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| HDVY.OB > SEC Filings for HDVY.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Corporate Overview
Our Company is a molecular diagnostics company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. Our Company operates primarily in the emerging field of personalized medicine where such tools are critical to scientific discovery. Our primary business consists of licensing our intellectual property and working with prospective customers on the development of varied products that utilize pattern recognition tools. We also endeavor to develop our own product line of newly discovered biomarker-based diagnostic tests that include human genes and genetic variations, as well as gene, protein, and metabolite expression differences and image analysis. In drug discovery, biomarkers can help elicit disease targets and pathways and validate mechanisms of drug action. They may also be pharmacodynamic indicators of drug activity, response and toxicity for use in clinical development.
We intend to continue partnering with clinical laboratories to commercialize our clinical diagnostic tests and to provide pharmaceutical and diagnostic companies with all aspects of all phases of diagnostic and drug discovery, from expert assessment of the clinical dilemma to proper selection and procurement of high quality specimens. Through the application of our proprietary analytical evaluation methods and state-of-the-art computational analysis to derive relevant and accurate clinical data, we intend to produce accurate biomarker and pathway discoveries, resulting in patent protection of our biomarker discoveries for future development.
Our business is based on the belief that to discover the most clinically relevant biomarkers the computational component must begin at the inception of the clinical dilemma to be solved. This process includes several critical levels of decision-making - all of which are part of our business strategy. We intend to produce more relevant and predictable biomarkers for drug discovery so that new and better medicines and diagnostic markers can be developed for patients worldwide.
Operational Activities
The Company actively markets its technology and related developmental expertise to several prospects in the healthcare field, including some of the world's largest corporations in the pharmaceutical, biotech, and life sciences industries. Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts will produce favorable results.
On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. ("Abbott"), pursuant to which 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 "LDT" urine based molecular diagnostic test for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients. In addition, we granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive with Clarient, Inc.) for developing and commercializing a Laboratory Developed "LDT" tissue based molecular diagnostic test for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients.
In February 2009, Abbott paid to us a one-time initial signing fee of $100,000.
On August 7, 2009, Abbott reimbursed us $100,000 in development costs as
required by the license agreement. In addition, with respect to the products
subject to the license (the "Products"), Abbott will pay milestone payments to
us upon achievement of the following events: $250,000 upon completion of Phases
1 and 2 as described in the FDA Submission Plan; $250,000 upon completion of
Phases 3 and 4 as described in the FDA Submission Plan; $500,000 upon submission
of either a 510(k) or Pre Market Approval ("PMA") submission to the FDA; and
$500,000 upon the receipt of a written notification by the FDA of the approval
of the applicable 510(k) or PMA submission. We will also receive royalty
payments of 10% of Abbott's Net Sales for the Products with medical utility
claims for use on prostate biopsy tissue samples, and 5% of Abbott's Net Sales
for the Products with medical utility claims for use on urine samples. We will
also receive royalty payments on the Laboratory Developed Tests "LDT" equal to
10% of Abbott's Net Sales for the tests performed on prostate biopsy tissue and
5% of Abbott's Net Sales for tests performed on urine samples. In addition to
the royalty payments, with respect to the urine based products, Abbott will also
pay us certain amounts upon the achievement of certain milestones as follows:
after the sale of 50,000 tests in a calendar year, a milestone payment of
$200,000; after a sale of 200,000 tests in a calendar year, a milestone payment
of $750,000; and after a sale of 500,000 tests in a calendar year, a milestone
payment of $1,500,000. "Net Sales" is equal to Abbott's gross revenue less 5%,
subject to adjustments as described in the license.
On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a Laboratory Developed "LDT" urine based molecular diagnostic test for clinically significant prostate cancer which could be commercialized and sold by Quest's clinical laboratories directly to physicians for their patients. In consideration of granting the license to Quest, Quest paid a license fee to the Company and will pay running royalty payments, certain milestone payments, and development fees.
The Company is continuing to successfully advance the development of the urine based prostate cancer test. The Company is very pleased with the data and results thus far completed to date as we progress towards the goal of commercialization of the urine-based prostate cancer test as a Lab Developed Test "LDT" at Quest Diagnostics Clinical Laboratory and with Abbott, as well as, an in-vitro diagnostic test (IVD test kits) offered for sale by Abbott. Upon regulatory approval through Abbott, the individual in-vitro diagnostic test kits could be sold to additional national, regional and local clinical laboratories, as well as hospital, academic and physician laboratories around the world. Prostate cancer is the second-leading cause of cancer death in men, after lung cancer. The National Cancer Institute (NCI) estimates that more than 186,000 new cases of prostate cancer will be diagnosed in the U.S. in 2008, with more than 28,660 deaths. The prostate cancer testing market is approximately 50 million tests performed worldwide annually with approximately 25 million PSA tests performed annually in the US and an additional 25 million PSA tests performed annually outside the US. The PSA test sells in US national clinical laboratories for approximately $100 per test. In a peer-reviewed paper recently published in the New England Journal of Medicine, the PSA test was shown to be an ineffective prostate cancer screening test, leaving open the opportunity for a better test to replace the PSA test as a screening tool for prostate cancer. The Company"s prostate cancer test was the subject of a peer-reviewed paper published in the August 2009 edition of UroToday International, a respected international urology journal.
As we disclosed in our Form 10-K for the fiscal year ended December 31, 2007, we were in discussions regarding the licensing of and product development using SVMs and FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI and other radiological images. In August 2008, we entered into a licensing agreement with Smart Personalized Medicine, LLC, a company founded by our former director and current Senior Advisor, Dr. Richard Caruso. Under the terms of this agreement, work will be done to develop a superior breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. In exchange for a license to use our SVM technology, we received a 15% equity position in Smart Personalized Medicine, LLC (which will remain undiluted until there is at least $5 million in investment from investors in Smart Personalized Medicine, LLC) and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test. Smart Personalized Medicine, LLC recently signed a license agreement with a prestigious U.S. academic cancer center and is now in discussions with a national clinical laboratory for developing and commercializing a new state-of-the-art prognostic test for breast cancer. Smart Personalized Medicine, LLC has now started the development of the SVM-based prognostic test for breast cancer on tissue biopsy specimens. Smart Personalized Medicine, LLC believes that there is a possibility the new breast cancer test can be ready for clinical laboratory commercialization within the next twelve months. An estimated 221,000 women are diagnosed with breast cancer in the United States each year, and one in eight U.S. women will have breast cancer in her lifetime. Breast cancer is the most common cancer among women and the second-largest cancer killer among women. Currently, the breast cancer prognostic market is projected to be about $300 to $400 million. Smart Personalized Medicine, LLC expects that its new SVM-based prognostic test for breast cancer can provide physicians and their patients a way to better determine the probability of relapse, allowing patients with good prognosis results an opportunity to avoid unnecessary expensive and traumatic chemotherapy treatments.
In July 2008, the Company and DCL Medical Laboratories LLC, a full-service clinical laboratory focused on women's health, entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests for the independent detection of ovarian, cervical and endometrial cancers. Through the application of the advanced technology of pattern recognition, this new SVM-based system is intended to further improve the sensitivity of the Pap Smear test and augment the recent improvements of computer guided screening that have already significantly improved detection rates. In addition, images and interpretative data from this new SVM-based system may now be transmitted electronically, thus allowing remote review and collaborative interpretation. The Company has now completed development of most of the individual modules for the SVM-based computer assisted diagnostic test for the analysis of cervical cells in Pap Smears and has implemented a large number of image processing operations using various spatial, spectral, morphological, statistical, and other techniques. The Company is currently finalizing development of the interface software to read and interpret the Pap Smear scans. The Company has completed development of a suite of features and custom kernels, and additional methods are being developed to address the specific challenges in reading and interpreting Pap Smears. The Company has SVM software for final development and commercialization of HDC's Pap Smear Reader. The project is now entering the system integration phase, and the Company hopes to have this Automated Pap Smear Interpretation Diagnostic Test in pre-commercialization validation studies by the third quarter of 2009. Cervical cancer is one of the most common cancers among women throughout the world, with more than 11,000 primary diagnoses and over 3,700 cancer related deaths annually. The Pap Smear, as cervical cancer screening, represents a market of more than 1.7 billion women worldwide with approximately 50 million Pap Smear tests currently being performed annually in the U.S. When completed, the HDC SVM-based computer assisted diagnostic test for the analysis of cervical cells in Pap Smears could be implemented via the Internet for automated interpretation worldwide. Pursuant to the development and license agreement, HDC will own any developed intellectual property and DCL will have a sole use license relating to applications and new mathematical tools developed during the course of the development and license agreement. Dr. Hanbury, one of our directors, is currently a shareholder of DCL.
On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature. Under the terms of that agreement, as amended, Clarient obtained a non-exclusive license to make, use and sell any Licensed Product in the Field of Use within the Licensed Territory with respect to both the commercial reference laboratory field and the academic and research fields. During 2008, we and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test. Results from both the Phase I, Phase II and Phase III double-blinded clinical validation studies now completed at Clarient demonstrated a very high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells. On November 6, 2008, we announced that the RT-PCR assay for the four genes comprising the Company's recently commercialized gene-based molecular diagnostic test for prostate cancer, which is currently available at Clarient's Clinical Laboratory, can be successfully used in urine samples for gene testing. The study, completed in collaboration with a prominent cancer research hospital, demonstrated that the gene expression of all four genes comprising the molecular signature for clinically significant prostate cancer could be detected in urine samples spiked with as few as 50 prostate cancer cells. Clarient commercially launched its new gene expression test for prostate cancer in the first quarter of 2009, which is a Licensed Product under the agreement, as amended. This new test is available through Clarient's PATHSiTETM virtual reporting tool and accessible to Clarient's entire pathology network. HDC will receive 10% royalty on each test performed.
In August 2008, we announced the signing of an agreement with Patent Profit International ("PPI"), a Silicon Valley-based patent brokerage firm, with the goal of marketing our patent portfolio and exclusive rights to SVM techniques and applications beyond biomarker discovery and the healthcare field, to prospective buyers/licensees in a wide range of technologies, including, but not limited to, information technology such as Internet browsers and search engines, digital photography, spam mail detection, oil exploration, homeland security, and the automotive industry. As a requirement of any potential sale of the patent portfolio, HDC expects to retain a royalty-free, worldwide, exclusive license, with the right to grant sublicenses, in the entire field of healthcare to enable our continued research, development, licensing and commercialization activities in diagnostic and prognostic areas such as prostate cancer, ovarian cancer, breast cancer, endometrial cancer, colon cancer, leukemia and other healthcare arenas. PPI's marketing of our patent portfolio is ongoing.
In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC ("Atlantic Alpha") to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha has over thirty years of experience in commodity and futures trading. SVM Capital has made significant progress since the formation of the joint venture. SVM Capital has developed a machine learning based software system for analysis and prediction of stock market data. The system is completely data driven. It applies innovative technologies developed by SVM Capital that are capable of adapting advanced machine learning methods to the highly non-stationary systems commonly presented by the financial data. A preliminary software system was implemented for trading the four major indices. An analysis on the historical data was conducted for the period of January 1970 to December 2008. The SVM Capital system produced an average annual return of 19.81%, with an annualized alpha of 17.67% compared to the S&P 500 index rate of return of only 5.83% for the same time period. SVM Capital began a program of real-time live trading in November 2008. SVM Capital is now exploring opportunities to create and market an investment fund specifically utilizing the SVM Capital quantitative algorithm for making the investment decisions. SVM Capital expects to charge a management fee and a performance fee related to its investment activities. Depending on the level of its success, this venture can be profitable given its reliance on cost effective use of computer technology and ready access to efficient trading platforms.
Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for a particular medical condition has resulted in a successful proof of concept. These findings were presented during the first quarter of 2008 and the due diligence process has accelerated to confirm our findings for that particular condition and determine other applications within flow cytometry. Because the contract expired by its terms, we are now in discussion with other companies to commercialize these applications.
We continue our dialogue with several other important industry players in the healthcare field and, in certain situations, related to the field of molecular diagnostics, including proposed projects with some of the world's largest pharmaceutical and diagnostic companies and other prospective partnership opportunities with additional companies and research institutions. We also continue to pursue development opportunities with our existing licensing customers.
The Company has recognized revenue of $584,700 from inception through June 30, 2009 and has deferred revenue yet to be recognized of $458,310 as of June 30, 2009. Aggregate receipts created by its patent portfolio to date are $1,043,010.
While we have a number of negotiations in process with potential licensing partners, there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized in the near term, or that those that may be finalized do not provide the economic return that we expect.
On April 29, 2009 the Company entered into an employment agreement with Mr. R.
Scott Tobin for his employment as President and General Counsel. Mr. Tobin will
be responsible for strategic and operational leadership of the Company. The
employment agreement has an initial term of eighteen (18) months, beginning
April 15, 2009, and will automatically renew and continue for successive twelve
(12) month periods unless otherwise terminated. Mr. Tobin will receive an annual
base salary of $120,000 and will also be eligible to receive a bonus, which may
be paid in cash, stock, enhanced employee benefits or a combination thereof as
determined by the Company, of up to one hundred percent (100%) of his salary,
based on objectives jointly determined by Mr. Tobin and the Chairman and CEO.
Mr. Tobin was also granted options to purchase an aggregate of 4,500,000 shares
of the Company's common stock at an exercise price of $0.08, which vest over an
eighteen (18) month period. A portion of the options require that the Company
attain certain performance metrics, as more fully described in the Option Award.
Mr. Tobin is eligible to receive health insurance benefits and other benefits
maintained by us for our executives. If Mr. Tobin's employment is terminated
without Cause, as defined in the employment agreement, or if Mr. Tobin
terminates the employment agreement for Good Reason, as defined in the
employment agreement, then Mr. Tobin will receive as severance (i) the maximum
incentive bonus he would have received had he remained employed by the Company
the later of the entire calendar year in which the termination occurs or the end
of the term, (ii) the amount of his base salary for the remainder of the term of
the agreement plus ninety (90) days, and (iii) an amount equal to the actual
cost of ninety (90) days of his COBRA premium payments. If the employment
agreement is otherwise terminated, Mr. Tobin is not eligible to receive
severance, and will only receive his base salary accrued up to the effective
date of the termination, any unpaid earned and accrued incentive bonus, payment
for accrued and unused vacation, and reimbursement of expenses, if any. The
employment agreement also generally provides that Mr. Tobin will keep
confidential information that is confidential and that he will not compete with
us in our business nor solicit our customers or employees for a period of twelve
(12) months following termination of employment.
On April 29, 2009, the Company also appointed Dr. Joseph McKenzie and Mr. R. Scott Tobin to the Board to fill vacancies created by the resignation of former directors. In recognition of his service as a director, Dr. McKenzie was granted an option to purchase 500,000 shares of the Company's common stock. The options vest 250,000 shares every six months, have an exercise price of $0.08, and expire on April 29, 2015.
Intellectual Property Activities
The U.S. Patent and Trademark Office issued a new patent to the Company in January 2009, which covers the use of SVM technology for ranking of input features for selection of the most relevant input parameters needed to classify data. In June 2009, the U.S. Patent and Trademark Office issued two new patents to the Company. One of the patents includes additional, broader claims to the Company's exclusive SVM recursive feature elimination (SVM-RFE) method, the first patent for which issued in 2006. The SVM-RFE method has been used to successfully identify the most important pieces of information needed to solve complex pattern-recognition problems. The second patent covers an SVM-based data mining platform for classification of data from heterogeneous biological datasets. Also in June 2009, the European Patent Office issued a notice of its intent to grant a patent covering the Company's SVM-based computer-aided image analysis techniques. Corresponding patents have already been granted in the U.S., Australia and Japan.
Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008
Revenue
For the three months ended June 30, 2009, revenue was $16,215 compared with $15,677 for the three months ended June 30, 2008. Revenue is recognized for licensing and development fees over the period earned. This revenue is primarily related to the amortization of deferred revenue resulting from prior licensing agreements.
Cost of Revenues and Gross Margin
Internal development costs of $9,417 were recorded as cost of sales for the second quarter 2009 compared with $3,000 for the second quarter of 2008. Cost of revenues includes all direct costs, primarily wages and research fees, associated with the acquisition and development of patents and processes sold. All direct costs, including some professional fees associated with licensing negotiations, are also included in cost of revenues.
Operating and Other Expenses
Amortization expense was $65,680 for the second quarter of 2009 compared to $65,681 for the comparable 2008 period. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.
Professional and consulting fees totaled $155,842 for the second quarter of 2009 compared with $171,149 for the second quarter of 2008. The decrease is due to the reduction of use of outside legal counsel due to the hiring of Mr. Tobin.
Compensation of $270,233 for the second quarter of 2009 was higher than the $196,654 reported for the second quarter of 2008. Compensation increased due to the higher charge for option awards in 2009 and the addition of Mr. Tobin to the Company.
Other general and administrative expenses decreased to $66,655 for the second quarter of 2009 compared to $93,044 for the second quarter of 2008. The decrease was due primarily to a reduction in the charge for director's warrants.
Loss from Operations
The loss from operations for the second quarter of 2009 was $551,612 compared to $513,851 for the second quarter of 2008. This increased loss was due to increased costs as discussed previously.
Other Income and Expense
Interest income was $772 for the second quarter of 2009 compared to $11,782 in 2008. Interest income decreased because the Company had less cash on hand to invest throughout the second quarter of 2009.
Interest expense of $48 in the second quarter of 2009 was comparable to the $170 recorded in the second quarter of 2008.
Net Loss
The net loss for the second quarter of 2009 was $550,888 compared to $502,239 for the second quarter of 2008. The increased loss was due to the increased operating loss as previously described and by the reduced interest income.
Net loss per share was $0.00 for both the second quarter of 2009 and 2008.
Six Months Ended June 30, 2009 Compared with Six Months Ended June 30, 2008
Revenue
For the six months ended June 30, 2009, revenue was $32,905 compared with $31,354 for the six months ended June 30, 2008. Revenue is recognized for licensing and development fees over the period earned. This revenue is primarily related to the amortization of deferred revenue resulting from prior licensing agreements.
Cost of Revenues and Gross Margin
Internal development costs of $12,704 were recorded as cost of sales for the six months ended June 30, 2009 compared with $6,600 for the comparable 2008 period. Cost of revenues includes all direct costs, including wages and research fees and some professional fees associated with licensing negotiations associated with the acquisition and development of patents and processes sold.
Operating and Other Expenses
Amortization expense was $131,360 for both the six months ended June 30, 2009 and 2008. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.
Professional and consulting fees totaled $433,396 for the six months ended June 30, 2009 compared with $324,999 for the same 2008 period. The increase is due to increased licensing and patent related activities and the increased use of outside counsel upon the departure last year of our Executive Vice President.
Compensation of $437,999 for the six months ended June 30, 2009 was higher than the $393,840 reported for the comparable 2008 period. Compensation increased due to the hiring of Mr. Tobin in April, 2009.
Other general and administrative expenses decreased to $127,843 for six months ended June 30, 2009 compared to $262,587 for the comparable 2008 period. The decrease was due primarily to a reduction in the charge for director's warrants.
Loss from Operations
The loss from operations for the six months ended June 30 2009 was $1,110,397 compared to $1,088,032 for the previous year. This increased loss was due to increased costs as discussed previously.
Other Income and Expense
Interest income was $2,413 for the six months ended June 30, 2009 compared to . . .
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