Summary of Significant Accounting Policies

12 Months Ended

Sep. 30, 2012

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

1. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Hauppauge Digital Inc. and its wholly-owned subsidiaries, Hauppauge Computer Works Inc., Hauppauge Digital Inc. Taiwan, PCTV Systems Sarl, its branch PCTV Systems GmbH, Hauppauge Digital Europe Sarl, its branch Hauppauge Digital Europe Sarl Ireland and Hauppauge Digital Europe Sarl’s wholly-owned subsidiaries, Hauppauge Digital Asia Pte Ltd, Hauppauge Computer Works, GmbH, Hauppauge Computer Works, Ltd. and Hauppauge Computer Works Sarl, ( collectively, the “Company”). All inter-company accounts and transactions have been eliminated.

Nature of Business

Hauppauge Digital Inc. is a developer of analog and digital video products for the personal computer and Apple iPad and iPhone market. Through its Hauppauge Computer Works Inc., Hauppauge Digital Europe Sarl and PCTV subsidiaries, the Company designs, develops, manufactures and markets analog, digital and other types of TV tuners, streaming video and video recorders and other devices that allow PC users to watch television on an Apple iPad, iPhone or PC. Certain of the Company’s products also enable the recording of video from game consoles and TV shows to a PCs hard disk, receiving of digital TV data transmissions, and the display of digital media stored on a computer to a TV set and other mobile devices via a home network. The Company, incorporated in Delaware in August 1994, is headquartered in Hauppauge, New York. The Company has administrative offices in Luxembourg, Ireland and Singapore and sales offices in Germany, London, Paris, The Netherlands, Sweden, Italy, Spain, Singapore, Taiwan and California and research and development centers in Hauppauge, New York, Braunschweig, Germany and Taiwan.

The Company’s products fall under three product categories:

· TV receivers, which include Digital TV tuners for PCs, analog TV receivers, our Broadway Internet streaming TV receiver and hybrid analog and digital TV tuner products

· Video recorder products, such as USB-Live2, HD PVR, HD PVR 2 and Colossus

· Non-TV tuner products such as the ImpactVCB, MediaMVP-HD and our TV applications for the PC and the Apple iPad and iPhone.

The Company’s TV tuner products enable, among other things, a PC user to watch TV in a resizable window on a PC. The Company’s video recorder products allow consumers to record high definition video from a cable TV or satellite set top box or a game console such as a Xbox 360 or Sony Playstation 3. The Company’s other non TV tuner products enable, among other things, the ability to watch and listen to PC based videos, music and pictures on a TV set through a home network.

Product Segment and Geographic Information

The Company operates primarily in one business segment, which is the development, marketing and manufacturing of TV receiver and video recording products for the personal computer market. Most of the Company’s 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 its TV tuner products directly to PC manufacturers. The Company evaluates its product lines under the functional categories of video recorder products, such as the USB-Live2, TV tuner products and other video products and software.

Sales by functional category are as follows:

	Fiscal years ended September 30,
	2012		2011
Product line sales
Video recorder products	$	23,828,900	$	17,693,070
TV tuner products		18,546,331		23,220,545
Other video products and software		2,265,129		1,429,444
Total sales	$	44,640,360	$	42,343,059

The Company sells its product through a domestic and international network of distributors and retailers.

Net sales to customers by geographic location consist of:

	Fiscal years ended September 30,
Sales to:	2012			2011
The Americas		56	%		59	%
Northern Europe		12	%		12	%
Southern Europe		11	%		10	%
Central and Eastern Europe		17	%		15	%
Asia		4	%		4	%
Total		100	%		100	%

Net long lived assets located in the United States, Europe and Asia were approximately 60%, 35% and 5% of total net long lived assets, respectively, at September 30, 2012, and 55%, 39% and 6%, respectively, at September 30, 2011.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any adjustments when necessary.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, such cash in banks are in excess of the FDIC insurance limit. Concentration of credit risk with respect to accounts receivable exists because the Company operates in one industry (also see Note 10). Although the Company operates in one business segment, it does not believe that it has a material concentration of credit risk either from an individual counter party or a group of counter parties, due to the large and diverse user group for its products. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances to cover potential or anticipated losses for uncollectible amounts.

Shipping and Handling Costs

The Company records all shipping and handling charges in Cost of Sales.

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 60 day payment terms. Those customers deemed as significant 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 product price 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 products and the cost of pilferage, while in the customer’s possession, is the responsibility of the customer. The Company sells analog, hybrid video recorders or digital computer products 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 (Financial Accounting Standards Board (“FASB”) ASC 605-15 “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 seasonal nature of the business coupled with the changing economic environment, management exercises 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, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” and classifies these expenses as a component of sales and marketing expenses.

Warranty Policy

The Company warrants that its products are free from defects in material and workmanship for a period of two years from the date of initial retail purchase. The warranty does not cover any losses or damage that occur as a result of improper installation, misuse or neglect and repair or modification by anyone other than the Company or its authorized repair agent. The Company accrues anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. The Company’s repair rate of product under warranty has been minimal and the warranty reserve has not been material.

Inventories

Inventories are valued at the lower of cost (principally average cost) or market. Cost adjustments have been provided to reduce obsolete and/or excess inventory to its net realizable value.

Property, Plant and Equipment

Depreciation of office equipment and machinery and amortization of leasehold improvements is provided for using both accelerated and straight line methods over the estimated useful lives of the related assets as follows:

Office Equipment and Machinery: 5 to 7 years

Leasehold improvements: asset life or lease term, whichever is shorter

Income taxes

The Company follows the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the temporary differences in the tax bases of the assets or liabilities and their reported amounts in the financial statements and for tax credit carry forwards. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount currently estimated to be realized. The Company follows FASB ASC 740-10 , under which tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in tax returns that do not meet these recognition and measurement standards. As of September 30, 2012 and 2011, the Company did not have any uncertain tax positions, and due to unused tax loss carry forwards, has three years worth of open tax years. The Company does not expect any open tax years or uncertain tax positions to have a significant impact on its results of operations or financial position during the next 12 months.  As permitted by ASC-740-10, the Company also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision.

Long-Lived Assets

Long-lived assets, such as property and equipment and intangible assets, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Impairment indicators include, among other conditions: cash flow deficits, a historic or anticipated decline in net sales or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset, and a material decrease in the fair market value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Amortization of intangible assets is provided using the straight-line method over the estimated useful lives of the assets.

Research and Development

Expenditures for research and development are charged to expense as incurred.

Foreign Currency Translations and Transactions

The Company’s Asian subsidiary’s functional currency is 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 the functional currency are included in earnings as a component of other income. The Company had a translation loss of $4,541,707 recorded on the balance sheet as of September 30, 2011. For the fiscal year ended September 30, 2012, the Company recorded balance sheet translation losses of $68,892, resulting in an accumulated translation loss of $4,610,599 recorded as a component of accumulated other comprehensive loss as of September 30, 2012.

Fair Value of Financial Instruments

The carrying amounts of certain financial instruments, including cash, receivables and accounts payable, approximate fair value as of September 30, 2012 and 2011 because of the relatively short term maturity of these instruments.

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 (loss) per share reflects, in 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 earnings (loss) per share follows:

	Years ended September 30,
	2012		2011
Weighted average Common Stock outstanding-basic		10,122,344		10,108,670
Common Stock equivalents-stock options		-		-
Weighted average shares outstanding-diluted		10,122,344		10,108,670

Options to purchase 1,524,567 and 1,382,692 shares of Common Stock at prices ranging $0.77 to $7.45 and $0.95 to $7.45, respectively, were outstanding as of September 30, 2012 and 2011, respectively, but were not included in the computation of diluted net loss per share of Common Stock because they were anti-dilutive.

Stock Based Compensation

The Company follows FASB ASC-718 “Share Based Payments”, under which the fair value of stock options are determined using the Black-Scholes valuation model and such fair value is recognized as an expense over the service period, net of estimated forfeitures. As of September 30, 2012, options had been issued from four incentive option plans and one non qualified option plan. These options typically vest over a period of four to five years. Options granted have a contract term of 10 years. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the weighted average assumptions in the table below based on the interest rate of a 10 year government bond and an expected volatility based on historical data of the Company’s stock.

Stock option grant assumptions:	2012			2011
Weighted average fair value of grants	$	0.63		$	1.47
Risk free interest rate		1.96% and 1.66	%		2.75	%
Dividend yield		-			-
Expected volatility		65	%		65	%
Expected life in years		7			7

As of September 30, 2012, there was $293,398 of total unrecognized compensation expense net of estimated forfeitures, related to non-vested share based compensation arrangements which is expected to be recognized over a weighted average period of 4 years. The total stock based compensation recorded during the years ended September 30, 2012 and 2011 was $128,490 and $401,872. For September 30, 2012 and 2011, stock compensation expense of $81,773 and $255,770 have been recorded to selling, general and administrative expense and $46,717 and $146,102 have been recorded to research and development expense.

Accrued expenses - 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 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 Company is obligated to provide the licensor with reports which quantify the licenses used and in certain cases the Company is subject to periodic audits. The licensing fees are accounted for as a component of product cost and are charged to cost of sales.

Recent Accounting Pronouncements

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the previous option to report other comprehensive income and its components in the statement of stockholders’ equity. In December 2011, the FASB issued an amendment to defer indefinitely a requirement in the June 2011 standard that called for reclassification adjustments from accumulated other comprehensive income to be measured and presented by income statement line item in net income and also in other comprehensive income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The Company already complies with this disclosure guidance.