HEALTH DISCOVERY CORP - Quarter Report: 2010 March (Form 10-Q)

t68088_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2010

Transition report under Section 13 or 15(d) of the Exchange Act

For the transaction period from _____________ to _____________

Commission file number 333-62216

HEALTH DISCOVERY CORPORATION (Exact name of registrant as specified in its charter)

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

2 East Bryan Street, Suite #601 Savannah, Georgia 31401 (Address of principal executive offices)

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



(Former name, former address and former fiscal year, if changed since the last report)

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

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

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

	Large Accelerated Filer o	Non-Accelerated Filer o

		(do not check if a smaller reporting company)

	Accelerated Filer o	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

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

Class:	Outstanding as of May 13, 2010

Common Stock, no par value	210,723,486

Series A Preferred Stock	0

Series B Preferred Stock	19,402,675

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION			1

	Item 1.	Financial Statements	1

		Balance Sheet	1

		Statements of Operations	2

		Statements of Cash Flows	3

		Notes to Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

PART II -- OTHER INFORMATION			16

	Item 4T.	Controls and Procedures.	17

	Item 5.	Other Information.	17

	Item 6.	Exhibits.	18

SIGNATURES			19

iii

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTH DISCOVERY CORPORATION

Balance Sheet

Assets
	March 31,			December
	2010 (unaudited)			31, 2009
Current Assets
Cash	$	3,877,565			2,328,912
Certificates of Deposit		1,303,501			622,358
Accounts Receivable		541,666			112,500
Prepaid Expenses and Other Assets		90,841			15,569
Total Current Assets		5,813,573			3,079,339

Equipment, Less Accumulated Depreciation of $21,233 and $19,251		27,849			24,667

Other Assets
Deferred Charges		56,973			10,336
Patents, Less Accumulated Amortization of $1,534,092 and $1,468,412		2,451,702			2,517,382

Total Assets	$	8,350,097			5,631,724

Liabilities and Stockholders’ Equity

Current Liabilities
Accounts Payable – Trade	$	541,073			570,837
Accrued Liabilities		393,442			214,122
Dividends Payable		76,435			-
Deferred Revenue		75,520			39,375

Total Current Liabilities		1,086,470			824,334

Deferred Revenue – Long Term		955,903			504,560
Dividends Payable		78,296			14,993

Total Liabilities		2,120,669			1,343,887

Commitments and Contingencies (Note H)

Stockholders’ Equity

Series B Preferred Stock, Convertible, 20,625,000 Shares Authorized, 19,402,675 Issued and Outstanding		1,490,015			1,490,015
Common Stock, No Par Value, 300,000,000 Shares Authorized 210,723,486 Shares Issued and Outstanding March 31, 2010 and 194,462,847 Shares Issued and Outstanding December 31, 2009		21,761,823			18,807,239
Accumulated Deficit		(17,022,410	)		(16,009,417	)
Total Stockholders’ Equity		6,220,428			4,287,837

Total Liabilities and Stockholders' Equity	$	8,350,097			5,631,724

See accompanying notes to financial statements.

HEALTH DISCOVERY CORPORATION

Statements of Operations

(unaudited)

	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2010			2009
Revenues:
Licensing	$	54,178		$	16,690

Operating Expenses:
Amortization		65,680			65,680
Professional and Consulting Fees		350,182			280,718
Compensation		397,487			167,889
Other General and Administrative Expenses		257,869			61,188
Total Operating Expenses		1,071,218			575,475

Loss From Operations		(1,017,040	)		(558,785	)

Other Income (Expense)
Interest Income		4,206			1,641
Interest Expense		(159	)		(314	)
Total Other Income (Expense)		4,047			1,327

Net Loss	$	(1,012,993	)	$	(557,458	)

Preferred stock dividends	$	139,738			-

Loss attributable to common shareholders	$	(1,152,731	)	$	(557,458	)



Weighted Average Outstanding Shares		199,543,994			169,522,590

Loss Per Share (basic and diluted)	$	(.01	)	$	(.00	)

See accompanying notes to financial statements.

HEALTH DISCOVERY CORPORATION

Statements of Cash Flows

(unaudited)

For the Three Months Ended March 31, 2010 and 2009

	Three Months			Three Months
	Ended			Ended
Cash Flows From Operating Activities	March 31, 2010			March 31, 2009
Net Loss	$	(1,012,993	)	$	(557,458	)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Stock-based Compensation		21,312			58,340
Services Exchanged for Warrants		33,488			38,186
Depreciation and Amortization		67,642			67,119

Increase in Accounts Receivable		(429,166	)		-
Increase in Deferred Charges		(46,636	)		(26,212	)
(Increase) Decrease in Interest Receivable		(363	)		151
Increase in Deferred Revenue		487,488			133,310
(Increase) Decrease in Prepaid Expenses and Other Assets		(74,910	)		10,965
Increase (Decrease) in Accounts Payable – Trade		(29,764	)		149,192
Increase (Decrease) in Accrued Liabilities		179,320			(36,638	)
Net Cash Used by Operating Activities		(804,582	)		(163,045	)

Cash Flows From Investing Activities:
Purchase of Certificates of Deposit		(681,143	)		-
Purchase of Equipment		(5,144	)		(2,465	)
Net Cash Used by Investing Activities		(686,287	)		(2,465	)

Cash Flows From Financing Activities:
Proceeds from Sales of Preferred B Stock		-			250,000
Proceeds from the Exercise of Warrants		3,039,522			-
Increase in Stock Subscriptions Receivable		-			(100,000	)

Net Cash Provided by Financing Activities		3,039,522			150,000


Net Increase (Decrease) in Cash		1,548,653			(15,510	)

Cash, at Beginning of Period		2,328,912			325,887

Cash, at End of Period	$	3,877,565		$	310,337

Supplemental disclosures of cash flow information:
Cash Paid for Interest	$	159		$	314

See accompanying notes to financial statements.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements

Note A - BASIS OF PRESENTATION

Health Discovery Corporation (the “Company”) is a molecular diagnostics company that has acquired certain patents and has patent pending applications for certain machine learning tools used for diagnostic and drug discovery. The Company licenses the use of its patent protected technology and utilizes such technology internally to develop diagnostic tests, prognostic tests, drug monitoring tests and drug targets for therapeutic use, and sells or licenses such discoveries to diagnostic or pharmaceutical companies worldwide.

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP). In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates.

The interim financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the period ended March 31, 2010 are not necessarily indicative of the results of a full year’s operations and should be read in conjunction with the financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

ASC Topic 105 incorporates the July 2009, FASB issuance of SFAS No. 168, Codification and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (the “Codification” or “ASC”) and supersedes all existing accounting standards as the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification is considered non-authoritative, except for additional authoritative rules and interpretive releases of the SEC and applicable only to SEC registrants. The Codification is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applied beginning in the third quarter 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.

In November 2008, the FASB issued Codification No. 323, Equity Method Investment Accounting Considerations ("ASC 323"). ASC 323 clarifies accounting for certain transactions and impairment considerations involving the equity method, including initial measurement, decrease in investment value and change in level of ownership or degree of influence. ASC 323 is effective on a prospective basis for fiscal years beginning on or after December 15, 2008. We adopted ASC 323 on January 1, 2009, and the adoption did not have an impact on our financial statements.

In June 2009, the FASB issued ASC 810, Consolidations, to improve financial reporting by enterprises involved with variable interest entities by addressing (1) the elimination of the qualifying special-purpose entity concept and (2) constituent concerns about the application of accounting and disclosures which do not provide timely and useful information about an enterprise’s involvement in a variable interest entity. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2009, with earlier adoption prohibited. The adoption of this standard did not have a material effect on our financial position or results of operations.

In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. This update provides clarification for the fair value measurement of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available. ASU also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update is effective for interim periods beginning after August 28, 2009. The adoption of this standard did not have a material effect on our financial position or results of operations.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements

Note B – REVENUE RECOGNITION

Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements. These arrangements are controlled by contracts that dictate responsibilities and payment terms. The Company recognizes revenues as earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled. Revenue is earned under development agreements in the period the services are performed.

During the first quarter the Company signed a License Agreement which required an initial payment to the Company from Quest of $500,000.

The Company recognized deferred revenue in connection with such licensing agreement of $500,000 which will be recognized as income over the approximate 9 year weighted average remaining term of the patents subject to the License Agreement.

In addition, during the first quarter the Company signed a Development Agreement with Quest. The Development Agreement, in the amount of $375,000 requires the Company to perform services to assist Quest in developing and obtaining regulatory approval for certain products. Revenue of $41,666 was recorded in March for the Development Agreement and $333,334 will be recognized as income over the remaining estimated development period of 8 months.

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

Deferred revenue represents the unearned portion of payments received in advance for licensing and development agreements. The Company had total unearned revenue of $1,031,423 as of March 31, 2010. Unearned revenue of $75,520 is recorded as current and $955,903 is classified as long-term.

Note C - NET LOSS PER SHARE

Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. Due to the net loss in all periods presented, the calculation of diluted per share amounts would create an anti-dilutive result and therefore is not presented.

Note D - STOCK-BASED COMPENSATION AND OTHER OUTSTANDING DERIVATIVE SECURITIES

Stock-based expense included in our net loss for the three months ended March 31, 2010 consisted of $54,800 for options granted to executives and directors. Stock-based expense included in our net loss for the three months ended March 31, 2009 was $96,526.

As of March 31, 2010 and March 31, 2009 there was $336,116 and $249,837, respectively, of unrecognized cost related to stock option and warrant grants. The cost is to be recognized over the remaining vesting periods with a weighted average of approximately 2.5 years.

One of our directors resigned during the first quarter of 2010 due to other work commitments.As a result of his resignation, he forfeited options to acquire 750,000 shares of common stock at $0.08 because the vesting provisions will not be satisfied.

A new outside director has been appointed to replace the director who resigned. In connection with this appointment to the Company’s Board of Directors, the Company granted the new director 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 1.0816%. The aggregate computed value of these options was $307,469, and this amount will be charged as expense over the three year vesting period.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note D - STOCK-BASED COMPENSATION AND OTHER OUTSTANDING DERIVATIVE SECURITIES, continued

The following schedule summarizes combined stock option and warrant information for the three months ended March 31, 2010 and the twelve months ended December 31, 2009:

2009	Option and Warrant Shares			Weighted Average Exercise Price
Outstanding, January 1, 2009		128,777,644		$	0.16
Granted		5,000,000		$	0.08
Exercised		(17,503,073	)	$	0.14
Expired un- exercised		(15,659,394	)	$	0.15
Outstanding, December 31, 2009		100,615,177		$	0.16
2010
Granted		1,500,000		$	0.26
Exercised		(16,260,642	)	$	0.19
Expired un-exercised		(3,751,828	)	$	0.17

Outstanding, March 31, 2010		82,102,707		$	0.15

The following schedule summarizes combined stock option and warrant information as of March 31, 2010

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

$	0.08		13,550,000	7.7		6,300,000	7.7
$	0.13		2,500,000	1.9		2,500,000	1.9
$	0.14		31,276,357	0.5		31,276,357	0.5
$	0.19		33,276,350	0.5		33,276,350	0.5
$	0.26		1,500,000	4.9		-	-
Total			82,102,707			73,352,707

The weighted average remaining life of all outstanding warrants and options at March 31, 2010 is 1.3 years. (See Note G – Subsequent Events for disclosure of a declaratory judgment action filed by a shareholder relating to the expiration date for certain warrants held by such shareholder.) As of March 30, 2010, the aggregate net intrinsic value of all options and warrants outstanding is $4,741,372

Note E - PATENTS

The Company has acquired and developed a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Legal costs associated with patent acquisitions and the application process for new patents are also capitalized as patent assets. The Company has recorded as other assets $2,451,702 in patents and patent related costs, net of $1,534,092 in accumulated amortization, at March 31, 2010.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note E - PATENTS, continued

Amortization charged to operations for the three months ended March 31, 2010 and 2009 was $65,680 in both periods. Estimated amortization expense for the next five years is $262,720 per year.

Note F – STOCKHOLDERS’ EQUITY

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

Exercised warrants in the First Quarter of 2010 that were exercised independent of the Tranche 2 Warrant call totaled 4,531,250 warrant shares with proceeds to the Company of $810,939.

In connection with our Series B Preferred stock, we are required to pay dividends which accrue on a cumulative 10% basis. Such dividends are payable at the Company’s option in cash or common stock and the dividends will be accrued until paid at the Company’s option or when the shares are redeemed. As there is no requirement to pay such dividends in the upcoming year and it is not the intention of the Company to do so, the dividends payable of $78,296 are reflected as a long term liability in the accompanying balance sheet. In addition, the Company is required to pay a special dividend to the Preferred B shareholders equal to 15% of net revenues for the year related to new revenue contracts signed after the issuance of the series B stock. The Company has recorded $76,435 in dividends related to this requirement as a result of revenue contracts signed in the first quarter of 2010.

Note G – SUBSEQUENT EVENTS

In April 2010, the Company received a cash payment of $500,000 from Quest in connection with a license granted to Quest in March 2010. The Company also received a $41,666 payment from Quest in April 2010 in connection with a development agreement entered into in March 2010.

On May 6, 2010, William F. Quirk, Jr., a shareholder of the Company, filed a declaratory judgment action in Georgia state court In the filing, Mr. Quirk contends that, because Mr. Quirk is a 10% shareholder of the Company, the expiration date for certain warrants issued to him is September 7, 2012 rather than September 7, 2010.

The warrants in question were issued to Mr. Quirk in September 2007 in HDC’s 2007 private placement transaction and consist of (i) a warrant to purchase up to 16,263,888 shares of HDC common stock at a price of $0.14 per share, and (ii) a warrant to purchase up to 16,263,888 shares of HDC common stock at a price of $0.19 per share. Although the stated expiration date for these warrants is September 7, 2010, Mr. Quirk contends that the expiration date for shareholders holding more than 10% of HDC’s common stock is extended automatically by two years. Accordingly, Mr. Quirk is seeking a judicial declaration that he may exercise his warrants at any time prior to September 7, 2012. Mr. Quirk also is seeking award of his attorney’s fees in connection with the action.

HDC has engaged outside counsel to evaluate the claim and to defend HDC in the action.

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note H – COMMITMENTS

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.

The Company has received letters from an investor in the Company’s 2007 private placement (“2007 Private Placement”), claiming (a) that certain rights to receive additional common stock of the Company for no additional consideration have been triggered by certain actions of the Company, (b) breaches of its contractual rights to approve certain issuances of derivative securities, (c) breaches of other covenants made by the Company in the 2007 Private Placement, (d) the Company had violated its SEC disclosure obligations, and (e) various breaches by the members of the Board of Directors of their fiduciary duties. The Company denies the allegations and intends to vigorously defend these claims. However, due to the uncertainties inherent in litigation, we cannot predict the outcome of this matter if the investor brings suit against the Company. Such a lawsuit would be time consuming, distract our management from the business of the Company and result in substantial expenditures to defend the claim, each of which could have a material adverse impact on our business, financial condition and results of operations. Moreover, if we are unsuccessful in defending against the claims, the Company may be required, among other things, to issue approximately 146,664,375 shares to such investor, and, if all of the other investors in the 2007 Private Placement sought the same remedy, the Company may be required to issue approximately 1,099,494,872 shares in the aggregate. Issuing any significant portion of such shares of Common Stock would cause substantial dilution to existing shareholders.

Item 2. 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 several prospects in the healthcare field, including some of the world’s largest corporations in the pharmaceutical, biotech, and life sciences industries. Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts will produce favorable results.

On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. (“Abbott”), pursuant to which the Company granted Abbott a worldwide, exclusive, royalty-bearing license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests in both biopsy tissue and urine. We also granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive with Quest Diagnostics Incorporated (“Quest”)) for developing and commercializing a Laboratory Developed (“LDT”) urine based molecular diagnostic test for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients. In addition, we granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive with Clarient, Inc.) for developing and commercializing a tissue-based LDT for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients.

In February 2009, Abbott paid to us a one-time initial signing fee of $100,000. On August 7, 2009, Abbott reimbursed us $100,000 in development costs as required by the license agreement. In addition, with respect to the products subject to the license (the “Products”), Abbott will pay milestone payments to us upon achievement of the following events: $250,000 upon completion of Phases 1 and 2 as described in the FDA Submission Plan; $250,000 upon completion of Phases 3 and 4 as described in the FDA Submission Plan; $500,000 upon submission of either a 510(k) or Pre Market Approval (“PMA”) submission to the FDA; and $500,000 upon the receipt of a written notification by the FDA of the approval of the applicable 510(k) or PMA submission. We will also receive royalty payments of 10% of Abbott’s Net Sales for the Products with medical utility claims for use on prostate biopsy tissue samples, and 5% of Abbott’s Net Sales for the Products with medical utility claims for use on urine samples. We will also receive royalty payments on the urine-based LDTs equal to 10% of Abbott’s Net Sales for the tests performed on prostate biopsy tissue and 5% of Abbott’s Net Sales for tests performed on urine samples. In addition to the royalty payments, with respect to the urine based products, Abbott will also pay us certain amounts upon the achievement of certain milestones as follows: after the sale of 50,000 tests in a calendar year, a milestone payment of $200,000; after a sale of 200,000 tests in a calendar year, a milestone payment of $750,000; and after a sale of 500,000 tests in a calendar year, a milestone payment of $1,500,000. “Net Sales” is equal to Abbott’s gross revenue less 5%, subject to adjustments as described in the license.

On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a 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 running royalty payments, certain milestone payments, and development fees.

The Company is continuing to advance the development of the urine based prostate cancer test. The Company is pleased with the data and results completed to date. We continue to progress towards the goal of commercialization of the urine-based prostate cancer test at Quest and with Abbott, as well as, an in-vitro diagnostic test (IVD test kits) offered for sale by Abbott. Upon regulatory approval sought by Abbott, the individual in-vitro diagnostic test kits could be sold to additional national, regional and local clinical laboratories, as well as hospital, academic and physician laboratories around the world. Prostate cancer is the second-leading cause of cancer death in men, second to lung cancer. The National Cancer Institute (NCI) estimates that more than 186,000 new cases of prostate cancer will be diagnosed in the U.S. in 2008, with more than 28,660 deaths. 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.

In August 2008, we entered into a licensing agreement with Smart Personalized Medicine, LLC, a company founded by our former director and current Senior Advisor, Dr. Richard Caruso. Under the terms of this agreement, work will be done to attempt to develop a breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. In exchange for a license to use our SVM technology, we initially received a 15% equity position in Smart Personalized Medicine, LLC and a per test royalty up to 7.5% based on net proceeds received by Smart Personalized Medicine, LLC from the sale of the new breast cancer prognostic test. Smart Personalized Medicine, LLC signed a license agreement with the same research hospital and is now in discussions with a national clinical laboratory for developing and commercializing a new state-of-the-art prognostic test for breast cancer. Smart Personalized Medicine, LLC has now started the development of the SVM-based prognostic test for breast cancer on tissue biopsy specimens. Smart Personalized Medicine, LLC believes that there is a possibility the new breast cancer test can be ready for clinical laboratory commercialization within the next twelve months. An estimated 221,000 women are diagnosed with breast cancer in the United States each year, and one in eight U.S. women will have breast cancer in her lifetime. Breast cancer is the most common cancer among women and the second-largest cancer killer among women. Currently, the breast cancer prognostic market is projected to be about $300 to $400 million. Smart Personalized Medicine, LLC expects that its new SVM-based prognostic test for breast cancer can provide physicians and their patients a way to better determine the probability of relapse, allowing patients with good prognosis results an opportunity to avoid unnecessary expensive and traumatic chemotherapy treatments.

On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature. Under the terms of that agreement, as amended, Clarient obtained a non-exclusive license to make, use and sell any Licensed Product in the Field of Use within the Licensed Territory with respect to both the commercial reference laboratory field and the academic and research fields. During 2008, we and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test. Results from both the Phase I, Phase II and Phase III double-blinded clinical validation studies now completed at Clarient demonstrated a very high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells. On November 6, 2008, we announced that the RT-PCR assay for the four genes comprising the Company’s recently commercialized gene-based molecular diagnostic test for prostate cancer, which is currently available at Clarient’s Clinical Laboratory, can be successfully used in urine samples for gene testing. The study, completed in collaboration with a prominent cancer research hospital, demonstrated that the gene expression of all four genes comprising the molecular signature for clinically significant prostate cancer could be detected in urine samples spiked with as few as 50 prostate cancer cells. Clarient commercially launched its new gene expression test for prostate cancer in the first quarter of 2009, which is a Licensed Product under the agreement, as amended. This new test is available through Clarient’s PATHSiTETM virtual reporting tool and accessible to Clarient’s entire pathology network. HDC will receive 10% royalty on each test performed.

In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading. SVM Capital has made significant progress since the formation of the joint venture. Atlantic Alpha reports that the SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years as well as a limited pilot program of real-time trading activity, and that the latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk. Once the stability of these models is confirmed, SVM Capital intends to apply the models to a wide range of financial asset classes such as interest rates, currencies, metals and petroleum products. SVM Capital plans to apply the investment model either in a single fund or a series of related funds. SVM Capital expects to charge a management fee and a performance fee related to its investment activities. HDC owns a 45% equity position in SVM Capital.

Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for 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 seeking a strategic partnership with a clinical laboratory capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data.

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, such as the potential development and commercialization of our colon cancer molecular diagnostic test with an international diagnostics company, and other prospective partnership opportunities with additional companies and research institutions. We also continue to pursue development opportunities with our existing licensing customers.

The Company has recognized revenue of $1,647,987 from inception through March 31, 2010 and has deferred revenue yet to be recognized of $1,031,423 as of March 31, 2010. Aggregate receipts created by its patent portfolio to date are $1,104,703.

While we have a number of negotiations in process with potential licensing partners, there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized in the near term, or that those that may be finalized do not provide the economic return that we expect.

On March 11, 2010, the Company, Quest Diagnostics Incorporated (“Quest”) and Smart Personalized Medicine, LLC (“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 will separately make payments to SPM and us. Quest has made a $500,000 up front “Development License Fee” and will make monthly “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 Development Agreement, we have been engaged to use the support vector machine technology and other intellectual property 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 “Field” (collectively, the “Products”). In consideration for our efforts under the Quest Development Agreement, Quest will pay us $375,000 (in addition to the $500,000 described above), which payments shall be made in equal monthly installments over the term of the agreement with the first payment commencing in April 2010.

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.

Recent Developments

Progress continues with the iPhone app for melanoma risk assessment. The Company has created a version of the app that it is testing with end users and is working with dermatologists to begin to implement field-testing of the app.

The Company’s relationship with the Pancreas, Liver and Biliary Center of New York (the “Pancreas Center”) continues 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.

On Monday May 10, 2010, the Company announced the appointment of Maher Albitar, M.D., a world-renowned cancer scientist and inventor, to the position of Chief Medical Officer. Until recently, Dr. Albitar was the Medical Director of Hematology and Oncology and Chief of Research and Development at Quest Diagnostics Nichols Institute San Juan Capistrano, Calif. Prior to Quest Diagnostics, Dr. Albitar was a tenured full professor at the M.D. Anderson Cancer Center and the University of Texas, where he served as chief of the hematopathology of the leukemia section with joint appointment in the clinical leukemia department.

Dr. Albitar invented Leumeta™ plasma-based testing for cancer patients while at MD Anderson Cancer Center and Quest Diagnostics. Dr. Albitar also established and developed numerous new techniques in clinical laboratory testing.

Dr. Albitar is the principal inventor of more than 12 patents. He is the senior author or co-author of more than 250 peer-reviewed publications in major medical journals including the New England Journal of Medicine. In addition he has written numerous chapters and a book.

Dr. Albitar received the Physician Scientist Award from the U.S. National Institute of Health, the American Cancer Society Fellowship Award, and a Fellowship Award in Genetics from the Howard Hughes Medical Institute at the University of Pennsylvania. Dr. Albitar received his medical degree in 1979 from Damascus Medical School in Damascus, Syria, and is board-certified in anatomic and clinical pathology with extensive experience in hematopathology.

The Company will pay a monthly fee of $10,000 for Dr. Albitar’s services and, subject to approval of the option terms, will issue him an option to purchase 1,000,000 shares of common stock based on commercialization of four new molecular diagnostic tests.

On Tuesday, May 11, 2010, the Company was awarded the prestigious MICO Award presented by MDB Capital Group, San Francisco, Calif., at its invitation-only Bright Lights Conference held May 11-12, 2010. The MICO Award is Latin for “to shine.” The award was presented to the Top 5 companies across all industries with the most potentially disruptive or market changing intellectual property.

Intellectual Property Activities

In July 2009, the U.S. Patent and Trademark Office issued a notice of allowance of the Company’s application covering an alternative method of feature selection that reduces the number of support vectors to create a sparse-SVM that can be used to generate a codebook for identifying patterns in data, including applications to signal compression. With the issuance of these patents, the Company now holds the exclusive rights to 38 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.

In May 2010, the U.S. Patent and Trademark Office issued a notice of allowance of the Company’s application covering a system for providing data analysis services using a support vector machine for processing data received from a remote source.

Three Months Ended March 31, 2010 Compared with Three Months Ended March 31, 2009

Revenue

For the three months ended March 31, 2010 revenue was $54,178 compared with $16,690 for the three months ended March 31, 2009. Revenue is recognized for licensing and development fees over the period earned. This revenue is primarily related to ongoing development agreements and amortization of deferred revenue related to prior licensing agreements.

Operating and Other Expenses

Amortization expense was $65,680 for both the three months ended March 31, 2010 and 2009. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.

Professional and consulting fees, primarily legal, accounting and internal development costs related to research and development totaled $350,182 for the three months ended March 31, 2010 compared with $280,718 for the same 2009 period. The increase is due to both the increase in internal development activity and higher legal costs.

Compensation of $397,487 for the three months ended March 31, 2010 was higher than the $167,889 reported for the comparable 2008 period. Compensation increased due to the hiring of additional personnel and bonus amounts earned by a Company officer.

Other general and administrative expenses increased to $257,869 for three months ended March 31, 2010 compared to $61,188 for in 2009. This increase was due primarily to larger costs in connection with higher fees associated with public and investor relations activities.

Loss from Operations

The loss from operations for the three months ended March 31 2010 was $1,017,040 compared to $558,785 for the previous year. This increased loss was due to higher costs primarily associated with professional and administrative activities as discussed above .

Other Income and Expense

Interest income was $4,206 for the three months ended March 31, 2010 compared to $1,641 in 2009. Interest income increased because the Company had more cash on hand to invest throughout the 2010 period.

Interest expense of $159 in 2010 was slightly less than the $314 recorded for 2009.

Net Loss

The net loss for the three months ended March 31, 2010 was $1,012,993 compared to $557,458 for the three months ended March 31, 2009. The increased net loss was due to the increased loss from operations as previously described.

The net loss attributable to common shareholders was $1,152,731 in 2010 compared to $557,458 in the previous year.

Net loss per share was $0.01 and $0.0 for 2010 and 2009 respectively.

Liquidity and Capital Resources

At March 31, 2010, the Company had $3,877,565 in available cash and total current liabilities of $1,086,470. Our liquidity significantly improved during the first quarter due to proceeds received from the exercise of common stock purchase warrants and receipt of a final payment under the license agreement with Vermillion, Inc. (formerly known as Ciphergen Biosystems, Inc.). As a result, we believe we have sufficient resources to meet all of our current obligations.

Our net loss for the three months ended March 31, 2010 was $1,012,993. Our cash used by operating activities for the three months ended March 31, 2010 was $804,582. Cash used by investment activities was $686,287 due to the purchase of $681,143 in additional certificates of deposit and fixed asset acquisitions of $5,144. Cash provided by financing activities was $3,039,522, all due to exercise of warrants.

The Company received the final payment of $112,500, net of certain legal fees, that was due under a licensing agreement that settled the Company’s patent infringement lawsuit against Vermillion, Inc.

Exercised warrants from January 1, 2010 through March 23, 2010 that were exercised independent of the Tranche 2 Warrant call totaled 4,531,250 warrant shares with proceeds to the Company of $810,939.

On March 11, 2010, the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated entered into a Development Agreement. The Company, SPM and Quest also entered into a related Licensing Agreement (the “Quest License”). In consideration for the license, Quest will separately make payments to the Company and SPM. Payments to the Company will include a $500,000 up front “Development License Fee,” monthly “License Maintenance Fees” equal to $8,750 per month for the first year and $17,500 per month for each year thereafter. Quest will also pay, 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. The $500,000 upfront Development License Fee was received by the Company in April of 2010.

Effective March 11, 2010, the Company and SPM amended the original License Agreement, dated August 22, 2008 pursuant to which HDC had licensed its intellectual property to SPM for use in the development of breast cancer products. As amended, the Company 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. In addition, the Company’s 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 the Company’s prior written approval of the terms and conditions of such equity offering.

Pursuant to the Quest Development Agreement, we are required to use the support vector machine technology and other intellectual property 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 “Field” (collectively, the “Products”). In consideration for our efforts under the Quest Development Agreement, Quest will pay us $375,000 (in addition to the $500,000 described above), which payments shall be made in equal monthly installments over the next nine months. The Company has subsequently received two of the nine installment payments of $41,666.

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

	Total		1 Year Or Less		More than 1 Year
Accrued Compensation	$	226,276	$	226,276	$	-
Office Lease		9,200		9,200	$	-

Total	$	235,476	$	235,476	$	-

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 continue to do so 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 maintains a cash conservation program.

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.

Forward-Looking Statements

This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans. The forward-looking statements contained in this Report speak only as of the date of this Report as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers, and the inability to retain a significant number of customers, as well as the risks and uncertainties described in “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2009, filed on March 31, 2010.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

HDC has engaged outside counsel to evaluate the claim and to defend HDC in the action.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Exercised warrants in the First Quarter of 2010 that were exercised independent of the Tranche 2 Warrant call totaled 4,531,250 warrant shares with proceeds to the Company of $810,939.

Item 4T. Controls and Procedures.

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation regarding the fiscal quarter ended March 31, 2010, under the supervision and with the participation of our management, including our Chief Executive Officer and our President and General Counsel, who is also serving as our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our management concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

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

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Our Annual Report on Form 10-K contains information regarding a material weakness in our internal control over financial reporting as of December 31, 2009 due to an inadequate segregation of duties.

Item 5. Other Information.

Item 6. Exhibits.

The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-Q: [Need to determine whether additional contracts need to be filed.]

31.1	Rule 13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer.

31.2	Rule 13a-14(a)/15(d)-14(a) Certifications of Principal Financial Officer.

32.1	Section 1350 Certification of Chief Executive Officer and Principal Financial Officer.

SIGNATURES

In accordance with the requirement of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Health Discovery Corporation
	Registrant

Date: May 17, 2010	/s/ Stephen D. Barnhill
	Printed Name: Stephen D. Barnhill M.D.
	Title: Chief Executive Officer


Date: May 17, 2010	/s/ R. Scott Tobin
	Printed Name: R. Scott Tobin
	Title: President, General Counsel and Principal Financial Officer