Form 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-QSB
 
x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007

o 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 small business issuer as specified in its charter)

Texas
  
74-3002154
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification No.)
     
5501 ½ Abercorn Street
Savannah, Georgia
  
31405
(Address of principal executive offices)
  
(Zip Code)

912-352-7488
(Issuer’s telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year,
if changed since the last report)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 the filing requirements for at least the past 90 days. Yes x No o
 
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
 
Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 116,493,384 shares of common stock, no par value, were issued and outstanding as of May 11, 2007.
 
Transitional Small Business Disclosure Format (Check one): Yes o No x
 
 
TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
 
1
     
 
2
     
 
3
     
 
4
     
8
     
11
     
PART II
OTHER INFORMATION
 
     
12
     
12
     
13
     
 
14
 
HEALTH DISCOVERY CORPORATION

Balance Sheet
(unaudited)

Assets

   
March 31,
  
   
2007
  
       
Current Assets
      
Cash 
  
$
377,324
  
Prepaid Expenses and Other Assets
    
60,823
 
         
Total Current Assets
    
438,147
 
         
Equipment, Less Accumulated Depreciation of $16,760
    
12,538
  
         
Other Assets
        
Patents, Less Accumulated Amortization of $745,934
    
3,239,860
  
Investments
    
5,000
  
         
Total Assets
  
$
3,695,545
  
         
 Liabilities and Stockholders’ Equity
         
Current Liabilities
        
Accounts Payable - Trade
  
$
180,302
  
Accrued Liabilities
   
196,056
  
Deferred Revenue
   
90,278
  
         
Total Current Liabilities
    
466,636
  
         
Accrued Interest Payable
    
173,120
  
Long-Term Debt
    
321,911
  
Convertible Notes Payable
    
665,643
 
Notes Payable, Net of Unamortized Discount of $392,417
    
607,583
  
         
Total Liabilities
    
2,234,893
  
         
Commitments
       
         
Stockholders’ Equity
        
Common Stock, No Par Value, 200,000,000 Shares Authorized
       
 116,493,384 Shares Issued and Outstanding
    
11,185,911
  
Accumulated Deficit
    
(9,725,259
)
         
Total Stockholders' Equity
    
1,460,652
  
         
Total Liabilities and Stockholders' Equity
  
$
3,695,545
  

 
 
See accompanying notes to financial statements.
1
 
HEALTH DISCOVERY CORPORATION
 
Statements of Operations
(unaudited)
For the Three Months Ended March 31, 2007 and 2006

   
Three
  
Three
  
   
Months
  
Months
  
   
Ended
  
Ended
  
   
March 31,
  
March 31,
  
   
2007
  
2006
  
Revenues:
          
Licensing
 
$
10,833
  
$
105,000
  
Total Revenues
    
10,833
    
105,000
  
               
Cost of Sales:
              
Internal Development
    
7,500
   
-
  
               
Total Cost of Sales
    
7,500
   
-
  
               
Gross Profit
    
3,333
    
105,000
  
               
Operating Expenses:
              
Amortization 
    
65,680
    
65,680
  
Professional and Consulting Fees
    
170,232
    
573,229
  
Compensation
    
164,155
    
359,298
  
Other General and Administrative Expenses
    
131,904
    
240,211
  
Total Operating Expenses
    
531,971
    
1,238,418
  
               
Loss From Operations
    
(538,638
)
  
(1,133,418
)
               
Other Income (Expense)
              
Interest Income
    
6,987
    
4,830
  
Gains on Restructuring of Accounts Payable
    
44,594
    
77,546
  
Interest Expense
    
(102,044
)
  
(19,745
)
Total Other Income (Expense)
    
(50,463
)
  
62,631
  
               
Net Loss
 
$
(579,101
)
$
(1,070,787
)
               
               
Weighted Average Outstanding Shares
    
116,468,384
   
115,063,384
  
               
Loss Per Share
  
$
(.00
)
$
(.01
)
               
               




 
See accompanying notes to financial statements.
2
 
HEALTH DISCOVERY CORPORATION

Statements of Cash Flows
(unaudited)
For the Three Months Ended March 31, 2007 and 2006

   
Three Months
  
Three Months
  
   
Ended
  
Ended
  
   
March 31,
2007
  
March 31,
2006
  
   
Cash Flows From Operating Activities:
          
Net Loss
  
$
(579,101
)
  
(1,070,787
)
Adjustments to Reconcile Net Loss to Net Cash
              
Used by Operating Activities:
              
Noncash Compensation
    
38,606
    
190,322
  
Services Exchanged for Warrants
    
52,875
   
305,265
  
Accretion of Debt Discount
   
69,250
    
-
  
Issuance of Warrants
    
33,756
    
-
  
Decrease in Accounts Receivable
    
20,000
    
-
 
Decrease in Deferred Revenue
    
(10,833
)
  
-
 
Gains on Restructuring of Accounts Payable
    
(44,594
)
  
(77,546
)
Depreciation and Amortization
    
68,183
    
67,427
  
Increase in Prepaid Expenses and Other Assets
    
(5,636
)
  
(15,023
)
(Decrease) or Increase in Accounts Payable - Trade
    
(13,032
)
  
222,406
  
Increase in Accrued Liabilities
   
77,782
   
76,181
 
               
  Net Cash Used by Operating Activities
    
(292,744
)
  
(301,755
)
               
Cash Flows From Investing Activities:
              
Purchase of Equipment
    
(298
)
  
(502
)
Acquisition of Investee
    
(5,000
)
  
-
  
               
  Net Cash Used by Investing Activities
    
(5,298
)
  
(502
)
               
Cash Flows From Financing Activities:
              
Proceeds from Sales of Common Stock
Proceeds from the Exercise of Options
    
1,000
-
    
100,000
6,000
  
               
  Net Cash Provided by Financing Activities
    
1,000
    
106,000
  
               
Net Decrease in Cash
    
(297,042
)
  
(196,257
)
               
Cash, at Beginning of Period
    
674,366
    
719,167
  
               
Cash, at End of Period
  
$
377,324
    
522,910
  
               
Non-Cash Investing and Financing Transactions:
              
Warrants Issued in Restructuring of Accounts Payable
  
$
-
    
55,454
  
               
Supplemental disclosures of cash flow information:
              
Cash Paid for Interest
  
$
549
    
-
  

 
See accompanying notes to financial statements.
3
 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements
 
Note A - BASIS OF PRESENTATION

Health Discovery Corporation (the “Company”) is a biotechnology-oriented company that has acquired 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 patented protected technology and utilizes such technology internally to develop diagnostic 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, 2007 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-KSB for the year ended December 31, 2006.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement is effective for fiscal years beginning after December 15, 2006. We have adopted FIN 48 effective January 1, 2007. This adoption has not had a material impact on our financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, (“Statement No. 157”). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. Statement No. 157 applies under those previously issued pronouncements that prescribe fair value as a relevant measure of value, except Statement No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of Statement No. 157 to have a material impact on our financial position, results of operations, or cash flows.
 
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 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. Revenue is earned under development agreements in the period the services are performed. Deferred revenue represents the unearned portion of payments received in advance for licensing agreements. The Company had unearned revenue of $90,278 as of March 31, 2007.

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.

4
 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note D - STOCK-BASED COMPENSATION
 
Stock-based expense included in our net loss for the three months ended March 31, 2007 consisted of $116,736 in compensatory warrants and options for professional consulting services, compensation, and interest. Stock-based expense included in our net loss for the three months ended March 31, 2006 consisted of $495,587 for the issuance of options and warrants.

As of March 31, 2007, there was approximately $398,562 of unrecognized cost related to stock option and warrant grants. The cost is to be recognized over the remaining vesting periods that average approximately 3 years. No options were granted during the first quarter of 2007.

The Company granted 2,000,000 options during the first quarter of 2006. The fair value of each option granted in 2006 was $0.11 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 5.00%, an expected life of 10 years, and volatility of 133%. Expected option lives and volatilities used in the fair valuation calculations are based on historical data of the Company and the related expense is recognized on a straight-line basis over the vesting period.

The following schedule summarizes stock option activity for the three months ended March 31, 2007 and the twelve months ended December 31, 2006:

   
 
Option
  
Weighted
Average
  
 
  
Shares
  
Exercise Price
  
           
Outstanding, January 1, 2006
    
2,500,000
  
$
0.08
  
Granted
    
2,000,000
    
0.11
  
Exercised
    
(600,000
)
  
0.01
  
Forfeited
    
(400,000
)
  
0.10
  
               
Outstanding, December 31, 2006
    
3,500,000
  
$
0.11
  
Granted
    
-
    
-
  
Exercised
    
-
    
-
  
Forfeited
    
-
    
-
  
               
Outstanding, March 31, 2007
    
3,500,000
  
$
0.11
  

The weighted average remaining life of the outstanding options at March 31, 2007 is 8.75 years.

There were 2,250,000 options exercisable at March 31, 2007. The exercisable options have a weighted average exercise price of $0.11 and a weighted average remaining life of 8.75 years.



5
 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note D - STOCK-BASED COMPENSATION, continued

Information about warrants outstanding at March 31, 2007 is summarized below:

Exercise Prices
  
 
Number
Outstanding
  
Weighted-
Average
Remaining
Contractual
Life (years)
  
 
 
 
 
Number
Exercisable
  
Weighted Average Remaining Contractual Life (years) of
Exercisable
Warrants
  
$0.01
    
800,000
    
1
    
800,000
    
1
  
$0.10
    
1,365,000
    
2
    
1,265,000
    
2
  
$0.11
    
1,000,000
    
2
    
1,000,000
    
2
  
$0.12
    
150,000
    
2
    
150,000
    
2
  
$0.13
    
5,500,000
    
3
    
3,500,000
    
2
  
$0.15
    
1,000,000
    
2
    
1,000,000
    
2
  
$0.16
    
10,000,000
    
2.5
    
7,000,000
    
2.5
  
$0.20
    
500,000
    
1
    
500,000
    
1
  
$0.22
    
500,000
    
1
    
500,000
    
1
  
$0.24
    
32,546,250
    
1
    
32,546,250
    
1
  
$0.35
    
15,235,000
    
.5
    
15,235,000
    
.5
  
Total
    
68,596,250
          
63,496,250
        
 
 
On February 1, 2007, Health Discovery Corporation (the “Company”) issued in the aggregate 15,235,000 warrants to purchase common stock of the Company (the “Warrants”) to certain institutional investors and individual accredited investors. The Warrants vest immediately and have an exercise price of $0.35 per share. The Warrants expire on November 1, 2007. On February 1, 2007, an equal number of warrants issued to the same institutional and individual investors and with substantially similar terms expired. The aggregate value of these warrants is approximately $33,755 and they were recorded as expense on the issue date.

During January 2006, the Company issued 3,400,000 warrants to consultants and other service providers with a weighted-average exercise price of $0.12 per share. A total of $290,000 was charged to expense for Compensatory Warrants. The warrants became exercisable upon issuance.
 
The Company issued 3,000,000 warrants to two directors in January 2006 with an exercise price of $0.13 per share. The grant date fair value of these warrants was $355,500. The warrants vest at a rate of 500,000 warrants (250,000 warrants for each director) after satisfactory completion of each 6 months of service until 3 years of service has been completed. The expense is being recorded over the service period.
 
In January 2006, the Company issued 1,000,000 warrants to a director with an exercise price of $0.15 per share in conjunction with a common stock sale. The Company has ascribed no value to the warrants associated with the common stock sale.
 
Note E - GAIN ON RESTRUCTURING OF ACCOUNTS PAYABLE
 
On March 1, 2007, the Company recorded a gain on accounts payable restructuring of $44,594 pursuant to the agreement made in the third quarter of 2006 deferring some payments until certain conditions were met or eliminating the liability if these conditions did not occur.
 
Note F - PATENTS

The Company has acquired a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Additionally, legal costs associated with patent acquisitions and the application process are also capitalized as a part of patents. The Company has recorded as other assets $3,239,860 in patents and patent related costs, net of $745,934 in accumulated amortization, at March 31, 2007.

6

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued
Note F - PATENTS, continued

Amortization charged to operations for the three months ended March 31, 2007 and 2006 was $65,780 in both years. The weighted average amortization period for patents is 14 years. Estimated amortization expense for the next five years is $263,120 per year.

Note G - INVESTMENTS

On March 27, 2007, the Company formed SVM Capital LLC as an equity investment for purposes of utilizing SVMs as a quantitative investment management technique. The investment is presented using the equity method of accounting.

Note H - STOCKHOLDERS’ EQUITY

In January 2007, the Company issued 100,000 shares of stock for warrants exercised at $0.01 each. Proceeds of $1,000 were recorded in capital stock.

During the first quarter of 2006, the Company issued 600,000 shares of its common stock upon the exercise of stock options. Proceeds from the exercise totaled $6,000.

In addition, in the first quarter of 2006 the Company sold 1,000,000 shares of its common stock to one of its directors for $100,000. The shares were sold for $0.10 per share which was the closing price of the stock on the date of the sale. As part of the purchase, the director also received warrants to purchase an additional 1,000,000 shares of the Company’s common stock at a fixed price of $0.15 per share until December 2008. No portion of the proceeds was assigned to the value of the warrants because the exercise price of the warrants exceeded the market value of the underlying common stock on the date of purchase.

Note I - GOING CONCERN
 
The accompanying financial statements have been prepared in conformity with principles of accounting applicable to a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Limited revenue has been derived since inception, and the Company has not yet generated sufficient working capital to support its operations. The Company’s ability to continue as a going concern is dependent, among other things, on its ability to control certain costs and obtain new contracts to eventually attain a profitable level of operations.

The Company is licensing the technology underlying several of its patents and providing supporting services related to the application of such technology that is resulting in ongoing revenue. In addition, management has successfully negotiated agreements with its debt holders, which resulted in the deferral of cash payments on debt until October 2008. Management has instituted a cost reduction program whereby the salaries of company employees, including senior management, have been reduced or deferred. Based on these developments, management believes revenue generation will continue, additional licensing agreements will be obtained in the near-term, and non-revenue generating costs will be controlled.
 
7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Corporate Overview
 
Our Company is a pattern recognition 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 molecular diagnostics 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 biomarkers and pathways that include human genes and genetic variations, as well as gene, protein, and metabolite expression differences. 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 provide pharmaceutical and diagnostic companies with all aspects of first phase diagnostic and drug discovery, from expert assessment of the clinical dilemma through proper selection and procurement of high quality specimens. We will then apply our proprietary analytical evaluation methods and state-of-the-art computational analysis to derive relevant and accurate clinical data, producing accurate biomarker and pathway discoveries, resulting in patent protection of our biomarker discoveries for future development.
 
Our business is based on the belief that in order to discover the most clinically relevant biomarkers, the computational component must begin at the inception of the clinical dilemma to be solved. This process includes several critical levels of decision-making - all of which are part of our business strategy. We intend to produce more relevant and predictable biomarkers for drug discovery so that new and better medicines and diagnostic markers can be developed for patients worldwide. With the completion of the acquisition of the SVM portfolio of patents we have begun to license the use of this technology.
 
Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006
 
Revenue
 
For the three months ended March 31, 2007, revenue was $10,833 compared with $105,000 for the three months ended March 31, 2006. Revenue is recognized for licensing and development fees over the period earned.
 
Cost of Sales and Gross Margin
 
Internal development costs of $7,500 were recorded as cost of sales for the first quarter 2007. No such costs were recorded for the prior year. Cost of sales includes all direct costs, primarily wages and research fees, associated with the acquisition and development of patents and processes sold. All direct costs, primarily professional fees, associated with licensing negotiations, are also included in cost of sales.
 
Operating and Other Expenses
 
Amortization expense was $65,680 for both the first quarter of 2007 and the first quarter of 2006. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.
 
Professional and consulting fees totaled $170,232 for the first quarter of 2007 compared with $573,229 for the first quarter of 2006. In the first quarter 2006, warrants valued at approximately $250,000 were granted. No similar grants were made during the first quarter of 2007. These fees, related to legal, accounting and scientific activities, were also lower in 2007 because of efforts to control costs related to regulatory filing activity, patent protection efforts, and general corporate legal and accounting work.
 
Compensation of $164,155 for the first quarter of 2007 was lower than the $359,298 reported for the first quarter of 2006. The reduction in compensation is due primarily to options granted in 2006 totaling $190,322 included as compensation.
 
Other general and administrative expenses decreased to $131,904 for the first quarter of 2007 compared to $240,211 for the first quarter of 2006. This decrease was largely due to ongoing cost containment efforts undertaken since mid-2006.
 
8
 
Loss from Operations
 
The loss from operations for the first quarter of 2007 was $528,904 compared to $1,133,418 for the first quarter of 2006. This reduced loss was largely due to ongoing cost reduction efforts as previously discussed.

Other Income and Expense

Interest income was $6,987 for the first quarter of 2007 compared to $4,830 in 2006. Interest income increased because the Company had more cash on hand to invest throughout the first quarter of 2007.
 
Interest expense was $102,044 in the first quarter of 2007 compared with $19,745 in the first quarter of 2006. This increase was due to the higher interest rate associated with the renegotiated promissory notes, interest due on the promissory note secured in September 2006, and accretion of $69,250 related to the discount recorded for the warrants issued along with the September 2006 promissory note.
 
Net Loss
 
The net loss for the first quarter of 2007 was $579,101 compared to $1,070,787 for the first quarter of 2006. The reduced loss was due to the diminished loss from operations, unfavorably offset by the increased interest expense.

Net loss per share was $0.00 for the first quarter of 2007 compared to $0.01 for the first quarter of 2006.
 
Liquidity and Capital Resources
 
At March 31, 2007, the Company had $377,324 in available cash. Cash used by operating activities was $292,744. This was due primarily to the net loss of $579,101; however, net non-cash charges and adjustments of $286,357 favorably impacted the computation of the net cash used. Cash used by investment activities was $5,298 due to the acquisition of assets and the investment made in SVM Capital LLC. Net cash provided by financing activities was $1,000 due to the cash received from sale of common stock resulting from the exercise of warrants.
 
A portion of our cash will be used to satisfy the Company’s outstanding debt obligations related to the acquisition of the SVM assets and fees due to professionals for services performed.
 
The following table summarizes the due dates of our contractual obligations. The Company has no long term lease agreements in effect as of March 31, 2007.
 
   
 
Total
  
Less than
1 Year
  
1-3
Years
  
 
Accrued Interest Payable
  
$
173,120
  
$
-
  
$
173,120
  
 
Accounts Payable Deferred
    
126,272
    
126,272
    
-
  
 
Deferred Compensation
    
45,000
    
45,000
    
-
  
 
Term Debt
    
321,911
    
-
    
321,911
  
 
Convertible Notes Payable
    
665,643
    
-
    
665,643
  
 
Promissory Note
    
1,000,000
    
-
    
1,000,000
  
 
Total
  
$
2,331,946
  
$
171,272
  
$
2,160,674
  

 
The Company formed SVM Capital LLC as an equity investment in the first quarter of 2007 for purposes of utilizing SVM pattern recognition as a quantitative investment management tool.
 
The Company, in an effort to preserve cash, to enable the Company to continue its operations, and as a condition to a loan from a director, negotiated a restructuring of certain of its accounts payable with selected vendors, primarily its legal and professional vendors. In September 2006, two vendors reduced their outstanding balances by $37,190, or 50%, in settlement of the full liability for a cash payment of $37,190. This settlement was recorded as a gain on restructuring. Several other vendors agreed to extend the payment terms and defer collection on outstanding amounts for an indefinite period of time. The Company currently expects to pay such amounts in six to eight months upon increases in revenues and or additional equity or debt financing, although none of those events is certain. The total amount of accounts payable deferred in September 2006 was $170,966. The Company also issued 300,000 warrants to these vendors with an exercise price of $0.10 per share. The fair value of these warrants on the grant date was $16,872 and was recorded as an expense in connection with the restructuring. The amount was charged to expense in the quarter as the warrants vested immediately. The deferred payments to the vendors has not been discounted as the date of payment is not certain.
 
9
 
The Company has relied primarily on equity funding plus debt financing for liquidity. The Company produced sales, licensing, and developmental revenue in 2005 and 2006 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, will result in significant revenue. The Company has implemented a cash conservation plan that includes salary deferrals and reductions, reduction in consulting payments, negotiated settlements with creditors whereby the Company substituted equity instruments for amounts owed, and a heightened scrutiny of all potential expenditures.
 
Operational Activities
 
We are in the final stages of negotiations with a large European pharmaceutical company to develop a companion diagnostic test using our discovered biomarkers as surrogates in the last phase of a clinical trial for its new drug to treat BPH (enlarged prostate). If the negotiation results in an agreement, we believe this will be the first attempt to incorporate a custom-made surrogate biomarker expression signature into a clinical trial for an existing drug. Working together with seven corporations and universities we have selected as our development partners, we believe that the Company can indeed build a successful test. If the BPH drug ultimately receives FDA approval, the test, which we expect to own, could also be used to monitor patients after commercial launch of the drug. Such an undertaking has other advantages, as well. The methodology we develop might be a model for an important component in the conduct of future clinical trials worldwide. The advantages of this novel approach could include reducing a trial’s duration and cost, providing more objective data, increasing patient safety by potentially reducing or eliminating placebos, and expediting the time to market for successful drugs. Almost as importantly, it may be able to provide information earlier in the trial process that a drug is not working, thus saving time, money and intellectual resources.
 
We have entered into an agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for a particular medical condition. Our science team’s analysis of partial data provided to us demonstrates a successful proof of concept. If our partner accepts our conclusions, it opens a portal to similar work on diseases such as leukemia and lymphoma that are far more prevalent.
 
We have just entered discussions with the same biotechnology company and another diagnostics firm to develop a breast cancer prognostic test similar to the Oncotype DX test from Genomic Health and the new FDA-approved MammaPrint test from Agendia, a European firm. If we can reach agreement with either party, we will lead the development of this project and own some or all of the final FDA-approved product.
 
We have started discussions with a large international healthcare company we have long pursued. At stake is licensing and product development using SVMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI and other radiological images. We own a number of SVM patents in this field that we think are very important.
 
We are in early talks with three companies about our recently-discovered 4-gene prostate cancer biomarker signature, for which we have filed a patent application. Given the accuracy and disease-specific applicability of this biomarker, as well as the level of enthusiasm we discern at these firms, it is possible that discussions could progress at a much faster pace than we have experienced in the past.
 
We have received serious inquiry from a European molecular diagnostics company about the applicability of our RFE-SVM pattern recognition technology to MicroRNA expression signature discovery and to circulating tumor cells to identify micro-metastasis in blood.
 
Finally, we have been in continuing but still embryonic discussions with a few clinical labs to provide commercial outlets for biomarker-based clinical tests to be developed and wholly or partly owned by us. With one or more such partners, we may be able to market tests directly to physicians. The selection of any particular clinical lab partner may be incorporated into a specific license and product development deal.
 
In addition to traditional license and development agreements, we are expanding our approach to monetizing our intellectual property. In the first quarter of 2007, we formed an equity investment, SVM Capital, LLC, with Atlantic Alpha Strategies, LLC to apply our SVM pattern recognition tools to quantitative investment analysis. We believe that research efforts to date show promise in developing computer-based investment and hedging techniques. The specific goal is to substantially reduce investment risk while providing superior, but not necessarily outsized, returns for comparable asset classes. If SVM Capital can advance the predictive art sufficiently, the ultimate business objective is to create one or more funds that would appeal to conservative and risk-averse investors. We believe that there are many “quant funds” successfully using different mathematics-based techniques, including neural networks, to assist in the investment decision-making process by uncovering patterns that might otherwise be impossible or too time-consuming to discern. To the best of our knowledge, none use SVM-based models. In broad terms, if SVM Capital can replicate in this arena the consistent superiority SVMs have shown, for example, over neural networks in hundreds of medical field studies, it could achieve an advantaged and patent-protected position in quantitative-based investments in equities, debt instruments, currencies and commodities.
 
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While we have a lot of negotiations in process, there is a possibility that none will be finalized or that those that may be finalized do not provide the economic returns that we expect. Accordingly, the Company has implemented a cash conservation plan that includes salary deferrals and reductions, reduction in consulting payments, negotiated settlements with creditors whereby the Company substituted equity instruments for amounts owed, and a heightened scrutiny of all potential expenditures. Should it prove necessary, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings. Although this raises doubt with respect to our ability to operate as a going concern, the Company believes that it has sufficient capability to operate through the next twelve months.
 
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.

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 risks and uncertainties described in “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2006, filed on March 31, 2007.
 
Item 3. Controls and Procedures.

As of March 31, 2007 (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and President and 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 and our Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective under Rule 13a-15.
 
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.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

On May 25, 2004, we filed suit in the District Court of McLennan County, Texas, against Bill G. Williams, Shirley K. Williams, W. Steven Walker, Jerry W. Petermann and a company controlled by Mr. Williams. In this action we allege that an aggregate of 700,000 shares of our common stock (4,900,000 after a 7-1 stock split) issued to Mr. Williams, Mr. Walker, Mr. Braswell and Mr. Petermann were not issued in compliance with Texas law and we sought to restrain the defendants and persons acting on their behalf or in concert with them from selling any shares of our stock. We also requested that the Court declare we were permitted to cancel the shares issued to the defendants and award monetary damages, attorney’s fees and costs of the action.
 
In June 2004, Jerry W. Petermann agreed to return to the Company 1,000,000 shares of the Company stock, which were cancelled upon return to the Company. In addition, in June 2004, Robert S. Braswell IV agreed to return to the Company 2,100,000 shares of the company stock, all of which were cancelled upon return to the Company. Cancellation of the returned stock certificates was considered full and final settlement of the claims brought against Mr. Petermann and Mr. Braswell in this lawsuit.
 
In July 2004, W. Steven Walker Esq., former general counsel, an officer and director of the Company, agreed to settle with the Company and return 366,036 shares of our common stock, which were all of the shares then owned by him, and he will no longer be a party to the suit. At this time, only the shares originally issued to Mr. Williams are subject to the suit, and the Company believes he controls approximately 1.6 million shares of our common stock.
 
After several rulings at the District Court, on August 25, 2004 the Court of Appeals for the Tenth District of the State of Texas granted our appeal and entered an order, remanding the case to the original trial judge with instructions to issue a temporary injunction to preserve the status quo. The injunction will remain until a judgment in the case becomes final or the court otherwise instructs. The injunction requires the remaining defendants, their agents, employees, affiliates, any person or entity they control, and any person acting in concert with them to (i) stop and refrain from selling or otherwise disposing of any share of our common stock; and (ii) deposit into the registry of the District Court all shares of our common stock they now own or hold. Costs of the appeal were assessed against the Respondents. The defendants have asserted several counter claims against the Company, including a derivative action, and have brought third-party claims against several current officers of the Company.
 
On June 26, 2006, we originally filed suit in the United States District Court for the Eastern District of Texas against Ciphergen Biosystems, Inc. ("Ciphergen"), alleging claims for infringment of three patents related to support vector machine technology and seeking monetary and injunctive relief. Ciphergen denied infringement, challenged the validity of the patents, and alleged counterclaims against us. We deny liability to Ciphergen under the alleged counterclaims. Pursuant to a motion filed by Ciphergen, the litigation has been transferred to the United States District Court for the Northern District of California. The litigation is in its early stages, and no discovery has yet been taken.

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

During the first quarter of 2007, the Company issued 100,000 shares of stock for warrants exercised at $0.01 each. Proceeds of $1,000 were recorded in capital stock.
 
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Item 6. Exhibits.
 
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-B, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form SB-2:
 
3.1
Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Registration Statement on Form SB-2, filed June 4, 2001.
     
3.1(a)
 
Articles of Amendment to Articles of Incorporation Registrant incorporates by reference Exhibit 2.2 to Form10-QSB, filed November 14, 2001.
     
3.1(b)
 
Articles of Amendment to Articles of Incorporation changing Registrant name from Direct Wireless Communications, Inc., to Health Discovery Corporation. Registrant incorporates by reference Exhibit 3.1 (b) to Form 10-KSB, filed March 3, 2004.
     
3.2
By-Laws. Registrant incorporates by reference Exhibit 3.2 to Registration Statement on Form SB-2, filed June 4, 2001.
     
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(b)
 
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.
     
4.2
 
Excerpt from By-Laws. Registrant incorporates by reference Exhibit 4.2 to Registration Statement on Form SB-2, filed June 4, 2001.
     
4.2(a)
  
Corrected Article 3.02 of By-Laws. Registrant incorporates by reference Exhibit 4.2(A) to Amendment No. 2 to Registration Statement on Form SB-2, filed August 15, 2001.
     
10.1
 
Employment Agreement with Stephen Barnhill. Registrant incorporates by reference Exhibit 10.3 to Form 10-KSB, filed April 19, 2005. *
     
10.1(a)
  
First Amendment to Employment Agreement with Stephen Barnhill. Registrant incorporates by reference Exhibit 99.2 to Form 8-K, filed January 3, 2006.
     
10.1(b)
  
Second Amendment to Employment Agreement with Stephen Barnhill. Registrant incorporates by reference Exhibit 99.3 to Form 8-K, filed September 1, 2006.
     
10.2
  
Form of Warrant. Registrant incorporates by reference Exhibit 10.7 to Form 10-KSB, filed April 19, 2005.
     
10.3
 
Form of Warrant. Registrant incorporates by reference Exhibit 10.9 to Form 10-KSB, filed April 19, 2005.
     
10.4
  
Employment Agreement with Daniel R. Furth, dated as of December 5, 2005. Registrant incorporates by reference Exhibit 10.11 to Form SB-2/A, filed December 14, 2005.
     
10.5
  
Employment Agreement with Robert S. Braswell IV, dated as of January 1, 2006. Registrant incorporates by reference Exhibit 99.1 to Form 8-K, filed February 2, 2006.
     
10.6
  
Form of Amendment to Promissory Note. Registrant incorporates by reference Exhibit 99.1 to Form 8-K, filed January 3, 2006.
     
10.7
  
Promissory Note by the Company in favor of William F. Quirk, Jr. Registrant incorporates by reference Exhibit 99.1 to Form 8-K, filed September 5, 2006.
     
10.8
  
Warrant by the Company in favor of William F. Quirk, Jr. Registrant incorporates by reference Exhibit 99.2 to Form 8-K, filed September 5, 2006.
     
10.9
  
Form of Second Amendment to Promissory Note. Registrant incorporates by reference Exhibit 99.4 to Form 8-K, filed September 5, 2006.
     
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.
     
32.2
  
Section 1350 Certification of Principal Financial Officer.
 
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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 15, 2007
/s/ Stephen D. Barnhill M.D.
   
Printed Name: Stephen D. Barnhill M.D.
    Title: Chief Executive Officer
       
 
Date: May 15, 2007
/s/ Daniel R. Furth
   
Printed Name: Daniel R. Furth
    Title: Chief Financial Officer / Secretary
 
 
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