VIA FACSIMILE: 202-772-9218
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January 17, 2008
Ms. Angela Crane
Branch Chief
U.S. Securities and Exchange Commission
Division of Corporate Finance
Mail Stop 6010
100 F Street N.E.
Washington, D.C. 20549
Re: Hypertension Diagnostics, Inc. EIN: 41-1618036
Form 10-KSB for the fiscal year ended June 30, 2007
Filed September 27, 2007
File No. 000-24635
Dear Ms. Crane:
This letter is Hypertension Diagnostics, Inc.'s response to your January 14,
2008 letter in which you commented concerning the Critical Accounting Policies
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations, page 29 on Form 10-KSB for the fiscal year ended June 30, 2007.
In this letter, we have provided our responses in the same outline sequence used
in your letter.
1. In our results of operations for fiscal year ended June 30, 2003, we
included an $850,000 inventory write-down. At that time, our business model
focused on renting our units to our customers. Rental units placed in
service are reflected as fixed assets in our balance sheet, and related
depreciation of the units is reflected as cost of goods sold. Sales of our
finished product were not significant at that time. In accordance with ARB
43, Chapter 4, Statement 5, a departure from the cost basis of pricing the
inventory is required when the utility of the goods is no longer as great
as its cost. At June 30, 2003, substantially all inventories on hand were
raw materials acquired for future use in one primary finished product.
Inventory levels were sufficient to provide sales of our product for many
years into the future, based on current sales levels, without need for
additional materials purchases. We determined in fiscal year 2003 that the
market value for the finished product was significantly lower than related
cost of raw materials acquired for finished good assembly. ARB 43, Chapter
4, Paragraph 11 suggests that if only one end-product category exists,
application of lower of cost or market valuation may be appropriate against
the total stock. The company recorded an $850,000 reserve against inventory
Ms. Angela Crane January 17, 2008
Page 2 of 4
of $1,182,241 to reflect the market value of the inventory. In the fiscal
year ending June 30, 2005, we changed our business model to include selling
rental units to our existing rental and new customers. As discussed in
paragraph one of page 31 of our Form 10-KSB for the fiscal year ended June
30, 2007, our revised business model results in the majority of our revenue
coming from sales of rental units, with limited rental income. This revised
model results in a greater relief of inventory, at original costs offset by
reserves taken in 2003, into cost of goods sold at inventory's current net
realizable value. In fiscal year 2007 there were seven new units sold or
10.6% of the 66 total units sold that year. As a result, assembly of new
units is limited and is only performed when a sales order for a new unit is
received. Historically, we have not had in-process or finished goods as of
our reporting dates because it takes a few hours to assemble a new unit and
the unit is shipped to the customer within 48 hours of assembly.
-- The inventory write-down for fiscal year ended June 30, 2003 was
carefully contemplated in relation to the limited unit sales or
rental placements for the then current and the prior two fiscal
years. In accordance with ARB 43, Chapter 4, Paragraph 8, the
company took an $850,000 reserve against inventory of $1,182,241
reflecting the market value of the inventory. Management utilized
total end products equivalent on-hand as rationale for recording
and determining the amount of the inventory charge.
-- The Company only has one category of end-products for sale to our
customers. As a result, we only have one category of raw material
products for all of our units, and the materials are
representative of those used in products we produce for the
majority of our customers.
-- The Company only has one category of inventory. As shown on page
32 of our Form 10-KSB for the year ended June 30, 2007, the
inventory write-down initially taken was $850,000. The total
inventory cost after the write-down was $332,241 at June 30,
2003. The write-down was based on an estimate of the market value
of raw materials in inventory based on the Company's historical
unit sales and end-product unit equivalents on-hand.
-- The Company only has one category of inventory. Our entire
inventory is composed of raw materials at June 30, 2007. There
are no in-progress or finished goods. When we receive an order of
a new unit, it is on a made to order basis and the raw materials
are assembled and shipped within 48 hours of assembly. Raw
materials on hand at June 30, 2007 are $288,208.
-- Gross margins are affected by the write-down of raw materials
that occurred in the year ended June 30, 2003. As we have
disclosed on page 32 of our Form 10-KSB for the fiscal year ended
June 30, 2007, a portion of the previously recorded write-down is
adjusted with sales of inventory. The adjustment has a direct
impact on gross profit margins. The following disclosure found on
page 32 of our Form 10-KSB for the fiscal year ended June 30,
2007 discloses the effect on cost of sales, and as a result,
gross profit margins:
Ms. Angela Crane January 17, 2008
Page 3 of 4
Fiscal Year Ended June 30
-------------------------------
2007 2006
-------------- --------------
Cost of Sales $ 189,262 $ 188,936
Inventory Reserve Adjustment (122,849) (98,489)
-------------- --------------
Cost of Sales, as reported $ 66,413 $ 90,447
============== ==============
Revenues, costs of sales and gross profit as disclosed on page 40
of our Form 10-KSB for the fiscal year ended June 30, 2007 are as
follows:
Fiscal Year Ended June 30
-----------------------------------------------
2007 % 2006 %
----------------- --- ----------------- ---
Revenue $ 1,878,840 $ 1,789,546
Cost of Sales 66,413 3.5% 90,447 5.1%
----------------- -----------------
Gross Profit $ 1,812,427 96.5% $ 1,699,099 94.9%
================= =================
Gross profit without adjustment to the inventory reserve would be
$1,689,578 for the year ended June 30, 2007.
2. Our selling, general and administrative expenses were $2,381,310 for the
fiscal year 2007, including royalties, depreciation and amortization and
salaries. The Company recognizes that depreciation and amortization of
property and equipment utilized in the production and assembly of new units
should be recorded in cost of sales. The production and assembly of new
goods is limited due to limited sales of these units. In addition, limited
property and equipment is utilized in the production area of Company
occupied space. The equipment that is used for testing and assembly of new
units for sale has been fully depreciated in reporting periods prior to the
year ended June 30, 2007. As a result and in consideration of materiality,
the Company does not reflect depreciation of property and equipment
utilized in the production area for new units in cost of sales because such
property and equipment has minimal net book value. The Company recognizes
that costs incurred related to the production and assembly of units should
be capitalized and expensed under the caption cost of sales. The Company's
assembly and production of new units is limited and does not require
significant labor involvement, generally less than 5 man hours. The Company
has not recorded royalties, consultant costs or salaries of employees in
cost of sales. The Company feels that costs in these categories subject to
capitalization are not material to the overall financial statements. The
expenses incurred related to outside consultants were associated with
regulatory and product market exploration, including maintenance of ISO
13485:2003 certification and quality systems to allow sales in the United
States and in other countries. We have chosen to outsource our Quality
System and regulatory affairs functions. These consultants are not directly
associated with manufacturing. We do not feel costs related to royalties
should be capitalized in inventory. As a result, we have reflected these
costs in selling, general and administrative expenses.
Ms. Angela Crane January 17, 2008
Page 4 of 4
We acknowledge that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filings
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities law of the United States.
Please feel free to contact me for additional questions by phone at:
651-687-9999 x112 or by email at moneill@hdii.com.
Sincerely,
Mark P. O'Neill
Manager of Finance and Accounting
cc: Andri Boerman
Martin James