HAUPPAUGE DIGITAL INC - FORM 10-Q

Attached files

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EX-32 - HAUPPAUGE DIGITAL INC	v210797_ex32.htm
EX-31.2 - HAUPPAUGE DIGITAL INC	v210797_ex31-2.htm
EX-31.1 - HAUPPAUGE DIGITAL INC	v210797_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission file number 1-13550

HAUPPAUGE DIGITAL INC.

(Exact name of registrant as specified in its charter)

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

91 Cabot Court, Hauppauge, New York 11788

(Address of principal executive offices)

(631) 434-1600

(Registrant’s telephone number, including area code)

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

x YES ¨ NO

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

¨ YES ¨ NO

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

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

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

¨ YES x NO

As of January 31, 2011, 10,084,795 shares of .01 par value Common Stock of the issuer were outstanding.

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

INDEX

		Page no.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets –
December 31, 2010 (unaudited) and September 30, 2010		4

Consolidated Statements of Operations -
Three Months ended December 31, 2010 (unaudited) and 2009 (unaudited)		5

Consolidated Statements of Other Comprehensive Loss
Three Months ended December 31, 2010 (unaudited) and 2009 (unaudited)		6

Consolidated Statements of Cash Flows - Three Months ended December 31, 2010 (unaudited) and 2009 (unaudited)		7

Notes to Consolidated Financial Statements		8-13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-18

Item 3. Quantitative and Qualitative Disclosures about Market Risks		19

Item 4. Controls and Procedures		19

PART II. OTHER INFORMATION

Item 6. Exhibits		20

Signatures		21

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2010 (unaudited)			September 30 , 2010
Assets:
Cash and cash equivalents	$	7,286,019		$	7,057,904
Trade receivables, net of various allowances		3,623,630			4,403,194
Other non trade receivables		1,829,872			2,355,834
Inventories		12,214,733			11,450,565
Deferred tax asset-current		1,271,988			1,310,204
Prepaid expenses and other current assets		1,070,173			980,087
Total current assets		27,296,415			27,557,788

Intangible assets, net		3,752,557			3,941,266
Property, plant and equipment, net		505,835			544,959
Security deposits and other non current assets		106,241			106,241
Deferred tax asset-non current		449,224			610,734
Total assets	$	32,110,272		$	32,760,988

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	7,015,036		$	7,306,221
Accrued expenses fees		4,917,267			4,955,540
Accrued expenses		10,416,263			10,266,495
Income taxes payable		276,717			252,090
Total current liabilities		22,625,283			22,780,346

Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized,
10,845,368 and 10,842,274 issued, respectively		108,454			108,423
Additional paid-in capital		17,843,446			17,739,330
Retained deficit		(1,789,106	)		(1,050,886	)
Accumulated other comprehensive loss		(4,272,257	)		(4,410,677	)
Treasury Stock, at cost, 760,479 shares		(2,405,548	)		(2,405,548	)
Total stockholders' equity		9,484,989			9,980,642
Total liabilities and stockholders' equity	$	32,110,272		$	32,760,988

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended December 31,
	2010			2009

Net sales	$	12,862,946		$	17,878,358
Cost of sales		8,515,708			12,655,961
Gross profit		4,347,238			5,222,397

Selling, general and administrative expenses		3,774,704			4,332,523
Research and development expenses		1,096,779			1,170,071
Loss from operations		(524,245	)		(280,197	)

Other income (expense):
Interest income		1,559			1,452
Interest expense		-			(4,340	)
Foreign currency gain (loss)		31,523			(240	)
Total other income (expense)		33,082			(3,128	)
Loss before tax provision		(491,163	)		(283,325	)
Deferred tax expense		199,726			-
Current tax expense		47,331			51,226
Net loss	$	(738,220	)	$	(334,551	)

Net loss per share:
Basic and diluted	$	(0.07	)	$	(0.03	)

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(UNAUDITED)

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

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements for Hauppauge Digital Inc. and subsidiaries (collectively, the “Company”) included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these interim statements be read in conjunction with the financial statements and related notes included in the Company's September 30, 2010 Form 10-K.

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

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

Note 2. Trade Accounts and Other Non-Trade Receivables

Trade receivables consist of:

Trade receivables from sales to customers

Allowances, consisting of sales and bad debt

Other non trade receivables consist of:

Receivables pertaining to component parts purchased from the Company at cost by the Company’s contract manufacturers which are excluded from sales

General services tax (GST) and value added tax (VAT) reclaimable on goods purchased by the Company’s Asian and European locations

Other minor non-trade receivables

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

Note 3. Inventories

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

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

Note 4. Net Loss Per Share

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

	Three months ended
	December 31,
	2010		2009
Weighted average shares outstanding-basic		10,083,417		10,059,808
Number of shares issued on the assumed exercise of stock options		-		-
Weighted average shares outstanding-diluted		10,083,417		10,059,808

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

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5. Foreign Currency Translations and Transactions

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

The financial position and results of operations of the Company’s European subsidiaries are determined using Euros as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate during the year. Translation adjustments arising from the translation to U.S. Dollars at differing exchange rates are included in the accumulated other comprehensive income (loss) account in stockholders’ equity. Gains and losses resulting from transactions that are denominated in currencies other than Euros are included in earnings as a component of other income. The Company had a translation loss of $4,410,677 recorded on the balance sheet as of September 30, 2010. For the three months ended December 31, 2010 the Company recorded on the balance sheet translation gains of $161,219, resulting in an accumulated translation loss of $4,249,458 recorded as a component of accumulated other comprehensive loss as of December 31 2010.

Note 6. Product segment and geographic information

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

The Company’s products fall under three product categories:

Analog TV tuner products

Digital TV tuner, and combination analog and digital TV tuner, products

Other non-TV tuner products

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

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

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Sales by functional category are as follows:

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

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

	Three months ended December 31,
Geographic region	2010			2009
The Americas		61	%		43	%
Europe		37	%		55	%
Asia		2	%		2	%
Total		100	%		100	%

Note 7. Tax provision

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

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

Note 8. Accrued expense- fees

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

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 9, Accrued Expenses

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

Note 10. Fair Value Measurements

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

• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

• Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

• Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

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

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

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

The carrying amount of cash, accounts receivables and accounts payables and other short-term financial instruments approximate their fair value due to their short-term nature.

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

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

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

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	12/31/10			12/31/09			$				2010		2009			Variance

Net Sales	$	12,862,946		$	17,878,358		$	(5,015,412	)		100.00	%		100.00	%		-
Cost of sales		8,515,708			12,655,961			(4,140,253	)		66.20	%		70.79	%		-4.59	%
Gross Profit		4,347,238			5,222,397			(875,159	)		33.80	%		29.21	%		4.59	%
Gross Profit %		33.80	%		29.21	%		4.59	%
Expenses:
Sales & marketing		2,510,330			2,900,815			(390,485	)		19.52	%		16.23	%		3.29	%
Sales & marketing-PCTV		97,398			124,713			(27,315	)		0.76	%		0.70	%		0.06	%
Technical support		110,718			121,173			(10,455	)		0.86	%		0.68	%		0.18	%
General & administrative		747,422			835,677			(88,255	)		5.81	%		4.67	%		1.14	%
General & administrative-PCTV		56,184			92,980			(36,796	)		0.44	%		0.52	%		-0.08	%
Amortization of intangible assets		188,709			188,709			-			1.47	%		1.06	%		0.41	%
Selling, general and administrative stock compensation expense		63,943			68,456			(4,513	)		0.50	%		0.38	%		0.12	%
Total selling, general and administrative expense		3,774,704			4,332,523			(557,819	)		29.36	%		24.24	%		5.12	%
Research and development		655,950			627,757			28,193			5.10	%		3.51	%		1.59	%
Research and development-PCTV		404,302			504,519			(100,217	)		3.14	%		2.82	%		0.32	%
Research and development stock compensation expense		36,527			37,795			(1,268	)		0.28	%		0.21	%		0.07	%
Total expenses		4,871,483			5,502,594			(631,111	)		37.88	%		30.78	%		7.10	%
Loss from operations		(524,245	)		(280,197	)		(244,048	)		-4.08	%		-1.57	%		-2.51	%

Other income (expense) :
Interest income		1,559			1,452			107			0.01	%		0.01	%		0.00	%
Interest (expense)		-			(4,340	)		4,340			0.00	%		-0.02	%		0.02	%
Foreign currency		31,523			(240	)		31,763			0.25	%		0.00	%		0.25	%
Total other income (expense)		33,082			(3,128	)		36,210			0.26	%		-0.02	%		0.27	%
Loss before tax provision		(491,163	)		(283,325	)		(207,838	)		-3.82	%		-1.58	%		-2.24	%
Deferred tax expense		199,726			-			199,726			1.55	%		0.00	%		1.55	%
Current tax expense		47,331			51,226			(3,895	)		0.37	%		0.29	%		0.08	%
Net loss	$	(738,220	)	$	(334,551	)	$	(403,669	)		-5.74	%		-1.87	%		-3.87	%

Net sales for the three months ended December 31, 2010 decreased $5,015,412 compared to the three months ended December 31, 2009 as shown in the table below.

					Increase			Increase
					(decrease)			(decrease)			Percentage of sales by
	Three Months		Three Months		Dollar			dollar			geographic region
	ended 12/31/10		ended 12/31/09		Variance			variance %			2010			2009

The Americas	$	7,893,888	$	7,663,098	$	230,790			3	%		61	%		43	%
Europe		4,706,131		9,812,426		(5,106,295	)		-52	%		37	%		55	%
Asia		262,927		402,834		(139,907	)		-35	%		2	%		2	%
Total	$	12,862,946	$	17,878,358	$	(5,015,412	)		-28	%		100	%		100	%

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

Gross profit

Gross profit decreased $875,159 for the three months ended December 31, 2010 compared to the same period in the prior year.

The decrease in the gross profit is detailed below:

	Increase (decrease)
Decreased sales	$	(2,002,306	)
Decrease due weaker Euro to USD exchange rate		(344,281	)
Higher gross profit on sales mix		568,118
Change in warranty repair reserve		150,787
Lower production and production related costs		752,523
Total decrease in gross profit	$	(875,159	)

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

The increase in gross profit percentage is detailed below:

	Increase (decrease)
Higher gross profit on sales mix		4.60	%
Decrease due weaker Euro to USD exchange rate		-1.68	%
Change in warranty repair reserve		1.17	%
Lower production and production related costs		0.50	%
Total increase in gross profit percentage		4.59	%

The factors contributing to the gross profit percent increase of 4.59% for the three months ended December 31, 2010 were primarily:

Shift in sales to products with a higher average unit sales price resulted in a gross profit percentage increase of 4.60%.

A decrease in the Euro to USD exchange rate from 1.4773 for the three months ended December 31, 2010 to 1.3591 for the three months ended December 31, 2010 resulted in a gross profit decrease of 1.68%.

Change in warranty repair reserve to reflect changes in estimate based on actual experience resulted in gross profit increase of 1.17%

Lower production and production related costs such as building overhead, packaging costs, freight costs and labor costs at a third party facility resulted in a gross profit increase of 0.50%.

Selling, general and administrative expenses

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

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

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

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

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

Research and development expenses

Research and development expense for the three months ended December 31, 2010 decreased $73,292 from the three months ended December 31, 2009 as follows:

	HCW			PCTV			Total
Research and development expense-HCW	$	28,193		$	0		$	28,193
Research and development expense-PCTV		0			(100,217	)		(100,217	)
Stock compensation expense		(1,268	)		0			(1,268	)
Total research and development expense	$	26,925		$	(100,217	)	$	(73,292	)

The PCTV decrease in research and development expenses was due to lower personnel costs and lower program costs. The increase in HCW research and development costs was due to higher personnel costs.

Tax provision

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

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

Summary of operations

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

Seasonality

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales is our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international sales, mostly in the European market, were 54% of sales for fiscal year ended September 30, 2010 and 52% for the fiscal year ended September 30, 2009. Part of our third and fourth quarters (April through June and July to September) can be potentially impacted by the reduction of activity experienced in Europe during the summer holiday period.

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

Liquidity and capital resources

Our cash, working capital and stockholders’ equity position as of December 31, 2010 and September 30, 2010 is set forth below:

	December 31, 2010		September 30, 2010
Cash	$	7,286,019	$	7,057,904
Working Capital		4,671,132		4,777,442
Stockholders’ Equity		9,484,989		9,980,642

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

The increase in cash was due to was:

	Operating			Investing			Financing
	Activities			Activities			Activities		Total
Sources of cash:
Decrease in accounts receivable	$	1,696,257		$	0		$	0	$	1,696,257
Proceeds from employee stock purchases		-			-			3,677		3,677
Total sources of cash		1,696,257		$	0			3,677		1,699,934
Less cash used for:
Increase in inventory	$	(1,032,798	)	$	-		$	-	$	(1,032,798	)
Net loss adjusted for non cash items		(245,524	)		-			-		(245,524	)
Increase in prepaid expenses and other current assets		(86,338	)		-			-		(86,338	)
Decrease in accounts payable and accrued expenses		(62,716	)		-			-		(62,716	)
Effect of exchange rates on cash		(23,636	)		-			-		(23,636	)
Capital equipment purchases		-			(20,807	)		-		(20,807	)
Total cash usage		(1,451,012	)		(20,807	)		-		(1,471,819	)
Net cash increase	$	245,245		$	(20,807	)	$	3,677	$	228,115

Net cash provided by operating activities was due to a decrease in accounts receivable of $1,696,257. The decrease in accounts receivable was primarily due to timing of sales. Offsetting the cash increase were increases in inventory of $1,032,798, the net loss adjusted for non cash items of $245,524, increases in prepaid expenses of $86,338 and a decrease in accounts payable and accrued expenses of $62,716. The increase in inventory was for parts purchased for products that are expected to be built in the second fiscal quarter.

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

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

Future contractual obligations

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

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

Inflation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

Special note regarding forward-looking statements

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

PART II. OTHER INFORMATION

Item 6. Exhibits

3.1		Certificate of Incorporation (1)

3.1.1		Certificate of Amendment of the Certificate of Incorporation, dated July 14, 2000 (2)

3.2		By-laws, as amended to date (3)

4.1		Form of Common Stock Certificate (1)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Denotes document filed as an Exhibit to our Registration Statement on Form SB-2 (No. 33- 85426), as amended, effective January 10, 1995 and incorporated herein by reference.

(2)	Denotes document filed as an Exhibit to our Form 10-K for the period ended September 30, 2006, and incorporated herein by reference.

(3)	Denotes document filed as an Exhibit to our Form 8-K dated December 26, 2007 and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HAUPPAUGE DIGITAL INC.

Date: February 11, 2011	By	/s/Kenneth Plotkin
	KENNETH PLOTKIN
	Chief Executive Officer, Chairman of the
	Board, President (Principal Executive Officer)

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

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