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EX-32.1 - EXHIBIT 32.1 - HEALTH DISCOVERY CORPex_32-1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
   
 x
QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
   
 
or
   
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transaction period from _____________ to _____________
 
Commission file number 333-62216
HEALTH DISCOVERY CORPORATION
(Exact name of registrant as specified in its charter)
 
Georgia
(State or other jurisdiction of incorporation or organization)
74-3002154
(IRS Employer Identification No.)
         
   
4243 Dunwoody Club Drive
Suite 202
Atlanta, Georgia 30350
   
   
(Address of principal executive offices)
   
         
   
(678) 336-5300
   
 
(Registrant’s telephone number, including area code)
 
         
         
 
(Former name, former address and former fiscal year,
if changed since the last report)
 
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 x  No o
 
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 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
          Non-Accelerated Filer            o
   
(do not check if a smaller reporting company)
 
Accelerated Filer                         o
           Smaller Reporting Company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No  x
 
 
 

 

 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
   
Class:
Outstanding as of May 15, 2014
   
Common Stock, no par value
252,557,310
   
Series A Preferred Stock
0
   
Series B Preferred Stock
8,827,500
   
Series C Preferred Stock
4,333,334
 
ii
 

 

 
 
   
TABLE OF CONTENTS
   
         
PART I -- FINANCIAL INFORMATION  
2
         
   
2
         
     
2
         
     
3
         
     
4
         
     
5
         
  Managements’s Discussion and Analysis of Financial Condition and Results of Operations  
10
         
   
15
         
  Controls and Procedures  
15
 
   
         
 
16
         
   
16
   
Item 1A. Risk Factors   16
         
   
16
         
   
16
         
   
16
         
   
16
         
   
16
         
   
17
 
 
iii
 

 

 
 
 
HEALTH DISCOVERY CORPORATION
 
(unaudited)
 
             
   
March 31,
   
December 31,
 
   
2014
   
2013
 
             
Assets
           
             
Current Assets
           
     Cash
  $ 38,737     $ 71,991  
     Accounts Receivable
    61       80  
     Investment in Available For Sale Securities (Note G)
    624,600       724,000  
                 
          Total Current Assets
    663,398       796,071  
                 
Equipment, Less Accumulated Depreciation of $56,656 and $55,133
    4,229       5,752  
                 
Other Assets
               
     Patents, Less Accumulated Amortization of $2,584,970 and $2,519,290
    1,400,824       1,466,504  
                 
          Total Assets
  $ 2,068,451     $ 2,268,327  
                 
Liabilities and Stockholders’ Equity
               
                 
Current Liabilities
               
     Accounts Payable - Trade
  $ 337,715     $ 326,267  
     Accrued Liabilities
    5,000       2,500  
     Dividends Payable - S/T
    326,137       308,724  
     Deferred Revenue
    779,588       1,024,988  
                 
           Total Current Liabilities
    1,448,440       1,662,479  
                 
Long Term Liabilities
               
     Deferred Revenue
    180,781       191,628  
                 
           Total Liabilities
    1,629,221       1,854,107  
                 
Stockholders’ Equity
               
     Series B Preferred Stock, Convertible,
               
       20,625,000 Shares Authorized, 8,827,500 Issued and Outstanding
    677,902       677,902  
     Series C Preferred Stock, Convertible, 16,500,000 Shares Authorized,
               
        4,333,334 Issued and Outstanding March 31, 2014
    260,000       160,000  
        2,000,000 Issued and Outstanding December 31, 2013
               
     Common Stock, No Par Value, 300,000,000 Shares Authorized
               
       252,557,310 Shares Issued and Outstanding March 31, 2014
               
       252,557,310 Shares Issued and Outstanding December 31, 2013
    26,370,194       26,368,892  
     Accumulated Deficit
    (26,868,866 )     (26,792,574 )
                 
     Total Stockholders’ Equity
    439,230       414,220  
                 
     Total Liabilities and Stockholders’ Equity
  $ 2,068,451     $ 2,268,327  
                 
See accompanying notes to financial statements.
               
 
2
 

 

 
HEALTH DISCOVERY CORPORATION
 
Statements of Operations
(unaudited)
 
For the Three Months Ended March 31, 2014 and 2013
             
   
2014
   
2013
 
Revenues:
           
     Licensing & Development
  $ 261,359     $ 284,139  
                 
Operating Expenses:
               
     Amortization
    65,680       65,680  
     Professional and Consulting Fees
    91,917       279,083  
     Legal Fees
    16,681       39,155  
     Research & Development Fees
    23,438       35,151  
     Compensation
    78,530       166,025  
     Other General and Administrative Expenses
    43,685       114,333  
        Total Operating Expenses
    319,931       699,427  
                 
     Loss From Operations
    (58,572 )     (415,288 )
                 
Other (Expense) Income
               
     Unrealized (Loss) Gain on Available for Sale Securities (Note G)
    (70,800 )     459,650  
     Realized Gain on Available for Sale Securities (Note G)
    53,080       270,450  
        Total Other (Expense) Income
    (17,720 )     730,100  
                 
Net (Loss) Income
  $ (76,292 )   $ 314,812  
                 
Preferred Stock Dividends
    17,413       34,205  
                 
(Loss) Income Attributable to Common Shareholders
  $ (93,705 )   $ 280,607  
             
Weighted Average Outstanding Shares
           
Basic
    252,557,310       233,773,144  
Diluted
    252,557,310       251,141,406  
                 
(Loss) Income Per Share (basic and diluted)
  $ (0.000 )   $ 0.001  
 
See accompanying notes to financial statements.
 
3
 

 

 
HEALTH DISCOVERY CORPORATION
 
(unaudited)
 
For the Three Months Ended March 31, 2014 and 2013
             
   
2014
   
2013
 
Cash Flows From Operating Activities
           
Net (Loss) Income
  $ (76,292 )   $ 314,812  
Adjustments to Reconcile Net (Loss) Income to Net Cash
               
Used for Operating Activities:
               
        Stock-based Compensation
    3,837       17,931  
        Services Exchanged for Options
    14,878       10,158  
        Realized Gain on Investments in Available for Sale Securities Measured in Accordance with the Fair Value Option (Note G)
    (53,080 )     (270,450 )
       Unrealized Loss (Gain) on Investments in Available for Sale Securities Measured in Accordance with the Fair Value Option (Note G)
    70,800       (459,650 )
        Depreciation and Amortization
    67,203       67,832  
        Decrease (Increase) in Accounts Receivable
    19       (108 )
        Decrease in Deferred Revenue
    (256,247 )     (256,247 )
        Increase (Decrease) in Accounts Payable – Trade
    11,448       (41,482 )
        Increase (Decrease) in Accrued Liabilities
    2,500       (50,500 )
                Net Cash Used for Operating Activities
    (214,934 )     (667,704 )
                 
Cash Flows From Investing Activity:
               
     Proceeds from Sale of Available for Sale Securities (Note G)
    81,680       581,475  
                Net Cash Provided by Investing Activity
    81,680       581,475  
                 
Cash Flows From Financing Activity:
               
     Proceeds from Series C Preferred Stock Issuance
    100,000       -  
                Net Cash Provided by Financing Activity
    100,000       -  
                 
Net Decrease in Cash
    (33,254 )     (86,229 )
                 
Cash, at Beginning of Period
    71,991       171,424  
                 
Cash, at End of Period
  $ 38,737     $ 85,195  
                 
See accompanying notes to financial statements.
               
 
4
 

 

 
HEALTH DISCOVERY CORPORATION
 
 
Note A - BASIS OF PRESENTATION
 
Health Discovery Corporation (the “Company”) is a biotechnology-oriented company that has acquired patents and has patent pending applications for certain machine learning tools, primarily pattern recognition techniques using advanced mathematical algorithms to analyze large amounts of data thereby uncovering patterns that might otherwise be undetectable.  Such machine learning tools are currently in use for diagnostics and drug discovery, but are also marketed for other applications.  The Company licenses the use of its patented protected technology and may provide services to develop specific learning tools under development agreements or to sell to third parties.
 
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP).  In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements.  Actual results could differ significantly from those estimates.
 
The interim financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented.  All such adjustments are of a normal recurring nature.  The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of the results of a full year’s operations and should be read in conjunction with the financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.
 
Note B – REVENUE RECOGNITION
 
Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements.  These arrangements are generally governed by contracts that dictate responsibilities and payment terms.  The Company recognizes revenues as they are earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled.  If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.
 
The Company treats the incremental direct cost of revenue arrangements, which consists principally of employee bonuses, as deferred charges and these incremental direct costs are amortized to expense using the straight-line method over the same term as the related deferred revenue recognition.
 
Deferred revenue represents the unearned portion of payments received in advance for licensing and development agreements.  The Company had total unearned revenue of $960,369 as of March 31, 2014.  Unearned revenue of $779,588 is recorded as current and $180,781 is classified as long-term.
 
Note C - NET (LOSS) INCOME PER SHARE
 
Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity.

For the three-month period ending March 31, 2014, both the basic and diluted per share loss are computed by dividing net loss by the weighted average number of common shares outstanding for the period. The calculation of diluted per share amounts would have created an anti-dilutive result due to the net loss for the period.

 
5
 

 

 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
Note C - NET (LOSS) INCOME PER SHARE, (continued)
 
The following is an analysis of the basic and diluted earnings per common share computations for the three months ended March 31, 2013:
       
   
Three months ended
March 31, 2013
 
Basic:
     
Net income attributable to common shareholders
  $ 280,607  
Basic weighted average common shares outstanding
    233,773,144  
Basic earnings per common share
  $ 0.001  
         
         
Diluted:
       
Net income attributable to common shareholders
  $ 314,812  
Basic weighted average common shares outstanding
    233,773,144  
         
Effect of dilutive securities:
       
Conversion of options and warrants
    28,087  
Conversion of preferred shares to common shares
    17,340,175  
Diluted weighted average common shares outstanding
    251,141,406  
Diluted earnings per common share
  $ 0.001  
 
During the three month period ended March 31, 2013, 5,500,000 outstanding stock options and warrants were not included in the computation of diluted earnings per common share because to do so would have an antidilutive effect.

In addition, for the three month period ended March 31, 2014, 4,750,000 outstanding stock options and warrants were not included in the computation of diluted earnings per share as doing so would have an antidilutive effect.

Note D - STOCK-BASED COMPENSATION AND OTHER EQUITY BASED PAYMENTS
 
Stock-based expense included in our net income for the three months ended March 31, 2014 consisted of $18,715 for stock options granted to directors, officers and advisors.  Stock-based expense included in our net loss for the three months ended March 31, 2013 was $28,089.
 
As of March 31, 2014, there was $175,225 of unrecognized cost related to stock option and warrant grants.  The cost is to be recognized over the remaining vesting periods that average approximately 2.5 years.  
 
6
 

 

 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
There were no grants, exercises, forfeitures, or expirations of stock options and warrants for the three months ended March 31, 2014.  As of March 31, 2014, there were 13,500,000 option and warrant shares outstanding with a weighted average exercise price of $0.05.
 
The following schedule summarizes combined stock option and warrant information as of March 31, 2014:
 
Exercise Prices
 
Number 
Outstanding
   
Weighted-
Average
Remaining
 Contractual
Life (years)
 
Number
Exercisable
 
Weighted
Average
Remaining
Contractual Life
(years) of
Exercisable
Warrants and
 Options
 
                     
$0.027
 
3,000,000
   
9.25
 
-
 
-
 
$0.036
 
7,750,000
   
9.50
 
2,000,000
 
9.50
 
$0.040
 
1,000,000
   
3.75
 
1,000,000
 
3.75
 
$0.050
 
1,000,000
   
3.75
 
1,000,000
 
3.75
 
$0.080
 
750,000
   
.25
 
750,000
 
  .25
 
Total
 
13,500,000
       
4,750,000
     
 
                The weighted average remaining life of all outstanding warrants and options at March 31, 2014 is 8 years.  As of March 31, 2014, the aggregate net intrinsic value of all options and warrants outstanding is $12,000, based on the market closing price of $0.031 on March 31, 2014 less exercise prices.
 
Note E - PATENTS
 
                The Company has acquired and developed a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Legal costs associated with patent acquisitions and the application processes for new patents are also capitalized as patent assets. The Company has recorded as other assets $1,400,824 in patents and patent related costs, net of $2,584,970 in accumulated amortization, at March 31, 2014.
                 
                Amortization charged to operations for the three months ended March 31, 2014 and 2013 was $65,680 in both years. Estimated amortization expense is $262,720 for calendar year 2014 through 2018, and $152,904 in 2019.
 
Note F – STOCKHOLDERS’ EQUITY
 
Series B Preferred Stock
 
The Company sold to individual investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses, in 2009.  
 
The Series B Preferred Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding warrants and options. The shares of Series B Preferred Stock will convert into Common Stock of the Company in the fourth quarter of 2014, which is the fifth anniversary of the date of issuance.
 
7
 

 

HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
Note F – STOCKHOLDERS’ EQUITY, continued
 
The Series B Preferred Stock has accrued 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”) 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. Dividends have been accrued for the Series B Preferred Stock in the amount of $326,137 as of March 31, 2014 and $308,724 as of December 31, 2013. The Company plans to satisfy the accrued dividend for the Series B Preferred Stock in the fourth quarter of 2014.
 
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 is required to pay the holders of the Series B Preferred Stock a 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 (the “Cash Bonus”).  Company Net Revenue include, but is not 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”), reduced by the amount of any out-of-pocket costs or expenses that are directly related to obtaining, negotiating or documenting the Revenue Contracts and the performance of such Revenue Contracts, but does 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 right in its entirety if the aggregate payments made to the Series B Holders are equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Cash Bonus 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. No special dividends are accrued for the Series B Preferred Stock special dividend as of March 31, 2014 and December 31, 2013.
 
No dividend payment will be made if, after the payment of such dividend, the Company would not be able to pay its debts as they become due in the usual course of business, or the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved, to satisfy the preferential rights upon the dissolution to shareholders whose preferential rights are superior to those receiving the dividend.
 
Series C Preferred Stock
 
In the fourth quarter of 2013, the Board of Directors authorized issuing up to 12,500,000 Series C Preferred Shares and the Company began to receive funding for the Series C Preferred Shares. As of December 31, 2013 2,000,000 shares were issued at $0.08 for a total of $160,000. During the first quarter of 2014, the Company lowered the price of the Series C Preferred Shares to $0.06, raised the authorized amount to 16,500,000 shares, and issued an additional 666,667 shares to the Subscribers who bought shares in 2013 at $0.08 per share. As of March 31, 2014 the Company had outstanding 4,333,334 preferred shares at $0.06 for a total of $260,000. The Series C Preferred Shares feature $0.08 warrants and $0.08 contingency warrants. The contingency warrants will be issued only if the company has not attained profitability by the end of the first quarter 2016. The holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days.  The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days.  The warrants were valued at $0.025 each using the Black Scholes Method.
 
The goal is to raise a maximum of $1,000,000 funds via this funding. This funding is anti-dilutive because the purchase price is significantly higher than the current 180-day average share price. The Series C Preferred Stock has not been registered under either federal or state securities laws and must be held until a registration statement covering such securities is declared effective by the Securities and Exchange Commission or an applicable exemption applies.
 
8
 

 

 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
Note F – STOCKHOLDERS’ EQUITY, continued
 
The Series C Preferred Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding warrants and options. The Shares of Series C Preferred Stock must be converted into Common Stock of the Company either by the demand by the shareholder or at the fifth anniversary of the date of issuance.
 
Note G – INVESTMENT IN AVAILABLE FOR SALE SECURITIES
 
The Company has elected the fair value option in accordance with ASC 825, Financial Instruments, as it relates to its shares held in NeoGenomics’ common stock that were acquired resulting from the NeoGenomics Master License Agreement executed on January 6, 2012. Management made the election for the fair value option related to this investment because it believes the fair value option for the NeoGenomics common stock provides a better measurement from which to compare financial statements from reporting period to reporting period. No other financial assets or liabilities are measured at fair value using the fair value option.
 
The Company’s investment in NeoGenomics’ common stock is recorded on the accompanying balance sheets under the caption Investment in Available for Sale Securities. The carrying value of this investment on the date of acquisition approximated $1,945,000. The change in fair value from December 31, 2013 to March 31, 2014 was a net loss of $17,720 for the remaining 180,000 shares held and is classified as other expense under the captions Realized and Unrealized (Loss) Gain on Available for Sale Securities in the accompanying statements of operations. The change in fair value from December 31, 2012 to March 31, 2013 was $730,100 and is classified as other income under the captions Realized and Unrealized Gain on Available for Sale Securities for the three months ended March 31, 2013 in the accompanying statements of operations. The Company classifies its investment as an available for sale security presented as a trading security on the balance sheet and the fair value is considered a Level 1 investment in the fair value hierarchy. The March 31, 2014 fair value of the investment of $624,600 is for the remaining shares held and is calculated using the closing stock price of the NeoGenomics common stock at the end of the reporting period.
 
As of March 31, 2014 the Company held 180,000 shares of NeoGenomics stock as compared to 200,000 shares as of December 31, 2013.  The initial 1,360,000 shares were acquired in January 2012 as a result of the NeoGenomics Master License Agreement.
 
Note H – COMMITMENTS
 
From time to time, the Company is subject to various claims primarily arising in the normal course of business. Although the outcome of these matters cannot be determined, the Company does not believe it is probable that any such claims will result in material costs and expenses.
 
9
 

 

 
HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis
 
 
Corporate Overview
 
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.
 
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
 
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular have broad applicability in many other fields.  Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
 
Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by 80 patents that have been issued or are currently pending around the world.
 
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.  In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies.  Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM and FGM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
 
Operational Activities
 
The Company markets its technology and related developmental expertise to prospects in the healthcare, biotech, and life sciences industries.  Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts may produce favorable results in the future.  
 
NeoGenomics License
 
On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”).  Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (IVD) test kit development.
 
Upon execution of the NeoGenomics License, NeoGenomics Laboratories paid us $1,000,000 in cash and NeoGenomics issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012.  In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License.  Milestone payments will be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics Laboratories up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics Laboratories, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics Laboratories derives from any sublicensing arrangements it may put in place for the Cytogenetic Interpretation System and the Flow Cytometry Interpretation System.
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
NeoGenomics Laboratories agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetic Interpretation System”, and a “Flow Cytometry Interpretation System.” NeoGenomics is currently under the second of its one-year extension terms of the license.
 
If NeoGenomics Laboratories has not generated $5 million of net revenue from products, services and sublicensing arrangements within five years, we may, at our option, revoke the exclusivity with respect to any one or more of the initial licensed products, subject to certain conditions.
 
The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development.  We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with NeoGenomics.
 
Plasma Test for Prostate Cancer
 
NeoGenomics is developing a test for Prostate Cancer under the direction of Dr. Maher Albitar using the genes patented by HDC. The test is performed on blood plasma and urine rather than only prostate tissue biopsies. NeoGenomics recently announced that a publication has been released regarding Phase I of the test’s development.  Additionally, NeoGenomics completed Phase II of the prostate test validation.  The results were largely the same as those published regarding Phase I.  These results for Phase II have been submitted as an abstract for presentation at an upcoming conference. NeoGenomics announced their expectation is to launch a limited release of the test in the second quarter of 2014 and a full roll out of the test in the second half of 2014.
 
Cytogenetic Analysis
 
Cytogenetic analysis is the science of studying chromosomes.  Microscopic evaluation of individual chromosomes remains the first step in the evaluation of the human genome.  Cytogenetic analysis is performed on almost all patients with hematopoietic diseases (blood cancers such as leukemia and lymphoma) and on a significant number of patients with solid tumors. The collected data is useful for diagnosis, prognosis and monitoring of diseases.  Currently, specially trained technicians perform most of the analysis manually.  The work is labor-intensive and subjective. Computer automation of this work could significantly reduce cost and improve the quality of the test.
 
NeoGenomics is currently working on development, validation and commercialization of this new image analysis tool for cytogenetic analysis under the direction of Dr. Maher Albitar. The Company and NeoGenomics have spent a considerable amount of time using SVM Technology to create significant improvement in cytogenetic analysis.  NeoGenomics is currently beta testing this co-developed technology within their facilities.  One of the goals with this technology is for NeoGenomics to sub-license this technology after successful internal testing and validation. Per the license agreement, HDC will receive a portion of the sub-license revenue generated by NeoGenomics.
 
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Management’s Discussion and Analysis, continued
 
Flow Cytometry
 
Management believes that our efforts to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company, along with NeoGenomics, is now capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data. This test has been licensed to NeoGenomics for final development and work has begun on the further development of this technology.
 
SVM Capital, LLC
 
In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.    
 
In November 2012 Atlantic Alpha began auditable formal live trading by applying SVM technology to quarterly fundamental corporate data such as sales, earnings and projected earnings. The SVM algorithm is utilized to select U.S. stocks which are expected to outperform or underperform in the next quarter based on current data while at the same time rendering superior portfolio risk metrics. This application of SVM technology allows the creation of a variety of equity portfolios. In the fourteen months ending February 28, 2014, the three key portfolios, large-cap long, large-cap long/short and mid-cap long/short rose approximately 40%, 18% and 29%, respectively.
 
SVM Capital’s immediate goal is to secure a “seed investor”, i.e. an “anchor tenant” for whom to manage money, which may then lead to capital inflow from other investors. The seed investor may be an institution, family office or individual. To this end, SVM Capital is working both independently and with one or more intermediaries. The long-term strategy is to form hedge funds in other financial markets such as foreign stock markets, debt instruments and commodities. SVM Capital may also consider licensing its technology or using other methods that may lead to monetization. In 2013, SVM Capital formed a strategic relationship with Lucena Research of Atlanta, GA which provides machine learning tools to hedge funds, to jointly work on specific projects designed to further the interests of both companies.
 
A thorough exposition of SVM Capital may be found on the appropriate link on the Company’s web page.
 
Intellectual Property Developments
 
Currently, the Company holds the exclusive rights to 65 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.  The Company also has 15 pending U.S. and foreign patent applications covering uses of the SVM technology as well as biomarkers and diagnostic methods that have been discovered using the SVM technology.  The reduction in the total number of issued and pending patents during the past year resulted from the Company’s decision to allow certain foreign patents issued and/or filed in countries that were deemed to have lower strategic value to lapse.  This in turn reduced the Company’s total expenses for patent maintenance.
 
Intel
 
The Company’s patent application that was submitted to provoke an interference with Intel’s Patent No. 7,685,077 remains pending, and interference proceedings have yet to be initiated. The Company continues to evaluate the best approach to this matter that will allow protection of the patent in the most cost efficient manner possible.
 
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Management’s Discussion and Analysis, continued
 
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013
 
Revenue
 
For the three months ended March 31, 2014, revenue was $261,359 compared with $284,139 for the three months ended March 31, 2013.  The revenue earned during the first quarter of 2014 and 2013 is primarily related to the licensing revenue recognition for the NeoGenomics License.
 
Operating and Other Expenses
 
Amortization expense was $65,680 for both the three months ended March 31, 2014 and 2013. Amortization expense relates primarily to the costs associated with filing patent applications and acquiring rights to the patents.
 
Professional and consulting fees totaled $91,917 for the three months ended March 31, 2014, compared with $279,083 for the same 2013 period.  These fees consist primarily of patent filing and maintenance costs, professional fees, and accounting fees.  The decrease was due to the elimination of professional services provided to the Company, specifically consulting fees paid to a former management consultant.
 
Legal fees were reduced with fees totaling $16,681 during the three months ended March 31, 2014 and $39,155 during the same period in 2013.  The reduction was related to legal costs in the first quarter 2013 related to matters pertaining to the Company’s previous CEO, Steve Barnhill.
 
Research and development expense was $23,438 for the three months ended March 31, 2014, and $35,151 for the same period in 2013. This expense for research and development relates primarily to work completed under the NeoGenomics License.
 
Compensation expense of $78,530 for the three months ended March 31, 2014 was lower than the $166,025 reported for the comparable 2013 period. The decrease is attributed to the elimination of several highly compensated former employees.
 
Other general and administrative expense decreased to $43,685 for the three months ended March 31, 2014, compared to $114,333, for the same period in 2013.  This decrease principally was due to a reduction in all non-essential costs by the new leadership beginning in August 2013. 
 
Loss from Operations
 
The loss from operations for the three months ended March 31, 2014 was $58,572, compared to $415,288 for the three months ended March 31, 2013. The reduced loss was due to a disciplined approach by the new leadership team.  Specifically substantial reductions in costs associated with compensation and other general and administrative expenses.
 
Other Income and Expense
 
The Company received a portion of the NeoGenomics license fee in NeoGenomics stock.  The Company has chosen to measure the gain or loss on the value of this asset using the fair value option method.  During the three month period ending March 31, 2014, the change in the NeoGenomics stock fair value decreased by $17,720, which is recorded as other expense in the statements of operations.  During the same three month period in 2013, the change in the NeoGenomics stock fair value increased by $730,100.
 
Net (Loss) Income
 
The net loss for the three months ended March 31, 2014 was $76,292, compared to net income of $314,812 for the three months ended March 31, 2013.  The net income was due primarily to the gain on the sale of NeoGenomics stock.
 
The loss attributable to common shareholders was $93,705 for the three months ended March 31, 2014 compared to earnings of $280,607 in the three months ended March 31, 2013. This significant change is related to the treatment of the NeoGenomics stock (Investment in Available for Sale Securities), which occurred in the three-month period, ended March 31, 2013.
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
Loss per share was $0.000 for the three-month period ended March 31, 2014 compared to earnings per share of $0.001 for the quarterly period ended March 31, 2013.
 
Liquidity and Capital Resources
 
Our ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing our technologies to the market.  The outcome of these matters cannot be predicted at this time.  Our financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.
 
If the going concern assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.  Such adjustments may be material. 
 
At March 31, 2014, the Company had $38,737 in cash and total current liabilities of $1,448,440.  The primary amount of current liabilities relates to $779,588 in deferred revenue. Additionally, we continue to sell our NeoGenomics Stock in order to fund operations. Although the NeoGenomics Stock has increased in value, the number of shares and amount of cash we can generate from the sale of NeoGenomics Stock is subject to fluctuating market and price conditions. As a result we do not believe we have sufficient resources to meet all of our current obligations unless the Company is able to secure revenue via licensing activity or other forms of fund raising either in the debt or equity markets.  None of these options are definitive and there can be no assurances the Company will be successful in these financing efforts.
 
The Company has relied primarily on equity and debt financing for liquidity.  The Company must increase revenues in order to generate sufficient cash to continue operations.  The Company’s plan to have sufficient cash to support operations is comprised of selling its NeoGenomics stock, generating revenue through licensing its significant patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing.  The Company has been unable to generate significant revenue, as further described above.  As a result, the Company has implemented a cash conservation program.
 
As previously disclosed, the Company initially took steps to reduce its expenditures in order to reduce the “burn rate” of cash to approximately $185,000 per month. These steps included reducing expenses and allocating our remaining cash reserves for our operational requirements at a reduced level. Subsequently, the new Board and management team took steps necessary to substantially improve the prior burn.  They have been successful in this endeavor and the burn rate has been reduced to approximately $50,000 per month.  Nevertheless, the Company still will need additional financing in order to continue operations beyond September 2014. The Company continues to explore various means to raise capital, either via debt or equity offerings.
 
The following table summarizes the due dates of our contractual obligations.
 
   
Total
   
1 Year Or Less
   
More Than 1 Year
 
Accrued Liabilities
  $ 5,000     $ 5,000       -  
Total
  $ 5,000     $ 5,000       -  
 
Off-Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
 
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HEALTH DISCOVERY CORPORATION
 
Forward-Looking Statements
 
This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans. The forward-looking statements contained in this Report speak only as of the date of this Report as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers, and the inability to retain a significant number of customers, as well as the risks and uncertainties described in “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2013.
 
 
Not Applicable.
 
 
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation regarding the fiscal quarter ended March 31, 2014, under the supervision and with the participation of our management, including our Interim Chief Executive Officer, 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. 
 
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.  As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Our Annual Report on Form 10-K contains information regarding a material weakness in our internal control over financial reporting as of December 31, 2013 due to an inadequate segregation of duties resulting from our small number of employees.
 
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None.
 
 
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 
 
None.
 
 
Not applicable.
 
 
Not applicable.
 
 
None.
 
 
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-Q:
 
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.
 
 
10.27
License Agreement, dated January 6, 2012, between Health Discovery Corporation and NeoGenomics Laboratories, Inc. Registrant incorporates by reference Exhibit 10.27 to Form 8-K filed on January 12, 2012.
 
31.1
Rule 13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer and Principal Financial Offier. Filed herewith.
 
32.1
Section 1350 Certifications of Chief Executive Officer and Principal Financial Officer. Filed herewith.
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
       
 
Health Discovery Corporation  
  Registrant  
       
 Date: May 15, 2014  
By:
 /s/ Kevin Kowbel  
  Printed Name: Kevin Kowbel  
 
Title: Interim Chief Executive Officer, Principal Financial Officer, and
Principal Accounting Officer
 
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