-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Phd2ROVAN9dUv1m67jByxo81BM67SLo/Fuy/UU7euQvMw8PyM84f0DJj4fKAixoQ xV2ErgAhfFzh+pSCN/CUiQ== 0001144204-11-007777.txt : 20110211 0001144204-11-007777.hdr.sgml : 20110211 20110211161811 ACCESSION NUMBER: 0001144204-11-007777 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20101231 FILED AS OF DATE: 20110211 DATE AS OF CHANGE: 20110211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAUPPAUGE DIGITAL INC CENTRAL INDEX KEY: 0000930803 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 113227864 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13550 FILM NUMBER: 11599279 BUSINESS ADDRESS: STREET 1: 91 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164341600 MAIL ADDRESS: STREET 1: 91 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-Q 1 v210797_10q.htm Unassociated Document  
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   December 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 January 31, 2011, 10,084,795 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
   
     
Consolidated Balance Sheets –
   
December  31, 2010 (unaudited) and September 30, 2010
 
4
     
Consolidated Statements of Operations -
   
Three Months ended December 31, 2010 (unaudited) and 2009 (unaudited)
 
5
     
Consolidated Statements of Other Comprehensive Loss
   
Three Months ended December 31, 2010 (unaudited) and 2009 (unaudited)
 
6
     
Consolidated Statements of Cash Flows - Three Months ended December 31, 2010 (unaudited) and 2009 (unaudited)
 
7
     
Notes to Consolidated Financial Statements
 
8-13
   
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
14-18
     
Item 3. Quantitative and Qualitative Disclosures about Market Risks
 
19
     
Item  4. Controls and Procedures
 
19
 
2

 
PART II.  OTHER INFORMATION
   
     
Item 6. Exhibits
 
20
     
Signatures
 
21
 
3

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

   
December 31,
2010
(unaudited)
   
September 30 ,  2010
 
Assets:
           
Cash and cash  equivalents
  $ 7,286,019     $ 7,057,904  
Trade  receivables, net of  various allowances
    3,623,630       4,403,194  
Other non trade receivables
    1,829,872       2,355,834  
Inventories
    12,214,733       11,450,565  
Deferred tax asset-current
    1,271,988       1,310,204  
Prepaid expenses and other current assets
    1,070,173       980,087  
Total current assets
    27,296,415       27,557,788  
                 
Intangible assets, net
    3,752,557       3,941,266  
Property, plant and equipment, net
    505,835       544,959  
Security deposits and other non current assets
    106,241       106,241  
Deferred tax asset-non current
    449,224       610,734  
Total assets
  $ 32,110,272     $ 32,760,988  
                 
Liabilities and  Stockholders’  Equity:
               
Current Liabilities:
               
Accounts payable
  $ 7,015,036     $ 7,306,221  
Accrued expenses  fees
    4,917,267       4,955,540  
Accrued expenses
    10,416,263       10,266,495  
Income taxes payable
    276,717       252,090  
Total current  liabilities
    22,625,283       22,780,346  
                 
Stockholders' Equity:
               
Common stock, $.01 par value; 25,000,000 shares authorized,
               
10,845,368  and 10,842,274  issued, respectively
    108,454       108,423  
Additional paid-in capital
    17,843,446       17,739,330  
Retained deficit
    (1,789,106 )     (1,050,886 )
Accumulated other comprehensive loss
    (4,272,257 )     (4,410,677 )
Treasury Stock, at cost, 760,479 shares
    (2,405,548 )     (2,405,548 )
Total stockholders' equity
    9,484,989       9,980,642  
Total  liabilities and  stockholders' equity
  $ 32,110,272     $ 32,760,988  

 See accompanying notes to consolidated financial statements

 
4

 
 
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
Three months ended December 31,
 
   
2010
   
2009
 
             
Net sales
  $ 12,862,946     $ 17,878,358  
Cost  of sales
    8,515,708       12,655,961  
Gross profit
    4,347,238       5,222,397  
                 
Selling, general and  administrative expenses
    3,774,704       4,332,523  
Research and development expenses
    1,096,779       1,170,071  
Loss  from operations
    (524,245 )     (280,197 )
                 
Other  income (expense):
               
Interest  income
    1,559       1,452  
Interest expense
    -       (4,340 )
Foreign currency  gain (loss)
    31,523       (240 )
Total  other income (expense)
    33,082       (3,128 )
Loss before tax provision
    (491,163 )     (283,325 )
Deferred tax expense
    199,726       -  
Current tax expense
    47,331       51,226  
Net loss
  $ (738,220 )   $ (334,551 )
                 
Net  loss  per share:
               
Basic and diluted
  $ (0.07 )   $ (0.03 )

See accompanying notes to consolidated financial statements
 
 
5

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

   
Three months ended December 31,
 
    
2010
   
2009
 
Net  loss
  $ (738,220 )   $ (334,551 )
Foreign currency translation gain (loss)
    161,219       (122,240 )
Forward exchange contracts marked to market  loss
    (22,798 )     (2,424 )
Other  comprehensive loss
  $ (599,799 )   $ (459,215 )

See accompanying notes to consolidated financial statements

 
6

 
 
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Three months ended December 31,
 
   
2010
   
2009
 
Net loss
  $ (738,220 )   $ (334,551 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    59,931       69,521  
Amortization of intangible assets
    188,709       188,709  
Stock compensation expense
    100,470       106,251  
Deferred tax expense
    199,726       -  
Sales reserve, net
    (110,569 )     78,300  
Bad debt reserve
    -       20,000  
Other items
    54,429       18  
Changes in current assets and liabilities, net of effects of acquisition:
               
Accounts receivable
    1,696,257       251,123  
Inventories
    (1,032,798 )     146,083  
Prepaid expenses and other current assets
    (86,338 )     103,248  
Accounts payable
    (301,340 )     (151,918 )
Accrued expenses and other current liabilities
    238,624       1,971,997  
Total adjustments
    1,007,101       2,783,332  
Net cash provided by operating activities
    268,881       2,448,781  
Cash Flows From Investing Activities:
               
PCTV acquisition
    -       (511,332 )
Purchases of property, plant and equipment
    (20,807 )     (2,773 )
Net cash used in investing activities
    (20,807 )     (514,105 )
Cash Flows From Financing Activities:
               
Proceeds from the exercise of stock options and employee stock purchases
    3,677       5,237  
Net cash provided by financing activities
    3,677       5,237  
Effect of exchange rates on cash
    (23,636 )     (124,664 )
Net increase in cash and cash equivalents
    228,115       1,815,249  
Cash and cash equivalents, beginning of period
    7,057,904       8,368,342  
Cash and cash equivalents, end of period
  $ 7,286,019     $ 10,183,591  
Supplemental disclosures:
               
Interest paid
    -     $ 4,340  
Income taxes paid
  $ 33,416     $ 61,171  

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, 2010 Form 10-K.

The operating results for the three  months ended December 31, 2010 are not necessarily indicative of the results to be expected for the September 30, 2011 year end.

Management has evaluated subsequent events after the balance sheet date through the issuance of the financial statements for appropriate accounting and disclosure.
 
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
 
 
8

 

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

Trade receivables and other non-trade receivables as of December 31, 2010 and September 30, 2010 consisted of:

   
December 31,
   
September 30,
 
   
2010
   
2010
 
Trade receivables
  $ 7,975,599     $ 9,123,726  
Allowance for doubtful accounts
    (383,773 )     (383,773 )
Sales reserve
    (3,968,196 )     (4,336,759 )
Net trade receivables
  $ 3,623,630     $ 4,403,194  
Receivable from contract manufacturers
  $ 1,276,732     $ 1,846,949  
GST and VAT taxes receivables
    477,161       439,745  
Other
    75,979       69,140  
Total other non trade receivables
  $ 1,829,872     $ 2,355,834  
 
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:

   
December 31,
2010
   
September 30,
2010
 
Component parts
  $ 4,455,874     $ 3,565,643  
Finished goods
    7,758,859       7,884,922  
    $ 12,214,733     $ 11,450,565  
 
Note 4.  Net Loss Per Share

Basic net loss per share includes no dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss 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
 
    
December 31,
 
   
2010
   
2009
 
Weighted average shares outstanding-basic
    10,083,417       10,059,808  
Number of shares issued on the assumed exercise of  stock options
    -       -  
Weighted average shares outstanding-diluted
    10,083,417       10,059,808  

Options to purchase 1,537,442 and 1,522,394 shares of common stock, at prices from $0.89 to $7.45 and from $1.05 to $8.75, were outstanding for the three months ended December 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
 
 
9

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 5.  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 $4,410,677 recorded on the balance sheet as of September 30, 2010. For the three months ended December 31, 2010 the Company recorded on the balance sheet translation gains of $161,219,   resulting in an accumulated translation loss of $4,249,458 recorded as a component of accumulated other comprehensive loss as of December 31 2010.  
 
Note 6.  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.

The Company’s products fall under three product categories:

 
·
Analog TV tuner products
 
·
Digital  TV tuner, and combination analog and digital TV tuner, products
 
·
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.
 
 
10

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

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 and other types of video on a PC for playback on  portable video players.

Sales by functional category are as follows:

   
Three months ended December 31,
 
Product line sales
 
2010
   
2009
 
Analog TV tuner products
  $ 530,576     $ 277,870  
Digital and combination analog and  digital TV  tuner products
    8,195,740       15,805,316  
Other non-TV tuner products
    4,136,630       1,795,172  
Total sales
  $ 12,862,946     $ 17,878,358  

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 percentages by geographic region are as follows:

   
Three months ended December 31,
 
Geographic region
 
2010
   
2009
 
The Americas
    61 %     43 %
Europe
    37 %     55 %
Asia
    2 %     2 %
Total
    100 %     100 %
 
Note 7. Tax provision
 
The Company’s tax provision for the three months ended December 31, 2010 and 2009 is as follows:

   
Three months ended December 31,
 
   
2010
   
2009
 
Tax expense on international  operations
  $ 37,331     $ 41,226  
State taxes
    10,000       10,000  
Deferred tax expense
    199,726       -  
Tax provision
  $ 247,057     $ 51,226  

Note 8. Accrued expense- fees

The Company uses software and technology purchased or licensed from third parties in certain of the Company’s products.  The Company enters into agreements for these technologies, and incurs a fee for each product sold that includes the technology. The Company recognizes and estimates the amount of fees owed to third parties based on products sold that include software and technology purchased or 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 Accrued expense fees are accounted for as a component of product cost and are charged to cost of sales.  As of December 31, 2010 and September 30, 2010 the amount of Accrued expense fees amounted to $4,917,267 and $4,955,540, respectively.
 
 
11

 
 
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 9, Accrued Expenses

Accrued expenses are for costs incurred for goods and services which are based on estimates, charged as incurred to operations as period costs and for which no invoice has been rendered. Accrued expenses as of December 31, 2010 and September 30, 2010 were $10,416,263 and $10,266,495, respectively. Included in accrued expenses are accruals for product costs,  accruals for sales costs relating to a sales rebate program, accruals  for  freight and duty expenses, accruals for  compensation, accruals for  warranty repair costs and  accruals for advertising and marketing costs. During the quarter ended December 31, 201 the Company reduced its warranty repair accrual by $150,787  as the actual warranty costs appear to have decreased compared to original estimates.     

Note 10. Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures”, 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.

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.

As of December 31, 2010, the Company had foreign currency contracts outstanding of approximately $1,319,000 with a fair market value of $1,341,798 against the delivery of the Euro. These contracts expire each month through March 31, 2011. The Company had no forward exchange contracts outstanding as of September 30, 2010.
 
 
12

 
 
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.   
 
 
13

 

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF   FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
THREE MONTH PERIOD ENDED DECEMBER 31, 2010 COMPARED TO THE THREE MONTH PERIOD ENDED DECEMBER 31, 2009

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

   
Three
   
Three
             
   
Months
   
Months
             
   
Ended
   
Ended
   
Variance
   
Percentage of sales
 
     
12/31/10
   
12/31/09
   
 $
       2010    
2009
   
Variance
 
                                       
Net Sales
  $ 12,862,946     $ 17,878,358     $ (5,015,412 )     100.00 %     100.00 %     -  
Cost of sales
    8,515,708       12,655,961       (4,140,253 )     66.20 %     70.79 %     -4.59 %
Gross Profit
    4,347,238       5,222,397       (875,159 )     33.80 %     29.21 %     4.59 %
Gross Profit %
    33.80 %     29.21 %     4.59 %                        
Expenses:
                                               
Sales & marketing
    2,510,330       2,900,815       (390,485 )     19.52 %     16.23 %     3.29 %
Sales & marketing-PCTV
    97,398       124,713       (27,315 )     0.76 %     0.70 %     0.06 %
Technical support
    110,718       121,173       (10,455 )     0.86 %     0.68 %     0.18 %
General   & administrative
    747,422       835,677       (88,255 )     5.81 %     4.67 %     1.14 %
General   & administrative-PCTV
    56,184       92,980       (36,796 )     0.44 %     0.52 %     -0.08 %
Amortization of intangible assets
    188,709       188,709       -       1.47 %     1.06 %     0.41 %
Selling, general and administrative stock compensation expense
    63,943       68,456       (4,513 )     0.50 %     0.38 %     0.12 %
Total  selling, general and administrative expense
    3,774,704       4,332,523       (557,819 )     29.36 %     24.24 %     5.12 %
Research  and development
    655,950       627,757       28,193       5.10 %     3.51 %     1.59 %
Research  and development-PCTV
    404,302       504,519       (100,217 )     3.14 %     2.82 %     0.32 %
Research and development stock compensation expense
    36,527       37,795       (1,268 )     0.28 %     0.21 %     0.07 %
Total expenses
    4,871,483       5,502,594       (631,111 )     37.88 %     30.78 %     7.10 %
Loss from operations
    (524,245 )     (280,197 )     (244,048 )     -4.08 %     -1.57 %     -2.51 %
                                                 
Other income (expense) :
                                               
Interest income
    1,559       1,452       107       0.01 %     0.01 %     0.00 %
Interest  (expense)
    -       (4,340 )     4,340       0.00 %     -0.02 %     0.02 %
Foreign currency
    31,523       (240 )     31,763       0.25 %     0.00 %     0.25 %
Total other income (expense)
    33,082       (3,128 )     36,210       0.26 %     -0.02 %     0.27 %
Loss  before tax provision
    (491,163 )     (283,325 )     (207,838 )     -3.82 %     -1.58 %     -2.24 %
Deferred tax expense
    199,726       -       199,726       1.55 %     0.00 %     1.55 %
Current tax expense
    47,331       51,226       (3,895 )     0.37 %     0.29 %     0.08 %
Net  loss
  $ (738,220 )   $ (334,551 )   $ (403,669 )     -5.74 %     -1.87 %     -3.87 %
 
 
14

 

Net sales for the three months ended December 31, 2010 decreased $5,015,412 compared to the three months ended December 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 12/31/10
   
ended 12/31/09
   
Variance
   
variance %
   
2010
   
2009
 
                                     
The Americas
  $ 7,893,888     $ 7,663,098     $ 230,790       3 %     61 %     43 %
Europe
    4,706,131       9,812,426       (5,106,295 )     -52 %     37 %     55 %
Asia
    262,927       402,834       (139,907 )     -35 %     2 %     2 %
Total
  $ 12,862,946     $ 17,878,358     $ (5,015,412 )     -28 %     100 %     100 %

 European sales were impacted by lower consumer demand due to weak economic conditions and a weaker Euro exchange rate against the U.S. dollar for the quarter ended December 31, 2010.  A sales mix of higher priced product contributed to a 25.68% increase in the average unit sales price while unit sales declined by 42.75%.
 
Gross profit

Gross profit decreased $875,159 for the three months ended December 31, 2010 compared to the same period in the prior year.
 
The decrease in the gross profit is detailed below:
   
Increase (decrease)
 
Decreased sales
  $ (2,002,306 )
Decrease due weaker Euro to USD exchange rate
    (344,281 )
Higher gross profit on sales mix
    568,118  
Change in warranty repair reserve
    150,787  
Lower production and production related costs
    752,523  
Total decrease in gross profit
  $ (875,159 )

Gross profit percentage for the three months ended December 31, 2010 was 33.80% compared to 29.21% for the three months ended December 31, 2009, resulting in a gross profit percentage increase of 4.59%.

The increase in gross profit percentage is detailed below:
   
Increase (decrease)
 
Higher gross profit on sales mix
    4.60 %
Decrease due weaker Euro to USD exchange rate
    -1.68 %
Change in  warranty  repair reserve
    1.17 %
Lower production and production related costs
    0.50 %
Total increase in gross profit percentage
    4.59 %
 
The factors contributing to the gross profit percent increase of 4.59% for the three months ended December 31, 2010 were primarily:
 
 
15

 
 
 
·
Shift in sales to products with a higher average unit sales price resulted in a gross profit percentage increase of 4.60%.
 
·
A decrease in the Euro to USD exchange rate from 1.4773 for the three months ended December 31, 2010 to 1.3591 for the three months ended December 31, 2010 resulted in a gross profit decrease of 1.68%.
 
·
Change in warranty repair reserve to reflect changes in estimate based on actual experience resulted in gross profit increase of 1.17%
 
·
Lower production  and production related costs such as building overhead, packaging costs, freight costs and labor costs at a third party facility resulted in a gross profit increase of 0.50%.

Selling, general and administrative expenses

The chart below illustrates the components of selling, general and administrative expense.

   
Three months ended December 31,
 
   
Dollar Costs
   
Percentage of Sales
 
               
Increase
               
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
Sales and marketing-HCW
  $ 2,510,330     $ 2,900,815     $ (390,485 )     19.52 %     16.23 %     3.29 %
Sales and marketing-PCTV
    97,398       124,713       (27,315 )     0.76 %     0.70 %     0.06 %
Technical  support
    110,718       121,173       (10,455 )     0.86 %     0.68 %     0.18 %
General and administrative-HCW
    747,422       835,677       (88,255 )     5.81 %     4.67 %     1.14 %
General and administrative-PCTV
    56,184       92,980       (36,796 )     0.44 %     0.52 %     -0.08 %
Amortization of intangible assets
    188,709       188,709       -       1.47 %     1.06 %     0.41 %
Stock compensation
    63,943       68,456       (4,513 )     0.50 %     0.38 %     0.12 %
Total
  $ 3,774,704     $ 4,332,523     $ (557,819 )     29.36 %     24.24 %     5.12 %

Selling, general and administrative expense for the first quarter of fiscal 2011 decreased $557,819 from the same period as last year as follows.

Sales and marketing expenses for HCW and PCTV decreased $417,800, driven primarily by a $140,198 decrease in expenses attributable to the decrease in the Euro exchange rate compared to the U.S. dollar, $317,670 decrease in sales related expenses, mainly commission and co-op advertising expenses, offset by an increase of $77,822 in sales offices expenses.

The decrease in Technical Support was primarily due to lower personnel costs. The  decrease in HCW and PCTV general and administrative expenses of $125,051 was due primarily to lower professional fees for legal and accounting services of $73,121 and lower PCTV general and administrative expenses of $36,796, mainly for termination of service related  contracts and lower communication and professional fees.

Research and  development expenses

Research and development expense for the three months ended December 31, 2010 decreased $73,292 from the three months ended December 31, 2009 as follows:
   
HCW
   
PCTV
   
Total
 
Research and development expense-HCW
  $ 28,193     $ 0     $ 28,193  
Research and development expense-PCTV
    0       (100,217 )     (100,217 )
Stock compensation expense
    (1,268 )     0       (1,268 )
Total research and development expense
  $ 26,925     $ (100,217 )   $ (73,292 )
 
The PCTV decrease in research and development expenses was due to lower personnel costs and lower program costs.  The increase in HCW research and development costs was due to higher personnel costs.
 
 
16

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

   
Three months ended December 31,
 
   
2010
   
2009
 
Tax  expense  on international  operations
  $ 37,331     $ 41,226  
State taxes
    10,000       10,000  
Deferred tax expense
    199,726       -  
Tax provision
  $ 247,057     $ 51,226  
 
Summary of operations

We recorded a net loss of $738,220 for the three months ended December 31, 2010, which resulted in basic and diluted net income per share of $0.07 on weighted average basic and diluted shares of 10,083,417, compared to a net loss of $334,551 for the three months ended December 31, 2009, which resulted in basic and diluted net loss per share of $0.03 on weighted average basic and diluted shares of 10,059,808.

Options to purchase 1,537,442 and 1,522,394 shares of common stock, at prices from $0.89 to $7.45 and from $1.05 to $8.75, were outstanding for the three months ended December 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
 
Seasonality

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales 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 54% of sales for fiscal year ended September 30, 2010 and 52%  for the fiscal year ended September 30, 2009.  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 December 31, 2010 and September 30, 2010 is set forth below:
   
December 31, 2010
   
September 30, 2010
 
Cash
  $ 7,286,019     $ 7,057,904  
Working Capital
    4,671,132       4,777,442  
Stockholders’ Equity
    9,484,989       9,980,642  

The Company had cash and cash equivalents as of December 31, 2010 of $7,286,019, an increase of $228,115 from September 30, 2010.

 
17

 
 
The increase in cash was due to was:
 
   
Operating
   
Investing
   
Financing
       
   
Activities
   
Activities
   
Activities
   
Total
 
Sources of cash:
                       
Decrease in  accounts receivable
  $ 1,696,257     $ 0     $ 0     $ 1,696,257  
Proceeds from employee stock purchases
    -       -       3,677       3,677  
Total sources of cash
    1,696,257     $ 0       3,677       1,699,934  
Less cash used for:
                               
Increase in inventory
  $ (1,032,798 )   $ -     $ -     $ (1,032,798 )
Net loss adjusted for non cash items
    (245,524 )     -       -       (245,524 )
Increase  in prepaid expenses and other current assets
    (86,338 )     -       -       (86,338 )
Decrease  in  accounts payable and accrued expenses
    (62,716 )     -       -       (62,716 )
Effect of exchange rates on cash
    (23,636 )     -       -       (23,636 )
Capital equipment purchases
    -       (20,807 )     -       (20,807 )
Total  cash usage
    (1,451,012 )     (20,807 )     -       (1,471,819 )
Net cash increase
  $ 245,245     $ (20,807 )   $ 3,677     $ 228,115  
Net cash provided by operating activities was due to a decrease in accounts receivable of $1,696,257.   The decrease in accounts receivable was primarily due to timing of sales. Offsetting the cash increase were increases in inventory of $1,032,798, the net loss adjusted for non cash items of $245,524, increases in prepaid expenses of $86,338 and a decrease in accounts payable and accrued expenses of $62,716.  The increase in inventory was for parts purchased for products that are expected to be built in the second fiscal quarter.

Cash of $20,807 was used in investing activities for the purchase of fixed assets.  Cash of $3,677 from financing activities came from exercise of incentive stock options.

Our cash requirements for the next twelve months will include, among other things, the cash needed to fund our operating and working capital needs.  With the proper execution of our business and operating plan, we believe that our cash and cash equivalents as of December 31, 2010 and our internally generated cash will provide us with sufficient liquidity to meet our capital needs for the next twelve months.  Failure to meet the business and operating plan could require the need for additional sources of capital.   In light of the current economic and credit conditions there can be no assurances that we will be able to find external sources of financing to fund our additional capital needs.  In addition, if we are able to obtain financing, there can be no assurances that it will be on financially reasonable terms.
 
Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of December 31, 2010:

   
Payments due by period
 
   
Total
   
Less than 1 year
   
1-3 years
   
3 to 5 years
 
Operating lease obligations
  $ 901,735     $ 591,826     $ 280,440     $ 29,469  
 
18

 
Inflation
 
While inflation has not had a material effect on our operations in the past, there can be no assurance that we will be able to continue to offset the effects of inflation on the costs of our products or services through price increases to our customers without experiencing a reduction in the demand for our products; or that inflation will not have an overall effect on the computer equipment market that would have a material effect on us.
 
Item  3.  Quantitative and Qualitative Disclosures About Market Risk

Item 305 of Regulation S-K “Quantitative and Qualitative Disclosures About Market Risk” is not required for Smaller Reporting Companies.
 
Item 4. Controls and Procedures

 Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
19

 
Special note regarding forward-looking statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements as that term is defined in the federal securities laws.  The events described in forward-looking statements contained in this Quarterly Report on Form 10-Q may not occur.  Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated benefits from acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating results or financial position, and the outcome of any contingencies.  Any such forward-looking statements are based on current expectations, estimates and projections of management.  We intend for these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements.  Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.  Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  All cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.  Factors that could cause actual results to differ materially from those set forth or implied by any forward-looking statement include, but are not limited to, the mix of products sold and the profit margins thereon, order cancellation or a reduction in orders from customers, the availability and pricing of key raw materials, competitive product offerings and pricing actions, dependence on key members of management,   the availability of financing, successful integration of acquisitions,  economic  conditions in the United States and abroad, history of operating losses an  as well as other risks and uncertainties discussed in our reports filed with the Securities and Exchange Commission, including, but not limited to,  our Annual Report on  Form 10-K for the fiscal year ended September 30, 2010 and this  Form 10-Q for the three months ended December 31, 2010.  Copies of these filings are available at www.sec.gov.

PART II.  OTHER INFORMATION
 
Item 6.  Exhibits
 
3.1
 
Certificate of Incorporation (1)
     
3.1.1
 
Certificate of Amendment of the Certificate of Incorporation, dated July 14, 2000 (2)
     
3.2
 
By-laws, as amended to date (3)
     
4.1
 
Form of Common Stock Certificate (1)
     
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
 
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
 

(1)
Denotes document filed as an Exhibit to our Registration Statement on Form SB-2 (No. 33- 85426), as amended, effective January 10, 1995 and incorporated herein by reference.
(2)
Denotes document filed as an Exhibit to our Form 10-K for the period ended September 30, 2006, and incorporated herein by reference.
(3)
Denotes document filed as an Exhibit to our Form 8-K dated December 26, 2007 and incorporated herein by reference.
 
 
20

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
      HAUPPAUGE DIGITAL INC. 
       
Date:   February 11, 2011
By
/s/Kenneth Plotkin
 
 
KENNETH  PLOTKIN
 
Chief Executive Officer, Chairman of the
 
Board, President (Principal Executive Officer)

Date:   February 11, 2011
By
/s/Gerald Tucciarone
 
 
GERALD TUCCIARONE
 
Treasurer, Chief Financial Officer,
 
(Principal Financial Officer and Principal
 
Accounting Officer) and Secretary
 
 
21

 
EX-31.1 2 v210797_ex31-1.htm
 
Exhibit 31.1
CERTIFICATION
I, Kenneth Plotkin, certify that:

1.     I have reviewed this Form 10-Q of Hauppauge Digital Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s  internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 11, 2011
 /s/Kenneth Plotkin
 
Kenneth Plotkin
 
Principal  Executive Officer
 
 
 

 
EX-31.2 3 v210797_ex31-2.htm
Exhibit 31.2
CERTIFICATION
I, Gerald Tucciarone, certify that:

1.      I have reviewed this Form 10-Q of Hauppauge Digital Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 11, 2011
/s/Gerald Tucciarone
 
 Gerald Tucciarone
 
 Principal  Financial Officer

 
 

 
EX-32 4 v210797_ex32.htm

Exhibit 32

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

The undersigned hereby certifies, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hauppauge Digital Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 11, 2011
/s/ Kenneth Plotkin
 
Kenneth Plotkin
 
Chief Executive Officer

/s/ Gerald Tucciarone
Gerald Tucciarone
Chief Financial Officer, Treasurer
and Secretary
 
 
 

 

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