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HYPERTENSION DIAGNOSTICS INC /MN - Quarter Report: 2011 September (Form 10-Q)

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HYPERTENSION DIAGNOSTICS, INC.

INDEX TO FORM 10-Q


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

 

(Mark One)

x

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

 

 

 

For the quarterly period ended September 30, 2011

 

 

 

or

 

 

o

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

 

 

For the transition period from          to        


Commission File Number:  0-24635


HYPERTENSION DIAGNOSTICS, INC.

(Exact name of Registrant as Specified in its Charter)


MINNESOTA


411618036

(State or Other Jurisdiction of


(I.R.S. Employer Identification No.)

Incorporation or Organization)




10275 WAYZATA BOULEVARD, SUITE 310, MINNETONKA, MN

55305

(Address of Principal Executive Offices)

(Zip Code)


952-545-2457

(Registrants Telephone Number, Including Area Code)



2915 WATERS ROAD, SUITE 108, EAGAN, MN  55121-3528

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 NOo

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

YES x NOo


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

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer   o

Smaller reporting company x

(Do not check if a smaller reporting company)


 

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


As of November 10, 2011, there were issued and outstanding 43,325,843 shares of the issuers common stock.






Page No




PART I.

FINANCIAL INFORMATION:





Item 1.

Financial Statements






Consolidated Balance Sheets September 30, 2011 (unaudited) and June 30, 2011

4





Consolidated Statements of Operations (unaudited) Three Months Ended September 30, 2011 and 2010

5





Consolidated Statements of Cash Flows (unaudited) Three Months Ended September 30, 2011 and 2010

6





Notes to the Consolidated Financial Statements

7




Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

13




Item 4.

Controls and Procedures

16





PART II.

OTHER INFORMATION:





Item 6.

Exhibits

16





SIGNATURES

18





CERTIFICATIONS

19



















2


Hypertension Diagnostics, Inc.

Forward-Looking Statements


This report may contain forward-looking statements, as such term in defined by the Securities and Exchange Commission its rules, regulations and releases, which represent the current beliefs of our management as well as assumptions made by and information currently available to management, including but not limited to, statements concerning the registrants operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans.  For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as may, will, expect, believe, expect, can, estimate, anticipate, intent, could, might, plan, predict or continue or the negative or other variations thereof or comparable terminology 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.  


These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Companys control, and actual results may differ materially depending on a variety of important factors, including our ability to generate acceptable levels of revenues; negative effect on our stock price resulting from available securities for sale; our need for additional capital; significant business risks associated with the start-up of the Companys HDI Plastics, Inc. subsidiary business; the illiquidity of our securities on the OTC Bulletin Board and the related restrictions on our securities relating to penny stocks; and potential violations by us of federal and state securities laws; uncertainty related to acquisitions; governmental regulation; commercial viability of required raw materials, and any other factors discussed in this and other filings of the Company with the Securities and Exchange commission. We undertake no responsibility to update any forward-looking statement. These forwardlooking statements are only made as of the date of this report.  The following should be read in conjunction with the information presented in our Annual Report on Form 10-K for the year ended June 30, 2011.  




3


Hypertension Diagnostics, Inc.

Consolidated Balance Sheet

(Unaudited)


PART I.  FINANCIAL INFORMATION


Item 1.  Consolidated Financial Statements







September 30,


June 30,

Assets


2011


2011

Current Assets:





   Cash and cash equivalents


$

683,902


$

753,821

   Prepaids and other current assets


20,688


9,632

   Inventory


29,000


-

   Note receivable-related party-Minot


80,000


125,000

   Note receivable-related party-CPC


129,100


-

   Current assets of discontinued operations


-


374,190

               Total Current Assets


942,690


1,262,643






Property and Equipment, net


439,311


-






Non-current assets of discontinued operations


-


16,835

Other assets


43,658


6,530

               Total Assets


$

1,425,659


$

1,286,008






Liabilities and Shareholders' Equity (Deficit)





Current Liabilities:





   Accounts payable


$

55,015


$

   Compass Bank payable (Note 11)


250,000


   Payable to CP for equipment (Note 11)


155,000


 - 

   Current liabilities of discontinued operations


181,156


240,975 

   Other accrued expenses


-


3,170 

   Deferred compensation-discontinued operations, current portion


-


622,500 

               Total Current Liabilities


641,171


866,645 






Long Term Liabilities:





   Deferred compensation-discontinued operations, less current portion


1,312,500


               Total Liabilities


1,953,671


866,645 





 

Shareholders' Equity (Deficit):





   Series A Convertible Preferred Stock, $.01 par value:





      Authorized shares--5,000,000





      Issued and outstanding shares611,390 at September 30,





        2011  and June 30, 2011; each share of preferred





        stock is convertible into 12 shares of common stock at the option





        of the holder (aggregate liquidation preference $8,841,117 and





        $8,444,722 at September 30, 2011 and June 30, 2011, respectively)


6,114 


6,114 

   Common Stock, $.01 par value:





      Authorized shares--150,000,000





      Issued and outstanding shares43,325,843





      at September 30, 2011 and June 30, 2011


433,258 


433,258 

   Additional paid-in capital


28,062,670 


27,998,045 

   Accumulated deficit


(29,030,054)


(28,018,054)

               Total Shareholders' Equity (Deficit)


(528,012)


419,363 

               Total Liabilities and Shareholders' Equity (Deficit)


$

1,425,659 


$

1,286,008 






See accompanying notes.






     

   






Three Months Ended





September 30,





2011


2010

Revenues:







  Hypertension royalties




$

1,200 


$

  Plastic processing sales





     Total  revenues




1,200 









Cost of Sales-plastic processing




38,258 


               Gross Profit




(37,058)









Expenses:







   Selling, general and administrative




202,473 


65,096 

               Total Expenses




202,473 


65,096 

Operating loss




(239,531)


(65,096)








Other Income:







    Interest income




2,096 


1,995 

    Miscellaneous income




499 


                Total Other Income




2,595 


1,995 

                      Net loss before income taxes




(236,936)


(63,101)

Income taxes





 Net loss from continuing operations




(236,936)


(63,101)








Income (loss) from discontinued operations




(651,362)


327,322 

Loss on sale of discontinued operations




(123,702)


-

  Net income (loss) from discontinued operations




(775,064)


327,322

Net income (loss)




$

(1,012,000)


$

264,221 








Net Income (loss) from continuing operations:







                  Basic




$


$

                  Diluted




$


$

Net Income (loss) from discontinuing operations:







                  Basic




$

(0.02)


$

0.01 

                  Diluted




$

(0.02)


$

0.01 

Net Income (loss) per Common Share:







                  Basic




$

(0.02)


$

0.01 

                  Diluted




$

(0.02)


$

0.01 








Weighted Average Common Shares Outstanding:







                  Basic




43,325,843 


41,995,526 

                  Diluted




43,325,843 


41,995,526 


See accompanying notes.










Three Months Ended



September 30,



2011


2010

Operating Activities:










Net income (loss)


$

(1,012,000)


$

264,221 

Adjustments to reconcile income(loss) to net





     cash provided by(used in) operating activities:





   (Income) loss from discontinued operations


651,362 


(327,322)

   Loss on sale of discontinued operations


123,702 


         Net loss from continuing operations


(236,936)


       (63,101)






   Stock option expense


64,625 


30,250

      Change in operating assets and liabilities:





   Accreted interest on note receivable


1,600 


   Inventory


(29,000)


   Prepaids and other current assets


(11,056)


(7,212)

   Other assets


(37,128)


   Accounts payable


55,015 


   Other accrued expenses


(3,170)


        Net cash used in operating activities


(196,050)


(40,063)






Investing Activities:





Payment received on note receivable-related party-Minot


45,000 


Purchases of  property and equipment


(34,311)


         Net cash provided by investing activities


10,689 


Financing Activities:




Proceeds from exercise of warrants



30,000 

         Net cash provided by financing activities


30,000 

               Net cash used in continuing operations

(185,361)


(10,063)





Discontinued Operations:




      Net cash provided by (used in) operating activities

115,442 


(154,160)





Net increase(decrease) in cash and cash equivalents

(69,919)


(164,223)





Cash and cash equivalents at beginning of period

753,821 


1,053,648 





Cash and cash equivalents at end of period

$

683,902 


$

889,425 






Supplemental non-cash flow information:





   Compass Bank payable for equipment


$

250,000 


$

   Payable to CP for equipment


$

155,000 


$

   Note receivable-related party from sale of discontinued operations


$

127,500 


$






See accompanying notes.












6


Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

September 30, 2011


Note 1.   Basis of Presentation


             The accompanying unaudited consolidated 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, 2011 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2012.  The June 30, 2011 balance sheet was derived from audited financial statements and was adjusted to reflect unaudited adjustments to reclassify discontinued operations, as described in Note 2 and 3 below.  For further information, refer to the financial statements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2011.  The policies described in that report are used for preparing quarterly reports.


On July 14, 2011, the Company formed HDI Plastics, Inc. (HDIP), as a wholly-owned subsidiary. The Company anticipates that HDIP, which signed a lease agreement for manufacturing space on September 22, 2011 and commenced operations in October 2011, will be its principal operating business going forward. HDIP is engaged in the processing of recycled plastic material including re-processing into pellet-form for sale to manufacturing customers. (See Note 11.)


Note 2.  Nature of Business and Summary of Significant Accounting Policies:


Discontinued Operations- On August 26, 2011 (the Effective Date), the Company entered into and closed a definitive Asset Purchase Agreement (the Agreement) providing for the sale of selected assets from our Hypertension Diagnostics Business to Cohn Prevention Center, LLC (CPC), a Minnesota company, controlled by a Jay Cohn, a director and stockholder of HDI as of the Effective Date. The terms of the Agreement provided for the sale of selected operating assets of the Companys medical device business (including inventory but excluding cash, accounts receivable, and intellectual property).  The Agreement does not limit the ability of CPC to sell the purchased inventory to any customer or in any market where they can be legally sold.  Additionally, CPC assumed all warranty and on-going product support required by regulatory agencies related to such inventory. As a result of this agreement, and with the sale of selected assets to CPC, we have reclassified our previously reported financial results to exclude those operations affected by the sale. These results are presented on an historical basis as a separate line in our income statements and balance sheets entitled Discontinued Operations.  HDI has retained rights to its intellectual property including the rights to royalty payments from CPC.  HDI expects to pursue additional royalty opportunities although there is no assurance it will be successful.  Ongoing income derived from the Companys intellectual property is reflected as continuing operations.  All of the information in the financial statements and notes to the financial statements has been revised to reflect only the results of our continuing operations from our new recycled plastics process business.


Principles of Consolidation


The Company files consolidated financial statements that include its wholly-owned subsidiary HDIP. All material intercompany accounts and transactions have been eliminated in consolidation.



 Recent Accounting Pronouncements


There were no new accounting standards issued or effective during the three months ended September 30, 2011 that had or are expected to have a material impact on the Companys results of operations, financial condition, or cash flows.


Note 3.   Discontinued Operations


Discontinued Operations- On August 26, 2011, (the Effective Date), the Company entered into and closed a definitive Asset Purchase Agreement (the Agreement) providing for the sale of selected assets of  our medical device business to Cohn Prevention Center, LLC (CPC), a Minnesota company, controlled by a Jay Cohn, a director and stockholder of HDI as of the Effective Date. The terms of the Agreement provided for the sale of selected operating assets of the Companys medical device business (including inventory but excluding cash, accounts receivable, and intellectual



7


Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

September 30, 2011


property).  The Agreement does not limit the ability of CPC to sell the purchased inventory to any customer or in any market where they can be legally sold.  Additionally, CPC assumed all warranty and on-going product support required by regulatory agencies related to such inventory.


In connection with the Agreement, CPC paid the Company on the Effective Date a cash payment of  $125,000 and issued a secured promissory note to the Company in the amount of either $150,000 due in 12 months or $200,000 due in 18 months at the discretion of CPC (See Note 4). Nearly all of the proceeds received at closing will be allocated to cover severance and other costs related to the transaction. Severance costs include an agreement by the Company to pay to Greg Guettler, its former Chief Operating Officer, six months salary and health benefits totaling approximately $100,000. As part of the severance agreement, the Company agreed to pay Mr. Guettler a 10% fee of the proceeds received by the Company less applicable transaction expenses. The Company accrued $12,500 in connection with the 10% fee.  Additionally, CPC agreed to pay the Company a cash payment of $1,200 on each of the first 50 units of purchased inventory sold within 30 days of receipt of cash from such sale.  We received one royalty payment of $1,200 for the three months ended September 30, 2011.


The Company and CPC also entered into a Sublicense Agreement on the Effective Date (the Sublicense Agreement), pursuant to which the Company granted to CPC a limited license to use the Companys intellectual property, technology, and technical know-how related to the Companys arterial elasticity measurement technology exclusively in CPC clinics and research related exclusively to CPC clinics.  All other applications of the intellectual property, technology and technical know-how will be retained by the Company for the benefit of the Company.  The Sublicense Agreement also provides that any development of a next generation arterial measurement device, however, would be limited exclusively to use and sale within the CPC network of clinics and to research exclusively related to CPC clinics.


CPC and the Company also entered into a Sublease Agreement as of the Effective Date, which permits CPC to lease the Waters II Suite 108, Eagan, Minnesota facility of the Company during the remaining term of the Companys lease, which expires October 31, 2014, on the same pass-through economic terms as the underlying lease with HDI which remains as an obligation of the Company.


Upon the closing of this transaction, the Company had limited operations related to its medical device business and intends to seek additional opportunities to license its proprietary technology, intellectual property, technical know-how and other core assets, although there is no assurance these efforts will be successful.


As part of the sale transaction, the Company recorded the following loss which is reported as Loss on sale of discontinued operations in the Consolidated Statements of Operations as of September 30, 2011:


Cash

$

125,000 

Note receivable (present value)

127,500 

     Total sales price

252,500 

Net assets and liabilities


Inventories, net

370,984 

Property and equipment, net

16,059 

Accrued royalties

(10,841)

     Net assets sold

376,202 



Loss on sale of discontinued operation, before income tax

(123,702)

Income tax benefit

     Loss on sale of discontinued operations, net of tax

$

(123,702)


The Company has not included the results of operations of our former  medical device business in the results from continuing operations.  The Company expects to receive continuing royalties from its licensed technology and is continuing its efforts to license and market its intellectual property and revenue and expenses related to the ongoing licensing activities are reflected as continuing operations. The income (loss) from discontinued operations for the quarter ended September 30, 2011, and 2010 consists of the following:




September 30,


2011


2010

Revenue, net

$

234,560 


$

257,208 

Cost of Goods Sold

10,557 


37,854 

Gross Profit

224,003 


219,354 

Operating expenses including the deferred compensation fair




value change of $622,500 and ($438,750), respectively

875,365 


(107,968)

Net income (loss) from operations

(651,362)


327,322 

Loss on sale of selected assets to CPC

(123,702)


Net income (loss) from discontinued operations

$

(775,064)


$

327,322 


The major classes of assets and liabilities of discontinued operations as of September 30, 2011 and June 30, 2011 were as follows:



September 30,


June 30,

 


2011


2011

Accounts receivable

$

-


$

4,365

Inventory, net

-


364,952

Prepaid expenses

-


4,873

   Current assets of discontinued operations

-


$

374,190






2011


2010

Accrued payroll, vacation, and payroll taxes

$

61,832


$

51,253

Severance payable to former COO

112,500


-

Deferred revenue

-


88,819

Accrued commissions

-


46,500

Accrued royalties

-


17,770

Other accrued expenses

6,824


36,633

   Current liabilities of discontinued operations

$

181,156


$

240,975


Note 4.   Notes Receivable Related Parties

             

Notes  Receivable - On May 3, 2011, the Company entered into a promissory note agreement with Minot 123, LLC, a North Dakota limited liability company (Minot)  , under which HDI loaned Minot $125,000 toward the purchase of an office building (M Building) located in, Minot, North Dakota.   At the time the agreement was entered into, Kenneth W. Brimmer, a director of the Company, was one of the three principals of Minot. On July 13, 2011, the Company exercised its option to receive repayment of the Note and subsequently, in accordance with the repayment terms, $20,000 was paid to the Company. Six monthly payments of $12,500 are due beginning on August 15, 2011, and the final payment is due and payable February 15, 2012, which includes accrued interest and reimbursement of the Companys legal fees. Minots obligation to repay the Note is secured by a second mortgage on M Building, second only to the first mortgage held by the seller of M Building to Minot. As of July 13, 2011, Mr. Brimmer was no longer affiliated with Minot. The balance outstanding at September 30, 2011 is $80,000.


In connection with the Asset Purchase Agreement between HDI and Cohn Prevention Centers, LLC, Cohn paid HDI on the Effective Date a cash payment of $125,000 and issued a non-interest bearing secured promissory note due to HDI in the amount of either $150,000 in 12 months or $200,000 in 18 months, at the discretion of CPC.  The promissory note is reflected at an imputed discount rate of 15% based upon the amount due 12 months following the sale and is reflected as a net note receivable of $127,500.  The balance of the Note at September 30, 2011 is $129,100 after including $1,600 of accreted accrued interest.

 





9


Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

September 30, 2011


Note 5.  Property and Equipment


Property and Equipment are as follows:



September 30,


2011


2010

Equipment

$

412,998


$

-

Leasehold Improvements

26,313


-

Less accumulated depreciation

-


-

  Total equipment

$

439,311


$

-


The Company did not place these new assets for the recycled plastics processing business into service until October 1, 2011; as a result, there is no depreciation expense as of September 30, 2011.


Note 6.   Litigation


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 Companys financial position or results of operations.


Note 7.  Stock Options


            The Company regularly grants stock options to individuals under various plans as described in Note 10 of the Companys Annual Report on Form 10-K for the year ended June 30, 2011.  The Company recognizes share-based payments, as compensation costs for transactions, including grants of employee stock options, to be recognized in the financial statements.  Stock-based compensation expense is measured based on the fair value of the equity or liability instrument issued.  Share-based compensation arrangements includes: stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  The Company measures the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and expenses the cost over the period in which the employee is required to provide services for the award.  The Company uses the Black-Scholes option-pricing model that meets the fair value objective.


During the three months ended September 30, 2011and the three months ended September 30, 2010, there were no stock options granted. The Company recognized compensation expense of $64,625 for the three months ended September 30, 2011, and $30,250 for the three months ended September 30, 2010, which were related to options previously granted.


Note 8.

Deferred Compensation


The Company is a party to a Deferred Equity Compensation Agreement with its former CEO, Mark N. Schwartz (the Agreement), whereby the Company granted 225,000 phantom shares of its common stock to Mr. Schwartz for every month of employment for the period January 1, 2010 through September 30, 2011. Mr. Schwartz resigned as the Companys CEO effective September 22, 2011. Under the agreement, a cash payment will be made equal to the price per share of the Companys common stock times the number of phantom shares accrued at the earliest of certain events.


The Company has accrued a total deferred compensation liability of $1,312,500 at September 30, 2011, which is the fair market value of 13,125,000 phantom shares granted as of September 30, 2011.  Due to the changes in the average price of the Companys common stock at the end of the quarter (increase from $0.05 to $ 0.10), the Company recorded a net compensation expense of $690,000 for the period ended September 30, 2011. For the period ended September 30, 2010, the Company recorded a net compensation benefit of $378,000.  An increase in the Companys common stock price would cause an increase in the deferred compensation, while a decrease in the Companys stock price would cause a decrease in the deferred compensation liability. Expenses related to the Deferred Compensation arrangement with its former CEO are accounted for as part of Discontinued Operations.


Under the terms of Mr. Schwartzs original employment agreement, payment of the deferred compensation benefit would occur upon one of the following events: i) execution of a definitive agreement resulting in a change of control of the Companys common stock; ii) termination of employment; iii) death of the CEO; or iv) no later than January 1, 2012. Upon



10


Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

September 30, 2011


one of these events, a cash payment over 24 months will be made to the CEO equal to the trading price per share of the Companys common stock times the number of phantom stock shares accrued to date.  Mr. Schwartz and the Company modified the original Agreement on September 30, 2011,  whereby Mr. Schwartz has tentatively agreed to change event iv above to: suspend the requirement for a cash payment as of a date certain pursuant to the Agreement. Also, Mr. Schwartz agreed as of October 1, 2011 that no additional phantom shares will be granted to Mr. Schwartz under the Agreement.


Note 9.   Net Income (Loss) Per Share


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.  


The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share at September 30, 2011 and 2010.





September 30



September 30


 

 

 

2011



2010

 

 

Basic earnings (loss) per share calculation:

 

 

 

 

 

 

 

Net income (loss) from continuing operations to common shareholders


$

(236,936)



$

(63,101)



Net income (loss) from discontinued operations








   to common shareholders.


(775,064)



327,322 



Net income (loss) to common shareholders


$

(1,012,000)



$

264,221 










 

Weighted average of common shares outstanding


43,325,843 



41,995,526 

 









 

Basic net earnings (loss) from continuing operations


.00 



.00 



Basic net earnings (loss) from discontinued operations


(.02)



.01 



Basic net earnings (loss) per share


(.02)



.01 


 








 

Diluted earnings (loss) per share calculation:







 

Net income (loss) from continuing operations to common shareholders


(236,936)



(63,101)



Net income (loss) from discontinued operations








   to common shareholders.


(775,064)



327,322 



Net income (loss) to common shareholders


$

(1,012,000)



$

264,221 










 

Weighted average of common shares outstanding


43,325,843 



41,995,526 



Series A Convertible Preferred Stock (1)





 

           Stock Options (2)





 

           Warrants (3)













 

Diluted weighted average common shares outstanding


43,325,843 



41,995,526 

 










Diluted net earnings (loss) from continuing operations


(.00)



.00 



Diluted net earnings (loss) from discontinued operations


(.02)



.01 



Basic net earnings (loss) per share


(.02)



.01 











(1)

At September 30, 2011, there were 611,390 shares of Series A Convertible Preferred Stock outstanding and 611,390 at September 30, 2010. Using the preferred stock conversion ratio of 12:1, the common stock equivalents attributable to these preferred shares are 7,336,680 at September 30, 2011 and 8,624,076 at September 30, 2010.  


 (2)

At September 30, 2011, there were common stock equivalents attributable to outstanding stock options of 8,352,914 common shares and 7,141,914 common shares at September 30, 2010. All of the remaining stock options are anti-dilutive at September 30, 2011, due to the loss from continuing operations, and therefore have been excluded from diluted earnings per share.

 

(3)

At September 30, 2011 and 2010, there were common stock equivalents of 18,498,636 common shares attributable to warrants, respectively. The warrants expire on September 30, 2012, and have an exercise price of $.14 to $.30 per share. The warrants are not common stock equivalents at September 30, 2011 and 2010 due to the loss from continuing operations, and therefore have been excluded from diluted earnings per share.




11


Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

September 30, 2011


Note 10.

   Exercise Dates of Warrants


In February 2010, the Company modified the exercise price on all of the Preferred Stock Warrant B from $2.64 to $1.68 and on all of the Common Stock Warrant B from $0.22 to $0.14 to encourage the exercise of the warrants. In July 2010, the Company agreed to extend the modification to September 30, 2011, to encourage exercising of these warrants in order for the Company to receive additional funding.  No additional expense was recorded for this extension due to the warrants being originally connected to a capital raise.


On July 22, 2011, HDI agreed to extend the modification to September 30, 2012, to encourage exercising of the warrants in order for the Company to receive additional funding. No additional expense was recorded for this extension due to the warrants being originally connected to a capital raise. During the three months ended September 30, 2010, the Company received $30,000 in cash proceeds for the exercise of these common and preferred stock warrants of 122,127 and 7,680 shares, respectively. There were no warrants exercised during the three months ended September 30, 2011.


Note 11.  Acquisition of Assets


HDI Plastics, Inc.


On September 22, 2011, the Companys HDI Plastics, Inc. subsidiary entered into a five-year lease agreement with Flemtex Properties Corp., a Delaware corporation, for space totaling 104,291 square feet at Suite 100, 5330 Fleming Court, Austin, Texas (the Lease). The space includes 89,452 square feet of warehouse/manufacturing space and 14,839 square feet of office space. Under the terms of the Lease, HDIP shall pay rent of approximately $26,000 per month. The rental payments over the 64 months of the initial term of the Lease total $1,626,940. The lease payments are guaranteed by HDI.


On September 26, 2011, HDI entered into a definitive Tri-Party Sales Agreement (Agreement) providing for the purchase of selected manufacturing assets from Compass Bank (the Bank), and Cycled Plastics, LTD, a limited partnership (CP). In connection with the purchase of the assets, HDI agreed to pay the Bank a cash payment of $250,000. Additionally, HDI agreed to pay $25,000 at closing to CP and to make future payments of $130,000 to CP for equipment. The Company paid a total of $405,000 for selected assets. The agreement was finalized in October 2011. In September 2011, the Company paid CP approximately $29,000 for initial inventory. The $250,000 was paid to Compass Bank on October 7, 2011.


Note 12.   Subsequent Events


On October 10, 2011, HDI Plastics, Inc. entered into an Accounts Receivable Discount line facility with Charter Capital Holdings, L.P.  (Charter).   Under the terms of the financing agreement, which is guaranteed by HDI, Charter will advance 80% of eligible receivables up to a total advance of  $1 million. Charter retains a priority and perfected security interest in all accounts receivable and inventory of HDI Plastics, Inc.  The financing cost under the agreement is 0.59% for each 10-day period or an approximate annualized interest cost of approximately 21.25%.






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Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations


Overview


Historically we were engaged in the design, development, manufacture and marketing of proprietary medical devices. On August 26, 2011, the Company entered into and consummated an Asset Purchase Agreement providing for the sale of selected assets to Cohn Prevention Center, LLC (CPC). The terms of the Agreement provided for the sale of selected operating assets of the Companys medical device business (including inventory but excluding cash, accounts receivable, and intellectual property).  We remain engaged in marketing the core technology developed by HDI in an effort to obtain licensing and/or royalty income.


During the final quarter of fiscal 2011, the Company began to consider strategic alternatives given its limited capital, the challenges associated with marketing its medical devices, the effect of health care reform on reimbursement, and the need to develop the next generation of its medical devices. As a result of this review, the Company concluded to change its business and exit the medical device business and pursue an opportunity in the plastic recycling and processing business. To facilitate the new direction the Company formed HDI Plastics on July 14, 2011 and began pursuing negotiations to lease manufacturing space and purchase processing equipment.


HDI Plastics, a wholly owned subsidiary of the Company,  processes post-consumer and post-industrial thermoplastic waste material into clean, reusable resin sold to manufacturers of plastic products. HDI Plastics is also engaged in toll processing of customer plastic material for a fee and in brokerage sales of recycled plastic material.



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.


Principles of Consolidation. During the quarter ending September 30, 2011, HDI finalized a purchase agreement to acquire machinery and equipment to begin operations in Austin, TX under the name of HDI Plastics (HDIP), with processing operations commencing in October 2011. The Company files consolidated financial statements that include its wholly-owned subsidiary HDIP. All material intercompany accounts and transactions have been eliminated in consolidation.


Notes  Receivable.  On May 3, 2011, the Company entered into a promissory note agreement with Minot 123, LLC, a North Dakota limited liability company (Minot)  , under which HDI loaned Minot $125,000 toward the purchase of an office building (M Building) located in, Minot, North Dakota.   At the time the agreement was entered into, Kenneth W. Brimmer, a director of the Company, was one of the three principals of Minot. On July 13, 2011, the Company exercised its option to receive repayment of the Note and subsequently, in accordance with the repayment terms, $20,000 was paid to the Company. Six monthly payments of $12,500 are due beginning on August 15, 2011, and the final payment is due and payable February 15, 2012, which includes accrued interest and reimbursement of the Companys legal fees. Minots obligation to repay the Note is secured by a second mortgage on M Building, second only to the first mortgage held by the seller of M Building to Minot. As of July 13, 2011, Mr. Brimmer was no longer affiliated with Minot. The balance outstanding at September 30, 2011 is $80,000.


In connection with the Asset Purchase Agreement between HDI and Cohn Prevention Centers, LLC, Cohn paid HDI on the Effective Date a cash payment of $125,000 and issued a non-interest bearing secured promissory note due to HDI in the amount of either $150,000 in 12 months or $200,000 in 18 months, at the discretion of CPC.  The promissory note is reflected at an imputed discount rate of 15% based upon the amount due 12 months following the sale and is reflected as a net note receivable of $127,500.  The balance of the Note at September 30, 2011 is $129,100 after including $1,600 of accreted accrued interest.





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Revenue Recognition. Beginning October 2011, HDI Plastics will sell finished goods to manufacturers in the form of pelletized resin and clean shredded and ground material. These sales will be recorded as revenue at the time the product is shipped and invoiced to the customer. The Company also engages in toll processing of customer-owned material for a service fee. These service fees are recorded as plastic processing revenue at the time the product is shipped to the customer. The Company also engages in brokerage transactions of plastic material where goods are delivered to a customer without HDIP ever taking physical possession of the product. The net income from brokerage transactions will be recorded as revenue at the time it is shipped to the customer and invoiced. Brokerage sales are recorded as revenue net of the cost of the brokered material.


Inventories and Related Reserve for Obsolete Inventory.  Inventories are valued at the lower of cost or market and reviewed to determine the need for a reserve for obsolete inventories.  The need for a reserve is based on managements review of inventories on hand compared to estimated future usage and sales.  As of September 30, 2011 and June 30, 2011, there was no reserve for obsolete inventory.


Research and Development.  For the three months ended September 30, 2011 and 2010, we did not incur any research and development costs.


Recent Accounting Pronouncements


There were no new accounting standards issued or effective during the three months ended September 30, 2011 that had or are expected to have a material impact on the Companys results of operations, financial condition, or cash flows.


Results of Operations


As of September 30, 2011, we had an accumulated deficit of $29,030,054. Until we are able to generate significant revenue from our activities, we expect to continue to incur operating losses.  As of September 30, 2011, we had cash and cash equivalents of $683,902.  We anticipate that these funds, less our anticipated operating costs, will allow us to pursue our business development strategy for at least the next twelve months following September 30, 2011.


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


Revenue- The Company earned $1,200 and $0 in revenue from continuing operations in the quarters ended September 30, 2011 and 2010, respectively. The $1,200 was received from CPC as a result of the royalty agreement that was part of the sale of selected assets to CPC. The Company commenced operations of the HDIP business and began recognizing sales revenue in October 2011.


Expenses- Total selling, general and administrative expenses for continuing operations for the three months ended September 30, 2011 were $202,473 compared to $67,353 for the three months ended September 30, 2010. The following is a summary of the major categories included in selling, general and administrative expenses:




Three Months Ended

 


September 30

 


2011


2010





Wages, expenses, and benefits

$

67,353


$

-

Patent Expense.

5,220


1,405

Rent (building/equipment) and utilities.

10,194


8,987

Insurance-general and directors/officers liability

6,019


5,006

Legal and audit/accounting fees..

38,531


18,213

Stock option expense..

64,625


30,250

Other-general and administrative.

10,531


1,235

            Total selling, general and administrative expenses.

$

202,473


$

65,096


Wages, related expenses and benefits increased from $0 to $65,096 for the three months ended September 30, 2010 and 2011,  respectively, a 100% increase. The primary reason for the increase was discontinued operations



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for 2010 and 2011 of the medical device business. The wages, expenses, and benefits that remained in SG&A are for the cycled plastics processing business for the end of the period to set-up the new business.


Legal and audit/accounting fees increased from $18,213 to $38,531 for the three months ended September 30, 2010 and 2011, respectively, a 112% increase due to the sale of selected assets to CPC, the assignment of lease at the Waters Road address, purchase of CP selected assets and timing of invoices for audit for the fiscal year-end dated June 30, 2011.


Stock option expense was $64,625 and $30,250 for the three months ended September 30, 2011 and 2010, respectively. This expense is based on the grant date fair value related to stock options that vested during the three months ended September 30, 2011 and September 30, 2010.  The increase in expense is a result of additional stock options vesting to the Companys former COO as per his severance agreement.


Other general and administrative expenses increased from $1,235 to $10,531 for the three months ended September 30, 2010 and 2011, respectively, a 753% increase which is related to costs incurred on setting up the new cycled plastics processing business.


Our net loss from continuing operations was $236,936 for the three months ended September 30, 2011, compared to net income (loss) from continuing operations of $63,101 for the three months ended September 30, 2010.  For the three months ended September 30, 2011, basic and diluted net loss per share from continuing operations was $0.00, based on weighted average common shares outstanding of 43,325,843.  For the three months ended September 30, 2010, basic net income per share per continuing operations was $0.00 based on weighted average common shares outstanding of 41,995,526.


Liquidity and Capital Resources


Cash and cash equivalents had a net decrease of $69,919 and $164,223 for the three months ended September 30, 2011 and September 30, 2010, respectively.  The significant elements of these changes were as follows:




Three Months Ended September 30



2011



2010

Net cash provided by (used in) operating activities:






-- Net loss from continuing operations


$

(236,936)



$

(63,101)

-- Non-cash stock option expense


64,625 



30,250 

 (Increase)Decrease in inventory:






 (A) Inventory related to the new recycled plastics processing                               






          business.

(A)

$

(29,000)


(A)

$

-

 Increase(Decrease) in accounts payable:      






 (B) Payable amounts that relate to continuing operations

(B)

$

55,015 


(B)

$

-

 Net cash provided by (used in) discontinued operations:






 (C) Activity related to discontinued operations

(C)

$

115,442 


(C)

$

(154,160)

Net cash provided by financing activities:






--- Proceeds from sale of warrants

(D)

-


(D)

30,000








As of September 30, 2011, we had cash and cash equivalents of $683,902,  which, combined with our recently entered into credit facility (see Note 12 to Consolidated Financial Statement)  will allow us to operate as a going concern for at least the next twelve months following September 30, 2011. In October, 2011 $250,000 of the cash on hand was used to purchase equipment for the plastics processing business and the majority of the Companys remaining cash was invested in HDIP working capital including receivables and inventory.  


Net cash provided by financing activities of continuing operation for the three months ended September 30, 2011 and September 30, 2010, was $0 and $30,000 through the exercise of warrants and options held by investors and former employees.  


Off-Balance Sheet Arrangements


We have no off-balance sheet arrangements.




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Item 4.  Controls and Procedures.


(a) Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer, Kenneth W. Brimmer, and Marilee Douda, our Secretary and Manager of Finance and Accounting, 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 Exchange Act, within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Manager of Finance and Accounting, in a manner that allows for timely decisions regarding required disclosures.


(b) Changes in Internal Control Over Financial Reporting

 

The Company is currently in the process of changing and updating its internal controls over financial reporting due to the sale of the medical device business and starting the recycled plastics processing business in October 2011.


PART II. OTHER INFORMATION


Item 1A.

Risk Factors

 

The risk factors set forth in the Companys Annual Report on Form 10-K for the fiscal year ending June 30 ,2011 filed with the SEC on September 16, 2011 contain important factors that could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. Investors are encouraged to review and read such risk factors in relation to the statements herein.


Item 6.

Exhibits


(a)

The following Exhibits are furnished pursuant to Item 601 of Regulation S-K:


2.1

Asset Purchase Agreement dated August 24, 2011 by and between HDI and Cohn Prevention Centers, LLC (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed August 31, 2011).


2.2

Tri-Party Sale Agreement dated September 23, 2011 by and among HDI Plastics, Inc., Compass Bank and Cycled Plastics, Ltd. (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed September 26, 2011).


3.1

Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form SB-2 (File No. 333-53025) filed on May 19, 1998).


3.2

Bylaws incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form SB-2 (File No. 333-53025) filed on May 19, 1998).


3.3

Articles of Amendment of Incorporation (incorporated by reference to Exhibit 3.3 to the Companys Registration Statement on Form SB-2 (File No. 333-53025) filed on May 19, 1998).


10.1

Sublease Agreement dated August 2011 by and between HDI and Cohn Prevention Centers, LLC (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed August 31, 2011).




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10.2

Sublicense Agreement dated August 2011 by and between HDI and Cohn Prevention Centers, LLC (incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed August 31, 2011).


10.3

Retention and Separation Agreement by and between HDI and Greg Guettler (incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed August 31, 2011).


10.4

Lease Agreement dated September 20, 2011 by and between HDI Plastics, Inc., a wholly owned subsidiary of HDI, and Flemtex Properties Corp. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed September 26, 2011).


31.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES



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



HYPERTENSION DIAGNOSTICS, INC.



By /s/ Kenneth W. Brimmer

Kenneth W. Brimmer

Chief Executive Officer and Chief Financial Officer


Date:  November 14, 2011




















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