HEALTH DISCOVERY CORP - Quarter Report: 2011 September (Form 10-Q)

t71934_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2011

	or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transaction period from _____________ to _____________

Commission file number 333-62216

HEALTH DISCOVERY CORPORATION

(Exact name of registrant as specified in its charter)

Georgia

(State or other jurisdiction of incorporation or organization)

74-3002154

(IRS Employer Identification No.)

	2 East Bryan Street Suite 610 Savannah, Georgia 31401

	(Address of principal executive offices)

	912-443-1987
	(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,

if changed since the last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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		Non-Accelerated Filer	o

		(do not check if a smaller reporting company)

Accelerated Filer	o		Smaller Reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date:

Class:	Outstanding as of November 14, 2011

Common Stock, no par value	230,725,747

Series A Preferred Stock	0

Series B Preferred Stock	17,527,675

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION			1

	Item 1.	Unaudited Financial Statements	1

		Balance Sheets	1

		Statements of Operations	2

		Statements of Cash Flows	3

		Notes to Financial Statements	4

	Item 2.	Managements’s Discussion and Analysis of Financial Condition and Results of Operations	8

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14

	Item 4.	Controls and Procedures	14

PART II -- OTHER INFORMATION			15

	Item 1.	Legal Proceedings	15

	Item 1A.	Risk Factors	15

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

	Item 3.	Defaults Upon Senior Securities	15

	Item 4.	[Removed and Reserved]	15

	Item 5.	Other Information	15

	Item 6.	Exhibits	16

SIGNATURES			17

iii

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTH DISCOVERY CORPORATION

Balance Sheets

	September 30,			December 31,
	2011			2010
	(unaudited)
Assets

Current Assets
Cash	$	1,522,280		$	3,295,630
Accounts Receivable		278			334,988
Prepaid Expenses and Other Assets		65,605			172,034
Total Current Assets		1,588,163			3,802,652

Equipment, Less Accumulated Depreciation of $34,539 and $27,397		20,131			23,475

Other Assets
Deferred Charges		46,508			51,740
Patents, Less Accumulated Amortization of $1,928,171 and $1,731,132		2,057,623			2,254,662

Total Assets	$	3,712,425		$	6,132,529


Liabilities and Stockholders’ Equity

Current Liabilities
Accounts Payable – Trade (Note H)	$	210,577		$	820,126
Accrued Liabilities		22,250			122,152
Dividends Payable – Special		21,245			22,760
Deferred Revenue		114,035			114,035
Total Current Liabilities		368,107			1,079,073

Long Term Liabilities
Deferred Revenue		746,337			831,863
Dividends Payable		283,848			189,819
Total Liabilities	$	1,398,292		$	2,100,755

Stockholders’ Equity
Series B Preferred Stock, Convertible 20,625,000 Shares Authorized, 17,527,675 Issued and Outstanding		1,490,015			1,490,015
Common Stock, No Par Value, 300,000,000 Shares Authorized 230,725,747 Shares Issued and Outstanding September 30, 2011 229,475,747 Shares Issued and Outstanding December 31, 2010		25,545,731			25,593,728
Accumulated Deficit		(24,721,613	)		(23,051,969	)
Total Stockholders’ Equity	$	2,314,133		$	4,031,774

Total Liabilities and Stockholders’ Equity	$	3,712,425		$	6,132,529

See accompanying notes to financial statements.

HEALTH DISCOVERY CORPORATION

Statements of Operations

(unaudited)

For the Three and Nine Months Ended September 30, 2011 and 2010

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2011			2010			2011			2010
Revenues:
Licensing & Development	$	32,155		$	159,984		$	89,172		$	367,668


Operating Expenses:
Amortization		65,680			65,680			197,040			197,040
Professional and Consulting Fees		159,494			149,267			470,408			478,793
Legal Fees		9,137			174,827			115,116			602,475
Research & Development Fees		10,980			132,443			139,514			325,403
Compensation		267,676			202,500			855,537			931,425
Other General and Administrative		169,482			268,392			470,413			686,583
Total Operating Expenses		682,449			993,109			2,248,028			3,221,719

Loss From Operations		(650,294	)		(833,125	)		(2,158,856	)		(2,854,051	)

Other Income (Expense)
Interest Income		1,439			3,139			5,554			13,304
Gain on Payables Restructuring (Note H)		-			-			483,658			-
Settlement Charges		-			(396,779	)		-			(2,274,426	)
Interest Expense		-			-			-			(159	)
Total Other Income (Expense)		1,439			(393,640	)		489,212			(2,261,281	)

Net Loss	$	(648,855	)	$	(1,226,765	)	$	(1,669,644	)	$	(5,115,332	)

Preferred stock dividends		35,343			56,763			109,015			278,802

Loss attributable to common shareholders	$	(684,198	)	$	(1,283,528	)	$	(1,778,659	)	$	(5,394,134	)

Weighted Average Outstanding Shares		230,725,747			221,349,240			230,031,303			211,103,478


Loss Per Share (basic and diluted)	$	(.003	)	$	(.006	)	$	(.007	)	$	(.026	)

See accompanying notes to financial statements

HEALTH DISCOVERY CORPORATION

Statements of Cash Flows

(unaudited)

For the Nine Months Ended September 30, 2011 and 2010

	Nine Months			Nine Months
	Ended			Ended
	September 30, 2011			September 30, 2010
Cash Flows From Operating Activities
Net Loss	$	(1,669,644	)	$	(5,115,332	)
Adjustments to Reconcile Net Loss to Net Cash Used for Operating Activities:
Stock-based Compensation		-			25,807
Services Exchanged for Warrants and Options		61,018			99,366
Gain on Payables Restructuring (Note H)		(483,658	)		-
Warrants Issued to Shareholders		-			597,647
(Increase) Decrease in Deferred Charges		5,232			(43,149	)
Depreciation and Amortization		204,182			203,134
(Increase) Decrease in Accounts Receivable		334,710			(330,961	)
(Increase) Decrease in Recoverable Development Costs		96,248			(28,195	)
Decrease in Interest Receivable		-			288
Increase (Decrease) in Deferred Revenue		(85,526	)		430,472
(Increase) Decrease in Prepaid Expenses and Other Assets		10,180			(79,416	)
Decrease in Accounts Payable – Trade		(125,891	)		(59,135	)
Increase (Decrease) in Accrued Liabilities		(99,902	)		355,740
Net Cash Used for Operating Activities		(1,753,051	)		(3,943,734	)

Cash Flows From Investing Activities:
Redemption of Certificates of Deposit		-			471,564
Purchase of Equipment		(3,798	)		(5,164	)
Net Cash (Used for) Provided by Investing Activities		(3,798	)		466,400

Cash Flows From Financing Activities:
Proceeds from the Exercise of Warrants		-			5,852,332
Dividends Paid		(16,501	)		(99,164	)

Net Cash (Used for) Provided by Financing Activities		(16,501	)		5,753,168


Net Increase (Decrease) in Cash		(1,773,350	)		2,275,834

Cash, at Beginning of Period		3,295,630			2,328,912

Cash, at End of Period	$	1,522,280		$	4,604,746

Supplemental Disclosures of Cash Flow Information:
Cash Paid for Interest	$	-		$	159

See accompanying notes to financial statements.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements

Note A - BASIS OF PRESENTATION

Health Discovery Corporation (the “Company”) is a biotechnology-oriented company that has acquired patents and has patent pending applications for certain machine learning tools, primarily pattern recognition techniques using advanced mathematical algorithms to analyze large amounts of data thereby uncovering patterns that might otherwise be undetectable. Such machine learning tools are currently in use for diagnostics and drug discovery, but are also marketed for other applications. The Company licenses the use of its patented protected technology and may provide services to develop specific learning tools under development agreements or sell to third parties.

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). 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.

The 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. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2011 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, 2010.

Recent Accounting Pronouncements

In February 2010, the SEC issued a policy statement and staff work plan regarding the potential use by United States issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed timeline set forth by the SEC, we could be required in the future to prepare financial statements in accordance with IFRS, and the SEC is expected to make a determination regarding the mandatory adoption of IFRS. Management is currently assessing the impact that this potential change would have on our consolidated financial statements, and will continue to monitor the development of the potential implementation of IFRS.

Note B – REVENUE RECOGNITION

Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements. These arrangements are generally governed by contracts that dictate responsibilities and payment terms. The Company recognizes revenues as they are earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled. If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.

The Company treats the incremental direct cost of revenue arrangements, which consists principally of employee bonuses, as deferred charges and these incremental direct costs are amortized to expense using the straight-line method over the same term as the related deferred revenue recognition.

Deferred revenue represents the unearned portion of payments received in advance for licensing and development agreements. The Company had total unearned revenue of $860,372 as of September 30, 2011. Unearned revenue of $114,035 is recorded as current and $746,337 is classified as long-term.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note C - NET LOSS PER SHARE

Basic Earnings Per Share (“EPS”) includes no dilution and 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 reflects the potential dilution of securities that could share in the earnings or losses of the entity. Due to the net loss in all periods presented the calculation of diluted per share amounts would create an anti-dilutive result and therefore is not presented.

Note D - STOCK-BASED COMPENSATION AND OTHER EQUITY BASED PAYMENTS

Stock-based expense included in our net loss for the three months and nine months ended September 30, 2011 consisted of a credit of $13,759 and expense of $61,018 respectively for stock options granted to directors. Stock-based expense included in our net loss for the three months and nine months ended September 30, 2010 was $14,100 and $125,173 respectively.

As of September 30, 2011, there was approximately $289,508 of unrecognized cost related to stock option and warrant grants. The cost is to be recognized over the remaining vesting periods that average approximately 2.5 years.

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 vest 250,000 shares every six months and have 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 is $130,280, and this amount will be charged as an expense over the three year vesting period.

Effective April 7, 2011, Dr. Albitar and the Company agreed to terminate Dr. Albitar’s consultancy agreement with the Company pursuant to which Dr. Albitar was receiving a monthly fee of $10,000, and Dr. Albitar will no longer serve as Chief Medical Officer. In addition, the parties agreed to cancel an option to purchase 1,000,000 shares of common stock granted to Dr. Albitar in August 2010 in connection with his appointment as Chief Medical Officer.

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 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 $130,280, and this amount will be charged as an expense over the three year vesting period.

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.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note D - STOCK-BASED COMPENSATION AND OTHER EQUITY BASED PAYMENTS, continued

The following schedule summarizes combined stock option and warrant information for the nine months ended September 30, 2011 and the twelve months ended December 31, 2010:


2010	Option and Warrant Shares			Weighted Average Exercise Price
Outstanding, January 1, 2010		100,615,177		$	0.16
Granted		21,875,000		$	0.22
Exchanged		(32,527,776	)	$	0.17
Exercised		(34,387,903	)	$	0.17
Expired un-exercised		(18,949,498	)	$	0.18
Outstanding, December 31, 2010		36,625,000		$	0.16

2011
Granted		4,000,000		$	0.12
Exercised		--			--
Forfeited		(5,833,333	)	$	0.21
Outstanding, September 30, 2011		34,791,667		$	0.15

The following schedule summarizes combined stock option and warrant information as of September 30, 2011:

Exercise Prices		Number Outstanding		Weighted- Average Remaining Contractual Life (years)		Number Exercisable		Weighted Average Remaining Contractual Life (years) of Exercisable Warrants and Options

$	0.08		12,250,000		3.50		12,250,000		3.50
$	0.12		4,000,000		4.50		-		-
$	0.13		2,500,000		.25		2,500,000		.25
$	0.17		6,875,000		.75		6,875,000		.75
$	0.19		2,500,000		9.00		2,500,000		9.00
$	0.27		6,666,667		1.00		6,666,667		1.00

Total			34,791,667				30,791,667

The weighted average remaining life of all outstanding warrants and options at September 30, 2011 is 3 years. As of September 30, 2011, the aggregate net intrinsic value of all options and warrants outstanding is $636,237.

Note E - PATENTS

The Company has acquired and developed a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Legal costs associated with patent acquisitions and the application processes for new patents are also capitalized as patent assets. The Company has recorded as other assets $2,057,623 in patents and patent related costs, which is net of $1,928,171 in accumulated amortization, at September 30, 2011.

Amortization charged to operations for the three and nine months ended September 30, 2011, and 2010 were $65,680 and $197,040 respectively. Estimated amortization expense for the next five years is $262,720 per year.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note F – STOCKHOLDERS’ EQUITY

In connection with the 2007 private placement, the Company issued warrants to purchase 51,538,822 shares of restricted common stock at an exercise price of $0.19 (the “Tranche 2 Warrants”). Pursuant to the terms of the Tranche 2 Warrants, certain of the holders were obligated to exercise fifty percent of the Tranche 2 Warrants if the average of the last reported closing bid and asked prices on the Over-the-Counter Bulletin Board for the Company’s common stock was $0.24 for a period of thirty consecutive calendar days (which occurred on February 28, 2010) or forfeit the right to acquire those shares. The Company exercised its call rights relating to certain of the Tranche 2 Warrants during the first quarter of 2010. As a result, the holders of the Tranche 2 Warrants who received the Company’s call notice were obligated to purchase 14,731,217 shares of restricted common stock or forfeit an equal number of Tranche 2 Warrant shares. The number of shares of common stock purchased relating to the call notice was 11,729,390 and 3,001,827 Warrants were forfeited. The Company received $2,228,584 in gross proceeds from the purchase of the common stock related to the call provision.

Warrants issued as a part of the 2007 private placement that were exercised during the first quarter of 2010 independent of the Tranche 2 Warrant call totaled 4,531,250 warrant shares with proceeds to the Company of $810,938.

No warrants or options were exercised during the third quarter of 2011.

Series B Preferred Stock

In connection with our Series B Preferred stock, we are required to pay dividends which accrue on a cumulative 10% basis. Such dividends are payable at the Company’s option in cash or common stock and the dividends will be accrued until paid at the Company’s option or when the shares are redeemed. As there is no requirement to pay such dividends in the upcoming year and it is not the intention of the Company to do so, the dividends payable are reflected as a long term liability in the accompanying balance sheet. Dividends have been accrued for the Series B Preferred Stock in the amount of $283,848 as of September 30, 2011 and $189,819 as of December 31, 2010.

In addition, the Company is required to pay a special dividend to the Preferred B shareholders equal to 15% of net revenues for contracts signed after the issuance of the Series B stock. The maximum cash bonus 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. Dividends in the amount of $21,245 as of September 30, 2011, and $22,760 as of December 31, 2010, are reflected as Dividend Payable – Special in the accompanying balance sheet.

The Company paid $99,164 in dividends related to this requirement in the second quarter of 2010 as a result of revenue contracts signed in 2010. During the second quarter of 2011, the Company converted 1,125,000 Series B Preferred Stock to Common Stock at the request of a Series B holder. The Company also paid that Series B holder its portion of the accrued special dividend and accrued dividend. The total paid to this Series B holder was $16,501.

Note G – SUBSEQUENT EVENTS

On October 18, 2011, the Company signed a Letter of Intent with anti-aging, health and wellness company, Doctors Optimal Formula LLC, to create Retinalyze, LLC, an equally owned joint venture, to develop the first SVM-based retinal image analysis for retinal disease assessment and treatment protocols. Designed to assist physicians, the first product “Retinalyze Analytics Software” will use state-of-the-art mathematical algorithms and image-based pattern recognition technology to capture and analyze eye diseases such as age-related macular degeneration (AMD).

On November 8, 2011 announced the appointment of John R. Hadden to the position of Senior Vice President of National and International Business Development. Mr. Hadden’s compensation, among other things, will include both monthly compensation as well as an equity component. The equity component is composed of one million warrants issuable upon the closing of a merger with or purchase of a CLIA Certified laboratory approved by The Board of Directors. An additional equity award of one million warrants will be issuable when the company’s stock price reaches $0.75 per share.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note H – CONTINGENCIES

The Company’s balance sheet for the year ended December 31, 2010 reflected an accrued liability of approximately $483,658 for professional services. The Company disputed this amount with the provider of these services and initiated discussions with the service provider regarding potential settlement of this matter. During the quarter ended June 30, 2011, the Company and the service provider settled this matter and as a result, the Company recorded a decrease in accounts payables of $483,658.

From time to time, the Company is subject to various claims primarily arising in the normal course of business. Although the outcome of these matters cannot be determined, the Company does not believe it is probable that any such claims will result in material costs and expenses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

We are a molecular diagnostics company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. We operate primarily in the emerging field of personalized medicine where such tools are critical to scientific discovery. Our primary business consists of licensing our intellectual property and working with prospective customers on the development of varied products that utilize pattern recognition tools. We 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 identify 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 identify more relevant and predictable biomarkers for drug discovery so that new and better medicines and diagnostic markers can be developed for patients worldwide.

We continue to progress towards the goal of commercialization of the 4-gene urine-based prostate cancer test at Quest and with Abbott.

We have completed the Abbott clinical trial for Phase 1 and 2 of the urine prostate cancer test validation process. In addition, we have completed all clinical laboratory genomic testing on the clinical trial specimens at MD Anderson Cancer Center. We have fully analyzed the data and are pleased with the results. We have met with and submitted all of our results to Abbott for their independent analysis and are awaiting their comments. If Abbott is satisfied with these results, we expect to receive the $250,000 milestone payment for completion of Phase 1 and 2 and move on to Phase 3 and 4 as described in the FDA Submission Plan. If for some reason Abbott chooses not to move forward, we will immediately begin licensing discussions with other international IVD companies, as well as, clinical laboratories in the US, Europe and China.

Quest Diagnostics has completed the urine prostate cancer test clinical trial described in our Licensing and Development Agreement with them. In addition, Quest has completed all clinical laboratory genomic testing on the clinical trial specimens. The clinical trial has now been un-blinded and the patient information has been supplied to Quest. Quest is now in the process of fully analyzing the data and validating the results.

The Company is continuing to advance the development of the urine based prostate cancer test. The Company is pleased with the data and results completed to date. In a recent clinical trial, we have demonstrated that that the 4-gene urine test for clinically significant prostate cancer outperformed serum PSA, Digital Rectal Exam (DRE), as well as, published data for PCA3 and TMPRSS-ERG assays for the early detection of prostate cancer.

On August 10, 2011, the Company and Abbott amended the License Agreement dated as of January 30, 2009. Pursuant to the Amendment, the Company has reclaimed exclusive rights to both the urine-based and tissue-based laboratory-developed-tests (“LDT”) for prostate cancer. Abbott agreed to surrender the LDT rights at no cost to the company. This narrow amendment will have no effect on the other terms of theAbbott License Agreement, including Abbott retaining all rights to develop an in vitro diagnostic (“IVD”) urine-based test for prostate cancer and an IVD tissue-based test for prostate cancer.

We believe there exists a significant worldwide market for the clinical laboratory developed LDT version of the urine-based test for prostate cancer (which is also currently also licensed to Quest Diagnostics on a non-exclusive basis) and the clinical laboratory developed LDT version of the tissue-based test for prostate cancer (which is currently also licensed to Clarient/GE Healthcare on a non-exclusive basis). We have started the process of discussing potential licenses for these valuable LDT rights globally.

HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

The Company announced the launch of its first iPhone app called MelApp. This new iPhone App for Melanoma Risk Assessment is designed to help users learn about melanoma and identify areas on their skin which may need attention from a physician specializing in the diagnosis of melanoma. MelApp can assist in raising patient awareness of melanoma with the goal of ultimately saving lives.

MelApp uses patent protected, highly sophisticated, state-of-the-art mathematical algorithms and image based pattern recognition technology to analyze the uploaded image. MelApp was validated using an image database licensed from Johns Hopkins University Medical Center. Using the iPhone camera feature, users can take a picture of their skin lesions and moles and within seconds receive a risk analysis of their uploaded picture being a melanoma. Utilizing your iPhone GPS, MelApp can refer you to a nearby physician specializing in the diagnosis and treatment of melanoma for proper medical follow up, without the need to input a zip code or any personal information. These pictures also can be stored on MelApp and reviewed for changes in the skin lesions occurring over time.

Within just days of release, MelApp was being used by consumers in over 40 countries (United States, Canada, Australia, New Zealand, United Kingdom, Italy, Spain, Ireland, Germany, Portugal, Venezuela, Brazil, Switzerland, Sweden, Belgium, Bulgaria, Croatia, Argentina, Netherlands, Romania, Poland, Luxembourg, Greece, Turkey) as reported by tracking data.

SVM Capital, LLC

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’s management has over thirty years of experience in commodity and futures trading. Atlantic Alpha reports that the SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years as well as a limited pilot program of real-time trading activity, and that the latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk. After more than 2 years of successful live trading, Atlantic Alpha has now deployed the SVM K-2 model to over 30 securities. These include nation ETF’s, large cap equities and commodities. Atlantic Alpha is now exclusively trading SVM’s K-2 model and will begin offering this technology to the public via a new fund which began trading in January 2011. Research on the K-3 model is underway. The K-3 model will add a “context” for each security traded. This context will represent knowledge of how similar securities are trading. In this way, the K-3 model will insure that each security will not be analyzed by SVM technology in isolation. In more than two and a half years of live trading, SVM Capital’s live trading outperforms the S&P500 with approximately one half of the risk. HDC owns a 45% equity position in SVM Capital.

Intellectual Property Activities

In May 2011, the Canadian Intellectual Property Office issued a notice of allowance of the Company’s pending patent application covering the use of SVMs for computer aided image analysis. The claims of this patent will cover uses of separate SVMs for analysis of different features of interest within a digital image to generate a final analysis of the entire image. While the claims are not limited to a particular image type, applications of the SVM-based image analysis are particularly useful for medical image analysis for diagnostics and treatment.

In June 2011, the Company filed a trademark application in the USPTO for registration of its mark MELAPP for use on the melanoma smart phone app. The mark was approved for publication in September 2011. The U.S. trademark registration process should be completed in early 2012.

In July 2011, the USPTO issued a notice indicating the allowability of claims covering the SVM-RFE method in the Company’s patent application that was filed in November 2010 to provoke an interference with Intel’s Patent No. 7,685,077. The examiner in charge of the examination has confirmed the interfering claims and submitted the application for supervisory certification of the interference.

HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

In August 2011, USPTO issued Patent No. 8,008,012 covering genes that are underexpressed, (reduced relative to normal) in prostate cancer. The three genes covered by the patent claims were identified using the Company’s proprietary RFE-SVM algorithm.

Also in August 2011, the European Patent Office published the notice of grant of the Company’s patent No. EP1082646, covering pre-processing and post-processing for enhanced knowledge discovery using SVMs, in the European Patent Bulletin. The base claims of this patent are directed to pre-processing of data by transforming or adding expert data to the original input data prior to SVM analysis.

In September 2011, the USPTO issued a notice of allowance of the Company’s fourth U.S. patent application covering the SVM-RFE method. The claims of this application further expand coverage of the SVM-RFE method by using alternative claim language to describe the invention. The base claims are not limited to a specific data type, but dependent claims include coverage of SVM-RFE for biomarker discovery.

Also in September 2011, the Canadian Intellectual Property Office issued a notice of allowance of the Company’s pending patent application covering SVM-RFE for identifying genes that are useful for diagnosing, prognosing or treating a disease or condition. Once issued, this will be the Company’s second Canadian patent covering SVM-RFE.

Also in September 2011, efforts were abandoned to obtain Japanese coverage for the Company’s applications covering the use of multiple SVMs for analysis of multiple data sets after final rejection of the claims left a costly appeal as the only recourse.

In October 2011, the Company filed a Request for Reexamination of Intel’s Patent No. 7,685,077. The Request details errors made by the USPTO during examination of the patent in failing to consider the most relevant prior art and argues that a substantial question of patentability is raised by this prior art. The Request and its supporting documentation represent the first direct notification to Intel of the Company’s challenge to Intel’s patent.

Also in October 2011, the USPTO issued a notice of allowance of the Company’s patent application covering a method for visualizing feature ranking to facilitate identification of alternative features that can be used. This method is particularly useful for biomarker discovery to enable selection of alternative but equally effective markers that may be more practically detectable than a gene that was initially identified as one of the best for distinguishing between disease and normal.

The Company continued its efforts in the academic/research institution licensing program during the third quarter of 2011. Licensing discussions have been initiated with a number of universities and research institutions that have reported the use of SVMs in published reports such as academic journals and conference proceedings. The program started with admitted usages of the Company’s SVM-RFE method. Further literature and patent searches have identified more than 30 additional institutions beyond those originally identified, for a total of more than 60, which have used or are using SVM-RFE without authorization.

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Revenue

For the three months ended September 30, 2011, revenue was $32,155 compared with $159,984 for the three months ended September 30, 2010. Revenue is recognized for licensing and development fees over the period earned. The revenue earned during the third quarter is primarily related to the licensing revenue recognition for agreements with customers which began in previous periods. The reduction in revenue was due to the revenue received from the Quest Development Agreement in 2010 which did not continue in 2011.

Operating and Other Expenses

Amortization expense was $65,680 for both the three months ended September 30, 2011, and 2010. Amortization expense relates primarily to the costs associated with filing patent applications and acquiring rights to the patents.

HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

Professional and consulting fees were $159,494 for the three months ended September 30, 2011, compared with $149,267 for the same 2010 period. The increase is due primarily to higher costs associated with professional service fees of patent filing fees.

Legal fees totaled $9,137 during the three months ended September 30, 2011, compared to $174,827 during the same period in 2010. The decrease was primarily due to the Company resolving legal issues during 2010 and not having similar issues in the current period.

Research and development fees were $10,980 for the three months ended September 30, 2011, and $132,443 for the same period in 2010. This decrease relates primarily to the completion of recent validation studies of the urine-based molecular diagnostic test for prostate cancer.

Compensation expense of $267,676 for the three months ended September 30, 2011 was higher than the $202,500 reported for the comparable 2010 period. The increase is attributed to a credit recorded in 2010 as a result of a government grant received in 2010.

Other general and administrative expense decreased to $169,482 for the three months ended September 30, 2011, compared to $268,392 for the same period in 2010. This decrease was due primarily to management’s success in reducing costs.

Loss from Operations

The loss from operations for the three months ended September 30, 2011 was $650,294, compared to $833,125 for the three months ended September 30, 2010. This reduction was due to lower costs primarily associated with legal fees and research and development expense. In addition, the reduction is due in part to the Company’s success in controlling costs.

Other Income and Expense

Interest income was $1,439, for the three months ended September 30, 2011, compared to $3,139 in 2010. Interest income decreased because the Company had less cash on hand to invest throughout the 2011 period.

No interest expense was incurred during the three month periods ended September 30, 2011 and September 30, 2010.

Net Loss

The net loss for the three months ended September 30, 2011, was $648,855 compared to $1,226,765 for the three months ended September 30, 2010. The decrease in net loss was due in part to the Company’s success in controlling costs and a decrease in settlement charges.

The net loss attributable to common shareholders was $684,198 for the quarterly period ended September 30, 2011, compared to $1,283,528 for the quarterly period ended September 30, 2010.

Net loss per share was $0.003 for quarterly period ended September 30, 2011 and $0.006 for the quarterly period ended September 30, 2010.

HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Revenue

For the nine months ended September 30, 2011, revenue was $89,172 compared with $367,668 for the nine months ended September 30, 2010. Revenue is recognized for licensing and development fees over the period earned. This revenue is primarily related to ongoing development agreements and amortization of deferred revenue related to prior licensing agreements. The reduction in revenue was due to the revenue received from the Quest Development Agreement in 2010 which did not continue in 2011.

Operating and Other Expenses

Amortization expense was $197,040 for both the nine months ended September 30, 2011 and 2010. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.

Professional and consulting fees were $470,408 for the nine months ended September 30, 2011 compared with $478,793 for the same 2010 period. The decrease is due primarily to lower consulting fees.

Legal fees totaled $115,116 during the nine months ended September 30, 2011 compared to $602,475 during the same period in 2010. The decrease was primarily due to the Company resolving legal issues during 2010 and not having similar issues in the current period.

Research and development fees were $139,514 for the nine months ended September 30, 2011 and $325,403 for the same period in 2010. This decrease relates primarily to the completion of recent validation studies of the urine-based molecular diagnostic test for prostate cancer.

Compensation expense of $855,537 for the nine months ended September 30, 2011 was lower than the $931,425 reported for the comparable 2010 period. Compensation decreased due to the elimination of personnel and a reduction in the bonus amounts earned by Company executives.

Other general and administrative expenses decreased to $470,413 for nine months ended September 30, 2011 compared to $686,583 for in 2010. This decrease was due primarily to management’s success in reducing costs.

Loss from Operations

The loss from operations for the nine months ended September 30, 2011 was $2,158,856 compared to $2,854,051 for the previous year. This reduction in loss from operations was due to lower costs primarily associated with legal fees, research and development expense and professional and administrative expense.

Other Income and Expense

Interest income was $5,554 for the nine months ended September 30, 2011 compared to $13,304 in 2010. Interest income decreased because the Company had less cash on hand to invest throughout the 2011 period.

As previously discussed, the Company negotiated a settlement with a service provider. As a result, the Company realized an increase in other income and expense (gain on payables restructuring) of $483,658.

There was no interest expense for the nine months ended September 30, 2011 which was slightly less than the $159 recorded for the same period 2010.

HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

Net Loss

The net loss for the nine months ended September 30, 2011 was $1,669,644 compared to $5,115,332 for the nine months ended September 30, 2010. The decreased net loss was due to the decrease in settlement charges and loss from operations.

The net loss attributable to common shareholders was $1,778,659 for the nine months ended September 30, 2011 compared to $5,394,134 in the nine months ended September 30, 2010.

Net loss per share was $0.007 for the nine month period ended September 30, 2011 and $0.026 for the nine month period ended September 30, 2010.

Liquidity and Capital Resources

At September 30, 2011, the Company had $1,522,280 in available cash. As of the same date, the Company had total current liabilities of $368,107. As a result, we believe we have sufficient resources to meet our current obligations.

Our net loss for the nine months ended September 30, 2011 was $1,669,644. Our cash used for operating activities for the nine months ended September 30, 2011 was $1,753,051. There was no cash generated by investment activities during the nine months ending September 30, 2011. In addition there was no cash provided by financing activities during the nine months ending September 30, 2011. As a result, the Company realized a decrease in cash of $1,773,350 during the nine months of 2011.

The following table summarizes our contractual obligations at September 30, 2011.

	Total		1 Year Or Less		More Than 1 Year
Accrued Compensation	$	19,250	$	19,250	$	-
Office Lease		204,160		40,140		164,020
Total	$	223,410	$	59,390	$	164,020

The Company has relied primarily on equity and debt financing for liquidity. The Company produced sales, licensing, and developmental revenue starting in late 2005. The Company’s plan to have sufficient cash to support operations is comprised of 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 and continues to be in meaningful discussions with a variety of parties, which if successful may result in significant revenue. In addition, the Company has implemented a cash conservation program. However, if the Company is unable to generate sufficient additional revenue, reduce expenditures and/or raise additional equity or debt financing in the first half of 2012, the Company does not believe it will have sufficient cash to support ongoing operations in the later part of 2012.

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.

HEALTH DISCOVERY CORPORATION

Forward-Looking Statements

This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans. The forward-looking statements contained in this Report speak only as of the date of this Report as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers, and the inability to retain a significant number of customers, as well as the risks and uncertainties described in the “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2010.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Item 4. Controls and Procedures

As of the fiscal quarter ended September 30, 2011 (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, 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 management 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.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Our Annual Report on Form 10-K contains information regarding a material weakness in our internal control over financial reporting as of December 31, 2010 due to an inadequate segregation of duties due to the small number of employees.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. [Removed and Reserved]

Not applicable.

Item 5. Other Information

None

HEALTH DISCOVERY CORPORATION

Item 6. Exhibits

The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-Q:

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.

10.26

First Amendment to Abbott License Agreement. Filed herewith.

31.1	Rule 13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer and Principal Financial Officer. Filed herewith.

32.1	Section 1350 Certifications of Chief Executive Officer and Principal Financial Officer. Filed herewith.

101*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets; (ii) Statements of Operations; (iii) Statements of Cash Flows.

* Furnished, not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Health Discovery Corporation
		Registrant

Date: November 14, 2011	By:	/s/ Stephen D. Barnhill
	Printed Name: Stephen D. Barnhill M.D.
	Title: Chairman of the Board, Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer