10-Q

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 June 30, 2013

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).

x  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 the 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 Rule 12b-2 of the Exchange Act).

¨ YES      x NO

As of August 5, 2013, 10,122,344 shares of $0.01 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 – June 30, 2013 (unaudited) and September 30, 2012	3
Consolidated Statements of Operations - Three Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	4
Consolidated Statements of Operations - Nine Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	5
Consolidated Statements of Other Comprehensive Loss Three Months and Nine Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	6
Consolidated Statements of Cash Flows - Nine Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	7
Notes to Consolidated Financial Statements	8-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	25
PART II. OTHER INFORMATION
Item 6. Exhibits	26
Signatures	27

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2013 (unaudited)			September 30, 2012
Assets:
Cash and cash equivalents	$	2,254,689		$	5,095,853
Trade receivables, net of various allowances		1,815,014			2,618,081
Other non trade receivables		2,455,113			1,995,654
Inventories		12,055,389			9,497,856
Deferred tax asset-current		492,673			977,488
Prepaid expenses and other current assets		1,250,176			1,088,085
Total current assets		20,323,054			21,273,017
Intangible assets, net		1,865,467			2,431,594
Property, plant and equipment, net		177,262			235,978
Security deposits and other non-current assets		115,589			109,218
Deferred tax asset-non current		580,958			622,272
Total assets	$	23,062,330		$	24,672,079
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	6,661,809		$	5,865,085
Accrued expenses fees		12,549,844			12,943,022
Accrued expenses		2,771,337			3,668,491
Income taxes payable		213,107			230,123
Total current liabilities		22,196,097			22,706,721
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823 issued		108,828			108,828
Additional paid-in capital		18,399,765			18,316,085
Retained deficit		(10,487,112	)		(9,443,408	)
Accumulated other comprehensive loss		(4,749,700	)		(4,610,599	)
Treasury Stock, at cost, 760,479 shares		(2,405,548	)		(2,405,548	)
Total stockholders' equity		866,233			1,965,358
Total liabilities and stockholders' equity	$	23,062,330		$	24,672,079

See accompanying notes to consolidated financial statements

3

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended June 30,
	2013			2012
Net sales	$	5,587,632		$	9,215,703
Cost of sales		4,100,992			6,563,941
Gross profit		1,486,640			2,651,762
Selling, general and administrative expenses		2,650,602			2,935,797
Research and development expenses		824,637			821,414
Loss from operations		(1,988,599	)		(1,105,449	)
Other income :
Interest income		651			967
Foreign currency gain		31,954			(3,659	)
Total other income		32,605			(2,692	)
Loss before tax provision		(1,955,994	)		(1,108,141	)
Current tax expense		1,591			35,469
Deferred tax benefit		(157,187	)		(116,627	)
Net loss	$	(1,800,398	)	$	(1,026,983	)
Net loss per share:
Basic and diluted	$	(0.18	)	$	(0.10	)

See accompanying notes to consolidated financial statements

4

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Nine months ended June 30,
	2013			2012
Net sales	$	27,953,945		$	35,963,918
Cost of sales		17,530,937			24,703,077
Gross profit		10,423,008			11,260,841
Selling, general and administrative expenses		8,544,069			9,225,702
Research and development expenses		2,321,475			2,440,008
Loss from operations		(442,536	)		(404,869	)
Other income :
Interest income		2,619			3,802
Foreign currency gain		25,366			12,911
Total other income		27,985			16,713
Loss before tax provision		(414,551	)		(388,156	)
Current tax expense		103,024			107,864
Deferred tax expense		526,129			434,211
Net loss	$	(1,043,704	)	$	(930,231	)
Net loss per share:
Basic and diluted	$	(0.10	)	$	(0.09	)

See accompanying notes to consolidated financial statements

5

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(UNAUDITED)

	Three months ended June 30,
	2013			2012
Net loss	$	(1,800,398	)	$	(1,026,983	)
Foreign currency translation loss		(65,530	)		(103,310	)
Other comprehensive loss	$	(1,865,928	)	$	(1,130,293	)

	Nine months ended June 30,
	2013			2012
Net loss	$	(1,043,704	)	$	(930,231	)
Foreign currency translation loss		(139,101	)		(137,269	)
Other comprehensive loss	$	(1,182,805	)	$	(1,067,500	)

See accompanying notes to consolidated financial statements

6

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended June 30,
	2013			2012
Net loss	$	(1,043,704	)	$	(930,231	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		88,718			133,515
Amortization of intangible assets		566,127			566,127
Stock compensation expense		83,677			94,931
Deferred tax expense		526,129			434,211
Sales reserve, net		(400,191	)		75,029
Bad debt reserve		0			40,000
Inventory reserve		200,000			340,000
Other items		14,478			24,755
Changes in current assets and liabilities
Accounts receivable and other non trade receivables		1,677,800			1,715,178
Inventories		(3,618,079	)		(1,134,235	)
Prepaid expenses and other current assets		(154,464	)		(163,884	)
Accounts payable		600,897			(2,823,561	)
Accrued expenses and other current liabilities		(1,361,003	)		1,808,119
Total adjustments		(1,775,911	)		1,110,185
Net cash provided by (used in) operating activities		(2,819,615	)		179,954
Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(30,002	)		(39,430	)
Net cash used in investing activities		(30,002	)		(39,430	)
Effect of exchange rates on cash		8,453			(71,951	)
Net increase (decrease) in cash and cash equivalents		(2,841,164	)		68,573
Cash and cash equivalents, beginning of period		5,095,853			4,080,537
Cash and cash equivalents, end of period	$	2,254,689		$	4,149,110
Supplemental disclosures:
Income taxes paid	$	92,383		$	117,303

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, 2012 Form 10-K.

The operating results for the three months and nine months ended June 30, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2013.

The Company’s cash requirements for the next twelve months will include, among other things, the cash to fund its operating and working capital needs. The Company relies exclusively upon cash generated from its operations to fund these needs. The Company does not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from its operations are insufficient to fund its capital requirements to sustain its operations. Based on the Company’s current scale of operating expenses and the Company’s new product development schedule, the Company has evaluated that its cash and cash equivalents as of June 30, 2013 and its internally generated cash may not provide sufficient liquidity to meet its capital needs for the next twelve months, and that additional sources of cash may be required to meet its capital needs.

The Company has incurred operating losses for the last five fiscal years and in the nine month period ended June 30, 2013. Those losses are primarily attributable to a continuing decline in sales. In the quarter ended June 30, 2013, the Company experienced an unprecedented and precipitous 46% drop in sales from the quarter ended March 31, 2013. The Company believes that its sales have declined for reasons which we described in Item 1A of the Company’s Annual Report on 10-K for the fiscal year ended September 30, 2012, including, among other things:

· Reliance on a small number of its product lines being successful, the failure of any one of which could substantially reduce its sales.

· The Companny’s potential inability to develop new products or services that will meet its customers’ needs or wants.

· Intense competitive pressures from larger companies that have greater resources than the Company and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.

· The Company’s potential inability to remain ahead of the development of competing technologies, products and services.

· Lack of market diversification.

· Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute the Company’s products

8

Since the fourth quarter of fiscal 2011, the Company has been implementing expense reduction initiatives. The Company switched from air to ocean freight to reduce shipping costs, outsourced most of its shipping and logistics to a third party, reduced personel, relocated certain facilities to smaller offices, renogotiated certain exisitng leases to reduce rent and closed certain sales offices. The Company believes that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan. Addiitonally, absent a recovery in its business, the Company may be required to reduce its current expectations of future cash flows and pre tax operating results, which, in turn, may result in charges for the impairment of its longed lived assets and/or increase the valuation allowance against its net deferred tax assets. Such charges could be material.

The Company is working to develop a strategy to address its continuing operating losses and loss of sales, and the Company has retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs and the restructuring of its business.

The Company cannot assure that it will be able to develop and implement a plan that will enable it to successfully address its business and financial challenges. Among other things:

· If the Company seeks financing, the Company may not be able to obtain funding to address its capital needs on commercially reasonable terms, or at all.

· The Company may not be able to develop new lines of products or services that will be positively accepted by the marketplace.

· The Company may not be able to successfully compete with its competitors’ product and service offerings.

· Customers and consumers may lose confidence in the Company as a result of its financial condition and perfomance, its potential de-listing from Nasdaq, should the Company lose its appeal related to such  de-listing, and their perceptions of the Company’s business prospects and competitive position, and they may cease to do business with us or buy the Company’s products.

If any strategic or restructuring plan that the Company’s develops and implements is not successful, there is a substantial risk that that the Company might not be able to sustain its operations at current levels, which would have a material adverse effect on its business, operating results and financial condition.

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 June 30, 2013 and September 30, 2012 consisted of:

	June 30,			September 30,
	2013			2012
Trade receivables	$	3,975,540		$	6,319,544
Allowance for doubtful accounts		(102,123	)		(352,123	)
Sales reserve		(2,058,403	)		(3,349,340	)
Net trade receivables		1,815,014		$	2,618,081
Receivable from contract manufacturers		1,857,848		$	1,649,444
GST and VAT tax receivables		542,876			287,446
Other		54,389			58,764
Total other non trade receivables	$	2,455,113		$	1,995,654

9

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

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:

	June 30,		September 30,
	2013		2012
Component parts	$	3,782,816	$	3,412,673
Finished goods		6,641,421		3,563,284
Subtotal		10,424,237	$	6,975,957
Reserve for anticipated sales returns at cost		1,631,152		2,521,899
Total	$	12,055,389	$	9,497,856

Note 4. 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 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				Nine months ended
	June 30				June 30,
	2013		2012		2013		2012
Weighted average shares outstanding-basic		10,122,344		10,122,344		10,122,344		10,122,344
Number of shares issued on the assumed exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,122,344		10,122,344		10,122,344		10,122,344

Options to purchase 1,478,125 and 1,531,567 shares of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the three months and nine months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 5. Product segment and geographic information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital video products for the personal computer market and Apple iPad® and iPhone® 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.

10

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

The Company’s products fall under three product categories:

· Video recorder products, such as USB-Live2, which allows consumers to record video tapes to DVD disc or to some of the Company’s products, such as the HD PVR and Colossus

· TV receivers, which include Broadway and the Company’s WinTV and PCTV TV tuner products

· Non-TV tuner products such as the ImpactVCB, MediaMVP-HD and the Company’s 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.

Sales by functional category are as follows:

	Three months ended June 30,				Nine months ended June 30,
Product line sales	2013		2012		2013		2012
Video recorder products	$	2,252,347	$	4,137,859	$	15,437,377	$	19,115,575
TV tuner products		3,076,013		4,629,434		11,781,107		14,747,645
Other video products and software		259,272		448,410		735,461		2,100,698
Total sales	$	5,587,632	$	9,215,703	$	27,953,945	$	35,963,918

The Company sells its products through a North American and international network of distributors and retailers. It maintains sales offices in the United States, Europe and Asia. Sales percentages by geographic region are as follows:

	Three months ended June 30,						Nine months ended June 30,
Geographic region	2013			2013			2013			2012
The Americas		60	%		46	%		62	%		54	%
Europe		32	%		50	%		33	%		42	%
Asia		8	%		4	%		5	%		4	%
Total		100	%		100	%		100	%		100	%

11

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

Note 6. Tax provision

The Company’s tax provision for the three and nine months ended June 30, 2013 and 2012 is as follows:

	Three months ended June 30,						Nine months ended June 30,
	2013			2012			2013		2012
Current federal tax expense (benefit)	$	(28,850	)	$	-		$	-	$	-
Current state taxes		10,000			10,000			30,000		30,000
Current tax expense on international operations		20,441			25,469			73,024		77,864
Deferred tax (benefit) expense		(157,187	)		(116,627	)		526,129		434,211
Tax (benefit) provision	$	(155,596	)	$	(81,158	)	$	629,153	$	542,075

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to our United States subsidiary.

Note 7. Accrued expense-fees

The Company uses various software and technologies in certain of its products.  In certain cases, the Company purchases or licenses these software and technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees associated with the Company's sale of the related products. Such fees are estimated and get accrued and reflected as a component of cost of sales when those sales occur.  In certain circumstances, such fees are not specifically covered by contractual arrangements but are nonetheless potentially due to the third party sellers or owners of the software and technologies.  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. Occasionally, third parties audit the Company's historical determination of fees and adjustments are made.  Accrued fees are subject to elimination after three to seven years if not billed by or requested from the third parties.

Based on new information obtained during fiscal 2013, including the completion of a significant third party audit, the Company reduced its accrued expenses - fees balance by $2,214,453.  This estimate change resulted in an improved gross margin during fiscal 2013.  As of June 30, 2013 and September 30, 2012, the amount of accrued expense-fees amounted to $12,549,844 and $12,943,022, respectively.

Note 8. 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 June 30, 2013 and September 30, 2012 were $2,771,337 and $3,668,491, respectively. Included in accrued expenses are accruals for product costs, accruals for sales costs relating to sales rebate programs, accruals for freight and duty expenses, accruals for compensation, accruals for warranty repair costs and accruals for advertising and marketing costs. For the nine months ended June 30, 2013, the Company, using the most recent information available, reviewed its estimates for accruals for which no invoice has been rendered. As a result of this review, the Company recorded a change in estimate of $400,697 as a reduction in operating expenses related to unused severance accruals.

12

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited

Note 9. 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 follows the provisions of ASC 820-10 with respect to its non-financial assets and liabilities adopted 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.

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 receivable and accounts payable 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 JUNE 30, 2013 Compared to THE THREE MONTH PERIOD ENDED JUNE 30, 2012

Results of operations for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 is as follows:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	6/30/13			6/30/12			$			2013			2012			Variance
Net Sales	$	5,587,632		$	9,215,703		$	(3,628,071	)		100.00	%		100.00	%		-
Cost of sales		4,100,992			6,563,941			(2,462,949	)		73.39	%		71.23	%		2.16	%
Gross Profit		1,486,640			2,651,762			(1,165,122	)		26.61	%		28.77	%		-2.16	%
Gross Profit %		26.61	%		28.77	%		-2.16	%
Expenses:
Sales & marketing		1,514,818			1,748,014			(233,196	)		27.11	%		18.97	%		8.14	%
Sales & marketing-PCTV		50,064			63,065			(13,001	)		0.90	%		0.68	%		0.22	%
Technical support		89,030			90,941			(1,911	)		1.59	%		0.99	%		0.60	%
General & administrative		708,909			753,762			(44,853	)		12.69	%		8.18	%		4.51	%
General & administrative-PCTV		80,778			71,167			9,611			1.45	%		0.77	%		0.68	%
Amortization of intangible assets		188,709			188,709			0			3.38	%		2.05	%		1.33	%
Selling, general and administrative stock compensation expense		18,294			20,139			(1,845	)		0.33	%		0.22	%		0.11	%
Total selling, general and administrative expense		2,650,602			2,935,797			(285,195	)		47.45	%		31.86	%		15.59	%
Research and development		535,822			517,737			18,085			9.59	%		5.62	%		3.97	%
Research and development-PCTV		278,363			292,172			(13,809	)		4.98	%		3.17	%		1.81	%
Research and development stock compensation expense		10,452			11,505			(1,053	)		0.19	%		0.12	%		0.07	%
Total expenses		3,475,239			3,757,211			(281,972	)		62.21	%		40.77	%		21.44	%
Loss from operations		(1,988,599	)		(1,105,449	)		(883,150	)		-35.60	%		-12.00	%		-23.60	%
Other expense:
Interest income		651			967			(316	)		0.01	%		0.01	%		0.00	%
Foreign currency		31,954			(3,659	)		35,613			0.57	%		-0.04	%		0.61	%
Total other expense		32,605			(2,692	)		35,297			0.58	%		-0.03	%		0.61	%
Loss before tax provision		(1,955,994	)		(1,108,141	)		(847,853	)		-35.02	%		-12.03	%		-22.99	%
Current tax expense		1,591			35,469			(33,878	)		0.02	%		0.38	%		-0.36	%
Deferred tax benefit		(157,187	)		(116,627	)		(40,560	)		-2.81	%		-1.27	%		-1.54	%
Net loss	$	(1,800,398	)	$	(1,026,983	)	$	(773,415	)		-32.23	%		-11.14	%		-21.09	%

14

Net sales for the three months ended June 30, 2013 decreased $3,628,071 compared to the three months ended June 30, 2012 as shown in the table below.

					Increase
					(decrease)			Increase			Percentage of sales by
	Three Months		Three Months		Dollar			(decrease)			geographic region
	ended 6/30/13		ended 6/30/12		Variance			variance %			2013			2012
The Americas	$	3,322,823	$	4,217,404	$	(894,581	)		-21	%		60	%		46	%
Europe		1,824,218		4,673,280		(2,849,062	)		-61	%		32	%		50	%
Asia		440,591		325,019		115,572			36	%		8	%		4	%
Total	$	5,587,632	$	9,215,703	$	(3,628,071	)		-39	%		100	%		100	%

Increased competition, tepid economic conditions in Europe and a greater sales decline in our seasonally slow third fiscal quarter had a negative impact on sales.

Gross profit

Gross profit decreased $1,165,122 for the three months ended June 30, 2013 compared to the same quarter in the prior fiscal year. The decrease in gross profit was due to:

	Three Months ended
Gross profit in dollars-increase (decrease)	6/30/13
Lower sales	$	(1,498,273	)
Stronger Euro		34,746
Labor related and other costs		378,849
Lower gross profit due to mix of sales		(120,203	)
License fee adjustment		39,759
Total decrease in gross profit	$	(1,165,122	)

The decrease in the gross profit percentage was due to:

	Three Months ended
Gross profit percentage-increase (decrease)	6/30/13
Sales mix of lower gross profit sales		(2.39	)%
Stronger Euro		0.39	%
Labor related and other costs		(1.35	)%
License fee adjustment		1.19	%
Total gross profit percentage decrease		(2.16	)%

The factors contributing to the gross profit percentage decrease of 2.16% for the three months ended June 30, 2013 were primarily:

· Unfavorable gross profit percentage due to sales mix of lower average sales price product resulted in a decrease of 2.39%.

· An increase in the USD to Euro exchange rate from $1.2833 for the three months ended June 30, 2012 to $1.13069 for the three months ended June 30, 2013 resulted in a gross profit increase of 0.39%.

· Increase in labor related and other costs as a percentage of sales resulted in a gross profit decrease of 1.35%.

· Higher license fee adjustments resulted in a gross profit increase of 1.19%.

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Selling, general and administrative expenses

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

	Three months ended June 30,
	Dollar Costs							Percentage of Sales
					Increase									Increase
	2013		2012		(Decrease)			2013			2012			(Decrease)
Sales and marketing-HCW	$	1,514,818	$	1,748,014	$	(233,196	)		27.11	%		18.97	%		8.14	%
Sales and marketing-PCTV		50,064		63,065		(13,001	)		0.90	%		0.68	%		0.22	%
Technical support		89,030		90,941		(1,911	)		1.59	%		0.99	%		0.60	%
General and administrative-HCW		708,909		753,762		(44,853	)		12.69	%		8.18	%		4.51	%
General and administrative-PCTV		80,778		71,167		9,611			1.45	%		0.77	%		0.68	%
Amortization of intangible assets		188,709		188,709		0			3.38	%		2.05	%		1.33	%
Stock compensation		18,294		20,139		(1,845	)		0.33	%		0.22	%		0.11	%
Total	$	2,650,602	$	2,935,797	$	(285,195	)		47.45	%		31.86	%		15.59	%

Selling, general and administrative expense for the third quarter of fiscal 2013 decreased $285,195 from the prior year’s third fiscal quarter as follows:

Sales and marketing expenses decreased $246,197, driven primarily by $207,792 in lower commission and co-operative advertising expense, which declined due to lower sales, and $36,661 in lower sales office expense due to reduction in personnel.

The decrease in technical support of $1,911 was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $35,242 was due mainly to lower depreciation expense and lower credit card processing fees due to the issuing of credit lines to certain customers who previously purchased product with credit cards. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.

Research and development expenses

Research and development expenses for the three months ended June 30, 2013 increased slightly by $3,223 from the same quarter in the prior fiscal year. The increase was mainly due to lower compensation and compensation related expenses offset by higher product development costs. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.

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Tax provision

Our tax provision for the three months ended June 30, 2013 and 2012 is as follows:

	Three months ended June 30,
	2013			2012
Current federal tax expense (benefit)	$	(28,850	)	$	-
Current state taxes		10,000			10,000
Current tax expense on international operations		20,441			25,469
Deferred tax benefit		(157,187	)		(116,627	)
Tax benefit	$	(155,596	)	$	(81,158	)

Deferred tax benefit for the three months ended June 30, 2013 and 2012 was primarily due to increases in net operating losses.

Summary of operations

We recorded a net loss of $1,800,398 for the three months ended June 30, 2013, which resulted in basic and diluted net loss per share of $0.18 on weighted average basic and diluted shares of 10,122,344, compared to a net loss of $1,026,983 for the three months ended June 30, 2012, which resulted in basic and diluted net loss per share of $0.10 on weighted average basic and diluted shares of 10,122,344.

Options to purchase 1,478,125 and 1,531,567 shares of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the three months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

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NINE Month Period ENDED JUNE 30, 2013 Compared to THE NINE MONTH PERIOD ENDED JUNE 30, 2012

Results of operations for the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 is as follows:

	Nine			Nine
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	6/30/13			6/30/12			$			2013			2012			Variance
Net Sales	$	27,953,945		$	35,963,918		$	(8,009,973	)		100.00	%		100.00	%		0.00	%
Cost of sales		17,530,937			24,703,077			(7,172,140	)		62.71	%		68.69	%		-5.98	%
Gross Profit		10,423,008			11,260,841			(837,833	)		37.29	%		31.31	%		5.98	%
Gross Profit %		37.29	%		31.31	%		5.98	%
Expenses:
Sales & marketing		5,143,258			5,674,601			(531,343	)		18.40	%		15.78	%		2.62	%
Sales & marketing-PCTV		166,650			192,686			(26,036	)		0.60	%		0.54	%		0.06	%
Technical support		253,728			277,659			(23,931	)		0.91	%		0.77	%		0.14	%
General & administrative		2,136,524			2,248,113			(111,589	)		7.64	%		6.25	%		1.39	%
General & administrative-PCTV		224,529			206,102			18,427			0.80	%		0.57	%		0.23	%
Amortization of intangible assets		566,127			566,127			0			2.03	%		1.57	%		0.46	%
Selling, general and administrative stock compensation expense		53,253			60,414			(7,161	)		0.19	%		0.17	%		0.02	%
Total selling, general and administrative expense		8,544,069			9,225,702			(681,633	)		30.57	%		25.65	%		4.92	%
Research and development		1,612,446			1,554,715			57,731			5.77	%		4.32	%		1.45	%
Research and development-PCTV		678,606			850,777			(172,171	)		2.43	%		2.37	%		0.06	%
Research and development stock compensation expense		30,423			34,516			(4,093	)		0.11	%		0.10	%		0.01	%
Total expenses		10,865,544			11,665,710			(800,166	)		38.88	%		32.44	%		6.44	%
Loss from operations		(442,536	)		(404,869	)		(37,667	)		-1.59	%		-1.13	%		-0.46	%
Other income:
Interest income		2,619			3,802			(1,183	)		0.01	%		0.01	%		0.00	%
Foreign currency		25,366			12,911			12,455			0.09	%		0.04	%		0.05	%
Total other income		27,985			16,713			11,272			0.10	%		0.05	%		0.05	%
Loss before tax provision		(414,551	)		(388,156	)		(26,395	)		-1.49	%		-1.08	%		-0.41	%
Current tax expense		103,024			107,864			(4,840	)		0.37	%		0.30	%		0.07	%
Deferred tax expense		526,129			434,211			91,918			1.88	%		1.21	%		0.67	%
Net loss	$	(1,043,704	)	$	(930,231	)	$	(113,473	)		-3.74	%		-2.59	%		-1.15	%

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Net sales for the nine months ended June 30, 2013 decreased $8,009,973 compared to the nine months ended June 30, 2012 as shown in the table below.

					Increase
					(decrease)			Increase			Percentage of sales by
	Nine Months		Nine Months		Dollar			(decrease)			geographic region
	ended 6/30/13		ended 6/30/12		Variance			variance %			2013			2012
The Americas	$	17,436,317	$	19,290,328	$	(1,854,011	)		-10	%		62	%		54	%
Europe		9,100,922		15,225,059		(6,124,137	)		-40	%		33	%		42	%
Asia		1,416,706		1,448,531		(31,825	)		-2	%		5	%		4	%
Total	$	27,953,945	$	35,963,918	$	(8,009,973	)		-22	%		100	%		100	%

Increased competition, tepid economic conditions in Europe and a greater sales decline in our seasonally slow third fiscal quarter had a negative impact on sales. In addition, fiscal 2012 included the product rollouts of the DCR-2650 cable card, the Broadway, the HD-PVR gaming unit and the MY TV 2 Go TV application for the PC, Apple iPad® and iPhone® product. The rollout of these products resulted in a concentration of sales for fiscal 2012, which did not repeat in fiscal 2013.

Gross profit

Gross profit decreased $837,833 for the nine months ended June 30, 2013 compared to the same period in the prior fiscal year. The decrease in gross profit was due to:

	Nine Months  ended
Gross profit in dollars-increase (decrease)	6/30/13
Lower sales	$	(3,361,279	)
Weaker Euro		(115,328	)
Labor related and other costs		755,611
Higher gross profit due to mix of sales		76,609
License fee adjustment		1,806,554
Total decrease in gross profit	$	(837,833	)

The increase in the gross profit percentage was due to:

	Nine Months ended
Gross profit percentage-increase (decrease)	06/30/13
Sales mix of lower gross profit retail sales		(0.32	)%
Weaker Euro		(0.15	)%
Labor related and other costs		(0.35	)%
License fee adjustment		6.80	%
Total gross profit percentage increase		5.98	%

The factors contributing to the gross profit percentage increase of 5.98% for the nine months ended June 30, 2013 were primarily:

· Unfavorable gross profit percentage due to sales mix of lower average sales price product resulted in a decrease of 0.32%.

· A decrease in the USD to Euro exchange rate from $1.3142 for the nine months ended June 30, 2012 to $1.13083 for the nine months ended June 30, 2013 resulted in a gross profit decrease of 0.15%.

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· Increase in labor related and other costs as a percentage of sales resulted in a gross profit decrease of 0.35%.

· Higher license fee adjustments resulted in a gross profit increase of 6.80%.

Selling, general and administrative expenses

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

	Nine months ended June 30,
	Dollar Costs							Percentage of Sales
					Increase									Increase
	2013		2012		(Decrease)			2013			2012			(Decrease)
Sales and marketing-HCW	$	5,143,258	$	5,674,601	$	(531,343	)		18.40	%		15.78	%		2.62	%
Sales and marketing-PCTV		166,650		192,686		(26,036	)		0.60	%		0.54	%		0.06	%
Technical support		253,728		277,659		(23,931	)		0.91	%		0.77	%		0.14	%
General and administrative-HCW		2,136,524		2,248,113		(111,589	)		7.64	%		6.25	%		1.39	%
General and administrative-PCTV		224,529		206,102		18,427			0.80	%		0.57	%		0.23	%
Amortization of intangible assets		566,127		566,127		0			2.03	%		1.57	%		0.46	%
Stock compensation		53,253		60,414		(7,161	)		0.19	%		0.17	%		0.02	%
Total	$	8,544,069	$	9,225,702	$	(681,633	)		30.57	%		25.65	%		4.92	%

Selling, general and administrative expense for the nine months ended June 30, 2013 decreased $681,633 from same period in the prior fiscal year as follows:

Sales and marketing expenses decreased $557,379, driven primarily by $412,461 in lower commission and co-operative advertising expense, which declined due to lower sales, and a reduction in expenses of $213,783 for a change in estimate for unused severance liabilities. The decrease in expenses was offset somewhat by $83,586 in higher compensation expenses related to the addition of sales and marketing resources.

The decrease in technical support of $23,931 was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $93,162 was due primarily to decreases in rent and utilities due to the relocation of offices to smaller spaces, lower credit card processing fees due to the issuing lines of credit to certain customers who previously purchased product with credit cards, lower bad debt expense and lower depreciation. This was offset by to higher legal fees for consultation required during fiscal 2013. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.

Research and development expenses

Research and development expenses for the nine months ended June 30, 2013 decreased $118,533 from the same period in the prior fiscal year. The decrease was mainly due to lower compensation expenses of $199,112, primarily due to a change in estimate for unused severance liabilities, offset by $81,314 in higher product development related expenses. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.

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Tax provision (Benefit)

Our tax provision for the nine months ended June 30, 2013 and 2012 is as follows:

	Nine months ended June 30,
	2013		2012
Current federal tax expense (benefit)	$	-	$	-
Current state taxes		30,000		30,000
Current tax expense on international operations		73,024	$	77,864
Deferred tax expense		526,129		434,211
Tax expense	$	629,153	$	542,075

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to our United States subsidiary.

Summary of operations

We recorded a net loss of $1,043,704 for the nine months ended June 30, 2013, which resulted in basic and diluted net loss per share of $0.10 on weighted average basic and diluted shares of 10,122,344, compared to a net loss of $930,231 for the nine months ended June 30, 2012, which resulted in basic and diluted net loss per share of $0.09 on weighted average basic and diluted shares of 10,122,344.

Options to purchase 1,478,125 and 1,531,567 shares of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the nine months ended June 30, 2013 and 2012, 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 44% of sales for fiscal year ended September 30, 2012 and 41% for the fiscal year ended September 30, 2011. 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

The Company had cash and cash equivalents as of June 30, 2013 of $2,254,689, a decrease of $2,841,164 from September 30, 2012.

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The decrease in cash was due to:

	Operating			Investing			Financing
	Activities			Activities			Activities		Total
Sources of cash:
Decrease in accounts receivable	$	1,677,800		$	0		$	0	$	1,677,800
Net loss adjusted for non cash items		35,234			0			0		35,234
Total sources of cash		1,713,034			0			0		1,713,034
Less cash used for:		\
Increase in inventory		(3,618,079	)		0			0		(3,618,079	)
Decrease in accounts payable and accrued expenses		(760,106	)		0			0		(760,106	)
Increase in prepaid expenses and other current assets		(154,464	)		0			0		(154,464	)
Capital equipment purchases		0			(30,002	)		0		(30,002	)
Total cash usage		(4,532,649	)		(30,002	)		0		(4,562,651	)
Effect of exchange rates on cash		0			0			0		8,453
Net cash decrease	$	(2,819,615	)	$	(30,002	)	$	0	$	(2,841,164	)

Cash used in operating activities of $2,819,615 was due to an increase in inventory of $3,618,079, a decrease in accounts payable and accrued expenses of $760,106 and an increase in prepaid expenses and other current assets of $154,464. Sources of cash came from the net loss adjusted for non cash items of $35,234 and a decrease in accounts receivable of $1,677,800. The increase in inventory was due to a change in the delivery method of product from air shipments to boat shipments and a higher seasonal decline in sales than forecasted. We believe the change in delivery method from air to ocean will save on freight costs but require an additional investment in inventory in recognition of the anticipated four to five week transit time. The decrease in accounts payable and accrued expenses was due to the timing of payment to suppliers. The decrease in accounts receivable was due to cash collections coupled with lower sales in the third fiscal quarter compared to the previous two fiscal quarters. Cash of $30,002 was used to purchase capital equipment. We had a working capital deficit of $1,873,043 as of June 30, 2013 compared to a working capital deficit of $1,433,704 as of September 30, 2012.

Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from our operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from our operations is insufficient to fund our capital requirements to sustain our operations. Based on our current scale of operating expenses and our new product development schedule, we have evaluated that our cash and cash equivalents as of June 30, 2013 and our internally generated cash may not provide sufficient liquidity to meet our capital needs for the next twelve months, and that additional sources of cash may be required to meet our capital needs.

We have incurred operating losses for the last five fiscal years and in the nine month period ended June 30, 2013. Those losses are primarily attributable to a continuing decline in sales. In the quarter ended June 30, 2013, we experienced an unprecedented and precipitous 46% drop in sales from the quarter ended March 31, 2013. We believe that our sales have declined for reasons which we described in Item 1A of our Annual Report on 10-K for the fiscal year ended September 30, 2012, including, among other things:

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· Reliance on a small number of our product lines being successful, the failure of any one of which could substantially reduce our sales.

· Our potential inability to develop new products or services that will meet our customers’ needs or wants.

· Intense competitive pressures from larger companies that have greater resources than we do and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.

· Our potential inability to remain ahead of the development of competing technologies, products and services.

· Lack of market diversification.

· Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute our products.

Since the fourth quarter of fiscal 2011, we have been implementing expense reduction initiatives. We switched from air to ocean freight to reduce shipping costs, outsourced most of our shipping and logistics to a third party, reduced personel, relocated certain facilities to smaller offices, renegotiated certain existing leases to reduce rent and closed certain sales offices. We believe that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan. Additionally , absent a recovery in our business, we may be required to reduce our current expectations of future cash flows and pre-tax operating results, which, in turn, may result in charges for the impairment of our longed lived assets and/or  increase the valuation allowance against our net deferred tax assets. Such charges could be material. 

We are working to develop a strategy to address our continuing operating losses and loss of sales, and we have retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist us in considering and pursuing strategic alternatives, including possible additional financing to fund our capital needs and the restructuring of our business.

We cannot assure that we will be able to develop and implement a plan that will enable us to successfully address our business and financial challenges. Among other things:

· If we seek financing, we may not be able to obtain funding to address our capital needs on commercially reasonable terms, or at all.

· We may not be able to develop new lines of products or services that will be positively accepted by the marketplace.

· We may not be able to successfully compete with our competitors’ product and service offerings.

· Customers and consumers may lose confidence in us as a result of our financial condition and performance, our potential de-listing from Nasdaq, should we lose our appeal related to such  de-listing, and their perceptions of our business prospects and competitive position, and they may cease to do business with us or buy our products.

If any strategic or restructuring plan that we develop and implement is not successful, there is a substantial risk that that we might not be able to sustain our operations at current levels, which would have a material adverse effect on our business, operating results and financial condition.

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Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of June 30, 2013:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Operating lease obligations	$	1,444,818	$	601,667	$	843,151	$	0

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.

Recent Accounting Pronouncements

In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements.” ASU 2012-04 contains amendments to clarify the ASC, correct unintended application of guidance, or make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments are intended to make the ASC easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments that do not have transition guidance were effective upon issuance. The amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not anticipated to have a material impact on our results of operations or our financial position.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted.

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.

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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 June 30, 2013.

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.

Special note regarding forward-looking statements

This Quarterly Report on Form 10-Qcontains 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 statements contained herein that are not historical facts are forward-looking statements. 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. 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, competitive product offerings and pricing actions, the availability and pricing of key raw materials, continued decline in sales, continued operating losses, our ability to obtain financing on commercial reasonable terms or at all, our ability to formulate and implement a viable restructuring plan, dependence on key members of management, successful integration of acquisitions, economic conditions in the United States and abroad, fluctuation of the value of the Euro versus the U.S. dollar, our ability to make timely filings of the required periodic reports and other reports with the Securities and Exchange Commission, issues relating to our ability to maintain effective internal control over financial reporting and disclosure controls and procedures, our failure to maintain compliance with Nasdaq’s continued listing requirements and our potential de-listing from Nasdaq should we lose our appeal related to such de-listing, 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, 2012, this Quarterly Report on Form 10-Q, the Quarterly Report on Form 10-Q for the three months ended December 31, 2012 and March 31, 2013, and the risk of litigation or governmental investigations or proceedings relating to any of the foregoing matters. Copies of these filings are available at www.sec.gov. 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. 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.

25

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 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
101 INS	XBRL Instance Document **
101 SCH	SCH XBRL Taxonomy Extension Schema Document **
101 CAL	CAL XBRL Taxonomy Extension Calculation Linkbase Document **
101 LAB	LAB XBRL Taxonomy Extension Label Linkbase Document **
101 PRE	PRE XBRL Taxonomy Extension Presentation Linkbase Document**
101 DEF	DEF XBRL Taxonomy Extension Definition Linkbase Document**

** Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(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 (File Number: 001-13550, Film Number: 061302843) 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.

26

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: August 14, 2013	By:	/s/Kenneth Plotkin
		KENNETH PLOTKIN
		Chief Executive Officer, Chairman of the Board, President (Principal Executive Officer)
Date: August 14, 2013	By:	/s/Gerald Tucciarone
		GERALD TUCCIARONE
		Treasurer, Chief Financial Officer,
		(Principal Financial Officer and Principal Accounting Officer) and Secretary

27

EX-31.1

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: August 14, 2013	/s/Kenneth Plotkin
	Kenneth Plotkin
	Principal Executive Officer

EX-31.2

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: August 14, 2013	/s/Gerald Tucciarone
	Gerald Tucciarone
	Principal Financial Officer

EX-32

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 June 30, 2013 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: August 14, 2013	/s/ Kenneth Plotkin
	Kenneth Plotkin
	Chief Executive Officer
	/s/ Gerald Tucciarone
	Gerald Tucciarone
	Chief Financial Officer, Treasurer and
	Secretary

XML

Inventories (Tables)

9 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

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:

	June 30,		September 30,
	2013		2012
Component parts	$	3,782,816	$	3,412,673
Finished goods		6,641,421		3,563,284
Subtotal		10,424,237	$	6,975,957
Reserve for anticipated sales returns at cost		1,631,152		2,521,899
Total	$	12,055,389	$	9,497,856

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net sales	$ 5,587,632	$ 9,215,703	$ 27,953,945	$ 35,963,918
Cost of sales	4,100,992	6,563,941	17,530,937	24,703,077
Gross profit	1,486,640	2,651,762	10,423,008	11,260,841
Selling, general and administrative expenses	2,650,602	2,935,797	8,544,069	9,225,702
Research and development expenses	824,637	821,414	2,321,475	2,440,008
Loss from operations	(1,988,599)	(1,105,449)	(442,536)	(404,869)
Other income :
Interest income	651	967	2,619	3,802
Foreign currency gain	31,954	(3,659)	25,366	12,911
Total other income	32,605	(2,692)	27,985	16,713
Loss before tax provision	(1,955,994)	(1,108,141)	(414,551)	(388,156)
Current tax expense	1,591	35,469	103,024	107,864
Deferred tax expense	(157,187)	(116,627)	526,129	434,211
Net loss	$ (1,800,398)	$ (1,026,983)	$ (1,043,704)	$ (930,231)
Net loss per share:
Basic and diluted (in dollars per share)	$ (0.18)	$ (0.10)	$ (0.10)	$ (0.09)

XML

Net Income (Loss) Per Share

9 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 4. 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 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				Nine months ended
	June 30				June 30,
	2013		2012		2013		2012
Weighted average shares outstanding-basic		10,122,344		10,122,344		10,122,344		10,122,344
Number of shares issued on the assumed exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,122,344		10,122,344		10,122,344		10,122,344

Options to purchase 1,478,125 and 1,531,567 shares of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the three months and nine months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

XML

Net Income (Loss) Per Share (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Schedule of Earnings per share [Line Items]
Weighted average shares outstanding-basic	10,122,344	10,122,344	10,122,344	10,122,344
Number of shares issued on the assumed exercise of stock options	0	0	0	0
Weighted average shares outstanding-diluted	10,122,344	10,122,344	10,122,344	10,122,344

XML

Net Income (Loss) Per Share (Tables)

9 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Schedule of Weighted Average Number of Shares [Table Text Block]

A reconciliation of the shares used in calculating basic and diluted net income per share is as follows:

	Three months ended				Nine months ended
	June 30				June 30,
	2013		2012		2013		2012
Weighted average shares outstanding-basic		10,122,344		10,122,344		10,122,344		10,122,344
Number of shares issued on the assumed exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,122,344		10,122,344		10,122,344		10,122,344

XML

Product segment and geographic information (Details 1)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Segment Reporting Information [Line Items]
Sales Revenue Percentage	100.00%	100.00%	100.00%	100.00%
Americas Segment [Member]
Segment Reporting Information [Line Items]
Sales Revenue Percentage	60.00%	46.00%	62.00%	54.00%
Europe Segment [Member]
Segment Reporting Information [Line Items]
Sales Revenue Percentage	32.00%	50.00%	33.00%	42.00%
Asia Segment [Member]
Segment Reporting Information [Line Items]
Sales Revenue Percentage	8.00%	4.00%	5.00%	4.00%

XML

Product segment and geographic information (Details) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Segment Reporting Information [Line Items]
Total sales	$ 5,587,632	$ 9,215,703	$ 27,953,945	$ 35,963,918
Video Recorder Products [Member]
Segment Reporting Information [Line Items]
Total sales	2,252,347	4,137,859	15,437,377	19,115,575
Tv Receiver Products [Member]
Segment Reporting Information [Line Items]
Total sales	3,076,013	4,629,434	11,781,107	14,747,645
Non Tv Receiver Products [Member]
Segment Reporting Information [Line Items]
Total sales	$ 259,272	$ 448,410	$ 735,461	$ 2,100,698

XML

Net Income (Loss) Per Share (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Schedule of Earnings per share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares)	1,478,125	1,531,567	1,478,125	1,531,567
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	$ 0.74	$ 0.77	$ 0.74	$ 0.77
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit	$ 7.45	$ 7.45	$ 7.45	$ 7.45

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Net loss	$ (1,043,704)	$ (930,231)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	88,718	133,515
Amortization of intangible assets	566,127	566,127
Stock compensation expense	83,677	94,931
Deferred tax expense	526,129	434,211
Sales reserve, net	(400,191)	75,029
Bad debt reserve	0	40,000
Inventory reserve	200,000	340,000
Other items	14,478	24,755
Changes in current assets and liabilities
Accounts receivable and other non trade receivables	1,677,800	1,715,178
Inventories	(3,618,079)	(1,134,235)
Prepaid expenses and other current assets	(154,464)	(163,884)
Accounts payable	600,897	(2,823,561)
Accrued expenses and other current liabilities	(1,361,003)	1,808,119
Total adjustments	(1,775,911)	1,110,185
Net cash provided by (used in) operating activities	(2,819,615)	179,954
Cash Flows From Investing Activities:
Purchases of property, plant and equipment	(30,002)	(39,430)
Net cash used in investing activities	(30,002)	(39,430)
Effect of exchange rates on cash	8,453	(71,951)
Net increase (decrease) in cash and cash equivalents	(2,841,164)	68,573
Cash and cash equivalents, beginning of period	5,095,853	4,080,537
Cash and cash equivalents, end of period	2,254,689	4,149,110
Supplemental disclosures:
Income taxes paid	$ 92,383	$ 117,303

XML

Trade Accounts and Other Non-Trade Receivables

9 Months Ended

Jun. 30, 2013

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Financing Receivables [Text Block]

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 June 30, 2013 and September 30, 2012 consisted of: 

	June 30,		September 30,
	2013		2012
Trade receivables	$	3,975,540	$	6,319,544
Allowance for doubtful accounts		(102,123)		(352,123)
Sales reserve		(2,058,403)		(3,349,340)
Net trade receivables		1,815,014	$	2,618,081
Receivable from contract manufacturers		1,857,848	$	1,649,444
GST and VAT tax receivables		542,876		287,446
Other		54,389		58,764
Total other non trade receivables	$	2,455,113	$	1,995,654

XML

Product segment and geographic information

9 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

Note 5. Product segment and geographic information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital video products for the personal computer market and Apple iPad® and iPhone® 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’s products fall under three product categories:

· Video recorder products, such as USB-Live2, which allows consumers to record video tapes to DVD disc or to some of the Company’s products, such as the HD PVR and Colossus

· TV receivers, which include Broadway and the Company’s WinTV and PCTV TV tuner products

· Non-TV tuner products such as the ImpactVCB, MediaMVP-HD and the Company’s 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.

Sales by functional category are as follows:

	Three months ended June 30,				Nine months ended June 30,
Product line sales	2013		2012		2013		2012
Video recorder products	$	2,252,347	$	4,137,859	$	15,437,377	$	19,115,575
TV tuner products		3,076,013		4,629,434		11,781,107		14,747,645
Other video products and software		259,272		448,410		735,461		2,100,698
Total sales	$	5,587,632	$	9,215,703	$	27,953,945	$	35,963,918

The Company sells its products through a North American and international network of distributors and retailers. It maintains sales offices in the United States, Europe and Asia. Sales percentages by geographic region are as follows:

	Three months ended June 30,						Nine months ended June 30,
Geographic region	2013			2013			2013			2012
The Americas		60	%		46	%		62	%		54	%
Europe		32	%		50	%		33	%		42	%
Asia		8	%		4	%		5	%		4	%
Total		100	%		100	%		100	%		100	%

XML

Inventories

9 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

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:

	June 30,		September 30,
	2013		2012
Component parts	$	3,782,816	$	3,412,673
Finished goods		6,641,421		3,563,284
Subtotal		10,424,237	$	6,975,957
Reserve for anticipated sales returns at cost		1,631,152		2,521,899
Total	$	12,055,389	$	9,497,856

XML

Tax provision (Details) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Disclosure Income Tax Provision Benefit [Line Items]
Current federal tax expense (benefit)	$ (28,850)	$ 0	$ 0	$ 0
Current state taxes	10,000	10,000	30,000	30,000
Current tax expense on international operations	20,441	25,469	73,024	77,864
Deferred tax (benefit) expense	(157,187)	(116,627)	526,129	434,211
Tax (benefit) provision	$ (155,596)	$ (81,158)	$ 629,153	$ 542,075

XML

CONSOLIDATED BALANCE SHEETS [Parenthetical] (USD $)	Jun. 30, 2013	Sep. 30, 2012
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	10,882,823	10,882,823
Treasury stock, shares	760,479	760,479

XML

Accrued Expenses

9 Months Ended

Jun. 30, 2013

Accrued Expenses [Abstract]

Accrued Expenses [Text Block]

Note 8. 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 June 30, 2013 and September 30, 2012 were $2,771,337 and $3,668,491, respectively. Included in accrued expenses are accruals for product costs, accruals for sales costs relating to sales rebate programs, accruals for freight and duty expenses, accruals for compensation, accruals for warranty repair costs and accruals for advertising and marketing costs. For the nine months ended June 30, 2013, the Company, using the most recent information available, reviewed its estimates for accruals for which no invoice has been rendered. As a result of this review, the Company recorded a change in estimate of $400,697 as a reduction in operating expenses related to unused severance accruals.

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CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net loss	$ (1,800,398)	$ (1,026,983)	$ (1,043,704)	$ (930,231)
Foreign currency translation loss	(65,530)	(103,310)	(139,101)	(137,269)
Other comprehensive loss	$ (1,865,928)	$ (1,130,293)	$ (1,182,805)	$ (1,067,500)

XML

CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2013	Sep. 30, 2012
Assets:
Cash and cash equivalents	$ 2,254,689	$ 5,095,853
Trade receivables, net of various allowances	1,815,014	2,618,081
Other non trade receivables	2,455,113	1,995,654
Inventories	12,055,389	9,497,856
Deferred tax asset-current	492,673	977,488
Prepaid expenses and other current assets	1,250,176	1,088,085
Total current assets	20,323,054	21,273,017
Intangible assets, net	1,865,467	2,431,594
Property, plant and equipment, net	177,262	235,978
Security deposits and other non-current assets	115,589	109,218
Deferred tax asset-non current	580,958	622,272
Total assets	23,062,330	24,672,079
Liabilities and Stockholders' Equity:
Accounts payable	6,661,809	5,865,085
Accrued expenses fees	12,549,844	12,943,022
Accrued expenses	2,771,337	3,668,491
Income taxes payable	213,107	230,123
Total current liabilities	22,196,097	22,706,721
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823 issued	108,828	108,828
Additional paid-in capital	18,399,765	18,316,085
Retained deficit	(10,487,112)	(9,443,408)
Accumulated other comprehensive loss	(4,749,700)	(4,610,599)
Treasury Stock, at cost, 760,479 shares	(2,405,548)	(2,405,548)
Total stockholders' equity	866,233	1,965,358
Total liabilities and stockholders' equity	$ 23,062,330	$ 24,672,079

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Accrued expense-fees (Details Textual) (USD $)	9 Months Ended
	Jun. 30, 2013	Sep. 30, 2012
Accrued Expenses Fees [Line Items]
Reduction In Accrued Expenses Fees	$ 2,214,453
Accrued expenses fees	$ 12,549,844	$ 12,943,022

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Inventories (Details) (USD $)	Jun. 30, 2013	Sep. 30, 2012
Schedule of Inventory [Line Items]
Component parts	$ 3,782,816	$ 3,412,673
Finished goods	6,641,421	3,563,284
Subtotal	10,424,237	6,975,957
Reserve for anticipated sales returns at cost	1,631,152	2,521,899
Total	$ 12,055,389	$ 9,497,856

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Accrued expense-fees

9 Months Ended

Jun. 30, 2013

Accounts Payable and Accrued Liabilities [Abstract]

Accrued Expenses Fees [Text Block]

Note 7. Accrued expense-fees

The Company uses various software and technologies in certain of its products.  In certain cases, the Company purchases or licenses these software and technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees associated with the Company's sale of the related products. Such fees are estimated and get accrued and reflected as a component of cost of sales when those sales occur.  In certain circumstances, such fees are not specifically covered by contractual arrangements but are nonetheless potentially due to the third party sellers or owners of the software and technologies.  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. Occasionally, third parties audit the Company's historical determination of fees and adjustments are made.  Accrued fees are subject to elimination after three to seven years if not billed by or requested from the third parties.

Based on new information obtained during fiscal 2013, including the completion of a significant third party audit, the Company reduced its accrued expenses - fees balance by $2,214,453. This estimate change resulted in an improved gross margin during fiscal 2013.  As of June 30, 2013 and September 30, 2012, the amount of accrued expense-fees amounted to $12,549,844 and $12,943,022, respectively.

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Accrued Expenses (Details Textual) (USD $)	9 Months Ended
	Jun. 30, 2013	Sep. 30, 2012
Accrued Expenses [Line Items]
Accrued expenses	$ 2,771,337	$ 3,668,491
Reduction In Unused Severance Accruals	$ 400,697

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Trade Accounts and Other Non-Trade Receivables (Tables)

9 Months Ended

Jun. 30, 2013

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

Trade receivables and other non-trade receivables as of June 30, 2013 and September 30, 2012 consisted of: 

	June 30,		September 30,
	2013		2012
Trade receivables	$	3,975,540	$	6,319,544
Allowance for doubtful accounts		(102,123)		(352,123)
Sales reserve		(2,058,403)		(3,349,340)
Net trade receivables		1,815,014	$	2,618,081
Receivable from contract manufacturers		1,857,848	$	1,649,444
GST and VAT tax receivables		542,876		287,446
Other		54,389		58,764
Total other non trade receivables	$	2,455,113	$	1,995,654

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Tax provision

9 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 6. Tax provision

The Company’s tax provision for the three and nine months ended June 30, 2013 and 2012 is as follows:

	Three months ended June 30,				Nine months ended June 30,
	2013		2012		2013		2012
Current federal tax expense (benefit)	$	(28,850)	$	-	$	-	$	-
Current state taxes		10,000		10,000		30,000		30,000
Current tax expense on international operations		20,441		25,469		73,024		77,864
Deferred tax (benefit) expense		(157,187)		(116,627)		526,129		434,211
Tax (benefit) provision	$	(155,596)	$	(81,158)	$	629,153	$	542,075

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to our United States subsidiary.

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Basis of Presentation

9 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

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, 2012 Form 10-K.

The operating results for the three months and nine months ended June 30, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2013.

The Company’s cash requirements for the next twelve months will include, among other things, the cash to fund its operating and working capital needs. The Company relies exclusively upon cash generated from its operations to fund these needs. The Company does not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from its operations are insufficient to fund its capital requirements to sustain its operations. Based on the Company’s current scale of operating expenses and the Company’s new product development schedule, the Company has evaluated that its cash and cash equivalents as of June 30, 2013 and its internally generated cash may not provide sufficient liquidity to meet its capital needs for the next twelve months, and that additional sources of cash may be required to meet its capital needs.

The Company has incurred operating losses for the last five fiscal years and in the nine month period ended June 30, 2013. Those losses are primarily attributable to a continuing decline in sales. In the quarter ended June 30, 2013, the Company experienced an unprecedented and precipitous 46% drop in sales from the quarter ended March 31, 2013. The Company believes that its sales have declined for reasons which we described in Item 1A of the Company’s Annual Report on 10-K for the fiscal year ended September 30, 2012, including, among other things:

· Reliance on a small number of its product lines being successful, the failure of any one of which could substantially reduce its sales.

· The Companny’s potential inability to develop new products or services that will meet its customers’ needs or wants.

· Intense competitive pressures from larger companies that have greater resources than the Company and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.

· The Company’s potential inability to remain ahead of the development of competing technologies, products and services.

· Lack of market diversification.

· Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute the Company’s products

Since the fourth quarter of fiscal 2011, the Company has been implementing expense reduction initiatives. The Company switched from air to ocean freight to reduce shipping costs, outsourced most of its shipping and logistics to a third party, reduced personel, relocated certain facilities to smaller offices, renogotiated certain exisitng leases to reduce rent and closed certain sales offices. The Company believes that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan. Addiitonally, absent a recovery in its business, the Company may be required to reduce its current expectations of future cash flows and pre tax operating results, which, in turn, may result in charges for the impairment of its longed lived assets and/or increase the valuation allowance against its net deferred tax assets. Such charges could be material.

The Company is working to develop a strategy to address its continuing operating losses and loss of sales, and the Company has retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs and the restructuring of its business.

The Company cannot assure that it will be able to develop and implement a plan that will enable it to successfully address its business and financial challenges. Among other things:

· If the Company seeks financing, the Company may not be able to obtain funding to address its capital needs on commercially reasonable terms, or at all.

· The Company may not be able to develop new lines of products or services that will be positively accepted by the marketplace.

· The Company may not be able to successfully compete with its competitors’ product and service offerings.

· Customers and consumers may lose confidence in the Company as a result of its financial condition and perfomance, its potential de-listing from Nasdaq, should the Company lose its appeal related to such de-listing, and their perceptions of the Company’s business prospects and competitive position, and they may cease to do business with us or buy the Company’s products.

If any strategic or restructuring plan that the Company’s develops and implements is not successful, there is a substantial risk that that the Company might not be able to sustain its operations at current levels, which would have a material adverse effect on its business, operating results and financial condition.

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Product segment and geographic information (Tables)

9 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Revenue from External Customers by Products and Services [Table Text Block]

Sales by functional category are as follows:

	Three months ended June 30,				Nine months ended June 30
Product line sales	2013		2012		2013		2012
Video recorder products	$	2,252,347	$	4,137,859	$	15,437,377	$	19,115,575
TV tuner products		3,076,013		4,629,434		11,781,107		14,747,645
Other video products and software		259,272		448,410		735,461		2,100,698
Total sales	$	5,587,632	$	9,215,703	$	27,953,945	$	35,963,918

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

Sales percentages by geographic region are as follows:

	Three months ended June 30,						Nine months ended June 30,
Geographic region	2013			2013			2013			2012
The Americas		60	%		46	%		62	%		54	%
Europe		32	%		50	%		33	%		42	%
Asia		8	%		4	%		5	%		4	%
Total		100	%		100	%		100	%		100	%

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Fair Value Measurements

9 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

Note 9. 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 follows the provisions of ASC 820-10 with respect to its non-financial assets and liabilities adopted 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.

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 receivable and accounts payable and other short-term financial instruments approximate their fair value due to their short-term nature.

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Trade Accounts and Other Non-Trade Receivables (Details) (USD $)	9 Months Ended	12 Months Ended
	Jun. 30, 2013	Sep. 30, 2012
Accounts Receivable [Line Items]
Trade receivables	$ 3,975,540	$ 6,319,544
Allowance for doubtful accounts	(102,123)	(352,123)
Sales reserve	(2,058,403)	(3,349,340)
Net trade receivables	1,815,014	2,618,081
Total other non trade receivables	2,455,113	1,995,654
Receivable From Contract Manufacturers [Member]
Accounts Receivable [Line Items]
Total other non trade receivables	1,857,848	1,649,444
Gst and Vat Taxes Receivables [Member]
Accounts Receivable [Line Items]
Total other non trade receivables	542,876	287,446
Other [Member]
Accounts Receivable [Line Items]
Total other non trade receivables	$ 54,389	$ 58,764

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Tax provision (Tables)

9 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

The Company’s tax provision for the three and nine months ended June 30, 2013 and 2012 is as follows:

	Three months ended June 30,				Nine months ended June 30,
	2013		2012		2013		2012
Current federal tax expense (benefit)	$	(28,850)	$	-	$	-	$	-
Current state taxes		10,000		10,000		30,000		30,000
Current tax expense on international operations		20,441		25,469		73,024		77,864
Deferred tax (benefit) expense		(157,187)		(116,627)		526,129		434,211
Tax (benefit) provision	$	(155,596)	$	(81,158)	$	629,153	$	542,075

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Document And Entity Information	9 Months Ended
	Jun. 30, 2013	Aug. 05, 2013
Document Information [Line Items]
Entity Registrant Name	HAUPPAUGE DIGITAL INC
Entity Central Index Key	0000930803
Current Fiscal Year End Date	--09-30
Entity Filer Category	Smaller Reporting Company
Trading Symbol	HAUP
Amendment Flag	false
Entity Common Stock, Shares Outstanding		10,122,344
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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Basis of Presentation (Details Textual)	3 Months Ended
	Jun. 30, 2013
Basis Of Presentation [Line Items]
Decrease In Sales, Decrease Percentage	46.00%