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HEALTH DISCOVERY CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 2021
TABLE OF CONTENTS
| PART I -- FINANCIAL INFORMATION | 3 |
| Item 1. | Unaudited Financial Statements | 3 |
| Balance Sheets | 3 | |
| Statements of Operations | 4 | |
| Statements of Shareholders' Equity (Deficit) | 5 | |
| Statements of Cash Flows | 6 | |
| Notes to Financial Statements | 7 |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 |
| Item 4. | Controls and Procedures | 23 |
| PART II -- OTHER INFORMATION | 25 |
| Item 1. | Legal Proceedings | 25 |
| Item 1A. | Risk Factors | 25 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 25 |
| Item 3. | Defaults Upon Senior Securities | 25 |
| Item 4. | Mine Safety Disclosures | 25 |
| Item 5. | Other Information | 25 |
| Item 6. | Exhibits | 25 |
| SIGNATURES | 26 |
| 2 |
PART I — FINANCIAL INFORMATION
| Item 1. | Unaudited Financial Statements |
HEALTH DISCOVERY CORPORATION
Balance Sheets
(In thousands, except share amounts)
| (Unaudited) September 30, 2021 | December 31, 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Patents, net of accumulated amortization of $ | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ (deficit) equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Dividends payable | ||||||||
| Accrued interest | ||||||||
| Convertible debt | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders’ (deficit) equity: | ||||||||
| Series D convertible preferred stock, | ||||||||
| Common stock, | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ (deficit) equity | ( | ) | ||||||
| Total liabilities and shareholders’ (deficit) equity | $ | $ | ||||||
See accompanying notes to financial statements.
| 3 |
HEALTH DISCOVERY CORPORATION
Statements of Operations
(In thousands, except per share and share amounts) (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Licensing and development revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Professional and consulting fees | ||||||||||||||||
| Legal fees | ||||||||||||||||
| Compensation | ||||||||||||||||
| Other general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) income, net: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of common stock warrants liability | ||||||||||||||||
| Other (expense) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to financial statements.
| 4 |
HEALTH DISCOVERY CORPORATION
Statements of SHAREholders’ equity (deficit)
(In thousands, except share amounts) (Unaudited)
| For the three months ended | Series D Convertible Preferred Stock | Common Stock | Accumulated | Total Shareholders’ (Deficit) | ||||||||||||||||||||
| September 30, 2021 | Shares | Amount | Shares | Amount | Deficit | Equity | ||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Issuance of common stock pursuant to exercise of warrant | – | |||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| For the three months ended | Series D Convertible Preferred Stock | Common Stock | Accumulated | Total Shareholders’ (Deficit) | ||||||||||||||||||||
| September 30, 2020 | Shares | Amount | Shares | Amount | Deficit | Equity | ||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| For the nine months ended | Series D Convertible Preferred Stock | Common Stock | Accumulated | Total Shareholders’ (Deficit) | ||||||||||||||||||||
| September 30, 2021 | Shares | Amount | Shares | Amount | Deficit | Equity | ||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock pursuant to exercise of warrants | ||||||||||||||||||||||||
| Stock-based compensation expense | – | – | ||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| For the nine months ended | Series D Convertible Preferred Stock | Common Stock | Accumulated | Total Shareholders’ (Deficit) | ||||||||||||||||||||
| September 30, 2020 | Shares | Amount | Shares | Amount | Deficit | Equity | ||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Promissory note and accrued interest converted to Series D convertible preferred stock | – | |||||||||||||||||||||||
| Issuance of common stock in settlement of accrued wages | ||||||||||||||||||||||||
| Reclassification of common stock warrants liability | – | – | ||||||||||||||||||||||
| Stock-based compensation expense | – | – | ||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
See accompanying notes to financial statements.
| 5 |
HEALTH DISCOVERY CORPORATION
Statements of Cash Flows
(In thousands) (Unaudited)
Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock compensation | ||||||||
| Change in fair value of common stock warrants liability | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | ||||||||
| Accounts payable | ||||||||
| Accrued wages | ( | ) | ||||||
| Accrued interest | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from warrant exercise | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
Nine Months Ended September 30, | ||||||||
| Non-cash Financing and Investing Activities | 2021 | 2020 | ||||||
| Conversion of debt to Series D convertible preferred stock | $ | $ | ||||||
| Conversion of accrued wages to common stock | $ | $ | ||||||
| Conversion of accrued wages to note payable | $ | $ | ||||||
| Reclassification of common stock warrants liability | $ | $ | ||||||
See accompanying notes to financial statements.
| 6 |
HEALTH DISCOVERY CORPORATION
Notes to Financial Statements (unaudited)
Note 1 - BASIS OF PRESENTATION
Health Discovery Corporation (the “Company”) is a machine learning company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools. Our mission is to use our patents and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that may play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“SVM”) assets in particular have broad applicability in many other fields. Intelligently applied, our pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
Our principal asset is our intellectual property, which includes advanced mathematical algorithms called SVM, as well as biomarkers that we discovered by applying our SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by 21 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 technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
The 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.
The accompanying 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 for the Company. All such adjustments are of a normal recurring nature. 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”). Interim results 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, 2020.
Liquidity and Going Concern
The Company has prepared its financial statements on a “going concern” basis, which presumes that it will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.
| 7 |
The Company’s ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing, successfully bringing the Company’s technologies to the market and successfully pursuing infringement opportunities. The outcome of these matters cannot be predicted at this time. The Company’s financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should the Company be unable to continue in business.
If the going concern assumption was not appropriate for the Company’s financial statements then adjustments would be necessary in the carrying values of assets and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments may be material.
At September 30, 2021, the Company had
approximately $
The Company’s plan to have sufficient cash involves licensing the Company patents, pursuing infringement opportunities and obtaining additional equity or debt financing. While the Company believes these efforts may increase the value of the Company, there is no guarantee that the Company will be successful in these efforts. We estimate cash will be depleted by the first quarter of 2022 unless we are able to increase revenues or raise additional capital.
In March 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak a pandemic and the President of the United States declared it a national emergency. The COVID-19 pandemic remains a rapidly evolving situation. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and speed of the outbreak within the markets in which we operate, government actions and programs, and the related impact on consumer confidence and spending, all of which are highly uncertain.
Estimates and assumptions
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the outbreak of a novel strain of COVID-19.
| 8 |
Note 2 – SIGNIFICANT ACCOUNTING POLICIES
Patents
Initial costs paid to purchase patents are capitalized and amortized using the straight-line method over the remaining life of the patent, generally 17 years, beginning on the date the patent is issued. Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs. If the applied for patents are abandoned or are not issued, the Company will expense the costs capitalized to date in the period of abandonment or earlier if abandonment appears probable. The carrying value of patents is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
For the three and nine months ended September
30, 2021 and 2020, there was
Common Stock Warrants Liability
The Company has, from time to time beginning in 2014, issued convertible preferred stock, preferred stock warrants, common stock, common stock warrants, and fully vested options to purchase shares of common stock in excess of its available shares of underlying stock to be issued.
In the event the number of shares or warrants of common stock granted exceeds the number of shares available if the holders exercised all of the previously issued outstanding options and warrants, the Company accounts for this excess as a derivative which is recorded as a common stock warrants liability, which is adjusted to fair value at the end of each reporting period. If and when the Company authorizes sufficient shares of common stock and preferred stock, the common stock warrants liability is reclassified to equity at the fair value of the liability at the date of reclassification. The Company accounts for the reclassification from equity to liability (or vice versa) similar to a modification of a share-based payment award.
See further discussion in Note 6 –Shareholders’ Equity (Deficit) and Note 7 – Common Stock Warrants Liability.
Stock-based Compensation
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period using the straight-line method.
Valuation and Amortization Method – The fair value of stock awards that do not contain a market condition target are estimated on the grant date using the Black-Scholes option-pricing model. The fair value of options that contain a market condition, such as a specified hurdle price, is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model. Both the Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected life, expected dividend yield and expected risk-free interest rates.
Expected Term – The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and forfeitures due to departure prior to the end of the vesting schedule.
| 9 |
Expected Volatility – Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent to the expected term to estimate expected volatility
Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.
Cash
Cash includes cash deposited with financial institutions. Periodically, we maintain deposits in financial institutions in excess of government-insured limits. We believe we are not exposed to significant credit risk and to date, we have not realized any losses on these deposits.
Basic earnings per share (“EPS”) 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 is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, convertible promissory notes payable, convertible preferred stock, and warrants.
The computation of basic and diluted earnings per share was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss, in thousands | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding – basic and diluted | ||||||||||||||||
| Loss per share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Anti-dilutive shares excluded: | ||||||||||||||||
| Shares issuable on conversion of options and warrants | ||||||||||||||||
| Shares issuable on conversion of convertible debt | ||||||||||||||||
| Shares issuable on conversion of Series D convertible preferred stock | ||||||||||||||||
During the three and nine months ended September 30, 2021, the average share price exceeded the strike or conversion price of the Company’s options and warrants. The dilutive effect of and options and warrants were excluded from diluted weighted average shares during the three and nine months ended September 30, 2020, respectively, because the strike or conversion price was below the average share price during the related period.
| 10 |
As of September 30, 2021, there was unrecognized cost related to stock option grants because the outstanding option awards either completed their vesting schedule or the option awards immediately vested. As the market closing price was $0.1798 on September 30, 2021, there was $ million aggregate intrinsic value of all options and warrants outstanding and exercisable as of September 30, 2021.
In connection with their election to the Company’s
Board of Directors at the Shareholder Meeting and in recognition of their continuing contributions to the Company without cash compensation,
on June 29, 2021, the Company granted to Mr. William Fromholzer, Ms. Colleen Hutchinson, Mr. Ed Morrison, and Mr. James Murphy each an
option to purchase shares of the Company’s common stock. Additionally, the Company granted to Dr. Hong Zhang an option
to purchase shares of the Company’s common stock and the Company granted to Mr. George McGovern and Mr. Marty Delmonte
each an option to purchase shares of the Company’s common stock. These option grants are consistent with what has been
granted to other board members and management of the Company. The options immediately vest, have an exercise price of $ and expire
on . The exercise price is based upon the closing price of the Company’s common stock on the date of the option grant.
The fair value of each option granted is $ and was estimated on the date of grant using the Black-Scholes pricing model with the
following assumptions: dividend yield at %, risk-free interest rate of %, an expected life of years, and volatility of %. The
fair value of these options of $
stock-based compensation expense was recorded in the financial statements for both the three months ended September 30, 2021, and 2020, respectively. Stock-based compensation expense recorded in the financial statements was approximately $ million and $ for the nine months ended September 30, 2021, and 2020, respectively.
The following schedule summarizes common stock option information as of December 31, 2020 and September 30, 2021:
| Shares | Weighted-Average Exercise Price | |||||||
| Outstanding, December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Exercised | $ | |||||||
| Forfeited | $ | |||||||
| Outstanding and exercisable, September 30, 2021 | $ | |||||||
The following schedule summarizes common stock warrant information as of December 31, 2020 and September 30, 2021:
| Shares | Weighted-Average Exercise Price | |||||||
| Outstanding, December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Exercised | ( | ) | $ | ( | ) | |||
| Forfeited | $ | |||||||
| Outstanding, September 30, 2021 | $ | |||||||
| 11 |
Note 5 – PATENTS
The Company’s principal asset is its intellectual
property, which includes advanced mathematical algorithms called Support Vector Machines (“SVM”), as well as biomarkers that
we discovered by applying its SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression
signatures of certain disease states. The Company’s intellectual property is protected by
For the three and nine months ended September 30, 2021, and 2020 there was no amortization charged to operations as the patents are fully amortized. Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs.
Note 6 – SHAREHOLDERS’ (DEFICIT) EQUITY
Authorized capital
At September 30, 2021 and December 31, 2020, the Company’s authorized capital consisted of 900,000,000 shares of common stock and 90,000,000 shares of preferred stock.
Series B Preferred Stock
The Company sold to individual investors a total of 19,402,675 shares of Series B preferred shares for $1,490,015, net of associated expenses, in 2009. The Series B preferred shares were converted into common stock of the Company in the fourth quarter of 2014, which was the fifth anniversary of the date of issuance as outlined in the original purchase agreement. There are currently no Series B preferred shares outstanding.
Dividends were accrued
for the Series B preferred stock in the amount of $373,346 as of December 31, 2014. The Company gave the Series B holders the choice of
either (1) common stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to defer payment of the
dividend in cash until the Company is able to pay, at the sole discretion of the Company. During the first quarter of 2015, $166,709 in
dividends were paid with the issuance of 3,334,179 shares of common stock. The remaining accrued dividend of $
Series C Preferred Stock
In the fourth quarter of 2013, the Board of Directors authorized the issuance of Series C preferred shares in private placement transactions. As of December 31, 2014, and 2015, the Company had issued a total of 6,640,000 and 30,000,000 preferred shares, respectively. The Series C preferred shares were fully subscribed in the third quarter 2015. The Company received total net proceeds of $900,000, of which $568,000 was received during the year ended December 31, 2015. The Series C preferred shares were accompanied by $0.03 warrants and $0.03 contingency warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days. The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days. The warrants were valued at $0.022 each using the Black Scholes Method.
The Series C preferred stock were to be converted into common stock of the Company at the option of the holder, without the payment of additional consideration by the holder. The shares of Series C preferred stock must be converted into common stock of the Company either by the demand by the shareholder or at the fifth anniversary of the date of issuance. During the first quarter of 2019, the Series C preferred stock was converted to common stock. There are currently no Series C preferred shares outstanding.
| 12 |
Series D Preferred Stock
In February 2020, the Company effected the
conversion of its $
The Company’s Series D preferred stock has the following rights and preferences:
Dividend rights: The holders of Series D preferred stock shares pari passu with the holders of common stock in dividends payable to shareholders.
Voting rights: Each share of Series D preferred stock is entitled to vote on all matters submitted to shareholder vote and each share has a number of votes equal to ten votes for each share of common stock into which it is then convertible.
Conversion rights: Each share of Series D preferred stock is convertible into shares of the Company’s common stock at a 1:1 ratio at the option of the holder or on the ten-year anniversary of issuance, whichever occurs first.
Liquidation rights: In the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, the Series D holders receive distribution on a pari passu basis with the holders of other preferred shareholders after payment of the preferred stock dividends payable to the Series B preferred shareholders and before any payments to common shareholders.
Common Stock
In July and August 2021, the Company issued
In June 2021, the Company issued
In June 2020, the Chairman of the Board and the
Company entered into an agreed upon settlement whereby accrued wages of $ were immediately converted into shares of
the Company’s common stock at a conversion price of $
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.
At September 30, 2021 and December 31, 2020, the
Company had and options outstanding with exercise prices ranging from
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Note 7 – COMMON STOCK WARRANTS LIABILITY
The common stock warrants liability is recorded based upon the vested number of warrants or other equity-linked instruments outstanding which exceed the number of authorized shares available to meet the assumed exercise or conversion of such instruments at each reporting period.
The common stock warrants liability is recorded based upon the number of warrants which exceed the number of common shares available to meet the exercised options and warrants using the Black-Scholes option-pricing model.
In the nine months ended September 30, 2020, the Company recorded other income of $992,000 related to the reduction of the common stock warrants liability.
At September 30, 2021 and December 31, 2020, the common stock warrants liability was zero as the Company reclassified the common stock warrants liability to equity, as our shareholders approved the necessary increase in authorized share capital at our annual shareholder meeting held in May 2020. The Company now has adequate authorized shares available to meet the assumed exercise or conversion of its issued options, warrants, convertible debt and convertible preferred stock.
The following table presents a reconciliation of the Company’s common stock warrants liability for the nine months ended September 30, 2020 (in thousands):
Common Stock Warrants Liability | |||||
| Balance, December 31, 2019 | $ | ||||
| Change in fair value of common stock warrants liability | ( | ) | |||
| Reclassification of common stock warrants liability to equity | ( | ) | |||
| Balance, September 30, 2020 | $ | ||||
Note 8 – CONVERTIBLE DEBT
In April 2019, the Company issued a convertible promissory note in the amount of $200,000 to Mr. George McGovern, the Chairman and Chief Executive Officer of the Company, and Mr. James Dengler, a Company shareholder (the “Note Holders”) for funds advanced to the Company. The promissory note was approved by the Company’s board of directors in 2018, for funds advanced to the Company from August 2018 through March 2019 and the promissory note was executed in April 2019 by the Company. This promissory note contained an 8% annual interest rate, and the Note Holders had the right to convert the principal and unpaid accrued interest of the promissory note (the “2019 Convertible Promissory Note”) into shares of the Company’s Series D convertible preferred stock at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The right of conversion (optional) was solely at the Note Holders’ discretion.
On December 31, 2019, the Note Holders notified the Company of their election to convert the 2019 Convertible Promissory Note into shares of the Company’s Series D convertible preferred stock. As a result, the Note Holders received shares of the Company’s Series D convertible preferred stock in February 2020.
In June 2020, $
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Note 9 – FAIR VALUE MEASUREMENT
The carrying values of our prepaid expenses and accounts payable approximate their recorded values due to the short-term nature of these instruments.
The common stock warrants liability is recorded based on the number of warrants which exceed the number of common shares available to meet the exercised options and warrants using the Black-Scholes option pricing model. The Company has determined that the common stock warrants liability is a Level 3 measurement within the fair value hierarchy. See further discussion of the Common Stock Warrants Liability in Note 7 – Common Stock Warrants Liability.
On January 1, 2021, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, “Fair Value Measurement.” Certain requirements were removed such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, certain requirements were modified and certain disclosures were added such as the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
Note 10 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company does not own any real property. The Company leases approximately 300 square feet of office space in Atlanta, Georgia, pursuant to a short-term lease as of January 2021. The Company currently pays base rent in the amount of $636 per month.
Legal Proceedings
Intel Matter
As previously disclosed, the USPTO had declared an Interference between the Company’s Support Vector Machine – Recursive Feature Elimination (“SVM-RFE”) patent application and Intel Corporation’s (“Intel”) Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector Machine”. On February 27, 2019, the USPTO ruled in favor of the Company on the SVM-RFE patent application. The Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision, finding that HDC is entitled to claim exclusive ownership rights to the SVM-RFE technology as set forth in the SVM-RFE patent application that was filed to provoke the Interference. The decision ordered Intel Corporation’s Patent No. 7,685,077 to be cancelled.
In September 2019, the USPTO issued U.S. Patent No. 10,402,685 (“SVM-RFE Patent”) for the Company’s patent application covering SVM-RFE. The Company is the sole owner of all patents related to SVM-RFE. As a result of the issuance of the SVM-RFE Patent, the Company now has the right to exclude others from developing, commercializing, or licensing this patented technology without the uncertainty of the Interference or concerns over the ownership of the SVM-RFE patents. Furthermore, the USPTO granted a Patent Term Adjustment (“PTA”) to the SVM-RFE Patent. The PTA is 1,785 days (almost 5 years), which is added to the normal 20-year-from-filing patent term. The USPTO granted this adjustment to offset delays that occurred within the USPTO during the examination process and interference proceedings. This means the SVM-RFE Patent term has been extended from August 7, 2020, to June 7, 2025.
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On July 23, 2020, the Company filed a patent infringement lawsuit (“Infringement Lawsuit”) against Intel pertaining to the Company’s SVM-RFE technology. The lawsuit was filed in the United States District Court for the Western District of Texas, Waco Division (the “Court”). Subsequently, on October 19, 2020, Intel filed a motion to dismiss with the Court. On November 23, 2020, the Company filed a response in opposition of Intel’s motion to dismiss.
On December 21, 2020, the Court approved a scheduling order (“Scheduling Order”) for the Infringement Lawsuit. One of the items in the Scheduling Order was the Markman Hearing which was scheduled for June 3, 2021. A Markman Hearing is a pretrial hearing in a United States District Court during which a judge examines evidence from all parties on the appropriate meanings of relevant key words used in a patent claim. Prior to the Markman Hearing both parties submit Markman briefs, in which they explain their positions on the relevant key words. In the Western District of Texas, both parties file two briefs, with the Plaintiff (here, the Company) filing the Opening Brief.
Once briefing concluded on May 18, 2021, HDC and Intel submitted a Joint Claim Construction Statement to the Court. Within that Joint Claim Construction Statement, the parties identified several claim terms (i.e., key words) that were still in dispute. During the Markman Hearing on June 3, 2021, the Court considered arguments related to these disputed claim terms. Ultimately, the Court ruled in HDC’s favor on all the disputed claim terms and issued the Claim Construction Order. During the Markman Hearing, the Court also spoke regarding Intel’s pending motion to dismiss. The Court will review and determine if a hearing is needed on that motion or if it will rule on the previously filed pleadings. Per the Scheduling Order, the next step is fact discovery, which began June 4, 2021.
On February 27, 2021, Intel filed seven petitions for Inter Partes Review (“IPR”) of the Company’s SVM-RFE with the PTAB of the USPTO. Between September 7, 2021, and October 1, 2021, the PTAB ruled to deny an institution for four of the IPR’s and ruled to institute an IPR for three of the IPR’s. Intel has subsequently requested a rehearing from the PTAB on the IPR’s that were instituted, and those requests remain pending.
Legal fees for this matter were $
Quirk and Bear Matter
On February 7, 2020, two shareholders of the Company, William F. Quirk, Jr. (“Quirk”) and Cindy Bear (“Bear”), filed a complaint and motion for a temporary restraining order and preliminary injunction in DeKalb County Superior Court. Among the items in the motion, Quirk and Bear requested to have a special meeting of the shareholders and Quirk and Bear alleged misconduct by the Company and its directors. At the time of the Quirk and Bear complaint, the Company had stated its intent to schedule a shareholder meeting no later than June 30, 2020, and in fact did hold the shareholder meeting on May 27, 2020.
On March 2, 2020, Quirk and Bear filed a notice of dismissal in DeKalb County. Quirk and Bear subsequently filed a new lawsuit in Fulton County Superior Court based on substantially similar allegations and seeking similar relief. On March 4, 2020, the Fulton County court ordered a hearing on the emergency motion for a temporary restraining order against the Company for the following day.
At the hearing on March 5, 2020, Quirk and Bear presented their version of the facts through affidavits submitted by both Quirk and Bear, arguing that the affidavits supported the emergency relief they sought. The judge denied the motion and did not enter a temporary restraining order. The court set an evidentiary hearing on Quirk and Bear’s motion for a preliminary injunction for March 27, 2020. Due to the Covid-19 pandemic and multiple requests by Quirk and Bear, the scheduling of the hearing was cancelled. Quirk and Bear did not attempt to reschedule it.
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On September 2, 2020, the Company moved to dismiss the complaint on the grounds that Quirk and Bear lacked standing and failed to state claims for relief. Facing the Company’s motion to dismiss, on September 23, 2020, Quirk voluntarily dismissed his claims against the Company. Because this was the second dismissal of these claims, that dismissal was with prejudice and constitutes an adjudication of the merits under O.C.G.A. § 9-11-41(a)(3).
Bear remained a plaintiff in the case. Due to Bear’s refusal to participate in discovery and repeated violations of the Court’s orders, the Company filed a Motion for Involuntary Dismissal of Plaintiff’s Complaint with Prejudice and Incorporated Memorandum of Law on March 2, 2021. Among the request in the motion, the Company asked the Court to award attorney’s fees and costs against Bear as a result of abusive litigation.
Subsequently, the Court held a hearing regarding the Company’s motion on March 25, 2021. At that hearing, the Court ordered Bear to appear for her deposition to be taken remotely on March 31, 2021, and April 1, 2021. The Court warned Bear that her failure to appear at these depositions or to participate fully in them would result in the dismissal of the case with prejudice. Bear did not appear for the March 31, 2021, deposition.
As a result, on April 6, 2021, the Court issued
an Order Granting Motion for Involuntary Dismissal of Plaintiff’s Complaint with Prejudice and Final Order and Judgment (the “Ruling”)
against Bear. Among other findings in the Ruling, the Court found that Bear knowingly and willfully failed to participate in discovery
and violated the Court’s orders. Consequently, the Court entered final judgment against Bear and in favor of the Company on all
counts. In light of the Court’s ruling, the Company sought to seek reimbursement of its attorneys’ fees and costs against
Bear for bringing the action. On September 15, 2021, the Court held a hearing on the matter. During this hearing, the Court ruled in favor
of the Company. The Court agreed to require Bear to reimburse the Company for a portion of the legal fees incurred by the Company as a
result of Bear’s willful failure violation of the Court’s orders. Legal fees for this matter were $
Vennwest Matter
On September 24, 2020, the Company accepted service of a lawsuit filed by Vennwest Global Technologies, Inc. (“Vennwest”), a company owned by shareholder Laurie Venning (“Venning”) from Alberta, Canada.
The Vennwest lawsuit contains virtually identical claims against HDC that Quirk and Bear alleged. For this reason, the Company believes Venning, Quirk, Bear and others coordinated their irresponsible and costly attacks against the Company, its directors, and others. As Quirk’s dismissal and the Bear judgment reflects, the Company believes these claims are without merit and serve only to deplete the Company’s resources to the detriment of its shareholders.
On November 2, 2020, the Company moved to dismiss the complaint or stay the action pending the conclusion of the Quirk and Bear case, on the grounds that the first-filed derivative case would serve as res judicata to preclude the later-filed case. On November 30, 2020, Vennwest filed its response, and on December 15, 2020, the Company filed its reply. On June 8, 2021, the judge ruled to allow the case to proceed, and the parties are now in discovery phase of the case. The Company will vigorously defend itself against these claims and evaluate all options against the plaintiffs including, but not limited to, pursuing counterclaims.
Although the Company believes that it will ultimately
be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should Vennwest be successful,
the outcome could have a material adverse effect on the Company. Legal fees for this matter were $
Note 11 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events occurring through the date that the financial statements were available to be issued, for events requiring recording or disclosure in the September 30, 2021 financial statements. Other than disclosed earlier in these financial statements, there were no material events or transactions occurring during this period requiring recognition or disclosure.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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, 2020.
Objective
The objective of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is to provide users of our financial statements with the following:
| · | A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; |
| · | Useful context to the financial statements; and |
| · | Information that allows assessment of the likelihood that past performance is indicative of future performance. |
Our MD&A is provided as a supplement to, and should be read together with, our unaudited financial statements for the three and nine months ended September 30, 2021 and 2020, included in Part I, Item 1 of this Form 10-Q and our audited financial statements included in Part II, Item 7 of our Form 10-K for the year ended December 31, 2020.
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Overview
Health Discovery Corporation (the “Company”) is a machine learning company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools. Our mission is to use our patents and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that may play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“SVM”) assets in particular have broad applicability in many other fields. Intelligently applied, our pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
Our principal asset is our intellectual property, which includes advanced mathematical algorithms called SVM, as well as biomarkers that we discovered by applying our SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by 21 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 technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
The 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.
Intellectual Property Developments and Patent Defense Matters
As previously disclosed in our 2020 Form 10-K, the United States Patent and Trademark Office (“USPTO”) has issued a Notice of Allowance of Patent Application Number 14/754,434 covering the four-gene prostate cancer test developed using the Company’s proprietary SVM-RFE technology. The allowed claims cover a method for screening for and treating prostate cancer by measuring expression levels of the four genes within a patient sample compared to one or more reference genes and generating a prediction score based on the averaged relative expression levels. This Notice of Allowance is important after encountering the significant barriers to patenting of biomarkers that had been raised by the U.S. Supreme Court’s controversial decisions in Mayo Collaborative Services v. Prometheus Laboratories and Association for Molecular Pathology v. Myriad Genetics. This Biomarker Patent complements the Company’s already issued European Patent that covers similar claims.
We believe that this patent demonstrates the ability of the Company’s proprietary technology in the discovery and validation of biomarkers for diseases. We believe this same method can be applied to numerous different diseases and will explore opportunities with partners to deploy these same methods using our proprietary technology in biomarker discovery.
We hold the exclusive rights to 20 issued U.S. patents covering uses of SVM technology for discovery of knowledge from large data sets. The Company also has 1 pending U.S. patent application covering uses of the SVM technology as well as diagnostic methods that have been discovered using the SVM technology.
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Intel Matter
As previously disclosed, the USPTO had declared an Interference between the Company’s Support Vector Machine – Recursive Feature Elimination (“SVM-RFE”) patent application and Intel Corporation’s (“Intel”) Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector Machine”. On February 27, 2019, the USPTO ruled in favor of the Company on the SVM-RFE patent application. The Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision, finding that HDC is entitled to claim exclusive ownership rights to the SVM-RFE technology as set forth in the SVM-RFE patent application that was filed to provoke the Interference. The decision ordered Intel Corporation’s Patent No. 7,685,077 to be cancelled.
In September 2019, the USPTO issued U.S. Patent No. 10,402,685 (“SVM-RFE Patent”) for the Company’s patent application covering SVM-RFE. The Company is the sole owner of all patents related to SVM-RFE. As a result of the issuance of the SVM-RFE Patent, the Company now has the right to exclude others from developing, commercializing, or licensing this patented technology without the uncertainty of the Interference or concerns over the ownership of the SVM-RFE patents. Furthermore, the USPTO granted a Patent Term Adjustment (“PTA”) to the SVM-RFE Patent. The PTA is 1,785 days (almost 5 years), which is added to the normal 20-year-from-filing patent term. The USPTO granted this adjustment to offset delays that occurred within the USPTO during the examination process and interference proceedings. This means the SVM-RFE Patent term has been extended from August 7, 2020, to June 7, 2025.
On July 23, 2020, the Company filed a patent infringement lawsuit (“Infringement Lawsuit”) against Intel pertaining to the Company’s SVM-RFE technology. The lawsuit was filed in the United States District Court for the Western District of Texas, Waco Division (the “Court”). Subsequently, on October 19, 2020, Intel filed a motion to dismiss with the Court. On November 23, 2020, the Company filed a response in opposition of Intel’s motion to dismiss.
On December 21, 2020, the Court approved a scheduling order (“Scheduling Order”) for the Infringement Lawsuit. One of the items in the Scheduling Order was the Markman Hearing which was scheduled for June 3, 2021. A Markman Hearing is a pretrial hearing in a United States District Court during which a judge examines evidence from all parties on the appropriate meanings of relevant key words used in a patent claim. Prior to the Markman Hearing both parties submit Markman briefs, in which they explain their positions on the relevant key words. In the Western District of Texas, both parties file two briefs, with the Plaintiff (here, the Company) filing the Opening Brief.
Once briefing concluded on May 18, 2021, HDC and Intel submitted a Joint Claim Construction Statement to the Court. Within that Joint Claim Construction Statement, the parties identified several claim terms (i.e., key words) that were still in dispute. During the Markman Hearing on June 3, 2021, the Court considered arguments related to these disputed claim terms. Ultimately, the Court ruled in HDC’s favor on all the disputed claim terms and issued the Claim Construction Order. During the Markman Hearing, the Court also spoke regarding Intel’s pending motion to dismiss. The Court will review and determine if a hearing is needed on that motion or if it will rule on the previously filed pleadings. Per the Scheduling Order, the next step is fact discovery, which began June 4, 2021.
On February 27, 2021, Intel filed seven petitions for Inter Partes Review (“IPR”) of the Company’s SVM-RFE with the PTAB of the USPTO. Between September 7, 2021, and October 1, 2021, the PTAB ruled to deny an institution for four of the IPR’s and ruled to institute an IPR for three of the IPR’s. Intel has subsequently requested a rehearing from the PTAB on the IPR’s that were instituted, and those requests remain pending.
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COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of non-essential businesses. The COVID-19 pandemic has impacted and may continue to impact our business operations, including our employees, customers, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.
The intense focus on COVID-19 has also led to the suspension of clinical trials and research projects relating to other conditions, which may impact our ability to form new contractual arrangements to exploit our technology. While the potential economic impact brought by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets, which may reduce our ability to access capital either at all or on favorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common stock.
The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors which we cannot reasonably predict, including the duration and scope of the pandemic; governmental, business and individuals’ actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability. These factors may materially and adversely affect our business and financial condition.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2021, Compared with Three and Nine Months Ended September 30, 2020
Revenue for the three and nine months ended September 30, 2021, was zero compared with zero and $1,000 for the three and nine months ended September 30, 2020, respectively.
Operating and Other Expenses
Professional and consulting fees were $17,000 for the three months ended September 30, 2021, compared with $38,000 for the three months ended September 30, 2020, and $95,000 for the nine months ended September 30, 2021, compared with $230,000 for the nine months ended September 30, 2020. The decrease was driven by lower audit fees in both the three-and nine-month periods of 2021.
Legal fees were $271,000 for the three months ended September 30, 2021, compared to $101,000 during the same period in 2020. The increase was driven by legal fees related to the Intel Matter. Legal fees were $572,000 for the nine months ended September 30, 2021, compared with $286,000 for the nine months ended September 30, 2020, due to higher expenses related to the Intel Matter, Quirk and Bear Matter, and Vennwest Matter. See further discussion of legal matters in Note 10 – Commitments and Contingencies.
Compensation consists of expenses related to officer salaries and were $152,000 for the three months ended September 30, 2021, which was higher compared to $103,000 for the three months ended September 30, 2020. Compensation expense was $368,000 for the nine months ended September 30, 2021, compared to $339,000 for the nine months ended September 30, 2020. The higher compensation included a one-time bonus awarded to the Company’s President and COO during the three months ended September 30, 2021.
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Other general and administrative expenses increased to $54,000 for the three months ended September 30, 2021, compared to $48,000 for the same period in 2020, due to higher insurance expense in the current year period. Other general and administrative expenses increased to $1,507,000 for the nine months ended September 30, 2021, compared to $533,000 for the nine months ended September 30, 2020, due to higher expenses related to option awards for directors during the nine months ended September 30, 2021.
Loss from Operations for the three months ended September 30, 2021, was $494,000, compared to $290,000 for the three months ended September 30, 2020, related to the increases in expenses discussed above. Loss from operations for the nine months ended September 30, 2021, was $2.5 million compared to $1.4 million in the nine months ended September 30, 2020, due to increased operating expenses, primarily stock-based compensation, as discussed above.
Other income and expense remained $5,000 for both the three months ended September 30, 2021, and the three months ended September 30, 2020, as these expenses are related to interest expense on our promissory note. During the nine-month period ended September 30, 2021, other income and expense decreased to $13,000 from $987,000 during the nine-month period ended September 30, 2020, due to the change in fair value of common stock warrants liability. This change in fair value of common stock warrants liability was because the Company issued warrants exceeding the number of common shares available if the holders exercised the previously issued outstanding options and warrants. As our shareholders approved the increase in authorized share capital at our 2020 annual shareholder meeting held in May 2020, we reclassified the common stock warrants liability to equity as of June 30, 2020. See further discussion in Note 7 – Common Stock Warrants Liability.
Net loss for the three months ended September 30, 2021, was $499,000 compared to $295,000 for the three months ended September 30, 2020. Net loss for the nine months ended September 30, 2021, was $2.6 million compared to $400,000 for the nine months ended September 30, 2020, due primarily to higher stock-based compensation and legal fees in the current year-to-date period.
Diluted loss per share was $0.001 for both the three-month periods ended September 30, 2021 and 2020. Diluted loss per share was $0.006 for the nine-month period ended September 30, 2021, compared to diluted loss per share of $0.001 in the nine months ended September 30, 2020, due to the increase in net loss as discussed above.
Liquidity and Capital Resources
Introduction
We have relied primarily on equity and debt financing for liquidity, and most recently, proceeds from intellectual property litigation or arbitration. The Company produced sales, licensing, and developmental revenue starting in late 2005 and must increase revenues in order to generate sufficient cash to continue operations. Our plan to have sufficient cash to support operations is comprised of:
| · | generating revenue through licensing our patent portfolio; | |
| · | providing services related to those patents; | |
| · | protecting our proprietary technology against infringers; and | |
| · | obtaining additional equity or debt financing. |
We are pursuing licensing activity and collaborations to increase revenue. Additionally, we are evaluating options to secure funding for infringement activities to protect our proprietary technology or other forms of fund-raising either in the debt or equity markets. None of these options are definitive and there is no guarantee we will be successful in these fund-raising efforts. In addition, while the potential economic impact brought by and the duration of the COVID-19 pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets, which may reduce our ability to access capital either at all or on favorable terms. At September 30, 2021, we had $270,000 in cash and total current liabilities of $867,000. We estimate cash will be depleted by the first quarter of 2022 unless we are able to increase revenues or raise additional capital.
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Short-term borrowings
Our principal commitments consist of our obligations under our operating lease which is short-term in nature. In addition, in June 2020, we settled accrued wages in the amount of $212,000 through the issuance of a convertible promissory note in the same amount with our chief executive officer. The note bears interest at an 8% annual interest rate and is convertible at the option of the holder into shares of our common stock at a conversion price of 0.0138 shares of common stock. See further discussion in Note 8 – Convertible Debt.
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.
Critical Accounting Policies and Estimates
Refer to Note 2 – Significant Accounting Policies.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Not Applicable.
| Item 4. | Controls and Procedures |
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our Principal Executive Officer and our President who is also serving as our Principal Financial Officer, 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 Chief Executive Officer and President concluded that, as of the Evaluation Date, because of the Company’s internal control material weakness, our disclosure controls and procedures were not 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 and President, 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. 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, 2020. The Company lacked adequate segregation of duties which led to situations where an individual had access to both initiate and approve transactions with no additional formal review process. This also led to inadequate review of reconciliations.
In light of the conclusion that our internal disclosure controls were ineffective, as of September 30, 2021, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this quarterly report. These include the fact that the Company’s board of directors reviews the results of the Company quarterly and provides oversight concerning its results and that the Company has hired an independent consultant which provides the Company an additional layer of review and oversight as well as subject matter expertise regarding its external reporting and technical accounting matters. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this quarterly report.
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PART II — OTHER INFORMATION
| Item 1. | Legal Proceedings |
See discussion of legal proceedings under Note 10 – Commitments and Contingencies to the Notes to financial statements.
| Item 1A. | Risk Factors |
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, 2020, 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.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
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:
| 31.1 | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer, Principal Executive Officer. Filed herewith. | |
| 31.2 | Rule 13a-14(a)/15(d)-14(a) Certification of President, Principal Financial Officer. Filed herewith. | |
| 32.1 | Section 1350 Certification of Principal Executive Officer. Filed herewith. | |
| 32.2 | Section 1350 Certification of Principal Financial Officer. Filed herewith. | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
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SIGNATURES
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: November 15, 2021 | By: | /s/ George H. McGovern, III |
| George H. McGovern, III | ||
| Chairman, Chief Executive Officer, Principal Executive Officer | ||
| HEALTH DISCOVERY CORPORATION | ||
| Registrant | ||
| Date: November 15, 2021 | By: | /s/ Marty Delmonte |
| Marty Delmonte | ||
| President, Chief Operating Officer, Principal Financial Officer | ||
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