a member of the Board of Directors since November 2003.  He is a physician trained in laboratory medicine and clinical pathology. He has developed and used artificial intelligence, pattern-recognition, and computational techniques in Medicine, Genomics, Proteomics, Diagnostics and Drug Discovery.
 
Dr. Barnhill is or has been a Fellow of the American College of Physician Inventors, the American College of International Physicians, the American Medical Association, the American College of Physician Executives, the American Association of Artificial Intelligence, the American College of Managed Care Medicine, the Association of Clinical Scientists, the American Society of Contemporary Medicine and Surgery, the American Society of Law, Medicine and Ethics, the Southern Medical Society, the American Federation for Clinical Research, and the National Federation of Catholic Physicians.
 
Dr. Barnhill founded the Barnhill Clinical Laboratories in 1988 and served as Chairman, CEO, President and Medical Director. This laboratory was later acquired by Corning-Metpath in 1989 and after the acquisition he served as Medical Director of this clinical laboratory until 1992.
 
 
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In 1992, Dr. Barnhill founded National Medical Specialty Laboratories and served as Chairman, CEO, President, and Medical Director. This research laboratory was founded to utilize pattern-recognition mathematics and artificial intelligence techniques in cancer diagnosis.  Dr. Barnhill is an inventor on the very first patents issued by the United States Patent and Trademark Office for the use of neural networks in medicine. This company was acquired by Horus Therapeutics, a New York based pharmaceutical company.  Dr. Barnhill served as Executive Vice-President and Chairman of the Scientific Advisory Board for Horus Therapeutics until 1998. Johnson & Johnson later acquired the Horus patents invented by Dr. Barnhill.
 
In 1999, Dr. Barnhill founded and served as Chairman, President and CEO of Barnhill BioInformatics, Inc., which later became Barnhill Genomics, Inc. and BioWulf Technologies, LLC and raised over $13.5 million in private placement funding.   The primary focus of these companies was to utilize the next generation of artificial intelligence and pattern-recognition techniques, known as support vector machines, to identify genes that cause cancer. Dr. Barnhill is the sole inventor on the very first patents issued by the United States Patent and Trademark Office for the use of support vector machines in medicine.  From the summer of 2000 until he organized The Barnhill Group L.L.C. in the summer of 2003, Dr. Barnhill was not engaged in any professional activities as the result of a non-compete agreement signed by Dr. Barnhill when he left the employment of Barnhill Genomics, Inc.
 
D. Paul Graham has been a member of the Board of Directors since March 2010.  In 1997, after a successful 12-year career with one of Canada’s premier transportation companies, Mr. Graham opened offices in Toronto, Canada to bring M&A experience and value to what he considered the underserviced sector of the small to middle market.  In 2002, he added offices in Atlanta, Georgia and in 2005 opened offices in Savannah, Georgia, which is now his principal office.
 
As CEO of Graham Capital Partners, LLC (“GCP”), Mr. Graham fuels the Company’s strategic direction.  GCP provides investment banking and business advisory services to the small and middle markets for companies achieving revenues between $10 million and $100 million.
 
GCP undertakes multi-industry transactions and mandates with an emphasis on transportation, logistics, distribution, manufacturing, and business services.  Mr. Graham has been involved in acquisitions, divestitures, and financings totaling over $200,000,000 in transaction value in North America and abroad.
 
Leveraging his multifaceted experience gained in over two decades of day to day operations and finance of privately held companies, Mr. Graham leads GCP in M&A and advisory services in North America, Europe and North Africa.
 
Mr. Graham was educated at Lakehead University and York University in the disciplines of accounting and finance.  Mr. Graham serves in an advisory capacity and as a director for a number of privately held corporations and is a member of the Atlanta chapter of the Association for Corporate Growth.
 
Joseph McKenzie, D.V.M., has been a member of the Board of Directors since April 2009. Dr. McKenzie practices veterinary medicine, having founded and managed the multi-million dollar growth of multiple veterinary practices in Georgia, South Carolina and Florida. He also created and built the community “drug dog” program, which over the years and across the nation has become a generally accepted and highly successful weapon against drug smuggling at the port of Savannah as well as in the community at large. Dr. McKenzie has also been honored for his years of valuable service on the Board of Directors of the Georgia Veterinary Medical Association. Dr. McKenzie holds a degree in chemistry from Armstrong Atlantic State University, where he was recently honored as its most outstanding alumnus. He also holds a doctorate in veterinary science from the University of Georgia’s College of Veterinary Medicine.
 
 
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R. Scott Tobin is our President, General Counsel and Director and has been since April 2009.  Mr. Tobin brings over twenty-five years of corporate law experience.  During his legal practice, Mr. Tobin primarily focused on mergers and acquisitions, corporate governance and finance.  He most recently practiced with the Savannah, Georgia, law firm of Hunter Maclean.  In addition, he has enjoyed success as a senior executive, entrepreneur and venture capitalist.  Mr. Tobin also served as Executive Vice President for Global Strategies at a publicly traded technology company, CEO of a North Carolina manufacturer, General Counsel to a global software firm, Managing Partner of the Atlanta office of a European law firm and an Assistant Attorney General for the State of Georgia. A graduate of the University of North Carolina at Chapel Hill and its School of Law, he now serves as President and Chairman of the law school’s foundation.  Mr. Tobin also has served as the founding director of the UNC School of Law Initiative for Corporate Governance and as a member of the UNC School of Law Council for Entrepreneurial Law. He was recognized in 2003 as one of the Top 10 business people in the Triad Region of North Carolina.  
 
The following sets forth the biographical information for our executive officers and significant employees:
 
Thomas L. Gallagher has served as our Executive Vice President, Managing Director of Global IP Strategies and Associate General Counsel since December 2009.  Mr. Gallagher spent almost fifteen years on Wall Street as a securities and business transaction lawyer, as well as an assistant general counsel managing risk on a transaction and policy basis for a then-$9 billion publicly traded company. He went on to become a Vice President at Goldman, Sachs Co. (NYSE: GS - News), New York, NY, where he helped co-lead the restricted stock desk on the equity trading floor.  He pioneered the use of 10b5-1 selling plans, working with CEOs and other corporate executives to manage their large, single stock risk. He also assisted numerous companies in strategic buy backs of their stock. Subsequently, Mr. Gallagher was also a member of an investment management team at Goldman Sachs that advised clients with approximately $1.5 billion in assets.  In addition to his Wall Street experience, among other activities, Gallagher spent three years working on a pro bono basis for Mother Teresa’s religious order, the Missionaries of Charity, developing and administering the Mother Teresa of Calcutta Center, Inc., and traveling to Calcutta, India, among other locations. He spent a year working for a Jesuit-affiliated not-for-profit organization supporting Fe y Alegria, a network of 2,600 schools for the poor serving 1.3 million students in Latin America and the Caribbean.
 
Ramananda K. Madyastha, M.D., Ph.D, has served as our Senior Vice President of Research and Development since 2003.  Dr. Madyastha is the Recipient of the Raja Ravi Sher Singh of Kalsia Memorial Cancer Research Prize for outstanding contributions in the field of cancer research. He served on the Faculty of the Basic and Clinical Immunology and Microbiology Department at the Medical University of South Carolina. Dr. Madyastha has been an active member of the American Association of Cancer Research for more than 20 years. In addition, he is Board Certified by the American Board of Managed Care Medicine and is a licensed Clinical Laboratory Director. Dr. Madyastha was involved in the development of the first neural network based diagnostic tests for prostate and ovarian cancer.
 
John A. Norris has served as our Chief Operating Officer since September 2009.  Mr. Norris also serves as Chairman of Norris Capital.  From March 2007 to November 2008, Mr. Norris served as the Chairman and CEO of Needlebot, Inc.  From May 1999 to June 2005 Mr. Norris served as the Chairman and CEO of Coprindm Corporation (now Decision View). Mr. Norris is a Former Principal Deputy Commissioner and COO of the US FDA in Washington, DC, where he led the last major FDA-reform initiative, from May 1984 to May 1988.  This work was performed under the overall leadership and guidance of President Ronald Reagan, HHS Secretaries Margaret Heckler and Dr. Otis Bowen, FDA Commissioner Dr. Frank Young, Senator Orrin Hatch, and Congressman Paul Rogers.  Until recently, he also taught healthcare policy and management (including healthcare-reform, Medicare-reform, healthcare-IT-reform, personalized-medicine-reform, and FDA-reform) at Harvard University, and was Founder and Faculty-Editor-in-Chief of the American Journal of Law, Medicine, and Ethics, a leading academic publication covering healthcare policy, law, regulation, management, finance, and ethics.  Mr. Norris has been the CEO to a significant number of successful life-sciences and healthcare-IT companies and has served on the boards of and/or consulted with dozens more.  For example, he helped champion the billion dollar turn-around of the laser eye surgery company, Summit Technology, and he was Chairman of the Board of the American Society of Law, Medicine, and Ethics.  Additionally, he has consulted with senior executives of leading companies, including Pfizer, Merck, J&J, and Glaxo, among others.
 
 
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Hong Zhang, Ph.D. has been our Senior Vice President, Computational Medicine since 2004.  As visiting faculty at Johns Hopkins University, Dr. Zhang lectured at the Center for Biomarker Discovery on Bioinformatics: Peak Detection Methods for Mass Spectral Data.  Currently a Yamacraw Associate Professor at Armstrong Atlantic University, Dr. Zhang was the Vice President and CIO for a neural network and computer assisted medical diagnostic systems company that employs neural network and mathematical/statistical preprocessing techniques.  In this position, Dr. Zhang was involved in digital image processing and pattern recognition for medical image processing as well as software design and programming for support vector machine applications.  Dr. Zhang was a professor in the Department of Mathematical Sciences at Purdue University from 1989 to 1996.  He has held numerous academic positions, including Adjunct Associate Professor, Associate Professor with Tenure, and Assistant Professor.  He was a visiting Associate Professor in 1995 in the Department of Biometry at the Medical University of South Carolina.
 
Throughout his academic career, Dr. Zhang has consulted on many software and analytical development projects for Union Switch and Signal, Inc., General Electric Company, and the Department of Pharmacology at the University of Pittsburgh.  Dr. Zhang has published numerous articles on the use of neural networks in the detection of cancers.  He has been published in more than twenty medical and technical journals.  Dr. Zhang received a Ph.D., Mathematics at the University of Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh, 1986, M.S.E.E., Electrical Engineering, University of Pittsburgh, 1984, B.S., Computer Science, Fudan University, 1982.  Dr. Zhang’s numerous awards and honors include: National Cancer Institute SBIR Grant, 1999, 2000; Purdue Research Foundation Summer Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew Mellon Fellowship, 1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place, Fudan University Mathematics Competition, 1979.
 
The directors named above will serve until the next annual meeting of our stockholders.  Absent an employment agreement, officers hold their positions at the pleasure of the Board of Directors.
 
Audit Committee
 
We do not have a separately designated standing audit committee.  The entire board of directors is acting as our audit committee.  Given the size of the Company and the difficulty in attracting additional directors, the Board has not designated an audit committee financial expert.
 
Audit Report
 
The Board of Directors oversees the Company’s accounting and reporting practices, financial reports, internal controls and audit functions. Management is responsible for the preparation and integrity of the Company’s consolidated financial statements, accounting and financial reporting principles, disclosure controls and procedures, internal control over financial reporting, and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The Company’s independent registered public accounting firm (the “independent auditors”) is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those consolidated financial statements with generally accepted accounting principles, as well as performing an independent audit and expressing an opinion on the effectiveness of internal control over financial reporting.
 
 
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The Board, in overseeing the audit function, provides advice, counsel and direction to management and the Company’s independent auditors on the basis of the information it receives, through discussions with management and the independent auditors, and the experience of the Board in business, financial and accounting matters. The Board’s audit functions are not intended to duplicate or certify the activities of management or the independent auditors. The Board meets with management and the independent auditors to review the Company’s financial statements and discuss various topics and events, including, but not limited to, items related to the Company’s internal control over financial reporting, critical accounting policies and the adequacy of disclosure in the Company’s consolidated financial statements. In accordance with law, the Board has also established procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls, or auditing matters, including the confidential, anonymous submission of concerns regarding questionable accounting and auditing matters.
 
The Board reports as follows with respect to the audit of the Company’s 2009 consolidated financial statements:
 
The Board has reviewed and discussed the Company’s 2009 audited consolidated financial statements with its management, including the reasonableness of significant estimates and judgments and the clarity of disclosure in the Company’s financial statements, including the disclosures related to the Company’s critical accounting policies;
 
The Board has discussed with Hancock Askew & Co LLP, the matters required to be discussed by SAS 61, which include, among other items, matters related to the conduct of the audit of the Company’s consolidated financial statements;
 
The Board has received written disclosures and the letter from the independent auditors required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with the Board concerning independence; and
 
Based on review and discussions of the Company’s 2009 audited consolidated financial statements with management and discussions with Hancock Askew & Co LLP, the Board recommended that the Company’s 2009 audited consolidated financial statements be included in its Annual Report on Form 10-K.
 
This report is provided by the entire Board of Directors.
 
Nominees for Directors
 
In filling vacancies and otherwise identifying candidates for our Board of Directors, we seek individuals who will be able to guide our operations based on their business experience, both past and present, or their education. Responsibility for our operations is centralized within management.
 
Shareholder Nomination of Candidates for Board of Directors
 
We have not made any material changes to the procedures by which our shareholders may recommend nominees to the Board of Directors.  Nominations of persons for election to the Board of Directors may be made by any shareholder who complies with the notice provisions set forth in Section 3.8 of the Bylaws, which provides that a shareholder’s notice must be delivered or mailed and received at the principal executive office of the Company not less than thirty days before the date of the meeting; provided, however, that in the event that less than forty days’ notice or prior public disclosure of the date is given, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which the public announcement of the meeting date was made.  Such shareholder’s notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person as required to be disclosed in solicitation of proxies for election of Directors made in compliance with Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person’s written consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the books of the Company, of such shareholder and (B) the class and number of shares of the Company’s capital stock that are beneficially owned by such shareholder.  At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Company that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee.  No person shall be eligible for election as a Director of the Company unless nominated in accordance with the provisions of Section 3.8 of the Company’s Bylaws.
 
 
48

 
 
Code of Ethics
 
The Company has adopted a Code of Ethics applicable to our Chief Executive Officer and Principal Financial Officer.  This Code of Ethics is posted on our website at www.healthdiscoverycorp.com.  The Code of Ethics is also available without charge upon request directed to Investor Relations, Health Discovery Corporation, 2 East Bryan Street, Suite #601, Savannah, GA  31401.  The Company intends to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
Summary Compensation Table
 
The following table sets forth various elements of compensation for our Named Executive Officers for each of the last two calendar years:
                                   
Name and Principal
Position
 
Year
 
Salary ($)
   
Bonus ($)
   
Option
Awards
($)
   
All Other Compensation
($)
   
Total
 
                                   
Stephen D. Barnhill, M.D. Chief
 
2009
  $ 300,000     $ 8,508     $ - (1)   $ 31,855 (2)   $ 340,363  
Executive Officer
 
2008
  $ 300,000     $ 50,000     $ 172,485 (1)   $ 38,291 (2)   $ 560,776  
                                             
R. Scott Tobin
 
2009
  $ 84,461           $ 175,331 (1)   $ 8,752 (2)   $ 268,544  
President & General Counsel
 
2008
                             
 
(1)
See Note I –Stock Compensation, to the Company’s Financial Statements for the fiscal year ended December 31, 2009 for disclosure of assumptions made in the valuation of options.
 
(2)
Represents health insurance premiums and reimbursed healthcare costs.
 
Employment Agreements
 
On August 15, 2008, the Company entered into an employment agreement with Dr. Stephen Barnhill for his employment as Chief Executive Officer.   The employment agreement has a term of two years.  Under the terms of the employment agreement, Dr. Barnhill received a one-time retention signing bonus of $50,000 and his annual base salary is $300,000.  Dr. Barnhill will also be eligible to receive a cash bonus equal to 10% of the Company’s revenue received during the term of the employment agreement; but such cash bonus cannot exceed 300% of his annual base salary.  Dr. Barnhill was also granted an option to purchase an aggregate of 6,000,000 shares of the Company’s Common Stock at an exercise price of $0.08; 5,000,000 of which have vested with the remaining 1,000,000 vesting upon the Company’s Common Stock achieving a minimum share price.  Dr. Barnhill is eligible to be reimbursed monthly for reasonable and necessary business expenses and to receive health insurance benefits and other benefits maintained by us for our executives.  Dr. Barnhill will be entitled to twenty paid vacation days during the calendar year.  If Dr. Barnhill’s employment is terminated for Cause, as that term is defined in the employment agreement, or if Dr. Barnhill terminates the employment agreement for Good Reason, as that term is defined in the employment agreement, then Dr. Barnhill will receive as severance the amount of his base salary for the remainder of the term and an amount equal to the actual cost of ninety days of his COBRA premium payments.  If the employment agreement is terminated for any other reason than for Cause or for Good Reason, Dr. Barnhill is not eligible to receive severance.  The employment agreement also generally provides that Dr. Barnhill will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of 12 months following termination of employment.
 
 
49

 
 
We entered into an employment agreement with Mr. R. Scott Tobin  effective April 15, 2009. The employment agreement has an initial term of eighteen (18) months, beginning April 15, 2009, and will automatically renew and continue for successive twelve (12) month periods unless otherwise terminated.   Mr. Tobin will receive an annual base salary of $120,000 and will also be eligible to receive a bonus, which may be paid in cash, stock, enhanced employee benefits or a combination thereof as determined by the Company, of up to one hundred percent (100%) of his salary, based on objectives jointly determined by Mr. Tobin and the Chairman and CEO.   Mr. Tobin was also granted an option to purchase an aggregate of 4,500,000 shares of the Company’s Common Stock at an exercise price of $0.08, which vest over an eighteen (18) month period, and with respect to a portion of the options, the Company attaining certain performance metrics, since achieved.  Mr. Tobin is eligible to receive health insurance benefits and other benefits maintained by us for our executives.   If Mr. Tobin’s employment is terminated without Cause, as defined in the employment agreement, or if Mr. Tobin terminates the employment agreement for Good Reason, as defined in the employment agreement, then Mr. Tobin will receive as severance (i) the maximum incentive bonus he would have received had he remained employed by the Company the later of the entire calendar year in which the termination occurs or the end of the term, (ii) the amount of his base salary for the remainder of the term of the agreement plus ninety (90) days, and (iii) an amount equal to the actual cost of ninety (90) days of his COBRA premium payments.  If the employment agreement is otherwise terminated, Mr. Tobin is not eligible to receive severance, and will only receive his base salary accrued up to the effective date of the termination, any unpaid earned and accrued incentive bonus, payment for accrued and unused vacation, and reimbursement of expenses, if any.  The employment agreement also generally provides that Mr. Tobin will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of twelve (12) months following termination of employment.
 
On September 15, 2009, we entered into an employment agreement with Mr. John A. Norris for his employment as Chief Operating Officer.  In connection with his service as Chief Operating Officer, Mr. Norris is responsible for business development, primarily creating new strategic partnerships, licenses and contracts to complement the Company’s existing agreements.  The employment agreement with Mr. Norris had an initial term of four months, effective September 1, 2009, and the parties are continuing to perform under the current agreement on a month to month basis. Mr. Norris receives a monthly salary of $10,000. If Mr. Norris’ employment is terminated without Cause, as defined in the employment agreement, or if Mr. Norris terminates the employment agreement for Good Reason, as defined in the employment agreement, then Mr. Norris will receive as severance the amount of his base salary for the remainder of the term of the agreement. If the employment agreement is otherwise terminated, Mr. Norris is not eligible to receive severance, and will only receive his base salary accrued up to the effective date of the termination and reimbursement of expenses, if any. The employment agreement also generally provides that Mr. Norris will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of ninety days following termination of employment.
 
 
50

 
 
Effective December 1, 2009, we entered into an employment agreement with Mr. Thomas L. Gallagher for his employment as Managing Director, SVM Diversified Strategies.  In connection with his service, Mr. Gallagher’s responsibilities include executing on new licensing opportunities for the Company’s SVM technology in the non-medical space.  Mr. Gallagher receives a monthly salary of $10,000.
 
Outstanding Equity Awards at Fiscal Year-End
 
   
Option Awards
Name
 
Number of Securities Underlying Unexercised Options (#) Exercisable
   
Number of Securities Underlying Unexercised Options (#) Unexercisable
   
Option
Exercise
Price
 
Option Expiration Date
Stephen Barnhill M.D.
     3,000,000       3,000,000 (1)   $ 0.08  
August 15, 2018
R. Scott Tobin
     1,000,000       3,500,000 (2)   $ 0.08  
April 29, 2019
 
(1) The options vest according to the following vesting schedule:  2,000,000 vest on January 1, 2010 and upon the Company’s Common Stock’s closing price for any 20 consecutive trading days achieving a minimum share price of $0.20 (which occurred on December 1, 2009); and 1,000,000 vest on January 1, 2010 and upon the Company’s Common Stock’s closing price for any 20 consecutive trading days achieving a minimum share price of $0.25.
 
(2) The options vest according to the following vesting schedule:  On the designated vesting dates, January 1, 2010 (1,500,000 vest) and September 15, 2010 (2,000,000 vest), based upon the Company’s having achieved during the term of the agreement cash on hand in excess of $800,000 or a positive trailing 90-day EBITDA or raising an additional $1,000,000 in capital from new investors excluding the exercise of warrants and options.
 
Director Compensation
 
Outside directors are paid $1.00 each year.  Each outside director is awarded options to purchase shares of Company Common Stock as described below.
 
Name
 
Fees Earned or Paid in Cash
($)
   
Option Awards
($)
   
Total
($)
 
Stephen D. Barnhill, M.D.
  $ 0.00     $ 0.00     $ 0.00  
R. Scott Tobin
  $ 0.00     $ 0.00     $ 0.00  
Michael Hanbury (1)
  $ 1.00     $ 28,400     $ 28,401  
Joseph McKenzie (2)
  $ 1.00     $ 21,206     $ 21,207  
 
(1)
1,500,000 warrants granted in 2008.  750,000 remain outstanding as of March 30, 2010 and 750,000 were forfeited upon Dr. Hanbury’s resignation from the Board.
 
(2)
500,000 options granted in 2009 and remaining outstanding as of December 31, 2009.
 
 
51

 
 
ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
The following table sets forth information concerning the beneficial ownership of our Common Stock as of March 22, 2010 by (i) each of our directors, (ii) each of our executive officers, (iii) each person who is known to us to be the beneficial owner of more than five percent of our Common Stock, and (iv) all of our executive officers and directors as a group.  At March 22, 2010, there were 210,723,486 shares of Common Stock outstanding and 19,402,675 shares of Series B Preferred Stock outstanding.  At March 22, 2010 there were no shares of Series A Preferred Stock outstanding.
 
Name and Address of Beneficial Owner
 
Amount and Nature
of Beneficial Owner
   
Percent of
Class (1)
 
Dr. Stephen D. Barnhill
Chairman of the Board, Chief Executive Officer and Director
2 East Bryan Street, Suite #601
Savannah, GA 31401
    24,855,722 (2)     11.58 %
R. Scott Tobin
President & General Counsel, Director
2 East Bryan Street, Suite #601
Savannah, GA. 31401
    2,500,000 (3)     1.17 %
D. Paul Graham
Director
2 East Bryan Street, Suite #601
Savannah, GA. 31401
    0 (4)     0 %
Joseph McKenzie
Director
2 East Bryan Street, Suite #601
Savannah, GA. 31401
    6,056,225 (5)     2.84 %
William Quirk
2 East Bryan Street, Suite #601
Savannah, GA 31401
    55,461,664 (6)     22.71 %
All executive officers and directors as a group (4 persons)
    33,411,947       11.99 %
 
(1)
The percentage assumes the exercise by the stockholder or group named in each row of all options or warrants for the purchase of our Common Stock held by such stockholder or group and exercisable within 60 days as of March 31, 2010.
   
(2)
Includes 5,000,000 of vested options. The shares are held by The Barnhill Group LLC, which is wholly owned by Dr. Barnhill.
   
(3)
Consists of vested options.
   
(4)
None of Mr. Graham’s options are exercisable within the next 60 days.
   
(5)
Includes 2,219,802 vested options.
   
(6)
Includes 33,527,778 vested warrants.
 
For Equity Compensation Plan Information Table, see Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
 
52

 
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
On June 30, 2009, we issued a promissory note for $500,000 to Joseph McKenzie, a director and long term shareholder.  The promissory note contained an 8% annual interest rate and was due on January 4, 2010.  The promissory note was secured by certain intellectual property and other assets of the Company.  The proceeds from the promissory note were used for general working capital purposes.  This short term debt financing was intended to serve as a bridge to anticipated future licensing revenues in a manner which is not dilutive to shareholders.  On November 11, 2009, the Company paid in full the outstanding balance of $500,000, with a total payment, including interest, of $514,437, thus eliminating this debt and any collateral obligations on the Company’s intellectual property or other assets.
 
In July 2008, the Company and DCL Medical Laboratories LLC (“DCL”) entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests for the independent detection of ovarian, cervical and endometrial cancers.  Due to a change in strategic direction involving DCL, we mutually terminated the development and license agreement in January 2010.  At the time we entered into the development and license agreement, Dr. Hanbury, our former director, was President, CEO and a shareholder of DCL Medical Laboratories.
 
The Company has adopted the independence standards promulgated by the New York Stock Exchange and has made a determination that, as of March 30, 2010, the following directors are independent according to those standards: Joseph McKenzie and Paul Graham.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
The following table sets forth the fees billed by Hancock Askew & Co. LLP for 2009 and 2008.
 
   
2009
   
2008
 
                 
Audit Fees
  $ 72,938     $ 86,000  
                 
Audit-Related Fees
  $ 12,325       ---  
                 
Tax Fees
    ---       ---  
                 
     Sub-Total
  $ 85,263     $ 86,000  
                 
All Other Fees
  $ -     $ 4,083  
                 
Total Fees
  $ 85,263     $ 90,083  
 
Audit Fees.  This category includes aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements for the year ended December 31, 2009 and 2008, review for the annual report on Form 10-K and for the limited reviews of quarterly condensed financial statements (Forms 10-Q) included in periodic reports filed with the SEC during 2009 and 2008, 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.  No such fees were billed in 2008.
 
Tax Fees.  This category includes the aggregate fees billed or to be billed for tax services for the years ended December 31, 2009 and 2008.  No such fees were billed in 2009 or 2008.
 
 
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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.
 
 
54

 
 
ITEM 15.  EXHIBITS.
 
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(b) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-K:
 
3.1
Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 8-K filed July 18, 2007.
   
3.1(a)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed October 10, 2007.
   
3.1(b)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1(b) to Form 10-K filed March 31, 2009.
   
3.1(c)
Amended and Restated Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1 to Form 10-Q filed November 16, 2009.
   
3.2
By-Laws. Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July 18, 2007.
   
4.1
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 to Registration Statement on Form SB-2, filed June 4, 2001.
   
4.1(a)
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30, 2004.
   
4.1(b)
Copy of Specimen Certificate for shares of Series A Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(b) to Form 10-K filed March 31, 2008.
   
4.1(c)
Copy of Specimen Certificate for shares of Series B Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(c) to Form 10-K filed March 31, 2009.
   
10.1
Employment Agreement between the Company and Stephen Barnhill dated August 15, 2008.  Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed August 18, 2008. *
   
10.2
License Agreement between the Company and Clarient, Inc. dated July 31, 2007.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 3, 2007.
   
10.2(a)
Amendment to License Agreement between Health Discovery Corporation and Clarient, Inc., dated January 13, 2009.  Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed February 5, 2009.
   
10.3
Securities Purchase Agreement by and among the Company, the Cash Purchasers and the Lender Purchasers.  Registrant incorporates by reference Exhibit 10.11 to Form 10-QSB filed August 16, 2007.
   
10.4
Form of Warrant to Cash and Lender Purchasers.  Registrant incorporates by reference Exhibit 10.14 to Form 10-K filed March 31, 2008.
   
10.5
Amendment to Stock Purchase Warrant with Dr. Richard Caruso.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 18, 2008.
   
10.6
Option Award to Stephen D. Barnhill, M.D. dated August 15, 2008.  Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed August 18, 2008. *
   
10.7
License and Development Agreement by and between the Company and DCL Medical Laboratories, LLC dated July 14, 2008.  Registrant incorporates by reference Exhibit 10.17 to Registration Statement on Form S-1 filed September 19, 2008.
 
 
55

 
 
10.7(a)
Mutual Termination and Release Agreement between the Company and DCL Medical Laboratories, LLC dated January 28, 2010.  Filed herewith.
   
10.8
License Agreement between Health Discovery Corporation and Abbott Molecular Inc., dated January 30, 2009.  Registrant incorporates by reference Exhibit 10.13 to Form 10-K filed March 31, 2009.**
   
10.9
License Agreement between Health Discovery Corporation and Quest Diagnostics Incorporated, dated January 30, 2009. Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed February 5, 2009. **
   
10.10
Form of Securities Purchase Agreement.  Registrant incorporates by reference Exhibit 10.15 to Form 10-K filed March 31, 2009.
   
10.10(a)
Form of Amendment to Securities Purchase Agreement.  Filed herewith.
   
10.10(b)
Form of Amended and Restated Securities Purchase Agreement.  Filed herewith.
   
10.11
Employment Agreement between the Company and R. Scott Tobin dated as of April 15, 2009.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed May 5, 2009. *
   
10.12
Option Award to R. Scott Tobin dated April 29, 2009.  Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed May 5, 2009. *
   
10.13
Employment Agreement between the Company and John Norris dated as of September 1, 2009.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed September 18, 2009. *
   
10.14
Secured Promissory Note by the Company in favor of Joseph McKenzie.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed July 7, 2009. *
   
10.15
Form of 2009 Option Award.  Filed herewith. *
   
10.16
Form of 2010 Option Award.  Filed herewith. *
   
10.17
Development Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010.  Filed herewith.
   
10.18
Licensing Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010.  Filed herewith.
   
10.19
License Agreement, dated August 22, 2008, by and between the Company and Smart Personalized Medicine, LLC.  Filed herewith.
   
10.20
Amendment to License Agreement by and between the Company and Smart Personalized Medicine, LLC dated as of March 11, 2010.  Filed herewith.
   
10.21
Employment Agreement by and between the Company and Thomas Gallagher effective December 1, 2009.  Filed herewith. *
   
21.1
Subsidiaries of the Registrant.  Filed herewith.
   
31.1
Rule 13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer.
   
31.2
Rule 13a-14(a)/15(d)-14(a) Certifications of Principal Financial Officer.
   
32.1
Section 1350 Certification of Chief Executive Officer and Principal Financial Officer.
 
* management contract or compensatory plan or arrangement
 
** portions of exhibit have been omitted pursuant to a request for confidential treatment
 
 
56

 
 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  HEALTH DISCOVERY CORPORATION
       
 
By:
/s/ Stephen D. Barnhill, M.D.  
       
    Stephen D. Barnhill, M.D.
       
    Chairman and Chief Executive Officer
       
  Date:  March 31, 2010  
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Name
   
Title
   
Date
             
/s/Stephen D. Barnhill M.D.
   
Chief Executive Officer and Chairman
   
March 31, 2010
 
Stephen D. Barnhill M.D.
           
             
/s/R. Scott Tobin
   
President, General Counsel,
   
March 31, 2010
 
R. Scott Tobin
   
Principal Financial Officer and Director
     
             
/s/Joseph McKenzie, D.V.M.
   
Director
   
March 31, 2010
 
Joseph McKenzie, D.V.M.
           
             
/s/D. Paul Graham    
Director
   
March 31, 2010
 
D. Paul Graham
           

 
57

 
 
Hancock Askew & Co LLP
100 Riverview Drive
Savannah, GA 31404

Report of Independent Registered Public Accounting Firm


Board of Directors
Health Discovery Corporation
Savannah, Georgia


We have audited the accompanying balance sheets of Health Discovery Corporation as of December 31, 2009 and 2008, the related statements of operations, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2009.  These financial statements are the responsibility of the management of Health Discovery Corporation.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we expressed no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health Discovery Corporation as of December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.


/s/ Hancock Askew & Co., LLP

Savannah, Georgia
March 30, 2010

 
F-1

 
 
HEALTH DISCOVERY CORPORATION
 
Balance Sheets
 
December 31, 2009 and 2008

Assets
 
   
2009
   
2008
 
             
Current Assets
           
Cash
  $ 2,328,912       325,887  
Certificates of Deposit
    622,358       -  
Accounts Receivable
    112,500       112,500  
Prepaid Expense and Other Current Assets
    15,569       34,355  
                 
Total Current Assets
    3,079,339       472,742  
                 
Equipment, Less Accumulated Depreciation of $19,251 and $25,947
    24,667       14,888  
                 
Other Assets
               
Deferred  Charges
    10,336       -  
Patents, Less Accumulated Amortization of $1,468,412 and $1,205,693
    2,517,382       2,780,101  
                 
Total Assets
  $ 5,631,724       3,267,731  
Liabilities and Stockholders’ Equity
 
Current Liabilities
           
Accounts Payable – Trade
  $ 570,837       220,972  
Accrued Liabilities
    214,122       245,742  
Deferred Revenue
    39,375       57,153  
                 
Total Current Liabilities
    824,334       523,867  
                 
Deferred Revenue – Long Term
    504,560       396,562  
                 
Dividends Payable
    14,993       -  
Total Liabilities
    1,343,887       920,429  
                 
Commitments and Contingencies
               
                 
Stockholders’ Equity
               
Series A Preferred Stock, Convertible, Stated Value of $0.08 per Share,
               
7,437,184 Authorized, Issued and Outstanding  0 and 7,437,184 respectively
    -       594,975  
Series B Preferred Stock, Convertible, 20,625,000 Shares Authorized,  Issued
               
and Outstanding 19,402,675 and 0 Shares, respectively
    1,490,015       -  
Common Stock, No Par Value, 300,000,000 Shares Authorized,
               
Issued and Outstanding 194,462,847 and 169,522,590  Shares, respectively
    18,807,239       15,744,873  
Accumulated Deficit
    (16,009,417 )     (13,992,546 )
                 
Total Stockholders' Equity
    4,287,837       2,347,302  
                 
Total Liabilities and Stockholders' Equity
  $ 5,631,724       3,267,731  
 
 
See accompanying notes to financial statements.
 
F-2

 
 
HEALTH DISCOVERY CORPORATION
 
Statements of Operations
 
For the Years Ended December 31, 2009 and 2008

   
2009
   
2008
 
             
Revenues
           
Licensing and Development
  $ 61,803       65,731  
                 
Expenses:
               
Amortization
    262,719       262,719  
Professional and Consulting Fees
    406,786       757,748  
Compensation
    939,029       745,918  
Other General and Administrative Expenses
    461,257       484,806  
Total Expenses
    2,069,791       2,251,191  
Net Loss from Operations
    (2,007,988 )     (2,185,460 )
                 
Other Income (Expense):
               
Interest Income
    6,393       39,160  
Interest Expense
    (15,276 )     (1,161 )
Total Other Income (Expense)
    (8,883 )     37,999  
Net Loss
  $ (2,016,871 )     (2,147,461 )
                 
Preferred stock dividends
    14,993       -  
                 
Loss attributable to common shareholders (Basic and Diluted)
  $ (2,031,864 )     (2,147,461 )
                 
Weighted Average Outstanding Shares (Basic and Diluted)
    173,418,302       169,165,786  
                 
Loss Per Share (Basic and Diluted)
  $ (.01 )     (.01 )
 
 
See accompanying notes to financial statements.
 
F-3

 

HEALTH DISCOVERY CORPORATION
Statements of Changes in Stockholders’ Equity

For the Year Ended December 31, 2009 and 2008

   
Issued and Outstanding
                   
   
A
Preferred Shares
   
B
Preferred Shares
   
Common Shares
   
A
Preferred Amount
   
B
Preferred Amount
   
Common
Amount
   
Accumulated Deficit
   
Total Stockholders'
Equity
 
Balance – January 1, 2008
    7,437,184       -       169,007,206     $ 594,975     $ -     $ 15,390,609     $ (11,845,085 )   $ 4,140,499  
Shares issued pursuant to the terms of the Securities Purchase Agreement for no additional consideration
    -               515,384       -       -       36,077       -       36,077  
Share-based Compensation and Expense
    -               -       -       -       318,187       -       318,187  
                                                                 
Net Loss
    -               -       -       -       -       (2,147,461 )     (2,147,461 )
                                                                 
Balance - December 31, 2008
    7,437,184       -       169,522,590     $ 594,975     $ -     $ 15,744,873     $ (13,992,546 )   $ 2,347,302  
Shares issued pursuant upon the exercise of warrants
                    17,503,073       -       -       2,450,430       -       2,450,430  
Stock issued in connection with sales of Series B Preferred Stock
    -       19,402,675                       1,490,015                       1,490,015  
Share-based Compensation and Expense
    -               -       -       -       31,954       -       31,954  
Series A Preferred Stock Exchanged for Common Stock
    (7,437,184 )             7,437,184       (594,975 )     -       594,975       -       -  
Series B Preferred Stock Dividends
                                            (14,993 )             (14,993 )
                                                                 
Net Loss
    -               -       -       -       -       (2,016,871 )     (2,016,871 )
                                                                 
Balance - December 31, 2009
    -       19,402,675       194,462,847     $ -       1,490,015     $ 18,807,239     $ (16,009,417 )   $ 4,287,837  


See accompanying notes to financial statements.
 
F-4

 
 
HEALTH DISCOVERY CORPORATION
Statements of Cash Flows

For the Years Ended December 31, 2009 and 2008

   
2009
   
2008
 
Cash Flows From Operating Activities:
           
Net Loss
  $ (2,016,871 )   $ (2,147,461 )
Adjustments to Reconcile Net Loss to Net Cash
               
Used by Operating Activities:
               
Stock Issued Pursuant to Shareholder Agreement
    -       36,077  
Share-based Compensation and Expense
    31,954       318,187  
Depreciation and Amortization
    269,062       268,147  
                 
Changes in Assets and Liabilities:
               
Decrease (Increase) in Accounts Receivable
    -       112,500  
(Increase) Decrease in Prepaid Expense & Other Assets
    8,448       (526 )
Increase (Decrease)in Accounts Payable – Trade
    349,865       159,799  
(Decrease) Increase in Deferred Revenue
    90,220       (62,708 )
(Decrease) Increase in Accrued Liabilities
    (31,618 )     6,153  
                 
Net Cash Used by Operating Activities
    (1,298,940 )