##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 001-33027
 HOME DIAGNOSTICS, INC.
  Delaware
    
    22-2594392(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer Identification No.)
 2400 Northwest 55th Court
Fort Lauderdale, Florida 33309    (954) 677-9201
  x  o
 o o x
 o x




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##### Table of Contents



HOME DIAGNOSTICS, INC.
INDEX
 PagePart I
    
    FINANCIAL SUMMARY
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2006 and March 31, 2007 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2007 (Unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Stockholders Equity for the Three Months Ended March 31, 2007 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2007 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4T.
    
    Controls and Procedures
    
    
    17Part II
    
    OTHER INFORMATION
    
    
    18Item 1.
    
    Legal Matters
    
    
    18Item 1A.
    
    Risk Factors
    
    
    18Item 2.
    

Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6.
    
    Exhibits
    
    
    19SIGNATURES
    
    
    20EXHIBIT INDEX
    
    
    21CERTIFICATIONSEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
 2




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##### Table of Contents



Part I. FINANCIAL SUMMARY
 
 Item 1. Financial Statements
 
 HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 December 31,
    
    
    March 31,2006
    
    
    2007(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    26,487,163
    
    
    $
    29,527,784Accounts receivable, net
    
    
    17,010,471
    
    
    
    17,400,781Inventories, net
    
    
    12,389,654
    
    
    
    11,705,639Prepaid expenses and other current assets
    
    
    912,117
    
    
    
    1,066,351Income taxes receivable
    
    
    1,455,689
    
    
    
    752,291Deferred tax asset
    
    
    4,709,201
    
    
    
    4,968,318Total current assets
    
    
    62,964,295
    
    
    
    65,421,164Property and equipment, net
    
    
    17,932,833
    
    
    
    19,095,874Goodwill
    
    
    35,573,462
    
    
    
    35,573,462Other intangible assets, net
    
    
    1,048,781
    
    
    
    937,857Deferred tax asset
    
    
    15,140
    
    
    
    344,427Other assets, net
    
    
    141,504
    
    
    
    143,282Total assets
    
    $
    117,676,015
    
    
    $
    121,516,066Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    6,655,728
    
    
    $
    8,558,107Accrued liabilities
    
    
    13,907,664
    
    
    
    13,271,427Total current liabilities
    
    
    20,563,392
    
    
    
    21,829,534Commitments and contingencies (Note 10)
    
    
    
    
    
    
    Stockholders equity:Common stock, $.01 par value; 60,000,000
shares authorized, 17,697,691 and 17,725,900
shares issued and outstanding at December
31, 2006 and March 31, 2007, respectively
    
    
    176,977
    
    
    
    177,259Additional paid-in capital
    
    
    93,967,063
    
    
    
    94,269,489Retained earnings
    
    
    2,940,376
    
    
    
    5,504,968Accumulated other comprehensive income (loss)
    
    
    28,207
    
    
    
    (265,184
    )Total stockholders equity
    
    
    97,112,623
    
    
    
    99,686,532Total liabilities and stockholders equity
    
    $
    117,676,015
    
    
    $
    121,516,066
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 3




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Three Months EndedMarch 31,2006
    
    
    2007Net sales
    
    $
    27,152,729
    
    
    $
    28,100,050Cost of sales
    
    
    11,025,351
    
    
    
    11,204,337Gross profit
    
    
    16,127,378
    
    
    
    16,895,713Operating expensesSelling, general and administrative
(including stock-based compensation
expense of $572,384 and $300,944 for the
three months ended March 31, 2006 and 2007,
respectively)
    
    
    10,975,153
    
    
    
    11,541,073Research and development
    
    
    1,820,763
    
    
    
    2,012,170Total operating expenses
    
    
    12,795,916
    
    
    
    13,553,243Income from operations
    
    
    3,331,462
    
    
    
    3,342,470Other (expense) incomeChange in fair value of warrant put option
    
    
    (691,011
    )
    
    
    Interest (expense) income, net
    
    
    (87,313
    )
    
    
    345,006Other, net
    
    
    (59,570
    )
    
    
    120,698Total other (expense) income
    
    
    (837,894
    )
    
    
    465,704Income before provision for income taxes
    
    
    2,493,568
    
    
    
    3,808,174Provision for income taxes
    
    
    1,098,915
    
    
    
    1,332,861Net income
    
    $
    1,394,653
    
    
    $
    2,475,313Earnings per common share:Basic
    
    $
    0.10
    
    
    $
    0.14Diluted
    
    $
    0.09
    
    
    $
    0.13Weighted average shares used in computing
earnings per common share:Basic
    
    
    13,709,367
    
    
    
    17,725,786Diluted
    
    
    15,723,903
    
    
    
    19,737,266
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    TotalNumber of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    stockholdersshares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    equityBalance at December 31, 2006
    
    
    17,697,691
    
    
    $
    176,977
    
    
    $
    93,967,063
    
    
    $
    2,940,376
    
    
    $
    28,207
    
    
    $
    97,112,623Cumulative effect of change in
accounting for uncertainties in income
taxes (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,279
    
    
    
    
    
    
    
    89,279Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    300,944
    
    
    
    
    
    
    
    
    
    
    
    300,944Stock options and warrant exercised
    
    
    28,209
    
    
    
    282
    
    
    
    1,482
    
    
    
    
    
    
    
    
    
    
    
    1,764Comprehensive income:Foreign currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (293,391
    )
    
    
    (293,391
    )translation
adjustmentNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,475,313
    
    
    
    
    
    
    
    2,475,313Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,181,922Balance at March 31, 2007
    
    
    17,725,900
    
    
    $
    177,259
    
    
    $
    94,269,489
    
    
    $
    5,504,968
    
    
    $
    (265,184
    )
    
    $
    99,686,532
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 5




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Three Months EndedMarch 31,2006
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    1,394,653
    
    
    $
    2,475,313Adjustments
to reconcile net income to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    1,085,946
    
    
    
    993,520Amortization of deferred financing and debt issuance costs
    
    
    11,539
    
    
    
    2,254Loss on asset disposal
    
    
    9,918
    
    
    
    Bad debt expense
    
    
    15,000
    
    
    
    12,501Deferred income taxes
    
    
    (340,638
    )
    
    
    (329,058
    )Change in fair value of warrant put option
    
    
    691,011
    
    
    
    Stock-based compensation expense
    
    
    572,384
    
    
    
    300,944Changes in assets and liabilities:Accounts receivable
    
    
    (3,364,129
    )
    
    
    (402,811
    )Inventories
    
    
    (119,382
    )
    
    
    624,858Prepaid expenses and other current
and non-current assets
    
    
    (294,181
    )
    
    
    (154,234
    )Income taxes receivable and payable
    
    
    (1,844,414
    )
    
    
    1,476,726Accounts payable
    
    
    1,262,700
    
    
    
    1,902,379Accrued liabilities
    
    
    (1,550,264
    )
    
    
    (1,579,633
    )Net cash (used in) provided by operating activities
    
    
    (2,469,857
    )
    
    
    5,322,759Cash flows from investing activitiesCapital expenditures
    
    
    (2,920,484
    )
    
    
    (2,048,790
    )Net cash used in investing activities
    
    
    (2,920,484
    )
    
    
    (2,048,790
    )Cash flows from financing activitiesRepayment of term loans and notes payable
    
    
    (666,667
    )
    
    
    Repayment of notes payable to related party
    
    
    (1,300,000
    )
    
    
    Borrowings on line of credit, net of repayments
    
    
    4,145,179
    
    
    
    Payment of debt financing costs
    
    
    
    
    
    
    (4,317
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    1,764Net cash provided by (used in) financing activities
    
    
    2,178,512
    
    
    
    (2,553
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    168,005
    
    
    
    (230,795
    )Net (decrease) increase in cash and cash equivalents
    
    
    (3,043,824
    )
    
    
    3,040,621Cash and cash equivalentsBeginning of period
    
    
    3,483,424
    
    
    
    26,487,163End of period
    
    $
    439,600
    
    
    $
    29,527,784Supplemental cash flows disclosures:Cash paid during the period for:Interest
    
    $
    77,265
    
    
    $
    Income taxes
    
    $
    3,220,000
    
    
    $
    378,698
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 6




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 1. Basis of presentation
      Use of estimates
  Product warranties
  7




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Recent accounting pronouncements
   Reclassifications
  2. Stock option plans
   WeightedRange of
    
    averageNumber of
    
    exercise
    
    exerciseshares
    
    prices
    
    pricesOutstanding at December 31, 2006
    
    
    3,274,756
    
    
    $
    2.99-12.00
    
    
    $
    4.40Granted
    
    
    37,500
    
    
    $
    10.85
    
    
    $
    10.85Exercised
    
    
    (409
    )
    
    $
    3.63
    
    
    $
    3.63Forfeited/ Cancelled
    
    
    (1,760
    )
    
    $
    3.85--12.00
    
    
    $
    8.48Outstanding at March 31, 2007
    
    
    3,310,087
    
    
    $
    2.9912.00
    
    
    $
    4.47Exercisable at March 31, 2007
    
    
    2,632,076
    
    
    $
    2.99--9.51
    
    
    $
    3.47
  Three Months EndedMarch 31,
    
    March 31,2006
    
    2007Expected term of option (in years)
    
    
    6.00
    
    
    
    6.00Expected volatility factor (based on peer group volatility)
    
    
    30.00
    %
    
    
    30.00
    %Expected dividend yield
    
    none
    
    noneWeighted average risk-free interest rate (based on applicable U.S. Treasury rates)
    
    
    4.76
    %
    
    
    4.52
    %
  8




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3. Inventory, net
  December 31,
    
    March 31,2006
    
    2007Raw materials
    
    $
    6,873,057
    
    
    $
    6,677,480Work-in-process
    
    
    3,360,650
    
    
    
    3,539,101Finished goods
    
    
    2,155,947
    
    
    
    1,489,058$
    12,389,654
    
    
    $
    11,705,639
 4. Property and equipment, net
  December 31,
    
    March 31,2006
    
    2007Machinery and equipment
    
    $
    15,404,014
    
    
    $
    15,674,267Leasehold improvements
    
    
    3,004,636
    
    
    
    3,056,381Furniture, fixtures, and office equipment
    
    
    2,841,022
    
    
    
    3,004,060Computer software
    
    
    2,069,489
    
    
    
    2,106,138Equipment not yet placed in service
    
    
    11,042,883
    
    
    
    12,558,63534,362,044
    
    
    
    36,399,481Less: Accumulated depreciation and amortization
    
    
    (16,429,211
    )
    
    
    (17,303,607
    )$
    17,932,833
    
    
    $
    19,095,874
   9




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5. Accrued liabilities
  December 31,
    
    March 31,2006
    
    2007Accrued salaries and benefits
    
    $
    3,977,850
    
    
    $
    2,703,177Sales returns reserve
    
    
    5,588,068
    
    
    
    5,199,068Product warranty and customer liabilities
    
    
    3,399,119
    
    
    
    2,956,413Other accrued liabilities
    
    
    942,627
    
    
    
    2,412,769$
    13,907,664
    
    
    $
    13,271,427
 6. Credit facility and long-term debt
   7. Warrant put option
  8. Income taxes
  10




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9. Earnings per common share
    Three months ended March 31,2006
    
    2007Weighted
average number of
common shares
outstanding for
basic earnings per
share
    
    
    13,709,367
    
    
    
    17,725,786Effect of
dilutive
securities: stock
options and
warrants
    
    
    2,014,536
    
    
    
    2,011,480Weighted
average number of
common and common
equivalent shares
outstanding
    
    
    15,723,903
    
    
    
    19,737,266
  11




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10. Contingencies
 Litigation
  Roche Litigation
 Brandt Litigation
 12




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ITEM 2.
    
    Managements discussion and analysis of financial condition and results of operations
  Company overview
     
    
    Retailthe retail channel generates the majority of sales of blood
glucose monitoring products in the United States and includes chain
drug stores, food stores and mass merchandisers. We sell our products
into the retail channel on a direct basis or through domestic
distributors. Our retail net sales include products we sell directly
into the retail channel for the larger food and drug retailers.
    
    Domestic distributionthe domestic distribution channel includes
sales to domestic wholesalers, including AmerisourceBergen, Cardinal
Health, McKesson, and Invacare, who sell products to independent and
chain food and drug retailers, primary and long-term care providers,
durable medical equipment suppliers and mail service providers.
    
    Mail servicethe mail service channel includes sales to leading mail
service providers, who market their products primarily to the Medicare
population.
    
    Internationalthe international channel consists primarily of sales
to distributors in Latin America, the United Kingdom, Germany,
Australia and China. In May 2005, we acquired our United Kingdom
distributor, and we continually evaluate opportunities to partner with
or acquire distributors in other international markets.
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Three Months Ended March 31,2006
    
    2007(in thousands)Net sales by channel:Retail
    
    $
    5,389
    
    
    
    19.8
    %
    
    $
    6,535
    
    
    
    23.3
    %Domestic distribution
    
    
    15,071
    
    
    
    55.5
    %
    
    
    14,883
    
    
    
    53.0
    %Mail service
    
    
    3,245
    
    
    
    12.0
    %
    
    
    3,748
    
    
    
    13.3
    %International
    
    
    3,448
    
    
    
    12.7
    %
    
    
    2,934
    
    
    
    10.4
    %Net sales
    
    $
    27,153
    
    
    
    100.0
    %
    
    $
    28,100
    
    
    
    100.0
    %
    Results of operations
  Three Months Ended March 31,2006
    
    2007Net sales
    
    $
    27,152,729
    
    
    
    100.0
    %
    
    $
    28,100,050
    
    
    
    100.0
    %Cost of sales
    
    
    11,025,351
    
    
    
    40.6
    %
    
    
    11,204,337
    
    
    
    39.9
    %Gross profit
    
    
    16,127,378
    
    
    
    59.4
    %
    
    
    16,895,713
    
    
    
    60.1
    %Operating expenses:Selling, general and administrative
    
    
    10,975,153
    
    
    
    40.4
    %
    
    
    11,541,073
    
    
    
    41.1
    %Research and development
    
    
    1,820,763
    
    
    
    6.7
    %
    
    
    2,012,170
    
    
    
    7.2
    %Total operating expenses
    
    
    12,795,916
    
    
    
    47.1
    %
    
    
    13,553,243
    
    
    
    48.2
    %Income from operations
    
    
    3,331,462
    
    
    
    12.3
    %
    
    
    3,342,470
    
    
    
    11.9
    %Increase in fair value of warrant put option
    
    
    (691,011
    )
    
    
    (2.5
    %)
    
    
    
    
    
    
    0.0
    %Interest (expense) income, net
    
    
    (87,313
    )
    
    
    (0.3
    %)
    
    
    345,006
    
    
    
    1.2
    %Other, net
    
    
    (59,570
    )
    
    
    (0.2
    %)
    
    
    120,698
    
    
    
    0.4
    %Income before income taxes
    
    
    2,493,568
    
    
    
    9.2
    %
    
    
    3,808,174
    
    
    
    13.6
    %Provision for income taxes
    
    
    (1,098,915
    )
    
    
    (4.0
    %)
    
    
    (1,332,861
    )
    
    
    (4.7
    %)Net income
    
    $
    1,394,653
    
    
    
    5.1
    %
    
    $
    2,475,313
    
    
    
    8.8
    %
 14




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Three months ended March 31, 2007 as compared to three months ended March 31, 2006
          15




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Liquidity and capital resources
       Caution concerning forward-looking statements
  16




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Item 3.
    
    Quantitative and qualitative disclosures about market risk
  
 Item 4T.
    
    Controls and procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control
  17




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Part II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  Roche Litigation
 Brandt Litigation
 
 Item 1A.
    
    Risk Factors
  Competitive bidding for durable medical equipment suppliers could negatively affect our business.
  18




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 Recent Sales of Unregistered Securities
   Use of Proceeds from Sales of Registered Securities
    
 Item 6.
    
    Exhibits
  19




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##### Table of Contents



SIGNATURES
  HOME DIAGNOSTICS, INC.Date: May 11, 2007
    By:
    /s/ J. RICHARD DAMRON, JR.J. Richard Damron, Jr.President and Chief Executive Officer
(principal executive officer) and
DirectorDate: May 11, 2007
    By:
    /s/ RONALD L. RUBIN.Ronald L. RubinVice President and Chief Financial Officer
(principal financial and accounting officer) 20




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Exhibit Index
 ExhibitNumber
    
    
    
    Description31.1*
    
    
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934.31.2*
    
    
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934.32.1*
    
    
    
    Certification of Chief Executive Officer, Pursuant to
18 U.S.C. Section 1350.32.2*
    
    
    
    Certification of Chief Financial Officer, Pursuant to
18 U.S.C. Section 1350.
 
 *
    
    Filed herewith 21