HDVY Health Discovery Corporation (CE)

Notes to Financial Statements (unaudited)

Note 1 - BASIS OF PRESENTATION

Health Discovery Corporation (the “Company”) is a machine learning company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools. Our mission is to use our patents and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.

Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that may play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“SVM”) assets in particular have broad applicability in many other fields. Intelligently applied, our pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.

Our principal asset is our intellectual property, which includes advanced mathematical algorithms called SVM, as well as biomarkers that we discovered by applying our SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by 21 patents that have been issued or are currently pending around the world.

Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities. In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise. 

The accompanying interim financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented for the Company. All such adjustments are of a normal recurring nature. The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (“GAAP”). Interim results are not necessarily indicative of the results of a full year’s operations and should be read in conjunction with the financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2020.

Liquidity and Going Concern

The Company has prepared its financial statements on a “going concern” basis, which presumes that it will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

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

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

At June 30, 2021, the Company had approximately $485,000 in cash on hand, respectively. As a result, the Company estimates cash will be depleted in less than one year from the date that these financial statements are available to be issued, if the Company does not generate sufficient cash to support operations.

The Company’s plan to have sufficient cash involves licensing the Company patents, pursuing infringement opportunities and obtaining additional equity or debt financing. While the Company believes these efforts may increase the value of the Company, there is no guarantee that the Company will be successful in these efforts. We estimate cash will be depleted by the first quarter of 2022 unless we are able to increase revenues or raise additional capital.

In March 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak a pandemic and the President of the United States declared it a national emergency. The COVID-19 pandemic remains a rapidly evolving situation. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and speed of the outbreak within the markets in which we operate, government actions and programs, and the related impact on consumer confidence and spending, all of which are highly uncertain.

Estimates and assumptions

In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the outbreak of a novel strain of COVID-19.

Segments

In making decisions regarding resource allocation and assessing performance, our chief executive officer and president view our operations and manages our business as one operating segment.

Note 2 – SIGNIFICANT ACCOUNTING POLICIES

Patents

Initial costs paid to purchase patents are capitalized and amortized using the straight-line method over the remaining life of the patent, generally 17 years, beginning on the date the patent is issued. Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs. If the applied for patents are abandoned or are not issued, the Company will expense the costs capitalized to date in the period of abandonment or earlier if abandonment appears probable. The carrying value of patents is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

For the three and six months ended June 30, 2021, and 2020 there was no amortization charged to operations and there were no impairments to the Company’s patent assets, which are fully amortized.

Common Stock Warrants Liability

The Company has, from time to time beginning in 2014, issued convertible preferred stock, preferred stock warrants, common stock, common stock warrants, and fully vested options to purchase shares of common stock in excess of its available shares of underlying stock to be issued. 

In the event the number of shares or warrants of common stock granted exceeds the number of shares available if the holders exercised all of the previously issued outstanding options and warrants, the Company accounts for this excess as a derivative which is recorded as a common stock warrants liability, which is adjusted to fair value at the end of each reporting period. If and when the Company authorizes sufficient shares of common stock and preferred stock, the common stock warrants liability is reclassified to equity at the fair value of the liability at the date of reclassification. The Company accounts for the reclassification from equity to liability (or vice versa) similar to a modification of a share-based payment award.

See further discussion in Note 6 –Shareholders’ Equity (Deficit) and Note 7– Common Stock Warrants Liability.

Stock-based Compensation

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period using the straight-line method.

Valuation and Amortization Method – The fair value of stock awards that do not contain a market condition target are estimated on the grant date using the Black-Scholes option-pricing model. The fair value of options that contain a market condition, such as a specified hurdle price, is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model. Both the Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected life, expected dividend yield and expected risk-free interest rates.

Expected Term – The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and forfeitures due to departure prior to the end of the vesting schedule.

Expected Volatility – Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent to the expected term to estimate expected volatility

Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.

Cash

Cash includes cash deposited with financial institutions. Periodically, we maintain deposits in financial institutions in excess of government-insured limits. We believe we are not exposed to significant credit risk and to date, we have not realized any losses on these deposits.

Note 3 – NET (LOSS) INCOME PER SHARE

Basic earnings per share (“EPS”) is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, convertible promissory notes payable, convertible preferred stock, and warrants.

The computation of basic and diluted earnings per share was as follows: 

The dilutive effect of 6,108,502 and 105,869,976 options and warrants were also excluded from diluted weighted average shares during the three months ended June 30, 2021, and 2020, respectively, and 9,951,284 and 22,843,491 options and warrants were excluded from diluted weighted average shares during the six months ended June 30, 2021, and 2020, respectively, because the strike or conversion price was below the average share price during the related period.

Note 4 – STOCK-BASED COMPENSATION AND OTHER EQUITY BASED PAYMENTS

As of June 30, 2021, there was no unrecognized cost related to stock option grants because the outstanding option awards either completed their vesting schedule or the option awards immediately vested. As the market closing price was $0.0650 on June 30, 2021, there was $7.3 million aggregate intrinsic value of all options and warrants outstanding and exercisable as of June 30, 2021.

In connection with their election to the Company’s Board of Directors at the Shareholder Meeting and in recognition of their continuing contributions to the Company without cash compensation, on June 29, 2021, the Company granted to Mr. William Fromholzer, Ms. Colleen Hutchinson, Mr. Ed Morrison, and Mr. James Murphy each an option to purchase 3,000,000 shares of the Company’s common stock. Additionally, the Company granted to Dr. Hong Zhang an option to purchase 5,000,000 shares of the Company’s common stock and the Company granted to Mr. George McGovern and Mr. Marty Delmonte each an option to purchase 3,000,000 shares of the Company’s common stock. These option grants are consistent with what has been granted to other board members and management of the Company. The options immediately vest, have an exercise price of $0.065 and expire on June 29, 2031. The exercise price is based upon the closing price of the Company’s common stock on the date of the option grant. The fair value of each option granted is $0.0595 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 0.37%, an expected life of 5 years, and volatility of 154%. The aggregate computed value of these options of $1,368,500 was charged as a non-cash expense during the second quarter of 2021.

Stock-based compensation expense recorded in the financial statements was approximately $1.4 million and $268,000 for both the three and six months ended June 30, 2021, and 2020, respectively.

The following schedule summarizes common stock option information as of December 31, 2020 and June 30, 2021. 

The following schedule summarizes common stock warrant information as of December 31, 2020 and June 30, 2021. 

At June 30, 2021 and December 31, 2020, the Company had 86,875,000 and 63,875,000 options outstanding, respectively, with exercise prices ranging from $0.003 to $0.070. At June 30, 2021 and December 31, 2020, the Company had 115,650,448 and 115,983,781 warrants outstanding, respectively, with exercise prices ranging from $0.005 to $0.075.

Note 5 – PATENTS

The Company’s principal asset is its intellectual property, which includes advanced mathematical algorithms called Support Vector Machines (“SVM”), as well as biomarkers that we discovered by applying its SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. The Company’s intellectual property is protected by 21 patents that have been issued or are currently pending around the world. The patents have expirations ranging from 2022 to 2033. Initial costs paid to purchase patents are capitalized and amortized using the straight-line method over the remaining life of the patent.

For the three and six months ended June 30, 2021, and 2020 there was no amortization charged to operations as the patents are fully amortized. Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs.

Note 6 – SHAREHOLDERS’ EQUITY (DEFICIT)

Authorized capital

At June 30, 2021 and December 31, 2020, the Company’s authorized capital consisted of 900,000,000 shares of common stock and 90,000,000 shares of preferred stock.

Series B Preferred Stock

The Company sold to individual investors a total of 19,402,675 shares of Series B preferred shares for $1,490,015, net of associated expenses, in 2009. The Series B preferred shares were converted into common stock of the Company in the fourth quarter of 2014, which was the fifth anniversary of the date of issuance as outlined in the original purchase agreement. There are currently no Series B preferred shares outstanding.

Dividends were accrued for the Series B preferred stock in the amount of $373,346 as of December 31, 2014. The Company gave the Series B holders the choice of either (1) common stock for the amount of the dividend accrued based upon the price of $0.05 per share or (2) to defer payment of the dividend in cash until the Company is able to pay, at the sole discretion of the Company. During the first quarter of 2015, $166,709 in dividends were paid with the issuance of 3,334,179 shares of common stock. The remaining accrued dividend of $206,637 is reflected as current liability as of June 30, 2021, and December 31, 2020.

Series C Preferred Stock

In the fourth quarter of 2013, the Board of Directors authorized the issuance of Series C preferred shares in private placement transactions. As of December 31, 2014, and 2015, the Company had issued a total of 6,640,000 and 30,000,000 preferred shares, respectively. The Series C preferred shares were fully subscribed in the third quarter 2015. The Company received total net proceeds of $900,000, of which $568,000 was received during the year ended December 31, 2015. The Series C preferred shares were accompanied by $0.03 warrants and $0.03 contingency warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days. The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days. The warrants were valued at $0.022 each using the Black Scholes Method.

The Series C preferred stock were to be converted into common stock of the Company at the option of the holder, without the payment of additional consideration by the holder. The shares of Series C preferred stock must be converted into common stock of the Company either by the demand by the shareholder or at the fifth anniversary of the date of issuance. During the first quarter of 2019, the Series C preferred stock was converted to common stock. There are currently no Series C preferred shares outstanding.

Series D Preferred Stock

In February 2020, the Company effected the conversion of its $200,000 outstanding promissory note, plus accrued interest of $16,688, into shares of its Series D preferred stock. The note holders retain their outstanding warrants to purchase an aggregate of 41,983,781 shares of the Company’s common stock at a weighted average price of $0.0103. Each warrant expires on July 31, 2029.

The Company’s Series D preferred stock has the following rights and preferences:

Dividend rights: The holders of Series D preferred stock shares pari passu with the holders of common stock in dividends payable to shareholders.

Voting rights: Each share of Series D preferred stock is entitled to vote on all matters submitted to shareholder vote and each share has a number of votes equal to ten votes for each share of common stock into which it is then convertible.

Conversion rights: Each share of Series D preferred stock is convertible into shares of the Company’s common stock at a 1:1 ratio at the option of the holder or on the ten-year anniversary of issuance, whichever occurs first.

Liquidation rights: In the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, the Series D holders receive distribution on a pari passu basis with the holders of other preferred shareholders after payment of the preferred stock dividends payable to the Series B preferred shareholders and before any payments to common shareholders.

Common Stock

On June 9, 2021, the Company issued 333,333 shares of its common stock pursuant to a warrant exercise. The warrant had a strike price of $0.03 per share.

In June 2020, the Chairman of the Board and the Company entered into an agreed upon settlement whereby accrued wages of $212,500 were immediately converted into 15,398,551 shares of the Company’s common stock at a conversion price of $0.0138.

All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

At June 30, 2021 and December 31, 2020, the Company had 86,875,000 and 63,875,000 options outstanding with exercise prices ranging from $0.003 to $0.070, as well as 115,650,448 and 115,983,781 warrants outstanding with exercise prices ranging from $0.005 to $0.075, respectively.

Note 7 – COMMON STOCK WARRANTS LIABILITY

The common stock warrants liability is recorded based upon the vested number of warrants or other equity-linked instruments outstanding which exceed the number of authorized shares available to meet the assumed exercise or conversion of such instruments at each reporting period.

The common stock warrants liability is recorded based upon the number of warrants which exceed the number of common shares available to meet the exercised options and warrants using the Black-Scholes option-pricing model.

During the three months ended June 30, 2020, the Company recorded other income of $2.2 million related to the change in common stock warrants liability. In the six months ended June 30, 2020, the Company recorded other income of $992,000 related to the reduction of the common stock warrants liability.

At June 30, 2021 and December 31, 2020, the common stock warrants liability was zero as the Company reclassified the common stock warrants liability to equity, as our shareholders approved the necessary increase in authorized share capital at our annual shareholder meeting held in May 2020. The Company now has adequate authorized shares available to meet the assumed exercise or conversion of its issued options, warrants, convertible debt and convertible preferred stock.

The following table presents a reconciliation of the Company’s common stock warrants liability for the six months ended June 30, 2020 (in thousands): 

The Company has determined that the common stock warrants liability is a Level 3 measurement within the fair value hierarchy.

Note 8 – CONVERTIBLE DEBT

In April 2019, the Company issued a convertible promissory note in the amount of $200,000 to Mr. George McGovern, the Chairman and Chief Executive Officer of the Company, and Mr. James Dengler, a Company shareholder (the “Note Holders”) for funds advanced to the Company. The promissory note was approved by the Company’s board of directors in 2018, for funds advanced to the Company from August 2018 through March 2019 and the promissory note was executed in April 2019 by the Company. This promissory note contained an 8% annual interest rate, and the Note Holders had the right to convert the principal and unpaid accrued interest of the promissory note (the “2019 Convertible Promissory Note”) into shares of the Company’s Series D convertible preferred stock at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The right of conversion (optional) was solely at the Note Holders’ discretion.

On December 31, 2019, the Note Holders notified the Company of their election to convert the 2019 Convertible Promissory Note into shares of the Company’s Series D convertible preferred stock. As a result, the Note Holders received 20,991,891 shares of the Company’s Series D convertible preferred stock in February 2020.

In June 2020, $212,000 in accrued wages was converted into a convertible promissory note in the same amount with our chief executive officer. The promissory note and accrued interest are convertible into common stock of the Company at a conversion price of $0.0138. The conversion price is based upon the closing price of the Company’s common stock on June 1, 2020. The promissory note bears interest at an annual rate of 8%.

Note 9 – FAIR VALUE MEASUREMENT

The carrying values of our prepaid expenses and accounts payable approximate their recorded values due to the short-term nature of these instruments.

The common stock warrants liability is recorded based on the number of warrants which exceed the number of common shares available to meet the exercised options and warrants using the Black-Scholes option pricing model. The Company has determined that the common stock warrants liability is a Level 3 measurement within the fair value hierarchy. See further discussion of the Common Stock Warrants Liability in Note 7 – Common Stock Warrants Liability.

On January 1, 2021, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, “Fair Value Measurement.” Certain requirements were removed such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, certain requirements were modified and certain disclosures were added such as the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

Note 10 – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company does not own any real property.  The Company leases approximately 300 square feet of office space in Atlanta, Georgia, pursuant to a short-term lease as of January 2021. The Company currently pays base rent in the amount of $636 per month.

Legal Proceedings

Intel Matter

As previously disclosed, the USPTO had declared an Interference between the Company’s Support Vector Machine – Recursive Feature Elimination (“SVM-RFE”) patent application and Intel Corporation’s (“Intel”) Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector Machine”.  On February 27, 2019, the USPTO ruled in favor of the Company on the SVM-RFE patent application. The Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision, finding that HDC is entitled to claim exclusive ownership rights to the SVM-RFE technology as set forth in the SVM-RFE patent application that was filed to provoke the Interference. The decision ordered Intel Corporation’s Patent No. 7,685,077 to be cancelled.

In September 2019, the USPTO issued U.S. Patent No. 10,402,685 (“SVM-RFE Patent”) for the Company’s patent application covering SVM-RFE.  The Company is the sole owner of all patents related to SVM-RFE. As a result of the issuance of the SVM-RFE Patent, the Company now has the right to exclude others from developing, commercializing, or licensing this patented technology without the uncertainty of the Interference or concerns over the ownership of the SVM-RFE patents. Furthermore, the USPTO granted a Patent Term Adjustment (“PTA”) to the SVM-RFE Patent. The PTA is 1,785 days (almost 5 years), which is added to the normal 20-year-from-filing patent term. The USPTO granted this adjustment to offset delays that occurred within the USPTO during the examination process and interference proceedings.  This means the SVM-RFE Patent term has been extended from August 7, 2020, to June 7, 2025.

On July 23, 2020, the Company filed a patent infringement lawsuit (“Infringement Lawsuit”) against Intel pertaining to the Company’s SVM-RFE technology. The lawsuit was filed in the United States District Court for the Western District of Texas, Waco Division (the “Court”). Subsequently, on October 19, 2020, Intel filed a motion to dismiss with the Court. On November 23, 2020, the Company filed a response in opposition of Intel’s motion to dismiss.

On December 21, 2020, the Court approved a scheduling order (“Scheduling Order”) for the Infringement Lawsuit. One of the items in the Scheduling Order was the Markman Hearing which was scheduled for June 3, 2021. A Markman Hearing is a pretrial hearing in a United States District Court during which a judge examines evidence from all parties on the appropriate meanings of relevant key words used in a patent claim. Prior to the Markman Hearing both parties submit Markman briefs, in which they explain their positions on the relevant key words. In the Western District of Texas, both parties file two briefs, with the Plaintiff (here, the Company) filing the Opening Brief.

Once briefing concluded on May 18, 2021, HDC and Intel submitted a Joint Claim Construction Statement to the Court. Within that Joint Claim Construction Statement, the parties identified several claim terms (i.e., key words) that were still in dispute. During the Markman Hearing on June 3, 2021, the Court considered arguments related to these disputed claim terms. Ultimately, the Court ruled in HDC’s favor on all the disputed claim terms and issued the Claim Construction Order. During the Markman Hearing, the Court also spoke regarding Intel’s pending motion to dismiss. The Court will review and determine if a hearing is needed on that motion or if it will rule on the previously filed pleadings. Per the Scheduling Order, the next step is fact discovery, which began June 4, 2021.

On February 27, 2021, Intel filed a Petition for Inter Partes Review (“IPR”) of the Company’s SVM-RFE with the PTAB of the USPTO. The Company has responded to the IPR and the matter remains pending.

Legal fees for this matter were $116,000 and $0 for the three months ended June 30, 2021, and 2020, respectively, and $205,000 and $0 for the six months ended June 30, 2021, and 2020, respectively.

Quirk and Bear Matter

On February 7, 2020, two shareholders of the Company, William F. Quirk, Jr. (“Quirk”) and Cindy Bear (“Bear”), filed a complaint and motion for a temporary restraining order and preliminary injunction in DeKalb County Superior Court. Among the items in the motion, Quirk and Bear requested to have a special meeting of the shareholders and Quirk and Bear alleged misconduct by the Company and its directors. At the time of the Quirk and Bear complaint, the Company had stated its intent to schedule a shareholder meeting no later than June 30, 2020, and in fact did hold the shareholder meeting on May 27, 2020.

On March 2, 2020, Quirk and Bear filed a notice of dismissal in DeKalb County. Quirk and Bear subsequently filed a new lawsuit in Fulton County Superior Court based on substantially similar allegations and seeking similar relief. On March 4, 2020, the Fulton County court ordered a hearing on the emergency motion for a temporary restraining order against the Company for the following day.

At the hearing on March 5, 2020, Quirk and Bear presented their version of the facts through affidavits submitted by both Quirk and Bear, arguing that the affidavits supported the emergency relief they sought. The judge denied the motion and did not enter a temporary restraining order. The court set an evidentiary hearing on Quirk and Bear’s motion for a preliminary injunction for March 27, 2020. Due to the Covid-19 pandemic and multiple requests by Quirk and Bear, the scheduling of the hearing was cancelled. Quirk and Bear did not attempt to reschedule it.

On September 2, 2020, the Company moved to dismiss the complaint on the grounds that Quirk and Bear lacked standing and failed to state claims for relief. Facing the Company’s motion to dismiss, on September 23, 2020, Quirk voluntarily dismissed his claims against the Company. Because this was the second dismissal of these claims, that dismissal was with prejudice and constitutes an adjudication of the merits under O.C.G.A. § 9-11-41(a)(3).

Bear remained a plaintiff in the case. Due to Bear’s refusal to participate in discovery and repeated violations of the Court’s orders, the Company filed a Motion for Involuntary Dismissal of Plaintiff’s Complaint with Prejudice and Incorporated Memorandum of Law on March 2, 2021. Among the request in the motion, the Company asked the Court to award attorney’s fees and costs against Bear as a result of abusive litigation.

Subsequently, the Court held a hearing regarding the Company’s motion on March 25, 2021. At that hearing, the Court ordered Bear to appear for her deposition to be taken remotely on March 31, 2021, and April 1, 2021. The Court warned Bear that her failure to appear at these depositions or to participate fully in them would result in the dismissal of the case with prejudice. Bear did not appear for the March 31, 2021, deposition.

As a result, on April 6, 2021, the Court issued an Order Granting Motion for Involuntary Dismissal of Plaintiff’s Complaint with Prejudice and Final Order and Judgment (the “Ruling”) against Bear. Among other findings in the Ruling, the Court found that Bear knowingly and willfully failed to participate in discovery and violated the Court’s orders. Consequently, the Court entered final judgment against Bear and in favor of the Company on all counts. In light of the Court’s ruling, the Company intends to seek reimbursement of its attorneys’ fees and costs against Bear for bringing the action. Legal fees for this matter were $0 and $32,000 for the three months ended June 30, 2021, and 2020, respectively, and $43,000 and $184,000 for the six months ended June 30, 2021, and 2020, respectively.

Vennwest Matter

On September 24, 2020, the Company accepted service of a lawsuit filed by Vennwest Global Technologies, Inc. (“Vennwest”), a company owned by shareholder Laurie Venning (“Venning”) from Alberta, Canada.

The Vennwest lawsuit contains virtually identical claims against HDC that Quirk and Bear alleged. For this reason, the Company believes Venning, Quirk, Bear and others coordinated their irresponsible and costly attacks against the Company, its directors, and others. As Quirk’s dismissal and the Bear judgment reflects, the Company believes these claims are without merit and serve only to deplete the Company’s resources to the detriment of its shareholders.

On November 2, 2020, the Company moved to dismiss the complaint or stay the action pending the conclusion of the Quirk and Bear case, on the grounds that the first-filed derivative case would serve as res judicata to preclude the later-filed case. On November 30, 2020, Vennwest filed its response, and on December 15, 2020, the Company filed its reply. On June 8, 2021, the judge ruled to allow the case to proceed, and the parties are now in discovery phase of the case. The Company will vigorously defend itself against these claims and evaluate all options against the plaintiffs including, but not limited to, pursuing counterclaims.

Although the Company believes that it will ultimately be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should Vennwest be successful, the outcome could have a material adverse effect on the Company. Legal fees for this matter were $0 for both three months ended June 30, 2021, and 2020, and $20,000 and $0 for the six months ended June 30, 2021, and 2020, respectively.