UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DCD.C. 20549

_________________

FORM 10-Q

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(Mark One)

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)

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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 x   NOo Yes  ☐   No  ☒

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 o    NOx    Yes  ☐    No  ☒

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

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).     Yes  ☐    No  ☒

                                                                                                                YES o NO x 

As of May 13, 2013, thereThere 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.

See

The accompanying notes.notes are an integral part of these financial statements

See accompanying notes.

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 nine monthsQuarterly Period ended March 31, 2013 are not necessarily indicative2018

Note 1. Organization and Significant Accounting Policies

Description of Business

We were incorporated under the laws 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 includedState of Minnesota on July 19, 1988. We were previously engaged in the Company’s Annual Report on Form 10-K formedical 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 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” or “Plastics”), as a wholly-owned subsidiary ofwholly owned-subsidiary, entered into a new lease agreement, purchased selected manufacturing assets from Compass Bank and Cycled Plastics and began engaging in the Company. HDIP commenced operations in October 2011.  HDIP is the principal operating business of plastics reprocessing in Austin, TX. Demand for reprocessed plastic is growing, and HDIP has the Company.  HDIP is engaged in thesystems and infrastructure for collecting and processing of recycledpost-consumer and post-industrial plastic material including re-processingwaste into pellet-form for salepellets to be resold to domestic manufacturing customers.companies.

Note 2. Going ConcernUse of Estimates

The accompanyingpreparation of financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, assumingrequires management to make estimates and assumptions that affect 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 nine months ended March 31, 2013, we incurred losses from continuing operations of $1,369,091. At March 31, 2013, we had an accumulated deficit of $30,682,216and negative working capital of $857,619. 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 incurred to restart HDIP’s facility, hire production workers, and ramp up to full operating capacity for our revenue generating activities. 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. 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 12 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 “August 26, 2011 Agreement”) providing for the sale of selected assets from our Hypertension Diagnostics Business to Cohn Prevention Center, LLC (“CPC”), a Minnesota company, controlled by 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 previouslyamounts reported financial results to exclude those operations affected by the sale. These results are presented on a 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 royalty 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 have been revised to reflect only theaccompanying notes. Actual results of our continuing operationscould differ from our new recycled plastics process business. On January 25, 2013, the Company entered into and closed a second definitive Asset Purchase Agreement (the “January 25, 2013 Agreement”) with CVC-HD, LLC, a Minnesota limited liability company (“CVC”), controlled by Jay Cohn, effectively amending the August 26, 2011 Agreement and assigning to CVC the remaining assets related to the medical device business including intellectual property assets for an additional purchase price of $75,000. Additionally, at the time of this second agreement, HDI was still owed $200,000 from the first sale. In total, $275,000 is owed on these two sales and as of March 31, 2013, $75,000 has been received. The balance of the $200,000 is to be paid off in monthly installments with final payment due June 30, 2013. The royalty provisions of the August 26, 2011 Agreement were eliminated in this January 25, 2013 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

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. For HDI, this ASU was effective beginning January 1, 2013. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.

Note 4.   Discontinued Operations

On August 26, 2011, (the “Effective Date”), the Company entered into and closed a definitive Asset Purchase Agreement (the “August 26, 2011 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 6). 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 $0 and $6,000 less 10% due to Greg Guettler for the three and nine months ended March 31, 2013, respectively.Cash Equivalents

The Company and CPC also entered into a Sublicense Agreement onconsiders all highly liquid investments with an original maturity of three months or less at the Effective Date (the “Sublicense Agreement”), pursuanttime of purchase to which thebe cash equivalents. 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 exclusivelymaintains cash 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.financial institutions. 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.balances, at times, may exceed federally insured limits.

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.Accounts Receivable

The Company recorded a loss onreviews customers’ credit history before extending unsecured credit. Accounts receivable are reviewed to determine the sale transactionneed for an allowance for amounts that may become uncollectible in the amountfuture. The necessity of $123,702 in the quarter ended Septemberan 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 2011.

On January 25, 2013, (the “Effective Date”), thedays. 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 $75,000. This amount is in addition to the $200,000 owed to thedoes not accrue interest on past due accounts receivable. The Company by CPC as set forth above, which payment terms were modified as set forth below.writes off receivables when they are deemed uncollectible after all collection attempts have failed. The Company has not recorded the revenue from this additional sale due to the collectabilitydetermined that an allowance for doubtful accounts is not reasonably assurednecessary as of March 31, 2019.

Inventory

Inventories are valued at this time, since the original $150,000 note fromlower of cost or market with cost based upon the first saleaverage 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 been paid following its original terms.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 aggregate $275,000 consistsneed for a reserve is based on management’s review of a cash payment in the amount of $37,500 dueinventories on the Effective Date which was received,hand compared to estimated future usage 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.sales. As of March 31, 2013, a total2019, there was no reserve for obsolete inventory.

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 $75,000 has been receivedthe 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 note.debt was recently obtained.

Impairment of Long-Lived Assets

The Company has not includedwill record impairment losses on long-lived assets used in operations when indicators of impairment are present and the results of operations of our former medical device business inundiscounted future cash flows estimated to be generated by those assets are less than the results from continuing operations.  The income (loss) from discontinued operations for the three and nine months ended March 31, 2013, and 2012 consists of the following:assets’ carrying amount. To date, no such losses have been recognized.

The Company does not have any existing assets of discontinued operations at March 31, 2013. The only remaining liabilities of discontinued operations as of March 31, 2013 pertain to the deferred compensation of the former CEO. (See Note 9)Revenue Recognition

Note 5. Inventory

Inventory consisted of the following:

Note 6.   Notes Receivable – Related Parties

In connection with the Asset Purchase Agreement between HDI and CPC on August 26, 2011, 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 Company received a letter from CPC on July 27, 2012 indicating CPC’s intent to pay the $200,000 due February 26, 2013 instead of the original $150,000. The Company has elected to not recognize the additional income forthcoming on this Note until the cash is collected in the future.

On January 25, 2013, 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 which was applied to the original note, and a promissory note in the amount of $237,500 that replaces the existing note issued by CPC listed above. The Company has not recorded the revenue from this additional sale due to the collectability is not reasonably assured at this time, since the original $150,000 note from the first sale has not been paid following its original terms. The new note is payable in installments with the first payment due February 2013 for $37,500, which was received in March 2013, and $50,000 due per month beginning in March 2013, which was not received, with the final payment due June 2013. As of March 31, 2013 $75,000 has been received on the note. A subsequent payment of $25,000 on the note was received in April 2013.

Note 7.  Property and Equipment

Property and Equipment is as follows:

Depreciation expense was $44,670 and $37,603 for the three months ended March 31, 2013 and 2012, respectively. For the nine months ended March 31, 2013 and 2012, depreciation expense was $116,659 and $67,560, respectively.

The Company recognized a net loss of $79,973 from the sale of equipment in the nine month period ended March 31, 2013 related to the abandonment of leasehold improvements associated with the property at 5330 Fleming Court, Austin, TX due to the termination of the lease and surrender of the property.

Note 8.   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 former 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. 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.

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 has accrued as of March 31, 2013, the utility and rent payments due for April and May 2012 totaling $139,493.

On July 12, 2012, a representative from  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 in Austin 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.

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 previously 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 to 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 $280,643 at March 31, 2013, which is the fair market value of 13,125,000 phantom shares outstanding as of March 31, 2013, $262,500 plus $18,143 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 nine months ended March 31, 2013, the Company recorded a net compensation expense of $135,994 and $0 for the three and nine months ended March 31, 2013, respectively. For the three and nine months ended March 31, 2012, the Company recorded a net compensation expense (benefit) of ($393,750) and $165,000, respectively. An increase in the Company’s common stock price would cause an increase in the deferred compensation liability, 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 March 31, 2012, 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 an 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 March 31, 2013 is $0 and $0 as of June 30, 2012. As of the date of this filing, the outstanding balance is $63,383.

Note 11. Notes Payable-short term

Asher-Convertible Debt

On January 2, 2013, HDI closed on a Securities Purchase Agreement entered into December 3, 2012 with Asher Enterprises, Inc., pursuant to which we issued 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. Asher has the right to convert 180 days after the initial advance 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.

On March 1, 2013, HDI closed on a second Securities Purchase Agreement with Asher, pursuant to which we issued to Asher an 8% Convertible Promissory Note in the original principal amount of $32,500 with a maturity date of December 15, 2013.

Due to the discounted conversion price on the date of issuance of the notes, the Company recorded a discount to the notes in the amount of $54,310 for the beneficial conversion future. The discount is being amortized over the term of the debt using the effective interest method. Additionally, Asher held back $5,000 of the proceeds to cover its legal expenses.

HDI closed on a third Note dated April 8, 2013 in the amount of $32,500 that matures on January 15, 2014. The other terms of the notes are the same as the note described above.

The following table summarizes the Asher – Convertible Debt at March 31, 2013:

Senior Debt

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. In connection with the issuance of the Note, the Company issued to each of Messrs. Schwartz and Stern a warrant to purchase 3,333,333 shares of common stock 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 expire on February 4, 2018. Pursuant to the terms of the Note and Security Agreement, HDI Plastics may borrow an additional $300,000 on the same terms and conditions as those set forth in the Note, Security Agreement and Warrants. The accrued interest on the Notes was $3,000 as of March 31, 2013.

The total estimated value of the warrants using the Black-Scholes Option Pricing Model, with a volatility of 209%, had an estimated fair value of $0.01 per warrant.  After calculating the relative fair value of the debt and warrants, $48,388 was recorded as a debt discount to the debt for the warrants.  This discount is being amortized over the term of the debt using the effective interest method.

The following table summarizes the Senior Debt at March 31, 2013:

Note 12. Notes Payable-long term

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 March 31, 2013, $140,000 had been advanced under the TEDCO Agreement.

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. 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 $0.07 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.

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:

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 $0.035 per share. As of March 31, 2013, 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 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 from $0.01 to $0.05 per warrant. After calculating the relative fair value of the debt and warrants, $158,131 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. Subsequent to March 31, 2013, on April 22, 2013, the Company received an additional $54,000 for private placement Series II Subordinated Notes.

The following table summarizes the entire subordinated debt balance at March 31, 2013:

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. The plan suspended 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 notes. We currently plan to resume monthly cash interest payments on such notes commencing May 1, 2013.  As of March 31, 2013, the accrued interest payable for the Notes was $56,913.

Note 13.   Related Party Transactions

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. In connection with the issuance of the Note, the Company issued to each of Messrs. Schwartz and Stern a warrant 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 expire on February 4, 2018. Pursuant to the terms of the Note and Security Agreement, HDI Plastics may borrow an additional $300,000 on the same terms and conditions as those set forth in the Note, Security Agreement and Warrants. The accrued interest on the notes was $3,000 as of March 31, 2013.

The total estimated value of the warrants using the Black-Scholes Option Pricing Model, with a volatility of 209%, had an estimated fair value of $0.01 per warrant.  After calculating the relative fair value of the debt and warrants, $48,388 was recorded as a debt discount to the debt for the warrants.  This discount is being amortized over the term of the debt using the effective interest method.  See Note 11 for more information.

As of March 31, 2013, the Company has issued the following Subordinated Notes to the following directors of the Company, subject to the terms set forth in Note 12:

On April 22, 2013, the Company received an additional $54,000 from Kenneth Brimmer, the Company’s CEO as part of the private placement of Series II Subordinated Notes (See Note 12).

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 March 31, 2013, $4,500 is unpaid under the arrangement.

Note 14.   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 and convertible debt. 

The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share at March 31, 2013 and 2012.

Note 15. 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:

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

Note 16.   Subsequent Events

On April 15, 2013, HDI closed on a third note disbursement of the 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 amount of $32,500 (the “Note”). The Note has a maturity date of January 15, 2014 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.

On April 22, 2013 the Company received an additional $54,000 from an entity controlled by Kenneth Brimmer as part of the private placement of Series II Subordinate Notes with the terms as stated in Note 12.

Beginning April 26, 2013, as the Company recommenced operations and started invoicing customers again, HDIP began borrowing under the terms of the full-recourse financing agreement with Charter Capital (See Note 10). As of the date of this filing, Charter has advanced the Company $63,383.

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 waste water 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. As of March 31, 2013, 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. Demand for reprocessed plastic is growing, and we believe HDIP has the systems and infrastructure for cost effectively collecting and processing post-consumer and post-industrial plastic waste into pellets to be resold to domestic manufacturing companies.

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

Revenue Recognition. Beginning October 2011, HDI Plastics began operations to sellselling 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 at its processing facility, although HDIP does assume legalassumes 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.

InventoriesRoyalties – 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 Related ReserveHandling 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 Obsolete Inventory.  Inventoriesincome 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 valued atdetermined using the lowertax 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 cost basedincome taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the consolidated statement of operations.

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 average costexercise of raw material purchased duringstock options, warrants, or the month including an allocationconversion of manufacturing overhead, or market. Typically,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 Company holds material for less than 45 days. The naturerespective vesting period of the Company’s inventory does not result in obsolescence of either processed or unprocessed material. Inventory on hand atawards. The compensation expense for 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 reserveCompany's stock-based payments is based on management’s reviewestimated fair values determined at the time of inventories on hand comparedthe grant of the portion of stock-based payment awards that are ultimately expected to estimated future usage and sales.  As of March 31, 2013 and June 30, 2012, there was no reserve for obsolete inventory.vest.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, thatThe Company estimates the fair value of stock-based payment awards on the indefinite-lived intangible asset is more-likely-than-not less thandate of grant using the carrying amount,Black-Scholes option pricing model. This option pricing model involves a number of assumptions, including the existing quantitative impairment test is required. Otherwise,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 further impairment testing is required. For HDI, this ASU wasadjustments to net income (loss) to arrive at comprehensive income (loss).

Recent Accounting Pronouncements

There were no new accounting standards issued or effective beginning January 1, 2013. The adoption of this standard did notduring the quarterly period ended March 31, 2018 that had, or are expected to have a material impact on the Company’s consolidated results of operations, financial condition or financial condition.

Results of Operationscash flows.

AsNote 2.    Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of March 31, 2013, we had an accumulated deficitAmerica, assuming the Company will continue as a going concern, which contemplates the realization of $30,682,216. Until we are able to generate significant revenue from our reopened plastics recycling business, we expect to continue to incur operating losses.  Asassets and satisfaction of March 31, 2013, we had cash and cash equivalentsliabilities in the normal course of $5,664.  Following the end of the quarter, we raised a net $30,000 with a Securities Purchase Agreement with Asher Enterprises, (see Note 12 to the Consolidated Financial Statements) and received an additional $54,000 in private placement subordinated notes.  The cash was needed in order to continue our efforts to get the new facility in Taylor completely operational.business. 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 restartrelocate our plastics processing operationsfacility to a new site and then restart the facility 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.works.

Three Months Ended March 31, 2013 ComparedNote 3.     Inventory

Raw materials consist of the plastics that arrive at the processing facility that are sorted and staged in the warehouse as bales or in bins. The value of raw material is based on weight and volume and the average cost of purchasing. Finished goods are processed into pellet or regrind form and stored in gaylords. The inventory value of finished goods is based on weight and the cost to Three Months Ended March 31, 2012convert using a standard labor and overhead rate.

4.     Subsequent Events

None.

 Revenue- The Company earned $821 and $1,840,529 in revenue from continuing operations in the quarters ended March 31, 2013 and 2012, respectively. The $821 was received from the limited operations of the plastics processing business. For the quarter ended March 31, 2013, our plastics production facility had just begun operations in our new facility in Taylor, TX. For the three months ended March 31, 2012 revenue consisted of $3,240 in royalty revenue and $1,837,289 in plastic processing revenue while HDIP was in full operation in its former facility in Austin, TX. We anticipate our revenue in the quarter ending June 30, 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 plastics recycling business were comprised of the following:

Cost of Sales – Cost of sales were $184,530 and $1,624,477 for the three months ended March 31, 2013 and 2012, respectively. The following is a summary of the cost of sales:

                The significant decrease in the cost of sales for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 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.SIGNATURES

Expenses - Total selling, general and administrative expenses for continuing operations for the three months ended March 31, 2013 were $188,237 comparedPursuant to $566,892 for the three months ended March 31, 2012. The following is a summary of the major categories included in selling, general and administrative expenses:

Wages, related expenses and benefits decreased from $435,608 to $106,788 for the three months ended March 31, 2012 and 2013, due to the lay-off of sales and office employees during the shut-down beginning March 28, 2012, and HDIP conducting little or no operations for the three months ended March 31, 2013. The 2013 wages, expenses, and benefits included in SG&A are for the corporate office and one management employee in the plastics processing business.

Legal and accounting fees decreased from $46,659 to $26,633 for the three months ended March 31, 2012 and 2013, respectively. Legal fees for the three months ended March 31, 2013 and 2012 related to the shutdown of operations in our facility in Austin, Texas and locating our new facilities in Taylor, Texas.

Interest expense increased from $69,197 to $106,951 for the three months ended March 31, 2012 and 2013, respectively. The increase in the interest expense is related to the significant new debt agreements the Company has obtained over the last year.

Our net loss from continuing operations was $478,897 for the three months ended March 31, 2013, compared to net loss from continuing operations of $403,480 for the three months ended March 31, 2012.  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 March 31, 2013, 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 March 31, 2012, basic and diluted net loss per share per continuing operations was $(0.01) based on weighted average common shares outstanding of 48,305,462.

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012

Revenue- The Company earned $48,880 and $3,039,301 in revenue from continuing operations in the nine months ended March 31, 2013 and 2012, respectively. The revenue consisted of $5,400 of royalty income and $43,480 of plastic processing income from HDIP in the nine months ended March 31, 2013 compared to $16,320 of royalty income and $3,022,981 in plastic processing income in the nine months ended March 31, 2012. As previously noted, we were not operational during the nine months ended March 31, 2013.

Cost of Sales – Cost of sales were $588,911 and $2,859,479 for the nine months ended March 31, 2013 and 2012, respectively. The following is a summary of cost of sales:

                        The significant decrease in the cost of sales for the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012 relates to the shut-down of our plastic processing facility during the current fiscal year. The increase in depreciation relates to the full nine months ended March 31, 2013 and due to additional equipment purchases. Operations for our processing facility began in October 2011, therefore depreciation in the nine months ended March 31, 2012 related to depreciation in the second and third quarter. During the period of shutdown, the Company continued to incur overhead costs for removing waste water and setting up operations at the new facility in Taylor, TX.

Expenses- Total selling, general and administrative expenses for continuing operations for the nine months ended March 31, 2013 were $507,220 compared to $1,021,553 for the nine months ended March 31, 2012. The following is a summary of the major categories included in selling, general and administrative expenses:

Wages, related expenses and benefits decreased from $646,529 to $286,060 for the nine months ended March 31, 2012 and 2013, respectively. The 2013 wages, related expenses, and benefits included in SG&A are for the corporate office and one management employee in the plastics processing business. The Company has significantly reduced their overhead expenses during the period the plant was shut down.

Legal and audit/accounting fees decreased from $105,437 to $81,529 for the nine months ended March 31, 2013 and 2012, respectively. Legal fees increased from $48,502 in the nine months ended March 31, 2012 to $63,816 for the nine months ended March 31, 2013 due to the various issues relating to the shutdown of operations at HDIP and the process of locating new facilities. Auditing fees decreased from $56,935 to $17,713 in the nine months ended March 31, 2013 and 2012, respectively due to the timing of the work for the June 30, 2011 and 2012 financial statement audits.

Stock option expense was $0 and $87,125 for the nine months ended March 31, 2013 and 2012, respectively. This expense is based on the grant date fair value related to stock options that vested during the nine months ended March 31, 2013 and March 31, 2012.  There have been no new options granted in the last year and all options have been previously expensed.

The Company recorded $245,548 in interest expense in the nine months ended March 31, 2013 related to the various debt agreements, including the sale/leaseback transaction, and the Charter Capital line of credit. Comparably, there was $88,244 in interest expense in the nine months ended March 31, 2012. The significant increase in interest expense is due to a significant amount of new debt that has been added since December 2011 to help fund the Company’s restart efforts.

Our net loss from continuing operations was $1,369,091 for the nine months ended March 31, 2013, compared to net loss from continuing operations of $904,063 for the nine months ended March 31, 2012.  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 waste water from the Austin, Texas location. For the nine months ended March 31, 2013, basic and diluted net loss per share from continuing operations was $(0.03), based on weighted average common shares outstanding of 52,388,750.  For the nine months ended March 31, 2012, basic and diluted net loss per share per continuing operations was $(0.02) based on weighted average common shares outstanding of 44,973,644.

Liquidity and Capital Resources

Cash and cash equivalents had a net decrease of $69,379 and $371,786 for the nine months ended March 31, 2013 and March 31, 2012, respectively.  The significant elements of these changes were as follows:

As of March 31, 2013, we had cash and cash equivalents of $5,664. The Company has a negative working capital position of $857,619 at March 31, 2013. We expect the cash anticipated to be received from the plastics revenue generated in the next quarter, the payments to be received from the promissory note from CVC, and potential debt borrowings will be enough to continue our operations for the next few months.

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. 

No remediation of these internal control weaknesses have been done at this time due to the limited discretionary funds the Company has 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 March 31, 2013 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 still had limited operations at its new facility in Taylor, TX.

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 intentionalSection 13 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 through 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.

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

On January 2, 2013, HDI closed on a Securities Purchase Agreement entered into December 3, 2012 with Asher Enterprises, Inc., pursuant to which we issued 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. Asher has the right to convert 180 days after the initial advance 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.

On March 1, 2013, HDI closed on a second Securities Purchase Agreement with Asher, pursuant to which we issued to Asher an 8% Convertible Promissory Note in the original principal amount of $32,500 with a maturity date of December 15, 2013. HDI closed on a third Note dated April 8, 2013 in the amount of $32,500 that matures on January 15, 2014.  The other terms of the notes are the same as the note described above. The Company issued these notes in reliance upon representations and warranties made by Asher that it qualified as an accredited investor under Regulation D of the Securities Act of 1933.

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. In connection with the issuance of the Note, the Company issued to each of Messrs. Schwartz and Stern a warrant 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 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. The accrued interest on the notes was $3,000 as of March 31, 2013.  The Company issued these notes in reliance upon Regulation D of the Securities Act of 1933 given the director’s qualification as accredited investors of the Company.

On April 22, 2013, the Company received an additional $54,000 from an entity controlled by Kenneth Brimmer, the Company’s CEO in a private placement of a Subordinated Note. Terms for the Subordinated Note include the issuance of five-year warrants to purchase 1,542,857 shares of the Company’s common stock with an exercise price of $.035 per share. The note is duetwo years from the closing date at 105% of face value.  The issuance of the Subordinated Note and warrant occurred in reliance upon Regulation D of the Securities Act of 1933 given the Mr. Brimmer’s status as Chief Executive Officer and qualification as an accredited investor of the Company.

Item 3. Defaults Upon Senior Securities

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. The plan suspended the monthly cash payments of interest to the note holders for four months through April 1, 2013, which is a default under the terms of such notes. 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.  As of March 31, 2013 the accrued interest payable for the loans was $56,913.

Item 4.    Mine Safety Disclosures

                Not Applicable.

Item 5.    Other Information

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 HDIP’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 it may be required repay the advances with interest at the prime rate plus 3%.  As of March 31, 2013, $140,000 had been advanced under the TEDCO Agreement.

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:

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 requirements15(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.

The 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 will continue to do so until the Company needs its own office space.

Officers, 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:

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)

                                By /s/ Kenneth W. Brimmer                             

                                Kenneth W. Brimmer

 Chief Executive Officer and Chief Financial Officer

Date:  May 15, 2013Legal/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:

September 19, 2019

Date

/s/ Liangjian Peng

CEO