Overview
We are a molecular diagnostics company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. We operate primarily in the emerging field of personalized medicine where such tools are critical to scientific discovery. Our primary business consists of licensing our intellectual property and working with prospective customers on the development of varied products that utilize pattern recognition tools.
We intend to continue to develop partnership and licensing relationships for test development, from expert assessment of the clinical dilemma to proper selection and procurement of high quality specimens. Through the application of our proprietary analytical evaluation methods and state-of-the-art computational analysis to derive relevant and accurate clinical data, we intend to identify accurate biomarker and pathway discoveries, resulting in patent protection of our biomarker discoveries for future development.
Operational Activities
NeoGenomics
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.
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 would 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 to the Company. 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 Cytogenetics Interpretation System and the Flow Cytometry Interpretation System and (ii) the Company will receive 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 Cytogenetics Interpretation System and the Flow Cytometry Interpretation System.
NeoGenomics Laboratories has 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 “Blood Test for Prostate Cancer (using Blood Plasma)”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetics Interpretation System”, and a “Flow Cytometry Interpretation System.” If NeoGenomics Laboratories has not generated $5.0 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.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Simultaneously with the signing of the NeoGenomics Master License Agreement, Dr. Maher Albitar, former Chief Medical Officer of Heath Discovery Corporation and current member of the Board of Directors and Consultant to HDC, accepted the position as Chief Medical Officer and Director of Research and Development of NeoGenomics and he was placed in charge of completing development, validation and commercialization of the Company’s product pipeline licensed to NeoGenomics.
NeoGenomics continues to move forward with its efforts to commercialize products using Health Discovery Corporation’s technology.Please refer to NeoGenomicsfilings and press releases for further information.
Blood Test for Prostate Cancer
NeoGenomics has initiated the development of the Blood Test for Prostate Cancer under the direction of Dr. Maher Albitar using the genes patented by HDC.
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 most of the analysis is performed manually by specially trained technicians. 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.
Retinalyze
On February 17, 2012, the Company announced the commercial launch of Retinalytics SVM
TM
, to assist Ophthalmologistsand Optometrists in the Detection of Macular Degeneration. While the first Retinalytics SVM
TM
productreleased focuses on age-related macular degeneration (“AMD”), the Company continues to develop a second Retinalytics SVM
TM
product using fundoscopic images of retinal vessels to assist eye care professionals in the detection of Alzheimer’s disease.
On April 17, 2012 Retinalyze, LLC granted to the National EYEPA Coalition (“EYEPA”) the exclusive right to use technologies developed by Retinalyze, LLC for optometrists provided that EYEPA use its best efforts to meet certain performance goals. Approximately 753 doctors have signed up to use the Retinalytics SVM
TM
analysis technology and 1,700 scans were sent for analysis during the 3
rd
Quarter for a total of 2,274 scans analyzed to date. However, the volume of images processed via the agreement has thus far been significantly less than expected and revenues to date from Retinalyze have been negligible. The Company believes the lower volume is attributed to difficulties with integration of the fundoscopic cameras to the Retinalytics SVM
TM
analysis program on the doctor's in-house computer systems which requires technical computer assistance and in some cases the purchase of a computer. Retinalyze, LLC continues to evaluate options to streamline this process with the goal of solving this slower than expected implementation issue thereby allowing the doctors who sign up for the program to begin using the Retinalytics SVM
TM
system quicker allowing for the analysis of a higher volume of scans.
In addition to the Optometry contract with the National EYEPA, Retinalyze, LLC has also signed agreements with several large multi-physician Ophthalmology groups in Florida to begin using the Retinalytics SVM
TM
analysis technology to assist physicians in the diagnosis of macular degeneration.
In June, 2012, Retinalyze, LLC signed a licensing agreement to incorporate Retinalytics SVM
TM
as a reimbursed procedure with Vision Care Direct’s Vision Plans and corresponding Independent Physician Associations (IPA) systems.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Intellectual Property Activities
In September 2012, the U.S. Patent and Trademark Office granted Patent No. 8,275,723 to the Company coveringa
s
ystem for providing data analysis services using a support vector machine for processing data received from a remote source. This is the Company’s third patent covering a fee-for-service SVM analysis, with claimed uses including both medical and financial analyses.
In October 2012, the European Patent Office granted a patent to the Company covering asystem for providing data analysis services using a support vector machine for processing data received from a remote source. The patent will be validated in several European countries including the UK, France, Germany, Ireland, and Switzerland.
Also in October 2012, the U.S. Patent and Trademark Office granted Patent No. 8,293,461 covering a group of genes which exhibit reduced expression (down-regulated) relative to normal in the presence of prostate cancer. The claimed biomarkers may be of particular value in tests using DNA methylation methods. Once issued, this will be the Company’s second patent covering methods for screening for prostate cancer using down-regulated genes.
With the recently issued patents, the Company now holds the exclusive rights to 57 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 23 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 relative to the last report (61 and 26, respectively) results 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 Update
In October 2012, the US Patent and Trademark Office issued a reexamination certificate for Intel’s U.S. Patent No. 7,685,077, which issued in 2010 with claims covering SVM-RFE. The reexamination certificate confirms the patentability of the claims as amended during the reexamination proceedings.
While disappointed with issuance of the reexamination certificate, the Company draws encouragement from the fact that the Patent Office has agreed that all elements of the Company’s patented SVM-RFE method are present in the Intel claims. A fundamental principle of patent law is that the addition of one or more elements to a patented claim does not avoid infringement. In this case, Intel merely added a standard computer operation to the Company’s SVM-RFE method. Furthermore, possession of a patent on series of steps does not avoid infringement of a patent covering a subset of those steps.
In September, the Company submitted a request to the Patent Office to initiate interference proceedings once the reexamination certificate was issued. The Patent Office has yet to act on this request.
Quest Agreements
The Company previously entered into a Development Agreement with Quest Diagnostics, Incorporated (“Quest”) and Smart Personalized Medicine, LLC (“SPM”) pursuant to which the Company and SPM agreed to assist Quest in the development of new laboratory tests for aiding in the detection of breast cancer therapies. The Company and SPM also entered into a related Licensing Agreement with Quest.
In addition, the Company entered into a license agreement with Quest pursuant to which the Company granted a non-exclusive, royalty-bearing license to Quest for developing and commercializing a urine-based laboratory developed test for clinically significant prostate cancer.
The Company terminatedthese agreements with Quest on September 28, 2012. The Company does not expect to receive any further payments in connection with the termination of these agreements. The Company currently intends to explore other opportunities to exploit its technology in the fields of breast cancer and prostate cancer diagnostic tests.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Due tothe termination agreement is finalized, the Company’s urine and blood test for prostate cancer isnow exclusively held by NeoGenomics as part of the NeoGenomics Master License.
Abbott Agreement
The Company previously entered into a license agreement with Abbott Molecular, Inc. pursuant to which we granted Abbott a worldwide, exclusive license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests. Under the license agreement, the Company was due to receive milestone payments and royalties. The Company terminated its agreement with Abbott on September 28, 2012. As a result, the Company is not entitled to any further milestone payments or royalties.
Internal Investigation
In the third quarter, the Board of Directors received allegations from a shareholder that Stephen D. Barnhill, M.D., the Company’s Chairman of the Board and Interim Chief Executive Officer, used the corporate debit card for personal expenses. Following an investigation by counsel, the Board determined that there were a limited number of expenditures that could be considered personal expenses, and that the amount and circumstances were immaterial to the Company’s financial results. Dr. Barnhill agreed to pay the Company for certain expenses, and the Board considers the matter closed.
In connection with the investigation, the Board also determined that the debit card was used by the Company’s Chief Executive Officer on two occasions in early 2012 to pay expenses for personal travel. Dr. Barnhill stated that the hotels charged the Company card they had on file rather than his personal card that he presented upon check-out. Dr. Barnhill subsequently repaid these charges to the Company in June 2012. These transactions might be deemed to constitute personal loans from the Company that violate Section 402 of the Sarbanes-Oxley Act of 2002.
Please refer to our Annual Report on Form 10-K filed on March 31, 2012 for further information regarding updates with our business.
Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011
Revenue
For the three months ended September 30, 2012, revenue was $731,894 compared with $32,155for the three months ended September 30, 2011. Revenue is recognized for licensing and development fees over the period earned. The revenue earned during the third quarter of 2012 is related to the licensing revenue recognition for the NeoGenomics License and the acceleration of the revenue recognition for the Abbott and Quest license agreements. Because those agreements were terminated, the Company recognized the revenue which was being amortized over the life of the patents within the current period.
Operating and Other Expenses
Amortization expense was $65,680 for both the three months ended September 30, 2012 and 2011. Amortization expense relates primarily to the costs associated with filing patent applications and acquiring rights to the patents.
Professional and consulting fees were $100,590 for the three months ended September 30, 2012, compared with $159,494for the same 2011 period. The decrease is due primarily to lower costs associated with patent filing and maintenance fees.
Legal fees totaled $110,210 during the three months ended September 30, 2012 compared to $9,137 during the same period in 2011. The increase was primarily due to the Company requiring additional legal consultations during the current period.
Research and development fees were $24,118 for the three months ended September 30, 2012, and $10,980for the same period in 2011. This increase relates primarily to theexpenses related to the research work completed by consultants to the Company who were not working with the Company in 2011.
Compensation expenseincreased slightly with the Company recognizing $270,079 during the three months ended September 30, 2012, compared to $267,676 during the same period in 2011.
Other general and administrative expense decreased to $151,225for the three months ended September 30, 2012, compared to $169,482for the same period in 2011. This decrease was due primarily to lower costs associated with travel expense in the current period.
Income from Operations
The income from operations for the three months ended September 30, 2012was $
9,992,
compared to a loss of $
650,294
for the three months ended September 30, 2011. The income was due to the acceleration of revenue recognized from the termination of the Abbott and Quest License Agreements.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
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 September 30, 2012, the NeoGenomics stock fair value increased by $1,135,380, which is recorded as other income in the statements of operations. In addition, the Company Realized a Gain on the sale of NeoGenomics stock of $337,841 in the current period. During the same period in 2011, the Company did not own any NeoGenomics stock.
Interest income was $67for the three months ended September 30, 2012, compared to $1,439in 2011. Interest income decreased because the Company had less cash on hand to invest throughout the 2012 period.
The net income for the three months ended September 30, 2012, was $1,483,280, compared to a loss of $648,855for the three months ended September 30, 2011. The net income was due primarily to the gain on the sale of NeoGenomics stock.
The earnings attributable to common shareholders was $1,448,315for the quarterly period ended September 30, 2012, compared to a loss of $684,198for the quarterly period ended September 30, 2011.
Earnings per share was $0.006 for quarterly period ended September 30, 2012 and a net loss per share $0.003 for the quarterly period ended September 30, 2011.
Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011
Revenue
For the nine months ended September 30, 2012, revenue was $1,293,960 compared with $89,172for the nine months ended September 30, 2011. Revenue is recognized for licensing and development fees over the period earned. The revenue earned during the second quarter of 2012 is related to the licensing revenue recognition for the NeoGenomics License and the acceleration of the revenue recognition for the Abbott and Quest license agreements. Because those agreements were terminated, the Company recognized the revenue which was being amortized over the life of the patents within the current period.
Operating and Other Expenses
Amortization expense was $197,040 for both the nine months ended September 30, 2012 and 2011. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.
Professional and consulting fees were $442,059 for the nine months ended September 30, 2012 compared with $470,408for the same 2011 period. The decrease is due to primarily to lower costs associated with patent filing and maintenance fees.
Legal fees totaled $174,901 during the nine months ended September 30, 2012compared to $115,116during the same period in 2011. The increase was primarily due to the Company requiring additional legal consultations during the current period.
Research and Development fees were $97,267 for the nine months ended September 30, 2012 and $139,514for the same period in 2011. This decrease relates primarily to the completion of development related to the MelApp which was completed in 2011.
Compensation expense of $929,227 for the nine months ended September 30, 2012 was higher than the $855,537reported for the comparable 2011 period. Compensation increased due to the costs associated with the stock issued to Dr. Barnhill as a part of his employment contract executed in May 2012.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
Other general and administrative expenses increased to $600,311for nine months ended September 30, 2012 compared to $470,413in 2011. This increase was due to higher costs for Mr. Hadden’s bonus, investor relations fees, and higher travel costs.
Loss from Operations
The income from operations for the nine months ended September 30, 2012 was $1,146,845compared to loss of $2,158,856for the period ended September 30, 2011. This reduction in loss from operations was due to an increase in revenue earned is primarily related to the licensing revenue recognition for the NeoGenomics License and the acceleration of revenue recognized from the termination of the Abbott and Quest License Agreements.
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 nine month period ending September 30, 2012, the NeoGenomics stock fair value increased by $1,502,580, which is recorded as other income in the statements of operations. In addition, the Company realized a gain on the sale of NeoGenomics stock of $337,841 in the current period. During the same period in 2011, the Company did not own any NeoGenomics stock.
Interest income was $1,059 for the nine months ended September 30, 2012 compared to $5,554in 2011. Interest income decreased because the Company had less cash on hand to invest throughout the 2012 period.
During the nine month period ended September 30, 2011,
the Company negotiated a settlement with a service provider. As a result, the Company realized an increase in other income and expense (gain on payables restructuring) of $483,658 for the nine month period ended September 30, 2011. The Company did not have a similar transaction in the nine month period ended September 30, 2012.
Net Income / Loss
The net income for the nine months ended September 30, 2012 was $694,635compared to a loss of $1,669,644for the nine months ended September 30, 2011. The net income was due primarily to the gain on the sale of NeoGenomics stock.
The earnings attributable to common shareholders was $240,237for the nine months ended September 30, 2012 compared to a loss of $1,778,659in the nine months ended September 30, 2011.
Earnings per share were $0.001 for the nine month period ended September 30, 2012 compared to loss per share of $0.007 for the nine month period ended September 30, 2011.
Liquidity and Capital Resources
For the nine month period ended September 30, 2012, the Company has had net income of $
694,635
with $
1,421,674
of cash being used by operating activities. During the nine month period ending September 30, 2012, $918,832 was provided by investment activities primarily from the sale of 409,000 shares of the 1,360,000 NeoGenomics shares that were received as a part of the NeoGenomics License signed in January 2012. In addition, there was no cash provided by financing activities during the nine months ending September 30, 2012. As a result, the Company realized a decrease of cash of $
502,842
during the nine month period ending September 30, 2012.
At September 30, 2012, the Company had $3,250,561 in current assets of which $387,484 was in cash and $2,862,510 in NeoGenomicsstock
which became eligible for sale in July 2012
. In addition, the Company ended the September 30, 2012 period with $1,564,503 in total current liabilities of which $
1,024,988 is deferred revenue related to the NeoGenomics transaction
.
The Company has taken steps to reduce the Company’s expenditures in order to reduce the “burn rate” to approximately $150,000 per month. These steps included reducing expenses and allocating our remaining cash reserves for our operational requirements at a reduced level.
HEALTH DISCOVERY CORPORATION
Management’s Discussion and Analysis, continued
In the third quarter 2012, the Company began selling its NeoGenomics stock to fund ongoing operations. The Company’s ability to generate cash from NeoGenomics stock may be negatively impacted by various factors including the trading price and trading volume of the stock, the operational performance and investor interest in NeoGenomics and other factors beyond the Company’s control.
In the longer term, the Company plans to generate additional cash from its licensing arrangement with NeoGenomics and its Retinalyze joint venture with Doctors Optimal Formula. There can be no assurance that the Company will be able to fully implement its cash conservation program, sell sufficient number of NeoGenomics shares to fund ongoing operations, or generate sufficient revenues from the NeoGenomics license and the Retinalyze joint venture in an amount that would permit funding of ongoing operations. In such event, the Company plans to obtain other additional equity or financing in order to support operations.
There can be no assurance that the Company will be able to secure such funding.
The following table summarizes the due dates of our contr
actual obligations.
|
|
|
Total
|
|
|
1 Year
Or Less
|
|
|
More Than
1 Year
|
|
|
Accrued Compensation
|
|
$
|
6,250
|
|
|
|
6,250
|
|
|
$
|
-
|
|
|
Total
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
|
$
|
-
|
|
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.
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 uncertaintiesthat 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, 2011.
HEALTH DISCOVERY CORPORATION
