HYPERTENSION DIAGNOSTICS INC /MN - Quarter Report: 2012 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

(Mark One)

 

Commission File Number:  0-24635

HYPERTENSION DIAGNOSTICS, INC.

(Exact name of Registrant as Specified in its Charter)

MINNESOTA		41-1618036
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)

10501 WAYZATA BOULEVARD SOUTH, SUITE 102, MINNETONKA, MN	55305
(Address of Principal Executive Offices)	(Zip Code)
952-545-2457
(Registrant’s Telephone Number, Including Area Code)
(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 o NOx

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 February 13, 2012, there were issued and outstanding 52,388,750 shares of the issuer’s common stock and 611,390 shares of the issuer’s Series A convertible preferred stock.

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HYPERTENSION DIAGNOSTICS, INC.

INDEX TO FORM 10-Q

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Hypertension Diagnostics, Inc.

Forward-Looking Statements

This report may contain “forward-looking” statements, as such term is defined by the Securities and Exchange Commission’s 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 operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans of Hypertension Diagnostics, Inc. (referred to as “HDI,” the “Company,” “we,” or “us”). 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,” “expect,” “believe,” “expect,” “can,” “estimate,” “anticipate,” “intend,” “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 Company’s 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 relocation and re-start of the Company’s 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” 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 forward-looking 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, 2012, as amended.

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Hypertension Diagnostics, Inc.

Consolidated Balance Sheets

December 31, 2012

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

Consolidated Balance Sheets
		December 31, 2012 (Unaudited)		June 30, 2012
Assets
Current Assets:
Cash and cash equivalents		$ 401		$ 75,043
Accounts receivable, net		54,102		149,156
Prepaids and other current assets		16,979		31,304
Inventory, net		127,608		172,223
Note receivable-related party-CPC		150,000		146,319
Accrued royalties receivable from CPC		3,600		2,400
Total Current Assets		352,690		576,445
Property and equipment, net		595,743		678,331
Debt issuance costs, net		6,560		7,380
Other assets		49,157		43,657
Total Assets		$ 1,004,150		$ 1,305,813
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable		$ 345,251		$ 170,832
Line of credit-Charter Capital		9,629		-
Sale-leaseback obligation-current portion		38,705		35,383
Accrued vacation, payroll and payroll taxes		61,641		29,236
Payable for equipment		155,000		155,000
Other accrued expenses		169,590		246,240
Advance from shareholder/CEO		19,000		-
Current liabilities of discontinued operations		-		18,143
Total Current Liabilities		798,816		654,834
Long Term Liabilities:
Notes payable-subordinated debt, net of discounts		861,810		610,615
Sale-leaseback obligation		46,313		66,533
Note Payable-Taylor Economic Development		49,556		-
Deferred compensation-discontinued operations		144,649		262,500
Total Long-Term Liabilities		1,102,328		939,648
Total Liabilities		1,901,144		1,594,482
Shareholders' Equity (Deficit)
Series A Convertible Preferred Stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares—611,390
at December 31, 2012 and June 30, 2012.  Each share of
preferred stock is convertible into 12 shares of common
stock at the option of the holder.  (Aggregate
liquidation preference of $11,120,290 and $10,145,478
at December 31, 2012 and June 30, 2012, respectively.)		6,114		6,114
Common Stock, $.01 par value:
Authorized shares--150,000,000
Issued and outstanding shares—52,388,750
at December 31, 2012 and June 30, 2012.		523,887		523,887
Additional paid-in capital		28,626,643		28,462,631
Accumulated deficit		(30,053,638)		(29,281,301)
Total Shareholders' Equity (Deficit)		(896,994)		(288,669)
Total Liabilities and Shareholders' Equity (Deficit)		$ 1,004,150		$ 1,305,813

See accompanying notes.

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Hypertension Diagnostics, Inc.

Consolidated Statements of Operations

December 31, 2012 and 2011

See accompanying notes.

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Hypertension Diagnostics, Inc.

Consolidated Statements of Cash Flows

December 31, 2012

See accompanying notes.

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Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2012

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 and six months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2013.  For further information, refer to the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012, as amended.  The policies described in that report are used for preparing quarterly reports.

On July 14, 2011, the Company formed HDI Plastics, Inc. (“HDIP” or “Plastics”), as a wholly-owned subsidiary of the Company. HDIP commenced operations in October 2011.  HDIP is the principal operating business of the Company.  HDIP is engaged in the processing of recycled plastic material including re-processing into pellet-form for sale to manufacturing customers.

Note 2. Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the six months ended December 31, 2012, we incurred losses from continuing operations of $890,194. At December 31, 2012, we had an accumulated deficit of $30,053,638 and negative working capital of $446,126. Our ability to continue as a going concern is dependent on our ability to raise the required additional capital or debt financing to meet short-term needs to repay certain liabilities to restart HDIP’s facility, hire production workers, and ramp up to full operating capacity and earn revenue. On February 4, 2013, HDIP borrowed $200,000 pursuant to a Secured Promissory Note (the “Note”) in a principal amount of $200,000 in favor of Mark Schwartz and Alan Stern, directors of the Company. (See Note 16 to the financial statements).  Under the terms of the Note, HDIP may borrow an additional $300,000 on the same terms and conditions as those set forth in the Note. See Note 16 to these financial statements for more information.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to adequately restart our plastics business, which could significantly and materially restrict our operations.

Note 3.   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. See additional terms of this agreement in Note 4. As a result of the sale of selected assets of our medical device business, 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 statements of operations and balance sheets entitled “Discontinued Operations.”  HDI had previously retained rights to its intellectual property including the rights to royalty payments from CPC.  Ongoing income derived from the Company’s 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. On January 25, 2013, (the “Effective Date”), the Company entered into and closed a second definitive Asset Purchase Agreement (the “Agreement”) with CVC-HD, LLC, a Minnesota limited liability company (“CVC”), controlled by Jay Cohn, effectively amending the August 26, 2011 Agreement and assigning the remaining assets related to the medical device business including intellectual property assets for an additional purchase price of $75,000. A payment of $37,500 was received at closing and the remaining $37,500  plus $200,000 still due on the original sale is due over the next five months. The royalty provisions of the August 26, 2011 Agreement were eliminated in this agreement.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary (HDI Plastics, Inc.), after elimination of all intercompany accounts, transactions, and profits.

Recent Accounting Pronouncements

There were no new accounting standards issued or effective during the quarter ended December 31, 2012 that had, or are expected to have a material impact on the Company’s results of operations, financial condition or cash flows.

Note 4.   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, a Minnesota limited liability company (“CPC”), controlled by 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 Company’s 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.

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 (non-interest bearing) 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 5). We received a letter on July 27, 2012 from CPC indicating the intent to pay $200,000 on February 26, 2013. Nearly all of the proceeds received on the Effective Date were allocated to cover severance and other costs related to the transactions contemplated by the Agreement. Severance costs included an agreement by the Company to pay to Greg Guettler, its former Chief Operating Officer, nine months’ salary and health benefits. The Company paid Mr. Guettler $119,463 to fulfill the agreement on March 1, 2012. Pursuant to the Agreement, CPC agreed to pay to the Company a cash payment of $1,200 upon the sale of each of the first 50 units of inventory sold by CPC within 30 days of receipt of cash from such sale. The Company has agreed to pay Mr. Guettler 10% of the royalty proceeds received by the Company less applicable transaction expenses related to such sales.  The Company has earned royalty income of $3,600 and $6,000 less 10% due to Greg Guettler for the three and six months ended December 31, 2012, respectively.

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 Company’s intellectual property, technology, and technical know-how related to the Company’s arterial elasticity measurement technology exclusively in CPC clinics and research related exclusively to CPC clinics.  All other applications of the Company’s 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 Company’s 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 remaining operations related to its medical device business and intends to potentially 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.

The Company recorded a loss on the sale transaction in the amount of $123,702 in the quarter ended September 30, 2011.

Subsequent to December 31, 2012, on January 25, 2013, (the “Effective Date”), the Company entered into and closed a second definitive Asset Purchase Agreement (the “Agreement”) modifying the August 26, 2011 Agreement, by selling the remaining medical device business assets to CVC-HD, LLC, a Minnesota limited liability company (“CVC”), controlled by Jay Cohn, for $275,000, encompassing the original $200,000 still owed the Company and an additional purchase price of $75,000. The $275,000 consists of a cash payment in the amount of $37,500 due on the Effective Date which was received, and a promissory note in the amount of $237,500 payable in installments with the first payment of $37,500 due February 2013 and $50,000 due each subsequent month with the final payment due in June 2013. In addition, CVC paid the Company royalties due from CPC for the period of October 2012 through November 2012 in the amount of $3,600 less $2,560 for maintenance fees on the intellectual property paid by CPC.

The Company has not included the results of operations of our former medical device business in the results from continuing operations.  The income (loss) from discontinued operations for the three and six months ended December 31, 2012, and 2011 consists of the following:

Income from Discontinued Operations	Three months ended December 31,				Six months ended December 31,
	2012		2011		2012		2011
Revenue, net	$ -		$ 14,363		$ -		$ 248,923
Cost of Goods Sold	-		-		-		10,557
Gross Profit	-		14,363		-		238,366
Operating Expenses (miscellaneous)	8,245		95,615		18,137		280,980
Deferred Compensation expense (benefit)	(407,982)		(131,250)		(135,994)		558,750
Income (loss) from discontinued operations	399,737		49,998		117,857		(601,364)
Loss on sale of selected assets to CPC	-		-		-		(123,702)
Net income (loss) from discontinued operations	$ 399,737		$ 49,998		$ 117,857		$ (725,066)

The Company does not have any existing assets of discontinued operations at December 31, 2012. The only remaining liabilities of discontinued operations as of December 31, 2012 pertain to the deferred compensation of the former CEO. (See Note 9)

Note 5.   Notes Receivable – Related Parties

In connection with the Asset Purchase Agreement between HDI and CPC, CPC 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 due in 12 months or $200,000 due in 18 months, at the discretion of CPC. The promissory note was reflected at an imputed discount rate of 15%  based upon the amount due 12 months following the Effective Date, and was originally recorded as a net note receivable of $127,500.  The balance of the Note at December 31, 2012 is $150,000. The Company received a letter from CPC on July 27, 2012 indicating CPC’s intent to pay the $200,000 due February 26, 2013. The Company has elected to not recognize the additional income forthcoming on this Note until the cash is collected in the future.

Subsequent to December 31, 2012, the Company sold the remaining intellectual property for an additional $75,000 (See Note 4). The Company received $37,500 in cash on January 25, 2013 and a promissory note in the amount of $237,500 that replaces the existing note issued by CPC listed above. The new note is payable in installments with the first payment due February 2013 for $37,500, and $50,000 due per month beginning in March 2013 with the final payment due June 2013.

Note 6.  Property and Equipment

Property and Equipment is as follows:

	December 31,		June 30,
	2012		2012
Equipment	$ 702,413		$ 672,383
Leasehold  improvements	37,261		93,235
Office furniture and equipment	9,006		7,923
Vehicles	11,984		11,984
Less accumulated depreciation	(164,921)		(107,194)
Total equipment	$ 595,743		$ 678,331

Depreciation expense was $36,813 and $29,957 for the three months ended December 31, 2012 and 2011, respectively. For the six months ended December 31, 2012 and 2011, depreciation expense was $71,989 and $29,957, respectively.

The Company recognized a gain of $625 from the sale of equipment in the three month period ended December 31, 2012, and a net loss of $79,973 in the six months ended December 31, 2012 related to the abandonment of leasehold improvements associated with the property at 5330 Fleming Court, Austin, TX due to the termination of lease and the surrender of the property.

Note 7.   Litigation

The Company is involved in various legal actions in the ordinary course of its business.  

On March 28, 2012, HDIP received a Notice of Violation related to its sole processing facility located at 5330 Fleming Court, Austin, Texas, from the City of Austin Code Compliance Department.  The Notice of Violation alleges violations of Austin’s City Code and failures to obtain required permits and a Certificate of Occupancy based upon the current use of the processing facility. The violation primarily relates to the electrical design and capacity of the building. The Notice of Violation required HDIP to vacate the processing facility until such alleged violations are cured.  HDIP unsuccessfully attempted to negotiate temporary permits allowing it to continue operations while it addresses the alleged violations identified in the Notice of Violation.  On March 29, 2012, HDIP ceased processing operations at the processing facility.  On April 2, 2012, HDIP notified approximately 70 of its employees working at the facility of their termination and they were paid their outstanding vacation pay, however, no severance was paid. The Company is in the final stages of relocating its operations to a new location in Taylor, TX. At this time, the Company has not been assessed any fines or penalties by the City of Austin, but no assurances can be made that they will not do so in the future. At the time of this filing, the Company is engaged in limited production activities at its Taylor facility and expects to initiate full production during its third quarter.

Because the City of Austin required HDIP to vacate the property at 5330 Fleming Court, the landlord, Flemtex Properties (“Flemtex”) denied access to the premises; therefore, the Company did not pay rent and utilities for April and May 2012. On May 30, 2012, the Company received a Notice of Termination of Lease from Flemtex, for failure to pay rent and reimbursable costs. The letter stated that the Lease was terminated effective May 31, 2012, and that HDI was to quit and surrender the Leased Premises to the landlord in accordance with the requirements of the Lease on May 31, 2012, and to remove all of the Tenant’s personal property from the Leased Premises. The Company is in the process of negotiating a final Termination Agreement related to its Austin lease. The Company has been informed that the landlord is withholding a final release of all obligations of the Company related to the lease until all of the discharge water is removed from the property, which was completed as of October 31, 2012. The Company has accrued as of December 31, 2012, the utility and rent payments due for April and May 2012 totaling $139,493.

On July 12, 2012, a representative of the Travis County, (Texas) Attorney Office, Texas Parks and Wildlife, and the Texas Commission on Environmental Quality (TEEQ) searched the Company’s Austin offices pursuant to an affidavit signed by a representative of Texas Parks and Wildlife seeking evidence that the Company committed the offense of intentional or knowing unauthorized discharge of a pollutant under Section 7.145 of the Texas Water Code. No charge of illegal discharge has been made against the Company. The Company has not been contacted further relative to alleged discharge and strongly denies any such discharge occurred. As of October 31, 2012 the removal and disposal of the waste water at the Company’s former facility was completed.

On December 14, 2012, Flemtex Properties filed a lawsuit alleging breach of the commercial lease at the Fleming Court location. The lawsuit seeks damages totaling $412,711 as of November 16, 2012 and future obligations due under the lease which extends to December 2017. The Company intends to vigorously defend itself and may seek compensation for losses resulting from the willful and malicious interference into its Fleming Court operations by the landlord and its agent. Due to the uncertainty regarding the outcome of this matter, the Company does not believe that it is probable that they will owe all of the damages claimed by Flemtex and have only accrued for the costs of the lease up until Flemtex terminated the lease on May 31, 2012, as noted above. The Company does not believe they are liable for any additional lease costs beyond May 31, 2012.

Note 8.  Stock Options

The Company regularly grants stock options to individuals under various plans as described in Note 13 to the Consolidated Financial Statements set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012, as amended.  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 may include: 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 and six months ended December 31, 2012 and 2011, there were no stock options granted. The Company recognized compensation expense of $0 for the three and six months ended December 31, 2012, and $22,500 and $87,125 for the three and six months ended December 31, 2011, which were related to options previously granted.

Note 9.

Deferred Compensation Liability

The Company is a party to a Deferred Equity Compensation Agreement with its former CEO, Mark N. Schwartz (the “Agreement”), whereby the Company granted phantom shares of its common stock to Mr. Schwartz for every month of employment over the years of his employment. Mr. Schwartz resigned as the Company’s CEO effective September 22, 2011 and as a result, agreed as of October 1, 2011 that no additional phantom shares will be granted him under the Agreement. Under the Agreement, a cash payment will be made equal to the price per share of the Company’s common stock times the number of phantom shares accrued at the earliest of certain events to occur.

The Company has accrued a total deferred compensation liability of $144,649 at December 31, 2012, which is the fair market value of 13,125,000 phantom shares outstanding as of December 31, 2012 ($131,250) plus $13,399 of accrued payroll taxes and vacation pay related to the agreement.  Due to the fluctuations in the price of the Company’s common stock during the six months ended December 31, 2012, the Company recorded a net compensation expense (benefit) of ($407,982) and ($135,994) for the three and six months ended December 31, 2012, respectively. For the three and six months ended December 31, 2011, the Company recorded a net compensation expense (benefit) of ($131,250) and $558,750, respectively. An increase in the Company’s common stock price would cause an increase in the deferred compensation, while a decrease in the Company’s 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 original terms of Mr. Schwartz’s deferred equity compensation 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 Company’s common stock; ii) termination of employment; iii) death of the CEO; or iv) no later than January 1, 2012. Upon one of these events, a cash payment over 24 months was to be made to the CEO equal to the trading price per share of the Company’s common stock times the number of phantom stock shares accrued to date.  Mr. Schwartz and the Company modified the original Agreement on December 31, 2011, whereby Mr. Schwartz agreed to eliminate the requirement for a cash payment as of a date certain pursuant to the Agreement. This deferred compensation is classified as a long-term liability with no definitive payout date specified. The Company and Mr. Schwartz are negotiating a permanent settlement to satisfy both parties.

Note 10.  Factoring Line of Credit

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 full-recourse financing agreement, which is guaranteed by HDI, Charter advances to HDIP and amount equal to 80% of eligible pledged 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%. HDIP began borrowing under this facility in November 2011.  The outstanding balance as of December 31, 2012 is $9,629 and $0 as of June 30, 2012.

Note 11. Note Payable-Taylor Economic Development

On December 24, 2012, HDIP entered into a Letter of Agreement with the Taylor Economic Development Corporation (“TEDCO”).  Under the terms of the TEDCO Agreement, TEDCO agreed to advance up to $140,000 for improvements and upgrades to the Company’s new facility located in Taylor, Texas. The advances are in the form of a forgivable loan which will convert to a grant in 10 years provided among other conditions, HDIP continues to operate in Taylor and maintain at least 50 full-time jobs at the Taylor facility.  Should HDIP default under its agreement with TEDCO, the Company may be required to repay the advances with interest at the prime rate plus 3%.  As of December 31, 2012, $49,556 had been advanced under the TEDCO Agreement. As of February 11, 2013, the advanced amount was $103,232.

Note 12.   Note Payable - Subordinated Debt

In December 2011, the Company commenced a private placement offering of 14.5% Five Year Subordinated Notes (the “Notes”) with Warrants to its existing preferred shareholders, directors of the Company and certain other accredited investors. The notes are issued by HDIP and are guaranteed by the Company.  Interest is payable monthly in cash. The offering was completed February 10, 2012 and resulted in the issuance of $833,600 in notes and five-year warrants to purchase an aggregate of 11,908,572 shares of the Company’s common stock with an exercise price of $.07 per share. The notes are due five years from the closing date at 105% of face value. The total estimated value of the warrants using the Black-Scholes Option Pricing Model, with a volatility rate of 153%, had an estimated fair value of $0.03 per warrant. After calculating the relative fair value of the debt and warrants, $252,393 was recorded as a debt discount to the notes for the warrants. The discount is being amortized over the term of the debt using the effective interest method.

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Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2012

The Notes may be prepaid by the Company in accordance with the following schedule below at the redemption prices (expressed in percentages of principal amount to be repaid), plus unpaid accrued interest to the date of payment:

Loan Year	Redemption Price
1	125%
2	120%
3	115%
4	110%
Maturity	105%

In August 2012, the Company initiated a second private placement of Subordinated Notes due October 31, 2014 (Series II Subordinated Notes) with terms otherwise similar to the offering in December 2011. Terms for the Series II Subordinated Notes also include the issuance of five-year warrants to purchase shares of the Company’s common stock with an exercise price of $.035 per share. As of December 31, 2012, the Company had issued to directors and other accredited investors of the Company, $360,000 in Series II Subordinated Notes which included warrants to purchase 10,285,714 shares of Company stock. The notes are due two years from the closing date at 105% of face value. The total estimated value of the warrants using the Black-Scholes Option Pricing Model, with a volatility rate of 178%, had an estimated fair value from $0.01 to $0.05 per warrant. After calculating the relative fair value of the debt and warrants, $164,012 was recorded as a debt discount to the notes for the warrants. The discount is being amortized over the term of the debt using the effective interest method.

The following table summarizes the entire subordinated debt balance at December 31, 2012:

Schedule of Subordinated Debt
	Series I		Series II		Total
Gross proceeds received	$ 833,600		$ 360,000		$ 1,193,600
Less value assigned to warrants	(252,393)		(164,012)		(416,405)
Present Value	581,207		195,988		777,195
Add: amortization of debt discount	50,480		23,424		73,904
Interest accreted to redemption price	8,336		2,375		10,711
Subordinated Debt outstanding	640,023		221,787		861,810
Less current maturities	-		-		-
Total Subordinated Debt	$ 640,023		$ 221,787		$ 861,810

Note 13.   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 December 31, 2012 and 2011.

Note 14. Operating Lease

On December 28, 2012 as part of the Company’s plan to relocate its plastic recycling business and resume operations, HDIP entered into a four-year  lease and purchase option agreement with Southern Mattress Company of Texas, Inc. for approximately 65,000 square feet of main building space, including an additional approximate 15,000 square feet of storage space in Taylor, Texas (“Taylor Lease”).  The Taylor Lease calls for minimum monthly rents as follows:

Period	Minimum Monthly Rent
12/28/12 - 2/9/2013	$3,000
3/1/2013 - 2/28/2015	$8,500
3/1/2015 - 2/28/16	$12,750
3/1/2016 - 2/29/17	$20,625

In addition to rent, HDIP shall pay for insurance and property taxes effective March 1, 2013.  HDIP will have the right to purchase the property for $700,000 at any time after February 28, 2016.

Note 15.   Related Party Transactions

On December 28, 2012, Kenneth Brimmer, the Company’s CEO, loaned HDIP $19,000 through his Stencor Company, LLC, of which he is 85% owner. HDIP paid back the short-term loan on January 3, 2013. The loan is listed on the consolidated balance sheet as “Advance from shareholder/CEO”. Stencor loaned additional amounts to the HDIP in January 2013. The short term loans were paid back and as of this filing, there is $0 outstanding in short-term loans to Stencor or Mr. Brimmer. In addition, the Company has agreed to pay $500 per month for executive office space from STEN Corporation. Mr. Brimmer is also CEO of STEN Corporation. As of December 31, 2012, $4,000 is unpaid under the arrangement.

Note 16.   Subsequent Events

On January 1, 2013 the Company’s board of directors approved a 4-month “Payment-in-Kind” or “PIK” interest plan on the Company’s currently outstanding Subordinated Debt Notes (See Note 12). The plan suspends the monthly cash payments of interest to the note holders for four months through April 1, 2013. The monthly interest will be added to the principal of the note. We currently plan to resume monthly cash interest payments on such notes commencing May 1, 2013. 

On January 2, 2013, HDI closed on a Securities Purchase Agreement entered into December 3, 2012 with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $42,500 (the “Note”). The Note has a maturity date of September 12, 2013 and is convertible into our common stock at the Variable Conversion Price of 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The shares of common stock issuable upon conversion of the Note are not registered shares under the Securities Act of 1933.  The Company has the right to prepay the outstanding Note for an amount equal to 115%, multiplied by the sum of the then outstanding principal amount of this Note plus accrued and unpaid interest on the unpaid principal amount of this Note. The purchase and sale of the Note closed on January 2, 2013, the date that the purchase price was delivered to us.

On January 25, 2013, (the “Effective Date”), the Company entered into and closed a definitive Asset Purchase Agreement (the “Agreement”) providing for the additional sale of the intellectual property of our former  medical device business to CVC-HD, LLC, a Minnesota limited liability company (“CPC”), controlled by Jay Cohn, for the sales price of $75,000.  At closing, the Company received $37,500 in cash and a promissory note in the amount of $237,500 which includes the 2^nd half payment of $37,500 due on the new sale and the outstanding balance of $200,000 still due on the original purchase agreement. The first payment of $37,500 is due February 2013 and $50,000 is due each month thereafter with the final payment due in June 2013. In addition, CVC paid the Company royalties due for the period of October 2012 through November 2012 in the amount of $3,600 less $2,560 for maintenance fees on the intellectual property paid by CVC.

On February 4, 2013, HDI Plastics, Inc. executed a Secured Promissory Note (the “Note”) in a principal amount of $200,000 in favor of Mark Schwartz and Alan Stern, directors of the Company.  The Note bears interest at an annual rate of 18%, payable monthly, and is guaranteed by the Company.  The Note matures on February 1, 2014, at which time all principal and accrued and unpaid interest on the Note is due.  The Note is secured by certain equipment of HDI Plastics pursuant to a negotiated Security Agreement (the “Security Agreement”) executed by HDI Plastics in favor of Messrs. Schwartz and Stern. In connection with the issuance of the Note, the Company issued to each of Messrs. Schwartz and Stern a warrant (collectively, the “Warrants”) to purchase 3,333,333 shares of common stock, par value $0.01 per share, of the Company for an exercise price of $0.03 per share, subject to appropriate adjustment for stock splits, combinations and similar recapitalization events.  The warrants contained other customary terms and conditions.  The warrants expire on February 4, 2018. Pursuant to the terms of the Note and Security Agreement, HDI Plastics may raise an additional $300,000 on the same terms and conditions as those set forth in the Note, Security Agreement and Warrants.

9

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

Overview

We were previously engaged in the design, development, manufacture and marketing of proprietary devices. In August 2011, we sold our medical device inventory, subleased our office and manufacturing facility, and entered into a limited license agreement with a company controlled by Jay Cohn, a founder and at that time, a director of the Company. In September 2011, we formed HDI Plastics Inc. (“HDIP”), a wholly owned-subsidiary, leased a facility for warehouse and processing of recycled plastic, purchased selected manufacturing assets and began engaging in the business of plastics reprocessing in Austin, TX. On March 29, 2012, we ceased operations at the Austin facility and we began working to relocate the processing facility to a new location. In September 2012, we began disposing of the wastewater stored in tanks located at 5330 Fleming, Austin. The water was transported by tanker truck to a location where contaminants were removed and it was disposed of into the city sewer system in compliance with local regulations. Demand for reprocessed plastic is growing, and HDIP has the systems and infrastructure for collecting and processing post-consumer and post-industrial plastic waste into pellets to be resold to domestic manufacturing companies. As of December 31, 2012, we have relocated our operations to a facility in Taylor, Texas and have recently resumed limited operations. We plan to resume production to full capacity by May 2013, assuming adequate capital is obtained to do so. We cannot guarantee that we will not encounter delays in resuming production to full capacity which may extend the date.

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 ended September 30, 2011, HDI finalized a purchase agreement to acquire machinery and equipment to begin operations in Austin, Texas through its wholly owned subsidiary 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.

Revenue Recognition. Beginning October 2011, HDI Plastics began operations to sell finished goods to manufacturers in the form of pelletized resin and clean shredded and ground plastics material. These sales are 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 back to the customer.  In addition, the Company engages in brokerage transactions of plastic material where goods are delivered to a customer without HDIP ever taking physical possession of the product although HDIP does assume legal ownership of the material. The net profit from “brokerage” transactions is recorded as revenue at the time it is shipped to the customer and invoiced. Brokered 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 based upon the average cost of raw material purchased during the month including an allocation of manufacturing overhead, or market. Typically, the Company holds material for less than 45 days. The nature of the Company’s inventory does not result in obsolescence of either processed or unprocessed material. Inventory on hand at the end of the period is reviewed to determine the need for a reserve for possible write-off and dispose of any material which is not useable.  The need for a reserve is based on management’s review of inventories on hand compared to estimated future usage and sales.  As of December 31, 2012 and June 30, 2012, there was no reserve for obsolete inventory.

Recent Accounting Pronouncements

There were no new accounting standards issued or effective during the three and six months ended December 31, 2012 that had or are expected to have a material impact on the Company’s results of operations, financial condition, or cash flows.

Results of Operations

As of December 31, 2012, we had an accumulated deficit of $30,053,638. Until we are able to generate significant revenue from our reopened plastics recycling business, we expect to continue to incur operating losses.  As of December 31, 2012, we had cash and cash equivalents of $401.  Following the end of the quarter, we raised $200,000 in 18% senior notes (see Note 16 to the Consolidated Financial Statements). The cash was needed in order to continue our efforts to get the new facility in Taylor completely operational. Our ability to continue as a going concern is dependent on our ability to raise the required additional capital or debt financing to meet short-term needs to restart our plastics processing operations which would include hiring additional production workers. There is no guarantee that we will be able to raise such capital or that such capital will be available on terms satisfactory to us, if at all.

Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011

Revenue- The Company earned $13,437 and $1,197,572 in revenue from continuing operations in the quarters ended December 31, 2012 and 2011, respectively. Of the $13,347, $3,240 was received from CPC as a result of the royalty agreement that was part of the sale of selected assets to CPC and $10,197 was received from the limited operations of the plastics processing business. For the quarter ended December 31, 2012, our plastics production facility was not operating. We have moved into our new facility and have restarted processing operations. December 31, 2011 revenue consisted of $11,880 in royalty revenue and $1,185,692 in plastic processing revenue that began in October 2011. We anticipate our revenue in the quarter ending March 31, 2013 will show positive progress and we anticipate our operations will be at approximately 67% compared to our operations of last year at the same time.

Net revenues from our new plastics recycling business were comprised of the following:

	Three Months Ended
	December 31
	2012		2011
Sales – Non-toll	$   10,197		$   934,360
Sales – Toll Processing	-		225,694
Prepaid discounts	-		(500)
Sales - Brokered	-		250,816
Less Brokered Purchases and Freight	-		(224,678)
Net of Brokered Revenue	10,197		26,138
Net revenue-Plastic recycling	$10,197		$1,185,692

Cost of Sales – Cost of sales were $258,302 and $1,196,744 for the three months ended December 31, 2012 and 2011, respectively. The following is a summary of the cost of sales:

	Three Months Ended
	December 31
	2012		2011
Material	$   68,125		$   400,494
Labor	59,975		299,005
Depreciation	35,407		29,650
Equipment rental	25,574		3,746
Tractor trailer rental	16,177		45,617
Facility and overhead	29,892		198,441
Other costs	22,307		133,762
Rent	845		86,029
Total cost of sales	$258,302		$1,196,744

The significant decrease in the cost of sales for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 related to the shut-down of our plastic processing facility. The current costs are mostly related to our re-start efforts for the new facility in Taylor.

Expenses - Total selling, general and administrative expenses for continuing operations for the three months ended December 31, 2012 were $117,959 compared to $252,188 for the three months ended December 31, 2011. The following is a summary of the major categories included in selling, general and administrative expenses:

	Three Months Ended
	December 31
	2012		2012
Legal	$ 10,071		$ 7,219
Payroll and related taxes	92,422		192,464
Travel & meals and entertainment	3,458		7,596
Stock option expense	-		22,500
Stock transfer agent	2,118		637
Other G & A Expenses	9,890		21,772
Total selling, general and administrative expenses	$ 117,959		$ 252,188

Wages, related expenses and benefits decreased from $192,464 to $92,422 for the three months ended December 31, 2011and 2012, due to the costs associated with the start-up of HDI Plastics, including hiring various new administrative and selling personnel in 2011, and HDIP conducting little or no operations for the three months ended December 31, 2012. The 2012 wages, expenses, and benefits included in SG&A are for the corporate office and one management employee in the plastics processing business.

Legal fees increased from $7,219 to $10,071 for the three months ended December 31, 2011 and 2012, respectively, a 39.5% increase related to various issues relating to the shutdown of operations of HDIP in Austin, Texas and the process of locating our new facilities located in Taylor, Texas.

Stock option expense was $0 and $22,500 for the three months ended December 31, 2012 and 2011, respectively. This expense is based on the grant date fair value related to stock options that vested during the three months ended December 31, 2012 and December 31, 2011.  There have been no new options granted in the last year and all options have been previously expensed.

Interest expense increased from $19,047 to $80,038 for the three months ended December 31, 2011 and 2012, respectively. The increase in the interest expense is related to the new sub-debt note agreements of the Company.

Our net loss from continuing operations was $442,237 for the three months ended December 31, 2012, compared to net loss from continuing operations of $263,647 for the three months ended December 31, 2011.  The increase in the loss was due to HDIP’s operations being shut down along with the costs being incurred to re-start operations and the continuation of general overhead expenses. For the three months ended December 31, 2012, basic and diluted net loss per share from continuing operations was $(0.01), based on weighted average common shares outstanding of 52,388,750.  For the three months ended December 31, 2011, basic and diluted net loss per share per continuing operations was $(0.01) based on weighted average common shares outstanding of 43,325,843.

Six Months Ended December 31, 2012 Compared to Six Months Ended December 31, 2011

Revenue- The Company earned $48,059 and $1,198,772 in revenue from continuing operations in the six months ended December 31, 2012 and 2011, respectively. The revenue consisted of $5,400 of royalty income and $42,659 of plastic processing income from HDIP in the six months ended December 31, 2012 and $13,080 of royalty income and $1,185,692 in plastic processing income in the six months ended December 31, 2011. As previously noted, we were not operational during the six months ended December 31, 2012.

Cost of Sales – Cost of sales were $404,381 and $1,235,002 for the six months ended December 31, 2012 and 2011, respectively. The following is a summary of cost of sales:

	Six Months Ended
	December 31
	2012		2011
Material	$   94,584		$   400,494
Labor	72,022		299,005
Depreciation	69,214		29,650
Equipment rental	39,291		3,746
Tractor trailer rental	37,076		45,617
Facility and overhead	40,011		199,312
Other costs	51,338		150,149
Rent	845		107,029
Total cost of sales	$404,381		$1,235,002

The significant decrease in the cost of sales for the six months ended December 31, 2012 compared to the six months ended December 31, 2011 relates to the shut-down of our plastic processing facility. The increase in depreciation relates to the full six months ended December 31, 2012. Operations for our processing facility began in October 2011, therefore depreciation in the six months ended December 31, 2011 related to depreciation in the second half of the quarter.

Expenses- Total selling, general and administrative expenses for continuing operations for the six months ended December 31, 2012 were $318,983 compared to $454,661 for the six months ended December 31, 2011. The following is a summary of the major categories included in selling, general and administrative expenses:

	Six Months Ended
	December 31
	2012		2011
Legal	$ 45,260		$ 21,343
Accounting	9,636		37,435
Payroll and related taxes	179,272		192,464
Travel & Meals and Entertainment	7,390		7,588
Rent	4,710		23,683
Utilities	11,451		3,600
Merchant Processing Fees	-		3,741
Stock Option Expense	-		87,125
Office Supplies	397		7,097
Other G & A Expenses	60,867		70,585
Total selling, general and administrative expenses	$ 318,983		$ 454,661

Wages, related expenses and benefits decreased from $192,464 to $179,272 for the six months ended December 31, 2011 and 2012, respectively. The 2012 wages, expenses, and benefits included in SG&A are for the corporate office and one management employee in the plastics processing business.

Legal and audit/accounting fees decreased from $58,778 to $54,896 for the six months ended December 31, 2011 and 2012, respectively. Legal fees increased from $21,343 in the six months ended December 31, 2011 to $45,260 for the six months ended December 31, 2012 due to the various issues relating to the shutdown of operations at HDIP and the process of locating new facilities. Auditing fees decreased from $37,435 to $9,636 in the six months ended December 31, 2012 and 2011, respectively due to the timing of the work and invoices for the June 30, 2011 and 2012 financial statement audits.

Stock option expense was $0 and $87,125 for the six months ended December 31, 2012 and 2011, respectively. This expense is based on the grant date fair value related to stock options that vested during the six months ended December 31, 2012 and December 31, 2011.  There have been no new options granted in the last year and all options have been previously expensed.

The Company recorded $138,597 in interest expense in the six months ended December 31, 2012 related to the sub-debt agreements, the sale/leaseback transaction, and the Charter Capital line of credit. There was $19,047 in interest expense in the six months ended December 31, 2011 because we did not enter into any of these agreements until the subsequent quarters.

Our net loss from continuing operations was $890,194 for the six months ended December 31, 2012, compared to net loss from continuing operations of $500,583 for the six months ended December 31, 2011.  The increase in the loss was due to operations being shut down and the continuation of expenses including moving expenses and the removal and disposal of water from the Austin location. For the six months ended December 31, 2012, basic and diluted net loss per share from continuing operations was $(0.02), based on weighted average common shares outstanding of 52,388,750.  For the six months ended December 31, 2011, basic net income per share per continuing operations was $(0.01) based on weighted average common shares outstanding of 43,325,843.

 

Liquidity and Capital Resources

Cash and cash equivalents had a net decrease of $74,642 and $660,962 for the six months ended December 31, 2012 and December 31, 2011, respectively.  The significant elements of these changes were as follows:

		Six months Ended December 31,
		2012		2011
Net cash provided by (used in) operating activities:
Net loss from continuing operations		$ (890,194)		$ (500,583)
Non-cash stock option expense		$ -		$ 87,125
(Increase) decrease in inventory related to the recycled
plastics processing business.		$ 44,615		$ (114,014)
(Increase) decrease in accounts receivable
plastics processing business.		$ 95,054		$ (606,457)
Increase in accounts payable that relate to continuing
operations		$ 176,483		$ 294,885
Increase (decrease) in accrued expenses relating to continuing operations		$ (44,245)		$ 119,048
Net cash provided by (used in) Investing activities:
Purchase of equipment and other fixed assets in setting
up HDIP for operations		$ (75,874)		$ (493,656)
Payment received on note receivable		$ -		$ 82,500
Net cash provided by financing activities:
Factoring line of credit agreement with Charter Capital		$ 9,629		$ 433,057
Proceeds from subordinated debt offering		$ 360,000		$ -
Proceeds from Taylor Economic Development Corp		$ 49,556		$ -
Payments for sale/leaseback obligation		$ (16,898)		$ -
Other:
Activity related to discontinued operations		$ (18,137)		$ 5,853

As of December 31, 2012, we had cash and cash equivalents of $401. We expect the cash received from the issuance of notes to two of our directors in February 2013 (see Note 16 to Consolidated Financial Statement), and the proceeds from Taylor Economic Development Corporation (see Note 11 to Consolidated Financial Statement), will allow us to continue our efforts to get the new facility in Taylor completely operational.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risks is limited to changes in interest rates. We do not use derivative financial instruments as part of an overall strategy to manage risk.

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 and Chief Financial 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 (CEO) and Chief Financial Officer (CFO) and Manager of Finance and Accounting have concluded that, as of the evaluation date, our disclosure controls and procedures were not operating effectively for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities and Exchange Act of 1934 within the time periods specified in the SEC’s rules, and that such information is not accumulated and communicated to our management, including our CEO and CFO in a manner that allows for timely decisions regarding timely disclosures.

As reported in our assessment of the effectiveness of our internal control over financial reporting as of June 30, 2012, included in “Item 9A. Controls and Procedures” of Form 10-K for the year ended June 30, 2012, as amended, the following material weaknesses existed: 

 

1.

Management did not maintain effective internal controls relating to the quarter-end closing and financial reporting process in adequately preparing account reconciliations pertaining to stock transactions and complicated debt instruments;

2.

The Company has insufficient internal personnel resources and technical accounting and reporting expertise within the Company’s financial closing and reporting functions; and

3.

A more robust inventory costing system needs to be designed to ensure accurate inventory costing each reporting period. 

11

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No remediation of these internal control weaknesses have been done at this time.

(b)

Changes in Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is involved in various legal actions in the ordinary course of its business.  

On March 28, 2012, HDIP received a Notice of Violation related to its sole processing facility located at 5330 Fleming Court, Austin, Texas, from the City of Austin Code Compliance Department.  The Notice of Violation alleges violations of Austin’s City Code and failures to obtain required permits and a Certificate of Occupancy based upon the current use of the processing facility. The violation primarily relates to the electrical design and capacity of the building. The Notice of Violation required HDIP to vacate the processing facility until such alleged violations are cured.  HDIP unsuccessfully attempted to negotiate temporary permits allowing it to continue operations while it addresses the alleged violations identified in the Notice of Violation.  On March 29, 2012, HDIP ceased processing operations at the processing facility.  On April 2, 2012, HDIP notified approximately 70 of its employees working at the facility of their termination and they were paid their outstanding vacation pay, however, no severance was paid. The violations have not been satisfied and the Company has vacated the Austin property and has moved their operations to a new location in Taylor, TX. At this time, the Company has not been assessed any fines or penalties by the City of Austin, but no assurances can be made that they will not do so in the future. At the time of this filing, the Company has limited operations.

Because the City of Austin required HDIP to vacate the property at 5330 Fleming Court, the landlord, Flemtex Properties denied access to the premises; therefore, the Company did not pay rent and utilities for April and May 2012. On May 30, 2012, the Company received a Notice of Termination of Lease from Flemtex, for failure to pay rent and reimbursable costs. The letter stated that the Lease was terminated effective May 31, 2012, and that HDI was to quit and surrender the Leased Premises to the Landlord in accordance with the requirements of the Lease on May 31, 2012, and to remove all of the Tenant’s personal property from the Leased Premises. The Company is in the process of negotiating a final Termination Agreement related to its Austin lease.   The Company has been informed that the landlord is withholding a final release of all obligations of the Company related to the lease until all of the discharge water is removed from the property, which was completed as of October 31, 2012.  

On July 12, 2012, a representative of the Travis County, (Texas) Attorney Office, Texas Parks and Wildlife, and the Texas Commission on Environmental Quality (TEEQ) searched the Company’s Austin offices pursuant to an affidavit signed by a representative of Texas Parks and Wildlife seeking evidence that the Company committed the offense of intentional or knowing unauthorized discharge of a pollutant under Section 7.145 of the Texas Water Code. No charge of illegal discharge has been made against the Company. The Company has not been contacted further relative to alleged discharge and strongly denies any such discharge occurred. As of October 31, 2012 the removal and disposal of the wastewater at the Company’s former facility was completed.

On December 14, 2012, Flemtex Properties filed a lawsuit alleging breach of the commercial lease at the Fleming Court location. The lawsuit seeks damages totaling $412,711as of November 16, 2012 and future obligations due under the lease which extends to December 2017. The Company intends to vigorously defend itself and may seek compensation for losses resulting from the willful and malicious interference into its Fleming Court operations by the landlord and its agent. Due to the uncertainty regarding the outcome of this matter, the Company does not believe that it is probable that they will owe all of the damages claimed by Flemtex and have only accrued for the costs of the lease up until Flemtex terminated the lease on May 31, 2012, as noted above. The Company does not believe they are liable for any additional lease costs beyond May 31, 2012.

Item 1A.

Risk Factors

 

The risk factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 filed with the SEC on September 28, 2012, as amended on September 28, 2012 and October 26, 2012, 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 2. Unregistered Sales of Equity Securities and use of Proceeds

None.

Item 4.    Mine Safety Disclosures

Not Applicable.

Item 5.    Other Information

On December 24, 2012, HDIP also entered into a Letter of Agreement with the Taylor Economic Development Corporation (“TEDCO”).  Under the terms of the TEDCO Agreement, TEDCO agreed to advance up to $140,000 for improvements and upgrades to the Company’s new potential facility located in Taylor, Texas.  The advances are in the form of a forgivable loan which will convert to a grant in 10 years provided among other conditions, HDIP continues to operate in Taylor and maintain at least 50 full-time jobs at the Taylor facility.  Should HDIP default under its agreement with TEDCO it may be required repay the advances with interest at the prime rate plus 3%.  As of December 31, 2012 $49,556 had been advanced under the TEDCO Agreement. As of February 4, 2013 the advanced amount was $103,232

On December 28, 2012, as part of the Company’s plan to relocate HDIP’s business and resume operations, HDIP entered into a four-year  lease and purchase option agreement with Southern Mattress Company of Texas, Inc. for approximately 65,000 square feet of main building space, including an additional approximate 15,000 square feet of storage space in Taylor, Texas (“Taylor Lease”).  The Taylor Lease calls for minimum monthly rents as follows:

Period	Minimum Monthly Rent
12/28/12 - 2/9/2013	$3,000
3/1/2013 - 2/28/2015	$8,500
3/1/2015 - 2/28/16	$12,750
3/1/2016 - 2/29/17	$20,625

In addition to rent, HDIP shall pay for insurance and property taxes effective March 1, 2013.  HDIP will have the right to purchase the property for $700,000 at any time after February 28, 2016.

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 Company’s 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 Company’s Current Report on Form 8-K filed September 26, 2011).

2.3*

Asset purchase agreement dated January 25, 2013 by and between HDI and CVC-HD, LLC

3.1

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

10.1

Securities Purchase Agreement dated December 3, 2012, by and between Hypertension Diagnostics, Inc. and Asher Enterprises (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 3, 2013).

.

10.2

Convertible Promissory Note dated December 3, 2012 by and between Hypertension Diagnostics, Inc. and Asher Enterprises (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 3, 2013)

10.3*

Lease Agreement dated December 28, 2012 by and between HDI Plastics, Inc., a wholly owned subsidiary of HDI, and Southern Mattress Company of Texas, Inc.

10.4*

Letter of Agreement dated December 24, 2012 by and between HDI Plastics and Taylor Economic  Development Corporation.

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.

101.INS*

XBRL Instance Document**

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document**

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document**

101.SCH*

XBRL Taxonomy Extension Schema Document**

*

Filed herewith

**

In accordance with Rule 406T of Regulation S-T, this information deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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:  February 14, 2013

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