UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCWashington, D.C. 20549
_________________
FORM 10-Q
_________________
(Mark One)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________
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Commission File Number: 0-24635000-24635
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HYPERTENSION DIAGNOSTICS, INC.
Hypertension Diagnostics,Inc.
(Exact name of Registrantregistrant as Specifiedspecified in its Charter)charter)
_____________________
Minnesota | |||
| 41-1618036 | ||
(State or | incorporation or organization) | (I.R.S. Employer Identification No.) | |
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| L4B 3Z4 |
(Address of | (Zip Code) |
404-449-6151
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
N/A | N/A |
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐
Indicate by check mark whether the registrant: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 ☐ No ☒
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( §(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒
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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“large accelerated filer,” “accelerated filer,”filer”, “accelerated filer” and “smaller“smaller reporting company”company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | Smaller reporting company | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes ☐ No ☒
As of November 12, 2012, there
There were issued and outstanding 52,388,750136,813,921 shares of the issuer’sregistrant’s common stock, and 611,390 shares$.001 par value per share, outstanding as of the issuer’s Series A convertible preferred stock.July 12, 2019.
HYPERTENSION DIAGNOSTICS, INC.
INDEX TO FORM 10-Q
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Part I - Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheet – September 30, 2012 (unaudited) and June 30, 2012
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Consolidated Statement of Operations (unaudited) – Three Months Ended September 30, 2012 and 2011
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Consolidated Statement of Cash Flows (unaudited) – Three Months Ended September 30, 2012 and 2011
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Notes to the Consolidated Financial Statements
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
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Item 4.
Controls and Procedures
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PART II.
OTHER INFORMATION:
Item 1.
Legal Proceedings
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Item 1A.
Risk Factors
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Item 2.
Unregistered Sales of Equity Securities and use of Proceeds
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Item 5
Other Information
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Item 6.
Exhibits
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SIGNATURES
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CERTIFICATIONS
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2
Hypertension Diagnostics, Inc.
Forward-Looking StatementsBalance Sheets
March 31, 2019 | December 31, 2018 | |||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 86,392 | $ | 86,392 | ||||
Accounts receivable, net | 187,595 | 187,595 | ||||||
Inventory, net | 189,434 | 189,434 | ||||||
Prepaids and other current assets | 41,950 | 41,950 | ||||||
Note receivable - related party | 196,181 | 196,081 | ||||||
Accrued royalty’s receivable from CPC | 4,252 | 4,252 | ||||||
Total Current Assets | 705,704 | 705,704 | ||||||
Property and Equipment | ||||||||
Leasehold improvements | 93,235 | 93,235 | ||||||
Furniture and equipment | 19,907 | 19,907 | ||||||
Computer & electronic equipment | 672,383 | 672,383 | ||||||
Total property and equipment | 785,525 | 785,525 | ||||||
Less accumulated depreciation and amortization | (275,998 | ) | (275,998 | ) | ||||
Property and equipment, net | 509,527 | 509,527 | ||||||
Other assets | 62,598 | 62,598 | ||||||
Total Assets | $ | 1,277,829 | $ | 1,277,829 | ||||
Liabilities and Shareholders’ Equity (Deficit) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 445,644 | $ | 445,644 | ||||
Accrued vacation, payroll and payroll taxes | 37,700 | 37,700 | ||||||
Other accrued expenses | 860,792 | 860,792 | ||||||
Current Liabilities | 1,344,136 | 1,344,136 | ||||||
Long Term Liabilities: | ||||||||
Notes payable - subordinated debt, net | 4,685,469 | 4,685,469 | ||||||
Total Long-term liabilities | 4,685,469 | 4,685,469 | ||||||
Total Liabilities | 6,029,605 | 6,029,605 | ||||||
Shareholders’ Equity (Deficit) | ||||||||
Series A Convertible Preferred Stock, $.01 par value: | ||||||||
Authorized Shares - 5,000,000, Issued and outstanding shares - 611,390 | 6,144 | 6,144 | ||||||
Common stock, $.01 par value: | ||||||||
Authorized shares - 150,000,000, Issued and outstanding shares 52,388,750 issued | 523,887 | 523,887 | ||||||
Additional paid-in capital | 28,462,631 | 28,462,631 | ||||||
Accumulated deficit | (33,744,438 | ) | (33,744,438 | ) | ||||
Total Shareholders’ Equity (Deficit) | (4,751,776 | ) | (4,751,776 | ) | ||||
Total Liabilities and Shareholders’ Equity | $ | 1,277,829 | $ | 1,277,829 |
The accompanying notes are an integral part of these financial statements
2 |
This report may contain “forward-looking”Hypertension Diagnostics, Inc.
Statements of Operations
For the three months ended March 31, 2019 | For the year ended December 31, 2018 | |||||||
Revenue: | ||||||||
Sales | $ | – | $ | 3,659,168 | ||||
Rental / brokered | – | 100,200 | ||||||
Service/contract income/royalties | – | 32,738 | ||||||
Total Revenue | – | 3,792,106 | ||||||
Cost of Sales: | ||||||||
Cost of sales | – | 2,837,632 | ||||||
Inventory obsolescence reserve | – | – | ||||||
Net Cost of Sales | – | 2,837,632 | ||||||
Gross Profit | – | 954,474 | ||||||
Expenses | ||||||||
Selling, general & administrative | – | 917,768 | ||||||
Interest Expenses | – | 161,678 | ||||||
Depreciation | – | 36,000 | ||||||
Total Expenses | – | 1,115,446 | ||||||
Operating Loss | – | (160,972 | ) | |||||
Other Income: | ||||||||
Interest Income | – | 27,327 | ||||||
Other Income | – | 8,255 | ||||||
Rounding | – | 2 | ||||||
Total Other Income | – | 34,884 | ||||||
Net income (loss) before income taxes | – | (125,388 | ) | |||||
Income Tax | – | – | ||||||
Net Loss | $ | – | $ | (125,388 | ) |
The accompanying notes are an integral part of these financial statements as such term is defined by the Securities and Exchange Commission in 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 registrant’s 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,” “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 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”; 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 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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3
Hypertension Diagnostics, Inc.
Consolidated Balance SheetStatements of Shareholders’ Equity (Deficit)
(Unaudited)
Additional | ||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance at DECEMBER 31, 2017 | 611,390 | $ | 6,114 | 52,388,750 | $ | 523,887 | $ | 28,462,631 | $ | (33,619,050 | ) | $ | (4,626,388 | ) | ||||||||||||||
Net Loss | (125,388 | ) | (125,388 | ) | ||||||||||||||||||||||||
Balance at DECEMBER 31, 2018 | 611,390 | $ | 6,114 | 52,388,750 | $ | 523,887 | $ | 28,462,631 | (33,744,438 | ) | $ | (4,751,776 | ) | |||||||||||||||
Net Loss | – | – | ||||||||||||||||||||||||||
Balance at MARCH 31, 2019 | 611,390 | $ | 6,114 | 52,388,750 | $ | 523,887 | $ | 28,462,631 | $ | (33,744,438 | ) | $ | (4,751,776 | ) |
The accompanying notes are an integral part of these financial statements
4 |
PART I. FINANCIAL INFORMATIONHypertension Diagnostics, Inc.
Statements of Cash Flows
For the three months ended March 31, 2019 | For the year ended December 31, 2018 | |||||||
Operating Activities: | ||||||||
Net Loss | $ | – | $ | (125,388 | ) | |||
Adjustment to reconcile net loss to net | ||||||||
Cash used in operating activities: | ||||||||
Deferred stock-based compensation (income) expenses | ||||||||
Depreciation | – | 36,000 | ||||||
Rounding | – | (1 | ) | |||||
Allowance for Receivables | – | 361 | ||||||
Inventory obsolescence reserve | – | 1,580 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | – | (17,092 | ) | |||||
Inventory | – | (4,520 | ) | |||||
Prepaid and other current assets | – | (1,998 | ) | |||||
Accounts Payable | – | 23,504 | ||||||
Accrued vacation, payroll and payroll taxes | – | 1,795 | ||||||
Notes, Loans and Lines of Credit | – | 65,391 | ||||||
Rounding | – | 1 | ||||||
Other accrued expenses | – | (368,911 | ) | |||||
Net cash used in operating activities | – | (389,278 | ) | |||||
Investing Activities | ||||||||
Issuance of note receivable-related party | ||||||||
Property, Plant, Equipment and other Assets | – | (2,111 | ) | |||||
Net cash used in investing activities | – | (2,111 | ) | |||||
Financing Activities | ||||||||
Proceeds from exercise of warrants | ||||||||
Proceeds from subordinate debt | – | 81,066 | ||||||
Proceeds from Other Debt and Loans | – | 108,281 | ||||||
Proceeds from exercise of stock options | – | – | ||||||
Net cash provided by financing activities | – | 189,347 | ||||||
Net increase/(decrease) in cash and cash equivalents | – | (202,042 | ) | |||||
Cash and cash equivalents at beginning of period | 83,392 | 285,434 | ||||||
Cash and cash equivalents at end of period | $ | 83,392 | $ | 83,392 |
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet | ||||
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| September 30, 2012 (Unaudited) |
| June 30, 2012 |
Assets |
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Current Assets: |
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Cash and cash equivalents |
| $ 77,275 |
| $ 75,043 |
Accounts receivable, net |
| 49,163 |
| 149,156 |
Prepaids and other current assets |
| 26,373 |
| 31,304 |
Inventory, net |
| 184,839 |
| 172,223 |
Note receivable-related party-CPC |
| 150,000 |
| 146,319 |
Accrued royalties receivable from CPC |
| 2,400 |
| 2,400 |
Total Current Assets |
| 490,050 |
| 576,445 |
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Property and equipment, net |
| 573,789 |
| 678,331 |
Debt issuance costs, net |
| 6,560 |
| 7,380 |
Other assets |
| 49,157 |
| 43,657 |
Total Assets |
| $ 1,119,556 |
| $ 1,305,813 |
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Liabilities and Shareholders' Equity (Deficit) |
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Current Liabilities: |
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Accounts payable |
| $ 268,069 |
| $ 170,832 |
Line of credit-Charter Capital |
| 5,288 |
| - |
Sale-leaseback obligation-current portion |
| 37,007 |
| 35,383 |
Accrued vacation, payroll and payroll taxes |
| 48,842 |
| 29,236 |
Payable for equipment |
| 155,000 |
| 155,000 |
Other accrued expenses |
| 203,369 |
| 246,240 |
Current liabilities of discontinued operations |
| - |
| 18,143 |
Total Current Liabilities |
| 717,575 |
| 654,834 |
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Long Term Liabilities: |
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Notes payable-subordinated debt, net of discounts |
| 702,442 |
| 610,615 |
Sale-leaseback obligation |
| 56,649 |
| 66,533 |
Deferred compensation-discontinued operations |
| 552,631 |
| 262,500 |
Total Long-Term Liabilities |
| 1,311,722 |
| 939,648 |
Total Liabilities |
| 2,029,297 |
| 1,594,482 |
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Shareholders' Equity (Deficit) |
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Series A Convertible Preferred Stock, $.01 par value: |
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Authorized shares--5,000,000 |
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Issued and outstanding shares—611,390 |
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at September 30, 2012 and June 30, 2012. Each share of |
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preferred stock is convertible into 12 shares of common |
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stock at the option of the holder. (Aggregate |
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liquidation preference of $10,621,707 and $10,145,478 |
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at September 30, 2012 and June 30, 2012, respectively.) |
| 6,114 |
| 6,114 |
Common Stock, $.01 par value: |
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Authorized shares--150,000,000 |
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Issued and outstanding shares—52,388,750 |
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at September 30, 2012 and June 30, 2012. |
| 523,887 |
| 523,887 |
Additional paid-in capital |
| 28,571,396 |
| 28,462,631 |
Accumulated deficit |
| (30,011,138) |
| (29,281,301) |
Total Shareholders' Equity (Deficit) |
| (909,741) |
| (288,669) |
Total Liabilities and Shareholders' Equity (Deficit) |
| $ 1,119,556 |
| $ 1,305,813 |
SeeThe accompanying notes.notes are an integral part of these financial statements
4
5 |
Hypertension Diagnostics, Inc.
Notes to the Consolidated Financial Statements of Operation
(Unaudited)Quarterly Period ended March 31, 2018
Consolidated Statement of Operations | ||||
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| Three months ended September 30, | ||
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| 2012 |
| 2011 |
Income Statement |
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Net Revenues: |
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Plastics |
| $ 32,462 |
| $ - |
Royalties |
| 2,160 |
| 1,200 |
Total revenues |
| 34,622 |
| 1,200 |
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Cost of Sales-Plastics |
| 146,079 |
| 38,258 |
Gross Profit (loss) |
| (111,457) |
| (37,058) |
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Expenses: |
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Selling, general and administrative |
| 201,024 |
| 202,473 |
Loss on disposition of assets |
| 80,598 |
| - |
Total Expenses |
| 281,622 |
| 202,473 |
Operating loss |
| (393,079) |
| (239,531) |
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Other Income and (Expense): |
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Interest income |
| 3,681 |
| 2,096 |
Miscellaneous income |
| - |
| 499 |
Interest Expense |
| (58,559) |
| - |
Total Other Income and (Expense) |
| (54,878) |
| 2,595 |
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Net loss before income taxes |
| (447,957) |
| (236,936) |
Income taxes |
| - |
| - |
Net loss from continuing operations |
| (447,957) |
| (236,936) |
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Loss from discontinued operations |
| (281,880) |
| (651,362) |
Loss on sale of discontinued operations |
| - |
| (123,702) |
Net loss from discontinued operations |
| (281,880) |
| (775,064) |
Net loss |
| $ (729,837) |
| $ (1,012,000) |
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Earnings Per Share: |
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Net Income (loss) from continuing operations: |
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Basic income (loss) from continuing operations per share |
| $ (0.01) |
| $ 0.00 |
Diluted income (loss) from continuing operations per share |
| $ (0.01) |
| $ 0.00 |
Net Income (loss) from discontinued operations: |
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Basic income (loss) from discontinued operations per share |
| $ (0.00) |
| $ (0.02) |
Diluted income (loss) from discontinued operations per share |
| $ (0.00) |
| $ (0.02) |
Net Income (loss) per Common Share: |
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Basic income (loss) per common share |
| $ (0.01) |
| $ (0.02) |
Diluted income (loss) per common share |
| $ (0.01) |
| $ (0.02) |
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Weighted Average Common Shares Outstanding Basic |
| 52,388,750 |
| 43,325,843 |
Weighted Average Common Shares Outstanding Diluted |
| 52,388,750 |
| 43,325,843 |
See accompanying notes.
5
Hypertension Diagnostics, Inc.
Consolidated Statements of Cash Flow
(Unaudited)
Consolidated Statement of Cash Flows | ||||
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| Three months ended September 30, | ||
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| 2012 |
| 2011 |
Operating Activities: |
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Net loss |
| $ (729,837) |
| $ (1,012,000) |
Loss from discontinued operations |
| 281,880 |
| 651,362 |
Loss on sale of discontinued operations |
| - |
| 123,702 |
Net loss from continuing operations |
| (447,957) |
| (236,936) |
Adjustments to reconcile net loss to net cash used in operating activities |
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Loss on disposition of leasehold improvements |
| 80,598 |
| - |
Depreciation |
| 35,176 |
| - |
Stock option expense |
| - |
| 64,625 |
Amortization of debt issuance costs |
| 820 |
| - |
Amortization of debt discount and accreted interest |
| 20,592 |
| - |
Accreted interest on note receivable |
| (3,681) |
| (1,600) |
Change in operating assets and liabilities: |
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Decrease in accounts receivable |
| 99,993 |
| - |
Increase in inventory |
| (12,616) |
| (29,000) |
(Increase) decrease in prepaid and other current assets |
| 4,931 |
| (11,056) |
Increase in other assets |
| (5,500) |
| (37,128) |
Increase in accounts payable |
| 97,237 |
| 55,015 |
Increase in accrued vacation, payroll and payroll taxes |
| 19,606 |
| - |
Decrease in other accrued expenses |
| (42,871) |
| (3,170) |
Net cash used in operating activities |
| (153,672) |
| (199,250) |
Investing Activities: |
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Purchases of property and equipment |
| (11,232) |
| (34,311) |
Proceeds from note receivable-related party-Minot |
| - |
| 45,000 |
Net cash provided by (used in) investing activities |
| (11,232) |
| 10,689 |
Financing Activities: |
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Payments on sale-leaseback obligation |
| (8,260) |
| - |
Proceeds from Charter Capital line of credit |
| 5,288 |
| - |
Proceeds from issuance of subordinated notes |
| 180,000 |
| - |
Net cash provided by financing activities |
| 177,028 |
| - |
Net cash used in continuing operations |
| 12,124 |
| (188,561) |
Net cash provided by (used in) operating activities of discontinued operations | (9,892) |
| 118,642 | |
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Net increase(decrease) in cash and cash equivalents |
| 2,232 |
| (69,919) |
Cash and cash equivalents at beginning of period |
| 75,043 |
| 753,821 |
Cash and cash equivalents at end of period |
| $ 77,275 |
| $ 683,902 |
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Supplemental non-cash investing and financing activities: |
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Payable for equipment |
| $ - |
| $ 155,000 |
Payable for equipment to Compass Bank |
| $ - |
| $ 250,000 |
Note receivable-related party from sale of discontinued operations |
| $ - |
| $ 127,500 |
Increase in debt discounts on subordinated notes by issuing stock warrants | $ 108,765 |
| $ - |
See accompanying notes.
6
NOTES TO FINANCIAL STATEMENTS
Note 1. BasisOrganization and Significant Accounting Policies
Description of PresentationBusiness
The accompanying unaudited consolidated financial statements of Hypertension Diagnostics, Inc. (the “Company” or “HDI”) have been prepared in accordance withWe were incorporated under 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 presentationlaws of the financial statements. The resultsState of operations forMinnesota on July 19, 1988. We were previously engaged in the three months ended September 30, 2012 are not necessarily indicativemedical device business. In mid-2011, HDI’s board of directors determined to pursue a change in strategic direction. 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 owned by Jay Cohn, a founder and a director 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,Company. In September 2011, the Companywe formed HDI Plastics Inc. (“HDIP”), a wholly owned-subsidiary, entered into a new lease agreement, purchased selected manufacturing assets from Compass Bank and Cycled Plastics and began engaging in the business of plastics reprocessing in Austin, TX. 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or “Plastics”),less at the time of purchase to be cash equivalents. The Company maintains cash in financial institutions. The balances, at times, may exceed federally insured limits.
Accounts Receivable
The Company reviews customers’ credit history before extending unsecured credit. Accounts receivable are reviewed to determine the need for an allowance for amounts that may become uncollectible in the future. The necessity of an allowance is based on management’s review of accounts receivable balances and historic write-offs. Invoice terms can vary from at date of shipment to net 30 days. The Company does not accrue interest on past due accounts receivable. The Company writes off receivables when they are deemed uncollectible after all collection attempts have failed. The Company has determined that an allowance for doubtful accounts is not necessary as of March 31, 2019.
Inventory
Inventories are valued at the lower of cost or market with cost based upon the average cost of raw material purchased which includes an allocation of manufacturing overhead if further processing has been done. 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 or 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 March 31, 2019, there was no reserve for obsolete inventory.
6 |
Property and Equipment
Property and equipment are stated at cost. Improvements are capitalized, while repair and maintenance costs are charged to operations when incurred. Depreciation is computed principally using the straight-line method. Estimated useful lives for leasehold improvements are the shorter of the lease term or estimated useful life and 3 to 5 years for furniture and processing equipment, and computer equipment.
Fair Value of Financial Instruments
The Company’s financial instruments are recorded on its balance sheet. The carrying amounts for cash, accounts receivable, note receivable, accounts payable, and accrued expenses approximate fair value due to the immediate or short-term maturity of these financial instruments. The lease obligation and subordinated debt approximates fair value since this debt was recently obtained.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets’ carrying amount. To date, no such losses have been recognized.
Revenue Recognition
Plastics - Beginning October 2011, HDI Plastics began selling 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 taking physical possession of the product at its processing facility, although HDIP assumes 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.
Royalties – After the sale of the medical device business in August 2011, the Company is receiving a minor amount of royalty income in connection with the license agreement. This income is being recorded as revenue when a sale is made by CPC to a 3rd party purchaser.
Shipping and Handling Costs
The Company records all amounts billed to customers in a sales transaction related to shipping and handling as sales. The Company records costs related to shipping and handling in cost of sales.
Income Taxes
The Company accounts for income taxes by following an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the difference between the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax amounts are determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under currently enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change in deferred tax assets and liabilities during the period. In accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a wholly-owned subsidiarycomponent of interest expense and any related penalties will be classified in operating expenses in the consolidated statement of operations.
7 |
The Company recognizes a financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
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 includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, warrants, or the conversion of preferred stock.
Stock-Based Compensation
The Company regularly grants options to individuals under various plans. The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors on a straight-line basis over the respective vesting period of the Company. HDIP commenced plastic processing operations in October 2011. HDIPawards. The compensation expense for the Company's stock-based payments is based on estimated fair values determined at the principal operating businesstime of the Company. HDIP is engaged ingrant of the processingportion of recycled plasticstock-based payment awards that are ultimately expected to vest.
The Company estimates the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the expected term of the stock options, the volatility of the public market price for the Company's common stock and interest rates.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and items defined as other comprehensive income (loss). Items defined as other comprehensive income (loss) include items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities. For the three month period ended March 31, 2018, there were no adjustments to net income (loss) to arrive at comprehensive income (loss).
Recent Accounting Pronouncements
There were no new accounting standards issued or effective during the quarterly period ended March 31, 2018 that had, or are expected to have a material including re-processing into pellet-form for sale to manufacturing customers.impact on the Company’s results of operations, financial condition or cash flows.
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 quarter ended September 30, 2012, we incurred losses from continuing operations of $447,957. At September 30, 2012, we had an accumulated deficit of $30,011,138 and negative working capital of $227,525. 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 relocate our plastics processing facility to a new site and then restart the facility which would include hiring production works. The Company is currently seeking to raise an additional $750,000 through an issuance of 14.5% Series II Subordinated Notes in order to meet the cash flow needs to restart our plastics business. As of this filing, we have raised $210,000 related to these notes. 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:Inventory
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 asRaw materials consist 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 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 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.
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
7
NOTES TO FINANCIAL STATEMENTS
There were no new accounting standards issued or effective during the quarter ended September 30, 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 monthsarrive at the discretion of CPC (See Note 5). We received a letter on July 27, 2012 from CPC indicating they will be paying $200,000 due 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 $2,400 less 10% due to Greg Guettler for three months ended September 30, 2012
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 have been 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 economic terms as the underlying lease with HDI which remains as an obligation of the Company.
Upon the closing of this transaction, the Company has limited remaining operations (collection of royalties under the license agreement) related to its medical device business and currently is seeking 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.
In connection with 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 for the three months ended September 30, 2011:
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The Company has not included the results of operations of the former medical device business in the results from continuing operations. We expect to receive continuing royalties from our licensed technology and from continuing efforts to license and market our intellectual property. 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, 2012, and 2011 consists of the following:
| September 30, | ||
| 2012 |
| 2011 |
Revenue, net | $ - |
| $ 234,560 |
Cost of Goods Sold | - |
| 10,557 |
Gross Profit | - |
| 224,003 |
Operating Expenses | 9,892 |
| 252,865 |
Deferred Compensation expense (1) | 271,988 |
| 622,500 |
Loss from discontinued operations | $ (281,880) |
| $ (651,362) |
(1)
Deferred compensation valuation change relating to the former CEO (Mark Schwartz), who resigned after the medical device assets were sold.
The Company does not have any existing assets of discontinued operations at September 30, 2012. The only remaining liabilities of discontinued operations as of September 30, 2012 pertain to the deferred compensation of the former CEO. (See Note 9).
Note 5. Notes Receivable – related party
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 Effective Date, and was originally recorded as a net note receivable of $127,500. The balance of the Note at September 30, 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.
Note 6. Property and Equipment
Property and Equipment is as follows:
| September 30, |
| June 30, |
| 2012 |
| 2012 |
Equipment | $ 674,659 |
| $ 672,383 |
Leasehold improvements | 7,872 |
| 93,235 |
Office furniture and equipment | 9,006 |
| 7,923 |
Vehicles | 11,984 |
| 11,984 |
Less accumulated depreciation | (129,732) |
| (107,194) |
Total equipment | $ 573,789 |
| $ 678,331 |
Depreciation expense was $35,176 and $0 for the three months ended September 30, 2012 and 2011, respectively.
The Company recognized a loss of $80,598 in the three months ended September 30, 2012 for the abandonment of leasehold improvements related to the property at 5330 Fleming Court, Austin, TX due to the termination of lease and the surrender of the property.
Note 7. Litigation and Contingencies
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 violationsthat are cured. HDIP unsuccessfully attempted to negotiate temporary permits allowing it to continue operations while it addresses the alleged violations identifiedsorted and staged 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.warehouse as bales or in bins. The violations have not been satisfied and the Company has begun the process of moving their operations to a new location in Taylor, TX. There is no guarantee when or if the moving of the operations of the Company will be complete. 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 still not operating a processing facility and only has a few small brokered sales.
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. The Company has accrued as of September 30, 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 wastewater at the Company’s former facility was completed.
Note 8. Stock Options
The Company regularly grants stock options to individuals under various plans as described in Note 13 of 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 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.
10
NOTES TO FINANCIAL STATEMENTS
During the three months ended September 30, 2012 and the three months ended September 30, 2011, there were no stock options granted. The Company recognized compensation expense of $0 for the three months ended September 30, 2012, and $64,625 for the three months ended September 30, 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 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 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 $552,631 at September 30, 2012, which is the fair market value of 13,125,000 phantom shares outstanding as of September 30, 2012 ($525,000) plus $27,631 of accrued payroll taxes related to the agreement. Due to the increase in the price of the Company’s common stock during the quarter ended September 30, 2012 (increase from $0.02 to $ 0.04), the Company recorded a net compensation expense of $271,988 for the quarter ended September 30, 2012. For the quarter ended September 30, 2011, the Company recorded a net compensation expense of $622,500. 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%. The Company began borrowing under this facility in November 2011. The outstanding balance as of September 30, 2012 is $5,288 and $0 as of June 30, 2012.
Note 11. Note Payable - Subordinated Debt
In December 2011, the Company commenced a private placement offering of 14.5% Five Year Subordinated 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 duefive 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.
11
NOTES TO FINANCIAL STATEMENTS
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 September 30, 2012, the Company had issued to directors of the Company $180,000 in Series II Subordinated Notes which included warrants to purchase 5,142,858 shares of Company stock. The notes are duetwo 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 of $0.05 per warrant. After calculating the relative fair value of the debt and warrants, $108,765 and 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 September 30, 2012:
Subordinated Debt | Series I |
| Series II |
| Total |
Gross proceeds received | $ 833,600 |
| $ 180,000 |
| $ 1,013,600 |
Less value assigned to warrants | (252,393) |
| (108,765) |
| (361,158) |
| 581,207 |
| 71,235 |
| 652,442 |
Add: amortization of debt discount | 37,860 |
| 5,438 |
| 43,298 |
Interest accreted to redemption price | 6,252 |
| 450 |
| 6,702 |
| 625,319 |
| 77,123 |
| 702,442 |
Less current maturities | - |
| - |
| - |
| $ 625,319 |
| $ 77,123 |
| $ 702,442 |
Note 12. 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, 2012 and 2011.
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| September 30, |
| September 30, |
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| 2012 |
| 2011 |
Basic earnings (loss) per share calculation: |
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Net income (loss) from continuing operations to common shareholders |
| $ (447,957) |
| $ (236,936) |
Net income (loss) from discontinued operations to common shareholders |
| (281,880) |
| (775,064) |
Net income (loss) to common shareholders |
| $ (729,837) |
| $ (1,012,000) |
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Weighted average of common shares outstanding |
| 52,388,750 |
| 43,325,843 |
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Basic net earnings (loss) from continuing operations |
| $ (.01) |
| $ .00 |
Basic net earnings (loss) from discontinued operations |
| (.00) |
| (.02) |
Basic net earnings (loss) per share |
| $ (.01) |
| $ (.02) |
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Diluted earnings (loss) per share calculation: |
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Net income (loss) from continuing operations to common shareholders |
| $ (447,957) |
| (236,936) |
Net income (loss) from discontinued operations to common shareholders |
| (281,880) |
| (775,064) |
Weighted average of common shares outstanding |
| $ (729,837) |
| $ (1,012,000) |
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Weighted average of common shares outstanding |
| 52,388,750 |
| 43,325,843 |
Series A Convertible Preferred Stock (1) |
| - |
| - |
Stock Options (2) |
| - |
| - |
Warrants (3) |
| - |
| - |
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Diluted weighted average common shares outstanding |
| 52,388,750 |
| 43,325,843 |
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Diluted net earnings (loss) from continuing operations |
| $ (.01) |
| $ (.00) |
Diluted net earnings (loss) from discontinued operations |
| (.00) |
| (.02) |
Diluted net earnings (loss) per share |
| $ (.01) |
| $ (.02) |
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Note 13. Subsequent Events
Subsequent to September 30, 2012 the Company had issued a total of $30,000 in Series II Subordinated Notes which included warrants to purchase an aggregated of 857,142 shares of Company common stock (See Note 11).
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 are currently seeking 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. We currently have a plan to resume production around February 1, 2013 assuming adequate capital is obtained to do so. We cannot guarantee that there will not exist delays in resuming production that may extend the date in which we commence operations, or that we will resume our production at all.
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. Allraw material intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition. Beginning October 2011, HDI Plastics began selling finished goods to manufacturers in the form of pelletized resin and clean shredded and ground 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 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 management’s review of inventories on hand compared to estimated future usageweight and sales. As of September 30, 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 months ended September 30, 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 September 30, 2012, we had an accumulated deficit of $30,011,138. Until we are able to generate significant revenue from our activities, we expect to continue to incur operating losses. As of September 30, 2012, we had cash and cash equivalents of $77,275. 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 relocate our plastics processing facility to a new site and then restart the facility which would include hiring production workers.
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Revenue- The Company earned $34,622 and $1,200 in revenue from continuing operations in the quarters ended September 30, 2012 and 2011, respectively. Of the $34,622, $2,160 was received from CPC as a result of the royalty agreement that was part of the sale of selected assets to CPC and $32,462 was received from the limited operations of the plastics processing business for brokered sales. For the quarter ended September 30, 2012, our plastics production facility was not operating. We are in the middle of our efforts to move to a new facility. There was no plastics revenue in the quarter ended September 30, 2011 because the plastics business did not start until October 2011.
Expenses- Total selling, general and administrative expenses for continuing operations for the three months ended September 30, 2012 were $201,024 compared to $202,473 for the three months ended September 30, 2011. The following is a summary of the major categories included in selling, general and administrative expenses:
| Three Months Ended | ||
| September 30 | ||
| 2012 |
| 2011 |
|
|
|
|
Wages, expenses, and benefits | $ 86,850 |
| $ 67,353 |
Patent Expense | - |
| 5,220 |
Rent (building/equipment) and utilities | 1,700 |
| 10,194 |
Insurance-general and directors/officers liability | 16,273 |
| 6,019 |
Legal and audit/accounting fees | 71,808 |
| 38,531 |
Stock option expense | - |
| 64,625 |
Other-general and administrative | 24,393 |
| 10,531 |
Total selling, general and administrative expenses | $ 201,024 |
| $ 202,473 |
Wages, related expenses and benefits increased from $67,353 to $86,850 for the three months ended September 30, 2011 and 2012, respectively, which was a 29% increase due to one additional employee for the HDIP business. The wages, expenses, and benefits included in SG&A are for the corporate office and one management employee in the plastics processing business. There were no payroll related costs for the period ended September 30, 2011 relating to the HDIP.
Legal and audit/accounting fees increased from $38,531 to $71,808 for the three months ended September 30, 2011 and 2012, respectively, a 86% increase due to various issues relating to the shutdown of operations at HDIPvolume and the processaverage cost of locating new facilities.
Stock option expense was $64,625purchasing. Finished goods are processed into pellet or regrind form and $0 for the three months ended September 30, 2011 and 2012, respectively. This expensestored in gaylords. The inventory value of finished goods 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, 2012. There have been no new options granted in the last year and all options have been previously expensed.
Other general and administrative expenses increased from $10,531 to $24,393 for the three months ended September 30, 2011 and 2012, respectively, a 131% increase because the plastics business was not operating during the quarter ended September 30, 2011.
The Company recognized a loss of $80,598 in the three months ended September 30, 2012 for the abandonment of leasehold improvements related to the property at 5330 Fleming Court, Austin, TX due to the termination of leaseweight and the surrender of such property.
The Company recorded $58,559 in interest expense in the three months ended September 30, 2012 relatedcost to the sub-debt agreements, the sale/leaseback transaction,convert using a standard labor and the Charter Capital line of credit. There was $0 in interest expense in the three months ended September 30, 2011 because we did not enter into any of these agreements until the subsequent quarters.
Our net loss from continuing operations was $447,957 for the three months ended September 30, 2012, compared to net loss from continuing operations of $236,936 for the three months ended September 30, 2011. For the three months ended September 30, 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 September 30, 2011, basic and diluted net loss per share per continuing operations was $0.00 based on weighted average common shares outstanding of 43,325,843.
Liquidity and Capital Resources
Cash and cash equivalents had a net increase (decrease) of $2,232 and $(69,919) for the three months ended September 30, 2012 and September 30, 2011, respectively. The significant elements of these changes were as follows:
|
| Three months Ended September 30, | ||
|
| 2012 |
| 2011 |
Net cash provided by (used in) operating activities: |
|
|
|
|
Net loss from continuing operations |
| $ (447,957) |
| $ (236,936) |
Non-cash stock option expense |
| $ - |
| 64,625 |
Increase in inventory related to the new recycled |
|
|
|
|
plastics processing business. |
| $ (12,616) |
| $ (29,000) |
Decrease in accounts receivable related to the new recycled |
|
|
|
|
plastics processing business. |
| $ 99,993 |
| - |
Increase in accounts payable that relate to continuing |
|
|
|
|
operations |
| $ 97,237 |
| $ 55,015 |
Increase (decrease) in accrued expenses relating to continuing operations |
| $ (42,871) |
| $ (3,170) |
Net cash provided by (used in) Investing activities: |
|
|
|
|
Purchase of equipment and other fixed assets in setting |
|
|
|
|
up HDIP for operations |
| $ (11,232) |
| $ (34,311) |
Payment received on note receivable |
| $ - |
| $ 45,000 |
Net cash provided by financing activities: |
|
|
|
|
Factoring line of credit agreement with Charter Capital |
| $ 5,288 |
| $ - |
Proceeds from subordinated debt offering |
| $ 180,000 |
| - |
Payments for sale/leaseback obligation |
| $ (8,260) |
| - |
Other: |
|
|
|
|
Activity related to discontinued operations |
| $ (9,892) |
| $ 118,642 |
As of September 30, 2012, we had cash and cash equivalents of $77,275. The Company believes that the cash and cash equivalents of the Company will be sufficient to fund our operations for less than 12 months without accounting for additional financing. 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 relocate our plastics processing facility to a new site and then restart the facility which would include hiring production workers.
Net cash provided by financing activities of continuing operation for the three months ended September 30, 2012 and September 30, 2011, was $177,028 and $0 through the proceeds of issuing subordinated notes to investors and former employees. At the time of this filing, we do not have all of the funds necessary to get the plastics production facility up and running. The Company is continuing its best efforts to raise funds under its Series II subordinated debt offering. There is no guarantee that the efforts of such financing will be successful.
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 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, material weakness existed as follows: overhead rate.
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.
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 September 30, 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 begun the process of moving their operations to a new location in Taylor, TX. There is no guarantee when or if the moving of the operations of the Company will be complete at this time. 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 still not operating a processing facility and only has a few small brokered sales.
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.
Item 1A.
Risk Factors4. Subsequent Events
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.None.
Item 2. Unregistered Sales of Equity Securities and use of Proceeds
See Item 5. below.
Item 5. Other Information
Unregistered Sales of Equity Securities
In August 2012, the Company commenced a second private placement offering of 14.5% Two Year Subordinated 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 of 14.5% per year
8 |
is payable monthly in cash. As of September 30, 2012, this offering resulted in the issuance of $180,000 in notes and five-year warrants to purchase an aggregate of 5,142,858 shares of the Company’s common stock with an exercise price of $.035 per share. The notes are duetwo years from the closing date at 105% of face value. 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 connection with the offering, no underwriters were utilized and no commissions were paid. The Company and HDIP relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for such issuance.
Subsequent to September 30, 2012, the Company had issued a total of $30,000 in Series II Subordinated Notes which included warrants to purchase an aggregate of 857,142 shares of Company common stock.
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).
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
Bylawsincorporated 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).
4.1*
Form of 14.5% Two Year Subordinated Notes
4.2*
Form of Warrant issued in connection with issuance of 14.5% Two Year Subordinated Notes
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 Company’s Current Report on Form 8-K filed August 31, 2011).
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 Company’s 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 Company’s 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 Company’s Current Report on Form 8-K filed September 26, 2011).
10.5
Purchase and Sale Agreement/Security Agreement dated October 11, 2011 among Charter Capital Holdings LP, HDIP Plastics Inc., and the Company (incorporated by reference to Exhibit 5.1 to the Company’s Quarterly Report on Form 10-Q dated February 14, 2012).
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 Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has caused duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Hypertension Diagnostics Inc. | |
Date: September 18, 2019 | By: /s/ Liangjian Peng |
Liangjian Peng Chief Executive Officer |
HYPERTENSION DIAGNOSTICS, INC.
9 |
By/s/ Kenneth W. Brimmer
Kenneth W. BrimmerThe Issuer’s Business, Products and Services
A. Hypertension Diagnostics, Inc. is a consulting company.
B. The Company was incorporated under the laws of the State of Minnesota on July 19, 1998.
C. The Company’s SIC code is 8748 - Business Consulting Services.
D. the Company’s principle products are consulting services.
Issuer’s facilities
Hypertension Diagnostics, Inc. currently operates out of shared space offered to the Company at no charge by the Chief Executive Officer, and Chief Financial Officerwill continue to do so until the Company needs its own office space.
Date: November 14, 2012Officers, Directors, and Control Persons
A. Names of Officers, Directors, and Control Persons.
Liangjian Peng, CEO
2915 Waters Rd #108 Eagan MN 55121
Owns 3,000,000 Preferred Series A super voting shares - (Approx. 95% Control)
B. Legal/Disciplinary History. Please identify whether any of the foregoing persons have, in the last five years, been the subject of:
1. | A conviction in a criminal proceeding or named as a defendant in a pending criminal proceeding (excluding traffic violations and other minor offenses):NO |
2. | The entry of an order, judgement, or decree, not subsequently reversed, suspended or vacated, by a court of competent jurisdiction that permanently or temporarily enjoined, barred, suspended or otherwise limited such person’s involvement in any type of business, securities, commodities, or banking activities;NO |
3. | A finding or judgment by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission, the Commodity Futures Trading Commission, or a state securities regulator of a violation of federal or state securities or commodities law, which finding or judgment has not been reversed, suspended or vacated:NO |
4. | The entry of an order by a self-regulatory organization that permanently or temporarily barred suspended or otherwise limited such person’s involvement in any type of business or securities activities.NO |
C.Beneficial Shareholders.
The following are persons or entities owning 5% of the current outstanding shares or more as of the date of this information statement.
Liangjian Peng, CEO
2915 Waters Rd #108 Eagan MN 55121
Owns 3,000,000 Preferred Series A super voting shares - (Approx. 95% Control)
22
10 |
Legal/Disciplinary History
NONE
Third Party Providers
Please provide the name, address, telephone number, and email address of each of the following outside providers that advise your company on matters relating to operations, business development and disclosure:
a.Legal Counsel: None
b.Accountant or Auditor: None
c.Investor Relations Consultant:None
d.Other Advisor: None
Issuer Certification
I,Liangjian Peng certify that:
1. | I have reviewed this Disclosure Statement of Hypertension Diagnostics, Inc.: |
2. | Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this disclosure statement; and |
3. | Based on my knowledge, the financial statements, and other financial information included or incorporated by reference in this disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this disclosure statement. |
September 19, 2019
Date
/s/ Liangjian Peng
CEO
11 |