HEALTH DISCOVERY CORP - FORM 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, 2011

OR

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

	For the transition period from to

Commission File No. 333-62216

HEALTH DISCOVERY CORPORATION

(Name of Registrant as Specified in its charter)

Georgia		74-3002154
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2 East Bryan Street, Suite 1500 Savannah, Georgia		31401
(Address of principal executive offices)		(Zip Code)

(912) 443-1987

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12 (b) of the Exchange Act:

None

Securities Registered Pursuant to Section 12 (g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large Accelerated Filer	o	Accelerated Filer o
	Non-accelerated Filer	o	Smaller Reporting Company x

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

The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2011 was approximately $23,072,575.

As of March 30, 2012, there were 231,299,810 shares of common stock outstanding, no shares of Series A Preferred Stock outstanding, and 17,340,175 shares of Series B Preferred Stock are outstanding.

HEALTH DISCOVERY CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31, 2011

Table of Contents

			Page No.
PART I				1

	ITEM 1.	Business		1
	ITEM 1A.	Risk Factors		18
	ITEM 1B.	Unresolved Staff Comments		27
	ITEM 2.	Properties		27
	ITEM 3.	Legal Proceedings		27
	ITEM 4.	(Removed and Reserved)		27

PART II				28

	ITEM 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		28
	ITEM 6.	Selected Financial Data		30
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		36
	ITEM 8.	Financial Statements and Supplementary Data		36
	ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		36
	ITEM 9A.	Controls and Procedures		36
	ITEM 9B.	Other Information		37

PART III				37

	ITEM 10.	Directors, Executive Officers and Corporate Governance		37
	ITEM 11.	Executive Compensation		41
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		43
	ITEM 13.	Certain Relationships and Related Transactions, and Director Independence		44
	ITEM 14.	Principal Accounting Fees and Services		44

PART IV				45

	ITEM 15.	Exhibits and Financial Statement Schedules		45

SIGNATURES				48

PART I

ITEM 1. BUSINESS

Our History

We were organized under the name Direct Wireless Communications, Inc. in April 2001 by Direct Wireless Corporation, which licensed to us its technology for a wireless telephone. In October 2001, Direct Wireless Corporation, then our sole stockholder, pursuant to an effective registration statement under the Securities Act of 1933, distributed its entire holdings of our common stock as a stock dividend to its stockholders. As a result of the dividend, Direct Wireless Corporation ceased to own any of our equity securities. The negative events that occurred over the next several years in the communications industry made it difficult for us to fund the advancement of our communication platform. As a result, we made the decision to strategically change the overall direction of our intended business activities.

On August 26, 2003, we acquired all of the assets of The Barnhill Group, LLC, which was owned by Stephen D. Barnhill, M.D. Dr. Barnhill is a physician trained in laboratory medicine and clinical pathology. He developed artificial intelligence and pattern recognition computational techniques used today in medicine, genomics, proteomics, diagnostics, drug discovery and other fields of scientific endeavor. Following the acquisition, Dr. Barnhill became our Chief Executive Officer and Chairman of our Board of Directors. Also, immediately following our acquisition of the assets of The Barnhill Group, LLC and the change in strategic direction of the Company, our licensing rights to the telecommunications technology previously granted by Direct Wireless Corporation were terminated and all payment obligations to Direct Wireless Corporation were terminated.

We amended our charter to change our name to Health Discovery Corporation (“HDC” or the “Company”) on November 6, 2003, at which time the new trading symbol (HDVY) became effective.

On December 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented Fractal Genomics Modeling (“FGM”) software, through the issuance of 3,825,000 common shares of the Company and the issuance of a $500,000 note payable, all of which has been paid.

On July 30, 2004, we began purchasing rights to a portfolio of 71 patents and pending patent applications, including patents on the use of Support Vector Machines, or SVMs, and other machine learning tools useful for diagnostic and drug discovery (the “SVM Portfolio”). On May 6, 2005, we acquired the remaining interest in the SVM Portfolio from a group of unrelated third parties.

Effective September 26, 2004, we were assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement is associated with the SVM Portfolio. We agreed to pay minimum royalty fees to Lucent, which increases based on the revenue of each licensed product that is sold, leased, or put into use by the Company. The license granted will continue for the entire unexpired term of Lucent’s patents.

On July 12, 2007, we completed our reincorporation in Georgia by effecting a conversion in our legal domicile from Texas to Georgia. Our business, assets, liabilities, net worth and headquarters were unchanged as a result of the conversion, and our directors and officers prior to the conversion continued to serve after the conversion. In connection with the conversion, the Company’s shares were converted on a one-for-one basis.

On October 9, 2007, we amended our Articles of Incorporation to set forth the rights and preferences of the Series A Preferred Stock. All outstanding shares of Series A Preferred Stock were converted on a one-for-one basis into shares of our Common Stock, no par value (the “Common Stock”) on November 4, 2009.

On March 4, 2008, we formed two wholly owned subsidiaries, SVM Technology Inc., a Georgia corporation, and SVM Technology Inc., a Delaware corporation. We anticipate that we will use each of these subsidiaries to expand our business model by applying SVM technology outside of scientific discovery in the healthcare arena.

On March 30, 2009, we amended our Articles of Incorporation to provide the rights and preferences of the Series B Preferred Stock, including the right to receive dividends, including special dividends, the right to vote on matters presented to holders of Common Stock, a preference right in the event of liquidation, and the right to convert the Series B Preferred Stock into Common Stock. On November 13, 2009 we further amended and restated our Articles of Incorporation to provide for the rights and preferences of the Series B Preferred Stock.

Our Company Overview

HDC is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the emerging field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.

HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and homeland security markets.

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

Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by more than 90 patents that have been issued or are currently pending around the world.

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

Subsequent Events – NeoGenomics License

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

Upon execution of the NeoGenomics License, NeoGenomics Laboratories paid us $1,000,000 in cash and NeoGenomics issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012. In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License. Milestone payments would be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics Laboratories up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics Laboratories, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics Laboratories derives from any sublicensing arrangements it may put in place for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System.

NeoGenomics Laboratories has agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetics Interpretation System”, and a “Flow Cytometry Interpretation System.” If NeoGenomics Laboratories has not generated $5.0 million of net revenue from products, services and sublicensing arrangements within five years, we may, at our option, revoke the exclusivity with respect to any one or more of the initial licensed products, subject to certain conditions.

Retinalyze Analytics

On February 2012, the Company announced the launch of Retinalyze Analytics, to assist Ophthalmologists and Optometrists with the Detection of Macular Degeneration, at the Heart of America Convention geared for primary eye care practitioners on February 17, 2012. Retinalyze Analytics will initially be used for age-related macular degeneration (“AMD”), a progressive eye disease affecting more than 15 million Americans, with over 200,000 new cases diagnosed each year. AMD is the leading cause of blindness in adults 55 years and older which can result in severe visual loss because it affects the macula portion of the eye, where the sharpest central vision occurs.

Coinciding with the launch, the website www.retinalyze.com was unveiled. This website provides an extensive health care library relating to eye diseases. Additionally, Retinalyze.com will offer a Macular Degeneration Risk Assessment tool that will help evaluate the patient’s risk factors for developing macular degeneration. It will also provide very useful information on how best to prevent, minimize and/or treat their eye disease. Patients will be able to learn more about their eye disease, as well as, Retinalyze Analytics and can also search for Retinalyze Providers in their area.

Our Principal Market

The principal healthcare market for our pattern recognition technology and biomarker discoveries is medical diagnostics, particularly the rapidly growing field of molecular diagnostics. The market consists of two basic types of diagnostic procedures: in vitro tests performed on a patient’s fluid or tissue samples and in vivo tests performed directly on the body, including blood pressure monitoring and imaging analysis such as x-rays. In vitro diagnostics (IVD) can be further divided into several major segments, including clinical chemistry, immunochemistry, hematology/cytometry, microbiology, and molecular diagnostics.

According to a Visiongain Pharmaceutical Report, the IVD portion of the diagnostics market currently accounts for over $31 billion in sales worldwide. Today, the molecular diagnostics segment represents a fraction of the IVD revenues with about $2.5 billion in sales, but it is widely considered to be the fastest growing segment, estimated at a 20-25% compounded annual growth rate, mainly in the U.S. and EU markets, versus 6-7% for IVD as a whole. It is difficult to accurately assess the size of this segment since many countries do not have reference laboratories external to hospitals. Areas of particular growth include infectious diseases, oncology, genetic diseases, and pharmacogenetic analyses. Companies involved in this space include several major pharmaceutical and diversified corporations, including Roche Holdings Ltd., Abbott Laboratories, Inc., and Johnson & Johnson. Siemens AG and General Electric Company operate medical imaging segments that are expanding in diagnostics. Other market players include large technology companies like Becton, Dickinson and Company, Beckman Coulter, Inc. and Bio-Rad Laboratories, Inc.

IVDs have been established as effective tools for all aspects of disease management, especially in areas of unmet clinical need. Such tests have been developed for screening and prognosis as well as for applications, such as determination of genetic predisposition to disease, detection of presymptomatic disease, and prediction of individual drug response.

Molecular Diagnostics

Within the overall IVD market, the molecular diagnostics segment is expected to expand dramatically, largely attributable to advances in genomics and proteomics. Primary market drivers include the addition of new diagnostic tests in high volume testing areas coupled with the introduction of new instrumentation that provide greater ease, speed, and quality in test performance. Given its annualized growth rate, the potential for molecular diagnostics is particularly impressive in the U.S., which represents the largest commercial market with the most favorable conditions for entry and marketing.

Borrowing from the two disciplines of genomics and proteomics, molecular diagnostics categorizes cancer and other diseases using technology such as mass spectrometry and gene chips. Genomics is the study of all the genes in a cell or organism, and proteomics is the study of all the proteins in a cell or organism. Molecular diagnostics determines how these genes and proteins interact in patients by focusing on patterns in different types of healthy and diseased patient cells. Molecular diagnostics uncover these genomic and proteomic changes and capture this information as expression patterns. Also called molecular signatures, these expression patterns improve clinicians’ ability to diagnose cancer when it is less advanced, predict which patients will respond to certain treatments, predict cancer recurrence risk, and select appropriate treatment for individual patients.

Molecular diagnostics can facilitate early, accurate screening and prediction of diseases in their asymptomatic stages, years before symptoms manifest or diseases actually begin. This allows intervention to begin earlier, perhaps preventing the disease entirely. Early intervention will allow the healthcare system to encompass both preventative and reactive medicine, improving overall healthcare efficiency and possibly reducing systemic healthcare expenditures.

The molecular diagnostics industry is an increasingly powerful healthcare participant with tremendous potential. It is characterized by a very diverse, constantly changing technology base that continuously produces new opportunities and applications. Advances in polymerase chain reaction (“PCR”), multiplexing, sequencing and other technologies are propelling both new and old companies forward with novel capabilities. Similarly, a growing understanding of the molecular basis of cancer and other chronic diseases has awakened new realms of medicine to the possibilities of molecular diagnostic testing.

Clinicians have discovered that molecular diagnostics have many uses beyond just the creation of new screening and diagnostic tools. Expression patterns can also provide information for the design of new cancer treatments, monitor the treatment’s effectiveness as it is studied in a clinical trial, and even predict the patient’s response to a new treatment. In addition to its importance in addressing the many kinds of cancer, molecular diagnostics will likely become an important technology for detecting resistance to antibiotics, a major hazard in the hospital setting. In the future, molecular tests should be able to determine within two to three hours not only the nature of an infection, but also therapeutic selection and any potential resistance.

The molecular diagnostics market as a whole is experiencing growth, rapidly changing technology and intense competition. New tests and new instruments to perform automated analysis continue to expand the capabilities of companies in this industry. The identification and validation of novel genes, gene products, and biomarkers results in a potential market for diagnostic tests to identify such genes, gene products and biomarkers. The market includes sales of reagents, instruments, and kits to clinical laboratories and research reagents that can be used by labs to develop their own in-house diagnostic tests. It also includes testing services by those clinical labs that have developed their own products, plus diagnostics companies that operate their own branded, certified testing services.

Molecular diagnostic tests typically analyze DNA, RNA, or protein biomarkers (analytes) to identify a disease, determine its course, evaluate response to therapy, or predict individual predisposition to a disease. The techniques applied involve analysis of DNA sequences, DNA methylation patterns, gene expression profiles, proteins, protein expression, or combinations of these biomarkers. Such biomarkers provide direct information about genotypic and/or phenotypic changes associated with specific diseases or responses to treatment. Biomarker analysis has also become an important tool in drug discovery, preclinical drug development, and patient monitoring during clinical trials.

Most molecular diagnostics currently on the market are primarily single-analyte tests involving the detection of a single gene or protein. However, many disease-related processes are multifactorial, involving the abnormal expression of multiple genes or proteins. Second-generation molecular diagnostics are anticipated to utilize novel detection technologies and multiplexing platforms to allow the measurement of a large number of analytes simultaneously. These innovations within the industry will increasingly utilize multiplexing platforms such as DNA microarrays that perform parallel biomarker analysis.

The market has been driven by transition to fully automated systems, real time amplification, and growing development of point-of-care platforms. Industry experts estimate that future growth will stem from emerging applications like genotyping for identifying drug resistant strains; bioterrorism testing applications within infectious disease; disease diagnostics and prognostic assays for disease applications like sepsis and nosocomial infections, such as MRSA, cancer, cardiovascular disease, and Alzheimer’s disease; diagnosis of inherited disorders; and theranostics companion diagnostics.

Genomic testing to determine diagnosis, therapeutic selection and response, and preventative measures is an important segment of the overall IVD market. Although this segment is small today, it is an extremely fast-growing component.

Using companion diagnostics in patient care can substantially improve patient outcomes and pave the way for more personalized, targeted medicine by reducing both misdiagnoses and adverse reactions, and by eliminating unnecessary and expensive downstream tests. Today, patient dosage levels are based on age, sex, and weight, as determined by empirical studies. However, specific drug metabolism may be as individualized as one’s fingerprint. In the future, molecular diagnostics may be able to direct physicians to the right drugs for every patient, no matter what the illness.

This trend towards personalized medicine may ultimately lead to the reduction of overall healthcare expenditures. What is known as a surrogate molecular marker may now be substituted for the lengthy process of comparing the effects of a prospective new drug versus a placebo on the ultimate outcome of a disease. As a result, a drug’s effectiveness against the disease process in question may be monitored more efficiently by evaluating the presence or absence of a specific biomarker, thereby avoiding failures late in the research and development process as well as the threat of recalls. One example of the successful application of biomarker data to therapeutic evaluation is the use of blood cholesterol levels to evaluate the effectiveness of cholesterol lowering drugs. This approach has the potential for creating a revolutionary new paradigm in the conduct of clinical trials worldwide.

From a demographic standpoint, 12% of the U.S. population was 65 years old or older in 2000. By 2030, that portion of the population is anticipated to grow to 20%, burdening the healthcare system with increased numbers of cardiovascular, neurological, and other age-related diseases. Age-related conditions are expected to contribute to the health care market that may provide an opportunity to market greater product development and molecular tests.

Demand for diagnostics addressing the pharmacogenetic testing segment (i.e. companion diagnostics and surrogate biomarkers) are expected to drive market growth in the years ahead. Pharmacogenetics broadly relates to the study of genetic variations and their application to drug discovery to provide personalized therapy. Currently the second largest market sector behind diagnostics for infectious diseases, the pharmacogenetic sector of the molecular diagnostics market is projected to grow rapidly.

The Role of HDC’s Technology in Molecular Diagnostics

Our pattern recognition technology offers pharmaceutical companies a key tool as they approach drug discovery in this new era of personalized medicine. Accordingly, our marketing efforts are focused on utilizing our technology in partnership with many of the world’s leading pharmaceutical and life-sciences companies. Our primary commercialization strategy for our technology and discoveries is to enter into both licensing agreements and joint development opportunities that feature up-front license fees, fee-for-service development revenue, milestone payments, and royalty streams. We believe the pharmaceutical market offers us a promising commercial opportunity for the application of our technology, as the pharmaceutical industry is characterized by costly R&D efforts to create new patent-protected products.

The use of HDC’s SVM technology and our discovered biomarkers may help pharmaceutical companies develop and evaluate new drugs and medical therapies in less time and at lower cost. According to the lobby group PhRMA, only 1 of every 10,000 potential medicines investigated by America’s drug companies survives the research and development process and is approved for patient use by the U.S. Food and Drug Administration (FDA). On average, the drug developmental process can take up to 15 years in research and development, with costs approaching many hundreds of millions of dollars. This extended timeframe and enormous expense has led to an emphasis on the development of “blockbuster” drugs.

Within the drug discovery R&D process, biomarkers like ours can help pharmaceutical companies identify disease targets and pathways and validate mechanisms of drug action. They may also serve as pharmacodynamic indicators of drug activity, drug response, and drug toxicity in clinical development. Biomarkers may also be used to help avoid new drug failures in late stage trials. Outside of the pharmaceutical market, the use of biomarkers can result in earlier detection of disease, and improved prognosis of therapeutic outcome.

We consistently work to influence the evolving relationship between diagnostics and monitoring patients for therapeutic outcome. In February 2007, the FDA provided 510(k) clearance for MammoPrint, Agendia B.V.’s multi-gene expression breast cancer prognosis test. We believe this indicates the acceptance of the field of molecular diagnostics and highlighted the growing importance of personalized medicine. In particular, the advent of molecular diagnostics has led to the possibility of a completely new paradigm in the care of patients suffering from cancer and other diseases.

Current diagnostic tools, such as blood marker-based immunoassays, imaging techniques, and biopsy analyses, provide valuable information and have played an important role in the successful treatment of cancer patients, but are not without limitations. We believe there is a market for advanced diagnostic and prognostic tests that can provide meaningful information, screen for cancer, detect early recurrence, and monitor progression and therapeutic response in real time. HDC’s pattern recognition technology can play a critical role in the development of these tests because an advanced pattern recognition technique such as SVM technology could be required for this type of discovery.

Working with recognized diagnostic and pharmaceutical partners, our goal is to develop a product line of newly discovered biomarker signatures and pathways that can be found in human genes and genetic variations, as well as gene, protein and metabolite expression differences. In addition, we market our expertise in the design of clinical trials for companion diagnostics to substantiate the clinical validity and commercial utility of those biomarkers. We also market the potent combination of our intellectual property and intellectual prowess to our prospective collaborative partners. As inventors of the SVM technology, our world renowned mathematicians offer these companies an impressive development team for their drug discovery, diagnostic test or other applications.

Our Technologies and Discoveries

HDC owns a patent portfolio of machine learning technology, including certain pioneer patents on SVM. We also have consulting arrangements with many of the physicians, clinical specialists and mathematicians responsible for developing and filing the pioneer neural network and SVM patents for the analysis of clinical data.

The Company’s SVM technology is commonly considered within the context of artificial intelligence. This is a branch of computer science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development of algorithms and techniques that allow computers to learn. Pattern recognition is machine learning with a wide spectrum of applications including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object recognition in computer vision, and robot locomotion.

SVM Overview

SVMs are mathematical algorithms that allow computers to sift through large, complex datasets to identify patterns. SVMs are widely acknowledged for their ability to discover hidden relationships in these complex datasets. With the ability to handle what is known as infinite dimensional space, SVMs are broadly considered to be superior to neural networks and other mathematical techniques. SVM is a core machine learning technology with strong theoretical foundations and excellent empirical successes.

Since their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the Statistical Learning Theory developed by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory Board, SVMs quickly gained attention from the math and science communities due to a number of theoretical and computational merits. This development advanced a new framework for modeling learning algorithms. Within this framework, the fields of machine learning and statistics were merged introducing powerful algorithms designed to handle the difficulties of prior computational techniques.

The new generation of learning algorithms that were developed based on this theory has proved to be remarkably resistant to the problems imposed by noisy data and high dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization ability. SVMs have been validated in hundreds of independent academic publications and presentations. In recognition for his work, Professor Vapnik received the prestigious Alexander von Humboldt Prize from the German government honoring foreign scientists and scholars for lifetime achievement.

SVMs have become widely established as one of the leading approaches to pattern recognition and machine learning worldwide and are replacing neural networks in a variety of fields, including engineering, information retrieval and bioinformatics. This technology has been incorporated into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies. Educational and research institutions throughout the world have successfully applied SVMs to a wide array of applications, including gene and protein expression analysis, medical image analysis, flow cytometry, and mass spectrometry.

Recursive Feature Elimination - Support Vector Machine Overview

Recursive Feature Elimination (RFE-SVM) is an application of SVM that was created by members of HDC’s science team to find discriminate relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns – for instance, a biomarker/genetic expression signature of a disease. The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute most to the desired results. The Company believes that its six RFE-SVM patents are currently the only RFE patents properly issued in the world.

In March 2010, the U.S. Patent and Trademark Office issued Patent No. 7,685,077, which claims SVM-RFE, to Intel Corporation. In November 2010, the Company filed a continuation application intended to provoke an interference proceeding in the USPTO to obtain an affirmation of the Company’s prior and exclusive rights to the RFE-SVM technology. Although the patent examiner has indicated that the claims of the continuation and the Intel patent are indeed interfering, the Company is still awaiting action by the Interference Division of the Patent Office to initiate the proceedings. In November 2011, the Company filed a re-examination request asserting that the Intel patent was invalid over the Company’s prior art. The USPTO granted the Company’s re-examination request in January 2012 based on a finding that there was a substantial new question of patentability. Shortly after granting the request, the USPTO issued an Office Action rejecting all claims of the Intel patent as unpatentable over the prior art. Intel will be given an opportunity to respond to this rejection.

Using RFE-SVM, we have been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed. In one micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence. It has been shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool. HDC scientists believe that these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with the pharmacogenetic and toxicological profiling of patients. The RFE-SVM method is also capable of finding those specific genes and proteins that are unhindered by ever-increasing patent protection.

Fractal Genomic Modeling Overview

On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software. The fractal technology is used to find discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease versus normal tissues.

The Fractal Genomic Modeling (“FGM”) data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis and prevention of certain diseases. HDC scientists feel that these analytic methods are effective for finding genes implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a host of other diseases, as well as the pharmacogenetic profiling of patients.

FGM technology is designed to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM uses a new approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction and analysis of whatever process is your particular object of study. Two important concepts behind FGM technology are the notions of scale-free networks and self-similarity.

Our Scientific Advisory Board

Our Scientific Advisory Board is comprised of scientists with vast experience in the fields of mathematics and medicine. The members of the Scientific Advisory Board are Kary Mullis, Ph.D., winner of the Nobel Prize for Chemistry for discovering PCR (1993), Vladmir Vapnik, Ph.D., creator of SVMs and winner of the Humboldt Research Award, Isabelle Guyon, Ph.D., co-inventor of the first patent for SVMs, Ramananda K. Madyastha, M.D., Ph.D, recipient of the Raja Ravi Sher Singh of Kalsia Memorial Cancer Research Prize for outstanding contributions in the field of cancer research, and Bernhard Scholköpf, Ph.D., director at the Max Plank Institute for Biological Cybernetics in Tubingen, Germany and an elected member of the Max Plank Society.

Our Scientific Achievements

Our Chief Executive Officer and members of our Scientific Advisory Board are experienced in the design, analysis and application of machine learning technology, having invented many of the concepts and methodologies used to exploit domain knowledge. In addition, through pattern recognition, our Chief Executive Officer and members of our Scientific Advisory Board have identified and patent-protected biomarkers as possible treatment advances for several diseases, including prostate cancer, breast cancer, pancreatic cancer, Benign Prostatic Hyperplasia (BPH), colon cancer, and melanoma. Our Chief Executive Officer is an inventor or co-inventor on over forty patents within the Company’s patent portfolio.

Prostate Cancer

The National Cancer Institute (NCI) estimated that more than 186,000 new cases of prostate cancer would be diagnosed in the U.S. in 2008, with more than 28,660 deaths. There are approximately 50 million PSA tests performed worldwide each year, half of which are performed in the U.S. The PSA test sells in the U.S. 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.

HDC has identified, patent-protected and recently licensed a genetic biomarker signature that identifies clinically significant high grade prostate cancer cells based on analysis of tissue samples. Upon the achievement of successful validation, the Company’s test may be used to analyze patients with elevated PSA or abnormal rectal exams, with negative biopsy results to determine if there is genomic evidence of grade three or higher cancer cells present in biopsy tissue, indicating the presence of a cancer potentially missed by the biopsy.

On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. (recently acquired by GE Healthcare) for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature. During 2008, the Company and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test. Results from the Phase I, Phase II and Phase III double-blinded clinical validation studies were completed at Clarient and published in the peer reviewed journal UroToday International. These results demonstrated a high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells. Clarient has not yet reported any commercial sales to us. Clarient has not been actively marketing the 4-gene prostate cancer test because pathologists, not urologists, are their primary client. Due to cash constraints, Clarient did not have the funding to create a separate sales force focused on urologists. With the recent GE Healthcare acquisition, combining In Vivo imaging and In Vitro molecular diagnostics is now a primary focus for Clarient/GE Healthcare and prostate cancer is one of the primary diseases in which we believe they plan to combine the modalities for better patient management.

On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. (“Abbott”), pursuant to which, among other things, the Company granted Abbott a worldwide, exclusive, royalty-bearing license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests in both biopsy tissue and urine. We also granted Abbott a worldwide royalty bearing, co-exclusive license (co-exclusive with Quest) for developing and commercializing a laboratory developed urine based molecular diagnostic test (“LDT”) for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients. Because Abbott is primarily in the In-Vitro Diagnostic (IVD) development business, Abbott has chosen to develop, validate and commercialize the IVD version of the 4-gene prostate cancer test and not pursue the Laboratory Developed Test (LDT) development. Abbott paid a one-time initial signing fee of $100,000 and then reimbursed us $100,000 in development costs as required by the license agreement. In addition, with respect to 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. 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.

We have completed the Abbott clinical trial for Phase 1 and 2 of the urine prostate cancer test validation process. Therefore, the Company believes we are now entitled to receive the corresponding milestone payment. However, Abbott has not paid the corresponding $250,000 milestone payment. 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 met with and submitted all of our results to Abbott for their independent analysis. We are currently awaiting Abbott’s final decision on whether they will continue to proceed with the development of the test. They have asked to see additional study results from other testing sites. The Company is in the process of attempting to gather this information for Abbott. Due to confidentiality issues, there is no certainty that other companies will be willing to share this clinical data with Abbott or that Abbott will continue progressing with the development of the test. If Abbott chooses not to move forward, the Company anticipates that it will commence licensing discussions with other international IVD companies. These efforts to market to IVD companies were excluded from the NeoGenomics License and are therefore permitted.

On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a urine-based LDT for clinically significant prostate cancer 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 ongoing royalty payments, certain milestone payments, and development fees.

Quest Diagnostics has now 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. The Company is pleased with the results which demonstrated that HDC’s 4-gene urine test for clinically significant prostate cancer outperformed both the PSA as well as published data for PCA3 for the early detection of prostate cancer. The Company’s latest discussions with Quest have centered on whether or not Quest wants to enroll additional patients in the clinical trial. Quest has not responded to our repeated requests to move forward on the LDT development of the 4-gene urine test. As a result, the Company has also recently licensed the LDT rights to develop the test to NeoGenomics.

Additionally, preliminary testing has demonstrated that mRNA transcripts from the four genes can be detected in the plasma (blood) of patients with benign prostate hyperplasia (BPH) as well as from patients with prostate cancer. The levels in prostate cancer have been shown to be different from those in benign prostate hyperplasia (BPH). Further validation and a larger scale study are needed to confirm this preliminary observation and to establish correlation with clinical behaviors. This plasma based prostate cancer test has been licensed to NeoGenomics and the development of this new test in in process.

We continue to progress towards the goal of commercialization of the 4-gene urine-based prostate cancer test at Quest and with Abbott. If the Company is successful with its efforts with Quest towards completion of the development and validation to the satisfaction of Quest, the 4-gene urine test for prostate cancer can be commercialized as an LDT under the current CLIA regulations. In addition, if the Company is successful with its efforts with Abbott and upon regulatory approval, Abbott could immediately begin commercialization and sale of the individual In-Vitro Diagnostic (IVD) test kits to additional national, regional and local clinical laboratories, as well as hospital, academic and physician laboratories around the world.

Breast Cancer

For women, breast cancer is the most common non-skin cancer and the second leading cause of cancer-related death in the United States. 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. However, death rates from breast cancer have been declining since 1990, and these decreases are believed to be the result, in part, of earlier detection and improved treatment. Mammography remains the best method of early breast cancer detection. According to studies cited by the National Cancer Institute, 10-20% of breast cancers detected by a physical exam were missed by a film mammogram. For this reason, there have been extensive research efforts to improve mammography.

The FDA reports that there are about 33.5 million mammography procedures performed each year in the United States. Data from 2000-2002 show that about 70 percent of all mammograms that are performed annually are for screening purposes (to detect cancer as opposed to following cancer once it has been diagnosed). This translates to about 23.5 million screening procedures every year. Currently, the breast cancer prognostic market is projected to be about $300 to $400 million.

Detecting malignancy in mammograms can be very difficult. Individual mammograms are unique and there can be great variation within “normal” images. Unlike CT scans and MRIs, mammograms are not cross-sectional images. Basically, a mammogram produces a two-dimensional picture of a three-dimensional object. The projection from 3D to 2D and the resulting overlaps on the images may interfere with the recognition of the distinguishing features, which are often very subtle. The rules for differentiating the benign and malignant cases are vague and not easily formulated.

One way to reduce reading errors is to have two radiologists read the same mammograms independently. However, in most health care systems, it is not feasible to implement such a two-radiologist reading process. A computer-assisted detection (CAD) system serving as a second reader is therefore an attractive option, and CAD is currently reimbursed by both insurance companies and Medicare.

Both digital and film mammography use X-rays to produce an image of the breast. In film mammography, which has been used for over thirty-five years, the image is created directly on a film. While standard film mammography is very good, it is less sensitive for women who have dense breasts. A major limitation of film mammography is the film itself. Once a film mammogram is obtained, it cannot be significantly altered; if the film is underexposed, for example, contrast is lost and cannot be regained.

Digital mammography takes an electronic image of the breast and stores it directly in a computer. Digital mammography uses less radiation than film mammography and allows for improvement in image storage and transmission because images can be stored and sent electronically. Radiologists can use software to help interpret digital mammograms.

HDC licensed its two breast cancer diagnostic technologies (MammoSIGHT, for detecting malignancy in mammograms and MetastaSIGHT, for identifying circulating tumor cells in the blood) to Smart Personalized Medicine, LLC (“SPM”) pursuant to an amended license agreement in exchange for a 20% ownership position in SPM and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test other than by Quest Diagnostics Incorporated (“Quest”). The detection component of these technologies finds the areas of particular interest in the image and separates these objects from the background. The feature extraction component formulates numerical values relevant to the classification task from the segmented objects. HDC’s patented technology can be used within all diagnostic imaging radiology techniques, including PET scans, CT scans, and MRIs.

Effective March 11, 2010, the Company and SPM amended (the “Amendment”) the original License Agreement, dated August 22, 2008 (the “SPM License Agreement”), pursuant to which we had licensed our intellectual property to SPM for use in the development of breast cancer products. As amended, we will receive all payments under the Quest Development Agreement and License Agreement directly from Quest, and SPM will not be required to make any additional payments to the Company related to either such agreement. With respect to SPM proceeds received unrelated to the arrangement with Quest, we will receive a per test royalty up to 7.5% based on net proceeds received from a Test (as defined in the SPM License Agreement) and such additional allocation and distribution of license fees and royalties received from future sublicenses with third parties as may be agreed. In addition, our equity percentage interest in SPM was increased from 15% to 20%, and such equity percentage interest may be diluted only to the same extent and in the same manner as each other initial equity percentage interest holder; provided, however, that when raising additional equity, SPM must obtain our prior written approval of the terms and conditions of such equity offering. SPM expects that once the laboratory test is developed with Quest, it 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.

On March 11, 2010, the Company, Quest and SPM entered into a Development Agreement (the “Quest Development Agreement”) pursuant to which the Company and SPM will assist Quest in the development of new laboratory tests for aiding in the selection of breast cancer therapies. The Company, SPM and Quest also entered a related Licensing Agreement (the “Quest License”).

Pursuant to the Quest License, SPM granted a co-exclusive (with SPM) sublicense to utilize the Licensed Patent Rights to the extent necessary to enable Quest to develop Products and perform the Validation Work under the Quest Development Agreement. Quest has the right to use SPM’s Breast Cancer Database developed in association with a world renowned academic cancer center (the “Database”). In consideration for the license, Quest has separately made payments to SPM and us. Such payments to us include a $500,000 “License Fee (which has been paid in full), License Maintenance Fees” equal to $8,750 for the first year and $17,500 for each year thereafter (with such fees being credited against the “Royalty Payments” described below), upon the publication of a study performed for the Validation Work an “Initial Product License Fee” of $125,000 for each of the first two Products, and “Royalty Payments” equal to 2.45% of the Net Sales of each Licensed Product (i.e., each breast cancer test) sold by Quest. Quest will reimburse SPM and us for costs incurred related to any Validation Work done with respect to a Product.

Pursuant to the Quest License, in the event of a termination for cause by Quest prior to the termination of any products, Quest has the right to receive a refund of pro rata portion of the License Fee based on the ratio of the number of months from the date of termination until the eighteenth month anniversary of the agreement to such eighteenth month period. This eighteenth month provision has since passed.

Pursuant to the Quest Development Agreement, we are required to use the support vector machine technology and other intellectual property and expertise licensed to SPM to analyze data for the development and/or validation of applications of clinical laboratory services, In Vitro Diagnostic kits, clinical trial services and the other elements of the “Field”.

In consideration for our efforts under the Quest Development Agreement, Quest agreed to pay us $375,000 in development fees of which $291,662 has been received by HDC, with $83,338 remaining to be paid under the agreement. These amounts are in addition to the $500,000 License Fee previously received as described above. Quest timely paid the first seven development fee monthly installments; however, the final two required installment payments, which were due in October and November 2010, have not been made.

Quest is currently in discussions with SPM regarding its plans for the development of this test and the outstanding payments due under the agreement. The Company anticipates an update regarding these matters within the next few months. The Quest License relating to breast cancer is specifically excluded from the NeoGenomics License.

A collaborative effort between SPM and HDC is underway at the MD Anderson Cancer Center (“MDACC”) in Houston, Texas. The Principal Investigator at MDACC is completing the review of the breast cancer tissue blocks maintained in the tissue repository, to identify those subjects who meet the inclusion criteria for the study. Once the tissue blocks have been identified for the study, they will be assessed for hormone and HER-2 protein receptor status and subjected to multi parameter protein and gene expression assays, followed by SVM based pattern recognition analysis to identify those features that best predict cancer recurrence, time to recurrence and overall patient survival.

Pancreatic Cancer

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

The Company’s relationship with the Pancreas Center continued without interruption, irrespective of the fact that Saint Vincent Catholic Medical Centers located in New York City, has opted to close its operations. The Pancreas Center has affiliated with Beth Israel Medical Center and is expected to affiliate with other hospitals in the New York City region in the near future.

To date, over 55 fresh frozen pancreatic tissues with accompanying blood specimens have now been collected and stored for the genomic analysis. We plan to perform both gene expression profiling and profiling of micro-RNAs on specimens from pancreatic cancers, cysts and pancreatitis tissues. SVM based pattern recognition analysis will then be used to identify the features that can discriminate these three tissues. We will then interrogate the blood specimens to quantitate the gene transcripts (mRNA) and micro-RNAs and establish a gene based test to permit the early detection of pancreatic cancer. The Company has licensed final development rights to the pancreatic cancer test to NeoGenomics.

Benign Prostatic Hyperplasia (BPH)

BPH is a non-cancerous enlargement of the prostate gland that occurs as men age. The enlargement often leads to obstruction in the flow of urine through the urethra that passes through the prostate gland. BPH is a common condition, representing a global treatment market of almost $4 billion annually growing by 12% per year in fixed-rate US dollar terms. According to the National Institutes of Health (NIH), BPH affects more than 50% of men over age 60 and as many as 90% of men over the age of 70. While BPH does not cause prostate cancer, both may be found together.

HDC has identified and patent-protected a subset of genes that separates benign prostatic hyperplasia (BPH) from prostate cancer with a high degree of accuracy. This same set of genes also separated BPH from normal tissue patterns, indicating that BPH is a disease with molecular characteristics of its own. This discovery could be used to develop a new non-invasive diagnostic test for BPH, which does not currently exist, as well as a completely new type of therapy for patients with this disease.

We have identified and patent protected fifty gene biomarkers representing 5 gene pathways involved with the development of benign prostatic hypertrophic disease (BPH). All of these protein products of the genes are known to be secreted into the circulation or are highly likely to be secreted proteins from prostatic cells. This blood protein test may be useful as companion diagnostic for use in clinical trials of new drug treatments. The Company is seeking to license this BPH test to a third party diagnostic or pharmaceutical company.

Colon Cancer

In the United States, colorectal cancer is the third most common cancer in men and women. The National Cancer Institute (NCI) estimates that more than 108,000 new cases of colon and rectal cancer will be diagnosed in the U.S. in 2008, with nearly 50,000 deaths.

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

Melanoma

In July 2011, we announced the launch of our melanoma/skin cancer mobile phone application which enables customers to take a picture of a mole, lesion or birthmark, send it to HDC, and receive a risk assessment for melanoma and other skin cancer on their mobile phone. This first-ever melanoma/skin cancer mobile phone application using our SVM technology employs sophisticated image analysis techniques using patent protected algorithms for evaluating moles, lesions and birthmarks. We have selected Apple’s iPhone as our initial mobile platform and focused on tuning image capture and analysis capabilities for skin lesions and moles for that platform. In addition to the images we used to successfully train our melanoma app, we licensed a set of skin lesions including melanomas from Johns Hopkins University known as Dermatlas. We processed all the melanoma images from Dermatlas and a subset of the benign moles using the iPhone app. The results indicate a high sensitivity and specificity. In addition, we have been able to successfully eliminate images that are not skin lesions with a 99% accuracy rate. The Company has initiated discussions with potential U.S. and non-U.S. laboratory partners, dermatologists and marketing partners. In addition to the potential revenue generated from the app itself, we may generate revenue from skin biopsies being referred by our app for Dermatopathology review with our clinical laboratory partners.

Flow Cytometry, Cytogenetics, and Pap smear Imaging

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

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

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

SVM Capital, LLC

In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading. Atlantic Alpha reports that the SVM technology is now working well 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. Sine our research settled on the K-1 and K-2 models, the kernel of SVM has remained unchanged. Also, the basic data utilized in the data base has also remained unchanged in that we only utilize the open, high, low, close and volume of daily data to make predictions. However, the past year has seen a much expanded development of data base design and normalization. While the SVM portion of our logic remains the same and the basic data remains the same the presentation of this data to the SVM Kernel has changed substantially. At long last we are confident that we are presenting the best and most complete data structure and normalization to the SVM kernel and the proforma results have certainly verified this.

In a recent internal study, our technology outperformed the “buy and hold” strategy. These are proforma results and do not represent live trading. The “buy and hold” strategy performed at approximately 100% for the 12 year study period. SVM Capital’s K-1 and K-2 outperform the “buy and hold” strategy with K-1 achieving 140% return and K-2 a 150% gain. These gains are much smoother and do not show periods of large losses as the “buy and hold” strategy. SVM Capital’s K-5 model shows a return of approximately 175% while SVM Capital’s K-6 model shows a return of approximately 300%. The K-6 model is a fully redesigned data base and utilized a different normalization constant. In all these models, the core SVM Kernel is the same and the basic information is the same (open, high, low, close, and volume). What is different is the data base design and the normalization principle. The K-6 model presents the SVM Kernel with an 85 dimensional data base which fully reflects what we have learned about data base design and normalization. K-6 is a testament to what SVM Capital has learned about data base design and its importance to the quality of decision making by the SVM Kernel. The K-6 model is now fully implemented and began live trading in January of 2012 replacing the K-2 model that was live traded through December of 2011. Past results do not necessarily reflect future performance. This information is intended for demonstration purposes only and not an indication of future performance. In this analysis, no leverage is utilized and all trading costs are fully included.

Employees

On December 31, 2011, we had 5 full time employees.

Website Address

Our corporate website address is www.HealthDiscoveryCorp.com. To view our public filings from the home page, select the “Display SEC Filings” tab followed by “SEC Filings.” This is a direct link to our filings with the Securities and Exchange Commission (“SEC”), including but not limited to our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports. These reports are accessible soon after we file them with the SEC.

Governmental Regulation

Our business plan involves Biomarker Discovery in the field of molecular diagnostics. This early discovery process does not involve any governmental regulations or approvals. If we are successful in licensing our discoveries to other companies, FDA approvals may be required before the ultimate product may be sold to consumers. Our current plan is to require the companies licensing our discoveries or technologies to be responsible for the costs involved in such approvals. If we are not successful in licensing these discoveries on these terms or choose to take these discoveries to market ourselves, we may then be subject to applicable FDA regulations and would then bear the costs of such approvals.

We know of no current governmental regulations that will materially affect the Company’s current operations or products. However, if the FDA changes its current position, and decides to regulate laboratory developed tests (LDT’s) currently regulated by CLIA certification, this could materially affect the development costs and commercialization timelines for our products.

Intellectual Property

In connection with the SVM Acquisition, we obtained rights to the intellectual property within the “SVM portfolio” that currently consists of fifty-nine patents which were or have since issued as well as twenty-eight other patent applications that are pending in the U.S. and elsewhere in the world. The issued patents and pending applications in the SVM portfolio to date, including new applications that we have filed since acquiring the original IP, HDC are:

Patent/Application No.	Title	Expiration Date

U.S. Patent No. 6,128,608	Enhancing Knowledge Discovery Using Multiple Support Vector Machines	05/01/2019

U.S. Patent No. 6,157,921	Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment	05/01/2019

U.S. Patent No. 6,427,141	Enhancing Knowledge Discovery Using Multiple Support Vector Machines.	05/01/2019

U.S. Patent No. 6,658,395	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/01/2019

U.S. Patent No. 6,714,925	System for Identifying Patterns in Biological Data Using a Distributed Network.	05/01/2019

U.S. Patent No. 6,760,715	Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.	05/01/2019

U.S. Patent No. 6,789,069	Method of Identifying Patterns in Biological Systems and Method of Uses.	05/01/2019

U.S. Patent No. 6,882,990	Method of Identifying Biological Patterns Using Multiple Data Sets.	05/01/2019

U.S. Patent No. 6,944,602	Spectral Kernels for Learning Machines	02/19/2023

U.S. Patent No. 6,996,542	Computer-Aided Image Analysis	04/21/2021

U.S. Patent No. 7,117,188	Methods of Identifying Patterns in Biological Systems and Uses Thereof	05/01/2019

U.S. Patent No. 7,299,213	Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset	03/01/2022

U.S. Patent No. 7,318,051	Methods for Feature Selection in a Learning Machine	02/25/2021

U.S. Patent No. 7,353,215	Kernels and Methods for Selecting Kernels for Use in a Learning Machine	05/07/2022

U.S. Patent No. 7,383,237	Computer-Aided Image Analysis	11/04/2019

U.S. Patent No. 7,444,308	Data Mining Platform for Bioinformatics	08/07/2020

U.S. Patent No. 7,475,048	Pre-Processed Feature Ranking for a Support Vector Machine	08/07/2020

U.S. Patent No. 7,542,947	Data Mining Platform for Bioinformatics and Other Knowledge Discovery	08/07/2020

U.S. Patent No. 7,542,959	Feature Selection Using Support Vector Machine Classifier	05/01/2019

U.S. Patent No. 7,617,163	Kernels and Kernel Methods for Spectral Data	11/9/2021

U.S. Patent No. 7,624,074	Methods for Feature Selection in a Learning Machine	08/07/2020

U.S. Patent No. 7,676,442	Selection of Features Predictive of Biological Conditions Using Protein Mass Spectrographic Data	08/07/2020

U.S. Patent No. 7,778,193	Kernels and Methods for Selecting Kernels for Use in a Learning Machine	05/07/2022

U.S. Patent No. 7,797,257	System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source	05/01/2019

Patent/Application No.	Title	Expiration Date

U.S. Patent No. 7,805,388	Method for Feature Selection in a Support Vector Machine Using Feature Ranking	08/07/2020

U.S. Patent No. 7,890,445	Model Selection for Cluster Data Analysis	06/08/2024

U.S. Patent No. 7,921,068	Data Mining Platform for Knowledge Discovery from Heterogeneous Data Types and/or Heterogeneous Data Sources	05/20/2022

U.S. Patent No. 7,970,718	Feature Selection and for Evaluating Features Identified as Significant for Classifying Data	08/07/2020

U.S. Patent No. 8,008,012	Biomarkers Downregulated in Prostate Cancer	01/24/2022

U.S. Patent No. 8,095,483	Support Vector Machine-Recursive Feature Elimination (SVM-RFE)	08/07/2020

U.S. Patent No. 8,126,825	Method for Visualizing Feature Ranking of a Subset of Features for Classifying Data Using a Support Vector	05/20/2022

Australian Patent No. 764897	Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.	05/01/2019

Canadian Patent No. 2,330,878	Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines	05/01/2019

European Patent No. 1082646	Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines	05/01/2019

German Patent No. 69943664.8	Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines	05/01/2019

Indian Patent No. 212978	Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines	05/01/2019

South African Patent No. 00/7122	Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.	05/01/2019

Australian Patent No. 780050	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/24/2020

Canadian Patent No. 2,371,240	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines	05/24/2020

Chinese Patent No. ZL00808062.3	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/24/2020

European Patent No. 1192595	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/24/2020

Spanish Patent No. ES2254182	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/24/2020

German Patent No. DE60024452.0-08	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/24/2020

Indian Patent No. 223409	Enhancing Knowledge Discovery for Multiple Data Sets Using Multiple Support Vector Machines	05/24/2020

Israeli Patent No. 146705	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines	05/24/2020

Norwegian Patent No. 319,838	Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.	05/24/2020

South Korean Patent No. 724104	Enhancing Knowledge Discovery from Data Sets Using Multiple Support Vector Machines	05/24/2020

Australian Patent No. 779635	Method of Identifying Patterns in Biological Systems and Method of Uses.	10/27/2020

Patent/Application No.	Title	Expiration Date

Canadian Patent No. 2,388,595	Method of Identifying Patterns in Biological Systems and Method of Uses	08/07/2020

Australian Patent No. 2002243783	Computer Aided Image Analysis	01/23/2022

European Patent No.1356421	Computer Aided Image Analysis	01/23/2022

Spanish Patent No.2337556	Computer Aided Image Analysis	01/23/2022

Japanese Patent No. 3947109	Computer Aided Image Analysis	01/23/2022

Australian Patent No. 2002253879	Methods of Identifying Patterns in Biological Systems and Uses Thereof	01/24/2022

Japanese Patent No. 4138486	Methods of Identifying Patterns in Biological Systems and Uses Thereof	01/24/2022

European Patent No. 1459235	Methods of Identifying Patterns in Biological Systems and Uses Thereof	01/24/2022

European Application No. 10184558.4	Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines	05/01/2019

European Publication No. 1236173	Method of Identifying Patterns in Biological Systems and Method of Uses	08/07/2020

European Application No. 10185728.2	Method of Identifying Patterns in Biological Systems and Method of Uses	08/07/2020

Japanese Application No. 2001-534088	Method of Identifying Patterns in Biological Systems and Methods of Uses	08/07/2020

U.S. Patent Publication No. 2005/0165556	Colon Cancer-Specific Markers	05/01/2019

U.S. Patent Publication No. 2010/0256988	System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source	05/01/2019

U.S. Patent Publication No. 2011/0106735	Recursive Feature Elimination Method Using Support Vector Machines	05/01/2019

U.S. Patent Publication No. 2010/0318482	Kernels for Identifying Patterns in Datasets Containing Noise or Transformation Invariance	05/07/2022

U.S. Patent Publication No. 2010/0205124	Support Vector Machine-Based Method for Analysis of Spectral Data	08/07/2020

European Publication No. 1828917	Biomarkers for Screening, Predicting, and Monitoring Prostate Disease	11/14/2025

Canadian Application No. 2,435,254	Methods of Identifying Patterns in Biological Systems and Uses Thereof	01/24/2022

Canadian Application No. 2,435,290	Computer Aided Image Analysis	01/23/2022

U.S. Patent Publication No. 2011/0125683	Identification of Co-Regulation Patterns by Unsupervised Cluster Analysis of Gene Expression Data	05/17/2022

U.S. Patent Publication No. 2010/0256988	System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source	05/01/2019

U.S. Application No. 13/418,291	Biomarkers for Screening, Predicting, and Monitoring Benign Prostate Hyperplasia	01/24/2022

Patent/Application No.	Title	Expiration Date

U.S. Patent Publication No. 2009/0215024	Biomarkers Upregulated in Prostate Cancer	01/24/2022

U.S. Patent Publication No. 2009/0286240	Biomarkers Overexpressed in Prostate Cancer	01/24/2022

U.S. Patent Publication No. 2009/0215058	Methods for Screening, Predicting and Monitoring Prostate Cancer	01/24/2022

European Publication No. 2373816	Methods for Screening, Predicting and Monitoring Prostate Cancer	12/04/2029

U.S. Patent Publication No. 2009/0226915	Methods for Screening, Predicting and Monitoring Prostate Cancer	01/24/2022

U.S. Patent Publication No. 2009/0204557	Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines	02/08/2029

Australian Application No. 2009212193	Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines	02/08/2029

Chinese Application No. 200980110847.2	Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines	02/08/2029

European Application No. 09709037.7	Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines	02/08/2029

Indian Application No. 5526/CHENP/2010	Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines	02/08/2029

Japanese Application No. 2010-546084	Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines	02/08/2029

U.S. Patent Publication No. 2012/0008838	System and Method for Remote Melanoma Screening	05/01/2019

WIPO Application No. PCT/US10/61667	System and Method for Remote Melanoma Screening	12/21/2030

HDC also owns intellectual property rights in U.S. and foreign patents and pending patent applications covering the FGM technology. The FGM portfolio includes three issued patents, which are:

Patent/Application No.	Title	Expiration Date

U.S. Patent No. 6,920,451	Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.	01/19/2021
U.S. Patent No. 7,366,719	Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets	01/19/2021
European Patent No. 1252588	Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.	01/19/2021

Our Competition

HDC conducts its business principally in the diagnostics industry in the field of Biomarker Discovery and image analysis. The diagnostics industry is highly fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics companies attempting to discover potential new diagnostic products. These companies may:

●	develop new diagnostic products before we or our collaborators;
●	develop diagnostic products that are more effective or cost-effective than those developed by us or our collaborators; or
●	obtain patent protection or other intellectual property rights that would limit the ability to develop and commercialize, or a customers’ ability to use, our or our collaborators’ diagnostic products.

The Company competes with companies in the United States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize biomarker discovery and CAD image analysis techniques. These companies may develop products that are competitive with and/or perform the same or similar to the products offered by us or our collaborators. Also, clinical laboratories may offer testing services that are competitive with the products sold by us or our collaborators. The testing services offered by clinical laboratories may be easier to develop and market than test kits developed by us or our collaborators because the testing services are not subject to the same clinical validation requirements that are applicable to FDA-cleared or approved diagnostic test kits.

While a number of companies perform biomarker discovery, we believe that our SVM and FGM technologies give us a distinct advantage over competing technologies. Neither classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs necessary to produce fully validated biomarkers like the Company’s technology.

Customers and Licensees

We have produced sales, licensing, and developmental revenue since 2005 through agreements with several customers and licensees. In 2009, we entered into strategic alliance and licensing agreements with Abbott and Quest for commercialization of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature. In July 2008, we entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests with DCL Laboratories (“DCL”) for the independent detection of ovarian, cervical and endometrial cancers. However, in the first quarter of 2010, due to a shift in strategic direction involving the third party, we mutually terminated the license in February 2010, and are exploring other options to develop and commercialize such tests. In March 2010, we licensed the use of our SVM technology to SPM to develop a superior breast cancer prognostic test. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding these licensing activities.

On January 6, 2012, we entered into the NeoGenomics License pursuant to which we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. See “Subsequent Events – NeoGenomics License” above.

ITEM 1A. RISK FACTORS

This annual report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, all statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including but not limited to statements regarding the successful implementation of our services, business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and operations, references to future success, the ability of the Company to utilize its SVM and FGM assets and other intellectual property to identify biomarkers which can be used in diagnostic tests, the ability to enter into agreements with strategic partners for the development and commercialization of diagnostic tests, the ability of the Company to develop a product line, the ability to achieve profitability, about anticipated size of the market for diagnostic tests, the capabilities of molecular diagnostic tests, regarding working with our collaborators resulting in revenue for the Company, the sufficiency of our liquidity and capital resources, and other such matters. All such statements are forward-looking statements and are based on the beliefs of, assumptions made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause the actual results and performance of our company to be materially different from future results or performance expressed or implied by such statements.

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

Risks Related to Our Business

We are a developing business and a high-risk company.

We are a high-risk company in a volatile industry. In September 2003, we completely changed the focus of our business from wireless telecommunications to biotechnology. Investors should recognize that an investment in our company is risky and highly speculative. We are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development. Failure to implement and execute our business and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We must successfully overcome these and other business risks.

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

While we expect to continue to maintain a positive cash balance during 2012, our expenses are expected to exceed our income until we successfully complete transactions resulting in significant revenue. Accordingly, our capital will be decreased to pay these operating expenses. If we ever become profitable, of which there is no assurance that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these operating expenses. We cannot assure you that we will ever achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

We may need additional financing.

During 2009, we raised additional capital in the amount of $1,490,015 through the issuance of Series B Preferred Stock and received proceeds from the exercise of previously issued warrants to purchase our Common Stock of $2,450,430. In addition, since January 1, 2010, we have received an additional $5,852,333 from the exercise of previously issued warrants to acquire our Common Stock. If we are unable to generate sufficient revenue, additional proceeds may be required to finance our activities. We cannot assure prospective investors that we will not need to raise additional capital or that we would be able to raise sufficient additional capital on favorable terms, if at all. There can be no assurance that additional financing will be available, if required, on terms acceptable to us. If we fail to raise sufficient funds or do not increase our revenues from licensing our technology or performing services, we may have to cease operations or materially curtail our business operations. If we raise additional capital by issuing equity securities, our stockholders may experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

A significant portion of our net revenues will be paid as either a Special Dividend to the holders of the Series B Preferred Stock or to our senior management in bonuses.

Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock (the “Series B Preferred Stock”) remain outstanding, the Company must pay the holders of the Series B Preferred Stock a special dividend (the “Special Dividend”) equal to 15% of the Company’s “Net Revenues.” Company Net Revenues will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC, but will not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company. At any time following the issuance of the Series B Preferred Stock, the Company may satisfy the Special Dividend in its entirety if the aggregate payments made to the Series B Holders is equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock. The maximum Special Dividend to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. The shares of our Series B Preferred Stock also accrue dividends at the rate of 10% per year, which must be paid by the fifth anniversary of the issuance of such shares either by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion.

Further, pursuant to the terms of the employment agreement with Dr. Barnhill, a cash bonus (subject to an annual cap specified in the employment agreement) of 10% of the Company’s Net Revenue (as defined in the CEO’s employment agreement) is being accrued and paid as a cash bonus. Although the employment agreement terminated on August 15, 2010, the Company and Dr. Barnhill have agreed to extend the terms and conditions of the terminated employment agreement on a month-to-month basis while the parties negotiate the terms of a new employment agreement.

Additionally, the Company may pay additional bonuses out of such revenue to other senior management. The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our Common Stock and to otherwise distribute to holders of our Common Stock upon a sale or liquidation. The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our common stock and to otherwise distribute to holders of our common stock upon a sale or liquidation.

Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.

Our operating results may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and acceptance of our services. Factors that may cause our results to vary by period include:

■	payments of milestones, license fees or research payments under the terms of our increasing number of external alliances;
■	changes in the demand for our products and services;
■	the nature, pricing and timing of products and services provided to our collaborators;
■	acquisition, licensing and other costs related to the expansion of our operations;
■	reduced capital investment for extended periods;
■	losses and expenses related to our investments in joint ventures and businesses;
■	regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information; and
■	changes in intellectual property laws that affect our rights in genetic information that we sell and license.

Advisory and personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Some of these expenses cannot be adjusted quickly in the short term. If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular period.

Because we do not intend to pay dividends on our Common Stock, holders of our Common Stock will benefit from an investment in our Company only if it appreciates in value.

We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain the Company’s future earnings, if any, to finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which its investors purchased their shares.

Our stock price has been, and is likely to continue to be, highly volatile.

Our stock price has, since September 1, 2003, traded as high as $0.60 and as low as $0.03. Our stock price could fluctuate significantly due to a number of factors beyond our control, including:

■	variations in our actual or anticipated operating results;
■	sales of substantial amounts of our stock;
■	announcements about us or about our competitors, including technological innovation or new products or services;
■	litigation and other developments related to our patents or other proprietary rights or those of our competitors;
■	conditions in the life sciences, pharmaceuticals or genomics industries; and
■	Governmental regulation and legislation.

In addition, the stock market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our actual operating performance.

In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation. If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could affect our profitability.

Our approach of incorporating ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively new and may not be accepted by our potential customers or collaborators.

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

Even if our computational technologies are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products based on them.

Even if our computational technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting from them to produce new drugs, therapies, diagnostic products or other life science products. Despite recent scientific advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement in diseases and in other life processes is not well understood. Only a few therapeutic products based on the study of and discoveries relating to genes or proteins have been developed and commercialized. If our customers are unable to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.

Our SVM Portfolio utilizes technology that may be covered by an earlier-issued patent, and if we lose the rights to use that patent, our ability to exploit certain aspects of our SVM technology will be impaired.

Our SVM Portfolio utilizes technology that may be covered by the original hyperplane patent (Pat. No. 5,649,068) invented by members of our Scientific Advisory Board and owned by Lucent Technologies GRL Corporation (“Lucent”). We have obtained an assignment of a pre-existing patent license from Lucent. If Lucent were to terminate the license, it is possible that we would not be able to use portions of the SVM technology.

The industries in which we are active are evolving rapidly, and we may be unable to keep pace with changes in technology.

The pharmaceutical and biotechnology industries are characterized by rapid technological change. This is especially true of the data-intensive areas of such technologies. Our future success will largely depend on maintaining a competitive position in the field of drug, therapeutics and diagnostic products discovery. If we fail to keep pace with changes in technology, our business will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products and technologies. Products or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics discovery technologies. We may not be able to make the necessary enhancements to our technologies to compete successfully with newly emerging technologies.

We face intense competition, and if we are unable to compete successfully we may never achieve profitability.

The markets for our products and services are very competitive, and we expect our competition to increase in the future. Although we have not identified specific companies that provide the full suite of services that we do, we compete with entities in the U.S. and worldwide that provide products and services for the analysis of genomic information and information relating to the study of proteins (proteomic information) or that commercializes novel genes and proteins. These include genomics, pharmaceutical and biotechnology companies, academic and research institutions and government and other publicly funded agencies. We may not be able to successfully compete with current and future competitors. Many of our competitors have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do. This may allow these competitors to discover or to develop products in advance of us or of our customers.

Some of our competitors, especially academic and research institutions and government and other publicly funded agencies, may provide for free services or data similar to the services and data that we provide for a fee. Moreover, our competitors may obtain patent and other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or commercialize our discoveries, products and services. If we are unable to compete successfully against existing or potential competitors, we may never achieve profitability.

Our management may be unable to address future growth.

We anticipate that if we experience a period of growth in our customer base and market opportunities, a period of significant expansion of the Company will be required. This expansion will place a significant strain on our management, operational and financial resources. To manage future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.

If our business does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share or recover investments in our technologies.

Technologies in the biomarker industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors, limit our growth and damage our reputation and business.

The future success of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial selection. However, our business or others may make rapid technological developments, which could result in our technologies, products or services becoming obsolete before we are able to recover the expenses incurred to develop them.

If our business cannot enter into strategic alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services or continue to commercialize existing products or services.

We may be unable to maintain or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.

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

We may not be able to find business partners to develop and commercialize product candidates derived from our discovery activities.

Our strategy for the development and commercialization of diagnostic biomarkers and therapeutic proteins depends on the formation of collaborations or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities. We cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.

Our dependence on licensing and other collaboration agreements makes us heavily dependent on our collaborators.

We may not be able to enter into licensing or other collaboration agreements on terms favorable to us. Even if we do enter into an acceptable agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities. In most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.

In addition, we may not be able to control the amount and timing of resources our collaborators devote to the product candidates, and collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s business strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us. Furthermore, our rights in any intellectual property or products that may result from our collaborations may depend on additional investment of money that we may not be able or willing to make.

Potential or future collaborators may also pursue alternative technologies, including those of our competitors. Disputes may arise with respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be significantly harmed.

If we are unable to hire or retain key personnel or sufficient qualified employees, we may be unable to successfully operate our business.

Our business is highly dependent upon the continued services of our executive team and board of directors. While certain members of our senior management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability to compete. The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse effect upon our business, as well as our relationships with our potential customers. We do not carry key person life insurance on any member of our senior management. Furthermore, competition for highly qualified personnel in our industry and geographic locations is intense. Our business would be seriously harmed if we were unable to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.

We may not be able to employ and retain experienced scientists, mathematicians and management.

Technologies in our industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected revenues and earnings.

If our access to tissue samples or to genomic data or other information is restricted, or if this data is faulty, our business may suffer.

To continue to build our technologies and related products and services, we need access to third parties’ scientific and other data and information. We also need access to normal and diseased human and other tissue samples and biological materials. We may not be able to obtain or maintain such access on commercially acceptable terms. Some of our suppliers could become our competitors and discontinue selling supplies to us. Information and data from these suppliers could contain errors or defects that could corrupt our databases or the results of our analysis of the information and data. In addition, government regulation in the United States and other countries could result in restricted access to, or use of, human and other tissue samples. Although currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may suffer.

The sales cycle for some of our products and services is lengthy. We expend substantial funds and management effort with no assurance of successfully selling our products or services.

Our ability to obtain customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate their efforts in drug and diagnostics discovery. Our ability to obtain customers for our therapeutic or diagnostic product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed therapeutic or diagnostic purposes. Our ability to obtain customers will also depend on our ability to successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is typically lengthy and may take more than 12 months.

An inability to protect our proprietary data, technology or products may harm our competitive position.

If we do not adequately protect the intellectual property underlying our products and services, competitors may be able to develop and market the same or similar products and services. This would erode our competitive advantage. In addition, the laws of some countries do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.

We use contractual obligations to protect a significant portion of our confidential and proprietary information and know-how. This includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and services. However, these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how. Customers, employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.

In addition, we have applied for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have discovered using these technologies. We plan to continue to apply for patents covering parts of our technologies and discoveries as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will be upheld if challenged. The patent positions of biotechnology related companies are generally uncertain and involve complex legal and factual questions. Legislative changes and/or changes in the examination guidelines of governmental patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In contrast to recent court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed to identifying relationships between small groups of genes and proteins that are useful for diagnosing, treating and prognosing diseases and other conditions.

Our success depends in large part on our ability to patent our discoveries.

Our success depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize. We face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries. We cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered or may discover in the future. Our patent applications may conflict with prior applications of third parties or with prior publications. They may not result in issued patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any competitive advantages. U.S. and other patent applications ordinarily remain confidential for 18 months from the date of filing. As a result, patent applications that we file which we believe are novel at the time of filing may be determined at a later stage to be inconsistent with earlier applications. Additionally, the scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our competitive position. Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to the business. The issuance of a patent is not conclusive as to its validity or its enforceability. Federal courts may invalidate these patents or find them unenforceable. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies. Any of these events could materially harm our business or financial results.

Litigation or other proceedings or third party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or require us to spend time and money to modify our operations.

The technology that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies engage in other genomic-related businesses. If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies and products, we could experience serious harm. If litigation is commenced against us alleging intellectual property rights infringement or if we initiate a lawsuit to assert claims of infringement, protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others, we may incur significant costs in litigating, whether or not we prevail in such litigation. Regardless of the outcome, litigation can be very costly. These costs would also include diversion of management and technical personnel to defend us against third parties or to enforce our patents (once issued) or other rights against others. In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could prevent us from being able to further develop or commercialize. Further, these lawsuits could result in the invalidation or limitation of the scope of our patents or the forfeiture of the rights associated with these patents. This could also result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. If we are not able to obtain these licenses at a reasonable cost, if at all, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products, all of which could negatively impact our business, financial condition or results of operations. Moreover, during the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be negative, which could cause the market price of our common stock to decline.

Many of our services will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation and licensing. If we are found to be infringing the intellectual property of others, we could be required to stop the infringing activity, or we may be required to design around or license the intellectual property in question. If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our services, which could result in reduced revenue.

We may acquire or make strategic investments in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.

If opportunities arise, we may consider making acquisitions of or investments in businesses, technologies, services or products. These activities may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material adverse effect on the operating results of our business. Moreover, even if we acquire complementary businesses or technologies, we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.

Difficulties in integrating an acquired business or managing an investment could disrupt our business, distract our management and employees and increase our expenses. Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating to intangible assets. Sizable acquisitions or investments may also divert senior management from focusing on our existing business plan. Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders may be diluted, which could affect the market price of our stock.

We have identified a material weakness in our internal accounting control over financial reporting.

Management has concluded that our internal control over financial reporting was not effective as of December 31, 2011. Our Chief Executive Officer, who is also serving as our Principal Financial Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.

All internal control systems no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Risks Related to Our Industry

There are many risks of failure in the development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development and commercialization of these types of products.

Risks of failure are inseparable from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These risks include the possibility that any of these products will:

■	be found to be toxic or ineffective;
■	fail to receive necessary regulatory approvals;
■	be difficult or impossible to manufacture on a large scale;
■	be uneconomical to market;
■	fail to be developed prior to the successful marketing of similar products by competitors; or
■	be impossible to market because they infringe on the proprietary rights of third parties or compete with superior products marketed by third parties.

We are dependent on our customers’ commercialization of our discoveries. Any of these risks could materially harm our business and financial results.

The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.

The trend towards consolidation in the pharmaceutical and biotechnology industries may negatively affect us in several ways. These consolidations usually involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources and technological capabilities, thus strengthening competition in the industry. In addition, continued consolidation may result in fewer customers for our products and services.

We may be subject to product liability claims if products derived from our products or services harm people.

We may be held liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise unsuitable. These risks are inherent in the development of genomics, functional genomics and pharmaceutical products. If we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total assets. In addition, such claims could cause us to incur substantial costs, divert management’s attention from executing the Company’s business plan and subject us to negative publicity even if we prevail in our defense of such claims.

Our business and the products developed by our collaborators may be subject to governmental regulation.

New therapeutic or diagnostic products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process in the United States and other countries before it can be marketed. It may be several years, or longer, before any therapy or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues. This may delay or prevent us from becoming profitable. Changes in policies of regulatory bodies in the United States and in other countries could increase the delay for each new therapy and diagnostic products.

Even if regulatory approval is obtained, a product on the market and its manufacturer are subject to continuing review. Discovery of previously unknown problems with a product may result in withdrawal of the product from the market.

Although we intend to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities to file regulatory approval applications and generally direct the regulatory review process. We cannot be certain whether they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all. If they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until clearance can be obtained, if at all. This will in turn reduce our chances of receiving various forms of payments, including those relating to sales of marketed therapeutic or diagnostic products by them.

The law applicable to us may change in a manner that negatively affects our prospects.

We must comply with various legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements, which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, would result in adverse consequences.

If ethical and other concerns surrounding the use of genetic information become widespread, there may be less demand for our products and services.

Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to various conditions, particularly for those that have no known cure. Any of these scenarios could reduce the potential markets for our technologies in the field of predictive drug response, which could materially harm our business and financial results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2. PROPERTIES

We do not own any real property. We lease 664 square feet of office space in Savannah, Georgia, pursuant to a twelve month lease dated November 28, 2011. We currently pay base rent in the amount of $1,217 per month. Our principal executive office is located at 2 East Bryan Street, Suite 1500, Savannah, Georgia 31401, and our telephone number is (912) 443-1987. Our principal executive office is well maintained and suitable for the business conducted in this location.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. (REMOVED AND RESERVED)

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the OTC Bulletin Board under the symbol HDVY. The range of closing prices for our common stock, as reported on Bloomberg.com during each quarter of the last two fiscal years was as follows. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

	High		Low
First Quarter 2010	$	0.36	$	0.18
Second Quarter 2010	$	0.21	$	0.12
Third Quarter 2010	$	0.22	$	0.14
Fourth Quarter 2010	$	0.20	$	0.14

	High		Low
First Quarter 2011	$	0.17	$	0.09
Second Quarter 2011	$	0.15	$	0.10
Third Quarter 2011	$	0.09	$	0.06
Fourth Quarter 2011	$	0.13	$	0.06

Holders of Record

As of March 30, 2012, there were approximately 293 holders of record of our common stock.

Dividends

We have not paid any cash dividends for commons shares since inception, and we do not anticipate paying any in the foreseeable future on common shares. We intend to retain future earnings, if any, to support the development and growth or our business. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends. If the Company were to pay dividends, the holders of the shares of the Series B Preferred Stock have a right to first receive, or simultaneously receive, a dividend on each outstanding share of Series B Preferred Stock on an as if converted to common stock basis. The holders of the shares of Series B Preferred Stock also accrue a 10% annual dividend and have a special dividend right to receive 15% of the Company’s net revenues, subject to certain limitations.

Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend on any share of its Capital Stock if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends. The Company has had limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital investment in order to fund operations. Accordingly, depending on the Company’s financial condition, it may not be able to pay any dividends on any shares of its Capital Stock. For further discussion of the Company’s liquidity and capital resources, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth the equity securities of the Company which are authorized for issuance to employees, directors and consultants in consideration for services as of December 31, 2011:

Equity Compensation Plan Information

	A		B		C

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A)
Equity compensation plans approved by security holders		-		-		-
Equity compensation plans not approved by security holders		16,750,000	$	.11		-
Total		16,750,000	$	.11		-

Sales of Unregistered Securities

On April 7, 2011, the Board of Directors of the Company appointed Maher Albitar, M.D., the Company’s Chief Medical Officer, to the Board of Directors. In connection with such appointment, the Company granted Dr. Albitar an option to purchase 1,500,000 shares of common stock. The options 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 terminated 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.

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.

ITEM 6. SELECTED FINANCIAL DATA

As a smaller reporting company, we are not required to provide the information required by this item.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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.

Operational Activities

The Company actively markets its technology and related developmental expertise to 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 in the future.

Licensing and Commercialization Developments

In addition to the urine-based prostate cancer test, we anticipate developing a plasma based prostate cancer test with NeoGenomics.

Melanoma

Flow Cytometry, Cytogenetics, and Pap smear Imaging

The Company is working with NeoGenomics for development, validation and commercialization of this new image analysis tool for cytogenetic analysis. We anticipate working with NeoGenomics to develop, validate and commercialize the LDT version of this computer assisted Pap smear interpretation tool.

NeoGenomics

On January 6, 2012, we entered into the NeoGenomics License pursuant to which we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. See “Item 1. Business -- Subsequent Events – NeoGenomics License.”

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.

Intellectual Property Developments

In January 2011, the European Patent Office published the notice of grant of the Company’s SVM-RFE patent in the European Patent Bulletin. This new European patent was validated in, and is now enforceable in, Germany, France, Ireland, Switzerland, and the U.K. These countries were selected based on the number of published uses the SVM-RFE method in both academic and commercial applications. In February 2011, the U.S. Patent and Trademark Office issued a new patent to the Company for a method of unsupervised, cluster-based recognition of patterns in characters or words within speech or written text. Prior to issuance of this patent, the Company filed a new continuation application including claims directed to identification of gene co-regulation patterns using unsupervised clustering. Such a method is useful when some of the data is missing labels. Also in February, the U.S. Patent and Trademark Office issued a notice of allowance for the Company’s patent application with claims directed to an SVM-based method for evaluating features within data that have been identified as significant by another feature selection method. This method is particularly useful in flagging false positives within classification results performed by other methods. The application, which had been filed in September 2010, issued in June 2011.

In March 2011, the Canadian Intellectual Property Office issued a new patent to the Company covering pre-processing and post-processing of data for enhancing knowledge discovered using a support vector machine. The European Patent Office granted the European counterpart of this application the following August. The new European patent was validated in Germany, Ireland, Switzerland, and the U.K., with the validation countries being selected based on widespread use of SVMs. In April 2011, the U.S. Patent and Trademark Office issued a new patent to the Company based on its third continuation application covering a web-based data mining system that utilizes multiple support vector machine models to analyze combinations of biological data of many different types to produce ranked lists of genes or proteins that may be used as biomarkers. The claims of this application were filed to seek expanded coverage of the previously-patented system. Prior to issuance of this new patent, a fourth continuation application was filed with claims covering a method for visualizing feature ranking of a subset of features. This method may be particularly beneficial in identifying alternative genes that could be more easily detected in a laboratory or clinical setting compared to genes that, although they had been highly ranked using SVM-RFE, might be less practical for testing. This application was issued as a patent in February 2012.

In June 2011, the Canadian Intellectual Property Office issued a notice of allowance of the Company’s application covering computer-aided image analysis using SVMs. Counterpart patents have already issued in the U.S. (two patents), Australia, Europe and Japan.

In July 2011, the U.S. Patent and Trademark Office issued a notice of allowance of the application that the Company had filed the preceding November with claims copied from the Intel patent that claimed RFE-SVM. This application was filed to provoke an interference proceeding against the Intel patent in the U.S. Patent and Trademark Office. The allowance was later withdrawn in conjunction with an evaluation of the prospective interference. The Company is now awaiting action by the Interference Division to initiate the interference proceedings.

In August 2011, the U.S. Patent and Trademark Office issued a new patent to the Company covering a group of genes which exhibit reduced expression relative to normal in the presence of prostate cancer. The claimed biomarkers may be of particular value in tests using DNA methylation methods. Prior to issuance of the new patent a continuation application was filed to seek coverage of additional biomarker combinations that were disclosed in the application. Also in August, the Canadian Intellectual Property Office issued a patent covering to the Company covering a method of enhancing knowledge discovered from multiple data sets using multiple support vector machines.

In September 2011, the Canadian Intellectual Property Office issued a notice of allowance of the Company’s second Canadian application covering the SVM-RFE method. Also in September, the U.S. Patent and Trademark Office issued a notice of allowance of the continuation application that had been filed in December 2010 with further expanded claims to the SVM-RFE method. The claims of this application correspond to those granted in the European application that had been granted in January 2011. After issuance of the allowed applications, the Company will hold nine U.S and foreign patents covering SVM-RFE. This new U.S. patent issued in January 2012.

With the issuance of these patents, the Company now holds the exclusive rights to 59 issued and 31 pending U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.

The Company launched its new academic/research institution licensing program in the third quarter of 2011 by sending letters to a test group of universities and research institutions that have reported the use of SVMs in academic journals and conference proceedings. The letters received mixed responses, with some of the contacted institutions being receptive to entering into license negotiations. The Company’s proposed terms include a paid-up license against past and future infringement of the Company’s patented technology for a nominal one-time license administrative fee, plus a reach-through provision with royalties payable on any revenue generated when the results of the SVM usage are licensed for commercialization. To date, more than 50 U.S. institutions have been identified as using SVM-RFE and SVM through review of academic publications, with many of the reported uses relating to biomarker discovery and medical diagnostics.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Revenue

Since December 31, 2005, the Company has received cash from revenue generating activities totaling $2,018,661, which consists of recorded revenue of $1,186,797 through December 31, 2011 and deferred revenue yet to be recognized of $831,864 at December 31, 2011.

For the year ended December 31, 2011, revenue was $118,954 compared with $396,176 in revenue for the year ended December 31, 2010. Revenue is recognized for licensing and development fees over the period earned, which in most cases is the length of the license. The revenue recognized in 2010 was primarily the recognition of revenue of $291,662 associated with our breast cancer development agreement with Quest, which revenue did not recur in 2011. As of December 31, 2011, the Company had deferred revenue of $831,864, which includes cash received but not yet recognized as revenue. Deferred revenue was $945,898 at December 31, 2010. The decrease is due to the revenue recognition of existing license agreements.

Operating and Other Expenses

Amortization expense, which is the amortization of costs of acquiring or filing of patents over their estimated useful lives, was $262,719 for the twelve months ended December 31, 2011 and 2010.

Professional and consulting fees totaled $629,501 for 2011 compared with $776,122 for 2010. These fees consist primarily of patent filing and maintenance costs, professional fees, and accounting fees. The reduction was due to lower patent filing and maintenance costs and a reduction in professional services provided to the Company.

Legal fees totaled $221,113 during the period ending December 31, 2011, and were $1,012,500 during the same period 2010. The decrease was primarily due to the Company resolving legal issues during 2010 and not having similar issues in 2011.

Research and development fees were $250,971 during 2011 and $435,249 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 $1,135,189 for the twelve months ended December 31, 2011 was lower than the $1,763,101 reported for the comparable period of 2010. The decrease is attributed to a reduction in full time employees and lower bonus amounts earned.

Other general and administrative expenses decreased from $929,954 in 2010 to $634,452 in 2011. This decrease principally was due to a reduction in travel costs and management’s success in reducing other costs.

Loss from Operations

The loss from operations for the twelve months ended December 31, 2011 was $3,014,991 compared to a loss from operations of $4,783,469 for the prior year. The reduced loss was due to the decrease in expenses as previously discussed.

Other Income and Expense

Interest income was $6,385 for the twelve months ended December 31, 2011, compared to $15,501 in 2010. Interest income decreased because the Company had less cash on hand to invest throughout the 2011 period.

The Company negotiated a settlement in 2011 with a service provider regarding their fees. As a result, the Company realized an increase in other income and expense (gain on payables restructuring) of $483,658 in 2011. For the period ending December 31, 2010, there were no gains on payable restructuring.

The Company entered into settlement agreements in 2010 with the lead purchaser in the Company’s 2007 Private Placement and with R. Scott Tobin in the amounts of $1,877,647 and $396,779 respectively. As a result, the Company realized a settlement charge of $2,274,426 in 2010. For the period ending December 31, 2011 there were no similar settlement charges.

Net Loss

The net loss for the twelve months ended December 31, 2011 was $2,524,948 compared to a net loss of $7,042,553 for the twelve months ended December 31, 2010. The reduced loss was due to the overall decrease in expenses as previously discussed. Specifically, the decreases in legal fees and settlement costs were primarily responsible for the reduction in net loss in 2011.

Net loss per share attributable to common shareholders was $0.01 and $0.03 for twelve months ended December 31, 2011 and 2010, respectfully.

Liquidity and Capital Resources

At December 31, 2011, the Company had $890,326 in cash and cash equivalents and total current liabilities of $534,707. Additionally, during the first quarter of 2012, we received $1,000,000 in cash as well as 1,360,000 shares of NeoGenomic common stock (the “NeoGenomics Stock”) with a market value of $1,945,000 (based on the closing price of $1.43 per share on January 6, 2012, the closing date of transaction) as part of the NeoGenomics License (see Note J to our Financial Statements in Item 8 below). Although theNeoGenomics Stock will become free of transfer restrictions in July 2012 (assuming NeoGenomics continues to comply with Rule 144 current public information requirements), the number of shares and amount of cash we can generate from the sale of NeoGenomics Stock is subject to fluctuating market and price conditions. Nonetheless, as a result of the NeoGenomics transaction, we believe we have sufficient resources to meet all of our current obligations.

The following table summarizes the due dates of our contractual obligations.

	Total		1 Year Or Less		More Than 1 Year
Accrued Compensation	$	16,000	$	16,000	$	-
Office Lease		14,604		14,604	$	-
Total	$	30,604	$	30,604	$	-

The Company has relied primarily on equity and debt financing for liquidity. The Company produced sales, licensing, and developmental revenue starting in late 2005 and must increase revenues in order to generate sufficient cash to continue operations. The Company’s plan to have sufficient cash to support operations is comprised of 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, as further described above. In the meantime, the Company has implemented a cash conservation program.

Cash Flow from Operating Activities

Cash flow from operating activities was reflective and closely aligned with the net loss within the Statement of Operations.

Cash flow from operating activities included a gain on payable restructuring of $483,658 which is not expected to continue in future periods.

Cash Flow from Financing Activities

During the twelve month period ending December 31, 2011, there were no warrants exercised in relation to the Company’s stock. In 2010, the Company received $5,852,333 from the exercise of warrants to purchase the Company’s common stock. These warrants were primarily related to a 2007 private placement.

The Series B Preferred Stock accrues dividends at the rate of 10% of the Series B Original Issue Price per year, which shall be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Dividends have been accrued for the Series B Preferred Stock in the amount of $316,064 as of December 31, 2011 and $189,819 as of December 31, 2010.

During 2011, two Series B holders requested, and the Company complied with the Series B holders’ request to convert 1,437,500 Series B Preferred Stock to Common Stock. The Company also paid the Series B holders who chose to convert, their portion of the accrued special dividend and accrued dividend. The total paid to these Series B holders was $19,729.

During the second quarter of 2010, the Company paid $99,614 to the Series B holders for the special dividend. Also, during the fourth quarter of 2010, one Series B holder requested, and the Company complied with the Series B holder’s request to convert 625,000 Series B Preferred Stock to Common Stock. The Company also paid the Series B holder who chose to convert, their portion of the accrued special dividend and accrued dividend. The total paid to this Series B holder was $5,758.

The Company has relied primarily on equity funding plus debt financing for liquidity. While the Company has produced limited revenue, it must continue to do so in order to generate sufficient cash to continue operations. The Company believes it currently has sufficient cash to support operations until it is able to generate revenue through royalty payments from licensing deals from its significant patent portfolio and development fees for providing services related to those patents. In addition, the Company has been and continues to be in meaningful discussions with a variety of parties related to the commercialization efforts discussed above, which if successful, may result in significant revenue. Should it prove necessary, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings.

Critical Accounting Policies, Estimates and Assumptions

We consider our accounting policies related to revenue recognition, impairment of intangible assets and stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which represents the future undiscounted cash flows to be derived from the intangible asset, and estimating the useful life and volatility of stock awards granted. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

Valuation of intangible and other long-lived assets.

We assess the carrying value of intangible and other long-lived assets at least annually, which requires us to make assumptions and judgments regarding the future cash flows related to these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of events or changes in circumstances such as:

■	the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
■	loss of legal ownership or title to the asset;
■	significant changes in our strategic business objectives and utilization of the asset(s); and
■	the impact of significant negative industry or economic trends.

If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.

Revenue Recognition

We recognize revenue principally from license and royalty fees for intellectual property and from development agreements with research partners. Each element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; (iv) collectability is reasonably assured, and (v) both title and the risks and rewards of ownership are transferred to the buyer. We are required to make significant estimates involving our recognition of revenue from license and royalty fees. Our license and royalty fees revenue estimates depend upon our interpretation of the specific terms of each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period of time to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received. Changes to these assumptions or market conditions could cause changes in revenues.

Share-Based Compensation

Share-based compensation expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and we employ different assumptions in future periods, the compensation expense that we record could differ significantly from what we have recorded in the current period.

For share-based awards, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise, and post-employment termination behavior; however, due to the limited history of our Company, such data is limited. We estimated the expected life will be substantially longer than the vesting period given the early stage nature of our operations and accordingly have used the contractual life as the expected term. Our estimated volatility was derived using our historical stock price volatility. We have never declared or paid any cash dividends on our Common Stock and currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. For criteria share based award with vesting contingent upon meeting a market condition, we also make assumptions as to the probability of the market condition being met.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this item.

ITEM 8. FINANCIAL STATEMENTS

The following consolidated financial statements are included beginning on page F-1 of this report:

	Page
Report of Independent Registered Public Accounting Firm	F-1
Balance Sheets as of December 31, 2011 and 2010	F-2
Statements of Operations for the years ended December 31, 2011 and 2010	F-3
Statements of Stockholders’ Equity for the years ended December 31, 2011 and 2010	F-4
Statements of Cash Flows for the years ended December 31, 2011 and 2010	F-5
Notes to Consolidated Financial Statements	F-6

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Management’s Annual Report on Internal Controls over Financial Reporting

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.

Based on this evaluation, under that framework, management has concluded that our internal control over financial reporting was not effective as of December 31, 2011. Our Chief Executive Officer, who is also serving as our Principal Financial Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes In Internal Controls over Financial Reporting

No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Our executive officers, directors are:

Name	Age	Position
Stephen D. Barnhill, M.D.	53	Chairman and Chief Executive Officer , Principal Financial Officer and Principle Accounting Officer
Joseph McKenzie, D.V.M.	61	Lead Director
Maher Albitar, M.D.	49	Director
Curtis G. Anderson Herbert A. Fritsche, Ph.D. John A. Norris Ramananda Madyastha, M.D., Ph.D.	70 70 64 74	Director Senior Vice President, Chief Science Officer and Director Senior Vice President, Chief Regulatory and Technology Officer Senior Vice President, Research and Development
Hong Zhang, Ph.D.	49	Senior Vice President, Computational Medicine

In addition to the information presented in the biographical details below regarding each director’s specific experience, qualifications, attributes and skills that led us to conclude that he should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Company and our Board.

Stephen D. Barnhill, M.D., is currently our Chief Executive Officer and has been since September 2003. He also serves as our Chairman of the Board and has been a member of the Board of Directors since November 2003. On March 28, 2011, Dr. Barnhill was appointed our Principal Financial Officer and Principal Accounting Officer on an interim basis. He is a physician trained in laboratory medicine and clinical pathology. He has developed and used artificial intelligence, pattern-recognition, and computational techniques in Medicine, Genomics, Proteomics, Diagnostics and Drug Discovery.

Dr. Barnhill is or has been a Fellow of the American College of Physician Inventors, the American College of International Physicians, the American Medical Association, the American College of Physician Executives, the American Association of Artificial Intelligence, the American College of Managed Care Medicine, the Association of Clinical Scientists, the American Society of Contemporary Medicine and Surgery, the American Society of Law, Medicine and Ethics, the Southern Medical Society, the American Federation for Clinical Research, and the National Federation of Catholic Physicians.

Dr. Barnhill founded the Barnhill Clinical Laboratories in 1988 and served as Chairman, CEO, President and Medical Director. This laboratory was later acquired by Corning-Metpath in 1989 and after the acquisition he served as Medical Director of this clinical laboratory until 1992.

In 1992, Dr. Barnhill founded National Medical Specialty Laboratories and served as Chairman, CEO, President, and Medical Director. This research laboratory was founded to utilize pattern-recognition mathematics and artificial intelligence techniques in cancer diagnosis. Dr. Barnhill is an inventor on some of the very first patents issued by the United States Patent and Trademark Office for the use of neural networks in medicine. This company was acquired by Horus Therapeutics, a New York based pharmaceutical company. Dr. Barnhill served as Executive Vice-President and Chairman of the Scientific Advisory Board for Horus Therapeutics until 1998. Johnson & Johnson later acquired the Horus patents invented by Dr. Barnhill.

In 1999, Dr. Barnhill founded and served as Chairman, President and CEO of Barnhill BioInformatics, Inc., which later became Barnhill Genomics, Inc. and BioWulf Technologies, LLC and raised over $13.5 million in private placement funding. The primary focus of these companies was to utilize the next generation of artificial intelligence and pattern-recognition techniques, known as support vector machines, to identify genes that cause cancer. Dr. Barnhill is the sole inventor on the very first patents issued by the United States Patent and Trademark Office for the use of support vector machines in medicine. From the summer of 2000 until he organized The Barnhill Group L.L.C. in the summer of 2003, Dr. Barnhill was not engaged in any professional activities as the result of a non-compete agreement signed by Dr. Barnhill when he left the employment of Barnhill Genomics, Inc.

Joseph McKenzie, D.V.M., has been a member of the Board of Directors since April 2009. Dr. McKenzie practices veterinary medicine, having founded and managed the multi-million dollar growth of multiple veterinary practices in Georgia, South Carolina and Florida. He also created and built the community “drug dog” program, which over the years and across the nation has become a generally accepted and highly successful weapon against drug smuggling at the port of Savannah as well as in the community at large. Dr. McKenzie has also been honored for his years of valuable service on the Board of Directors of the Georgia Veterinary Medical Association. Dr. McKenzie holds a degree in chemistry from Armstrong Atlantic State University, where he was recently honored as its most outstanding alumnus. He also holds a doctorate in veterinary science from the University of Georgia’s College of Veterinary Medicine.

Maher Albitar, M.D., has been a member of the Board of Directors since April 2011. Dr. Albitar is currently the Chief Medical Officer for NeoGenomics. From 2003 to 2010, Dr. Albitar served as the Medical Director for Hematopathology and Oncology, and Chief of Research and Development, for Quest Diagnostics Nichols Institute. He was responsible for the development of numerous tests and inventions in molecular testing and plasma-based testing. From 1991 through 2003, Dr. Albitar held various faculty positions at The University of Texas MD Anderson Cancer Center where he also served as Director of the Leukemia and Molecular Laboratory in the Division of Laboratory Medicine and Pathology Medicine. He was also a tenured full professor in the Departments of Leukemia and Pathology.

Dr. Albitar attended medical school at Damascus Medical School, completed his Anatomic Pathology and Clinical Pathology Residency at Brown University, and completed a Hematopathology Fellowship as well as a post-doctoral training in Genetics at the Howard Hughes Medical Institute at the University of Pennsylvania. He holds numerous patents and has authored more than 300 peer-reviewed papers, book chapters, and review articles. Dr. Albitar has served on a variety of medical editorial review boards and is a frequent guest speaker at national and international conferences.

Curtis G. Anderson, has been a member of the Board of Directors since October 2010. Mr. Anderson served in the U.S. Navy and then spent 19 years in the corporate and investment banking field. Mr. Anderson founded Anderson Capital Corporation, a privately held venture capital company, in 1986. Mr. Anderson also served as president and chief operating officer for the Kuhlman Corporation in Savannah, Georgia from 1994 to 1999. Mr. Anderson earned his bachelor’s degree and his master’s in business administration from the University of Washington. Mr. Anderson served in the U.S. Navy from 1963 to 1965. He is active in numerous charitable and civic organizations.

The following sets forth the biographical information for our executive officers:

Herbert A. Fritsche, Ph.D., was appointed as our Senior Vice President, Chief Science Officer on September 1, 2010. He also serves as a member of our Board of Directors since July 2011. Prior to these positions, Dr. Fritsche was Professor of Laboratory Medicine and Chief of the Clinical Chemistry Section at The University of Texas, M.D. Anderson Cancer Center in Houston, Texas. During his 42 years at M.D. Anderson Cancer Center, Dr. Fritsche has focused his research activities on the development and validation of cancer diagnostics. Dr. Fritsche has participated in the validation and FDA clearance process for every commercial serum tumor marker product currently in use in the United States. Dr. Fritsche has served as President of the Clinical Ligand Assay Society (CLAS) and on various committees for both the CLAS and the American Association for Clinical Chemistry (AACC). He is a fellow of the National Academy of Clinical Biochemistry and was awarded the National Award for Contributions in Education by the AACC; the Outstanding Clinical Chemist Award by the Texas Section, AACC; a Dean’s Excellence Award for the University of Texas Graduate School of Biomedical Science; a Distinguished Scientist Award from the CLAS; and the Johnson and Johnson Award for Outstanding Research and Contributions to Clinical Biochemistry from the National Academy of Clinical Biochemistry. Dr. Fritsche currently serves on the Expert Panel for developing Tumor Marker Practice Guidelines for the American Society of Clinical Oncology, and the Laboratory Practice Guidelines Committee for the National Academy of Clinical Biochemistry. In addition, he serves on the Editorial Board of six international scientific journals. Dr. Fritsche serves as a consultant/advisor to the National Cancer Institute and for some major international diagnostic companies and biotech start-up companies. Dr. Fritsche has published over 170 peered reviewed scientific papers, invited articles and book chapters. Dr. Fritsche holds 3 patents and has 2 other applications on file. He has lectured extensively for many years at international and national meetings.

John A. Norris, has served as our Senior Vice President, Chief Regulatory and Technology Officer since October 2010. Mr. Norris served as our Chief Operating Officer from September 2009 to October 2010. Mr. Norris also serves as Chairman of Norris Capital. From March 2007 to November 2008, Mr. Norris served as the Chairman and CEO of Needlebot, Inc. From May 1999 to June 2005 Mr. Norris served as the Chairman and CEO of Coprindm Corporation (now Decision View). Mr. Norris is a former Principal Deputy Commissioner and COO of the US FDA in Washington, DC, where he led the last major FDA reform initiative, from May 1984 to May 1988. This work was performed under the overall leadership and guidance of President Ronald Reagan, HHS Secretaries Margaret Heckler and Dr. Otis Bowen, FDA Commissioner Dr. Frank Young, Senator Orrin Hatch and Congressman Paul Rogers. Mr. Norris also taught healthcare policy and management (including healthcare-reform, Medicare-reform, healthcare-IT-reform, personalized-medicine-reform, and FDA-reform) at Harvard University, and was founder and faculty-editor-in-chief of the American Journal of Law, Medicine, and Ethics, a leading academic publication covering healthcare policy, law, regulation, management, finance, and ethics. Mr. Norris has been the CEO to a significant number of successful life-sciences and healthcare-IT companies and has served on the boards of and/or consulted with dozens more. For example, he helped the billion dollar turn-around of the laser eye surgery company, Summit Technology. Additionally, he has consulted with senior executives of leading companies, including Pfizer, Merck, Johnson & Johnson, and Glaxo Smithkline, among others.

Ramananda Madyastha, M.D., Ph.D., has served as our Senior Vice President of Research and Development since 2003. Dr. Madyastha is the Recipient of the Raja Ravi Sher Singh of Kalsia Memorial Cancer Research Prize for outstanding contributions in the field of cancer research. He served on the Faculty of the Basic and Clinical Immunology and Microbiology Department at the Medical University of South Carolina. Dr. Madyastha has been an active member of the American Association of Cancer Research for more than 20 years. In addition, he is Board Certified by the American Board of Managed Care Medicine and is a licensed Clinical Laboratory Director. Dr. Madyastha was involved in the development of the first neural network based diagnostic tests for prostate and ovarian cancer.

Hong Zhang, Ph.D., has been our Senior Vice President, Computational Medicine since 2004. As visiting faculty at Johns Hopkins University, Dr. Zhang lectured at the Center for Biomarker Discovery on Bioinformatics: Peak Detection Methods for Mass Spectral Data. Currently a Yamacraw Associate Professor at Armstrong Atlantic University, Dr. Zhang was the Vice President and CIO for a neural network and computer assisted medical diagnostic systems company that employs neural network and mathematical/statistical preprocessing techniques. In this position, Dr. Zhang was involved in digital image processing and pattern recognition for medical image processing as well as software design and programming for support vector machine applications. Dr. Zhang was a professor in the Department of Mathematical Sciences at Purdue University from 1989 to 1996. He has held numerous academic positions, including Adjunct Associate Professor, Associate Professor with Tenure, and Assistant Professor. He was a visiting Associate Professor in 1995 in the Department of Biometry at the Medical University of South Carolina.

Throughout his academic career, Dr. Zhang has consulted on many software and analytical development projects for Union Switch and Signal, Inc., General Electric Company, and the Department of Pharmacology at the University of Pittsburgh. Dr. Zhang has published numerous articles on the use of neural networks in the detection of cancers. He has been published in more than twenty medical and technical journals. Dr. Zhang received a Ph.D., Mathematics at the University of Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh, 1986, M.S.E.E., Electrical Engineering, University of Pittsburgh, 1984, B.S., Computer Science, Fudan University, 1982. Dr. Zhang’s numerous awards and honors include: National Cancer Institute SBIR Grant, 1999, 2000; Purdue Research Foundation Summer Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew Mellon Fellowship, 1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place, Fudan University Mathematics Competition, 1979.

The directors named above will serve until the next annual meeting of our stockholders. Absent an employment agreement, officers hold their positions at the pleasure of the Board of Directors

Nominees for Directors

In filling vacancies and otherwise identifying candidates for our Board of Directors, we seek individuals who will be able to guide our operations based on their business experience, both past and present, or their education. Responsibility for our operations is centralized within management.

Shareholder Nomination of Candidates for Board of Directors

Nominations of persons for election to the Board of Directors may be made by any shareholder who complies with the notice provisions set forth in the Bylaws, which provides that a shareholder’s notice must be delivered or mailed and received at the principal executive office of the Company not less than thirty days before the date of the meeting; provided, however, that in the event that less than forty days’ notice or prior public disclosure of the date is given, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which the public announcement of the meeting date was made. Such shareholder’s notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person as required to be disclosed in solicitation of proxies for election of Directors made in compliance with Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person’s written consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the books of the Company, of such shareholder and (B) the class and number of shares of the Company’s capital stock that are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Executive Vice President of the Company that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Company unless nominated in accordance with the applicable provisions of the Company’s Bylaws.

Code of Ethics

The Company has adopted a Code of Ethics applicable to our Chief Executive Officer and Principal Financial Officer. This Code of Ethics is posted on our website at www.healthdiscoverycorp.com. The Code of Ethics is also available without charge upon request directed to Investor Relations, Health Discovery Corporation, 2 East Bryan Street, Suite 1500, Savannah, Georgia 31401. The Company intends to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth various elements of compensation for our Named Executive Officers for each of the last two fiscal years:

Name and Principal Position	Year	Salary ($)		Bonus ($)		All Other Compensation ($)			Total
Stephen D. Barnhill, M.D. Chief Executive Officer	2011	$	300,000	$	4,534	$	37,203	(1)	$	341,737
	2010	$	300,000	$	184,173	$	33,202	(1)	$	517,375

Herbert A. Fritsche, Ph.D	2011	$	250,000		-		-		$	250,000
Senior Vice President, Chief Science Officer	2010	$	83,333		-		-		$	83,333

John A. Norris	2011	$	120,000	$	30,000	$	1,186	(1)	$	151,186
Senior Vice President, Chief Regulatory and Technology Officer	2010	$	120,000		-	$	22,000	(1)	$	142,000

Ramananda Madyastha, M.D., Ph.D	2011	$	120,000		-		-		$	120,000
Senior Vice President, Research and Development	2010	$	120,000		-		-		$	120,000

Hong Zhang, Ph.D.	2011	$	130,000		-		-		$	130,000
Senior Vice President, Computational Medicine	2010	$	130,000		-		-		$	130,000

(1)	Represents health insurance premiums and reimbursed healthcare costs.

Employment Agreements

Dr. Stephen D. Barnhill

On August 15, 2008, the Company entered into an employment agreement with Dr. Stephen D. Barnhill for his employment as Chief Executive Officer. The employment agreement had a term of two years and terminated on August 14, 2010; however the Company and Dr. Barnhill have agreed to extend the terms and conditions of the terminated employment agreement on a month-to-month basis while the parties negotiate the terms of a new employment agreement. Under the terms of the employment agreement, Dr. Barnhill received a one-time retention signing bonus of $50,000 and his annual base salary is $300,000. Dr. Barnhill is also be eligible to receive a cash bonus equal to 10% of the Company’s revenue received during the term of the employment agreement; but such cash bonus could not exceed 300% of his annual base salary. Dr. Barnhill was also granted an option to purchase an aggregate of 6,000,000 shares of the Company’s Common Stock at an exercise price of $0.08; 5,000,000 of which have vested while the remaining 1,000,000 did not vest and were forfeited as a result of the Company’s common stock not achieving a minimum share price.

Dr. Barnhill is eligible to be reimbursed monthly for reasonable and necessary business expenses and to receive health insurance benefits and other benefits maintained by us for our executives. Dr. Barnhill will be entitled to twenty paid vacation days during the calendar year. If Dr. Barnhill’s employment is terminated for Cause, as that term is defined in the employment agreement, or if Dr. Barnhill terminates the employment agreement for Good Reason, as that term is defined in the employment agreement, then Dr. Barnhill will receive as severance the amount of his base salary for the remainder of the term and an amount equal to the actual cost of ninety days of his COBRA premium payments. If the employment agreement is terminated for any other reason than for Cause or for Good Reason, Dr. Barnhill is not eligible to receive severance. The employment agreement also generally provides that Dr. Barnhill will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of 12 months following termination of employment.

The Compensation Committee of the Board of Directors is in discussion with Dr. Barnhill about entering into a new written employment agreement.

Herbert A. Fritsche, Ph.D.

On September 1, 2010, the Company entered into a two-year employment agreement with Herbert A. Fristche, Ph.D. pursuant to which Dr. Fristche will serve as Senior Vice President, Chief Science Officer. Under the employment agreement, the Company pays Dr. Fristche an annual salary of $250,000. Dr. Fristche also is entitled to participate in a mutually acceptable equity and bonus program.

John A. Norris

On September 15, 2009, HDC employed Mr. John A. Norris as Chief Operating Officer. On October 20, 2010, Mr. Norris was appointed Senior Vice President, Chief Regulatory and Technology Officer. Mr. Norris is employed under the original terms of his employment dated September 15, 2009 on a month to month basis.

Outstanding Equity Awards at Fiscal Year-End

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable (1)		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price		Option Expiration Date
Stephen Barnhill M.D.		5,000,000		-	$	0.08	August 15, 2018
Herbert A. Fritsche, Ph.D.		-		-		-	-
John A. Norris		-		-		-	-
Ramananda Madyastha, M.D., Ph.D.		-		-		-	-
Hong Zhang, Ph.D.		-		-		-	-

(1) All options are fully vested and exercisable.

Director Compensation

Outside directors are paid $1.00 each year. Each outside director was awarded options in 2011 to purchase shares of the Company’s Common Stock as described below.

Name	Fees Earned or Paid in Cash ($)		Option Awards ($)		Total ($)
Stephen D. Barnhill, M.D.	$	0.00	$	0.00	$	0.00
Joseph McKenzie, D.V.M. (1)	$	1.00	$	21,717	$	21,718
Maher Albitar, M.D. (2)	$	1.00	$	32,571	$	32,572
Curtis G. Anderson (2)	$	1.00	$	32,571	$	32,572
Herbert A. Fritsche, Ph.D.	$	0.00	$	0.00	$	0.00

(1)	500,000 options granted in 2009 are fully vested as of December 31, 2011. 1,000,000 options granted in 2011, 250,000 were vested as of December 31, 2011. An additional 250,000 options vest in April 2012.
(2)	1,500,000 options granted in 2011, 250,000 were vested as of December 31, 2011. An additional 250,000 options vest in April 2012.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information concerning the beneficial ownership of our Common Stock as of March 30, 2012 by (i) each of our directors, (ii) each of our executive officers, (iii) each person who is known to us to be the beneficial owner of more than five percent of our Common Stock, and (iv) all of our executive officers and directors as a group. At March 30, 2012, there were 231,299,810 shares of Common Stock outstanding and 17,340,175 shares of Series B Preferred Stock outstanding. At March 30, 2012 there were no shares of Series A Preferred Stock outstanding. Unless otherwise noted, the address of each beneficial owner below is 2 East Bryan Street, Suite 1500, Savannah, Georgia 31401.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Owner			Percent of Class (1)
Stephen D. Barnhill, M.D., Chairman and Chief Executive Officer		12,940,000	(2)		5.5	%
Joseph McKenzie, D.V.M., Lead Director		6,556,225	(3)		2.8	%
Maher Albitar, M.D., Director		500,000	(4)		*
Curtis G. Anderson, Director		10,381,985	(4)		4.5	%
Herbert A. Fritsche, Ph.D., Senior Vice President, Chief Science Officer, and Director		-			*
William F. Quirk, Jr. 10 Walter Witch Crossing Savannah, Georgia 31411		24,092,460	(5)		10.3	%
Prime Mover Capital Partners, L.P. 54 Thompson Street 4th Floor New York, New York 10012		15,569,706	(6)		6.5	%
All executive officers and directors as a group (8 persons)		30,378,210	(7)		12.7	%

	*	Less than 1%
	(1)	The percentage assumes the exercise by the stockholder or group named in each row of all options or warrants for the purchase of our Common Stock held by such stockholder or group and exercisable within 60 days as of March 30, 2012.
	(2)	Includes 5,000,000 currently exercisable options. The shares are held by The Barnhill Group LLC, which is wholly owned by Dr. Barnhill.
	(3)	Consists of 1,000,000 currently exercisable options.
	(4)	Consist of 500,000 currently exercisable options.
	(5)	Includes 3,333,334 currently exercisable warrants.
	(6)	Includes 6,875,000 currently exercisable warrants.
	(7)	The executive officers that are not listed above currently do not own any shares or options that are exercisable within 60 days of March 30, 2012.

For Equity Compensation Plan Information Table, see “Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The Company has adopted the independence standards promulgated by the New York Stock Exchange and has made a determination that, as of March 30, 2012, the following directors are independent according to those standards: Dr. McKenzie and Mr. Anderson. Dr. Albitar, Dr. Barnhill, and Dr. Fritsche are not independent according to the New York Stock Exchange independence standards.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the fees billed by Hancock Askew & Co. LLP for 2011 and 2010.

	2011		2010

Audit Fees	$	82,500	$	74,615

Audit-Related Fees	$	12,385	$	23,333

Tax Fees	$	8,225	$	7,250

Sub-Total	$	103,110	$	105,198

All Other Fees	$	-	$	25,895

Total Fees	$	103,110	$	131,093

Audit Fees. This category includes aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements for the years ended December 31, 2011 and 2010, review for the annual report on Form 10-K and for the limited reviews of quarterly condensed financial statements (Forms 10-Q) included in periodic reports filed with the Securities and Exchange Commission during 2011 and 2010, including out of pocket expenses.

Audit-Related Fees. This category includes fees billed for professional services associated with consultation concerning financial accounting and reporting standards.

Tax Fees. This category includes the aggregate fees billed or to be billed for tax services for the years ended December 31, 2011 and 2010.

All Other Fees. This category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered to the Company.

The services provided by the independent auditors were pre-approved by the Board of Directors of the Company to the extent required under applicable law. The Board of Directors of the Company requires pre-approval of all audit and allowable non-audit services.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	Documents filed as part of this Report:

(1)	Financial Statements - all financial statements of the Company as set forth under Item 8 of this Report.

(2)	Financial Statement Schedules - As a smaller reporting company we are not required to provide the information required by this item.

(3)

Exhibits

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

3.1	Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 8-K filed July 18, 2007.

3.1(a)	Articles of Amendment to Articles of Incorporation. Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed October 10, 2007.

3.1(b)	Articles of Amendment to Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1(b) to Form 10-K filed March 31, 2009.

3.1(c)	Amended and Restated Articles of Amendment to Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 10-Q filed November 16, 2009.

3.2	By-Laws. Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July 18, 2007.

4.1	Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 to Registration Statement on Form SB-2, filed June 4, 2001.

4.1(a)	Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30, 2004.

4.1(b)	Copy of Specimen Certificate for shares of Series A Preferred Stock. Registrant incorporates by reference Exhibit 4.1(b) to Form 10-K filed March 31, 2008.

4.1(c)	Copy of Specimen Certificate for shares of Series B Preferred Stock. Registrant incorporates by reference Exhibit 4.1(c) to Form 10-K filed March 31, 2009.

10.1	Employment Agreement between the Company and Stephen Barnhill dated August 15, 2008. Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed August 18, 2008. *

10.2	License Agreement between the Company and Clarient, Inc. dated July 31, 2007. Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 3, 2007.

10.2(a)	Amendment to License Agreement between Health Discovery Corporation and Clarient, Inc., dated January 13, 2009. Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed February 5, 2009.

10.3	Securities Purchase Agreement by and among the Company, the Cash Purchasers and the Lender Purchasers. Registrant incorporates by reference Exhibit 10.11 to Form 10-QSB filed August 16, 2007.

10.4	Form of Warrant to Cash and Lender Purchasers. Registrant incorporates by reference Exhibit 10.14 to Form 10-K filed March 31, 2008.

10.5	Amendment to Stock Purchase Warrant with Dr. Richard Caruso. Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 18, 2008.

10.6	Option Award to Stephen D. Barnhill, M.D. dated August 15, 2008. Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed August 18, 2008. *

10.7	License and Development Agreement by and between the Company and DCL Medical Laboratories, LLC dated July 14, 2008. Registrant incorporates by reference Exhibit 10.17 to Registration Statement on Form S-1 filed September 19, 2008.


10.7(a)	Mutual Termination and Release Agreement between the Company and DCL Medical Laboratories, LLC dated January 28, 2010. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010

10.8	License Agreement between Health Discovery Corporation and Abbott Molecular Inc., dated January 30, 2009. Registrant incorporates by reference Exhibit 10.13 to Form 10-K filed March 31, 2009. **

10.9	License Agreement between Health Discovery Corporation and Quest Diagnostics Incorporated, dated January 30, 2009. Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed February 5, 2009. **

10.10	Form of Securities Purchase Agreement. Registrant incorporates by reference Exhibit 10.15 to Form 10-K filed March 31, 2009.

10.10(a)	Form of Amendment to Securities Purchase Agreement. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

10.10(b)	Form of Amended and Restated Securities Purchase Agreement. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

10.11	Employment Agreement between the Company and R. Scott Tobin dated as of April 15, 2009. Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed May 5, 2009. *

10.12	Option Award to R. Scott Tobin dated April 29, 2009. Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed May 5, 2009. *

10.13	Employment Agreement between the Company and John Norris dated as of September 1, 2009. Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed September 18, 2009. *

10.14	Secured Promissory Note by the Company in favor of Joseph McKenzie. Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed July 7, 2009. *

10.15	Form of 2009 Option Award. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010. *

10.16	Form of 2010 Option Award. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010 *

10.17	Development Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

10.18	Licensing Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

10.19	License Agreement, dated August 22, 2008, by and between the Company and Smart Personalized Medicine, LLC. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

10.20	Amendment to License Agreement by and between the Company and Smart Personalized Medicine, LLC dated as of March 11, 2010. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

10.21	Employment Agreement by and between the Company and Thomas Gallagher effective December 1, 2009. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010. *

10.22	Settlement and Release Agreement with Prime Mover Capital Partners, LP. Registrant incorporates by reference Exhibit 10.1 to Form 10-Q/A filed on February 11, 2011.

10.23	Settlement and Release Agreement between the Company and William F. Quirk, Jr. dated as of September 22, 2010. Registrant incorporates by reference Exhibit 10.2 to Form 10-Q filed on November 15, 2010.

10.24	Release Agreement between the Company and R. Scott Tobin dated October 2, 2010. Registrant incorporates by reference Exhibit 10.24 to Registration Statement on Form S-1 (333-171120) filed on December 8, 2010.

10.25	Employment Agreement Extension by and between the Company and Stephen D. Barnhill, M.D., effective March 28, 2011. *

10.26	First Amendment to Abbott License Agreement. Registrant incorporates by reference Exhibit 10.26 to Form 10-Q filed on November 14, 2011.

10.27	License Agreement, dated January 6, 2012, between Health Discovery Corporation and NeoGenomics Laboratories, Inc. Registrant incorporates by reference Exhibit 10.27 to Form 8-K filed on January 12, 2012.

21.1	Subsidiaries of the Registrant. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.

23.1	Consent of Hancock Askew & Co. LLP. Filed herewith.

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

32.1	Section 1350 Certification of Chief Executive Officer and Principal Financial Officer. Filed herewith.
* Management contract or compensatory plan or arrangement ** Portions of exhibit have been omitted pursuant to a confidentially agreement

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HEALTH DISCOVERY CORPORATION

	By:	/s/ Stephen D. Barnhill, M.D.
		Chairman, Chief Executive Officer,
		Principal Financial Officer, and Principal Accounting Officer

	Date: March 30, 2012

Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date

/s/ Stephen D. Barnhill M.D.	Chairman, Chief Executive Officer,	March 30, 2012
Stephen D. Barnhill M.D.	Principal Financial Officer, and Principal Accounting Officer

/s/ Joseph McKenzie, D.V.M.	Lead Director	March 30, 2012
Joseph McKenzie, D.V.M.

	Director	March 30, 2012
Maher Albitar, M.D.

	Director	March 30, 2012
Curtis G. Anderson
/s/ Herbert A. Fritsche, Ph.D.	Senior Vice President, Chief Science Officer, and Director	March 30, 2012
Herbert A. Fritsche, Ph.D.

Hancock Askew & Co LLP

100 Riverview Drive

Savannah, Georgia 31404

Report of Independent Registered Public Accounting Firm

Board of Directors

Health Discovery Corporation

Savannah, Georgia

We have audited the accompanying balance sheets of Health Discovery Corporation as of December 31, 2011 and 2010, the related statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the management of Health Discovery Corporation. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health Discovery Corporation as of December 31, 2011 and 2010 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

/s/ Hancock Askew & Co., LLP

Savannah, Georgia

March 29, 2012

F-1

HEALTH DISCOVERY CORPORATION

Balance Sheets

December 31, 2011 and 2010


	December 31,			December 31,
	2011			2010
Assets

Current Assets
Cash	$	890,326		$	3,295,630
Accounts Receivable		397			334,988
Prepaid Expenses and Other Assets		45,350			172,034

Total Current Assets		936,073			3,802,652

Equipment, Less Accumulated Depreciation of $37,061 and $27,397		17,609			23,475

Other Assets
Deferred Charges		44,764			51,740
Patents, Less Accumulated Amortization of $1,993,851 and $1,731,132		1,991,943			2,254,662

Total Assets	$	2,990,389		$	6,132,529

Liabilities and Stockholders’ Equity

Current Liabilities
Accounts Payable - Trade	$	378,154		$	820,126
Accrued Liabilities		21,500			122,152
Dividends Payable - Special		21,018			22,760
Deferred Revenue		114,035			114,035

Total Current Liabilities		534,707			1,079,073

Long Term Liabilities
Deferred Revenue		717,829			831,863
Dividends Payable		316,064			189,819

Total Liabilities		1,568,600			2,100,755

Stockholders’ Equity
Series B Preferred Stock, Convertible, 20,625,000 Shares Authorized
17,340,175 Issued and Outstanding December 31, 2011 18,777,675 Issued and Outstanding December 31, 2010		1,490,015			1,490,015
Common Stock, No Par Value, 300,000,000 Shares Authorized
231,299,810 Shares Issued and Outstanding December 31, 2011
229,475,747 Shares Issued and Outstanding December 31, 2010		25,508,691			25,593,728
Accumulated Deficit		(25,576,917	)		(23,051,969	)

Total Stockholders’ Equity		1,421,789			4,031,774

Total Liabilities and Stockholders’ Equity	$	2,990,389		$	6,132,529

See accompanying notes to financial statements

F-2

HEALTH DISCOVERY CORPORATION

Statement of Operations

For the Years Ended December 31, 2011 and 2010

	2011			2010
Revenues:
Licensing & Development	$	118,954		$	396,176

Operating Expenses:
Amortization		262,719			262,719
Professional and Consulting Fees		629,501			776,122
Legal Fees		221,113			1,012,500
Research & Development Fees		250,971			435,249
Compensation		1,135,189			1,763,101
Other General and Administrative Expenses		634,452			929,954
Total Operating Expenses		3,133,945			5,179,645

Loss From Operations		(3,014,991	)		(4,783,469	)

Other Income (Expense)
Interest Income		6,385			15,501
Gain on Payables Restructuring (Note G)		483,658			-
Settlement Charges		-			(2,274,426	)
Interest Expense		-			(159	)
Total Other Income (Expense)		490,043			(2,259,084	)

Net Loss		(2,524,948	)		(7,042,553	)

Preferred Stock Dividends		144,231			312,502

Loss Attributable to Common Shareholders	$	(2,669,179	)	$	(7,355,055	)

Weighted Average Outstanding Shares		230,268,377			215,644,462
Loss Per Share (basic and diluted)
	$	(0.01	)	$	(0.03	)

See accompanying notes to financial statements.

F-3

HEALTH DISCOVERY CORPORATION

Statements of Changes in Stockholders’ Equity

For the Year Ended December 31, 2011 and 2010

Issued and Outstanding

	Preferred Shares A		Preferred Shares B			Common Shares		Preferred Amount A		Preferred Amount B		Common Amount			Accumulated Deficit			Total Stockholders’ Equity
Balance – January 1, 2010		-		19,402,675			194,462,847		-	$	1,490,015	$	18,807,239		$	(16,009,416	)	$	4,287,838
Shares issued pursuant upon the exercise of warrants		-		-			34,387,900		-		-		5,852,333			-			5,852,333
Share-based Compensation and Expense		-					-		-		-		1,236,665			-			1,236,665
Series B Preferred Stock Exchanged for Common Stock		-		(625,000	)		625,000		-		-		-			-			-
Series B Preferred Stock Dividends		-		-			-		-		-		(302,509	)					(302,509	)

Net Loss		-					-		-		-		-			(7,042,553	)		(7,042,553	)
Balance - December 31, 2010		-		18,777,675			229,475,747		-	$	1,490,015	$	25,593,728		$	(23,051,969	)	$	4,031,774
Shares issued pursuant upon the exercise of options		-		-			386,563		-		-		(82,172	)		-			(30,776	)
Share-based Compensation and Expense		-					-		-		-		141,366			-			89,970
Series B Preferred Stock Exchanged for Common Stock		-		(1,437,500	)		1,437,500		-		-		-			-			-
Series B Preferred Stock Dividends		-		-			-		-		-		(144,231	)					(144,231	)

Net Loss		-					-		-		-		-			(2,524,948	)		(2,524,948	)
Balance - December 31, 2011		-		17,340,175			231,299,810		-	$	1,490,015	$	25,508,691		$	(25,576,917	)	$	1,421,789

See accompanying notes to financial statements.

F-4

HEALTH DISCOVERY CORPORATION

Statements of Cash Flows

For the Years Ended December 31, 2011 and 2010

	2011			2010
Cash Flows From Operating Activities
Net Loss	$	(2,524,948	)	$	(7,042,553	)
Adjustments to Reconcile Net Loss to Net Cash
Used for Operating Activities:
Stock-based Compensation (Note H)		(82,172	)		383,605
Services Exchanged for Warrants and Options		141,366			128,248
Gain on Payables Restructing (Note G)		(483,658	)		-
Warrants Issued to Shareholders (Note H)		-			724,811
Decrease (Increase) in Deferred Charges		6,975			(41,405	)
Depreciation and Amortization		272,384			270,865
Decrease (Increase) in Accounts Receivable		334,591			(221,638	)
Decrease in Recoverable Development Costs		96,249			-
(Decrease) Increase in Deferred Revenue		(114,034	)		401,963
Decrease (Increase) in Prepaid Expenses and Other Assets		30,436			(157,314	)
Increase in Accounts Payable – Trade		41,686			249,288
Decrease in Accrued Liabilities		(100,652	)		(91,968	)
Net Cash Used by Operating Activities		(2,381,777	)		(5,396,098	)

Cash Flows (Used by) Provided by Investing Activities:
Redemption of Certificates of Deposit		-			622,358
Purchase of Equipment		(3,798	)		(6,953	)
Net Cash (Used by) Provided by Investing Activities		(3,798	)		615,405

Cash Flows (Used by) Provided by Financing Activities:
Proceeds from the Exercise of Warrants		-			5,852,333
Dividends Paid		(19,729	)		(104,922	)
Net Cash (Used by) Provided by Financing Activities		(19,729	)		5,747,411

Net (Decrease) Increase in Cash		(2,405,304	)		966,718

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

Cash, at End of Period	$	890,326		$	3,295,630

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

See accompanying notes to financial statements.

F-5

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements

Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

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 to sell to third parties.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Accordingly, actual results could differ from those estimates. Significant estimates that are particularly susceptible to change in the near-term include the valuation of share-based compensation and consideration for services and the recoverability of the patents.

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.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and monies invested in overnight funds with financial institutions.

ACCOUNTS RECEIVABLE

Trade accounts receivable for licensing fees and development services are recorded at net contract value based upon the written agreement with the customer. In certain cases, accounts receivable may include royalties’ receivable from customers based upon those customers estimated sales of the products or diagnostic tests containing patented processes and technologies. The Company considers amounts past due based on the related terms of the agreement and reviews its exposure to amounts receivable based upon collection history and specific customer credit analysis. The Company provides an allowance for doubtful amounts if collectability is no longer reasonably assured. As of December 31, 2011 and 2010, all amounts receivable were from a single customer and a Grant from the Department of Health and Human Services. All amounts receivable are considered fully collectable and no allowance for doubtful accounts was recorded.

PROPERTY AND EQUIPMENT

Property and equipment, which consists of office furniture, computer equipment and leasehold improvements, are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.

F-6

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

PATENTS

Initial costs paid to purchase patents are capitalized and amortized using the straight line method over the remaining life of the patent. The Company capitalizes the external costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, 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 capitalized costs 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. As of December 31, 2011, the Company does not believe there has been any impairment of its intangible assets.

INVESTMENTS

The Company uses the equity method to account for its equity investments in ventures for which it has 50% or less ownership and the ability to exercise significant influence over operating and financial policies, but does not control. The Company uses the cost method to account for its investments in companies that it does not control and for which it does not have the ability to exercise significant influence over operating and financial policies.

INCOME TAXES

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax benefits and expenses or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income for the years in which those temporary differences are expected to be recovered or settled.

In the event the future tax consequences of differences between the financial reporting bases and tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is made. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the probability of realizing the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.

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.

Valuation and Amortization Method – The fair value awards of stock which 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 which 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 expectations of future employee behavior. Given the lack of historical data and early-stage nature of the Company’s operations, the expected term is estimated as the contractual term.

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.

F-7

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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.

RESEARCH AND DEVELOPMENT EXPENSE

The Company’s research and development costs consist of expenses paid to consultants and external laboratories and related primarily to the costs of co-development studies, clinical trials, and projects undertaken in 2011. The R&D costs were $250,971 in 2011 and $435,249 in 2010.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses. The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short term nature of such items.

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 cause an anti-dilutive result and therefore is not presented. Potentially dilutive shares at December 31, 2011 and 2010 include options and warrants outstanding of 30,291,667 and 36,625,000 at December 31, 2011 and 2010, respectively.

CONCENTRATIONS OF CREDIT RISK

The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per account. From time-to-time, the Company’s cash balances exceed the amount insured by the FDIC. Management believes the risk of loss of cash balances in excess of the insured limit to be low.

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.

F-8

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note B – DEFERRED REVENUE

Deferred revenue represents the unearned portion of payments received in advance for licensing or service agreements.

The Company received $500,000 in cash in March 2010 in connection with a licensing agreement completed in the first quarter of 2010. Deferred revenue of $500,000 was recorded and will be recognized as income over the estimated remaining term of the underlying patents of approximately 8 years, subject to the terms of the license agreement.

The Company treats the incremental direct cost of revenue arrangements, which consists principally of employee bonuses, as deferred charges. As such incremental direct costs are amortized to expense using the straight-line method over the same term as the revenue arrangement, subject to the terms of the license agreement.

The Company had total unearned revenue of $831,864 as of December 31, 2011. The long term portion of unearned revenue represents the remaining term of the agreements or the remaining lives of the underlying patents, as appropriate, and ranges from one to fifteen years.

The expected future annual recognition of revenue is as follows:

For the Year Ending December 31,

2012	$	114,035
2013		114,035
2014		114,035
2015		114,035
2016		114,035
Thereafter		261,689
Total expected future annual amortization	$	831,864

Note C – PATENTS

The Company has acquired a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery.

The cost and accumulated amortization for 2011 and 2010 are as follows:

	2011			2010
Cost of Patents	$	3,985,794		$	3,985,794
Accumulated Amortization		(1,993,851	)		(1,731,132	)
Patents, Net of Amortization	$	1,991,943		$	2,254,662

Amortization charged to operations for each of the years ended December 31, 2011 and 2010 was $262,719. The weighted average remaining amortization period for patents is 8 years. Estimated amortization expense for the next five years is $262,719 per year.

F-9

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note D – INVESTMENTS

On March 27, 2007, the Company and an investment partner formed SVM Capital LLC as an equity investment for purposes of utilizing SVMs as a quantitative investment management technique. The Company owns 45% of the membership interest and has significant influence with the operation of the entity but does not have control over the entity. The Company does not have any obligation to fund or provide support to SVM Capital LLC. Accordingly, the investment is accounted for using the equity method of accounting. The Company’s initial investment was $5,000 and the license to use the SVM technology applied to financial markets. The carrying value of this investment was zero as of December 31, 2011 and December 31, 2010.

In August 2008, pursuant to a license agreement, as amended, we contributed a license to Smart Personalized Medicine, LLC (“SPM”) in return for a 20% equity interest. SPM is a company founded by a former director and current senior advisor to attempt to develop a breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. There was no financial activity in this entity in 2009. The only activity for this entity in 2010 was the Quest license and development agreements for which there was an allocation of 50% to each of HDC and the other partner. In March 2010, the Company announced a deal with Quest Diagnostics and SPM to develop breast cancer products. With respect to SPM revenues received unrelated to the arrangement with Quest Diagnostics, we will receive a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test. This royalty arrangement is addition to distributions the Company is entitled to as a result of our 20% equity interest. The Company does not have any contractual obligation to provide any funds to this venture. The net value of the investment was zero as of December 31, 2011 and December 31, 2010.

Note E – LICENSE FEES EXPENSE - LUCENT AGREEMENT

Effective September 26, 2004, the Company was assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement was associated with the patents acquired July 30, 2004. The Company agreed to pay royalty fees to Lucent in the amount of the greater of an annual fee of $10,000 or at the rate of five percent (5%) on each licensed product which is sold, leased, or put into use by the Company, until cumulative royalties equal $40,000 and at the rate of one percent (1%) subsequently. The license granted will continue for the entire unexpired term of Lucent’s patents. During both 2011 and 2010, the Company paid $10,000 in royalty fees to Lucent.

Note F – INCOME TAXES

The Company has incurred net losses since inception, and we have determined that it is more likely than not we will be unable to benefit in the future from the accumulated net operating loss. Consequently, we have not recorded any U.S. federal or state income tax expense or benefit. We have no recorded income tax provision or benefit for the fiscal years ending December 31, 2011 or 2010.

The following items comprise the Company’s net deferred tax assets (liabilities) as of December 31, 2011 and 2010.

	2011			2010
Deferred tax assets:
Net operating loss carry-forward	$	7,358,650		$	6,177,101
Deferred revenue		282,834			321,605
Contributions		169			9,001
Depreciation and amortization		3,462			3,740
Warrants and options granted		385,043			673,296

Deferred tax assets		8,030,158			7,184,743
Deferred tax liability		(10,625	)		(20,462	)
Net deferred tax assets		8,019,533			7,164,281
Less valuation allowance		(8,019,533	)		(7,164,281	)
Net deferred taxes		-			-

F-10

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note F – INCOME TAXES, continued

As of December 31, 2011, an increase in the valuation allowance of $855,252 has been recorded for the deferred tax asset, as management has determined that it is more likely than not that the deferred tax asset will not be realized.

Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax loss for the fiscal years ending December 31, 2011 and 2010 as follows:

	2011			2010
Total expense (benefit) computed by:
Applying the U.S. Federal statutory rate		(34.0	)%		(34.0	)%
State income taxes, net of federal tax benefit		(3.0	)		(3.0	)
Valuation allowance		37.0			37.0
Effective tax rate (benefit)		-			-

The Company has unused net operating loss carry-forwards of approximately $21.6 million that are available to offset future income taxes payable. The net operating losses will begin to expire in 2020.

Based in its evaluation of tax positions, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company’s evaluation was performed for all tax years which remain subject to examination and adjustment by major tax jurisdictions as of December 31, 2011.

Note G – COMMITMENTS AND CONTINGENCIES

Operating Lease

Settlements

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 gain on settlement of accounts payables of $483,658.

Note H – STOCK COMPENSATION AND EQUITY BASED PAYMENTS

Information about options and warrants outstanding for 2011 and 2010 is summarized below:

Number of Warrants and Options Issued	2011			Weighted Average Exercise Price		2010			Weighted Average Exercise Price
Outstanding beginning of year		36,625,000		$	0.16		100,615,177		$	0.16
Granted		4,000,000		$	0.12		21,875,000		$	0.22
Exchanged		-			-		(32,527,776	)	$	0.17
Exercised		(386,563	)	$	0.08		(34,387,903	)	$	0.17
Forfeited		(2,500,000	)	$	0.22		-			-
Expired un-exercised *		(7,446,770	)	$	0.13		(18,949,498	)	$	0.18
Outstanding end of the year		30,291,667		$	0.16		36,625,000		$	0.16
Exercisable December 31		27,041,667		$	0.17		34,375,000		$	0.15

*See note below regarding Mr. Tobin’s and Mr. Quirk’s Options

F-11

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note H – STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued

December 31, 2011


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

$0.08		7,750,000		5.0		7,750,000		5.0
$0.12		4,000,000		4.3		750,000		4.3
$0.13		2,500,000		0.1		2,500,000		0.1
$0.17		6,875,000		0.6		6,875,000		0.6
$0.19		2,500,000		8.8		2,500,000		8.8
$0.30		6,666,667		0.8		6,666,667		0.8
Total		30,291,667				27,041,667

As of December 31, 2011, there was approximately $260,555 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 years. The weighted average remaining life of all outstanding warrants and options at December 31, 2011 is 4.5 years. The aggregate intrinsic value of all options and warrants outstanding and exercisable as of December 31, 2011 was $636,237.

The Company entered into an award agreement on August 15, 2008 with the Chief Executive Officer granting 6,000,000 stock options. The options vest in the following increments once both the service condition, indicated by the applicable Vesting Date, and the market condition, indicated by attaining the minimum share price for any 20 consecutive trading days, are satisfied.

Vesting Date	Minimum Share Price		Number of Options

August 15, 2008	$	0.10		1,000,000

January 1, 2009	$	0.15		2,000,000

January 1, 2010	$	0.20		2,000,000

January 1, 2010	$	0.25		1,000,000

The conditions have been satisfied with respect to 5,000,000 of these stock options and 1,000,000 of these options did not vest.

The fair value of each option was $0.03 and was estimated on the date of the grant using a probability weighted fair value model similar to a lattice valuation model with the following assumptions: dividend yield at 0%, risk free interest rate of 3.50%, an expected life of 6 years, and volatility of 106.52%. The aggregate computed value of these options was $172,485 and this amount was charged as expense over the 1.4 year vesting period. Expense of $119,898 was recorded in 2009. Due to 1,000,000 of the options not vesting, the Company recognized a reduction of stock compensation expense of $28,748 in 2010 for the cost of those non vesting options.

F-12

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note H – STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued

In February 2010, Mr. D. Paul Graham was appointed to the Company’s Board of Directors. In connection with this appointment to the Company’s Board of Directors, the Company granted the Mr. Graham 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 $0.26, and expire on February 24, 2015. The fair value of each option granted was $0.205 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 2.73%, an expected life of 5 years, and volatility of 108.16%. The aggregate computed value of these options was $307,469, and this amount will be charged as an expense over the three year vesting period. In July 2011, Mr. Graham resigned from the board of directors and as a result, the option grant was cancelled.

On May 10, 2010, the Company announced the appointment of Maher Albitar, M.D., to the position of Chief Medical Officer. On August 2, 2010, the company issued Dr. Albitar an option to purchase 1,000,000 shares of common stock. The options vest in four installments of 250,000 options and have a contingent vesting criteria based upon a market condition consisting of the commercialization of four new molecular diagnostic tests. Effective April 7, 2011, Dr. Albitar and the Company terminated 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 November 2011, Mr. Tobin exercised his options per the option agreement dated April 2009 and amended in October 2010. Mr. Tobin utilized 4,113,437 of his option grant to receive 386,563 shares of common stock.

As a part of Mr. Quirk’s Settlement 2010 agreement, the first traunche of his 10,000,000 warrants expired in September 2011. As a result, 3,333,333 warrants expired un-exercised.

Stock-based expense included in the 2011 net loss consisted of $59,194 in compensatory warrants, options and stock for director options and compensation options. Stock-based expense included in the net loss for 2010 consisted of $1,236,665 for the issuance of common stock, warrants and options.

F-13

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note H – STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued

The following table reflects stock-based compensation and expense recorded in 2011 and 2010:

	2011			2010
Options and Warrants Issued for Services	$	141,366		$	128,249

Stock Based Compensation Expense		-			412,353

Warrants Issued for Settlements Expense		-			724,811

Stock Based Compensation Expense Reversal		(82,172	)		(28,748	)

Net Increase	$	59,194		$	1,236,665

During the 2010, the Company recognized $724,811 of expense attributed to warrants issued for settlements with Mr. Tobin and the lead investor in the 2007 Private Placement which was Prime Mover Capital Partners, LP. The stock based compensation expense reversal primarily relates to expense reversed for option grants that were cancelled and the expense had been previously recorded based on the estimates.

Note I - STOCKHOLDERS’ EQUITY

Series A Preferred Stock

The shares of Series A Preferred Stock were entitled to be converted by the holders into common stock by of the Company at any time without the payment of additional consideration. The Series A Preferred Stock had to be converted into common stock of the Company when the trading value of the common stock of the Company exceeded $0.12 per share for a period of 30 consecutive calendar days. The holder of the Series A Preferred Stock had the right to receive dividends, the right to vote on matters presented to the common stockholders, and a preference right in the event of liquidation in an amount equal to $594,975. The Company had a right to redeem the shares of Series A Preferred Stock upon the fifth anniversary of the issue date at a redemption price of $0.08 per share if not previously converted. On November 4, 2009, as a result of the trading value of the Company’s common stock exceeding $0.12 per share for a period of 30 consecutive calendar days, all outstanding shares of Series A Preferred Stock converted by its terms into 7,437,184 shares of common stock.

Series B Preferred Stock

During the first quarter of 2009 the Board of Directors authorized the designation of Series B Preferred Stock. The number of shares originally constituting the Series B Preferred Stock was 13,750,000; however, during the fourth quarter of 2009 the Board of Directors authorized the increase in the number of shares constituting the Series B Preferred Stock to 20,625,000. The Company sold to individual investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses, in 2009. The Series B Preferred Stock has not been registered under either federal or state securities laws and must be held until a registration statement covering such securities is declared effective by the Securities and Exchange Commission or an applicable exemption applies.

The Series B Preferred Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding warrants and options. The Shares of Series B Preferred Stock must be converted into Common Stock of the Company upon the demand by the Company after the fifth anniversary of the date of issuance.

F-14

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note I – STOCKHOLDERS’ EQUITY, continued

Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock remain outstanding, the Company pay the holders of the Series B Preferred Stock a special dividend equal to 15% of Company Net Revenue collected beginning with the Original Issue Date and ending on the date the Series B Preferred Stock cease to be outstanding (the “Cash Bonus”). Company Net Revenue will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC (each a “Revenue Contract”), reduced by the amount of any out-of-pocket costs or expenses that are directly related to obtaining, negotiating or documenting the Revenue Contracts and the performance of such Revenue Contracts, but shall not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company. At any time following the Original Issue Date, the Company may satisfy the special dividend right in its entirety if the aggregate payments made to the Series B Holders are equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock. The maximum 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 $21,018 and $22,760 have been accrued for Series B Preferred Stock special dividend as of December 31, 2011 and December 31, 2010, respectfully.

No dividend payment will be made if, after the payment of such dividend, the Company would not be able to pay its debts as they become due in the usual course of business, or the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved, to satisfy the preferential rights upon the dissolution to shareholders whose preferential rights are superior to those receiving the dividend.

Note J – SUBSEQUENT EVENTS

On January 6, 2012, Health Discovery Corporation (“HDC”), and NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly-owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”), entered into a Master License Agreement (the “License Agreement”). Pursuant to the terms of the License Agreement, HDC granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to HDC’s “Licensed Patents” and “Licensed Know-How” (as defined in the License Agreement) to, among other things, use, develop, make, have made, sell, offer to sell, modify, and commercially exploit “Licensed Uses” (as defined in the License Agreement”) and “Licensed Products” (as defined in the License Agreement), in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs (as defined in the “License Agreement”) or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer (collectively with certain other qualifications as defined in the License Agreement, the “Field” or “Field of Use”).

F-15

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note J – SUBSEQUENT EVENTS, continued

HDC’s pre-existing licenses, including with Quest Diagnostics Incorporated and Smart Personalized Medicine, LLC relating to breast cancer, and commitments regarding the Letter of Intent to form a joint venture, Retinalyze, LLC relating to cancer of the retina, remain in effect. Moreover, HDC retains all rights to in-vitro diagnostic (IVD) test kit development.

Upon execution of the License Agreement, NeoGenomics Laboratories paid HDC $1,000,000 in cash and NeoGenomics issued to HDC 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012. In addition, the License Agreement provides for milestone payments to HDC, in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the License Agreement. Milestone payments would be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics Laboratories up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics Laboratories, HDC will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on Net Revenue (as defined in the License Agreement) generated from all Licensed Uses except for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of Net Revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics Laboratories derives from any sublicensing arrangements it may put in place for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System.

NeoGenomics Laboratories has agreed to use its best efforts to commercialize certain products within one year of the date of the License Agreement, subject to two one-year extensions per product if needed, including (and as defined in the License Agreement), a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetics Interpretation System”, and a “Flow Cytometry Interpretation System” (collectively, the “Initial Licensed Products”).

If NeoGenomics Laboratories has not generated $5.0 million of net revenue from products, services and sublicensing arrangements pursuant to the License Agreement within five years of the effective date of the License Agreement, HDC may, at its option, revoke the exclusivity with respect to any one or more of the Initial Licensed Products, subject to certain conditions.

Unless sooner terminated pursuant to its terms, the License Agreement will remain in effect until the expiration of the last of the patents licensed under the License Agreement and the license for certain products related to a specific patent will extend for an additional one year after the expiration of such patent.

The effectiveness of the License Agreement is contingent upon the execution of an employment or other agreement between NeoGenomics Laboratories and Maher Albitar, M.D. and consulting agreements between NeoGenomics Laboratories and each of Dr. Stephen Barnhill, Dr. Herbert Fritsche, Dr. Isabelle Guyon, and Dr. Hong Zhang.

The Company announced the launch of Retinalyze Analytics, to assist Ophthalmologists and Optometrists with the Detection of Macular Degeneration, at the Heart of America Convention geared for primary eye care practitioners.

Retinalyze Analytics will initially be used for age-related macular degeneration (“AMD”), a progressive eye disease affecting more than 15 million Americans, with over 200,000 new cases diagnosed each year. AMD is the leading cause of blindness in adults 55 years and older which can result in severe visual loss because it affects the macula portion of the eye, where the sharpest central vision occurs.

F-16

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note J – SUBSEQUENT EVENTS, continued

In February 2012, the Company announced the release of MelApp, the first SVM-based image analysis mobile app for melanoma risk assessment, for Android™ devices. As a result, health-conscious consumers can easily learn about melanoma and identify areas on their skin which may need attention from a specialist, anytime, anywhere with their iPhone, iPod Touch and iPad, as well as Android smartphone.

First launched July 2011 for iPhone, MelApp uses highly sophisticated patent protected mathematical algorithms and image based pattern recognition technology to analyze an uploaded image. The app was validated using an image database licensed from Johns Hopkins University Medical Center and uses a device’s camera feature to deliver a risk analysis of user’s photographed skin lesions within seconds. In addition, MelApp can use the smartphone’s GPS to refer users to physicians specializing in the diagnosis and treatment of melanoma for proper medical diagnosis and treatment.

The launch of MelApp for Android allows the Company to extend the availability of this easy to use, inexpensive and potentially life-saving app to the more than 46 percent of the smart phone market that use Android devices, according to Nielsen.

On March 23, 2012, John Hadden resigned from his appointment as Senior Vice President with the Company to pursue other opportunities. Mr. Hadden’s decision to discontinue his relationship with the Company was not the result of any disagreements with the Company over operations, policies or practices.

Note K – COMMITMENTS AND CONTINGENCIES

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.

F-17

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