10-K 1 t76012_10k.htm FORM 10-K t76012_10k.htm


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

 
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2012
   
OR
   
o
TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                    to
 
Commission File No. 333-62216
 

 
HEALTH DISCOVERY CORPORATION
(Name of Registrant as Specified in its charter)
 
Georgia
 
74-3002154
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
620 County Road
Hanson, Massachusetts
 
 
02341
     
(Address of principal executive offices)
 
(Zip Code)
 
(339) 244-1223
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12 (b) of the Exchange Act:
None
 
Securities Registered Pursuant to Section 12 (g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
 
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
         
 
Large Accelerated Filer
o
Accelerated Filer o
 
 
Non-accelerated Filer
o
Smaller Reporting Company x
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No x
 
The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2012 was approximately $18,712,946.
 
As of March 29, 2013, there were 233,773,144 shares of common stock outstanding, no shares of Series A Preferred Stock outstanding, and 17,340,175 shares of Series B Preferred Stock were outstanding.
 


 
 

 

HEALTH DISCOVERY CORPORATION
 
FORM 10-K
 
For the Fiscal Year Ended December 31, 2012

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Our Company Overview
 
HDC is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.
 
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
 
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that may play a critical role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular have broad applicability in many other fields.  Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
 
Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by more than 90 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; licensure of the SVM and FGM technologies directly to diagnostic companies; and, the formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise. 
 
Our Technology
 
HDC owns a patent portfolio of machine learning technology, including certain pioneer patents on SVM.  We also have consulting arrangements with clinical specialists and mathematicians responsible for developing our SVM patents for the analysis of data.
 
The Company’s SVM technology is commonly considered within the context of artificial intelligence.  This is a branch of computer science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development of algorithms and techniques that allow computers to learn.  Pattern recognition is machine learning with a wide spectrum of applications including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object recognition in computer vision, and robotics.
 
Support Vector Machines Overview
 
Support Vector Machines (“SVMs”) are mathematical algorithms that allow computers to sift through large, complex datasets to identify patterns.  SVMs are known for their ability to discover hidden relationships in these complex datasets.  With the ability to handle what is known as infinite dimensional space, SVMs are broadly considered to be an improvement to neural networks and other mathematical techniques.  SVM is a core machine learning technology with strong theoretical foundations and excellent empirical successes.
 
With their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the Statistical Learning Theory developed by Professor Vladimir Vapnik, SVMs quickly gained attention from the math and science communities due to a number of theoretical and computational merits.  This development advanced a new framework for modeling learning algorithms.  Within this framework, the fields of machine learning and statistics were merged introducing powerful algorithms designed to handle the difficulties of prior computational techniques.
 
 
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The generation of learning algorithms that were developed based on this theory has proved to be remarkably resistant to the problems imposed by noisy data and high dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization ability.  SVMs have been validated in hundreds of independent academic publications and presentations.  In recognition for his work, Professor Vapnik received the prestigious Alexander von Humboldt Prize from the German government honoring foreign scientists and scholars for lifetime achievement.
 
SVMs have become widely established as one of the leading approaches to pattern recognition and machine learning worldwide and are replacing neural networks in a variety of fields, including engineering, information retrieval and bioinformatics.  This technology has been incorporated into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies.  Educational and research institutions throughout the world have successfully applied SVMs to a wide array of applications, including gene and protein expression analysis, medical image analysis, flow cytometry, and mass spectrometry.
 
Recursive Feature Elimination - Support Vector Machine Overview
 
Recursive Feature Elimination (RFE-SVM) is an application of SVM that was created by members of HDC’s science team to find discriminate relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns – for instance, a biomarker/genetic expression signature of a disease.  The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute most to the desired results.  The Company believes that its six RFE-SVM patents are currently the only RFE patents properly issued in the world.
 
Using RFE-SVM, we have been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed.  In one micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence.  It has been shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool.  HDC scientists believe that these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with the pharmacogenetic and toxicological profiling of patients.  The RFE-SVM method is also capable of finding those specific genes and proteins that are unhindered by ever-increasing patent protection.
 
Fractal Genomic Modeling Overview
 
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software.  The fractal technology is used to find discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease versus normal tissues.
 
The Fractal Genomic Modeling (“FGM”) data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis and prevention of certain diseases. HDC scientists believe that these analytic methods are effective for finding genes implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a host of other diseases, as well as the pharmacogenetic profiling of patients.
 
FGM technology is designed to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM uses a new approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction and analysis of whatever process is your particular object of study. Two important concepts behind FGM technology are the notions of scale-free networks and self-similarity.
 
Our Business Activity

NeoGenomics License

On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly-owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”).  Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (IVD) test kit development.
 
 
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Upon execution of the NeoGenomics License, NeoGenomics Laboratories paid us $1,000,000 in cash and NeoGenomics issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012.  In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License.  Milestone payments will be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics Laboratories up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics Laboratories, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics Laboratories derives from any sublicensing arrangements it may put in place for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System.

NeoGenomics Laboratories agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetics Interpretation System”, and a “Flow Cytometry Interpretation System.” In January 2013, NeoGenomics informed the Company of its intent to continue under the terms of the license and therefore extend the license for the first of its one-year extensions discussed above.

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.

The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development.  We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with NeoGenomics.

Prostate Cancer

HDC has identified, patent-protected and licensed a genetic biomarker signature that identifies clinically significant high grade prostate cancer cells based on analysis of tissue samples.  Upon the achievement of successful validation, the Company’s test may be used to analyze patients with elevated PSA or abnormal rectal exams, with negative biopsy results to determine if there is genomic evidence of grade three or higher cancer cells present in biopsy tissue, indicating the presence of a cancer potentially missed by the biopsy.  
 
On July 31, 2007, we entered into an alliance and licensing agreement with Clarient, Inc. (acquired by GE Healthcare) for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  During 2008, the Company and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test.  Results from the Phase I, Phase II and Phase III double-blinded clinical validation studies were completed at Clarient and published in the peer reviewed journal UroToday International. These results demonstrated a high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells.  Clarient has not yet reported any commercial sales with this test.  Clarient has not been actively marketing the 4-gene prostate cancer test. While the agreement currently remains in effect, the Company does not anticipate any commercialization from this licensing agreement with Clarient.

On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. (“Abbott”), pursuant to which, among other things, the Company granted Abbott a worldwide, exclusive, royalty-bearing license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests in both biopsy tissue and urine.  We also granted Abbott a worldwide royalty bearing, co-exclusive license (co-exclusive with Quest Diagnostics Incorporated “Quest”) for developing and commercializing a laboratory developed urine based molecular diagnostic test (“LDT”) for clinically significant prostate cancer.
 
 
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We completed the Abbott clinical trial for Phase 1 and 2 of the urine prostate cancer test validation process. However, Abbott did not pay the corresponding $250,000 milestone payment and the Company has subsequently relinquished any rights to this milestone payment. In addition, we completed all clinical laboratory genomic testing on the clinical trial specimens at MD Anderson Cancer Center. We met with and submitted all of our results to Abbott for their independent analysis. Abbott asked to see additional study results from other testing sites. The Company attempted to gather this information for Abbott. Due to confidentiality issues, the Company was unable to share this clinical data with Abbott. Abbott decided to not proceed with the development of the test. As a result, the Company terminated the agreement effective September 28, 2012.
 
On January 30, 2009, we entered into a license agreement with Quest pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a urine-based LDT for clinically significant prostate cancer.

Quest completed the urine prostate cancer test clinical trial and all clinical laboratory genomic testing on the clinical trial specimens. The clinical trial was un-blinded and the patient information has been supplied to Quest. Quest did not respond to our repeated requests to move forward on the LDT development of the 4-gene urine test. As a result, the Company terminated the agreement effective September 28, 2012.

Breast Cancer
 
HDC licensed its two breast cancer diagnostic technologies (MammoSIGHT, for detecting malignancy in mammograms and MetastaSIGHT, for identifying circulating tumor cells in the blood) to Smart Personalized Medicine, LLC (“SPM”) pursuant to a license agreement in exchange for a 15% equity interest in SPM and a per test royalty up to 7.5% based on net proceeds received from the sale of a breast cancer prognostic test other than by Quest.   HDC’s patented technology can be used within all diagnostic imaging radiology techniques, including PET scans, CT scans, and MRIs.  

On March 11, 2010, the Company, Quest and SPM entered into a Development Agreement (the “Quest Development Agreement”) pursuant to which the Company and SPM was to assist Quest in the development of new laboratory tests for aiding in the selection of breast cancer therapies. The Company, SPM and Quest also entered a related Licensing Agreement (the “Quest License”).
 
Pursuant to the Quest License, SPM granted to  Quest a co-exclusive (with SPM) sublicense to utilize the licensed patent rights to the extent necessary to enable Quest to develop products and perform the validation work under the Quest Development Agreement. Quest has the right to use SPM’s Breast Cancer Database developed in association with an academic cancer center (the “Database”).  In consideration for the license, Quest has separately made payments to SPM and HDC. The payments included a $500,000 “License Fee”, which has been paid in full.
 
In consideration for our efforts under the Quest Development Agreement, Quest also agreed to pay us $375,000 in development fees of which $291,662 was received by HDC, with $83,338 remaining unpaid. The Company has subsequently relinquished any rights to this remaining unpaid balance.

Under the terms of the Quest Development Agreement, SPM was to provide the Database containing certain specific sample requirements within the Database.  SPM was unable to deliver the Database required by Quest. A collaborative effort between SPM and HDC was undertaken at the MD Anderson Cancer Center (“MDACC”) in Houston, Texas.  The Principal Investigator at MDACC completed the review of the breast cancer tissue blocks maintained in the tissue repository, to identify those subjects who meet the inclusion criteria for the study. The Company entered into discussions with SPM regarding its plans for the development of this test and the outstanding issues related to the agreement.  The Company decided there was not a way to proceed forward with Quest and terminated the Quest License and Quest Development Agreement effective September 28, 2012.
 
Pancreatic Cancer

In February 2010, the Company entered into an agreement with the Pancreas, Biliary and Liver Surgery Center of New York (the “Pancreas Center”) to develop new molecular diagnostic tests for the early detection of pancreatic cancer. The Pancreas Center is under the leadership of Drs. Michael Wayne, Franklin Kassim and Avram Cooperman.  Under the terms of the agreement, the Pancreas Center was to provide all specimens from their collected specimen banks, specimens on all new patients and all associated clinical and outcomes data. The specimens were to include tissue, blood and urine.  

At the conclusion of the agreement term, approximately 30 paraffin block samples were collected.  Those samples have been forwarded to NeoGenomics Laboratories as a part of the NeoGenomics License. In addition, the Company has licensed final development rights to the pancreatic cancer test to NeoGenomics Laboratories.
 
 
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Benign Prostatic Hyperplasia (BPH)
 
BPH is a non-cancerous enlargement of the prostate gland that occurs as men age.  The enlargement often leads to obstruction in the flow of urine through the urethra that passes through the prostate gland. BPH is a common condition, representing a global treatment market of almost $4 billion annually growing by 12% per year in fixed-rate US dollar terms.  According to the National Institutes of Health (NIH), BPH affects more than 50% of men over age 60 and as many as 90% of men over the age of 70.  While BPH does not cause prostate cancer, both may be found together.

HDC has identified and described in a pending patent application a subset of genes that separates benign prostatic hyperplasia (BPH) from prostate cancer with a high degree of accuracy.  This same set of genes also separated BPH from normal tissue patterns, indicating that BPH is a disease with molecular characteristics of its own.  This discovery could be used to develop a new non-invasive diagnostic test for BPH, which does not currently exist, as well as a completely new type of therapy for patients with this disease.   
 
We have identified fifty gene biomarkers representing 5 gene pathways involved with the development of benign prostatic hypertrophic disease (BPH).   All of these protein products of the genes are known to be secreted into the circulation or are highly likely to be secreted proteins from prostatic cells.  This blood protein test may be useful as companion diagnostic for use in clinical trials of new drug treatments. The Company may attempt to license this BPH test to a third party diagnostic or pharmaceutical company.

Colon Cancer
 
HDC has identified and patent-protected colon cancer-specific biomarkers that can be used in the development of diagnostic assays for cancer detection, disease discrimination, and even a potential vaccine.  The aim of this early biomarker discovery project was to define the gene expression patterns associated with colon cancer.  Our RFE-SVM served as an effective tool for sifting through the voluminous data of thousands of measurements to highlight only those genes that optimally contributed to the study focus.  The Company has licensed final development rights to the colon cancer test to NeoGenomics. 

Melanoma

In July 2011, we announced the launch of our melanoma/skin cancer mobile phone application, MelApp, which enables customers to take a picture of a mole, lesion or birthmark, send it to HDC, and receive a risk assessment for melanoma and other skin cancer on their mobile phone.  This first-ever melanoma/skin cancer mobile phone application using our SVM technology employs sophisticated image analysis techniques using patent protected algorithms for evaluating moles, lesions and birthmarks.   We selected Apple’s iPhone as our initial mobile platform and focused on tuning image capture and analysis capabilities for skin lesions and moles for that platform.  In early 2012, the Company expanded to the Android platform.  The Company receives a portion of revenue from the download fee charged by Apple and Google, however the revenue from MelApp has been negligible to date. Furthermore, the Company does not expect to realize any significant revenue in the future from selling MelApp via Apple or Google.

Flow Cytometry, Cytogenetics, and Pap smear Imaging

Management believes that our efforts to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company is pleased with the development progress to date, and the Company, along with NeoGenomics, is now capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data. This test has been licensed to NeoGenomics for final development.

The Company, along with NeoGenomics, is currently developing a software tool for the computer assisted analysis of chromosome abnormalities, referred to as cytogenetic analysis, using pattern recognition combined with image analysis techniques.  Innovative techniques for image processing are being developed to address the challenges in the cytogenetics product, which is to properly accommodate the variability of the chromosome images while retaining sensitivity to recognize subtle abnormalities in the chromosomes. The preprocessing techniques are designed to improve the performance of the subsequent SVM learning system. Performance data from the test will be collected and analyzed to guide the further improvements of the system. The Company has licensed final development rights to the flow cytometry and cytogenetics tests to NeoGenomics. The Company is working with NeoGenomics for development, validation and commercialization of this new image analysis tool for cytogenetic analysis.

 
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We have developed a set of sophisticated image processing operations to isolate the potentially abnormal cells in a high resolution digitized Pap smear image. Features relevant to the recognition problem can be extracted from the segmented cells. A set of fundamental geometrical, statistical, and topological features have been defined. These features can be used to facilitate SVM training, with other high level classification systems.  The data generated to date supports the development a laboratory developed test (LDT) for the interpretation of Pap smear images.  The Company has licensed final development rights to the pap smear imaging test to NeoGenomics.
 
SVM Capital, LLC

In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.   Atlantic Alpha reports that the SVM technology is now working well in two distinct investment areas.

First, it is being applied to price data.  Utilizing open, high, close, low and volume SVM utilizes an 85 dimensional space to make future predictions.  This price driven model is using fifty exchange traded funds (ETFs) which give it a global perspective.  Much testing and refinement of this model has been accomplished and is being used for trading by Atlantic Alpha.  

Second, Atlantic Alpha is applying SVM technology to quarterly fundamental corporate data such as sales, earning and projected earnings.  SVM is utilized to separate stocks which should outperform and underperform in the next quarter based on current data.  This application of SVM technology allows the creation of four equity portfolios:  Large Capital, Mid Capital, Small Capital, and a Large Capital Long & Short.  Atlantic Alpha has hired Kurt Kaltreider, Ph.D., who is regarded as one of the best fundamental analyst of his generation.  We have taken Dr. Kaltreider’s formulas for examining fundamental data and refined them with SVM technology.  The result of this marriage of two distinct technologies has a strong proforma history and is currently being used for trading by Atlantic Alpha.

Employees
 
On December 31, 2012, we had 5 full time employees.
 
Website Address
 
Our corporate website address is www.HealthDiscoveryCorp.com.  To view our public filings from the home page, select the “Display SEC Filings” tab followed by “SEC Filings.”  This is a direct link to our filings with the Securities and Exchange Commission (“SEC”), including but not limited to our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports.  These reports are accessible soon after we file them with the SEC.
 
Governmental Regulation
 
Our business plan involves Biomarker Discovery in the field of molecular diagnostics.  This early discovery process does not involve any governmental regulations or approvals.  If we are successful in licensing our discoveries to other companies, FDA approvals may be required before the ultimate product may be sold to consumers.  Our current plan is to require the companies licensing our discoveries or technologies to be responsible for the costs involved in such approvals.  If we are not successful in licensing these discoveries on these terms or choose to take these discoveries to market ourselves, we may then be subject to applicable FDA regulations and would then bear the costs of such approvals.
 
We know of no current governmental regulations that will materially affect the Company’s current operations or products. However, if the FDA changes its current position, and decides to regulate laboratory developed tests (LDT’s) currently regulated by CLIA certification, this could materially affect the development costs and commercialization timelines for our products.
 
 
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Intellectual Property
 
In connection with the SVM Acquisition, we obtained rights to the intellectual property within the “SVM portfolio” that currently consists of fifty-seven (57) patents which were or have since issued as well as twenty-one (21) other patent applications that are pending in the U.S. and elsewhere in the world.  The issued patents and pending applications in the SVM portfolio to date, including new applications that we have filed since acquiring the original intellectual property are:
 
Patent/Application No.
 
Title
 
Expiration Date
         
U.S. Patent No. 6,128,608
 
Enhancing Knowledge Discovery Using Multiple Support Vector Machines
 
05/01/2019
         
U.S. Patent No. 6,157,921
 
Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment
 
05/01/2019
         
U.S. Patent No. 6,427,141
 
Enhancing Knowledge Discovery Using Multiple Support Vector Machines.
 
05/01/2019
         
U.S. Patent No. 6,658,395
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/01/2019
         
U.S. Patent No. 6,714,925
 
System for Identifying Patterns in Biological Data Using a Distributed Network.
 
05/01/2019
         
U.S. Patent No. 6,760,715
 
Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.
 
05/01/2019
         
U.S. Patent No. 6,789,069
 
Method of Identifying Patterns in Biological Systems and Method of Uses.
 
05/01/2019
         
U.S. Patent No. 6,882,990
 
Method of Identifying Biological Patterns Using Multiple Data Sets.
 
05/01/2019
         
U.S. Patent No. 6,944,602
 
Spectral Kernels for Learning Machines
 
02/19/2023
         
U.S. Patent No. 6,996,542
 
Computer-Aided Image Analysis
 
04/21/2021
         
U.S. Patent No. 7,117,188
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
05/01/2019
         
U.S. Patent No. 7,299,213
 
Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset
 
03/01/2022
         
U.S. Patent No. 7,318,051
 
Methods for Feature Selection in a Learning Machine
 
02/25/2021
         
U.S. Patent No. 7,353,215
 
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
 
05/07/2022
 
 
7

 
 
Patent/Application No.
 
Title
 
Expiration Date
         
U.S. Patent No. 7,383,237
 
Computer-Aided Image Analysis
 
11/04/2019
         
U.S. Patent No. 7,444,308
 
Data Mining Platform for Bioinformatics
 
08/07/2020
         
U.S. Patent No. 7,475,048
 
Pre-Processed Feature Ranking for a Support Vector Machine
 
08/07/2020
         
U.S. Patent No. 7,542,947
 
Data Mining Platform for Bioinformatics and Other Knowledge Discovery
 
08/07/2020
         
U.S. Patent No. 7,542,959
 
Feature Selection Using Support Vector Machine Classifier
 
05/01/2019
         
U.S. Patent No.  7,617,163
 
Kernels and Kernel Methods for Spectral Data
 
11/9/2021
         
U.S. Patent No. 7,624,074
 
Methods for Feature Selection in a Learning Machine
 
08/07/2020
         
U.S. Patent No. 7,676,442
 
Selection of Features Predictive of Biological Conditions Using Protein Mass Spectrographic Data
 
08/07/2020
         
U.S. Patent No. 7,778,193
 
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
 
05/07/2022
         
U.S. Patent No. 7,797,257
 
System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source
 
05/01/2019
         
U.S. Patent No. 7,805,388
 
Method for Feature Selection in a Support Vector Machine Using Feature Ranking
 
08/07/2020
         
U.S. Patent No. 7,890,445
 
Model Selection for Cluster Data Analysis
 
06/08/2024
         
U.S. Patent No.  7,921,068
 
Data Mining Platform for Knowledge Discovery from Heterogeneous Data Types and/or Heterogeneous Data Sources
 
05/20/2022
         
U.S. Patent No. 7,970,718
 
Feature Selection and for Evaluating Features Identified as Significant for Classifying Data
 
08/07/2020
         
U.S. Patent No. 8,008,012
 
Biomarkers Downregulated in Prostate Cancer
 
01/24/2022
         
U.S. Patent No. 8,095,483
 
Support Vector Machine-Recursive Feature Elimination (SVM-RFE)
 
08/07/2020
         
U.S. Patent No. 8,126,825
 
Method for Visualizing Feature Ranking of a Subset of Features for Classifying Data Using a Support Vector
 
05/20/2022
         
U.S. Patent No. 8,209,269
 
Kernels for Identifying Patterns in Datasets Containing Noise or Transformation Invariance
 
05/07/2022
         
U.S. Patent No. 8,275,723
 
System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source
 
05/01/2019
         
U.S. Patent No. 8,293,461
 
Biomarkers Downregulated in Prostate Cancer
 
01/24/2022
         
Australian Patent No.  764897
 
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
 
05/01/2019
         
Canadian Patent No. 2,330,878
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
European Patent No. 1082646
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
German Patent No. 69943664.8
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
 
 
8

 
 
Patent/Application No.
 
Title
 
Expiration Date
         
Indian Patent No. 212978
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
South African Patent No. 00/7122
 
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
 
05/01/2019
         
Australian Patent No.  780050
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
Canadian Patent No.  2,371,240
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
 
05/24/2020
         
Chinese Patent No. ZL00808062.3
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
European Patent No. 1192595
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
German Patent No. DE60024452.0-08
 
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
 
05/24/2020
         
Australian Patent No.  779635
 
Method of Identifying Patterns in Biological Systems and Method of Uses.
 
10/27/2020
         
Canadian Patent No. 2,388,595
 
Method of Identifying Patterns in Biological Systems and Method of Uses
 
08/07/2020
         
Australian Patent No.  2002243783
 
Computer Aided Image Analysis
 
01/23/2022
         
Canadian Patent No. 2,435,290
 
Computer Aided Image Analysis
 
01/23/2022
         
European Patent No.1356421
 
Computer Aided Image Analysis
 
01/23/2022
         
Japanese Patent No. 3947109
 
Computer Aided Image Analysis
 
01/23/2022
         
Australian Patent No. 2002253879
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
Canadian Patent No. 2,435,254
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
Japanese Patent No. 4138486
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
European Patent No. 1459235
 
Methods of Identifying Patterns in Biological Systems and Uses Thereof
 
01/24/2022
         
European Patent No. 2296105
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
German Patent No. 69943664.8
 
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
 
05/01/2019
         
European Publication No. 1236173
 
Method of Identifying Patterns in Biological Systems and Method of Uses
 
08/07/2020
         
European Publication No. 2357582
 
Method of Identifying Patterns in Biological Systems and Method of Uses
 
08/07/2020
         
Japanese Application No. 2001-534088
 
Method of Identifying Patterns in Biological Systems and Methods of Uses
 
08/07/2020
         
U.S. Patent Publication No. 2005/0165556
 
Colon Cancer-Specific Markers
 
05/01/2019
         
U.S. Patent Publication No. 2011/0106735
 
Recursive Feature Elimination Method Using Support Vector Machines
 
05/01/2019
 
 
9

 
 
Patent/Application No.
 
Title
 
Expiration Date
         
U.S. Patent Publication No. 2010/0205124
 
Support Vector Machine-Based Method for Analysis of Spectral Data
 
08/07/2020
         
U.S. Patent Publication No. 2011/0125683
 
Identification of Co-Regulation Patterns by Unsupervised Cluster Analysis of Gene Expression Data
 
05/17/2022
         
U.S. Patent Publication No. 2010/0256988
 
System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source
 
05/01/2019
         
U.S. Application No. 13/418,291
 
Biomarkers for Screening, Predicting, and Monitoring Benign Prostate Hyperplasia
 
01/24/2022
         
U.S. Patent Publication No. 2009/0215024
 
Biomarkers Upregulated in Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0286240
 
Biomarkers Overexpressed in Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0215058
 
Methods for Screening, Predicting and Monitoring Prostate Cancer
 
01/24/2022
         
European Publication No.  2373816
 
Methods for Screening, Predicting and Monitoring Prostate Cancer
 
12/04/2029
         
U.S. Patent Publication No. 2009/0226915
 
Methods for Screening, Predicting and Monitoring Prostate Cancer
 
01/24/2022
         
U.S. Patent Publication No. 2009/0204557
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
Australian Application No. 2009212193
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
Chinese Application No. 200980110847.2
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
European Application No. 09709037.7
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
Indian Application No. 5526/CHENP/2010
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
Japanese Application No. 2010-546084
 
Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines
 
02/08/2029
         
U.S. Patent Publication No. 2012/0008838
 
System and Method for Remote Melanoma Screening
 
05/01/2019
 
HDC also owns intellectual property rights in U.S. patents covering the FGM technology.  The FGM portfolio includes two issued patents, which are:
 
Patent/Application No.
 
Title
 
Expiration Date
         
U.S. Patent No. 6,920,451
 
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
 
01/19/2021
         
U.S. Patent No. 7,366,719
 
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets
 
01/19/2021
 
 
10

 
 
Our Competition
 
HDC conducts its business principally in the diagnostics industry in the field of Biomarker Discovery and image analysis.  The diagnostics industry is highly fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics companies attempting to discover potential new diagnostic products.  These companies may:
 
 
develop new diagnostic products before we or our collaborators; 
 
develop diagnostic products that are more effective or cost-effective than those developed by us or our collaborators; or 
 
obtain patent protection or other intellectual property rights that would limit the ability to develop and commercialize, or a customers’ ability to use, our or our collaborators’ diagnostic products.
 
The Company competes with companies in the United States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize biomarker discovery and CAD image analysis techniques. These companies may develop products that are competitive with and/or perform the same or similar to the products offered by us or our collaborators. Also, clinical laboratories may offer testing services that are competitive with the products sold by us or our collaborators. The testing services offered by clinical laboratories may be easier to develop and market than test kits developed by us or our collaborators because the testing services are not subject to the same clinical validation requirements that are applicable to FDA-cleared or approved diagnostic test kits.
 
While a number of companies perform biomarker discovery, we believe that our SVM and FGM technologies give us a distinct advantage over competing technologies.  Neither classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs necessary to produce fully validated biomarkers like the Company’s technology.

Customers and Licensees

On January 6, 2012, we entered into the NeoGenomics License pursuant to which 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. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding our activities with NeoGenomics.

We have produced sales, licensing, and developmental revenue since 2005 through agreements with several customers and licensees.  In 2009, we entered into strategic alliance and licensing agreements with Abbott and Quest for commercialization of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature. The Company cancelled these license agreements in September 2012. In July 2008, we entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests with DCL Laboratories (“DCL”) for the independent detection of ovarian, cervical and endometrial cancers.  However, in the first quarter of 2010, due to a shift in strategic direction, we mutually terminated the license with DCL.  In March 2010, we licensed the use of our SVM technology to SPM to develop a superior breast cancer prognostic test.  See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding these licensing activities.
 
 
This annual report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, all statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including but not limited to statements regarding the successful implementation of our services, business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and operations, references to future success, the ability of the Company to utilize its SVM and FGM assets and other intellectual property to identify biomarkers which can be used in diagnostic tests, the ability to enter into agreements with strategic partners for the development and commercialization of diagnostic tests, the ability of the Company to develop a product line, the ability to achieve profitability, about anticipated size of the market for diagnostic tests, the capabilities of molecular diagnostic tests, regarding working with our collaborators resulting in revenue for the Company, the sufficiency of our liquidity and capital resources, and other such matters.  All such statements are forward-looking statements and are based on the beliefs of, assumptions made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause the actual results and performance of our company to be materially different from future results or performance expressed or implied by such statements.
 
 
11

 
 
The cautionary statements set forth in this “Risk Factors” section and elsewhere in this annual report identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Among others, factors that could adversely affect actual results and performance include failure to successfully develop a profitable business, delays in identifying and enrolling customers, the inability to retain a significant number of customers, effectiveness and execution of licensing efforts, our ability to employ and retain key employees and experienced scientists, our access to tissue samples, loss of the ability to use certain patent rights, the inability to continue to protect our proprietary information, competitive conditions, our ability to remain competitive in a rapidly changing technological environment, acceptance of our products by the market, volatility in U.S. and global stock markets generally and in our stock price specifically, potential shareholder claims which could result in substantial dilution to our shareholders, economic conditions generally, the effect of current difficulties in the credit markets on our business, factors beyond our control, including, but not limited to, catastrophes (both natural and man-made), earthquakes, floods, fires, explosions, acts or terrorism or war, and the risks identified elsewhere in this report. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement.  All forward looking statements and cautionary statements included in this report are made as of the date hereof based on information available to us, and we assume no obligation to update any forward looking statement or cautionary statement.  

Risks Related to Our Business

Our financial statements have been prepared on a going concern basis.

We have prepared our financial statements on a “going concern” basis which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

Our ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing our technologies to the market.  The outcome of these matters cannot be predicted at this time.  Our financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.

If the going concern assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.  Such adjustments may be material. 

At December 31, 2012 we had $171,424 cash on hand along with NeoGenomics Stock for sale worth $1,716,160 and our current monthly cash expenses were approximately $185,000. As a result, the Company believes cash will be depleted by the end of 2013. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding our liquidity and capital resources.
 
We are a developing business and a high-risk company.
 
We are a high-risk company in a volatile industry.  In September 2003, we completely changed the focus of our business from wireless telecommunications to biotechnology.  Investors should recognize that an investment in our company is risky and highly speculative.  We are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development.  Failure to implement and execute our business and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We must successfully overcome these and other business risks.
 
 
12

 
 
We may incur future losses, and we may never achieve or sustain profitability.

Our expenses are expected to exceed our income until we successfully complete transactions resulting in significant revenue.  Accordingly, our capital will be decreased to pay these operating expenses.  If we ever become profitable, of which there is no assurance that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these operating expenses.  We may never achieve profitability.  Even if we do achieve profitability, we may not be able to sustain or increase profitability.
 
We may need additional financing.
 
If we are unable to generate sufficient revenue, additional proceeds may be required to finance our activities. We cannot assure prospective investors that we will not need to raise additional capital or that we would be able to raise sufficient additional capital on favorable terms, if at all.  There can be no assurance that additional financing will be available, if required, on terms acceptable to us.  If we fail to raise sufficient funds or do not increase our revenues from licensing our technology or performing services, we may have to cease operations or materially curtail our business operations. If we raise additional capital by issuing equity securities, our stockholders may experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
 
A significant portion of our net revenues will be paid as either a Special Dividend to the holders of the Series B Preferred Stock or to our senior management in bonuses.
 
Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock (the “Series B Preferred Stock”) remain outstanding, the Company must pay the holders of the Series B Preferred Stock a special dividend (the “Special Dividend”) equal to 15% of the Company’s “Net Revenues.”  Company Net Revenues will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC, but will not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company.  At any time following the issuance of the Series B Preferred Stock, the Company may satisfy the Special Dividend in its entirety if the aggregate payments made to the Series B Holders are equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Special Dividend to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. The shares of our Series B Preferred Stock also accrue dividends at the rate of 10% per year, which must be paid by the fifth anniversary of the issuance of such shares either by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion.

Additionally, the Company may pay additional bonuses out of such revenue to senior management.  The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our Common Stock and to otherwise distribute to holders of our Common Stock upon a sale or liquidation. The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our common stock and to otherwise distribute to holders of our common stock upon a sale or liquidation.
   
Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
 
Our operating results may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and acceptance of our services. Factors that may cause our results to vary by period include:
 
payments of milestones, license fees or research payments under the terms of our increasing number of external alliances;
changes in the demand for our products and services;
the nature, pricing and timing of products and services provided to our collaborators;
acquisition, licensing and other costs related to the expansion of our operations;
 
 
13

 
 
reduced capital investment for extended periods;
losses and expenses related to our investments in joint ventures and businesses;
regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information; and
changes in intellectual property laws that affect our rights in genetic information that we sell and license.
  
Advisory and personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Some of these expenses cannot be adjusted quickly in the short term.  If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly.  Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular period.
 
Because we do not intend to pay dividends on our Common Stock, holders of our Common Stock will benefit from an investment in our Company only if it appreciates in value.
 
We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain the Company’s future earnings, if any, to finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future.  As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which its investors purchased their shares.
 
Our stock price has been, and is likely to continue to be, highly volatile.
 
Our stock price has, since September 1, 2003, traded as high as $0.60 and as low as $0.03.  Our stock price could fluctuate significantly due to a number of factors beyond our control, including:
 
variations in our actual or anticipated operating results;
sales of substantial amounts of our stock;
announcements about us or about our competitors, including technological innovation or new products or services;
litigation and other developments related to our patents or other proprietary rights or those of our competitors;
conditions in the life sciences, pharmaceuticals or genomics industries; and
Governmental regulation and legislation.
 
In addition, the stock market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our actual operating performance.
 
In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation. If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could affect our profitability.

Our approach of incorporating ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively new and may not be accepted by our potential customers or collaborators.
 
We intend to create a fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically relevant and economically significant biomarkers.  Our potential customers and collaborators may be reluctant to accept our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove to be ineffective or not as effective as other methods.  For example, our products and technologies may prove to be ineffective if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model.  If our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective, our business may fail or we may never become profitable.

 
14

 
 
Even if our computational technologies are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products based on them.
 
            Even if our computational technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting from them to produce new drugs, therapies, diagnostic products or other life science products.  Despite recent scientific advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement in diseases and in other life processes is not well understood.  Only a few therapeutic products based on the study of and discoveries relating to genes or proteins have been developed and commercialized.  If our customers are unable to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.
 
Our SVM Portfolio utilizes technology that may be covered by an earlier-issued patent, and if we lose the rights to use that patent, our ability to exploit certain aspects of our SVM technology will be impaired.
 
Our SVM Portfolio utilizes technology that may be covered by the original hyperplane patent (Pat. No. 5,649,068) owned by Lucent Technologies GRL Corporation (“Lucent”).  We have obtained an assignment of a pre-existing patent license from Lucent. If Lucent were to terminate the license, it is possible that we would not be able to use portions of the SVM technology.
 
The industries in which we are active are evolving rapidly, and we may be unable to keep pace with changes in technology.
 
The pharmaceutical and biotechnology industries are characterized by rapid technological change.  This is especially true of the data-intensive areas of such technologies.  Our future success will largely depend on maintaining a competitive position in the field of drug, therapeutics and diagnostic products discovery.  If we fail to keep pace with changes in technology, our business will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products and technologies.  Products or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics discovery technologies.  We may not be able to make the necessary enhancements to our technologies to compete successfully with newly emerging technologies.
 
We face intense competition, and if we are unable to compete successfully we may never achieve profitability.
 
The markets for our products and services are very competitive, and we expect our competition to increase in the future.  Although we have not identified specific companies that provide the full suite of services that we do, we compete with entities in the U.S. and worldwide that provide products and services for the analysis of genomic information and information relating to the study of proteins (proteomic information) or that commercializes novel genes and proteins.  These include genomics, pharmaceutical and biotechnology companies, academic and research institutions and government and other publicly funded agencies.  We may not be able to successfully compete with current and future competitors.  Many of our competitors have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do.  This may allow these competitors to discover or to develop products in advance of us or of our customers.
 
Some of our competitors, especially academic and research institutions and government and other publicly funded agencies, may provide for free services or data similar to the services and data that we provide for a fee.  Moreover, our competitors may obtain patent and other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or commercialize our discoveries, products and services.  If we are unable to compete successfully against existing or potential competitors, we may never achieve profitability.
 
Our management may be unable to address future growth.
 
We anticipate that if we experience a period of growth in our customer base and market opportunities, a period of significant expansion of the Company will be required. This expansion will place a significant strain on our management, operational and financial resources. To manage future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
 
 
15

 
 
 If our business does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share or recover investments in our technologies.
 
Technologies in the biomarker industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors, limit our growth and damage our reputation and business.
 
The future success of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial selection. However, our business or others may make rapid technological developments, which could result in our technologies, products or services becoming obsolete before we are able to recover the expenses incurred to develop them.
 
If our business cannot enter into strategic alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services or continue to commercialize existing products or services.
 
We may be unable to maintain or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.

We also depend on collaborators for the development and manufacture of complex instrument systems and chemicals and other materials that are used in laboratory experiments.  We cannot control the amount and timing of resources our collaborators devote to our products. We may not be able to enter into or satisfactorily retain these research, development and manufacturing collaborations and licensing agreements, which could reduce our growth and harm our competitive position.

We may not be able to find business partners to develop and commercialize product candidates derived from our discovery activities.
 
Our strategy for the development and commercialization of diagnostic biomarkers and therapeutic proteins depends on the formation of collaborations or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities.  We cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.
 
Our dependence on licensing and other collaboration agreements makes us heavily dependent on our collaborators.
 
We may not be able to enter into licensing or other collaboration agreements on terms favorable to us.  Even if we do enter into an acceptable agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities.  In most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
 
            In addition, we may not be able to control the amount and timing of resources our collaborators devote to the product candidates and collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s business strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us.  Furthermore, our rights in any intellectual property or products that may result from our collaborations may depend on additional investment of money that we may not be able or willing to make.
 
 
16

 
 
Potential or future collaborators may also pursue alternative technologies, including those of our competitors.  Disputes may arise with respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be significantly harmed.
 
If we are unable to hire or retain key personnel or sufficient qualified employees, we may be unable to successfully operate our business.
 
Our business is highly dependent upon the continued services of our executive team and board of directors.  While certain members of our senior management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability to compete.  The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse effect upon our business, as well as our relationships with our potential customers.  We do not carry key person life insurance on any member of our senior management.  Furthermore, competition for highly qualified personnel in our industry and geographic locations is intense.  Our business would be seriously harmed if we were unable to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.

We may not be able to employ and retain experienced scientists, mathematicians and management.
 
Technologies in our industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected revenues and earnings.
 
If our access to tissue samples or to genomic data or other information is restricted, or if this data is faulty, our business may suffer.
 
To continue to build our technologies and related products and services, we need access to third parties’ scientific and other data and information.  We also need access to normal and diseased human and other tissue samples and biological materials.  We may not be able to obtain or maintain such access on commercially acceptable terms.  Some of our suppliers could become our competitors and discontinue selling supplies to us.  Information and data from these suppliers could contain errors or defects that could corrupt our databases or the results of our analysis of the information and data.  In addition, government regulation in the United States and other countries could result in restricted access to, or use of, human and other tissue samples.  Although currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may suffer.
 
The sales cycle for some of our products and services is lengthy.  We expend substantial funds and management effort with no assurance of successfully selling our products or services.
 
Our ability to obtain customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate their efforts in drug and diagnostics discovery.  Our ability to obtain customers for our therapeutic or diagnostic product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed therapeutic or diagnostic purposes.  Our ability to obtain customers will also depend on our ability to successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is typically lengthy and may take more than 12 months.
 
An inability to protect our proprietary data, technology or products may harm our competitive position.
 
If we do not adequately protect the intellectual property underlying our products and services, competitors may be able to develop and market the same or similar products and services. This would erode our competitive advantage.  In addition, the laws of some countries do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.
 
 
17

 
 
We use contractual obligations to protect a significant portion of our confidential and proprietary information and know-how.  This includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and services.  However, these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how.  Customers, employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.
 
In addition, we have applied for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have discovered using these technologies.  We plan to continue to apply for patents covering parts of our technologies and discoveries as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will be upheld if challenged.  The patent positions of biotechnology related companies are generally uncertain and involve complex legal and factual questions.  Legislative changes and/or changes in the examination guidelines of governmental patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In contrast to recent court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed to identifying relationships between small groups of genes and proteins that are useful for diagnosing, treating and prognosing diseases and other conditions.
 
Our success depends in large part on our ability to patent our discoveries.
 
Our success depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize.  We face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries.  We cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered or may discover in the future.  Our patent applications may conflict with prior applications of third parties or with prior publications.  They may not result in issued patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any competitive advantages.  U.S. and other patent applications ordinarily remain confidential for 18 months from the date of filing.  As a result, patent applications that we file which we believe are novel at the time of filing may be determined at a later stage to be inconsistent with earlier applications.  Additionally, the scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our competitive position.  Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to the business.  The issuance of a patent is not conclusive as to its validity or its enforceability.  Federal courts may invalidate these patents or find them unenforceable.  Competitors may also be able to design around our patents.  If we are unable to protect our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies. Any of these events could materially harm our business or financial results.
 
Litigation or other proceedings or third party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or require us to spend time and money to modify our operations.
  
The technology that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies engage in other genomic-related businesses.  If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies and products, we could experience serious harm. If litigation is commenced against us alleging intellectual property rights infringement or if we initiate a lawsuit to assert claims of infringement, protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others, we may incur significant costs in litigating, whether or not we prevail in such litigation.  Regardless of the outcome, litigation can be very costly.  These costs would also include diversion of management and technical personnel to defend us against third parties or to enforce our patents (once issued) or other rights against others.  In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could prevent us from being able to further develop or commercialize.  Further, these lawsuits could result in the invalidation or limitation of the scope of our patents or the forfeiture of the rights associated with these patents.  This could also result in the award of substantial damages against us.  In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties.  If we are not able to obtain these licenses at a reasonable cost, if at all, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products, all of which could negatively impact our business, financial condition or results of operations.  Moreover, during the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be negative, which could cause the market price of our common stock to decline.
 
 
18

 
 
Many of our services will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation and licensing.  If we are found to be infringing the intellectual property of others, we could be required to stop the infringing activity, or we may be required to design around or license the intellectual property in question.  If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our services, which could result in reduced revenue.
 
We may acquire or make strategic investments in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.
 
If opportunities arise, we may consider making acquisitions of or investments in businesses, technologies, services or products.  These activities may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material adverse effect on the operating results of our business.  Moreover, even if we acquire complementary businesses or technologies, we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.
 
Difficulties in integrating an acquired business or managing an investment could disrupt our business, distract our management and employees and increase our expenses.  Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating to intangible assets.  Sizable acquisitions or investments may also divert senior management from focusing on our existing business plan.  Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders may be diluted, which could affect the market price of our stock.
 
We have identified a material weakness in our internal accounting control over financial reporting.
 
Management has concluded that our internal control over financial reporting was not effective as of December 31, 2012.  Our Chief Executive Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.
 
All internal control systems no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Risks Related to Our Industry
 
There are many risks of failure in the development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development and commercialization of these types of products.
 
Risks of failure are inseparable from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These risks include the possibility that any of these products will:  
 
be found to be toxic or ineffective;
fail to receive necessary regulatory approvals;
be difficult or impossible to manufacture on a large scale;
be uneconomical to market;
fail to be developed prior to the successful marketing of similar products by competitors; or
be impossible to market because they infringe on the proprietary rights of third parties or compete with superior products marketed by third parties.
 
We are dependent on our customers’ commercialization of our discoveries.  Any of these risks could materially harm our business and financial results.
 
 
19

 
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may negatively affect us in several ways.  These consolidations usually involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources and technological capabilities, thus strengthening competition in the industry.  In addition, continued consolidation may result in fewer customers for our products and services.
 
We may be subject to product liability claims if products derived from our products or services harm people.
 
We may be held liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise unsuitable.  These risks are inherent in the development of genomics, functional genomics and pharmaceutical products.  If we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total assets.  In addition, such claims could cause us to incur substantial costs, divert management’s attention from executing the Company’s business plan and subject us to negative publicity even if we prevail in our defense of such claims.
 
Our business and the products developed by our collaborators may be subject to governmental regulation.
 
New therapeutic or diagnostic products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process in the United States and other countries before it can be marketed.  It may be several years, or longer, before any therapy or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues.  This may delay or prevent us from becoming profitable.  Changes in policies of regulatory bodies in the United States and in other countries could increase the delay for each new therapy and diagnostic products.
 
Even if regulatory approval is obtained, a product on the market and its manufacturer are subject to continuing review.  Discovery of previously unknown problems with a product may result in withdrawal of the product from the market.
 
Although we intend to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities to file regulatory approval applications and generally direct the regulatory review process.  We cannot be certain whether they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all.  If they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until clearance can be obtained, if at all.  This will in turn reduce our chances of receiving various forms of payments, including those relating to sales of marketed therapeutic or diagnostic products by them.

The law applicable to us may change in a manner that negatively affects our prospects.
 
We must comply with various legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements, which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, would result in adverse consequences.
  
If ethical and other concerns surrounding the use of genetic information become widespread, there may be less demand for our products and services.
 
Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information.  For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to various conditions, particularly for those that have no known cure.  Any of these scenarios could reduce the potential markets for our technologies in the field of predictive drug response, which could materially harm our business and financial results.
 

Not Applicable.
 
 
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We do not own any real property.  We lease 650 square feet of office space in Hanson, Massachusetts, pursuant to a twelve month lease dated February 1, 2013. We currently pay base rent in the amount of $1,000 per month. Our principal executive office is located at 620 County Road, Hanson, MA 02341, and our telephone number is (339) 244-1223.  
 
 
In April 2012, R. Scott Tobin, a former officer of the Company, filed suit in a Georgia state court against Stephen D. Barnhill, M.D., alleging that Dr. Barnhill had made defamatory statements about Mr. Tobin.  Dr. Barnhill, through his counsel, has removed the action to federal court and has filed an answer denying Mr. Tobin’s allegations.  On October 24, 2012, Dr. Barnhill filed a third party complaint against the Company seeking indemnity from the Company for any expenses incurred by Dr. Barnhill in the defense of the Tobin lawsuit and for any damages assessed against Dr. Barnhill in the litigation. The Company does not believe Dr. Barnhill is entitled to indemnification or for expenses to be paid by the Company on Dr. Barnhill’s behalf with regards to this matter.
 

Not Applicable. 

 
Our common stock is traded on the OTC Bulletin Board under the symbol HDVY.  The range of closing prices for our common stock, as reported on Bloomberg.com during each quarter of the last two fiscal years was as follows.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
   
High
   
Low
 
First Quarter 2011
  $ 0.17     $ 0.09  
Second Quarter 2011
  $ 0.15     $ 0.10  
Third Quarter 2011
  $ 0.09     $ 0.06  
Fourth Quarter 2011
  $ 0.13     $ 0.06  
                 
   
High
   
Low
 
First Quarter 2012
  $ 0.10     $ 0.08  
Second Quarter 2012
  $ 0.11     $ 0.07  
Third Quarter 2012
  $ 0.10     $ 0.06  
Fourth Quarter 2012
  $ 0.07     $ 0.04  

            Holders of Record

As of March 29, 2013, there were approximately 290 holders of record of our common stock.
 
Dividends

We have not paid any cash dividends for commons shares since inception, and we do not anticipate paying any in the foreseeable future on common shares.  We intend to retain future earnings, if any, to support the development and growth or our business.  Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.  Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends.   If the Company were to pay dividends, the holders of the shares of  the Series B Preferred Stock have a right to first receive, or simultaneously receive, a dividend on each outstanding share of Series B Preferred Stock on an as if converted to common stock basis.  The holders of the shares of Series B Preferred Stock also accrue a 10% annual dividend and have a special dividend right to receive 15% of the Company’s net revenues, subject to certain limitations.
 
 
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Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend on any share of its capital stock if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends.  The Company has had limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital investment in order to fund operations.  Accordingly, depending on the Company’s financial condition, it may not be able to pay any dividends on any shares of its Capital Stock.  For further discussion of the Company’s liquidity and capital resources, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth the equity securities of the Company which are authorized for issuance to employees, directors and consultants in consideration for services as of December 31, 2012:
 
Equity Compensation Plan Information
 
     A

Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and rights
   
B
 
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights
   
C
 
Number of
securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in Column A)
 
Equity compensation plans approved by security holders
    -       -       -  
Equity compensation plans not approved by security holders
    12,250,000     $ .10       -  
Total
    12,250,000     $ .10       -  
 
Sales of Unregistered Securities

On April 7, 2011, the Board of Directors of the Company appointed Maher Albitar, M.D., the Company’s Chief Medical Officer, to the Board of Directors. In connection with such appointment, the Company granted Dr. Albitar an option to purchase 1,500,000 shares of common stock. The options vested 250,000 shares every six months and had an exercise price of $0.12. The options expire on April 7, 2016.  The fair value of each option granted is $0.087 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.31%, an expected life of 5 years, and volatility of 94%.  The aggregate computed value of these options was $130,280, and this amount was charged as an expense over the three year vesting period.  Upon Dr. Albitar’s resignation from the Board of Directors on November 15, 2012, these options were forfeited.  The computed value is no longer being charge as an expense.

In connection with his appointment to the Board of Directors in October 2010, on April 7, 2011, the Company granted to Mr. Curtis G. Anderson an option to purchase 1,500,000 shares of the Company’s common stock. The options vested 250,000 shares every six months, had an exercise price of $0.12, and expire on April 7, 2016.  The fair value of each option granted is $0.087 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.31%, an expected life of 5 years, and volatility of 94%.  The aggregate computed value of these options was $130,280, and this amount was charged as an expense over the three year vesting period. Upon Mr. Anderson’s resignation from the Board of Directors on November 25, 2012, these options were forfeited.  The computed value is no longer being charge as an expense.
 
 
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On April 7, 2011, the Company granted to Dr. Joseph McKenzie an option to purchase 1,000,000 shares of the Company’s common stock. The options vest 250,000 shares every six months, have an exercise price of $0.12, and expire on April 7, 2016.  The fair value of each option granted is $0.087 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.31%, an expected life of 5 years, and volatility of 94%.  The aggregate computed value of these options is $86,853, and this amount will be charged as an expense over the three year vesting period.

On December 18, 2012, the Company entered into an employment agreement with John A. Norris, J.D., M.B.A. to serve as our Chief Executive Officer. Under the terms of his employment agreement, Dr. Norris received a one-time bonus of 1,000,000 shares of the Company’s common stock.

Dr. Norris also was granted an option to purchase shares of the Company’s common stock. These options will be granted and vest according to the following schedule: (i) 1,000,000 options were granted on December 18, 2012 at an exercise price of $0.05 and vest during the six months following the grant date, (ii) 2,000,000 options shall be granted at the signing (or automatic extension) of a three year employment agreement and vest during the twelve months following the grant date, (iii) 3,000,000 options shall be granted  on the one year anniversary of the signing of the three year employment agreement and vest during the twelve months following the grant date, and (iv) 4,000,000 options shall be granted on the  second anniversary of the signing of the three year employment agreement and vest during the twelve months following the grant date.

In addition, the employment agreement contains an additional equity component pursuant to which Dr. Norris shall receive a grant of 5,000,000 shares of the Company’s common stock over the course of the three year employment agreement provided certain performance milestones are met. Specifically, the grants of common stock  are contingent upon the occurrence of the following events:  (1) a grant of 1,666,667 shares if the Company’s market capitalization during the first year increases by $25,000,000.00 above the market capitalization on the day of execution of the agreement, (2) a grant of 1,666,667 shares if the Company’s market capitalization during the second year of the term increases by 50% over the market capitalization on the one year anniversary of the agreement,  (3) a grant of 1,666,667 shares will be made if the Company’s market cap during the third year of the term increases by 50% over the market capitalization on the second year anniversary of the agreement. In each future period, the Company will calculate the probability of the milestone being met and a contingent liability will be disclosed as such in the footnotes to our financial statements. At December 31, 2012, no accrual has been made as the probability of meeting the performance milestones at December 31, 2012 is remote.
 
All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

 
As a smaller reporting company, we are not required to provide the information required by this item.
 
 
Corporate Overview
 
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.
 
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
 
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that play a critical role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular have broad applicability in many other fields.  Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
 
 
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Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by more than 90 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; licensure of the SVM and FGM technologies directly to diagnostic companies; and, the formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
 
Operational Activities
 
The Company markets its technology and related developmental expertise to prospects in the healthcare, biotech, and life sciences industries.  Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts may produce favorable results in the future.  
 
NeoGenomics License

On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly-owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”).  Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (IVD) test kit development.

Upon execution of the NeoGenomics License, NeoGenomics Laboratories paid us $1,000,000 in cash and NeoGenomics issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012.  In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License.  Milestone payments 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. 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) 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 agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetics Interpretation System”, and a “Flow Cytometry Interpretation System.” In January 2013,  NeoGenomics informed the Company of its intent to continue under the terms of the license and therefore extend the license for the first of its one-year extensions discussed above.

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.

The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development.  We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with the NeoGenomics License.
 
 
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Plasma 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 SVMTM, to assist Ophthalmologists and Optometrists in the Detection of Macular Degeneration. While the first Retinalytics SVMTM product released 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.
 
The volume of images processed thus far been significantly less than expected and revenues to date from Retinalyze have been negligible. Retinalyze, LLC continues to evaluate options to improve the product with the goal of solving this slower than expected adoption issue thereby allowing the analysis of a higher volume of scans. In addition, the Company is evaluating all options related to the product with the goal of optimal commercialization of this technology.

Intellectual Property Developments

 In January 2012, the U.S. Patent and Trademark Office issued a new patent to the Company with further expanded claims to the SVM-RFE method.  This is the fourth U.S. patent owned by the Company covering SVM-RFE.  The claims of this application correspond to those granted in the European application that had been granted in January 2011.

In February 2012, the U.S. Patent and Trademark Office issued a new patent to the Company for its method for visualizing feature ranking to facilitate identification of alternative features that can be used for separating classes.  This method is particularly useful for biomarker discovery, providing a tool for selection of alternative equally effective markers that may be more practical to detect compared to a gene that may have been initially identified as one of the best for distinguishing between disease and normal.  To illustrate, a gene that can be readily detected in blood would be more technically and economically desirable for diagnostic screening than would a gene that is only expressed in a tissue sample obtainable through biopsy.
 
Also in February, the U.S. Patent and Trademark Office issued a notice of allowance of the Company’s application covering a method for recognizing and eliminating noise within data to facilitate more accurate classification of the data.  The claimed method is effective for separating noise from true data in cases where the measurement process is subject to instrument noise, temperature drift and signal drift.
 
In March 2012, in consideration of recent court decisions relating to the patentability of genes, the Company revised its approach to obtaining a patent covering genes that have been identified as biomarkers for screening for BPH (benign prostate hyperplasia).  The change in strategy involved filing a new continuation application directed to a method for screening for BPH using the same genes as were claimed in the parent application, then allowing the parent application to lapse.  The continuation application will be entitled to the same priority as its parent.
 
In May 2012, the Canadian Intellectual Property Office issued the Company’s Canadian patent covering the use of SVMs for computer-aided image analysis. Counterpart patents have already issued in the U.S. (two patents), Australia, Europe and Japan.  That same month, the Canadian Patent Office also issued a new patent to the Company with claims directed to the use of the SVM-RFE method for identifying a determinative subset of genes for diagnosing, prognosing or treating a disease or condition.  This is the second Canadian patent issued to the Company covering SVM-RFE, and the ninth patent worldwide covering the Company’s SVM-RFE method.
 
 
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Also in May 2012, the U.S. Patent and Trademark Office issued a notice of allowance of the Company’s application covering a system for providing data analysis services using a support vector machine for processing data received from a remote source.  Once issued, this will be the Company’s third patent covering a fee-for-service SVM analysis, with claimed uses including medical and financial analysis.

In June 2012, the U.S. Patent and Trademark Office issued a new patent to the Company for its method for recognizing and eliminating noise within data to facilitate more accurate classification of the data.  The claimed method is effective for separating noise from true data in cases where the measurement process is subject to instrument noise, temperature drift and signal drift.
 
Also in June 2012, the U.S. Patent and Trademark Office issued a notice of allowance of the Company’s application 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.
 
Also in June 2012, the Company filed a new patent application covering the use of SVM technology for the evaluation of chromosomal abnormalities.  The method of computer-aided karyotyping described in the application has the potential of providing a significant improvement over current methods in which images of chromosomes must be manually evaluated in a tedious and sometimes error-prone process.
 
In July 2012, the Japanese Patent Office issued a notice of intention to grant a patent covering the Company’s SVM-RFE method.  This will be the Company’s second Japanese patent and the tenth patent worldwide covering the SVM-RFE method.
 
In September 2012, the U.S. Patent and Trademark Office granted Patent No. 8,275,723 to the Company covering a system 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 a system 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 during 2012 resulted from the Company’s decision to allow certain foreign patents issued and/or filed in countries that were deemed to have lower strategic value to lapse.  This in turn reduced the Company’s total expenses for patent maintenance.
 
Intel Update
 
In October 2012, the US Patent and Trademark Office (“USPTO”) 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 USPTO 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.
 
 
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The Company submitted a request to the USPTO to initiate interference proceedings once the reexamination certificate was issued and has subsequently received a final rejection in the application that was filed to provoke the interference.  The reasoning behind the rejection has been uniformly criticized in decisions by both the Patent Office Board of Appeals and the Federal Appeals Court in cases with nearly identical facts.  A response referring to these decisions has been submitted to the USPTO, and reversal of the rejection is expected, although the USPTO has yet to act on this response.

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
 
Revenue
 
Since December 31, 2005, the Company has received cash from revenue generating activities totaling $3,974,928, which consists of recorded revenue of $1,733,324 through December 31, 2012 and deferred revenue yet to be recognized of $2,241,604 at December 31, 2012.
 
For the year ended December 31, 2012, revenue was $1,585,517 compared with $118,954 in revenue for the year ended December 31, 2011.  Revenue is recognized for licensing and development fees over the period earned, which in most cases is the length of the license.  The revenue recognized in 2012 was primarily the recognition of revenue of $981,600 associated with our NeoGenomics, License which revenue did not occur in 2011.  As of December 31, 2012, the Company had deferred revenue of $2,241,604, which includes cash received but not yet recognized as revenue. Deferred revenue was $831,864 at December 31, 2011. The increase in revenue recognized is due to the revenue recognition of the NeoGenomics License and the acceleration of revenue pertaining to existing license agreements which were terminated in 2012.

Operating and Other Expenses
 
Amortization expense, which is the amortization of costs of acquiring or filing of patents over their estimated useful lives, was $262,719 for the twelve months ended December 31, 2012 and 2011.
 
Professional and consulting fees totaled $698,676 for 2012 compared with $629,501 for 2011.  These fees consist primarily of patent filing and maintenance costs, professional fees, and accounting fees.  The increase was due to an increase in professional services provided to the Company, specifically consulting fees paid to our former CEO.
 
Legal fees remained virtually unchanged with fees of $228,557 during the period ending December 31, 2012, and were $221,113 during the same period 2011.

Research and development fees were $127,648 during 2012 and $250,971 for the same period in 2011. This decrease relates primarily to the completion of costs related to the MelApp product which was completed in 2011.  The research and development fees in 2012 were related primarily to fees paid to consultants relating to the development work completed as a part of our NeoGenomics License.
 
Compensation expense of $1,483,899 for the twelve months ended December 31, 2012 was higher than the $1,135,189 reported for the comparable period of 2011. The increase is attributed to a bonus paid to our former CEO related to the NeoGenomics License.
 
Other general and administrative expenses decreased from $634,452 in 2011 to $621,266 in 2012.  This decrease principally was due to a reduction in travel costs and management’s efforts in reducing other costs. 
 
Loss from Operations
 
The loss from operations for the twelve months ended December 31, 2012 was $1,837,248 compared to a loss from operations of $3,014,991 for the prior year.  The reduced loss was due to the increase in revenue related to the NeoGenomics License and the acceleration of revenue recognition as previously discussed. 
 
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.  As of December 31, 2012, the unrealized gain on NeoGenomics stock held at the end of the reporting period was $726,600, 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 $668,852 in 2012. During the same period in 2011, the Company did not own any NeoGenomics stock.
 
 
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Interest income was $1,059 for the twelve months ended December 31, 2012, compared to $6,385 in 2011.  Interest income decreased because the Company had less cash on hand to invest throughout the 2012 period.
 
The Company negotiated a settlement in 2011 with a service provider regarding their fees.  As a result, the Company realized an increase in other income and expense (gain on payables restructuring) of $483,658 in 2011.  For the period ending December 31, 2012, there were no gains on payable restructuring.
 
Net Loss
 
The net loss for the twelve months ended December 31, 2012 was $440,737 compared to a net loss of $2,524,948 for the twelve months ended December 31, 2011.  The reduced net loss was due to the overall increase in revenue as previously discussed. Specifically, the revenue from the NeoGenomics License and accelerated revenue recognition for cancelled agreements with Quest and Abbott were primarily responsible for the reduction in net loss in 2012.
 
Net loss per share attributable to common shareholders was $0.002 and $0.012 for twelve months ended December 31, 2012 and 2011, respectfully.
 
Liquidity and Capital Resources
 
At December 31, 2012, the Company had $171,424 in cash and cash equivalents and total current liabilities of $1,220,278.  The primary amount of current liabilities relates to $1,024,988 in deferred revenue. Additionally, we continue to sell our NeoGenomics Stock in order to fund operations. Although the NeoGenomics Stock has increased in value, the number of shares and amount of cash we can generate from the sale of NeoGenomics Stock is subject to fluctuating market and price conditions. As a result we do not believe we have sufficient resources to meet all of our current obligations unless the Company is able to secure funds via licensing activity or other forms of fund raising either in the debt or equity markets.  None of these options are definitive and there is no guarantee the Company will be successful in these fund raising efforts.
 
The following table summarizes the due dates of our contractual obligations.
 
   
Total
   
1 Year
Or Less
   
More Than
 1 Year
 
Accrued Compensation
  $ 53,000     $ 53,000     $ -  
Office Lease
  $ 12,000     $ 12,000     $ -  
Total
  $ 65,000     $ 65,000     $ -  
 
The Company has relied primarily on equity and debt financing for liquidity.  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.  The Company’s plan to have sufficient cash to support operations is comprised of selling its NeoGenomics Stock, generating revenue through licensing its significant patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing.  The Company has been unable to generate significant revenue, as further described above.  As a result, the Company has implemented a cash conservation program.
 
Cash Flow from Operating Activities
 
For the year ended December 31, 2012, the Company had a net loss of $440,737 with $1,968,217 of cash being used by operating activities. During 2012, $1,620,214 was provided by investment activities primarily from the sale of 668,000 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 2012.  As a result, the Company realized a decrease of cash of $718,902 during the year ended December 31, 2012. 
 
The Company has taken steps to reduce the Company’s expenditures in order to reduce the “burn rate” to approximately $185,000 per month. These steps included reducing expenses and allocating our remaining cash reserves for our operational requirements at a reduced level.  
 
 
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Cash Flow from Financing Activities
 
The Series B Preferred Stock  accrues dividends at the rate of 10% of the Series B Original Issue Price per year, which shall be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Dividends have been accrued for the Series B Preferred Stock in the amount of $455,546 as of December 31, 2012 and $316,064 as of December 31, 2011.
 
During 2011, two Series B holders requested, and the Company complied with the Series B holders’ request to convert 1,437,500 Series B Preferred Stock to Common Stock.  The Company also paid the Series B holders who chose to convert, their portion of the accrued special dividend and accrued dividend.  The total paid to these Series B holders was $19,729.
 
During the fourth quarter of 2012, the Company made payments to the Series B holders for the special dividend. Dividends in the amount of $21,018 had been accrued for Series B Preferred Stock special dividend as of December 31, 2011 and the $349,882 was accrued as a result of the NeoGenomics transaction in 2012.  These accruals resulted in the Company making the required payment to the Series B Preferred shareholders of approximately $370,900.
 
The Company has relied primarily on equity funding plus debt financing for liquidity.  In the longer term, the Company plans to generate additional cash from its licensing arrangement with NeoGenomics  While the Company has produced limited revenue, it must continue to do so in order to generate sufficient cash to continue operations.  The Company does not believe it currently has sufficient cash to support operations until it is able to generate revenue through royalty payments from licensing deals from its patent portfolio and development fees for providing services related to those patents. 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 that would permit funding of ongoing operations. In such event, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings.  There can be no assurance that the Company will be able to secure such funding.
 
Critical Accounting Policies, Estimates and Assumptions
 
We consider our accounting policies related to revenue recognition, impairment of intangible assets and stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which represents the future undiscounted cash flows to be derived from the intangible asset, and estimating the useful life and volatility of stock awards granted. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.
 
Valuation of intangible and other long-lived assets.
 
We assess the carrying value of intangible and other long-lived assets at least annually, which requires us to make assumptions and judgments regarding the future cash flows related to these assets.  The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of events or changes in circumstances such as:
 
 
the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
 
loss of legal ownership or title to the asset;
 
significant changes in our strategic business objectives and utilization of the asset(s); and 
 
the impact of significant negative industry or economic trends.
 
If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
 
 
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Revenue Recognition
 
We recognize revenue principally from license and royalty fees for intellectual property and from development agreements with research partners. Each element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; (iv) collectability is reasonably assured, and (v) both title and the risks and rewards of ownership are transferred to the buyer. We are required to make significant estimates involving our recognition of revenue from license and royalty fees. Our license and royalty fees revenue estimates depend upon our interpretation of the specific terms of each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period of time to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received.  Changes to these assumptions or market conditions could cause changes in revenues.
 
Share-Based Compensation
 
Share-based compensation expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and we employ different assumptions in future periods, the compensation expense that we record could differ significantly from what we have recorded in the current period.
 
            For share-based awards, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise, and post-employment termination behavior; however, due to the limited history of our Company, such data is limited.  We estimated the expected life will be substantially longer than the vesting period given the early stage nature of our operations and accordingly have used the contractual life as the expected term. Our estimated volatility was derived using our historical stock price volatility. We have never declared or paid any cash dividends on our Common Stock and currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. For criteria share based award with vesting contingent upon meeting a market condition, we also make assumptions as to the probability of the market condition being met.
 
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.
 
 
As a smaller reporting company, we are not required to provide the information required by this item.
 
 
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The following consolidated financial statements are included beginning on page F-1 of this report:
 
 
 
            None.
 
 
Evaluation of Disclosure 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 Financial Officer and Principal Accounting 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 concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
 
Managements Annual Report on Internal Controls over Financial Reporting
 
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
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In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
 
Based on this evaluation, under that framework, management has concluded that our internal control over financial reporting was not effective as of December 31, 2012. Our Chief Executive Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company. The Company is planning on implementing an accounting policy and procedure plan during the second quarter of 2013.
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
Changes In Internal Controls over Financial Reporting
 
No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
None. 
 
Our executive officers, directors are: 
Name
 
Age
 
Position
John A. Norris, J.D., M.B.A.
Mark A. Moore, Ph.D.
Hong Zhang, Ph.D.
Herbert A. Fritsche, Ph.D.
 
65
67
49
70
 
Chief Executive Officer  and Director
Vice President, Product Development
Senior Vice President, Computational Medicine
Senior Vice President, Chief Science Officer and Director (Retired)
Joseph McKenzie, D.V.M.
 
62
 
Chairman, Board of Directors
David Eckoff
 
48
 
Director
Sumio Takeichi
 
72
 
Director
 
The following sets forth the biographical information for our executive officers:
 
John A. Norris, J.D., M.B.A. has served as our Chief Executive Officer since December 18, 2012.  Previously, Dr. Norris served as Senior Vice President, Chief Regulatory and Technology Officer since October 2010. Dr. Norris served as our Chief Operating Officer from September 2009 to October 2010.  Dr. Norris also serves as Chairman of Norris Capital.  From March 2007 to November 2008, Dr. Norris served as the Chairman and CEO of Needlebot, Inc.  From May 1999 to June 2005 Dr. Norris served as the Chairman and CEO of Coprindm Corporation (now Decision View). Dr. Norris is a former Principal Deputy Commissioner and COO of the US FDA in Washington, DC, where he led the last major FDA reform initiative, from May 1984 to May 1988.  This work was performed under the overall leadership and guidance of President Ronald Reagan, HHS Secretaries Margaret Heckler and Dr. Otis Bowen, FDA Commissioner Dr. Frank Young, Senator Orrin Hatch and Congressman Paul Rogers.  Dr. Norris also taught healthcare policy and management (including healthcare-reform, Medicare-reform, healthcare-IT-reform, personalized-medicine-reform, and FDA-reform) at Harvard University, and was founder and faculty-editor-in-chief of the American Journal of Law, Medicine, and Ethics, a leading academic publication covering healthcare policy, law, regulation, management, finance, and ethics.  Dr. Norris has been the CEO to a significant number of successful life-sciences and healthcare-IT companies and has served on the boards of and/or consulted with dozens more.  For example, he helped the billion dollar turn-around of the laser eye surgery company, Summit Technology.  Additionally, he has consulted with senior executives of leading companies, including Pfizer, Merck, Johnson & Johnson, and Glaxo Smithkline, among others.
 
 
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Mark A. Moore, Ph.D., was appointed interim Chief Operating Officer of the Company on November 16, 2012.  Dr. Moore has subsequently taken the role of Vice President, Product Development on a permanent basis.  In addition to his role with HDC, Dr. Moore serves as Chairman and Chief Executive Officer of SVM Capital, LLC (“SVM Capital”). SVM Capital was formed as a joint venture between the Company and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”), an absolute return hedge fund, to explore and exploit the potential applicability of the Company’s SVM technology to quantitative investment management techniques.  Dr. Moore received a B.A. degree in Science and Philosophy from Florida Atlantic University in 1966. He received a Ph.D. in Philosophy with an emphasis on Value Theory and Logic from the University of Tennessee, Knoxville in 1973. Currently, Dr. Moore is also Chairman of Atlantic Alpha. In addition, Dr. Moore has served as Treasurer and Chairman of Memorial Health University Hospital Foundation as well as a member of the Board of Directors of Memorial Health University, where he is a member of the Investment and Finance Committee. Dr. Moore remains a member of Memorial Foundation Board.
 
Hong Zhang, Ph.D., has been our Senior Vice President, Computational Medicine since 2004.  As visiting faculty at Johns Hopkins University, Dr. Zhang lectured at the Center for Biomarker Discovery on Bioinformatics: Peak Detection Methods for Mass Spectral Data.  Currently a Yamacraw Associate Professor at Armstrong Atlantic University, Dr. Zhang was the Vice President and CIO for a neural network and computer assisted medical diagnostic systems company that employs neural network and mathematical/statistical preprocessing techniques.  In this position, Dr. Zhang was involved in digital image processing and pattern recognition for medical image processing as well as software design and programming for support vector machine applications.  Dr. Zhang was a professor in the Department of Mathematical Sciences at Purdue University from 1989 to 1996.  He has held numerous academic positions, including Adjunct Associate Professor, Associate Professor with Tenure, and Assistant Professor.  He was a visiting Associate Professor in 1995 in the Department of Biometry at the Medical University of South Carolina.
 
Throughout his academic career, Dr. Zhang has consulted on many software and analytical development projects for Union Switch and Signal, Inc., General Electric Company, and the Department of Pharmacology at the University of Pittsburgh.  Dr. Zhang has published numerous articles on the use of neural networks in the detection of cancers.  He has been published in more than twenty medical and technical journals.  Dr. Zhang received a Ph.D., Mathematics at the University of Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh, 1986, M.S.E.E., Electrical Engineering, University of Pittsburgh, 1984, B.S., Computer Science, Fudan University, 1982.  Dr. Zhang’s numerous awards and honors include: National Cancer Institute SBIR Grant, 1999, 2000; Purdue Research Foundation Summer Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew Mellon Fellowship, 1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place, Fudan University Mathematics Competition, 1979.
 
Herbert A. Fritsche, Ph.D., was appointed as our Senior Vice President, Chief Science Officer on September 1, 2010. He also serves as a member of our Board of Directors since July 2011. Prior to these positions, Dr. Fritsche was Professor of Laboratory Medicine and Chief of the Clinical Chemistry Section at The University of Texas, M.D. Anderson Cancer Center in Houston, Texas.   During his 42 years at M.D. Anderson Cancer Center, Dr. Fritsche has focused his research activities on the development and validation of cancer diagnostics.   Dr. Fritsche has participated in the validation and FDA clearance process for every commercial serum tumor marker product currently in use in the United States.  Dr. Fritsche has served as President of the Clinical Ligand Assay Society (CLAS) and on various committees for both the CLAS and the American Association for Clinical Chemistry (AACC).   He is a fellow of the National Academy of Clinical Biochemistry and was awarded the National Award for Contributions in Education by the AACC; the Outstanding Clinical Chemist Award by the Texas Section, AACC; a Deans Excellence Award for the University of Texas Graduate School of Biomedical Science; a Distinguished Scientist Award from the CLAS; and the Johnson and Johnson Award for Outstanding Research and Contributions to Clinical Biochemistry from the National Academy of Clinical Biochemistry. Dr. Fritsche currently serves on the Expert Panel for developing Tumor Marker Practice Guidelines for the American Society of Clinical Oncology, and the Laboratory Practice Guidelines Committee for the National Academy of Clinical Biochemistry.   In addition, he serves on the Editorial Board of six international scientific journals. Dr. Fritsche serves as a consultant/advisor to the National Cancer Institute and for some major international diagnostic companies and biotech start-up companies.   Dr. Fritsche has published over 170 peered reviewed scientific papers, invited articles and book chapters.   Dr. Fritsche holds 3 patents and has 2 other applications on file.   He has lectured extensively for many years at international and national meetings. Dr. Fritsche retired from the Company as an executive and Director on December 31, 2012.  He continues to serve the Company as a Consultant. 
 
In addition to the information presented in the biographical details below regarding each director’s specific experience, qualifications, attributes and skills that led us to conclude that he should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards.  They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Company and our Board.
 
 
33

 
 
Joseph McKenzie, D.V.M., has been a member of the Board of Directors since April 2009. Dr. McKenzie practices veterinary medicine, having founded and managed the multi-million dollar growth of multiple veterinary practices in Georgia, South Carolina and Florida. He also created and built the community “drug dog” program, which over the years and across the nation has become a generally accepted and highly successful weapon against drug smuggling at the port of Savannah as well as in the community at large. Dr. McKenzie has also been honored for his years of valuable service on the Board of Directors of the Georgia Veterinary Medical Association. Dr. McKenzie holds a degree in chemistry from Armstrong Atlantic State University, where he was recently honored as its most outstanding alumnus. He also holds a doctorate in veterinary science from the University of Georgia’s College of Veterinary Medicine.
 
David Eckoff joined the Board of Directors on February 25, 2013. Mr. Eckoff is an experienced entrepreneur, technological innovator, and corporate executive with more than twenty-five years of experience. Mr. Eckoff is Co-Founder of Pickoff LLC, a technology startup developing a SaaS social games platform. He is also an advisor to technology companies, helping take revolutionary ideas from the drawing board to market. Eckoff has advised companies including Kleiner Perkins backed Zazzle.com, live interactive broadcasting platform Ustream.TV, 3D Virtual World innovator Kaneva, and more.
 
Previously, Mr. Eckoff was Vice President, New Products at Turner Broadcasting (a Time Warner company, NYSE: TWX) responsible for overseeing the development, evaluation and launch of new products across the Turner entertainment, news and animation divisions. Before joining Turner, Mr. Eckoff was Senior Director at RealNetworks Inc. (NASDAQ: RNWK). Before joining Real, Mr. Eckoff was Senior Vice-President at Rivals.com, and was employed by IBM Corporation (NYSE: IBM) and Raytheon Company (NYSE: RTN) in various financial management positions.
 
Mr. Eckoff holds an MBA from the University of North Carolina at Chapel Hill and a BBA in accounting from the University of Massachusetts Amherst.
 
Sumio Takeichi joined the Board of Directors on December 6, 2012. Mr. Takeichi is a Japanese citizen who is a well-known and widely respected high-tech businessman in Japan and throughout Asia, who served as Director of Cangen Corporation, USA, Senior Corporate Advisor of Cangen Biotechnologies, Inc., and President of Cangen Japan.  Cangen Biotechnologies, Inc., a cancer-focused biotechnology company, developed and marketed diagnostic tests for early detection of cancer.
 
Mr. Takeichi is a former director of the Mitsubishi Corporation which, with 60,000 employees, is one of the world’s largest corporations.  In addition, he served as Executive Vice President of the Mitsubishi International Corporation, New York, USA, Chief Representative for Mitsubishi International Corporation in Washington, D.C., General Manager of Mitsubishi Corporation, Tokyo, and Manager of Mitsubishi International GmbH, Dusseldorf, Germany.  He currently serves as a corporate advisor of the Mitsubishi Corporation.
 
In addition, Mr. Takeichi presently serves as the Senior Advisor to the Governor of Kanagawa Prefecture, Japan’s second largest state government, after Tokyo.  He also serves as a Special Advisor to the Japan Management Association (JMA), Japan’s largest management association; having more than 1,300 Tokyo Stock Exchange listed corporations as its members.  He also serves as a Principal Member of the Green Finance Corporation (GFC), and as a Principal Member of the Food, Drug, Device and Healthcare Strategic Service Corporation (FDDH SSC), as well as, Secretary General of FTRT (Financial Technology Roundtable among MOF, FSA, National Tax Bureau) in Tokyo, Japan.  Mr. Takeichi’s previous positions include a three-year tenure as ... the Director of Marketing and Business Development at IFC (International Finance Corporation, part of the World Bank Group).  He also served as Chairman of the Cosmos Alliance Board in Washington, D.C., a US Bio Venture-Capital firm established by Dr. Frank Young, Former US FDA Commissioner, and Dr. John Norris, Former US Deputy FDA Commissioner,
 
Mr. Takeichi received a B.A. in Economics from Keio University in 1966 and has since received advanced certification from the Japan Management Association and the Harvard Graduate School of Business.
 
            The directors named above will serve until the next annual meeting of our stockholders.  Absent an employment agreement, officers hold their positions at the pleasure of the Board of Directors
 
Nominees for Directors
 
In filling vacancies and otherwise identifying candidates for our Board of Directors, we seek individuals who will be able to guide our operations based on their business experience, both past and present, or their education. Responsibility for our operations is centralized within management.
 
 
34

 
  
 Shareholder Nomination of Candidates for Board of Directors
 
 Nominations of persons for election to the Board of Directors may be made by any shareholder who complies with the notice provisions set forth in the Bylaws, which provides that a shareholder’s notice must be delivered or mailed and received at the principal executive office of the Company not less than thirty days before the date of the meeting; provided, however, that in the event that less than forty days’ notice or prior public disclosure of the date is given, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which the public announcement of the meeting date was made.  Such shareholder’s notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person as required to be disclosed in solicitation of proxies for election of Directors made in compliance with Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person’s written consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the books of the Company, of such shareholder and (B) the class and number of shares of the Company’s capital stock that are beneficially owned by such shareholder.  At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Executive Vice President of the Company that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee.  No person shall be eligible for election as a Director of the Company unless nominated in accordance with the applicable provisions of the Company’s Bylaws.
 
Code of Ethics
 
The Company has adopted a Code of Ethics applicable to our Chief Executive Officer and Principal Financial Officer.  This Code of Ethics is posted on our website at www.healthdiscoverycorp.com.  The Code of Ethics is also available without charge upon request directed to Investor Relations, Health Discovery Corporation, 620 County Road, Hanson, MA 02341.  The Company intends to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.
 
 
Summary Compensation Table
 
The following table sets forth various elements of compensation for our Named Executive Officers for each of the last two fiscal years:
Name and Principal Position
Year
 
Salary ($)
   
Bonus ($)
   
All Other
Compensation
($)
   
Total
 
John A. Norris, J.D., M.B.A.
2012
  $ 125,000     $ 50,000     $ -     $ 175,000  
Chief Executive Officer
2011
  $ 120,000     $ 30,000     $ 1,186 (1)   $ 151,186  
                                   
Mark A. Moore, Ph.D.
2012
  $ 13,846       -       -     $ 13,846  
Vice President, Product Development
2011
  $ -       -       -     $ -  
                                   
Hong Zhang, Ph.D.
2012
  $ 132,000       -       -     $ 132,000  
Senior Vice President, Computational Medicine
2011
  $ 132,000       -       -     $ 132,000  
                                   
Herbert A. Fritsche, Ph.D. (2)
2012
  $ 230,769       -     $ 8,009 (1)   $ 238,778  
Senior Vice President, Chief Science Officer
2011
  $ 250,000       -       -     $ 250,000  
                                   
Stephen D. Barnhill, M.D., Former Chairman
2012
  $ 264,423     $ 377,441 (4)   $ 129,770 (5)   $ 771,634  
and Chief Executive Officer (3)
2011
  $ 300,000     $ 4,534     $ 37,203 (1)   $ 341,737  
 
 (1)
Represents health insurance premiums and reimbursed healthcare costs.
 (2)
Dr. Fritsche retired as a full time employee and director as of December 31, 2012.  He continues as a consultant to the Company.
 (3)
Dr. Barnhill resigned as a CEO on October 21, 2012.
 (4)
Represents $100,000 in costs associated with stock grant and $277,441 in cash bonus.
 (5)
Represents $71,400 in consulting fees, $35,485 in health insurance premiums, and $22,885 in vacation time.
 
 
35

 
 
Employment Agreements
 
John A. Norris, J.D., M.B.A.
 
On December 18, 2012, the Board of Directors appointed John A. Norris, J.D., M.B.A. as Chief Executive Officer. The Board of Directors also granted Dr. Norris a 2012 year-end bonus of $50,000 as well as entered into a new employment agreement with him. The employment agreement has an initial term of six months and the Company shall, absent prior proper termination, automatically enter into a three year agreement with Dr. Norris.
 
Under the terms of the employment agreement, Dr. Norris received a one-time bonus of 1,000,000 shares of the Company’s common stock and an annual base salary of $250,000. Dr. Norris will also be eligible to receive a cash bonus equal to $100,000 for every $0.01 in earnings per share as measured by US GAAP with a maximum of $400,000 received during each calendar year of the agreement. The Company will pay a $100,000 cash bonus to Dr. Norris if the Company obtains equity investment of at least $10,000,000 before the six month anniversary of the employment agreement.
 
Dr. Norris may receive an option to purchase 10,000,000 shares of common stock according to the vesting schedule disclosed earlier. Dr. Norris may also receive a grant of 5,000,000 of shares of the Company’s common stock upon the Company attaining certain performance metrics in market capitalization.
 
Dr. Norris is eligible to be reimbursed monthly for reasonable and necessary business expenses and to receive health insurance benefits and other benefits. Dr. Norris will be entitled to twenty paid vacation days during the calendar year. If Dr. Norris’ employment is terminated Without Cause, as that term is defined in the employment agreement, or if Dr. Norris terminates the employment agreement for Good Reason, as that term is defined in the employment agreement, then Dr. Norris will receive severance and an acceleration of his equity vesting terms. If the employment agreement is terminated for any other reason than Without Cause or for Good Reason, Dr. Norris is not eligible to receive severance. The employment agreements also generally provides that Dr. Norris will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees following termination of employment.
 
Stephen D. Barnhill, M.D.
 
On May 14, 2012, the Company entered into a new employment agreement with Dr. Stephen Barnhill for his employment as Chief Executive Officer. Dr. Barnhill’s existing employment agreement expired on August 30, 2010 and the Company and Dr. Barnhill agreed to extend those terms on a month to month basis while negotiating this new agreement.
 
The employment agreement had a term of three years. Under the terms of the employment agreement, Dr. Barnhill received a one-time retention signing bonus of 1,000,000 shares of the Company’s common stock and an annual base salary of $350,000. The fair value of this stock grant was based on the closing price of the Company’s stock on the date of the grant.  As a result, the Company recognized a cost of $100,000 during the second quarter 2012.
 
On October 21, 2012, Stephen D. Barnhill, M.D., resigned as an employee of the Company, effective immediately, and resigned as Chief Executive Officer of the Company, effective upon the appointment of his successor.  Dr. Barnhill continued to serve in the role of interim Chief Executive Officer until the Board of Directors identifies and appoints a successor which occurred on December 18th 2012 with the appointment of Dr. Norris as CEO.
 
In connection with his resignation as an employee and his continued service as a consultant to the Company, the Company entered into a consulting agreement with Dr. Barnhill. The consulting agreement includes among its provisions compensation to Dr. Barnhill at the rate of $200 per hour for a minimum of 35 hours per week.  The Company also agreed to pay Dr. Barnhill his earned but unused vacation for 2012 upon execution of the Consulting Agreement.
 
After giving Dr. Barnhill notice, the Company terminated the Consulting Agreement by and between the Company and Dr. Barnhill, effective January 31, 2013, for cause. Dr. Barnhill was required to work within the terms of Consulting Agreement in order to continue to receive payment under the Consulting Agreement.  The cause for termination was due to performance issues.  Additionally, because the termination was for cause, Dr. Barnhill is no longer entitled to receive payment from the Company.
 
 
36

 
 
Outstanding Equity Awards at Fiscal Year-End
 
Name
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   
Option
Exercise Price
   
Option Expiration
Date
John A. Norris, J.D., M.B.A.
   
-
   
1,000,000
   
$
0.05
   
December  18,  2017
Mark A. Moore, Ph.D.
   
-
   
-
     
       -
   
-
Hong Zhang, Ph.D.
   
-
   
-
     
       -
   
-
Herbert A. Fritsche, Ph.D.
   
-
   
-
     
       -
   
-
Stephen D. Barnhill, M.D.
   
5,000,000
   
-
   
$
0.08
   
February 16, 2013
 
Director Compensation
 
Outside directors are paid $1.00 each year.  Each outside director was awarded options in either 2012 or 2013 to purchase shares of the Company’s Common Stock as described below.
 
Name
   
Fees Earned or Paid in Cash
($)
   
Option Awards
($)
   
Total
($)
 
John A. Norris, J.D., M.B.A. (1)
   
 $
0.00
   
$
0.00
   
$
0.00
 
Joseph McKenzie, D.V.M. (2)
   
 $
1.00
   
$
28,956
   
$
28,957
 
David Eckoff (1)
   
 $
0.00
   
$
0.00
   
$
0.00
 
Sumio Takeichi (1)
   
 $
0.00
   
$
0.00
   
$
0.00
 
 
(1)
1,500,000 options granted on February 28, 2013
(2)
500,000 options granted in 2009 are fully vested as of December 31, 2012. 1,000,000 options granted in 2011, 750,000 were vested as of December 31, 2012. An additional 250,000 options vest in April 2013.
 
 
The following table sets forth information concerning the beneficial ownership of our Common Stock as of March 29, 2013 by (i) each of our directors, (ii) each of our executive officers, (iii) each person who is known to us to be the beneficial owner of more than five percent of our Common Stock, and (iv) all of our executive officers and directors as a group.  At March 29, 2013, there were 233,773,144 shares of Common Stock outstanding and 17,340,175 shares of Series B Preferred Stock outstanding.  At March 29, 2013 there were no shares of Series A Preferred Stock outstanding. Unless otherwise noted, the address of each beneficial owner below is 620 County Road, Hanson, MA 02341
 
Name and Address of Beneficial Owner
 
Amount and Nature
of
Beneficial Owner
 
Percent of
Class (1)
 
John A. Norris, J.D., M.B.A., Chief Executive Officer and Director
 
    1,000,000 (2)     *  
Joseph McKenzie, D.V.M., Chairman, Board of Directors
 
    7,056,225 (3)     3.0 %
David Eckoff, Director
 
    - (4)     *  
Sumio Takeichi, Director
 
    - (4)     *  
Mark A. Moore, Ph.D., Vice President, Product Development
 
    844,000       *  
Hong Zhang, Ph.D., Senior Vice President, Computational Medicine
 
   
-
      *  
Herbert A. Fritsche, Ph.D., Senior Vice President, Chief Science Officer and Director (Retired)
 
   
1,000,000
(5)     *  
Stephen D. Barnhill, M.D., Former Chairman and Chief Executive Officer
 
    8,600,000 (6)     3.7 %
William F. Quirk, Jr.
10 Walter Witch Crossing
Savannah, Georgia 31411
 
    21,232,460       9.1 %
All executive officers and directors as a group (8 persons)
    18,500,225       7.8 %
      
   * Less than 1%
 
(1)
The percentage assumes the exercise by the stockholder or group named in each row of all options or warrants for the purchase of our Common Stock held by such stockholder or group and exercisable within 60 days as of March 29, 2013.
 
(2)
Does not include options granted in December 2012 and February 2013 which are not exercisable within 60 days of March 29, 2013.
 
(3)
Consists of 1,500,000 currently exercisable options.
 
(4)
Does not include options granted in February 2013 which are not exercisable within 60 days of March 29, 2013.
 
(5)
Includes 1,000,000 currently exercisable options granted in January 2013.
  (6)
Includes 5,000,000 shares held by the Barnhill Group LLC.
 
For Equity Compensation Plan Information Table, see “Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.
 
 
37

 
 
 
The Company has adopted the independence standards promulgated by the New York Stock Exchange and has made a determination that, as of March 29, 2013, the following directors are independent according to those standards: Dr. McKenzie, Mr. Eckoff and Mr. Takeichi. Dr. Norris is not independent according to the New York Stock Exchange independence standards.
 
 
The following table sets forth the fees billed by Hancock Askew & Co. LLP for 2012 and 2011.
 
   
2012
   
2011
 
                 
Audit Fees
 
$
87,500
   
$
82,500
 
                 
Audit-Related Fees
 
$
16,686
   
$
12,385
 
                 
Tax Fees
 
$
8,250
   
$
8,225
 
                 
     Sub-Total
 
$
112,436
   
$
103,110
 
                 
All Other Fees
 
$
-
   
$
-
 
                 
Total Fees
 
$
112,436
   
$
103,110
 
 
Audit Fees.  This category includes aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements for the years ended December 31, 2012 and 2011, review for the annual report on Form 10-K and for the limited reviews of quarterly condensed financial statements (Forms 10-Q) included in periodic reports filed with the Securities and Exchange Commission during 2012 and 2011, including out of pocket expenses.
 
Audit-Related Fees.  This category includes fees billed for professional services associated with consultation concerning financial accounting and reporting standards.  
 
Tax Fees.  This category includes the aggregate fees billed or to be billed for tax services for the years ended December 31, 2012 and 2011.  
  
All Other Fees.  This category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered to the Company.
 
The services provided by the independent auditors were pre-approved by the Board of Directors of the Company to the extent required under applicable law.  The Board of Directors of the Company requires pre-approval of all audit and allowable non-audit services.
 
 
38

 
 
 
 
(a)
Documents filed as part of this Report:
 
(1)  
Financial Statements - all financial statements of the Company as set forth under Item 8 of   this Report.
 
(2)  
Financial Statement Schedules - As a smaller reporting company we are not required to provide the information required by this item.
 
(3)  
Exhibits
 
(b)
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(b) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-K:
 
3.1
Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 8-K filed July 18, 2007.
   
3.1(a)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed October 10, 2007.
   
3.1(b)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1(b) to Form 10-K filed March 31, 2009.
   
3.1(c)
Amended and Restated Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1 to Form 10-Q filed November 16, 2009.
   
3.2
By-Laws. Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July 18, 2007.
   
4.1
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 to Registration Statement on Form SB-2, filed June 4, 2001.
   
4.1(a)
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30, 2004.
   
4.1(b)
Copy of Specimen Certificate for shares of Series A Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(b) to Form 10-K filed March 31, 2008.
   
4.1(c)
Copy of Specimen Certificate for shares of Series B Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(c) to Form 10-K filed March 31, 2009.
  
10.1
License Agreement between Health Discovery Corporation and Abbott Molecular Inc., dated January 30, 2009.  Registrant incorporates by reference Exhibit 10.13 to Form 10-K filed March 31, 2009. **
   
10.2
License Agreement between Health Discovery Corporation and Quest Diagnostics Incorporated, dated January 30, 2009. Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed February 5, 2009. **
   
10.3
Development Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.
   
10.4
Licensing Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.
 
 
39

 
 
10.5
License Agreement, dated August 22, 2008, by and between the Company and Smart Personalized Medicine, LLC.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.
   
10.6
Amendment to License Agreement by and between the Company and Smart Personalized Medicine, LLC dated as of March 11, 2010.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.
   
10.7
Settlement and Release Agreement with Prime Mover Capital Partners, LP. Registrant incorporates by reference Exhibit 10.1 to Form 10-Q/A filed on February 11, 2011.
   
10.8
Settlement and Release Agreement between the Company and William F. Quirk, Jr. dated as of September 22, 2010. Registrant incorporates by reference Exhibit 10.2 to Form 10-Q filed on November 15, 2010.
 
10.9
Release Agreement between the Company and R. Scott Tobin dated October 2, 2010. Registrant incorporates by reference Exhibit 10.24 to Registration Statement on Form S-1 (333-171120) filed on December 8, 2010.
 
10.10
License Agreement, dated January 6, 2012, between Health Discovery Corporation and NeoGenomics Laboratories, Inc. Registrant incorporates by reference Exhibit 10.27 to Form 8-K filed on January 12, 2012.
 
10.11
Consulting Agreement between the Company and Stephen D. Barnhill, M.D. dated as of October 21, 2012.  Registrant incorporates by reference Exhibit 10.1 to Form 10-Q filed on November 16, 2012.*
   
10.12
Employment Agreement between the Company and John A. Norris, J.D., M.B.A. dated as of December 18, 2012.  Filed herewith. *
   
10.13
Termination Letter to the Consulting Agreement with Stephen D. Barnhill, M.D. dated January 31, 2013. Filed herewith *
   
23.1
Consent of Hancock Askew & Co. LLP. Filed herewith.
 
31.1
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer. Filed herewith.
   
32.1
Section 1350 Certification of Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer. Filed herewith.
 
  *
**
Management contract or compensatory plan or arrangement
Portions of exhibit have been omitted pursuant to a confidentially agreement
 
 
40

 
 
 
Pursuant to the requirements of Section 13 or 15(d) 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
     
 
By:
/s/ John A. Norris, J.D., M.B.A.
 
   
Chief Executive Officer,
   
Principal Financial Officer, and
Principal Accounting Officer
   
 
Date:  March 29, 2013
 
Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Name
   
Title
   
Date
             
/s/ John A. Norris, J.D., M.B.A.
    Chief Executive Officer, Director, Principal Financial Officer, and Principal Accounting
Officer
   
March 29, 2013
 
John A. Norris, J.D., M.B.A.
         
             
/s/ Joseph McKenzie, D.V.M.
   
Chairman
   
March 29, 2013
 
Joseph McKenzie, D.V.M.
           
             
 
   
Director
   
March 29, 2013
             
David Eckoff
           
             
/s/ Sumio Takeichi
   
Director
   
March 29, 2013
 
Sumio Takeichi
 
           
 
 
41

 
 
Hancock Askew & Co LLP
100 Riverview Drive
Savannah, Georgia 31404
 
 
Board of Directors
Health Discovery Corporation
Savannah, Georgia
 
We have audited the accompanying balance sheets of Health Discovery Corporation as of December 31, 2012 and 2011, the related statements of operations, changes in stockholders equity, and cash flows for each of the two years in the period ended December 31, 2012.  These financial statements are the responsibility of the management of Health Discovery Corporation.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health Discovery Corporation as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note L to the financial statements, the Company has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note L. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
 
/s/ Hancock Askew & Co., LLP
 
Savannah, Georgia
March 29, 2013
 
 
F-1

 
 
HEALTH DISCOVERY CORPORATION 
 
 
December 31, 2012 and 2011
 
   
December 31,
   
December 31,
 
   
2012
   
2011
 
Assets            
Current Assets
           
     Cash
  $ 171,424     $ 890,326  
     Accounts Receivable
    90       397  
     Investment in Available For Sale Securities (Note J)
    1,716,160       -  
     Prepaid Expenses and Other Assets
    -       45,350  
                 
          Total Current Assets
    1,887,674       936,073  
                 
Equipment, Less Accumulated Depreciation of $47,219 and $37,061
    11,329       17,609  
                 
Other Assets
               
     Deferred Charges
    -       44,764  
     Patents, Less Accumulated Amortization of $2,256,570 and $1,993,851
    1,729,224       1,991,943  
                 
          Total Assets
  $ 3,628,227     $ 2,990,389  
                 
                 
  Liabilities and Stockholders Equity                
                 
Current Liabilities
               
     Accounts Payable - Trade
  $ 139,790     $ 378,154  
     Accrued Liabilities
    55,500       21,500  
     Dividends Payable - Special
    -       21,018  
     Deferred Revenue
    1,024,988       114,035  
                 
           Total Current Liabilities
    1,220,278       534,707  
                 
Long Term Liabilities
               
     Deferred Revenue
    1,216,616       717,829  
     Dividends Payable
    455,546       316,064  
                 
           Total Liabilities
    2,892,440       1,568,600  
                 
Stockholders Equity
               
     Series B Preferred Stock, Convertible,
               
       20,625,000 Shares Authorized, 17,340,175 Issued and Outstanding
    1,490,015       1,490,015  
     Common Stock, No Par Value, 300,000,000 Shares Authorized
               
       233,773,144 Shares Issued and Outstanding December 31, 2012
               
       231,299,810 Shares Issued and Outstanding December 31, 2011
    25,263,426       25,508,691  
     Accumulated Deficit
    (26,017,654 )     (25,576,917 )
                 
     Total Stockholders’ Equity
    735,787       1,421,789  
                 
     Total Liabilities and Stockholders’ Equity
  $ 3,628,227     $ 2,990,389  
                 
 
See accompanying notes to financial statements.
 
 
F-2

 
 
HEALTH DISCOVERY CORPORATION
 
 
For the Years Ended December 31, 2012 and 2011
 
   
2012
   
2011
 
Revenues:
           
     Licensing & Development
  $ 1,585,517     $ 118,954  
                 
Operating Expenses:
               
     Amortization
    262,719       262,719  
     Professional and Consulting Fees
    698,676       629,501  
     Legal Fees
    228,557       221,113  
     Research & Development Fees
    127,648       250,971  
     Compensation
    1,483,899       1,135,189  
     Other General and Administrative Expenses
    621,266       634,452  
        Total Operating Expenses
    3,422,765       3,133,945  
                 
     Loss From Operations
    (1,837,248 )     (3,014,991 )
                 
Other Income
               
     Realized Gain on Available for Sale Securities (Note J)
    668,852       -  
     Unrealized Gain on Available for Sale Securities (Note J)
    726,600       -  
     Interest Income
    1,059       6,385  
     Gain on Payables Restructuring
    -       483,658  
        Total Other Income
    1,396,511       490,043  
                 
Net Loss
  $ (440,737 )   $ (2,524,948 )
                 
Preferred Stock Dividends
    139,481       144,231  
                 
Loss Attributable to Common Shareholders
  $ (580,218 )   $ (2,669,179 )
                 
                 
Weighted Average Outstanding Shares
    232,374,255       230,268,377  
                 
Loss Per Share (basic and diluted)
  $ (0.002 )   $ (0.012 )
 
See accompanying notes to financial statements.
 
 
F-3

 
 
HEALTH DISCOVERY CORPORATION
 
 
For the Year Ended December 31, 2012 and 2011
 
Issued and Outstanding
 
   
Preferred
Shares A
   
Preferred
Shares B
   
Common
Shares
   
Preferred
Amount A
   
Preferred
Amount B
   
Common
Amount
   
Accumulated
Deficit
   
Total
Stockholders’
Equity
 
                                                                 
Balance – January 1, 2011
    -       18,777,675       229,475,747     $ -     $ 1,490,015     $ 25,593,728     $ (23,051,969 )   $ 4,031,774  
Share-based compensation and exercise of options
    -       -       386,563       -       -       59,194       -       59,194  
Series B Preferred Stock Exchanged for Common Stock
    -       (1,437,500 )     1,437,500       -       -       -       -       -  
Series B Preferred Stock Annual Dividend
    -       -       -       -       -       (144,231 )     -       (144,231 )
                                                                 
Net Loss
    -       -       -       -       -       -       (2,524,948 )     (2,524,948 )
                                                                 
Balance - December 31, 2011
    -       17,340,175       231,299,810       -     $ 1,490,015     $ 25,508,691     $ (25,576,917 )   $ 1,421,789  
Shares issued pursuant upon the exercise of options
    -       -       473,334       -       -       -       -       -  
Stock issued for sevices
    -               2,000,000       -       -       150,000       -       150,000  
Share-based Compensation and Expense
    -       -       -       -       -       94,098       -       94,098  
Series B Preferred Stock Special Dividend
    -       -       -       -       -       (349,882 )     -       (349,882 )
Series B Preferred Stock Annual Dividend
    -       -       -       -       -       (139,481 )     -       (139,481 )
Net Loss
    -       -       -       -       -       -       (440,737