10-Q 1 v184883_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended   March 31, 2010

OR

¨ 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          1-13550

HAUPPAUGE DIGITAL INC.
(Exact name of registrant as specified in its charter)

Delaware
11-3227864
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

91 Cabot Court, Hauppauge, New York 11788
(Address of principal executive offices)

(631) 434-1600
(Registrant’s telephone  number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x YES          ¨ NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ YES            ¨ NO

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

¨  LARGE ACCELERATED FILER
¨  ACCELERATED  FILER
¨ NON-ACCELERATED FILER
x  SMALLER REPORTING COMPANY
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in  Rule12b-2 of the Exchange Act).

¨ YES              x  NO

As of April 30, 2010, 10,069,070 shares of .01 par value Common Stock of the issuer were outstanding.

 
 

 
 
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
 
INDEX

 
Page no.
   
PART I. FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
3
   
Consolidated Balance Sheets –
March 31, 2010 (unaudited) and September 30, 2009
3
   
Consolidated Statements of Operations -
Three Months ended March 31, 2010 (unaudited) and 2009 (unaudited)
4
   
Consolidated Statements of Operations -
Six Months ended March 31, 2010 (unaudited) and 2009 (unaudited)
5
   
Consolidated Statements of Other Comprehensive Loss
Three Months and Six Months ended March 31, 2010 (unaudited) and 2009 (unaudited)
6
   
Consolidated Statements of Cash Flows - Six Months ended March 31, 2010 (unaudited) and 2009 (unaudited)
7
   
Notes to Consolidated Financial Statements
8-16
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
   
Item 3. Quantitative and Qualitative Disclosures about Market Risks
26
   
Item  4T. Controls and Procedures
26
   
PART II.  OTHER INFORMATION
 
   
Item 6. Exhibits
28
   
Signatures
29
 
 
2

 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements 
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
March 31,
2010
(unaudited)
   
September 30 ,
2009
 
Assets:
           
Cash and cash equivalents
  $ 8,712,496     $ 8,368,342  
Trade receivables, net of various allowances
    7,335,968       9,770,584  
Other non trade receivables
    4,263,465       4,116,392  
Inventories
    9,961,418       8,616,800  
Deferred tax asset-current
    1,297,574       1,297,574  
Prepaid expenses and other current assets
    1,145,158       928,680  
Total current assets
    32,716,079       33,098,372  
                 
Intangible assets, net
    4,318,684       4,696,102  
Property, plant and equipment, net
    641,754       757,488  
Security deposits and other non current assets
    108,070       108,088  
Deferred tax asset-non current
    887,611       887,611  
Total assets
  $ 38,672,198     $ 39,547,661  
                 
Liabilities and Stockholders’ Equity:
               
Current Liabilities:
               
Accounts payable
  $ 12,392,648     $ 12,478,625  
Accrued expenses fees
    5,681,983       5,753,546  
Accrued expenses
    9,716,484       8,131,263  
Note payable
    0       625,045  
Income taxes payable
    209,332       224,316  
Total current liabilities
    28,000,447       27,212,795  
                 
Stockholders' Equity:
               
Common stock, $.01 par value; 25,000,000 shares authorized, 10,825,296 and 10,814,042 issued, respectively
    108,253       108,140  
Additional paid-in capital
    17,498,372       17,276,651  
Retained earnings (deficit)
    (441,750 )     795,674  
Accumulated other comprehensive loss
    (4,088,787 )     (3,441,262 )
Treasury Stock, at cost, 759,579 shares
    (2,404,337 )     (2,404,337 )
Total stockholders' equity
    10,671,751       12,334,866  
Total liabilities and stockholders' equity
  $ 38,672,198     $ 39,547,661  
 
 See accompanying notes to consolidated financial statements

 
3

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three months ended March 31,
 
   
2010
   
2009
 
             
Net sales
  $ 13,847,079     $ 12,733,429  
Cost of sales
    9,981,288       9,769,150  
Gross profit
    3,865,791       2,964,279  
                 
Selling, general and administrative expenses
    3,777,737       3,861,671  
Research and development expenses
    1,005,101       1,267,848  
Loss from operations
    (917,047 )     (2,165,240 )
                 
Other income (expense):
               
Interest income
    1,435       5,156  
Interest expense
    -       (28,646 )
Foreign currency gain
    61,875       296,675  
Total other income
    63,310       273,185  
Loss before tax provision
    (853,737 )     (1,892,055 )
Tax provision
    49,136       40,015  
Net loss
  $ (902,873 )   $ (1,932,070 )
                 
Net loss per share:
               
Basic and diluted
  $ (0.09 )   $ (0.19 )

See accompanying notes to consolidated financial statements

 
4

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Six months ended March 31,
 
   
2010
   
2009
 
             
Net sales
  $ 31,725,437     $ 30,022,109  
Cost of sales
    22,637,249       24,459,569  
Gross profit
    9,088,188       5,562,540  
                 
Selling, general and administrative expenses
    8,110,260       7,700,567  
Research and development expenses
    2,175,172       2,113,490  
Loss from operations
    (1,197,244 )     (4,251,517 )
                 
Other income (expense):
               
Interest income
    2,894       9,625  
Interest expense
    (4,347 )     (28,646 )
Foreign currency gain
    61,635       643,677  
Total other income
    60,182       624,656  
Loss before tax provision
    (1,137,062 )     (3,626,861 )
Tax provision
    100,362       77,522  
Net loss
  $ (1,237,424 )   $ (3,704,383 )
                 
Net loss per share:
               
Basic and diluted
  $ (0.12 )   $ (0.37 )

See accompanying notes to consolidated financial statements

 
5

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(UNAUDITED)

   
Three months ended March 31,
 
   
2010
   
2009
 
Net loss
  $ (902,873 )   $ (1,932,070 )
Foreign currency translation loss
    (546,772 )     (319,673 )
Forward exchange contracts marked to market gain (loss)
    23,911       (17,060 )
Other comprehensive loss
  $ (1,425,734 )   $ (2,268,803 )

   
Six months ended March 31,
 
   
2010
   
2009
 
Net loss
  $ (1,237,424 )   $ (3,704,383 )
Foreign currency translation loss
    (669,012 )     (492,636 )
Forward exchange contracts marked to market gain
    21,487       37,674  
Other comprehensive loss
  $ (1,884,949 )   $ (4,159,345 )

See accompanying notes to consolidated financial statements

6


HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
   
Six months ended March 31,
 
   
2010
   
2009
 
Net loss
  $ (1,237,424 )   $ (3,704,383 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    138,468       129,878  
Amortization of intangible assets
    377,418       188,709  
Stock compensation expense
    212,502       265,187  
Sales reserve, net
    223,300       -  
Bad debt reserve
    40,000       -  
Other non cash items
    18       (6,129 )
Changes in current assets and liabilities, net of effects of acquisition:
               
Accounts receivable
    1,354,543       2,125,931  
Inventories
    (674,918 )     1,754,778  
Prepaid expenses and other current assets
    (216,478 )     (5,193 )
Accounts payable
    (1,527,858 )     (2,614,412 )
Accrued expenses and other current liabilities
    2,826,842       1,648,481  
Total adjustments
    2,753,837       3,487,230  
Net cash provided by (used in) operating activities
    1,516,413       (217,153 )
                 
Cash Flows From Investing Activities:
               
PCTV acquisition
    (511,332 )     (2,970,499 )
Purchases of property, plant and equipment
    (22,734 )     (7,926 )
Net cash used in investing activities
    (534,066 )     (2,978,425 )
                 
Cash Flows From Financing Activities:
               
Proceeds from the exercise of stock options and employee stock purchases
    9,332       19,282  
Net cash provided by financing activities
    9,332       19,282  
Effect of exchange rates on cash
    (647,525 )     (454,962 )
Net increase (decrease) in cash and cash equivalents
    344,154       (3,631,258 )
Cash and cash equivalents, beginning of period
    8,368,342       14,191,721  
Cash and cash equivalents, end of period
  $ 8,712,496     $ 10,560,463  
                 
Supplemental disclosures:
               
Interest paid
  $ 4,347     $ 28,646  
Income taxes paid
  $ 106,451     $ 21,354  
Note payable to Avid Technology, Inc.
  $ -     $ 2,500,000  

See accompanying notes to consolidated financial statements

7


HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 1.  Basis of Presentation

The accompanying unaudited consolidated financial statements for Hauppauge Digital Inc. and subsidiaries (collectively, the “Company”) included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these interim statements be read in conjunction with the financial statements and related notes included in the Company's September 30, 2009 Form 10-K.

The operating results for the three and six months ended March 31, 2010 are not necessarily indicative of the results to be expected for the September 30, 2010 year end.

Certain reclassifications have been made to prior consolidated financial statements to conform to the current classifications.

Management has evaluated subsequent events after the balance sheet date through the issuance of the financial statements for appropriate accounting and disclosure through the filing date of this Form 10-Q.
 
Note 2.  Trade Accounts and Other Non-Trade Receivables
 
Trade receivables consist of:
 
 
·
Trade receivables from sales to customers
 
 
·
Allowances, consisting of sales and bad debt
 
 
Other non trade receivables consist of:
 
 
·
Receivables pertaining to component parts purchased from the Company at cost by the Company’s contract manufacturers which are excluded from sales
 
 
·
General services tax (GST) and value added tax (VAT) reclaimable on goods purchased by the Company’s Asian and European locations
 
 
·
Other minor non-trade receivables
 
Trade receivables and other non-trade receivables as of March 31, 2010 and September 30, 2009 consisted of:

 
8

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

   
March 31,
   
September 30,
 
   
2010
   
2009
 
Trade receivables
  $ 12,165,660     $ 13,893,804  
Allowances and reserves
    (4,829,692 )     (4,123,220 )
Total trade receivables
    7,335,968       9,770,584  
Receivable from contract manufacturers
    3,590,656       2,933,918  
GST and VAT taxes receivables
    598,557       1,134,331  
Other
    74,252       48,143  
Total non trade receivables
  $ 4,263,465     $ 4,116,392  
 
Note 3.  Inventories

Inventories have been valued at the lower of average cost or market on a first in first out basis. The components of inventory consist of:

   
March 31,
   
September 30,
 
   
2010
   
2009
 
Component parts
  $ 3,255,847     $ 2,799,723  
Finished goods
    6,705,571       5,817,077  
    $ 9,961,418     $ 8,616,800  
 
Note 4.  Intangible Assets

The following is a summary of intangible assets as of March 31, 2010:
               
Net
   
Weighted
 
   
Purchase
   
Accumulated
   
Book
   
average remaining
 
Asset description
 
cost
   
Amortization
   
Value
   
life (in years)
 
Customer relationships
  $ 1,644,353     $ (171,287 )   $ 1,473,066       10.75  
Value of technology
    1,849,897       (330,339 )     1,519,558       5.75  
Covenant not to compete
    1,767,979       (441,919 )     1,326,060       3.75  
Total intangible assets
  $ 5,262,229     $ (943,545 )   $ 4,318,684       8.03  

Amortization expense totaled approximately $377,000 for the six months ended March 31, 2010. Amortization expense is expected to be approximately $755,000 for each of the fiscal years ended September 30, 2010, 2011, 2012 and 2013, respectively, and $490,000 for the year ended September 30, 2014.

9


HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 5.  Net Income (Loss) Per Share

Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income per share reflects, in the periods in which they have a dilutive effect, the dilution which would occur upon the exercise of stock options. A reconciliation of the shares used in calculating basic and diluted net income per share is as follows:

   
Three months ended
   
Six months ended
 
   
March 31,
   
March 31,
 
   
2010
   
2009
   
2010
   
2009
 
Weighted average shares outstanding-basic
    10,065,344       10,043,876       10,062,545       10,039,434  
Number of shares issued on the assumed exercise of stock options
    -       -       -       -  
Weighted average shares outstanding-diluted
    10,065,344       10,043,876       10,062,545       10,039,474  

Options to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05 to $7.45 and from $1.05 to $8.75 were outstanding for the three months and six months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
 
Note 6.  Foreign Currency Translations and Transactions

The Company’s Asian subsidiary reports its financial position and results of operations in the reporting currency of the Company.

The financial position and results of operations of the Company’s European subsidiaries are determined using Euros as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate during the year. Translation adjustments arising from the translation to U.S. Dollars at differing exchange rates are included in the accumulated other comprehensive income (loss) account in stockholders’ equity. Gains and losses resulting from transactions that are denominated in currencies other than Euros are included in earnings as a component of other income. The Company had a translation loss of $3,441,262 recorded on the balance sheet as of September 30, 2009. For the six months ended March 31, 2010 the Company recorded on the balance sheet translation losses of $669,012, resulting in an accumulated translation loss of $4,110,274 recorded as a component of accumulated other comprehensive income as of March 31, 2010.

 
10

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7. Derivatives and Hedging Activities

For each of the fiscal years ended September 30, 2009 and 2008 and the six months ended March 31, 2010, at least 40 % of the Company’s sales were generated by its European subsidiary and were invoiced and collected in local currency, which was primarily the Euro. On the supply side, since the Company predominantly deals with North American and Asian suppliers and contract manufacturers, approximately 95% of the Company’s inventory required to support its European sales are purchased and paid in U.S. Dollars. The combination of sales billed in Euros supported by inventory purchased in U.S. dollars results in an absence of a natural local currency hedge. Consequently, the Company’s financial results are subject to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates.

The Company attempts to reduce these risks by entering into foreign exchange forward contracts with financial institutions. The purpose of these forward contracts is to hedge the foreign currency market exposures underlying the U.S. Dollar denominated inventory purchases required to support its European sales.

The Company does not try to hedge against all possible foreign currency exposures because of the inherent difficulty in estimating the volatility of the Euro. The contracts the Company procures are specifically entered into to as a hedge against forecasted or existing foreign currency exposure. The Company does not enter into contracts for speculative purposes. Although the Company maintains these programs to reduce the short term impact of changes in currency exchange rates, long term strengthening or weakening of the U.S. Dollar against the Euro impacts the Company’s sales, gross profit, operating income and retained earnings. Factors that could impact the effectiveness of the Company’s hedging program are:

 
·
volatility of the currency markets
 
·
availability of hedging instruments
 
·
accuracy of the Company’s inventory forecasts

Additionally, there is the risk that foreign exchange fluctuations will make the Company’s products less competitive in foreign markets, which would substantially reduce the Company’s sales.

 As of March 31, 2010, the Company had foreign currency contracts outstanding of approximately $393,000 against the delivery of the Euro. These contracts expire each month through June 30, 2010. The Company had no forward exchange contracts outstanding as of September 30, 2009.

The Company’s accounting policies for these instruments designate such instruments as cash flow hedging transactions. The Company does not enter into such contracts for speculative purposes. The Company records all derivative gains and losses on the balance sheet as a component of stockholders’ equity under the caption “Accumulated other comprehensive loss.” For the six months ended March 31, 2010, the Company recorded on the balance sheet a mark to market deferred forward exchange gain of $21,487.

 
11

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 8. Revenue recognition

The Company sells through a sales channel which is comprised of retailers, PC manufacturers and distributors. The majority of the Company’s customers are granted lines of credit. The product is shipped on account with the majority of customers typically given 30 to 45 day payment terms. Those customers deemed as large credit risks either pay in advance or issue the Company a letter of credit.

The Company requires the customer to submit a purchase order to the Company. The price of the product and payment terms are fixed per the terms of the purchase order. Upon shipment of the order to the customer, the title to the goods is passed to the customer. The customer is legally obligated to pay for the order within the payment terms stated on the customer’s purchase order. The obligation to insure the boards and the cost of any pilferage while in the customer’s possession is the responsibility of the customer. The Company sells analog, hybrid video recorders or digital computer boards that are stocked on the shelves of retailers and are subject to the normal consumer traffic that retail stores attract. Aside from normal store promotions such as advertisements in the store’s circular, the Company has no further obligation to assist in the resale of the products.

The Company offers some of its customers a right of return. The Company’s accounting complies with FASB ASC 605-15 (SFAS 48) Revenue Recognition when Right of Return Exists, as typically at the end of every quarter the Company, based on historical data, evaluates its sales reserve level based on the previous six months sales. Due to the seasonal nature of the business coupled with the changing economic environment, management exercises some judgment with regard to the historical data when calculating the reserve.

The Company offers mail-in rebates on certain products at certain times as determined by the Company. The rebates are recorded as a reduction to sales. The Company also participates in limited cooperative advertising programs with retailers and distributors and accounts for these in accordance with FASB ASC 605-50 ( EITF 01-09), “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”.
 
Note 9.  Product segment and geographic information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital TV tuner products for the personal computer market. The products are similar in function and share commonality of component parts and manufacturing processes. The Company’s products are either sold, or can be sold, by the same retailers and distributors in the Company’s marketing channel. The Company also sells product directly to PC manufacturers. The Company evaluates its product lines under the functional categories of analog TV tuners, digital TV tuners and other non-TV tuner products.

 
12

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company’s products fall under three product categories:

 
·
Analog TV tuner boards
 
·
Digital TV tuner, and combination analog and digital TV tuner, boards
 
·
Other non-TV tuner products

The Company’s Analog TV tuner products are TV tuner modules which can be added to a PC and enable a PC user, among other things, to watch and record analog cable TV in a resizable window on a PC.

The Company’s digital TV and combination analog and digital tuner products are TV tuner modules which enable a PC user, among other things, to watch and record analog cable TV and digital TV in a resizable window on a PC.

The Company’s other non-TV tuner products enable a PC user, among other things, to video conference, watch and listen to PC based videos, music and pictures on a TV set through a home network, and record TV shows on a PC for playback on portable video players.

Sales by functional category are as follows:

   
Three months ended March 31,
   
Six months ended March 31,
 
Product line sales
 
2010
   
2009
   
2010
   
2009
 
Analog TV tuner products
  $ 135,719     $ 678,880     $ 430,189     $ 2,044,463  
Digital and combination analog and digital TV tuner products
    11,799,562       11,210,311       27,588,278       26,470,036  
Other non-TV tuner products
    1,911,798       844,238       3,706,970       1,507,610  
Total sales
  $ 13,847,079     $ 12,733,429     $ 31,725,437     $ 30,022,109  
 
The Company sells its products through a North American and international network of distributors and retailers. It maintains sales offices in Europe and Asia. Sales percent by geographic region are as follows:

   
Three months ended March 31,
   
Six months ended March 31,
 
Geographic region
 
2010
   
2009
   
2010
   
2009
 
The Americas
    45 %     57 %     44 %     48 %
Europe
    52 %     40 %     53 %     48 %
Asia
    3 %     3 %     3 %     4 %
Total
    100 %     100 %     100 %     100 %
 
13


HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 10. Tax provision

The Company’s tax provision for the three months and six months ended March 31, 2010 and 2009 is as follows:

   
Three months ended March 31,
   
Six months ended March 31,
 
   
2010
   
2009
   
2010
   
2009
 
Tax expense on international operations
  $ 39,136     $ 30,015     $ 80,362     $ 57,522  
State taxes
    10,000       10,000       20,000       20,000  
Tax provision
  $ 49,136     $ 40,015     $ 100,362     $ 77,522  

Note 11. Accrued expense- fees

The Company uses technology licensed from third parties in certain products. The Company enters into agreements to license this technology, and in return for the use of the technology, the Company incurs a license fee for each unit sold that includes the licensors’ technology. The licensing amount per unit varies by licensor. The Company is obligated to provide the licensor with reports which quantify the licenses used and these reports are subject to audits by the licensor. The Company recognizes and estimates the amount of licensing fees owed to third parties based on products sold that include software and technology licensed from these third parties. The Company uses all available applicable information in determining these estimates and thus the accrued amounts are subject to change as new information is made available to the Company. The licensing fees are accounted for as a component of product cost and are charged to cost of sales. As of March 31, 2010 and September 30, 2009 the amount of accrued expenses relating to these license agreements amounted to $5,681,983 and $5,753,546, respectively.

Note 12. Fair Value Measurements

Effective October 1, 2008 the Company adopted ASC 820-10, Fair Value Measurements, for financial assets and liabilities. This ASC defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. The ASC indicates, among other things, that a fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company also adopted the provisions of ASC 820-10 with respect to its non-financial assets and liabilities during the first quarter of fiscal 2010. In order to increase consistency and comparability in fair value measurements, ASC 820-10 establishes a hierarchy for observable and unobservable inputs used to measure fair value into three broad Levels, which are described below:

• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
• Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
• Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 
14

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

 At March 31, 2010, the Company had forward contracts whose fair value at quarter end was determined via inputs that included quoted prices for similar foreign exchange contracts in active markets and were thus considered to be Level 2 inputs under the SFAS 157 hierarchy (see Note 7).

Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs.
 
The carrying amount of cash, accounts receivables and accounts payables and other short-term financial instruments approximate their fair value due to their short-term nature. 

Note 13. Acquisition of PCTV assets from Avid Technology, Inc.

Effective December 24, 2008, pursuant to an Asset Purchase Agreement, dated as of October 25, 2008, as amended by that certain Amendment No. 1 to the Asset Purchase Agreement (the “Amendment”) (together with the Amendment, the “Asset Purchase Agreement”), PCTV Systems, Sarl, a Luxembourg company (“Buyer”) and the Company’s wholly-owned subsidiary, acquired certain assets and properties (the “Acquired Assets”) of Avid Technology, Inc. (“Avid”), a Delaware corporation, Pinnacle Systems, Inc., a California corporation (“Pinnacle”), Avid Technology GmbH, a limited liability company organized under the laws of Germany, Avid Development GmbH, a limited liability company organized under the laws of Germany, and Avid Technology International BV (collectively, the “Sellers”). The Acquired Assets were used by the Sellers in the business of, among other things, the development, manufacture and sale of personal devices containing a television tuner for receiving over-the-air, satellite and/or cable television signals that are used in conjunction with personal computers for personal television viewing. The potential increase in the Company’s customer base, the potential absorption of the PCTV operations into the existing Hauppauge infrastructure with minimal incremental costs plus the acquisition of the seller’s technology, reference designs and product line were among the attributes that were considered in the Company’s decision to complete the acquisition.

Because the acquisition was completed on December 24, 2008, results from the operations of the PCTV business effectively started on January 1, 2009. The following unaudited pro forma results assume the acquisition occurred on October 1, 2008. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions set forth above had occurred on the date indicated or what the Company’s results of operations will be in future periods. The financial results for the periods prior to the acquisition were based on internal financial statements as provided by the Sellers. 

 
15

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
   
Six months
 
   
ended
 
   
March 31,
 
Pro forma statements:
 
2009
 
Revenue
  $ 41,045,109  
         
Net loss
  $ (4,402,393 )
Net  loss per share
       
Basic net loss per share
  $ (0.44 )
Diluted net loss per share
  $ (0.44 )
 
 
16

 

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THREE MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTH PERIOD ENDED MARCH 31, 2009

Results of operations for the three months ended March 31, 2010 compared to March 31, 2009 is as follows:

   
Three
   
Three
                         
   
Months
   
Months
                         
   
Ended
   
Ended
   
Variance
   
Percentage of sales
 
   
3/31/10
   
3/31/09
    $     2010    
2009
   
Variance
 
Net Sales
  $ 13,847,079     $ 12,733,429     $ 1,113,650       100.00 %     100.00 %     -  
Cost of sales
    9,981,288       9,769,150       212,138       72.08 %     76.72 %     -4.64 %
Gross Profit
    3,865,791       2,964,279       901,512       27.92 %     23.28 %     4.64 %
Gross Profit %
    27.92 %     23.28 %     4.64 %                        
Expenses:
                                               
Sales & marketing
    2,406,232       2,356,129       50,103       17.38 %     18.50 %     -1.12 %
Sales & marketing-PCTV
    112,924       88,045       24,879       0.82 %     0.69 %     0.13 %
Technical support
    123,329       135,600       (12,271 )     0.89 %     1.06 %     -0.17 %
General & administrative
    808,853       864,058       (55,205 )     5.84 %     6.79 %     -0.95 %
General & administrative-PCTV
    69,234       143,701       (74,467 )     0.50 %     1.13 %     -0.63 %
Amortization of intangible assets
    188,709       188,709       0       1.36 %     1.48 %     -0.12 %
Selling, general and administrative stock compensation expense
    68,456       85,429       (16,973 )     0.49 %     0.67 %     -0.18 %
Total selling, general and administrative expense
    3,777,737       3,861,671       (83,934 )     27.28 %     30.32 %     -3.04 %
Research and development
    524,483       790,265       (265,782 )     3.79 %     6.21 %     -2.42 %
Research and development-PCTV
    442,823       430,418       12,405       3.20 %     3.38 %     -0.18 %
Research and development stock compensation expense
    37,795       47,165       (9,370 )     0.27 %     0.37 %     -0.10 %
Total expenses
    4,782,838       5,129,519       (346,681 )     34.54 %     40.28 %     -5.74 %
Net  loss from operations
    (917,047 )     (2,165,240 )     1,248,193       -6.62 %     -17.00 %     10.38 %
                                                 
Other income :
                                               
Interest income
    1,442       5,156       (3,714 )     0.01 %     0.04 %     -0.03 %
Interest (expense)
    0       (28,646 )     28,646       0.00 %     -0.22 %     0.22 %
Foreign currency
    61,868       296,675       (234,807 )     0.45 %     2.33 %     -1.88 %
Total other income
    63,310       273,185       (209,875 )     0.46 %     2.15 %     -1.69 %
Loss before tax provision
    (853,737 )     (1,892,055 )     1,038,318       -6.16 %     -14.85 %     8.69 %
Income tax provision
    49,136       40,015       9,121       0.35 %     0.31 %     0.04 %
Net loss
  $ (902,873 )   $ (1,932,070 )   $ 1,029,197       -6.51 %     -15.16 %     8.65 %
 
17


Net sales for the three months ended March 31, 2010 increased $1,113,650 compared to the three months ended March 31, 2009 as shown in the table below.

               
Increase
   
Increase
       
               
(decrease)
   
(decrease)
   
Percentage of sales by
 
   
Three Months
   
Three Months
   
dollar
   
dollar
   
geographic region
 
   
ended 3/31/10
   
ended 3/31/09
   
variance
   
variance %
   
2010
   
2009
 
The Americas
  $ 6,318,133     $ 7,233,329     $ (915,196 )     -13 %     45 %     57 %
Europe
    7,141,656       5,136,179       2,005,477       39 %     52 %     40 %
Asia
    387,290       363,921       23,369       6 %     3 %     3 %
Total
  $ 13,847,079     $ 12,733,429     $ 1,113,650       9 %     100 %     100 %

 The sales increase was attributable to increased international sales due to the addition of customers acquired in the PCTV acquisition, increased sales to computer manufacturers and a strengthening of the Euro exchange rate against the U.S. dollar. A favorable mix of higher sales priced product contributed to a 1.67% increase in the average sales price while units sales increased by about 14.50%.

Gross profit

Gross profit increased $901,512 for the three months ended March 31, 2010 compared to the same period in the prior year. The increase in gross profit was due to:

The increase in the gross profit is detailed below:

   
Increase (decrease)
 
Increased sales
  $ 380,244  
Increase due to strengthening of the Euro exchange rate
    357,452  
Higher gross profit due to favorable sales mix, including PCTV products
    266,591  
Higher production and production related expenses
    (102,775 )
Total increase in gross profit
  $ 901,512  

Gross profit percentage for the three months ended March 31, 2010 was 27.92 % compared to 23.28% for the three months ended March 31, 2009, resulting in a gross profit percentage increase of 4.64%.
The increase in gross profit percentage is detailed below:

   
Increase (decrease)
 
Higher gross profit due to favorable sales mix, including PCTV products
    2.68 %
Increase due to strengthening of the Euro exchange rate
    1.83 %
Production and production related expenses
    0.13 %
Net increase in gross profit percentage
    4.64 %
 
18

 
Selling, general and administrative expenses
 
The chart below illustrates the components of selling, general and administrative expense.
 
   
Three months ended March 31,
       
   
Dollar Costs
   
Percentage of Sales
 
   
2010
   
2009
   
Decrease
   
2010
   
2009
   
Increase
 
Sales and marketing-HCW
  $ 2,406,232     $ 2,356,129     $ 50,103       17.38 %     18.50 %     -1.12 %
Sales and marketing-PCTV
    112,924       88,045       24,879       0.82 %     0.69 %     0.13 %
Technical support
    123,329       135,600       (12,271 )     0.89 %     1.06 %     -0.17 %
General and administrative-HCW
    808,853       864,058       (55,205 )     5.84 %     6.79 %     -0.95 %
General and administrative-PCTV
    69,234       143,701       (74,467 )     0.50 %     1.13 %     -0.63 %
Amortization of intangible assets
    188,709       188,709       0       1.36 %     1.48 %     -0.12 %
Stock compensation
    68,456       85,429       (16,973 )     0.49 %     0.67 %     -0.18 %
Total
  $ 3,777,737     $ 3,861,671     $ (83,934 )     27.28 %     30.32 %     -3.04 %

Selling, general and administrative expense decreased $83,934 from last year’s second quarter as follows.

Excluding the PCTV expenses and amortization of intangible assets acquired in the PCTV acquisition, selling, general and administrative expense decreased $34,346 from the prior year’s second quarter. Sales and marketing expense for HCW increased $50,103, driven by a $94,316 expense increase resulting from the increase in the Euro exchange rate compared to the U.S. dollar and an increase in sales volume related expenses, mainly commissions and co-op advertising expense of $72,998, offset by reductions in trade show expenses of $24,025 and lower sales office expenses of $92,686, mainly due to personnel and overhead reductions.

Sales and marketing expenses related to the PCTV product line increased $24,879, primarily due to  personnel and overhead expenses.

The decrease in general and administrative expense for HCW of $55,205 was primarily due to lower professional fees, primarily for legal, consulting fees and directors fees of $106,651 and a decrease in compensation expense of $19,147 due to staff reductions and a 10% salary reduction, offset by higher rent expense of $5,255, higher bad debt expense of $20,000 and higher credit costs of $45,338 due primarily for premiums paid to purchase Euro denominated option put contracts.

General and administrative expenses related to the PCTV product line decreased $74,467, primarily due to expenses related to a transitional services agreement in effect with Avid during the second fiscal quarter of 2009. This agreement was terminated during the third fiscal quarter of 2009.

Research and development expenses

Research and development expense for the three months ended March 31, 2010 decreased $262,747 from the three months ended March 31, 2009 as follows:
   
HCW
   
PCTV
   
Total
 
Research and development expense-HCW
  $ (265,782 )   $ 0     $ (265,782 )
Research and development expense-PCTV
    0       12,405       12,405  
Stock compensation expense
    (9,370 )     0       (9,370 )
Total research and development expense
  $ (275,152 )   $ 12,405     $ (262,747 )
 
 
19

 

Excluding the expense of the PCTV division, research and development expense decreased $265,782 from the prior year’s second fiscal quarter. The decrease was primarily due to personnel and personnel related reductions and the number of development programs in process.

Offsetting the expense decreases were increases of $12,405 related to personnel and product development programs of the PCTV business.
 
Tax provision

Our tax provision for the three months ended March 31, 2010 and 2009 is as follows:

   
Three months ended March 31,
 
   
2010
   
2009
 
Tax expense on international operations
  $ 39,136     $ 30,015  
State taxes
    10,000       10,000  
Tax provision
  $ 49,136     $ 40,015  
 
Summary

We recorded a net loss of $902,873, for the three months ended March 31, 2010, which resulted in basic and diluted net loss per share of $0.09 on weighted average basic and diluted shares of 10,065,344 compared to a net loss of $1,932,070 for the three months ended March 31, 2009, which resulted in basic and diluted net loss per share of $0.19 on weighted average basic and diluted shares of 10,043,876.

Options to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05 to $7.45 and from $1.05 to $8.75, were outstanding for the three months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

 
20

 

SIX MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE SIX MONTH PERIOD
ENDED MARCH 31, 2009

Results of operations for the six months ended March 31, 2010 compared to March 31, 2009 is as follows:

   
Six
   
Six
                         
   
Months
   
Months
                         
   
Ended
   
Ended
   
Variance
   
Percentage of sales
 
     
3/31/10
   
3/31/09
   
$
     
2010
   
2009
   
Variance
 
                                                 
Net Sales
  $ 31,725,437     $ 30,022,109     $ 1,703,328       100.00 %     100.00 %     5.67 %
Cost of sales
    22,637,249       24,459,569       (1,822,320 )     71.35 %     81.47 %     -10.12 %
Gross Profit
    9,088,188       5,562,540       3,525,648       28.65 %     18.53 %     10.12 %
Gross Profit %
    28.65 %     18.53 %     10.12 %                        
Expenses:
                                               
Sales & marketing
    5,307,047       5,115,420       191,627       16.73 %     17.04 %     -0.31 %
Sales & marketing-PCTV
    237,637       88,045       149,592       0.75 %     0.29 %     0.46 %
Technical support
    244,502       270,984       (26,482 )     0.77 %     0.90 %     -0.13 %
General & administrative
    1,644,530       1,722,851       (78,321 )     5.18 %     5.74 %     -0.56 %
General & administrative-PCTV
    162,214       143,701       18,513       0.51 %     0.48 %     0.03 %
Amortization of intangible assets
    377,418       188,709       188,709       1.19 %     0.63 %     0.56 %
Selling, general and administrative stock compensation expense
    136,912       170,857       (33,945 )     0.43 %     0.57 %     -0.14 %
Total selling, general and administrative expense
    8,110,260       7,700,567       409,693       25.56 %     25.65 %     -0.09 %
Research and development
    1,152,240       1,588,742       (436,502 )     3.63 %     5.28 %     -1.65 %
Research and development-PCTV
    947,342       430,418       516,924       2.99 %     1.43 %     1.56 %
Research and development stock compensation expense
    75,590       94,330       (18,740 )     0.24 %     0.30 %     -0.06 %
Total expenses
    10,285,432       9,814,057       471,375       32.42 %     32.66 %     -0.24 %
Loss from operations
    (1,197,244 )     (4,251,517 )     3,054,273       -3.77 %     -14.13 %     10.36 %
                                                 
Other income :
                                               
Interest income
    2,894       9,625       (6,731 )     0.01 %     0.03 %     -0.02 %
Interest (expense)
    (4,347 )     (28,646 )     24,299       -0.01 %     -0.10 %     0.09 %
Foreign currency
    61,635       643,677       (582,042 )     0.19 %     2.14 %     -1.95 %
Total other income
    60,182       624,656       (564,474 )     0.19 %     2.07 %     -1.88 %
Loss before tax provision
    (1,137,062 )     (3,626,861 )     2,489,799       -3.58 %     -12.06 %     8.48 %
Income tax provision
    100,362       77,522       22,840       0.32 %     0.26 %     0.06 %
Net loss
  $ (1,237,424 )   $ (3,704,383 )   $ 2,466,959       -3.90 %     -12.32 %     8.42 %
 
 
21

 

Net sales for the six months ended March 31, 2010 increased $1,703,328 compared to the six months ended March 31, 2009 as shown in the table below.

               
Increase
   
Increase
       
               
(decrease)
   
(decrease)
   
Percentage of sales by
 
   
Six Months
   
Six Months
   
dollar
   
dollar
   
Geographic region
 
   
ended 3/31/10
   
ended 3/31/09
   
variance
   
variance %
   
2010
   
2009
 
The Americas
  $ 13,981,231     $ 14,506,453     $ (525,222 )     -4 %     44 %     48 %
Europe
    16,954,082       14,541,478       2,412,604       17 %     53 %     48 %
Asia
    790,124       974,178       (184,054 )     -19 %     3 %     4 %
Total
  $ 31,725,437     $ 30,022,109     $ 1,703,328       6 %     100 %     100 %

The sales increase was attributable to increased international sales due to the addition of customers acquired in the PCTV acquisition, increased sales to computer manufacturers and a strengthening of the Euro exchange rate against the U.S. dollar. A favorable mix of higher sales priced product contributed to a 8.09% increase in the average sales price while units sales increased by about 3.00%.

Gross profit

Gross profit increased $3,525,648 for the six months ended March 31, 2010 compared to the same period in the prior year.  The increase in gross profit was due to:

The increase in the gross profit is detailed below:
   
Increase (decrease)
 
Increased sales
  $ 497,446  
Increase due to strengthening of the Euro exchange rate
    1,143,879  
Higher gross profit due to favorable sales mix, including PCTV products
    2,081,391  
Higher production and production related expenses
    (197,068 )
Total increase in gross profit
  $ 3,525,648  

Gross profit percentage for the six months ended March 31, 2010 was 28.65 % compared to 18.53% for the six months ended March 31, 2009, resulting in a gross profit percentage increase of 10.12%.

The increase in gross profit percentage is detailed below:

   
Increase (decrease)
 
Higher gross profit due to favorable sales mix, including PCTV products
    7.61 %
Increase due to strengthening of the Euro exchange rate
    2.56 %
Production and production related expenses
    (0.05 )%
Net increase in gross profit percentage
    10.12 %
 
 
22

 
 
Selling, general and administrative expenses
 
The chart below illustrates the components of selling, general and administrative expense.
 
   
Six months ended March 31,
                   
   
Dollar Costs
   
Percentage of Sales
 
   
2010
   
2009
   
Decrease
   
2010
   
2009
   
Increase
 
Sales and marketing-HCW
  $ 5,307,047     $ 5,115,420     $ 191,627       16.73 %     17.04 %     -0.31 %
Sales and marketing-PCTV
    237,637       88,045       149,592       0.75 %     0.29 %     0.46 %
Technical support
    244,502       270,984       (26,482 )     0.77 %     0.90 %     -0.13 %
General and administrative-HCW
    1,644,530       1,722,851       (78,321 )     5.18 %     5.74 %     -0.56 %
General and administrative-PCTV
    162,214       143,701       18,513       0.51 %     0.48 %     0.03 %
Amortization of intangible assets
    377,418       188,709       188,709       1.19 %     0.63 %     0.56 %
Stock compensation
    136,912       170,857       (33,945 )     0.43 %     0.57 %     -0.14 %
Total
  $ 8,110,260     $ 7,700,567     $ 409,693       25.56 %     25.65 %     -0.09 %

Selling, general and administrative expense for the six months ended March 31, 2010 increased $409,693 compared to the same period in the prior year.

Excluding the PCTV expenses and amortization of intangible assets acquired in the PCTV acquisition, selling, general and administrative expense increased $52,879 over the prior year. Sales and marketing expense for HCW increased $191,627, driven by a $302,577 expense increase resulting from the increase in the Euro exchange rate compared to the U.S. dollar and an increase in sales volume related expenses, mainly commissions and co-op advertising expense of $170,500, offset by reductions in trade show expenses of $47,178, lower sales office expenses of $207,783 mainly due to personnel and overhead reductions, and lower sales compensation expense due to personnel reductions of $26,489.

Sales and marketing expenses related to the PCTV product line increased $149,592. The PCTV acquisition was finalized at the end of December 2008, so the results for six months ended March 31, 2009 only included three months of PCTV expense while the results for the six months ended March 31, 2010  included PCTV expenses for six months.

The decrease in general and administrative expense for HCW of $78,321 was primarily due to lower professional fees, mainly for legal, consulting fees and directors fees of $115,793 and a decrease in compensation expense of $44,640 due to staff reductions and a 10% salary reduction, offset by higher rent expense of $6,427, higher bad debt expense of $40,000 and higher credit costs of $35,685 due primarily for premiums paid to purchase Euro denominated option put contracts.

General and administrative expenses related to the PCTV product line increased $18,513. The PCTV acquisition was finalized at the end of December 2008, so the results for the six months ended March 31, 2009 only included three months of PCTV expense, while the results for the six months ended March 31, 2010  included PCTV expenses for six months.

Amortization of intangible assets of $188,709 was related to intangible assets acquired in the purchase of the PCTV business. The PCTV acquisition was finalized at the end of December 2008, so the results for the six months ended March 31, 2009 only included three months of intangible asset amortization while the results for the six months ended March 31, 2010 included six months of intangible asset amortization.

 
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Research and development expenses

Research and development expense for the six months ended March 31, 2010 increased $61,682 from the six months ended March 31, 2009 as follows:
   
HCW
   
PCTV
   
Total
 
Research and development expense-HCW
  $ (436,502 )   $ 0     $ (436,502 )
Research and development expense-PCTV
    0       516,924       516,924  
Stock compensation expense
    (18,740 )     0       (18,740 )
Total research and development expense
  $ (455,242 )   $ 516,924     $ 61,682  

Excluding the expense of the PCTV division, research and development expense decreased $436,502 from the same period in the prior year. The decrease was primarily due to personnel and personnel related reductions and the number of development programs in process.

Offsetting the expense decreases were $516,924 in expense related to personnel and development programs of the PCTV business acquired at the end of December 2008. The PCTV acquisition was finalized at the end of December 2008, so the results for the six months ended March 31, 2009 only included three months of research and development expense, while the results for the six months ended March 31, 2010 included six months of research and development expense.
 
Tax provision

Our tax provision for the six months ended March 31, 2010 and 2009 is as follows:

   
Six months ended March 31,
 
   
2010
   
2009
 
Tax expense on international operations
  $ 80,362     $ 57,522  
State taxes
    20,000       20,000  
Tax provision
  $ 100,362     $ 77,522  
 
Summary

We recorded a net loss of $1,237,424 for the six months ended March 31, 2010, which resulted in basic and diluted net loss per share of $0.12 on weighted average basic and diluted shares of 10,062,545 compared to a net loss of $3,704,383 for the six months ended March 31, 2009, which resulted in basic and diluted net loss per share of $0.37 on weighted average basic and diluted shares of 10,039,434.

Options to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05 to $7.45 and from $1.05 to $8.75 were outstanding for the six months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

 
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Seasonality

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Our peak sales quarter due to holiday season sales of computer equipment is our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international sales, mostly in the European market, were 52% of sales for the two years ended September 30, 2009 and 2008 respectively, and 56% for the six months ended March 31, 2010.  Part of our third and fourth quarters (April through June and July to September) can be potentially impacted by the reduction of activity experienced in Europe during the summer holiday period.

We target a wide range of customer types to attempt to moderate the seasonal nature of our retail sales.

Liquidity and capital resources

Our cash, working capital and stockholders’ equity position as of March 31, 2010 and September 30, 2009 is set forth below:
 
   
March 31, 2010
   
September 30, 2009
 
Cash
  $ 8,712,496     $ 8,368,342  
Working Capital