**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý**                                                                                                                                                          |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                |   |                                                                                                          |
| **For the Quarterly Period Ended March 31, 2003**                                                                                                                   |
|                                                                                                                                                                |   |                                                                                                          |
| **o**                                                                                                                                                               |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                |   |                                                                                                          |
| **For the Transition Period  From           to          ** |

 

**Commission File Number 000-49871**

 

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**HEALTHETECH, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **77-0478611**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |   | (I.R.S.  employer identification no.) |
|                                                            |   |                                  |
| **523 Park Point Drive, 3rd Floor,  Golden, Colorado**          |   | **80401**                             |
| (Address  of principal executive office)                        |   | (Zip  code)                           |

 

Registrant’stelephone number, including area code: **(303) 526-5085**

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes o  No ý

 

As of May 2, 2003, the number of shares outstanding of the registrant’scommon stock, par value $0.001 per share, was 19,615,292.

 

 

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**INDEX**

 
| **PART I.**                        | **FINANCIAL INFORMATION**                                                                   |   |
|------------------------------------|---------------------------------------------------------------------------------------------|--------|
| Item  1.                           | Unaudited  Condensed Financial Statements                                                   | 3      |
|                               | Unaudited Condensed  Balance Sheets                                                         | 3      |
|                               | Unaudited  Condensed Statements of Operations                                               | 4      |
|                               | Unaudited  Condensed Statements of Cash Flows                                               | 5      |
|                               | Notes to  Unaudited Condensed Financial Statements                                          | 6      |
| Item  2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12     |
| Item  3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 21     |
| Item 4.                            | Controls and Procedures                                                                     | 21     |
| **PART II.**                       | **OTHER INFORMATION**                                                                       | 21     |
| Item  1.                           | Legal  Proceedings                                                                          | 21     |
| Item  2.                           | Changes  in Securities and Use of Proceeds                                                  | 22     |
| Item 3.                            | Defaults Upon  Senior Securities                                                            | 22     |
| Item  4.                           | Submission  of Matters to a Vote of Security Holders                                        | 22     |
| Item  5.                           | Other  Information                                                                          | 22     |
| Item 6.                            | Exhibits  and Reports on Form 8-K                                                      | 22-23  |
| **SIGNATURES AND  CERTIFICATIONS** |                                                                                        | 24     |   |

 

2

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**PART I****. FINANCIAL INFORMATION**

 

**Item 1. Unaudited Condensed Financial Statements**

 

**HEALTHETECH, INC.**

**UNAUDITED CONDENSED BALANCE SHEETS**

 
|                                                                                                                                                                     |   | **March 31,  2003** |       | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|------------------------|------------|
|                                                                                                                                                                     |   |                     |       |                   |       |
| **ASSETS**                                                                                                                                                               |   |                     |       |                   |       |
| Current assets:                                                                                                                                                          |   |                     |       |                   |       |
| Cash and cash equivalents                                                                                                                                                |   | $                        | 15,278,485 |                   | 16,878,263 |   |
| Investments                                                                                                                                                              |   | 1,497,114                |       | 5,242,726              |       |
| Receivables, net of allowance of $85,000 and $29,000 in 2003 and 2002                                                                                                    |   | 804,522                  |       | 3,156,686              |       |
| Inventory                                                                                                                                                                |   | 2,433,707                |       | 2,359,809              |       |
| Prepaid expenses                                                                                                                                                         |   | 488,984                  |       | 3,082,412              |       |
| Other current assets                                                                                                                                                     |   | 183,167                  |       | 17,420                 |       |
| Total current assets                                                                                                                                                     |   | 20,685,979               |       | 30,737,316             |       |
| Property and equipment, net                                                                                                                                              |   | 2,769,395                |       | 2,997,244              |       |
| Deposits                                                                                                                                                                 |   | 266,363                  |       | 266,363                |       |
| Restricted cash                                                                                                                                                          |   | 1,371,170                |       | 1,372,497              |       |
| Intangible assets, net of accumulated amortization of $885,000 and  $741,000 in 2003 and 2002, respectively                                                              |   | 3,366,849                |       | 3,406,326              |       |
| **TOTAL ASSETS**                                                                                                                                                         |   | $                        | 28,459,756 |                   | 38,779,746 |   |
|                                                                                                                                                                     |   |                     |       |                   |       |
| **LIABILITIES & STOCKHOLDERS’ EQUITY**                                                                                                                     |   |                     |       |                   |       |
| Current liabilities:                                                                                                                                                     |   |                     |       |                   |       |
| Accounts payable                                                                                                                                                         |   | $                        | 1,460,193  |                   | 2,243,769  |   |
| Accrued liabilities                                                                                                                                                      |   | 2,974,130                |       | 2,956,560              |       |
| Current portion of deferred revenue                                                                                                                                      |   | 692,681                  |       | 689,851                |       |
| Note payable to related party                                                                                                                                            |   | —                   |       | 10,000                 |       |
| Total current liabilities                                                                                                                                                |   | 5,127,004                |       | 5,900,180              |       |
| Other liabilities:                                                                                                                                                       |   |                     |       |                   |       |
| Deferred revenue, less current portion                                                                                                                                   |   | 502,325                  |       | 669,767                |       |
| Other liabilities                                                                                                                                                        |   | 227,843                  |       | 332,306                |       |
| Total other liabilities                                                                                                                                                  |   | 730,168                  |       | 1,002,073              |       |
| Total liabilities                                                                                                                                                        |   | 5,857,172                |       | 6,902,253              |       |
| Stockholders’ equity:                                                                                                                                               |   |                     |       |                   |       |
| Common stock, $0.001 par value, 100,000,000 shares authorized in 2003  and 2002, 19,615,292 and 19,562,680 shares issued and outstanding in 2003 and  2002, respectively |   | 19,615                   |       | 19,563                 |       |
| Deferred stock-based charges                                                                                                                                             |   | (2,203,585               | )          | (2,509,183             | )          |
| Additional paid-in capital                                                                                                                                               |   | 98,988,256               |       | 98,566,849             |       |
| Accumulated deficit                                                                                                                                                      |   | (74,201,702              | )          | (64,199,736            | )          |
| Total stockholders’ equity                                                                                                                                          |   | 22,602,584               |       | 31,877,493             |       |
| Commitments and contingencies                                                                                                                                            |   |                     |       |                   |       |
| **TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY**                                                                                                               |   | $                        | 28,459,756 |                   | 38,779,746 |   |

 

Theaccompanying notes are an integral part of these unaudited condensed financialstatements.

 

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**HEALTHETECH, INC.**

**UNAUDITED CONDENSED STATEMENTS OF OPERATIONS**

 
|                                                                                                       |   | **Three months ended March 31,** |        |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                                                       |   | **2003**                                   |        | **2002** |   |
|                                                                                                       |   |                                       |        |   |   |
| Revenue:                                                                                                   |   |                                       |        |   |   |
| Product sales                                                                                              |   | $                                          | 928,117     |   | 2,017,611 |   |
| Software and other                                                                                         |   | 689,938                                    |        | 337,443 |   |
| Total revenue                                                                                              |   | 1,618,055                                  |        | 2,355,054 |   |
| Cost of revenue:                                                                                           |   |                                       |        |   |   |
| Product sales                                                                                              |   | 873,789                                    |        | 1,666,533 |   |
| Software and other                                                                                         |   | 273,520                                    |        | 217,587 |   |
| Total cost of revenue                                                                                      |   | 1,147,309                                  |        | 1,884,120 |   |
| Gross profit                                                                                               |   | 470,746                                    |        | 470,934 |   |
| Operating expenses:                                                                                        |   |                                       |        |   |   |
| Research and development, excluding $83,613 and $62,909 of  stock-based charges, respectively              |   | 2,434,821                                  |        | 1,434,621 |   |
| Selling, general and administrative, excluding $535,234 and $524,384  of stock-based charges, respectively |   | 7,490,208                                  |        | 2,382,973 |   |
| Stock-based charges                                                                                        |   | 618,847                                    |        | 587,293 |   |
| Total operating expenses                                                                                   |   | 10,543,876                                 |        | 4,404,887 |   |
| Loss from operations                                                                                       |   | (10,073,130                                | )           | (3,933,953 | ) |
| Interest income                                                                                            |   | 73,056                                     |        | 74,847 |   |
| Interest expense                                                                                           |   | (1,892                                     | )           | (3,075 | ) |
| Net loss                                                                                                   |   | $                                          | (10,001,966 | ) | (3,862,181 | ) |
|                                                                                                       |   |                                       |        |   |   |
| Loss per common share:                                                                                     |   |                                       |        |   |   |
| Basic and diluted loss per common share                                                                    |   | $                                          | (0.51       | ) | (0.53 | ) |
|                                                                                                       |   |                                       |        |   |   |
| Basic and diluted weighted average number of shares outstanding                                            |   | 19,588,678                                 |        | 7,307,911 |   |

 

Theaccompanying notes are an integral part of these unaudited condensed financialstatements.

 

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**HEALTHETECH, INC.**

**UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS**

 
|                                                                         |   | **Three months ended  March 31, 2003** |        | **Three months ended  March 31, 2002** |       |
|------------------------------------------------------------------------------|--------|--------------------------------------------------|-------------|--------------------------------------------------|------------|
|                                                                         |   |                                             |        |                                             |       |
| Cash flows from operating activities:                                        |   |                                             |        |                                             |       |
| Net loss                                                                     |   | $                                                | (10,001,966 | )                                                | (3,862,181 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                                             |        |                                             |       |
| Depreciation and amortization                                                |   | 554,259                                          |        | 402,767                                          |       |
| Loss on disposal of property and equipment                                   |   | —                                           |        | 79,369                                           |       |
| Stock-based charges                                                          |   | 620,922                                          |        | 588,528                                          |       |
| Change in deposits and other                                                 |   | (104,463                                         | )           | —                                           |       |
| Allowance for doubtful accounts                                              |   | 65,000                                           |        | —                                           |       |
| Change in assets and liabilities net of effects of acquisitions:             |   |                                             |        |                                             |       |
| Receivables                                                                  |   | 2,287,164                                        |        | (689,104                                         | )          |
| Inventory                                                                    |   | (73,898                                          | )           | 779,076                                          |       |
| Prepaid expenses and other current assets                                    |   | 2,427,681                                        |        | (175,484                                         | )          |
| Accounts payable                                                             |   | (783,576                                         | )           | (1,210,163                                       | )          |
| Accrued and other liabilities                                                |   | 17,570                                           |        | 1,124,669                                        |       |
| Deferred revenue                                                             |   | (164,612                                         | )           | —                                           |       |
| **Net cash used in operating activities**                                    |   | (5,155,919                                       | )           | (2,962,523                                       | )          |
| Cash flows from investing activities:                                        |   |                                             |        |                                             |       |
| Purchase of office equipment, software and leasehold improvements            |   | (182,164                                         | )           | (378,438                                         | )          |
| Purchase of marketable securities                                            |   | —                                           |        | (8,047                                           | )          |
| Redemption of marketable securities                                          |   | 3,745,612                                        |        | —                                           |       |
| Purchase of intangible assets                                                |   | (104,769                                         | )           | (142,813                                         | )          |
| **Net cash provided by (used in) investing activities**                      |   | 3,458,679                                        |        | (529,298                                         | )          |
| Cash flows from financing activities:                                        |   |                                             |        |                                             |       |
| Payments on note payable                                                     |   | (10,000                                          | )           | (15,000                                          | )          |
| Prepaid stock offering costs                                                 |   | —                                           |        | (243,819                                         | )          |
| Proceeds from preferred stock offering                                       |   | —                                           |        | 2,900,000                                        |       |
| Preferred stock issuance costs                                               |   | —                                           |        | (8,067                                           | )          |
| Proceeds from sale of common stock                                           |   | 100,517                                          |        | —                                           |       |
| Proceeds from common stock option exercises                                  |   | 5,618                                            |        | 31,270                                           |       |
| **Net cash provided by financing activities**                                |   | 96,135                                           |        | 2,664,384                                        |       |
| Net change in restricted cash                                                |   | 1,327                                            |        | (97,768                                          | )          |
|                                                                         |   |                                             |        |                                             |       |
| Net decrease in cash and cash equivalents                                    |   | (1,599,778                                       | )           | (925,205                                         | )          |
| Cash and cash equivalents, beginning of period                               |   | 16,878,263                                       |        | 12,898,164                                       |       |
| **Cash and cash equivalents, end of period**                                 |   | $                                                | 15,278,485  |                                             | 11,972,959 |   |

 

Theaccompanying notes are an integral part of these unaudited condensed financialstatements.

 

5

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**HEALTHETECH, INC.**

**UNAUDITED NOTES TO CONDENSED FINANCIALSTATEMENTS**

 

**(1)   Business and Basis of Financial StatementPresentation**

 

HealtheTech, Inc. (the Company or HealtheTech) was incorporated inFebruary 1998 under the laws of the State of Delaware. The Companyoperates in one segment and develops and markets health solutions designed togive consumers simple, informative ways to improve and maintain health andwellness.

 

The accompanying condensed financial statements as of March 31,2003 and for the three months ended March 31, 2003 and 2002 are unauditedand have been prepared in accordance with generally accepted accountingprinciples on a basis consistent with the December 31, 2002 auditedfinancial statements and include normal recurring adjustments which are, in theopinion of management, necessary for a fair statement of the results of theseperiods. These statements should be read in conjunction with our financialstatements and notes thereto included in our Form 10-K (Commission FileNo. 000-49871), filed on February 25, 2003. Operating results for thethree months ended March 31, 2003 are not necessarily indicative of theresults that may be expected for the full year.

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results could differ significantly from thoseestimates.

 

The Company’s financial statements are based on several significantestimates, including the reserve for warranty obligations and product returns,provision for excess and obsolete inventory, and the selection of estimateduseful lives of long-lived assets.

 

**(2)   Significant Accounting Policies**

 

***(a) Cash and Cash Equivalents andRestricted Cash***

 

All highly liquid investments purchased with original maturities ofthree months or less are considered to be cash equivalents. Restricted cashrepresents amounts the Company has pledged related to deposits on leases foroffice space and equipment.

 

***(b) Allowance for Doubtful Accounts***

 

The Company extends credit terms to our customers based upon creditanalysis performed by management.  Anallowance is made for customer accounts for which collection has becomedoubtful.

 

***(c) Investments***

 

Investments of $1,497,114 and $5,242,726 at March 31, 2003 and December31, 2002, respectively, consisted of mutual funds with investments in mediumterm U.S. governmental securities. Investments are stated at fair value and areclassified as available for sale.

 

***(d) Inventory***

 

Inventory is stated at the lower of cost or market, using the first-in,first-out method and consists of purchased items or finished goods that weremanufactured for the Company by contract manufacturers. The Company iscontractually required to purchase from a manufacturer raw materials andwork-in-process that such manufacturer has purchased or processed based on theCompany’s initial forecasts, but which will not be utilized within 90 daysdue to subsequently revised forecasts. The Company normally leaves suchinventory at the manufacturer, but can request it to be shipped to anotherlocation, and bears risk of loss due to obsolescence and other generalinventory risk other than pilferage or mishandling by the manufacturer.

 

6

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***(e) Intangible Assets***

 

Intangible assets consist of purchased patents and legal fees to obtainpatents and are recorded at cost. Amortization of intangible assets iscalculated using the straight-line method over the estimated useful lives,generally five to ten years. Amortization expense was $144,246 and $83,877, for the three monthsending March 31, 2003 and 2002, respectively.

 

***(f) Accrued liabilities***

 

Accrued liabilities consisted of the following:

 
|                                 |   | **March 31,  2003** |      | **December  31, 2002** |      |
|--------------------------------------|--------|---------------------|-----------|------------------------|-----------|
|                                 |   | **(unaudited)**     |      |                   |      |
| Contract manufacturer                |   | $                   | 728,865   |                   | 728,865   |   |
| Sales and marketing services         |   | 331,644             |      | 199,317                |      |
| Compensation                         |   | 518,578             |      | 689,920                |      |
| Consulting and professional services |   | 281,765             |      | 457,185                |      |
| Lease costs                          |   | 302,881             |      | 262,596                |      |
| Product royalties                    |   | 559,523             |      | 451,189                |      |
| Other                                |   | 250,874             |      | 167,488                |      |
| Total                                |   | $                   | 2,974,130 |                   | 2,956,560 |   |

 

***(g) Deferred Revenue***

 

Deferred revenue consists of paymentsreceived to maintain exclusivity and are recognized ratably over the contractperiod.

 

***(h) Fair Value of FinancialInstruments***

 

The carrying amounts of certain of the Company’s financial instruments,including, cash and cash equivalents, restricted cash, short-term investments,accounts receivable, accounts payable and accrued expenses, approximate fairvalue.

 

***(i) Research and Development Costsand Software Development Costs***

 

Research and development costs are expensed as incurred and consist ofsalaries and other direct costs. SFAS No. 86, *Accounting for the Costs of Computer Software to Be Sold, Leased orOtherwise Marketed*, (SFAS No. 86) requires the capitalizationof certain software development costs once technological feasibility isestablished. The Company’s software is deemed to be technologically feasible atthe point a working model of the software product is developed.  Through March 31, 2003, the period betweenachieving technological feasibility and general availability of such softwarehas been short. Consequently, software development costs qualifying forcapitalization have been insignificant.

 

***(j) Revenue***

 

The Company generates revenue from the sale of its products, softwareand licensing arrangements.  Revenuefrom the sale of products is recognized when evidence of an arrangement exists,ownership transfers to the customer or distributor, the price is fixed andcollectibility is probable. The software component of the Company’s products isconsidered incidental under Statement of Position (SOP) 97-2, *Software Revenue Recognition.*

 

Software fees are comprised of sales of prepackaged software that canbe sold independently or in conjunction with product sales. Software fees arerecognized according to the criteria of SOP 97-2, as amended. Revenue isrecognized upon execution of a license agreement or signed written contractwith fixed or determinable fees, shipment or electronic delivery of theproduct, and when collection of the receivable is probable. Software sales areto retail consumers who install the software themselves and pay via credit cardprior to shipment.  We also sellsoftware to mass-market resellers who have a contractual or implied right ofreturn and as we do not have a historical basis for estimating returns fromthis channel, the Company recognizes

 

7

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revenue when the software issold through to the end user. The Company provides support only to assist ininstalling the software.

 

Service revenue, including training and consulting services, isrecognized as services are performed. Licensing fees are recognized ratably over the contract term.

 

Cost of product revenue consists primarily of purchases of productsfrom contract manufacturers, warranty reserves and royalty payments, inaddition to costs of personnel directly related to managing the supply chainand related overhead. Cost of software revenue primarily consists of purchasesof product. Additionally, costs of shipping are included in software and othercost of revenue.

 

The Company provides 30 day right ofreturn on software sales and limited warranty on its software products for90 days from date of purchase. However as returns have been insignificant,no reserve has been established. In general, the Company does not provide priceprotection or right of return on health monitoring devices. The Companyprovides limited warranty on its devices for periods of 12 to 15 months.

 

***(k) Stock-Based Charges***

 

The Company accounts for its stock option plan in accordance with theprovisions of Accounting Principles Board (APB) Opinion No. 25, Accounting forStock Issued to Employees, and related interpretations. Generally, compensationexpense is recorded for options issued to employees and directors on the dateof grant only if the current estimated fair value of the underlying commonstock exceeds the exercise price of the option, the intrinsic value method.SFAS No. 123, Accounting for Stock-Based Compensation, permits entities torecognize as expense, over the vesting period, the fair value of allstock-based awards on the date of the grant. Alternatively, SFAS No. 123 allowsentities to continue to apply the provisions of APB Opinion No. 25 and providepro forma net income or loss disclosures as if the fair value based methoddefined in SFAS No. 123 had been applied. The Company has elected to continueto apply the provisions of APB Opinion No. 25 and provide the pro formadisclosures required by SFAS No. 123.

 

At March 31, 2003, the Company has one stock-based employeecompensation plan, which is described more fully in Note 4. The following tableillustrates the effect on net loss if the Company had applied the fair valuebased measurement and recognition provisions of SFAS No. 123 to stock-basedemployee compensation.

 
|                                                                     |   | **March 31,  2003** |       | **March 31,  2002** |      |
|--------------------------------------------------------------------------|--------|---------------------|------------|---------------------|-----------|
|                                                                     |   | **(unaudited)**     |       | **(unaudited)**     |      |
| Net loss, as reported                                                    |   | $                   | 10,001,966 |                | 3,862,181 |   |
| Stock-based employee compensation costs, included in net loss            |   | (305,598            | )          | (563,112            | )         |
| Stock-based employee compensation cost, if fair value based method  used |   | 1,647,702           |       | 618,235             |      |
| Pro forma net loss                                                       |   | 11,344,070          |       | 3,917,304           |      |
|                                                                     |   |                |       |                |      |
| Net loss per share, basic and diluted, as reported                       |   | $                   | (0.51      | )                   | (0.53     | ) |
| Net loss per share, basic and diluted, pro forma                         |   | $                   | (0.58      | )                   | (0.54     | ) |

 

The Company accounts for non-employee stock based awards in accordancewith SFAS No. 123 and related interpretations. Prior to the Company’s initial public offering in July 2002, the fairvalue of equity instruments was determined by the Company’s Board of Directors.  Subsequent to July 2002, the fair value isdetermined by price of the Company’s stock.

 

***(l) Income Taxes***

 

The Company uses the asset and liability method of accounting forincome taxes as prescribed by SFAS No. 109, *Accounting for Income Taxes*. Under the asset and liabilitymethod, deferred tax assets and liabilities are recognized for the

 

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estimated future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected to berecovered or settled. The resulting deferred tax assets and liabilities areadjusted to reflect changes in tax laws or rates in the period of enactment.

 

At March 31, 2003, the Company has adeferred tax asset primarily consisting of a cumulative net operating losscarryforward for income tax purposes of approximately $54.5 million(unaudited), which expires in various amounts through the year 2022, if notutilized. Due to the uncertainty regarding the utilization of net operatingloss carryforwards, the Company has recorded no tax benefit and a valuationallowance has been recorded for the entire amount of the deferred tax asset.

 

***(m) Advertising Costs***

 

Advertising costs are expensed when media placements occur.  Advertising expense was $3,332,100 and$22,445 for the three months ended March 31, 2003 and 2002, respectively.

 

***(n) Loss Per Share***

 

Loss per share is presented in accordance with the provisions of SFASNo. 128, *Earnings Per Share*,(SFAS No. 128). Under SFAS No. 128, basic loss per share (EPS)excludes dilution for potential common stock issuances and is computed bydividing net loss by the weighted average number of common shares outstandingfor the period. Diluted EPS reflects the potential dilution that would occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. Basic and diluted EPS are the same for all periods, as allpotential common stock instruments, consisting of common stock options andwarrants and convertible preferred stock, are anti-dilutive due to the netlosses for each period.

 

The following is a reconciliation of the numerators and denominators ofthe basic and diluted EPS computations:

 
|                                                                                                  |   | **Three months ended March 31,** |        |
|-------------------------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                                                  |   | **2003**                         |        | **2002** |   |
| Numerator:                                                                                            |   |                             |        |   |   |
| Net loss                                                                                              |   | $                                | (10,001,966 | ) | (3,862,181 | ) |
| Denominator:                                                                                          |   |                             |        |   |   |
| Historical common shares outstanding for basic and diluted loss per  share at beginning of the period |   | 19,562,680                       |        | 7,299,272 |   |
| Weighted average number of common equivalent shares issued during the  period                         |   | 25,998                           |        | 8,639 |   |
| Denominator for basic and diluted loss per share—weighted average  shares                        |   | 19,588,678                       |        | 7,307,911 |   |
| Loss per share—basic and diluted:                                                                |   |                             |        |   |   |
| Net loss                                                                                              |   | $                                | (0.51       | ) | (0.53 | ) |

 

For the three months ending March 31, 2003 and 2002, 8,270,845 and2,692,386 respectively, potential common stock equivalents consisting ofoptions and warrants were excluded from the diluted loss per share calculationbecause their effect would be anti-dilutive.

 

**(3)   Property andEquipment**

 

Property and equipment consist of thefollowing:

 
|                                           |   | **March 31,  2003** |      | **December 31,  2002** |      | **Estimated  useful life** |           |
|------------------------------------------------|--------|--------------------------|-----------|-----------------------------|-----------|---------------------------------|----------------|
|                                           |   | **(unaudited)**          |      |                        |      |                            |           |
|                                           |   |                     |      |                        |      |                            |           |
| Furniture and fixtures                         |   | $                        | 428,400   |                        | 418,084   |                            | 60 months |   |
| Computer equipment                             |   | 1,474,415                |      | 1,399,609                   |      | 36 months                  |           |
| Development tools                              |   | 821,594                  |      | 668,925                     |      | 18 months                  |           |
| Leasehold improvements                         |   | 796,135                  |      | 796,135                     |      | 60 months                  |           |
| Purchased software                             |   | 980,650                  |      | 922,576                     |      | 36 months                  |           |
| Capitalized website and software               |   | 769,156                  |      | 769,156                     |      | 24 months                  |           |
| Capital projects in process                    |   | 20,374                   |      | 134,075                     |      |                            |           |
|                                           |   | 5,290,724                |      | 5,108,560                   |      |                            |           |
| Less accumulated depreciation and amortization |   | (2,521,329               | )         | (2,111,316                  | )         |                            |           |
| Total property and equipment                   |   | $                        | 2,769,395 |                        | 2,997,244 |                            |           |   |

 

9

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**(4)   Warrants and Non-Qualified Stock Options**

 

In March 2003, the Company issued a fully vested warrant to aconsultant to purchase an aggregate of 85,000 shares of common stock at anexercise price of $7.50 per share.  Inaddition, this consultant was issued fully vested non-qualified stock optionsto purchase an aggregate of 40,000 shares of common stock at an exercise priceof $7.50 per share. The fair value of the warrant and stock optionsapproximated $57,000, as determined using the Black-Scholes optionpricing model assuming no dividends, 92% volatility, risk free interest ratesranging from 1.47% to 2.24% and expected lives of two to four years andhas been included in selling, general and administrative stock-based charges onthe accompanying statement of operations.

 

In March 2003, the Company issued a fully vested warrant to aconsultant to purchase an aggregate of 4,000 shares of common stock at anexercise price of $1.80 per share.  Thefair value of the warrant and stock options approximated $5,000, as determinedusing the Black-Scholes option pricing model assuming no dividends, 92% volatility,risk free interest rate of 2.97% and an expected life of five years and hasbeen included in selling, general and administrative stock-based charges on theaccompanying statement of operations.

 

In December 2002, the Company issued a warrant to purchase 625,000shares of common stock at prices ranging from $15.00 to $50.00 per share to aconsultant for services based upon the acquisition of or introduction intocertain distribution channels for its health monitoring products. The warrantsbecome exercisable upon the occurrence of seven defined events.  The condition for one event was met duringthe year ended December 31, 2002.  InJanuary 2003, the condition for a second event was met granting the consultantthe right to purchase up to 200,000 shares of common stock at an exercise priceof $40.00 per share expiring in three years. The fair value of the warrant approximated $58,000, as determined usingthe Black-Scholes options pricing model assuming no dividends, 83% volatility,risk free interest rate of 2.21% and an expected life of three years. As thereis no significant disincentive for nonperformance on the part of the consultantfor the remaining five conditions, a measurement date has not occurred for theremaining warrants, and no additional amounts have been recorded in theaccompanying financial statements. The fair value of this warrant has beenincluded in selling, general and administrative stock-based charges on theaccompanying statement of operations.

 

**(5)   Stockholders’ Equity**

 

*(a) Employee Stock PurchasePlan*

 

The Company has an employee stock purchaseplan for all eligible employees.  Underthe plan, shares of the Company’s common stock may be purchased at six-monthintervals at 85% of the lower of the fair market value on the first or the lastday of each six-month period.  Employeesmay purchase shares having a value not exceeding 15% of their grosscompensation during an offering period. The first six-month offering period ended February 18, 2003 andemployees purchased 49,786 shares at a price of $2.02 per share.

 

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*(b) Stock Options*

 

The following table summarizes stock option activity and balances forthe period ended March 31, 2003 and 2002:

 
|                             |   | **2003  Number of  options** |   | **2003  Weighted-average  exercise price** |   | **2002  Number of  options** |      | **2002  Weighted-average  exercise price** |   |
|----------------------------------|--------|------------------------------|--------|--------------------------------------------|--------|------------------------------|-----------|--------------------------------------------|--------|
| Balance at December 31,          |   | 4,508,180                    |   | $                                          | 4.44   |                         | 1,927,594 |                                       | $      | 1.93 |   |
| Granted                          |   | 1,765,681                    |   | 2.33                                       |   | 512,661                      |      | 2.74                                       |   |
| Exercised                        |   | (426                         | )      | 2.63                                       |   | (12,949                      | )         | 2.42                                       |   |
| Forfeited                        |   | (141,319                     | )      | 5.83                                       |   | (76,796                      | )         | 3.19                                       |   |
| Balance at March 31, (unaudited) |   | 6,132,116                    |   | $                                          | 3.80   |                         | 2,350,510 |                                       | $      | 2.06 |   |

 

The following table summarizes information about stock optionsoutstanding at March 31, 2003:

 
| **Range of****exercise  prices** |   | **Number  outstanding** |   | **Weighted  average  remaining  contractual  life** |   | **Weighted  average  exercise  price** |   | **Number  exercisable  as of  March 31,  2003** |      | **Weighted  average  exercise  price** |   |
|----------------------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------------|-----------|----------------------------------------|--------|
|                             |   |                    |   |                                                |   |                                   |   |                                            |      |                                   |   |
| $0.94 - $1.68                    |   | 1,571,942               |   | 5.74                                                |   | $                                      | 1.49   |                                            | 846,666   |                                   | $      | 1.32 |   |
| 1.71 - 2.55                      |   | 1,387,442               |   | 4.94                                                |   | 2.30                                   |   | 1,130,946                                       |      | 2.34                                   |   |
| 2.63 - 5.80                      |   | 1,615,406               |   | 8.98                                                |   | 4.01                                   |   | 377,080                                         |      | 2.80                                   |   |
| 6.05 - 6.98                      |   | 263,000                 |   | 8.24                                                |   | 6.16                                   |   | 198,624                                         |      | 6.07                                   |   |
| 7.50                             |   | 1,294,326               |   | 8.09                                                |   | 7.50                                   |   | 76,852                                          |      | 7.50                                   |   |
|                             |   | 6,132,116               |   | 7.01                                                |   | $                                      | 3.80   |                                            | 2,630,168 |                                   | $      | 2.51 |   |

 

The following table includes options for common stock whose exerciseprice was less than the fair market value, for financial reporting purposes, ofthe underlying common stock at the date of grant, equal to the fair marketvalue at the date of grant or greater than the fair market value at the date ofgrant:

 
|                             |   | **Period ended March 31,** |   |
|----------------------------------|--------|----------------------------|--------|
|                             |   | **2003**                   |   | **2002** |   |
| Exercise Price:                  |   |                       |   |   |   |
| Less than fair market value -    |   |                       |   |   |   |
| Number of options                |   | —                     |   | 512,661 |   |
| Weighted average exercise price  |   | —                     |   | $ | 2.74 |   |
| Weighted average fair value      |   | —                     |   | $ | 5.16 |   |
| Equal to fair market value -     |   |                       |   |   |   |
| Number of options                |   | 1,690,681                  |   | — |   |
| Weighted average exercise price  |   | $                          | 2.10   |   | — |   |
| Weighted average fair value      |   | $                          | 1.33   |   | — |   |
| Greater than fair market value - |   |                       |   |   |   |
| Number of options                |   | 75,000                     |   | — |   |
| Weighted average exercise price  |   | $                          | 7.50   |   | — |   |
| Weighted average fair value      |   | $                          | 0.83   |   | — |   |
|                             |   |                       |   |   |   |

 

The per share weighted average fair value of stock options granted was$1.31 and $5.16 during the three months ended March 31, 2003 and 2002, respectively,using the Black-Scholes option pricing model with the following weightedaverage assumptions: no expected dividends, volatility ranging from 83% to 92%during the three months ended March 31, 2003 and 0% volatility during the threemonths ended March 31, 2002, risk-free interest

 

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rates ranging from 2.36% to2.59% during the three months ended March 31, 2003 and 3.99% during the threemonths ended March 31, 2002, and an expected life of four years.

 

**(6)   Significant Customers**

 

Revenue earned from significant customers is as follows:

 

|       |   | **Three months  ended  March 31,** |   |
|------------|--------|----------------------------------------------|--------|
|       |   | **2003**                                     |   | **2002** |   |
|       |   | **(unaudited)**                              |   |
|       |   |                                         |   |   |   |
| Customer A |   | 31                                           | %      | 18 | % |
| Customer B |   | 13                                           | %      | — |   |
| Customer C |   | —                                       |   | 43 | % |
| Customer D |   | 11                                           | %      | 23 | % |
|       |   |                                         |   |   |   |

 

At March 31, 2003 and 2002, receivables from these customersrepresented 62% and 49% respectively, of total receivables.

 

**(7)   Related Party Transactions**

 

The Company receives professional services from a firm in which adirector is a partner. Fees paid were $179,000 and $140,000 for thethree months ended March 31, 2003 and 2002, respectively.  In addition, a former director and astockholder of the Company was an officer during 2002 in a company with whichHealtheTech entered into a product sales agreement. HealtheTech recognizedapproximately $1.0 million in revenue from this company for the three monthsended March 31, 2002. The director resigned his position effectiveOctober 1, 2002 and the product sales agreement expired October 31, 2002.

 

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*The following discussion of HealtheTech, Inc.’s(referred to herein as the Company, we, us or our) financial condition andresults of operations should be read in conjunction with the condensedfinancial statements and notes thereto included in Item 1 of Part 1 ofthis quarterly report and the audited consolidated financial statements andnotes thereto and Management’s Discussion and Analysis of Financial Conditionand Results of Operations for the year ended December 31, 2002 included inour Annual Report on Form 10-K filed with the Securities and ExchangeCommission. The following Management’s Discussion and Analysis of FinancialCondition and Results of Operations, as well as information contained elsewherein this report, contain statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”). You can identify these statements by forward-lookingwords such as “may,” “will,” expect,” “intend,” “anticipate,” “believe,”“estimate,” “plan,” “could,” “should,” and “continue,” or similar words. Actualresults could differ materially from those anticipated in these forward-lookingstatements. Factors that could cause or contribute to such differences include,but are not limited to, those mentioned in the discussion below, the summary“Risk Factors” contained herein and those described in the “Risk Factors”discussion of our Annual Report on Form 10-K for the year ended December 31,2002.  As a result, you should not placeundue reliance on these forward-looking statements. We do not intend toupdate or revise these forward-looking statements to reflect futureevents or developments.*

 

**Overview**

 

We were incorporated in Delaware inFebruary 1998. We design, develop and market technologically advanced andproprietary handheld medical devices and software for the measurement ofimportant health parameters.

 

We have incurred losses since commencingoperations and, as of March 31, 2003, we had an accumulated deficit of$74.2 million. Our net loss was $10.0 million and $3.9 million forthe three months ended March 31, 2003 and 2002, respectively. We have notachieved profitability on a quarterly or annual basis.  We now expect revenues in 2003 to be lower

 

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than we previouslyanticipated.  As a result, we havedecided to implement a significant company-wide cost reduction program expectedto reduce our quarterly operating expenses by approximately 25%.  This will be achieved through a downsizingof our employee workforce, a significant reduction in our use of outsidecontractors and outside services, and company-wide salary reductions.  Our focus going forward will be primarily inthe medical and commercial weight loss markets.  However, we intend to continue to develop our proprietaryproducts and services and increase our sales efforts.  We expect to continue to incur losses at least through 2003.  Despite the progress we expect to make inreducing expenses, we will need to generate substantially higher revenue thanthat generated in the fourth quarter of 2002 or the first quarter or 2003 inorder to achieve and sustain profitability. If we are unable to achieve higherrevenue and attain profitability we may need to seek additional capital.  If we should require additional capital, itmay not be available when needed or, if available, we may not be able to obtainsuch capital on terms favorable to us or to our stockholders. If we raiseadditional capital by issuing equity securities, substantial dilution toexisting stockholders may result. Insufficient capital may require us to delay, scale back or eliminatesome or all of our current programs, or cause us to further contract the scopeof our operations.

 

Since our inception, our principal activitieshave involved developing our products, forming distributor and strategicpartner relationships, and more recently, marketing our initial products. Wereceived FDA 510(k) clearance in January 2002 to market MedGem forthe measurement of oxygen uptake in clinical and research applications.BodyGem, which we promote for non-medical weight management applications, wascommercially launched in November 2001. Our BalanceLog softwareapplication, which can be used as a stand-alone weight and nutritionmanagement program or in conjunction with measurements from our devices, wasalso commercially launched in November 2001.

 

We derive revenue from the sale of our healthmonitoring devices, single-use disposables, software products and license fees.We anticipate that our revenue will be generated primarily through strategicpartnerships and distribution agreements. Our sales strategy is to establishrelationships with at least one large, prominent company in each channel thatalready possesses the sales, marketing and distribution capabilities needed toreach our end users.  In the medical andclinical markets, we currently have agreements with HealthSouth Corporation andMead Johnson & Company (a subsidiary of Bristol-Myers SquibbCompany) for use or distribution of MedGem. In 2002, HealthSouth Corporation was our largest customer andcontributed approximately 56% of our revenue. HealthSouth Corporation is currently the subject of various governmentalinvestigations into its business. Because of the uncertainty around the outcome of these investigationsand HealthSouth’s business prospects, we currently anticipate that we willreceive no revenue from HealthSouth in 2003.

 

In the non-medical markets, we currently haverelationships with Nature’s Sunshine Products, Inc. for distribution of BodyGemthrough their independent distributors who provide measurement services toconsumers; Bally Total Fitness for purchase of BodyGem devices to providemeasurement services in their fitness clubs; SAM’S West, Inc. (asubsidiary of Wal-Mart Stores, Inc.), and Wal-Mart Stores, Inc. for themass market retail distribution of our BalanceLog software; and a subsidiary ofMicrolife Corporation for distribution of BodyGem to retail pharmacies inEurope to provide in-store metabolic rate measurement services and the weightmanagement and fitness/exercise markets in Taiwan.  In addition, we have entered into agreements with severalregional distributors for the sale of MedGem and BodyGem into certain medicaland non-medical markets.

 

We recognize revenue from the sale of our products, other than retailsoftware, when ownership transfers to our customer or distributor. Other thansoftware, we offer products with warranty periods of 12 to 15 months fromthe date of purchase. With certain limited exceptions, we provide limitedwarranties on our software products for 90 days from the date of purchase.In the future, we expect that revenue from the sale of disposables willincrease as a percentage of total revenue as the installed base of ourmonitoring devices increases.  As themass-market retail distribution channel is a new channel for us and we have nohistorical basis for estimating returns, we recognize revenue when the softwareis sold through to the end user.  Duringthe first quarter, we recognized approximately $160,000 in revenue from SAM’SWest and Wal-Mart Stores, Inc. as software was sold through to end users.  We expect revenue resulting from the retailsale of software to decline in future periods, as we have decided to exit themass market retail distribution channel due to lower than expected sell-throughrates experienced during the first quarter of 2003.

 

We pay royalties to third-parties to license various sensortechnologies that are used in our health monitoring devices. These royaltyexpenses are included in our cost of revenue. In general, we pay the greater ofminimum royalty amounts or a percentage of product revenue to thesethird-parties in order to maintain exclusivity in specified fields of usethrough the terms of the agreements covering the licensed technologies.

 

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We currently outsource the manufacturing, testing and packaging of ourhealth monitoring devices, disposable products and software. We pay ourcontract manufacturers a negotiated price, inclusive of labor, material,overhead and profit, for the products that they manufacture. Generally, we payfor products as they are completed and move into finished goods inventory. Insome circumstances, if we reschedule purchase orders placed with ourmanufacturers, we may be liable for restocking fees or may be required topurchase surplus inventory at the manufacturer. Cost of revenue consistsprimarily of purchases of products from our contract manufacturing partners,royalties, tooling depreciation and costs of our manufacturing liaison group.We anticipate that we will recognize higher margins on our disposables andsoftware products as compared to our health monitoring devices. We anticipatethat our gross margins will improve over time as product volume increases andhigher-margin disposables become a greater percentage of our totalrevenue.

 

Research and development expenses have principally consisted ofcompensation and other personnel costs, contractor fees, fees paid to outsideservice providers, project material, and clinical expenses. Research anddevelopment costs are expensed as incurred.

 

Selling, general and administrative expenses consist of compensationand other personnel fees, professional fees, travel, tradeshows, public andinvestor relations, advertising and marketing, insurance, outsourced customersupport and, to a lesser extent, account management and customer training. Oursales and marketing strategy is to establish strategic distributionrelationships, generate awareness of our products and penetrate and expand inthe medical nutrition therapy, weight management and fitness markets. Weinitiated an awareness campaign emphasizing the importance of metabolism inweight management and began running advertisements in magazines and cable andbroadcast television in late 2002. We also conducted an advertising campaignfor our BalanceLog software in early 2003. Both of these advertising campaigns concluded in the first quarter of2003.  Largely because of the conclusionof this advertising and the cost reduction efforts we have undertaken, webelieve our selling, general and administrative expenditures will decline infuture periods.

 

**Resultsof Operations**

** **

**ThreeMonths Ended March 31, 2003 and 2002**

 

*Revenue.* Revenue decreased $0.7 million to $1.6 million in the quarterended March 31, 2003 from $2.4 million in the comparable quarter in 2002.In the quarter ended March 31, 2003, we shipped initial stocking orders ofMedGem devices and single-use disposables to a new medical distributor and wealso shipped a large re-stocking order of single-use disposables to a keycustomer.  In the quarter ended March31, 2002, our shipments were primarily initial stocking orders to distributorsand key customers.  We sold approximately190 BodyGem and MedGem devices and over 120,000 single-use disposables in thefirst quarter of 2003 compared to approximately 1,550 devices and 92,000disposables in the first quarter of 2002. Sales of single-use disposablesrepresented 42% of total revenue for the quarter ended March 31, 2003 comparedto 34% in the comparable quarter of the prior year. The increase was due to ahigher installed base of health monitoring devices, marketing campaignsinforming the public on the benefits of obtaining a resting metabolic ratemeasurement and increasing success in weight management programs implemented byour strategic partners. Software and other revenue increased $0.4 millionto $0.7 million in the first quarter of 2003 from $0.3 million in thecomparable quarter of 2002. The increase was primarily due to the recognitionof license fees from a distributor, which accounted for 24% of software andother revenue, and sales of our BalanceLog software product, which increased70% in the first quarter of 2003 compared to the prior year comparable quarter.Sales of software in the first quarter of 2003 are primarily generated from ourwebsite and the retail channel.  Werecognize revenue from the retail channel when the software is sold through tothe end user.

 

In late 2002 and early 2003, we receivedpurchase orders from SAM’S and Wal-Mart and shipped a total of $3.8 million ofBalanceLog software based on retail prices. Through March 31, 2003, we recognized revenue of only $160,000 based onthe sell-through of our software to customers from these retail stores.  Because of the low sell-through rates, weanticipate that SAM’S and Wal-Mart will be returning all unsold product to usin the second quarter of 2003.

 

Revenue from customers outside the United States accounted for 11% and23% of total revenue for the three months ended March 31, 2003 and 2002,respectively.

 

*Cost ofRevenue.*  Total cost of revenue decreased to 71% ofsales in the first quarter of 2003 from 80% of sales in the first quarter of2002. The reduction in cost of revenue as a percent of sales is principally dueto lower contract manufacturing costs for redesigned disposable products and toa lesser extent increasing volumes of high-margin software sold. In addition,our

 

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internal manufacturing department expensesdeclined for the quarter ended March 31, 2003 compared to same period in 2002,due to personnel reductions in this group.

 

Cost of revenue directly associated with product sales was 94% ofproduct revenue for the first quarter of 2003 and 83% for the correspondingperiod in 2002. These changes resulted from increased minimum royalties,increased costs associated with the establishment of a quality assuranceprogram and increased warranty costs. Cost of software and other revenue was 40% and 65% of software and otherrevenue for the three months ended March 31, 2003 and 2002, respectively. Thelower percentage costs in 2003 resulted from increasing sales of downloadedsoftware from our website and the discontinuance of low-margin HealtheTech-brandedpersonal digital assistants bundled with certain software sales in 2002.  The increase was partially offset byincreased obsolescence reserves for software packaging.  We also recorded as revenue a full quarterof license fees from a distributor in 2003 compared to one half month for thecomparable period in 2002.  This licensefee, which has no associated cost of sales, also contributed to the marginimprovement.

 

We anticipate that our cost of revenue as a percent of sales willdecrease due to a continual shift in sales mix towards higher-margin disposableproducts as well as higher volumes of product shipments.

 

*Researchand Development.*  Research and development expenses increased$1.0 million, or 70%, to $2.4 million in the quarter ended March 31,2003 from $1.4 million in the comparable quarter in 2002.  The primary reasons for the increase includecontracting software developers to meet scheduled release dates for ourBalanceLog and BalanceLog Pro (professional version of BalanceLog) softwareproducts, contracting outside service firms to assist us in designing anddeveloping our next generation product and engaging hardware contractors towork on cost reduction projects. Ongoing efforts in development will focus on a web-based version of ourBalanceLog weight and nutrition management software and improved, lower-costBodyGem and MedGem devices.

 

*Selling,General and Administrative.*  Selling, general andadministrative expenses increased $5.1 million, or 214%, to$7.5 million in the quarter ended March 31, 2003 from $2.4 million inthe comparable quarter of the prior year. The primary reasons for the increaseinclude marketing campaign expense and headcount growth.  We incurred $2.3 million of expense in thefirst quarter of 2003 for advertising placements related to our metabolismawareness campaign initiated in the fourth quarter of 2002.  We also incurred $1.0 million in costs forradio and print advertising in the first quarter of 2003 to promote ourBalanceLog software and incurred approximately $0.7 million in merchandisingcosts launching it into the retail channel. Going forward, we do not anticipate significant advertisingexpenditures, such as we incurred during the first quarter of 2003.  During the first quarter of 2003, wecontinued to expand our marketing department and filled positions in ourexecutive team. Headcount in sales, general, and administration increased 72%to 43 employees at March 31, 2003 from 25 employees at March 31, 2002. Generaland administrative costs grew due to increased use of consultants in the firstquarter of 2003 for recruiting, investor relations, annual meeting preparation,as well as increased legal expenses. However, in conjunction with the cost reduction program discussed above,we anticipate selling, general and administrative expenses to significantlydecline in future quarters as a result of headcount and salary reductions andsignificant reductions in our use of contractors and outside services.

 

*Stock-basedcharges.*  Stock-based charges increased nominally forthe first quarter of 2003 compared to the first quarter of the prior year.  We recorded deferred stock-basedcharges of $4.0 million with respect to stock options that we grantedthrough March 31, 2003. We amortized $1.5 million of the deferred stock-basedcharges through March 31, 2003, reduced deferred stock-based charges by $0.3million for unvested options that have been forfeited and will ratably amortizethe remaining $2.2 million of deferred stock-based charges over theremaining vesting period of the options, which is generally four yearsfrom the date of grant. We expect to record expense for deferred compensationas follows: $0.6 million for the remainder of 2003, $0.9 millionduring 2004 and $0.7 million during 2005. The amount of deferred compensationexpense to be recorded in future periods may again decrease if unvested optionsfor which deferred compensation has been recorded subsequently lapse or arecancelled.

 

**Liquidityand Capital Resources**

 

Unrestricted cash, cash equivalents and investments totaled$16.8 million at March 31, 2003. Cash used in operating activities was$5.2 million in the first three months of 2003, compared to$3.0 million in the first three months of the prior year. Theincrease reflects supporting an advertising launch for BalanceLog software,supporting merchandising and promotion efforts to place our software in theretail channel and to a lesser extent supporting the operations of a larger andnow public

 

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organization.  This increase is offset by cash receivedfrom customers and reduced prepaid expenses.

 

Cash provided by investing activities was $3.5 million in thefirst three months of 2003, an increase of $4.0 million from thefirst three months of the prior year, due to the redemption of marketableequity securities offset by purchases of capital equipment and laboratoryequipment.

 

Cash flows from financing activities were $0.1 million in thefirst three months of 2003, a decrease of $2.6 million from the firstthree months of the prior year.  Netcash from financing activities for the three months ended March 31, 2003primarily reflects proceeds from the sales of equity securities from theCompany’s employee stock purchase plan and exercise of stock options.  Net cash from financing activities for thethree months ended March 31, 2002 primarily reflects proceeds from thesale of Series C preferred stock offset by stock offering costs.

 

We have no long-term debt. Stockholders’ equity at March 31, 2003 was$22.6 million. We expect to continue to modestly invest in marketingprograms and research and development. We do not expect significant additions to property and equipment in thenear term. Management believes existing cash and cash equivalents will besufficient to meet operating requirements for at least the next 12 months.Subsequent to the end of the first quarter, we entered into a $4.0 millionreceivable-based line of credit with a large bank.  Advances under the line of credit are available to us pursuant toa borrowing-base formula and subject to the maintenance of certain financialcovenants and other terms and conditions. Financial covenants include a minimum tangible net worth requirement andan adjusted quick ratio requirement. Amounts outstanding under the line of credit are due one year from theexecution of the agreement.  Should wedetermine that additional debt or equity financing is necessary, we believethat such financing may be available from strategic or financialinvestors.  However, to the extent thatsuch financing is available, it may cause substantial dilution to existingstockholders or contain terms and conditions not favorable to us orstockholders. Insufficient capital may require us to delay, scale backor eliminate some or all of our current programs, or cause us to furthercontract the scope of our operations.

 

We have decided to implement a significantcompany-wide cost reduction program expected to reduce our quarterly operatingexpenses by approximately 25%.  Thiswill be achieved through a downsizing of our employee workforce, a significantreduction in our use of outside contractors and outside services, andcompany-wide salary reductions.  Ourfocus going forward will be primarily in the medical and commercial weight lossmarkets.

 

The following table sets forth informationconcerning our material contractual obligations as of March 31, 2003:

 
|                                 |   | **Payments  Due By Period** |      |
|--------------------------------------|--------|-----------------------------|-----------|
| **Material Contractual Obligations** |   | **Total**                   |      | **Due in  next 9  months** |   | **1-3 years** |   | **4-5 years** |   | **After 5  years** |   |
| Operating Lease Obligations          |   | $                           | 3,602,071 |   | $ | 749,071 |   | $ | 1,699,000 |   | $ | 986,000 |   | $ | 168,000 |   |
| Due to Contract Manufacturer         |   | 826,992                     |      | 826,992 |   | — |   | — |   | — |   |
|                                 |   |                        |      |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations   |   | $                           | 4,429,063 |   | 1,576,063 |   | $ | 1,699,000 |   | $ | 986,000 |   | $ | 168,000 |   |
|                                      |        |                             |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have contractual rights tothird party intellectual property underlying certain of our sensor technologiesunder which there are obligations to pay transaction-based royalties.  To maintain exclusive rights to theseintellectual property rights, we may be obligated to make additional minimumpayments.

 

We have commitments to pay atotal of $1.3 million secured by standby letters of credit as follows:  $55,000 in one year, $15,000 between one andthree years and $1.2 million in five years. Cash securing the letters of credit becomes available when net worth andcash flow requirements are met.

 

**CriticalAccounting Policies and Estimates**

 

We have disclosed in Note 2 to our condensed financial statementsthose accounting policies that we consider to be significant in determining ourresults of operations and our financial position.

 

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The preparation of financial statements requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenueand expenses. We evaluate our estimates, including those related to bad debts,inventories and warranty obligations, on an ongoing basis. We base ourestimates on historical experience and on various assumptions that we believeto be reasonable under the circumstances. These estimates and assumptionsaffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe periods presented. The actual results may differ from these estimates underdifferent assumptions or conditions.

 

The significant accounting policies which we believe are the mostcritical to aid in fully understanding and evaluating our reported financialresults include the following:

 

*Revenuerecognition*

 

We derive our revenue primarily from the sale of our health monitoringdevices, the recurring sale of our single-use disposables and our companionsoftware. Our software revenue is recognized in accordance with Statement of Position97-2, as amended by Statement of Position 98-9. We license our softwareproducts on a perpetual basis. We recognize revenue from the sale of our healthmonitoring devices and single-use disposables upon ownership transfer to thecustomer and when it is determined that a continuing service obligation nolonger exists. We recognize revenue from the sale of our software whenpersuasive evidence of an arrangement exists, the product is delivered, theprice is fixed or determinable and collectibility is probable. For sales of oursoftware over the Internet, we use a credit card authorization as evidence ofan arrangement. Sales through our distributors are evidenced by a masteragreement governing the relationship together with binding purchase orders on atransaction-by-transaction basis. Delivery generally occurs when the product isdelivered to a common carrier. Service revenue, including training, isrecognized as services are performed. We offer customers a limited right toreturn software products within 30 days if they do not accept the terms andconditions of our software license agreement. We provide limited warranties on our health monitoring devices for aperiod of 12 to 15 months from the date of purchase and on our softwareproducts for 90 days from date of purchase, with certain limitedexceptions.

 

Receivables are recorded net of allowance for doubtful accounts. Weregularly review the adequacy of our accounts receivable allowance afterconsidering the accounts receivable aging, the ages of each invoice, eachcustomer’s expected ability to pay and our collection history with eachcustomer. We review any invoice greater than 90 days past due to determineif an allowance is appropriate based on the risk category using the factorsdiscussed above. The allowance for doubtful accounts represents our bestestimate, but changes in circumstances relating to accounts receivable mayresult in additional allowances or recoveries in the near future.

 

*Valuationallowances, specifically sales returns and warranty reserve*

 

Management makes estimates of potential future product returns andproduct warranties related to current period product revenue, based onhistorical returns, current economic trends and changes in customer demand andacceptance of our products when evaluating the adequacy of the sales returnsand other allowances. Significant management judgments and estimates must bemade and used in connection with establishing the sales returns and otherallowances in any accounting period. Significant differences may result in theamount and timing of our revenue for any period if management made differentjudgments or used different estimates.

 

*Relatedparty transactions*

 

We periodically enter into transactions with individuals or entitiesthat are considered to be related parties. Our policy is to enter into thesetransactions on terms consistent with those that have been, or would be,granted to unrelated parties.

 

**RiskFactors**

 

*In addition to the other information contained in thisreport, we caution stockholders and potential investors that the followingsummary risk factors and those additional factors described in the “RiskFactors” discussion of our Annual Report on Form 10-K for the year endedDecember 31, 2002, in some cases have affected, and in the future could affect,our actual results of operations and could cause our actual operating resultsto differ materially from those expressed in any forward-looking statementsmade by or on our behalf.  The followinginformation is not intended to limit in any way the characterization of otherstatements or information under other captions or in the “Risk Factors” sectionof our Annual Report on Form 10-K for*

 

17

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*such purpose.*

 

**Our briefoperating history makes it difficult to evaluate our prospects.**

 

We were incorporated in February 1998. Through November 2001,we were primarily engaged in the research and development of our initialproducts. We commenced shipment of our health monitoring devices in 2001 andexecuted our first significant distribution agreement in August 2001. As aresult of our limited operating history, we have a limited amount of financialdata that you can use to evaluate our business. Moreover, the revenue andprofitability potential of our markets are unproven. You must consider ourprospects in light of the risks, expenses and challenges we might encounterbecause we are at an early stage of development in new and developing markets.We may not successfully address these risks, and our business strategy may notprove successful.

 

**We recordedonly $18.6 million in revenue since our inception, we have a largeaccumulated deficit, we expect future losses and we may not achieve or maintainprofitability.**

 

Since our inception through March 31, 2003, we recorded only$18.6 million in revenue, of which only $17.6 million was fromproducts we currently sell. As a result, we will need to significantly increasethe revenue we receive from sales of our products, while controlling our expenses,in order to achieve profitability. We have incurred substantial losses eachyear since our inception in funding the research and development of ourproducts and technologies, the Food and Drug Administration (FDA) marketingclearance process for MedGem, the growth of our organizational resources andother activities. As of March 31, 2003, we had an accumulated deficit of$74.2 million.  We may not generatea sufficient level of revenue to offset our planned expenditures, and we may beunable to adjust spending in a timely manner to respond to any failure toincrease our revenue. Even if we do achieve profitability, we may not be ableto sustain or increase profitability.

 

**We expectour future financial results to fluctuate significantly, and failure toincrease our revenue or achieve profitability may disappoint securitiesanalysts or investors and result in a decline in our stock price.**

 

We believe that period-to-period comparisons of our historical resultsof operations are not meaningful and are not a good predictor of our futureperformance. We expect our future quarterly and annual operating results tofluctuate significantly as we attempt to expand our product offerings andincrease sales into different markets. Our revenue, gross margins and operatingresults are difficult to forecast and may vary significantly from period toperiod due to a number of factors, many of which are not in our control. Thesefactors include:

 

•   marketacceptance of our recently launched MedGem, BodyGem and software products;

 

•   the abilityof our distributors and strategic partners to penetrate our target markets;

 

•   the amount and mix of health monitoring devices,disposable products and software sold by us or our strategic partners anddistributors;

 

•             our ability todevelop new products and introduce enhancements to our existing products on atimely basis and to obtain any required regulatory clearances or approvals forthose products;

 

•             the success of new product introductions,distribution channels, including mass-market retail outlets, sales andmarketing efforts and pricing changes by our competitors;

 

•             the success of our recently completedadvertising and customer awareness program;

 

•             unanticipated delays in production by ourthird-party contract manufacturers caused by insufficient capacity ordelays in the availability of components;

 

•             changes in the amount or timing of productorders;  

 

•             our ability to recognize revenue from salesof BalanceLog software kits since some retail distributors have return rightsunder certain circumstances and we do not have a historical basis forestimating such returns;

 

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•             the utilization rate of our monitoringdevices sold, which directly impacts the sales of disposables; and

 

•             our ability to expandour operations, and the amount and timing of expenditures to expand ouroperations, including costs related to acquisitions of technologies andbusinesses.

 

We forecast the volume and timing of orders for our products foroperational and production planning and in some cases we become liable forprocurement costs based on these forecasts. These forecasts, however, are basedon many factors and subjective judgments, and they may be inaccurate. Inparticular, because of our limited operating history, we do not have meaningfulhistorical information to predict demand for our products, and trends that mayemerge, in the various markets into which we sell and plan to sell ourproducts. Moreover, because most of our expenses, such as employee compensationand lease payment obligations, are relatively fixed in the short term, we maybe unable to adjust spending quickly enough to offset any unexpected shortfallin revenue growth or any decrease in revenue levels in any particular period.As a result of the foregoing, our operating results may fall below theexpectations of securities analysts or investors in future quartersor years, causing our stock price to decline.

 

**Ourstrategic partners may experience financial difficulties or undergo organizationalchanges, which may harm our ability to distribute our products, and couldresult in a substantial decline in our revenue and overall operating results.**

 

We expect that a majority of our sales will be made to a limited numberof customers, including our strategic partners and distributors. One or more ofour strategic partners may experience financial difficulties or undergoorganizational changes that could affect their ability or need to purchase ourproducts. Organizational restructurings and financial concerns may cause ourstrategic partners to substantially reduce the volume of their purchases of ourproducts, or to no longer continue as our distributors. As a result, ourability to effectively distribute our products may be harmed, and we may experiencea significant decline in our revenue and overall operating results.

 

**We havevery limited product offerings from which we expect to derive substantially allof our future revenue. If demand for our limited number of products fails todevelop as we expect or otherwise declines, we could fail to generatesufficient revenue to achieve profitability.**

 

We derive substantially all of our revenue from the sale of MedGem,BodyGem, disposables and software. In January 2002, we obtained FDAclearance to market MedGem and accordingly did not derive any of our revenuefrom the sale of MedGem prior to that time. We expect that revenue from thesale of MedGem, BodyGem, disposables and our BalanceLog software will accountfor substantially all of our revenue for the foreseeable future. In particular,we expect disposable sales to comprise a larger portion of revenue over time.The limited development and sales of our product line makes our futureprospects difficult to predict. If the anticipated demand for our productsfails to develop, our ability to generate revenue and achieve profitabilitywould be significantly harmed. In particular, the failure to sell sufficientquantities of MedGem and BodyGem would not only directly affect revenue butwould also significantly harm our ability to generate recurring revenue fromthe sale of our disposables and may limit sales of software products.

 

**Wecurrently rely on a limited number of distributors for the sale of MedGem andBodyGem into the medical markets and, to a lesser extent, other target markets.If these distributors are not successful selling our products, or if we areunable to establish additional distributor arrangements as planned, we will notbe able to achieve our sales goals and our business will be harmed.**

 

We expect to rely primarily upon distributors and their sales forces tosell MedGem into the medical market and to increasingly rely upon distributorsand their sales forces to sell BodyGem into the retail pharmacy, weightmanagement, fitness and other target markets. We currently have a limitednumber of distributors, such as HealthSouth Corporation, MeadJohnson & Company, Microlife Corporation and Nature’s SunshineProducts, Inc. for the distribution of our products into global markets. Ourreliance on distributors subjects us to many risks, including risks related totheir inventory levels and support for our products. If any of our distributorsattempt to reduce their inventory levels or if they do not maintain sufficientlevels to meet customer demand, our sales could be negatively affected. As isgenerally the case with our current distribution agreements, we anticipate thatour future distribution agreements will allow our distributors to reduce ordiscontinue purchases of our products with short notice. Further, distributorsmay not recommend, or continue to recommend, our products. We will rely heavilyupon our distributors for the sales and marketing activities that we believeare critical to the successful sale of our

 

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products. However, ourdistributors may not market or sell our products effectively or continue todevelop and devote the resources necessary to provide us with effective sales,marketing and technical support. In addition, we intend to attract additionaldistributors of MedGem and BodyGem in order to increase penetration in themedical and other markets. It may be difficult to increase our distributor basedue to current exclusivity arrangements and prospective requests for exclusivityfrom distributors and other customers. If we are unable to maintain successful relationships with ourdistributors or obtain additional distributors, we will have to devotesubstantially more resources to the distribution, sales, marketing, implementationand support of our products than we would otherwise and our efforts may not beas effective. The loss of any one or more of our distributors, a reduction inpurchases of our products by or through our distributors, the decline of ourdistributors’ business or the inability to increase our third-partydistributor base may limit our revenue growth and harm our operatingresults.  In particular, HealthSouth,which contributed 56% of our revenue in 2002, is currently the subject ofvarious governmental investigations into its business.  Because of the uncertainty of the outcome ofthese investigations and HealthSouth’s business prospects, we currentlyanticipate that we will receive no revenue from HealthSouth in 2003.  If we are unable to offset the anticipatedloss or decrease of this revenue stream, our operating results and financialcondition will be materially and adversely affected.

 

**Because asmall number of customers are likely to account for a substantial portion ofour revenue, the loss of any of these customers or the cancellation ordeferment of a customer’s order could cause our revenue to declinesubstantially and may result in a decline in our share price.**

 

We expect that the majority of our revenue will depend on sales of ourproducts to a limited number of customers, which include our strategic partnersand our distributors. We intend to establish strategic relationships withlarge, prominent companies that possess significant sales, marketing anddistribution capabilities in each of our targeted medical and non-medicalchannels. We have only recently entered into contracts with customers thatprovide for the potential purchase of significant quantities of our products.As a result, we have not had significant working experience with these new customersand it is difficult to predict their purchasing patterns. Many of our contractswith our customers do not contain minimum purchase requirements and anycustomer may reduce or discontinue purchases of our products at any time. Theloss of one or more of our customers, a reduction in purchases of our productsby our customers or the decline of our customers’ business may cause ourrevenue to decline substantially or fall short of our expectations. Inaddition, because we expect our accounts receivable to be concentrated on asmall group of customers, the failure of any of them to pay on a timely basiswould reduce our cash flow and negatively affect our operating results.

 

We have granted, and may in the future grant, certain of our customers’exclusive rights to particular markets. These exclusive agreements may limitour ability to add additional customers. If one of these current or futurecustomers fails to adequately promote and sell our products, our sales andpenetration into their markets will be adversely affected. Moreover, if anycustomer that has an exclusive right in a particular market proves to beineffective, we may not be able to replace that customer for a significantperiod of time, if at all.

 

**Failure toraise additional capital or to generate the significant capital necessary toexpand our operations and invest in new products and technologies could reduceour ability to compete and to take advantage of market opportunities and couldresult in lower revenue.**

 

We expect to expend significant capital to develop and market ourproducts and technologies and expand our operations. These initiatives mayrequire us to raise additional capital from public and private stock offerings,borrowings under lease lines, lines of credit or other sources. Although wecurrently believe that our current cash reserves should be sufficient to fundour operations, working capital and capital expenditure needs for at least thenext twelve months, we may consume available resources more rapidly than anticipated.Our limiting operating history makes it difficult to predict whether thesefunds will be sufficient to finance our anticipated requirements. We may needto raise additional funds if our estimates of revenue or if our working capitalor capital expenditure requirements change or prove inaccurate, if we arerequired to respond to unforeseen technological or marketing hurdles or if wechoose to take advantage of unanticipated opportunities.

 

We may not be able to raise additional funds when needed, or on acceptableterms, or at all. If adequate funds are not available on a timely basis, we maynot be able to, among other things:

 

•              develop, enhance orcommercialize our products and technologies;

 

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•           acquire new technologies, products orbusinesses;

 

•              expand ouroperations, in the United States or internationally;

 

•              hire, train andretain employees; or

 

•              respond tocompetitive pressures or unanticipated capital requirements.

 

Our failure to do any of these things could result in lower revenue andcould seriously harm our business. Moreover, if additional funds are raisedthrough the issuance of equity securities, the percentage ownership of our thencurrent stockholders would be reduced and the value of their investments mightdecline. In addition, any new securities issued might have rights, preferencesor privileges senior to those of the securities held by stockholders. If weraise additional funds through the issuance of debt, we might become subject torestrictive covenants or we may subject our assets to security interests.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

Our interest income is sensitive to changes in the general level ofinterest rates in the United States, particularly because the majority of ourinvestments are short-term in nature. Due to the nature of our short-terminvestments, we have concluded that we do not have material market riskexposure.

 

Our investment policy requires us to investfunds in excess of current operating requirements. At March 31, 2003, our cashand cash equivalents consisted primarily of money market and mutual funds withaverage maturities of less than 90 days. The recorded carrying amounts of cash and cash equivalents approximatefair value due to their short maturities. At March 31, 2003, we also invested funds in a short-duration governmentmutual fund with an average maturity of greater than 90 days, which isclassified as a short-term investment. The recorded carrying amount of this investment approximates fair value.

 

**Item 4.Controls and Procedures**

 

Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, wehave evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures within 90 days of filing of this quarterly report,and, based on their evaluation, our principal executive officer and principalfinancial officer have concluded that these controls and procedures areeffective. There were no significant changes in our internal controls or otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

Disclosure controls and procedures are our controls and other proceduresthat are designed to ensure that information required to be disclosed by us inthe reports that we file or submit under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On March 19, 2003, Pirahna Plastics, LLC, asupplier of plastic components and disposables for our MedGem and BodyGemdevices, filed suit against us in Santa Clara County, California Superior Courtalleging breach of contract in conjunction with our Purchase Agreement enteredinto on March 6, 2002.  We believe thatwe have meritorious defenses that the specified claims are without merit andintend to vigorously contest this lawsuit. At this time the deadline for our response has been extended to mid-May2003 by mutual agreement.

 

While management currently believes thatresolving this matter will not have a material adverse impact on the Company’sfinancial position or its results of operations, litigation is subject toinherent uncertainties and management’s

 

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view of these matters maychange in the future. Were an unfavorable final outcome to occur, there existsthe possibility of a material adverse impact on the Company’s financialposition and the results of operations for the period in which the effectbecomes reasonably estimable.

 

**Item 2.Changes in Securities and Use of Proceeds**

 

*Changes inSecurities.*  During the period covered by this report,(1) we issued a warrant to Agassi Enterprises, Inc. to purchase anaggregate of 85,000 shares of our common stock at an exercise price of $7.50per share pursuant to a promotion agreement; and (2) we issued a warrantto Gary Foster to purchase an aggregate of 4,000 shares of our common stock atan exercise price of $1.80 per share. We relied upon Rule 506 under theSecurities Act of 1933, as amended (the “Securities Act”) andSection 4(2) of the Securities Act, as an exemption from theregistration requirements of the Securities Act for these issuances of thesesecurities.

 

*Use ofProceeds.*  On July 12, 2002, the initial publicoffering of our common stock, $0.001 par value, commenced trading on the NasdaqNational Stock Market. The managing underwriters were UBS Warburg LLC, CreditSuisse First Boston Corporation, William Blair & Company, L.L.C. andStifel, Nicolaus & Company, Inc. The shares of common stock soldin the offering were registered under the Securities Act on a registrationstatement on Form S-1 (File No. 333-86076) that was declaredeffective by the SEC on July 12, 2002. All of the 4,000,000 shares ofcommon stock registered under the registration statement were sold at a priceto the public of $7.50 per share. All of the shares of common stock sold in theoffering were sold by us. The offering did not terminate until after the saleof all of the securities registered on the registration statement, whichclosing occurred on July 17, 2002. The aggregate gross proceeds wereapproximately $25.7 million after deducting $2.1 million inunderwriting discounts and commissions and an estimated $2.2 million inother expenses incurred in connection with the offering.

 

Upon closing of the initial public offering, we paid $1.75 millionout of the proceeds of the offering to Dr. Mault, our former ChiefExecutive Officer, as partial consideration for the sale and assignment ofpatent rights by Dr. Mault to us.

 

We spent $3.5 million of the proceeds from the offering toimplement and support a marketing campaign that was launched in the fourthquarter of 2002 and concluded in the first quarter of 2003 and an additional$1.0 million for radio and print advertising for our BalanceLog softwareproduct.

 

No other proceeds of the offering were paid, directly or indirectly, toany other of our officers or directors or any of their associates, or to anypersons owning 10% or more of our outstanding common stock or to any of ouraffiliates. We invested the remaining proceeds in short-term, investment-grade,interest bearing instruments, pending their use to fund working capital andcapital expenditures.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6.Exhibits and Reports on Form 8-K**

 

**(a)           Exhibits**

 

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| **Exhibit  No.** |   |                                                                                                                                                                                        |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                        |
| 4.14             |   | Warrant to Purchase Shares  of Common Stock issued by the registrant to Agassi Enterprises, Inc.                                                                                            |
|             |   |                                                                                                                                                                                        |
| 4.15             |   | Warrant to Purchase Shares  of Common Stock issued by the registrant to Gary Foster.                                                                                                        |
|             |   |                                                                                                                                                                                        |
| 10.13            |   | Agreement, dated  November 7, 2001, between the registrant and Sensors for Medicine and  Science, Inc.                                                                            |
|             |   |                                                                                                                                                                                        |
| 10.23            |   | Supply and Services  Agreement, dated March 25, 2002, between the registrant and Bally Total  Fitness Corporation.                                                                     |
|             |   |                                                                                                                                                                                        |
| 99.1             |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

**(b)           Reportson Form 8-K:**

 

The Company filed no reports on Form 8-K during the quarter endedMarch 31, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Exchange Act, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Dated: May 6, 2003 |   |   |                                                                         | **HEALTHETECH, INC.**(Registrant) |   |
|--------------------|--------|--------|------------------------------------------------------------------------------|-----------------------------------|--------|
|               |   |   |                                                                         |
|               |   | By:    |                                                                         | /s/ James W. Dennis               |   |
|               |   |   |                                                                         |
|               |   |   | James W. Dennis                                                              |
|               |   |   | *President and Chief Executive Officer*                                      |
|               |   |   |                                                                         |
|               |   | By:    |                                                                         | /s/ Stephen E. Webb               |   |
|               |   |   |                                                                         |
|               |   |   | Stephen  E. Webb                                                             |
|               |   |   | *Chief Financial Officer*                                                    |
|               |   |   | *(Duly Authorized Officer and Principal Financial and  Accounting  Officer)* |
|                    |        |        |                                                                              |                                   |        |  |

 

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**CERTIFICATIONS**

 

I, James W. Dennis, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of HealtheTech, Inc.;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)             presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  May 6, 2003 |   |   |                                   |
|--------------------|--------|--------|----------------------------------------|
|               |   | By:    | /s/ James W. Dennis                    |   |
|               |   |   |                                   |
|               |   |   | James  W. Dennis                       |
|               |   |   | President  and Chief Executive Officer |
|               |   |   | (Principal  Executive Officer)         |

 

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I, Stephen E. Webb, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of HealtheTech, Inc.;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)             presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  May 6, 2003 |   |   |                           |
|--------------------|--------|--------|--------------------------------|
|               |   | By:    | /s/ Stephen E. Webb            |   |
|               |   |   |                           |
|               |   |   | Stephen  E. Webb               |
|               |   |   | Chief  Financial Officer       |
|               |   |   | (Principal  Financial Officer) |

 

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**EXHIBIT INDEX**

** **
| **Exhibit  No.** |   |                                                                                                                                                                                        |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                        |
| 4.14             |   | Warrant to Purchase Shares  of Common Stock issued by the registrant to Agassi Enterprises, Inc.                                                                                            |
|             |   |                                                                                                                                                                                        |
| 4.15             |   | Warrant to Purchase Shares  of Common Stock issued by the registrant to Gary Foster.                                                                                                        |
|             |   |                                                                                                                                                                                        |
| 10.13            |   | Agreement, dated  November 7, 2001, between the registrant and Sensors for Medicine and  Science, Inc.                                                                            |
|             |   |                                                                                                                                                                                        |
| 10.23            |   | Supply and Services  Agreement, dated March 25, 2002, between the registrant and Bally Total  Fitness Corporation.                                                                     |
|             |   |                                                                                                                                                                                        |
| 99.1             |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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