HYPERTENSION DIAGNOSTICS INC /MN - Quarter Report: 2008 September (Form 10-Q)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
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(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2008
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
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Commission
File Number: 0-24635
HYPERTENSION
DIAGNOSTICS, INC.
(Exact
name of small business issuer as specified in its charter)
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MINNESOTA
(State
of incorporation)
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41-1618036
(I.R.S.
Employer Identification No.)
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2915
WATERS ROAD, SUITE 108
EAGAN,
MINNESOTA 55121-3528
(651)
687-9999
(Address
of issuer’s principal executive offices and telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities 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 such filing
requirements for the past 90 days.
YES
x NO
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
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
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YES
NO
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The
number of shares of Common Stock outstanding as of November 13, 2008 was
40,795,820.
INDEX TO
FORM 10-Q
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Page No
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PART
I.
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Item
1.
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4
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5
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6
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7
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Item
2.
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9
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Item
4T.
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14
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PART
II.
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Item
6.
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15
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16
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17
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Forward-Looking
Statements
This report contains forward-looking
statements that are based on the current beliefs of our management as well as
assumptions made by and information currently available to
management. In addition, we may make forward-looking statements
orally in the future by or on behalf of the Company. When used, the
words “believe,” “expect,” “will,” “can,” “estimate,” “anticipate” and similar
expressions are intended to identify forward-looking statements. We
caution readers not to place undue reliance on any forward-looking statements
and to recognize that the statements are not predictions of actual future
results. Actual results could differ materially from those
anticipated in the forward-looking statements due to the risks and uncertainties
set forth in our 2008 Annual Report on Form 10-KSB under the caption “Risk
Factors,” as well as others not now anticipated. These risks and
uncertainties include, without limitation: our ability to develop a business
model to timely generate acceptable levels of revenues; negative effect on our
stock price resulting from available securities for sale; our need for
additional capital; our dependence on our CVProfilor® DO-2020; the availability
of third-party reimbursements for the use of our products; increased market
acceptance of our products; our marketing strategy potentially resulting in
lower revenues; the illiquidity of our securities on the OTC Bulletin Board and
the related restrictions on our securities relating to “penny stocks” potential
violations by us of federal and state securities laws; the availability of
integral components for our products; our ability to develop distribution
channels; increased competition; changes in government regulation; health care
reforms; exposure to potential product liability; our ability to protect our
proprietary technology; regulatory restrictions pertaining to data privacy
issues in utilizing our Central Data Management Facility; and the ability to
manufacture our products on a commercial scale and in compliance with regulatory
requirements. We undertake no responsibility to update any
forward-looking statement. These forward-looking statements are only made as of
the date of this report. In addition to the risks we have articulated
above, changes in market conditions, changes in our business and other factors
may result in different or increased risks to our business in the future that
are not foreseeable at this time.
PART
I. FINANCIAL INFORMATION
Balance
Sheets
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September
30,
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June
30,
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|||||||
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Assets
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(Unaudited)
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(Audited)
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||||||
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Current
Assets:
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Cash
and cash equivalents
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$ | 984,345 | $ | 1,081,868 | ||||
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Accounts
receivable
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2,874 | 26,000 | ||||||
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Inventory
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288,240 | 291,485 | ||||||
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Prepaids
and other current assets
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20,892 | 9,026 | ||||||
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Total
Current Assets
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1,296,351 | 1,408,379 | ||||||
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Property
and Equipment:
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Leasehold
improvements
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17,202 | 17,202 | ||||||
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Furniture
and equipment
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1,109,875 | 1,109,875 | ||||||
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Less
accumulated depreciation and amortization
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(1,116,980 | ) | (1,114,200 | ) | ||||
| 10,097 | 12,877 | |||||||
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Other
Assets
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6,530 | 6,530 | ||||||
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Total
Assets
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1,312,978 | 1,427,786 | ||||||
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Liabilities
and Shareholders' Equity
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Current
Liabilities:
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Accounts
payable
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19,305 | 19,997 | ||||||
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Accrued
payroll and payroll taxes
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274,245 | 527,611 | ||||||
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Deferred
revenue
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29,773 | 30,598 | ||||||
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Deposits
from Customers
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970 | 970 | ||||||
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Other
accrued expenses
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2,685 | 6,104 | ||||||
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Total
Current Liabilities
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326,978 | 585,280 | ||||||
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Deferred
Revenue, less current portion
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24,539 | 25,525 | ||||||
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Shareholders'
Equity:
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Series
A Convertible Preferred Stock, $.01 par value:
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Authorized
shares--5,000,000. Issued and outstanding shares--758,475 and
843,559 at September 30, 2008 and June 30, 2008, respectively; each share
of preferred stock convertible into 12 shares of common stock at the
option of the holder (aggregate liquidation preference $3,145,259 and
$3,375,835 at September 30, 2008 and June 30, 2008,
respectively)
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7,585 | 8,436 | ||||||
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Common
Stock, $.01 par value:
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Authorized
shares--150,000,000 Issued and outstanding shares--40,795,820
and 39,774,812 at September 30, 2008 and June 30, 2008, respectively at
September 30, 2008 and June 30, 2008, respectively
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407,958 | 397,748 | ||||||
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Additional
paid-in capital
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27,610,480 | 27,596,964 | ||||||
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Accumulated
deficit
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(27,064,562 | ) | (27,186,167 | ) | ||||
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Total
Shareholders' Equity
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961,461 | 816,981 | ||||||
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Total
Liabilities and Shareholders' Equity
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$ | 1,312,978 | $ | 1,427,786 | ||||
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See
accompanying notes.
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See
accompanying notes.
Statements
of Operations
(Unaudited)
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Three
Months Ended
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September
30
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2008
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2007
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Revenue:
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Equipment
sales
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$ | 82,000 | $ | 91,930 | ||||
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Equipment
rental
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25,697 | 46,227 | ||||||
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Service/contract
income
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28,815 | 8,195 | ||||||
| 136,512 | 146,352 | |||||||
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Cost
of Sales
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4,531 | 2,328 | ||||||
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Gross
Profit
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131,981 | 144,024 | ||||||
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Selling,
general and administrative expenses
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16,860 | 614,985 | ||||||
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Total
Expense
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16,860 | 614,985 | ||||||
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Operating
Income (Loss)
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115,121 | (470,961 | ) | |||||
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Interest
income
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6,484 | 14,753 | ||||||
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Net
Income (Loss)
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$ | 121,605 | $ | (456,208 | ) | |||
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Basic
and Diluted Net Loss per Share
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$ | .00 | $ | (.01 | ) | |||
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Weighted
Average Shares Outstanding - Basic
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40,363,001 | 39,649,319 | ||||||
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Weighted
Average Shares Outstanding - Diluted
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40,363,001 | 39,649,319 | ||||||
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See
accompanying notes.
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Statements
of Cash Flows
(Unaudited)
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Three
Months Ended
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September
30
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2008
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2007
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Operating
Activities:
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Net
Income / (loss)
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$ | 121,605 | $ | (456,208 | ) | |||
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Adjustments
to reconcile net loss to net
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cash
used in operating activities:
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CEO
stock based compensation
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(229,688 | ) | 283,500 | |||||
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Depreciation
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2,780 | 7,480 | ||||||
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Net
book value of disposed rental assets
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0 | 798 | ||||||
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Stock
options expense
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22,875 | 24,400 | ||||||
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Change
in operating assets and liabilities:
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Accounts
receivable
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23,126 | 266,134 | ||||||
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Inventory
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3,245 | (5,202 | ) | |||||
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Prepaids
and other current assets
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(11,866 | ) | (4,170 | ) | ||||
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Accounts
payable
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(692 | ) | 50,802 | |||||
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Accrued
payroll and payroll taxes
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(23,678 | ) | (50,350 | ) | ||||
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Deferred
revenue
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(1,811 | ) | (4,788 | ) | ||||
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Other
accrued expenses
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(3,419 | ) | (21,453 | ) | ||||
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Net
cash used provided by operating activities
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(97,523 | ) | 90,943 | |||||
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Net
increase/(decrease) in cash and cash equivalents
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(97,523 | ) | 90,943 | |||||
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Cash
and cash equivalents at beginning of period
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1,081,868 | 1,376,632 | ||||||
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Cash
and cash equivalents at end of period
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$ | 984,345 | $ | 1,467,575 | ||||
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See
accompanying notes.
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Notes to
Financial Statements
September
30, 2008
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1.
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Interim
Financial Information
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The
accompanying unaudited financial statements of Hypertension Diagnostics, Inc.
(the “Company” or “HDI”) have been prepared in accordance with the instructions
to Form 10-Q and do not include all the information and notes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, these unaudited financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments necessary for a fair presentation of the financial
statements. The results of operations for the three months ended
September 30, 2008 are not necessarily indicative of the results that may be
expected for the full year ending June 30, 2009. The June 30, 2008
balance sheet was derived from audited financial statements. For
further information, refer to the financial statements and notes included in the
Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30,
2008. The policies described in that report are used for preparing
quarterly reports.
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2.
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Recent
Accounting Pronouncements
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In
February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS No. 157 to July 1, 2009 for
us, for all nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the in the financial
statements on a recurring basis (at least annually). We believe the
adoption of the delayed items of SFAS No. 157 will not have a material impact on
our financial statements.
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3.
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Litigation
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The
Company is involved in various legal actions in the ordinary course of its
business. Although the outcome of any such legal actions cannot be
predicted, management believes that there are no pending legal proceedings
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the Company’s financial position or results of
operations.
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4.
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Stock
Options
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The
Company regularly grants stock options to individuals under various plans as
described in Note 4 of the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2008. FASB Statement No. 123 (revised 2004), Share-Based Payment (“FAS
123(R)”), requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair
value of the equity or liability instrument issued. FAS 123(R) covers
a wide range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. The effect of the Statement is to
require entities to measure the cost of employee services received in exchange
for stock options based on the grant-date fair value of the award, and to
recognize the cost over the period the employee is required to provide services
for the award. FAS 123(R) permits entities to use any option-pricing
model that meets the fair value objective in the Statement. The
Company implemented FAS 123(R) on July 1, 2006, using the modified prospective
transition method.
During
the three months ended September 30, 2008, and the three months ended September
30, 2007, there were no stock options granted. The Company recognized
compensation expense of $22,875 for the three months ending September 30, 2008,
and compensation expense of $24,400 for the three months ending September 30,
2007, related to the options granted previously. The Company
estimates the expense for the remainder of fiscal year 2009 to be approximately
$68,625 based on the value of options outstanding on September 30, 2008 that
will vest during the remainder of fiscal year 2009. Estimated
expenses for the fiscal year ended June 30, 2010 are $45,750. These
estimates do not include any expense for options that may be granted and vest in
the future
Hypertension
Diagnostics, Inc.
Notes to
Financial Statements
September
30, 2008
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4.
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Stock
Options (continued)
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As of
September 30, 2008, there was $114,375 of
total unrecognized compensation costs related to the outstanding stock options,
which is expected to be recognized over a weighted average period of 1.25
years.
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5.
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Stock
Based Compensation
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The
Company has entered into a Deferred Equity Compensation Agreement with its CEO,
Mark N. Schwartz (the “Agreement”), whereby the Company will grant 175,000
phantom shares of its common stock to its CEO for every month of employment for
the period January 1, 2006 through December 31, 2008. A cash payment
will be made to the CEO equal to the price per share of the Company’s common
stock times the number of phantom shares accrued at the earliest of certain
Event Dates (as defined in the Agreement). Accordingly, the Company
has accrued a compensation liability of $216,563 at September 30, 2008, which is
the fair market value of 5,775,000 phantom shares granted as of September 30,
2008 pursuant to the Agreement. Due to phantom shares granted and the
changes in the price of the Company’s common stock, the Company recorded a
benefit of $229,688 in compensation cost for the three months ended September
30, 2008, compared to compensation expense of $283,500 for the three months
ended September 30, 2007, respectively. An increase in the Company’s
common stock price would cause an increase in the compensation cost for Stock
Based Compensation, while a decrease in the Company’s stock price would cause a
decrease in the compensation cost. Therefore, the benefit that the
Company recorded for the three months ended September 30, 2008 results from a
decrease in the Company’s stock price and phantom shares granted from the prior
period ending June 30, 2008 to the period ending September 30,
2008. On the last trading day of the period ending June 30, 2008, the
Company’s stock price was $0.085 per share, and on the last trading day of the
period ending September 30, 2008, the Company’s stock price was $0.0375 per
share.
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6.
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Net
Loss Per Share
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Basic net
income (loss) per share is computed using the weighted average number of common
shares outstanding during each period. Diluted net income (loss) per
share would normally include the dilutive effect of common shares potentially
issuable upon the exercise of stock options, warrants, or the conversion of
preferred stock. However, since the Company reported losses for
periods presented or the exercise price for options outstanding at the end of
the period is higher than the average stock price for the period, all potential
common shares have been excluded from the calculation of diluted net loss per
share, as the effect would have been anti-dilutive.
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7.
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Exercise
Dates of Warrants
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On March 19, 2008, the Company agreed
to extend from March 31, 2008 to December 31, 2008, the exercise date of its
outstanding remaining 50% Warrant B warrants to purchase shares of its common
stock, $0.01 par value per share, and Series A Convertible Preferred Stock,
$0.01 par value per share, which were initially exercisable on or before June
23, 2006 and were granted in connection with the Company’s private offering
which closed on August 28, 2003.
Overview
We are
engaged in the design, development, manufacture and marketing of proprietary
medical devices that we believe non-invasively detect subtle changes in the
elasticity of both large and small arteries. We are currently
marketing two products: the HDI/PulseWave™ CR-2000 Research
CardioVascular Profiling System and the CVProfilor® DO-2020
CardioVascular Profiling System.
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·
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The
CR-2000 Research System is being marketed worldwide “for research purposes
only” to clinical research investigators for the purpose of collecting
data in cardiovascular studies. Because the CR-2000 Research System bears
the CE Mark and meets the European Union Medical Device Directive,
physicians may use the CR-2000 Research System with patients in a clinical
setting in the European Union.
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·
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In
the U.S., the CVProfilor®
DO-2020 System is being marketed to primary care physicians and other
health care professionals on a purchase or lease basis. Some
Systems previously marketed under a “per-patient-tested rental basis
remain in use although we no longer offer that option in our current
marketing. Utilizing our Central Data Management Facility, we are able to
track utilization of the CVProfilor®
DO-2020 System in each physician’s office and medical clinic and to
invoice our physician customers on the number of CardioVascular Profile
Reports (CVProfile™ Reports) which they generate each
month.
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Recent
Accounting Pronouncements
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In
February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS No. 157 to July 1, 2009 for
us, for all nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the in the financial
statements on a recurring basis (at least annually). We believe the
adoption of the delayed items of SFAS No. 157 will not have a material impact on
our financial statements.
Critical
Accounting Policies
The
financial statements are prepared in accordance with accounting principles
generally accepted in the U.S., which requires us to make estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying financial statements and related footnotes. In preparing
these financial statements, management has made its best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality. We do not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates.
Revenue
Recognition. We recognize revenue in accordance with U.S. Securities
and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104, “Revenue
Recognition.” Pursuant to SAB No. 104, the Company recognizes revenue
from the sale of equipment at the time of shipment to a customer or
distributor. Shipment occurs only after receipt of a valid purchase
order and signed sale agreement. Payments from customers and
distributors are either made in advance of shipment or within a short time frame
after shipment. In the case of sales to distributors, such payment is
not contingent upon resale of the product to end users. Shipping and
handling costs are included as cost of equipment sales. At the time
of shipment, all of the criteria for recognition set forth in SAB No. 104 have
been met: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.
Equipment
rental revenue, whether from the minimum monthly fee or from the
per-patient-tested fee, is recognized when collection is probable, which is
currently upon cash receipt. At the time of receipt of rental
revenues, all of the criteria for recognition set forth in SAB No. 104 have been
met: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.
In the
case of either a sale or rental of our product, there are no post-shipment
obligations which affect the timing of revenue recognition. Once
purchased, neither customers nor distributors have a right to return or exchange
our product. Service/Contract revenue is recognized upon shipment, as
all parts sent to customers are prepaid before the part is shipped. Warranty
repairs on all of the above are handled on a repair or replacement basis, at our
discretion. Further, there is no installation of our product; it is
ready to use when plugged into an electrical outlet and no specialized knowledge
is required to ready it for use. For these reasons, we have concluded
that our revenue recognition policy is appropriate and in accordance with SAB
No.104.
Allowance
for Doubtful Accounts. Accounts receivable are reviewed to determine
the need for an allowance for amounts that may become uncollectible in the
future. The necessity of an allowance is based on management’s review
of accounts receivable balances and historical write-offs. As of
September 30, 2008 and June 30, 2008, there was no allowance for doubtful
accounts.
Inventories
and Related Allowance for Excess and Obsolete Inventory. Inventories
are valued at the lower of cost or market and reviewed to determine the need for
an allowance for excess and obsolete inventories. The need for an
allowance is based on management’s review of inventories on hand compared to
estimated future usage and sales. As of September 30, 2008 and June
30, 2008, there was an inventory allowance of $441,269 and $454,384,
respectively.
Research
and Development. For the three months ended September 30, 2008 and
2007, we did not incur any research and development costs.
Results
of Operations
As of
September 30, 2008, we had an accumulated deficit of $27,064,562, attributable
primarily to selling, general and administrative expenses. Until we
are able to generate significant revenue from our activities, we expect to
continue to incur operating losses. As of September 30, 2008, we had
cash and cash equivalents of $984,345. We anticipate that these
funds, in conjunction with revenue anticipated to be earned from sales of our
CVProfilor® DO-2020 Systems, anticipated sales of our CR-2000 Research Systems,
and anticipated operating costs, will allow us to pursue our business
development strategy for at least the next twelve months following September 30,
2008.
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
The
following is a summary of our Revenue and Cost of Sales for the three months
ended September 30, 2008 and 2007, respectively:
| Three Months Ended September 30, 2008 | ||||||||||||||||
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Equipment
|
Equipment
|
Service/
|
||||||||||||||
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Total
|
Sales
|
Rental
|
Contract
|
|||||||||||||
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Revenue
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$ | 136,512 | $ | 82,000 | $ | 25,697 | $ | 28,815 | ||||||||
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Cost
of Sales
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4,531 | 2,723 | 852 | 956 | ||||||||||||
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Gross
Profit
|
$ | 131,981 | $ | 79,277 | $ | 24,845 | $ | 27,859 | ||||||||
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Three
Months Ended September 30, 2007
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||||||||||||||||
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Equipment
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Equipment
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Service/
|
||||||||||||||
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Total
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Sales
|
Rental
|
Contract
|
|||||||||||||
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Revenue
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$ | 146,352 | $ | 91,930 | $ | 46,227 | $ | 8,195 | ||||||||
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Cost
of Sales
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2,328 | 1,201 | 604 | 523 | ||||||||||||
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Gross
Profit
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$ | 144,024 | $ | 90,729 | $ | 45,623 | $ | 7,672 | ||||||||
Revenue. Total
Revenue for the three months ended September 30, 2008 was $136,512, compared to
$146,352 for the three months ended September 30, 2007, a 6.7%
decrease.
Equipment
Sales Revenue for the three months ended September 30, 2008 was $82,000,
compared to $91,930 for the three months ended September 30, 2007, a 10.8%
decrease. A large part of this decrease is a result of the
replacement of the Company’s direct sales force with a network of independent
distributors selling multiple products to our customers.
Additionally
the Company is searching for a partner or partners with an established national
sales force or national distribution network serving the primary care market
with whom the CVProfilor product can be integrated into the partner’s existing
cardiovascular disease product platform. The Company believes that
this is the best strategy for broadening distribution and increasing sales of
the CVProfilor. No assurances can be given that the Company will
identify a suitable partner or partners or that the Company will consummate
mutually satisfactory arrangements with a partner or partners.
Market
acceptance of the CVProfilor® DO-2020
System by physicians has taken more time and resources than originally
anticipated due to the challenges associated with marketing new diagnostic
equipment in the primary care physician market. We have focused our
resources on specific regional markets that we believe are more likely to
generate higher levels of acceptance of the CVProfilor® DO-2020
System by physicians. Our current marketing strategy focuses on
marketing the CVProfilor® DO-2020
System to primary care physicians (internists and family practioners) who treat
patients with hypertension and diabetes. We believe these physicians
have the greatest interest in, and use for, our product. Therefore,
the most critical factor in our ability to increase revenue rests in our ability
to expand our marketing and distribution network to increase placements and
utilization of our CVProfilor® DO-2020
System.
Further,
the existence, timing and extent of reimbursement of physicians for the use of
our CVProfilor® DO-2020
System affects the market acceptance of our product. Reimbursement
will vary by the patient’s medical necessity, by physician, by provider, by
geography and by provider coverage plans, making the process of obtaining
reimbursement for the CVProfilor® DO-2020
System by current physician customers an important component of our product’s
success. To the extent that reimbursement is unavailable or
inadequate, physicians will be less likely to use the CVProfilor® DO-2020
System.
In
addition, for the CVProfilor® DO-2020
Systems currently being is rented on a per-patient-tested basis, we
have a delay in the cost recovery of our working assets. Although our
per-patient-tested marketing approach reduces the risk and thereby increases the
potential rate of acceptance for physician customers willing to use the
CVProfilor® DO-2020
System as compared to a capital acquisition approach, it also delays our cash
flow recovery of product costs. Physician payments for use of the
CVProfilor® DO-2020
System follow actual utilization by some 60-90 days; utilization in one month is
invoiced in the following month and payment is generally received within 30 to
60 days of invoicing.
For the
three months ended September 30, 2008, we recognized revenue for the
CVProfilor® DO-2020
System “per-patient-tested” rental program of $25,697, compared to $46,227 for
the three months ended September 30, 2007, a 44.4% decrease. The
decrease is due to the customers who have decided to purchase the CVProfilor
product rather than rent it and the elimination of the per-patient-tested rental
program from our current marketing strategy.
For the
three months ended September 30, 2008, Service/Contract Income was $28,815,
compared to $8,195 for the three months ended September 30, 2007, a 251.6%
increase.
Expenses. Total
selling, general and administrative expenses for the three months ended
September 30, 2008 were $16,860, compared to $614,985 for the three months ended
September 30, 2007. The following is a summary of the major categories included
in selling, general and administrative expenses:
| Three Months Ended | ||||||||
| September 30 | ||||||||
|
2008
|
2007
|
|||||||
|
Wages,
expenses, benefits before Stock Based CEO Compensation
|
$ | 63,867 | $ | 80,619 | ||||
|
Stock
Based CEO Compensation
|
(229,688 | ) | 283,500 | |||||
|
Outside
consultants
|
13,632 | 4,854 | ||||||
|
Rent
(building/equipment) and utilities
|
21,988 | 23,353 | ||||||
|
Insurance-general
and directors/officers liability
|
8,552 | 10,198 | ||||||
|
Selling,
marketing and promotion, including applicable wages
|
62,964 | 101,128 | ||||||
|
Legal
and audit/accounting fees
|
27,990 | 40,905 | ||||||
|
Royalties
|
3,216 | 4,137 | ||||||
|
Depreciation
and amortization
|
2,261 | 2,801 | ||||||
|
Stock
option expense
|
22,875 | 24,400 | ||||||
|
Other-general
and administrative
|
19,203 | 39,090 | ||||||
|
Total
selling, general and administrative expenses
|
$ | 16,860 | $ | 614,985 | ||||
Wages,
related expenses and benefits before Stock Based CEO Compensation decreased from
$80,619 to $63,867 for the three months ended September 30, 2007 and 2008,
respectively, a 20.8% decrease.
Accrued
Stock Based CEO Compensation, which is a non-cash charge that relates to the
estimated amount due our chief executive officer as part of his compensation for
services provided to us (see Note 5), was a benefit of $229,688 for the three
months ended September 30, 2008, compared with an expense of $283,500 for the
three months ended September 30, 2007. The benefit for the three
month period ended September 30, 2008 is a result from the decrease in the
Company’s stock price including the additional phantom shares granted during the
three month period ended September 30, 2008. The expense for the
three month period ended September 30, 2007 is a result of the increase in the
Company’s stock price.
Outside
consultants expense increased from $4,854 to $13,632 for the three months ended
September 30, 2007 and 2008, respectively, a 180.8% increase. This increase is
largely due to an increase in the expenses associated with our quality systems,
regulatory affairs, and engineering consultants in the three months ended
September 30, 2008.
Insurance
expense decreased from $10,198 to $8,552 for the three months ended September
30, 2007 and 2008, respectively, a 16.1% decrease. This decrease is
due to a decrease in the cost of the Company’s directors’ and officers’
liability insurance as well as a decrease in property insurance
premiums.
Selling,
marketing and promotion expense decreased from $101,128 to $62,964 for the three
months ended September 30, 2007 and 2008, respectively, a 37.7%
decrease. This category includes wages and commissions paid to our
sales reps, marketing expenses and travel and convention
expenses. This decrease is due mainly to a decrease in our revenues
from equipment sales, resulting in lower commissions paid, and a decrease in our
sales force, which has declined from one sales representative at the end of
September 30, 2007 to no sales representatives at the end of September 30, 2008
as we implemented a change to indirect distribution.
Legal and
audit/accounting fees decreased from $40,905 to $27,990 for the three months
ended September 30, 2007 and 2008, respectively, a 31.6% decrease.
Royalties
expense decreased from $4,137 to $3,216 for the three months ended September 30,
2007 and 2008, respectively, a 22.3% decrease. This expense is based
on an agreement with the University of Minnesota, which requires the Company to
pay a 3% royalty fee on total revenues each quarter. This decrease is
due to the decline of revenues for the three month period ending September 30,
2008, compared to the three month period ending September 30, 2007.
Stock
option expense decreased from $24,400 to $22,875 for the three months ended
September 30, 2007 and 2008, respectively, a 6.3% decrease. This expense is
based on the Black-Scholes option pricing model applied to the number of shares
of common stock underlying the stock options that vested during the three months
ended September 30, 2007 and September 30, 2008. This expense is a
result of the stock options granted to the non-management board of directors
effective January 1, 2007, which vest quarterly through December 31,
2009. Each quarter the value, based on the Black-Scholes option
pricing model, of the shares that vested during that quarter is recognized as a
stock option expense.
Other –
general and administrative expenses decreased from $39,090 to $19,203 for the
three months ended September 30, 2007 and 2008, respectively, a 50.9%
decrease. This decrease is due to the decline in several major
expense accounts. The Postage & Delivery account
decreased by $4,638, the Patent expense account decreased by $2,615,
the Advertising (distribution of press releases) account decreased by $3,597,
the Telephone expense account decreased by $3,297 and the Stock Transfer expense
account decreased by $1,126 from September 30, 2007 to September 30,
2008.
Interest
income was $6,484 and $14,753 for the three months ended September 30, 2008 and
2007, respectively a 56.0% decrease. This decrease was a result of the reduced
bank deposit rates and declining cash balances during the 2008
period.
Our net
income was $121,605 for the three months ended September 30, 2008, compared to a
net loss of $456,208 for the three months ended September 30,
2007. For the three months ended September 30, 2008, basic and
diluted net gain per share was $.00, based on weighted average shares
outstanding of 40,363,001. For the three months ended September 30,
2007, basic and diluted net loss per share was $(.01), based on weighted average
shares outstanding of 39,649,319.
At June
30, 2003, inventory which principally consists of raw materials had been written
down to estimated net realizable value to account for quantities in excess of
those expected to be sold currently. The results of operations for
the fiscal year ended June 30, 2003 included a corresponding charge to Cost of
Sales of $850,000 related to this write-down. As inventory is sold
relating to Equipment Sales Revenue, a portion of this Inventory Allowance is
recorded as an offset to Cost of Sales pertaining to these sales. As
of September 30, 2008, the Inventory Allowance balance is
$441,269. The following table shows the effect of this adjustment for
the periods indicated:
|
Three
Months Ended
|
||||||||
|
September
30, 2008
|
September
30, 2007
|
|||||||
|
Cost
of Sales
|
$ | 13,892 | $ | 4,933 | ||||
|
Inventory
Allowance Adjustment
|
(9,361 | ) | (2,605 | ) | ||||
|
Cost
of Sales, as reported
|
$ | 4,531 | $ | 2,328 | ||||
Off-Balance
Sheet Arrangements
During
the quarter ended September 30, 2008, we did not engage in any off-balance sheet
arrangements as defined in Item 303(c) of Regulation S-K.
Liquidity
and Capital Resources
Cash and
cash equivalents had a net decrease of $97,523 and a net increase of $90,943 for
the three months ended September 30, 2008 and September 30, 2007,
respectively. The significant elements of these changes were as
follows:
|
Three Months Ended September
30
|
||||||||
|
Net cash used in operating
activities:
|
2008
|
2007
|
||||||
|
— net
(loss), as adjusted for non-cash items
|
$ | (82,428 | ) | $ | (139,232 | ) | ||
|
— decrease
in accounts receivable:
– (A)the
increase in the collection of outstanding customer balances is a result of
customers paying with credit cards, and less sales at quarter
end.
|
(A) 23,126
|
(A) 266,134
|
||||||
|
— increase (decrease)
in accrued payroll and payroll taxes:
– (B)expense
amounts that relate to the estimated amount due our chief executive
officer as part of his compensation for services provided to
us.
|
(B)
(253,366)
|
(B) 233,151
|
||||||
We have
incurred operating losses and have not generated positive cash flow from
operations. As of September 30, 2008, we had an accumulated deficit
of $27,064,562.
As of
September 30, 2008, we had cash and cash equivalents of $984,345 and anticipate
that these funds, in conjunction with revenue anticipated to be earned from
placements and sales of our CVProfilor® DO-2020
Systems, anticipated sales of our CR-2000 Research Systems, and anticipated
operating costs, will allow us to pursue our business development strategy for
at least the next twelve months following September 30, 2008.
With a
current cash balance of approximately $984,345, the Company has sufficient cash
to meet its obligations and sustain operations for at least the next twelve
months as the Company considers its alternative strategies for the distribution
of its products. The most critical factor in our ability to increase
revenue rests in our ability to expand our marketing and distribution network to
increase placements and utilization of our CVProfilor® DO-2020
System. No assurances can be given that the Company will identify a
suitable partner or partners or that the Company will consummate mutually
satisfactory arrangements with a partner or partners.
Further,
the existence, timing and extent of reimbursement of physicians for the use of
our CVProfilor® DO-2020
affects the availability of our working capital. Reimbursement will
always vary considerably by the patient’s medical necessity, by physician, by
provider, by geography and by provider coverage plans, making the process of
obtaining reimbursement for the CVProfilor® DO-2020
by current physician customers an important component of our product’s
success. To the extent that reimbursement is unavailable or
inadequate, physicians will be less likely to use the CVProfilor®
DO-2020.
No
assurance can be given that additional working capital will be obtained in a
timely manner or on terms and conditions acceptable to us or our shareholders.
Our financing needs are based upon management estimates as to future revenue and
expense. Our business plan and our financing needs are also subject
to change based upon, among other factors, market conditions, and our ability to
materially increase the revenue generated by our CVProfilor® DO-2020
System and other cash flow from operations. Our efforts to raise
additional funds may be hampered by the fact that our securities are quoted on
the OTC Bulletin Board, are illiquid and are subject to the rules relating to
penny stocks.
(a)
Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer, Mark N. Schwartz, and our Manager of Finance and
Accounting, Mark O’Neill, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined
under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange
Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered
by this report. Based upon that review, our Chief Executive Officer and Manager
of Finance and Accounting have concluded that, as of the evaluation date, our
disclosure controls and procedures were operating effectively for gathering,
analyzing and disclosing the information that we are required to disclose in the
reports we file under the Securities Exchange Act of 1934, within the time
periods specified in the SEC’s rules and forms.
(b)
Management’s Annual Report on Internal Controls Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934, as amended). Our internal
control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles.
Under the
supervision and with the participation of management, including our Chief
Executive Officer and Manager of Finance and Accounting, our management assessed
the design and operating effectiveness of internal control over financial
reporting as of September 30, 2008 based
on criteria established in “Internal Control-Integrated Framework” issued by the
Committee of the Sponsoring Organizations of the Treadway Commission
(“COSO”).
Based on
this assessment, management concluded that our internal controls over financial
reporting were not effective as of June 30,
2008. In the course of our annual audit, our independent registered
public accounting firm uncovered a material accounting error which was corrected
prior to the filing of the 10-KSB. The adjustment to our financial
statements has been recorded properly. The cause of the material
accounting error was a deficiency in a control over the accounting for the
inventory reserve allowance. Management determined that this control
deficiency constituted a material weakness in our internal controls over
financial reporting. As of this date, the material weakness has been
remediated and this material weakness no longer exists.
This
quarterly report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to rules of the
Securities and Exchange Commission.
(c)
Changes in Internal Control Over Financial Reporting
On
September 18, 2008, we made a change to our internal control over financial
reporting such that the accounting for inventory reserve allowance is
significantly improve. During the quarter ended June 30, 2008, we needed
to make an adjustment to our financial statements prior to filing them with the
SEC because of a material accounting error causing a deficiency over the
accounting for inventory reserve allowance.
(a) The
following Exhibits are furnished pursuant to Item 601 of Regulation
S-B:
In
accordance with the requirements of the Exchange Act, the Registrant has caused
this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
HYPERTENSION
DIAGNOSTICS, INC.
|
|
|
By
/s/ Mark N.
Schwartz
|
|
|
Mark
N. Schwartz
|
|
|
Chief
Executive Officer
|
|
Date: November
13, 2008