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, 2012

 

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 July 31, 2012, 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	3
Consolidated Balance Sheets –  June 30, 2012 (unaudited) and September 30, 2011	3
Consolidated Statements of Operations -  Three Months ended June 30, 2012 (unaudited) and 2011 (unaudited)	4
Consolidated Statements of Operations -  Nine Months ended June 30, 2012 (unaudited) and 2011 (unaudited)	4
Consolidated Statements of Other Comprehensive Loss Three Months and Nine Months ended June 30, 2012 (unaudited) and 2011 (unaudited)	6
Consolidated Statements of Cash Flows - Nine Months ended June 30, 2012 (unaudited) and 2011 (unaudited)	7
Notes to Consolidated Financial Statements	8-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 6. Exhibits	24
Signatures	25

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements 

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		June 30, 2012 (unaudited)				September 30 , 2011
Assets:
Cash and cash equivalents		$	4,149,110			$	4,080,537
Trade receivables, net of various allowances			3,032,764				3,708,696
Other non trade receivables			890,951				2,408,326
Inventories			11,061,527				10,092,224
Deferred tax asset-current			1,077,837				1,127,641
Prepaid expenses and other current assets			1,140,357				992,258
Total current assets			21,352,546				22,409,682
Intangible assets, net			2,620,303				3,186,430
Property, plant and equipment, net			274,618				368,703
Security deposits and other non-current assets			113,883				112,813
Deferred tax asset-non current			404,890				789,297
Total assets		$	24,766,240			$	26,866,925
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable		$	3,815,037			$	6,674,900
Accrued expenses fees			4,900,534				4,082,719
Accrued expenses			12,348,028				11,417,895
Income taxes payable			226,000				242,201
Total current liabilities			21,289,599				22,417,715
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823 issued			108,828				108,828
Additional paid-in capital			18,282,526				18,187,595
Retained deficit			(7,830,189	)			(6,899,958	)
Accumulated other comprehensive loss			(4,678,976	)			(4,541,707	)
Treasury Stock, at cost, 760,479 shares			(2,405,548	)			(2,405,548	)
Total stockholders' equity			3,476,641				4,449,210
Total liabilities and stockholders' equity		$	24,766,240			$	26,866,925

 

See accompanying notes to consolidated financial statements

 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three months ended June 30,
		2012				2011
Net sales		$	9,215,703			$	8,879,417
Cost of sales			6,563,941				6,210,010
Gross profit			2,651,762				2,669,407
Selling, general and administrative expenses			2,935,797				3,273,690
Research and development expenses			821,414				977,489
Loss from operations			(1,105,449	)			(1,581,772	)
Other expense :
Interest income			967				5,394
Foreign currency loss			(3,659	)			(6,918	)
Total other expense			(2,692	)			(1,524	)
Loss before tax provision			(1,108,141	)			(1,583,296	)
Current tax expense			35,469				39,289
Deferred tax benefit			(116,627	)			(30,830	)
Net loss		$	(1,026,983	)		$	(1,591,755	)
Net loss per share:
Basic and diluted		$	(0.10	)		$	(0.16	)

 

See accompanying notes to consolidated financial statements

 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Nine months ended June 30,
		2012				2011
Net sales		$	35,963,918			$	32,066,525
Cost of sales			24,703,077				21,828,482
Gross profit			11,260,841				10,238,043
Selling, general and administrative expenses			9,225,702				10,562,265
Research and development expenses			2,440,008				3,217,181
Loss from operations			(404,869	)			(3,541,403	)
Other income :
Interest income			3,802				.8,569
Foreign currency gain (loss)			12,911				(2,455	)
Total other income			16,713				6,114
Loss before tax provision			(388,156	)			(3,535,289	)
Current tax expense			107,864				138,345
Deferred tax expense			434,211				99,708
Net loss		$	(930,231	)		$	(3,773,342	)
Net loss per share:
Basic and diluted		$	(0.09	)		$	(0.37	)

 

See accompanying notes to consolidated financial statements

 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(UNAUDITED)

 

		Three months ended June 30,
		2012				2011
Net loss		$	(1,026,983	)		$	(1,591,755	)
Foreign currency translation gain (loss)			(103,310	)			41,182
Forward exchange contracts marked to market gain			-				607
Other comprehensive loss		$	(1,130,293	)		$	(1,549,966	)

 

		Nine months ended June 30,
		2012				2011
Net loss		$	(930,231	)		$	(3,773,342	)
Foreign currency translation gain (loss)			(137,269	)			224,171
Other comprehensive loss		$	(1,067,500	)		$	(3,549,171	)

 

See accompanying notes to consolidated financial statements

 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine months ended June 30,
		2012				2011
Net loss		$	(930,231	)		$	(3,773,342	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			133,515				180,168
Amortization of intangible assets			566,127				566,127
Stock compensation expense			94,931				301,405
Deferred tax expense			434,211				99,708
Sales reserve, net			75,029				(110,569	)
Bad debt reserve			40,000				-
Inventory reserve			340,000				179,000
Other items			24,755				(14,287	)
Changes in current assets and liabilities
Accounts receivable and other non trade receivables			1,715,178				3,429,576
Inventories			(1,134,235	)			335,234
Prepaid expenses and other current assets			(163,884	)			(229,189	)
Accounts payable			(2,823,561	)			(3,418,548	)
Accrued expenses and other current liabilities			1,808,119				(709,208	)
Total adjustments			1,110,185				609,417
Net cash provided by (used in) operating activities			179,954				(3,163,925	)
Cash Flows From Investing Activities:
Purchases of property, plant and equipment			(39,430	)			(48,501	)
Net cash used in investing activities			(39,430	)			(48,501	)
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options and employee stock purchases			-				46,798
Net cash provided by financing activities			-				46,798
Effect of exchange rates on cash			(71,951	)			87,529
Net increase (decrease) in cash and cash equivalents			68,573				(3,078,099	)
Cash and cash equivalents, beginning of period			4,080,537				7,057,904
Cash and cash equivalents, end of period		$	4,149,110			$	3,979,805
Supplemental disclosures:
Income taxes paid		$	117,303			$	163,239

 

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, 2011 Form 10-K.

 

The operating results for the three months and nine months ended June 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2012.

 

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, 2012 and September 30, 2011 consisted of:

 

		June 30,				September 30,
		2012				2011
Trade receivables		$	7,396,438			$	7,893,923
Allowance for doubtful accounts			(352,123	)			(423,773	)
Sales reserve			(4,011,551	)			(3,761,454	)
Net trade receivables		$	3,032,764			$	3,708,696
Receivable from contract manufacturers		$	608,331			$	2,030,251
GST and VAT tax receivables			214,138				298,303
Other			68,482				79,772
Total other non trade receivables		$	890,951			$	2,408,326

 

 

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,
		2012				2011
Component parts		$	4,317,478			$	3,504,129
Finished goods			3,755,803				3,774,917
Subtotal			8,073,281				7,279,046
Reserve for anticipated sales returns at cost			2,988,246				2,813,178
Total		$	11,061,527			$	10,092,224

 

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,
		2012				2011				2012				2011
Weighted average shares outstanding-basic			10,122,344				10,122,344				10,122,344				10,104,061
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				10,104,061

 

Options to purchase 1,531,567 and 1,501,317 shares of common stock, at prices from $0.77 to $7.45 and from $0.89 to $7.45, were outstanding for the three months and nine months ended June 30, 2012 and 2011, 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.

 

 

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		2012				2011				2012				2011
Video recorder products		$	4,137,859			$	3,585,118			$	19,115,575			$	11,829,507
TV tuner products			4,629,434				4,610,004				14,747,645				18,697,862
Other video products and software			448,410				684,295				2,100,698				1,539,156
Total sales		$	9,215,703			$	8,879,417			$	35,963,918			$	32,066,525

 

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

 

		Three months ended June 30,								Nine months ended June 30,
Geographic region		2012				2011				2012				2011
The Americas			46	%			58	%			54	%			59	%
Europe			50	%			38	%			42	%			38	%
Asia			4	%			4	%			4	%			3	%
Total			100	%			100	%			100	%			100	%

 

 

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, 2012 and 2011 is as follows:

 

		Three months ended June 30,								Nine months ended June 30,
		2012				2011				2012				2011
Current tax expense on international operations		$	25,469			$	29,289			$	77,864			$	108,345
Current state taxes			10,000				10,000				30,000				30,000
Deferred tax (benefit) expense			(116,627	)			(30,830	)			434,211				99,708
Tax (benefit) provision		$	(81,158	)		$	8,459			$	542,075			$	238,053

 

Deferred tax benefit for the three months ended June 30, 2012 was primarily due to increases in reserves and net operating losses offset somewhat by write-offs for bad debt.

 

Deferred tax expense for the nine months ended June 30, 2012 was primarily due to the utilization of net operating losses and write-offs of inventory and bad debt.

 

Note 7. 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. Accrued expense-fees are accounted for as a component of product cost and are charged to cost of sales.  As of June 30, 2012 and September 30, 2011 the amount of accrued expense-fees amounted to $4,900,534 and $4,082,719, 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, 2012 and September 30, 2011 were $12,348,028 and $11,417,895, 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.

 

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:

 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

• 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. 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition

and Results of Operations

 

Three Month Period ENDED JUNE 30, 2012 Compared to THE THREE MONTH

PERIOD ENDED JUNE 30, 2011

 

Results of operations for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is as follows:

 

		Three				Three
		Months				Months
		Ended				Ended				Variance				Percentage of sales
		06/30/12				06/30/11				$				2012				2011				Variance
Net Sales		$	9,215,703			$	8,879,417			$	336,286				100.00	%			100.00	%			-
Cost of sales			6,563,941				6,210,010				353,931				71.23	%			69.94	%			1.29	%
Gross Profit			2,651,762				2,669,407				(17,645	)			28.77	%			30.06	%			-1.29	%
Gross Profit %			28.77	%			30.06	%			-1.29	%
Expenses:
Sales & marketing			1,748,014				1,978,195				(230,181	)			18.97	%			22.28	%			-3.31	%
Sales & marketing-PCTV			63,065				107,842				(44,777	)			0.68	%			1.21	%			-0.53	%
Technical support			90,941				105,909				(14,968	)			0.99	%			1.19	%			-0.20	%
General & administrative			753,762				759,250				(5,488	)			8.18	%			8.55	%			-0.37	%
General & administrative-PCTV			71,167				69,842				1,325				0.77	%			0.79	%			-0.02	%
Amortization of intangible assets			188,709				188,709				0				2.05	%			2.13	%			-0.08	%
Selling, general and administrative stock compensation expense			20,139				63,943				(43,804	)			0.22	%			0.72	%			-0.50	%
Total selling, general and administrative expense			2,935,797				3,273,690				(337,893	)			31.86	%			36.87	%			-5.01	%
Research and development			517,737				511,533				6,204				5.62	%			5.76	%			-0.14	%
Research and development-PCTV			292,172				429,432				(137,260	)			3.17	%			4.84	%			-1.67	%
Research and development stock compensation expense			11,505				36,524				(25,019	)			0.12	%			0.41	%			-0.29	%
Total expenses			3,757,211				4,251,179				(493,968	)			40.77	%			47.88	%			-7.11	%
Loss from operations			(1,105,449	)			(1,581,772	)			476,323				-12.00	%			-17.82	%			5.82	%
Other expense:
Interest income			967				5,394				(4,427	)			0.01	%			0.06	%			-0.05	%
Foreign currency			(3,659	)			(6,918	)			3,259				-0.04	%			-0.08	%			0.04	%
Total other expense			(2,692	)			(1,524	)			(1,168	)			-0.03	%			-0.02	%			-0.01	%
Loss before tax provision			(1,108,141	)			(1,583,296	)			475,155				-12.03	%			-17.84	%			5.81	%
Current tax expense			35,469				39,289				(3,820	)			0.37	%			0.44	%			-0.07	%
Deferred tax benefit			(116,627	)			(30,830	)			(85,797	)			-1.27	%			-0.35	%			-0.92	%
Net loss		$	(1,026,983	)		$	(1,591,755	)		$	564,772				-11.13	%			-17.93	%			6.80	%

 

 

Net sales for the three months ended June 30, 2012 increased $336,286 compared to the three months ended June 30, 2011 as shown in the table below.

 

										Increase
										(decrease)				Increase				Percentage of sales by
		Three Months				Three Months				Dollar				(decrease)				geographic region
		ended 0630/12				ended 06/30/11				Variance				variance %				2012				2011
The Americas		$	4,217,404			$	5,035,699			$	(818,295	)			(16	)%			46	%			58	%
Europe			4,673,280				3,467,110				1,206,170				35	%			50	%			38	%
Asia			325,019				376,608				(51,589	)			(4	)%			4	%			4	%
Total		$	9,215,703			$	8,879,417			$	336,286				4	%			100	%			100	%

 

Led by sales of our video recorder and video streaming products, our sales increased by approximately 10.24% before the effect on sales caused by the decline in the Euro. The decline in the Euro resulted in a reduction in sales of approximately 6.46%. The average USD to Euro rate for the third quarter of fiscal 2012 was $1.28330 compared to $1.44010 for the third quarter of fiscal 2011, a reduction of approximately 10.89%.

 

Gross profit

 

Gross profit decreased $17,645 for the three months ended June 30, 2012 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)			06/30/12
Higher sales		$	142,931
Weaker Euro			(573,238	)
Labor related and other costs			(49,434	)
Sales mix of higher gross profit retail sales			518,474
License fee adjustment			(96,690	)
Sales mix of OEM sales			40,312
Total decrease in gross profit		$	(17,645	)

The decrease in the gross profit percentage was due to:

		Three Months ended
Gross profit percentage-increase (decrease)		06/30/12
Sales mix of higher gross profit retail sales			2.91	%
Weaker Euro			(3.44	)%
Labor related and other costs			(0.08	)%
License fee adjustment			(1.12	)%
Sales mix of OEM sales			0.44	%
Total gross profit percentage decrease			(1.29	)%

 

 

The factors contributing to the gross profit percentage decrease of 1.29% for the three months ended June 30, 2012 were primarily:

 

·

Favorable gross profit percentage due to sales mix of higher average sales price retail sales resulted in an increase of 2.91%.

·

A decrease in the USD to Euro exchange rate from $1.4401 for the three months ended June 30, 2011 to $1.28330 for the three months ended June 30, 2012 resulted in a gross profit decrease of 3.44%.

·

A decrease in the sales mix of lower gross profit OEM sales resulted in a gross profit increase of 0.44%

·

Labor related and other costs resulted in a gross profit decrease of 0.08%

·

Lower license fee adjustments resulted in a gross profit decrease of 1.12%

 

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
		2012				2011				(Decrease)				2012				2011				(Decrease)
Sales and marketing-HCW		$	1,748,014			$	1,978,195			$	(230,181	)			18.97	%			22.28	%			-3.31	%
Sales and marketing-PCTV			63,065				107,842				(44,777	)			0.68	%			1.21	%			-0.53	%
Technical support			90,941				105,909				(14,968	)			0.99	%			1.19	%			-0.20	%
General and administrative-HCW			753,762				759,250				(5,488	)			8.18	%			8.55	%			-0.37	%
General and administrative-PCTV			71,167				69,842				1,325				0.77	%			0.79	%			-0.02	%
Amortization of intangible assets			188,709				188,709				0				2.05	%			2.13	%			-0.08	%
Stock compensation			20,139				63,943				(43,804	)			0.22	%			0.72	%			-0.50	%
Total		$	2,935,797			$	3,273,690			$	(337,893	)			31.86	%			36.87	%			-5.01	%

 

As a result of an expense reduction plan implemented in the fourth quarter of fiscal 2011, selling, general and administrative expense decreased $337,893 from the same quarter in the prior fiscal year as follows:

 

Sales and marketing expenses decreased $274,958, driven primarily by $6,224 in lower compensation expenses and $361,615 in lower sales office expenses due to office downsizing and office closures, offset somewhat by $92,881 in higher sales related expenses, primarily for commission and co-op advertising.

 

The decrease in technical support of $14,968 was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $4,163 was due primarily to lower compensation expenses and negotiated rent reductions. The decrease in stock compensation expense was due to fewer option grants issued at a lower fair value.

 

Research and development expenses

 

Research and development expenses for the three months ended June 30, 2012 decreased $156,075 from the same quarter in the prior fiscal year. The decrease was mainly due to lower compensation and compensation related expenses pursuant to an expense reduction plan implemented in the fourth quarter of fiscal 2011. The decrease in stock compensation expense was due to fewer option grants issued at a lower fair value.

 

 

Tax provision

 

Our tax provision for the three months ended June 30, 2012 and 2011 is as follows:

 

		Three months ended June 30,
		2012				2011
Current tax expense on international operations		$	25,469			$	29,289
Current state taxes			10,000				10,000
Deferred tax benefit			(116,627	)			(30,830	)
Tax provision (benefit)		$	(81,158	)		$	8,459

 

Deferred tax benefit for the three months ended June 30, 2012 was primarily due to increases in reserves and net operating losses offset somewhat by write-offs for bad debt.

 

Summary of operations

 

We recorded 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, compared to a net loss of $1,591,755 for the three months ended June 30, 2011, which resulted in basic and diluted net loss per share of $0.16 on weighted average basic and diluted shares of 10,122,344.

 

Options to purchase 1,531,567 and 1,501,317 shares of common stock, at prices from $0.77 to $7.45 and from $0.89 to $7.45, were outstanding for the three months ended June 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings (loss) per share because they were anti-dilutive.

 

 

NINE Month Period ENDED JUNE 30, 2012 Compared to THE NINE MONTH PERIOD ENDED JUNE 30, 2011

 

Results of operations for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011 is as follows:

 

		Nine				Nine
		Months				Months
		Ended				Ended				Variance				Percentage of sales
		06/30/12				06/30/11				$				2012				2011				Variance
Net Sales		$	35,963,918			$	32,066,525			$	3,897,393				100.00	%			100.00	%			0.00	%
Cost of sales			24,703,077				21,828,482				2,874,595				68.69	%			68.07	%			0.62	%
Gross Profit			11,260,841				10,238,043				1,022,798				31.31	%			31.93	%			-0.62	%
Gross Profit %			31.31	%			31.93	%			-0.62	%
Expenses:
Sales & marketing			5,674,601				6,713,710				(1,039,109	)			15.77	%			20.94	%			-5.17	%
Sales & marketing-PCTV			192,686				305,831				(113,145	)			0.54	%			0.95	%			-0.41	%
Technical support			277,659				325,857				(48,198	)			0.77	%			1.02	%			-0.25	%
General & administrative			2,248,113				2,259,663				(11,550	)			6.25	%			7.05	%			-0.80	%
General & administrative-PCTV			206,102				199,250				6,852				0.57	%			0.62	%			-0.05	%
Amortization of intangible assets			566,127				566,127				0				1.57	%			1.77	%			-0.20	%
Selling, general and administrative stock compensation expense			60,414				191,827				(131,413	)			0.17	%			0.60	%			-0.43	%
Total selling, general and administrative expense			9,225,702				10,562,265				(1,336,563	)			25.64	%			32.95	%			-7.31	%
Research and development			1,554,715				1,853,198				(298,483	)			4.32	%			5.78	%			-1.46	%
Research and development-PCTV			850,777				1,254,405				(403,628	)			2.37	%			3.91	%			-1.54	%
Research and development stock compensation expense			34,516				109,578				(75,062	)			0.10	%			0.34	%			-0.24	%
Total expenses			11,665,710				13,779,446				(2,113,736	)			32.43	%			42.98	%			-10.55	%
Loss from operations			(404,869	)			(3,541,403	)			3,136,534				-1.12	%			-11.05	%			9.93	%
Other income:
Interest income			3,802				8,569				(4,767	)			0.01	%			0.03	%			-0.02	%
Foreign currency			12,911				(2,455	)			15,366				0.04	%			-0.01	%			0.04	%
Total other income			16,713				6,114				10,599				0.05	%			0.02	%			0.03	%
Loss before tax provision			(388,156	)			(3,535,289	)			3,147,133				-1.07	%			-11.03	%			9.96	%
Current tax expense			107,864				138,345				(30,481	)			0.30	%			0.43	%			-0.13	%
Deferred tax expense			434,211				99,708				334,503				1.21	%			0.31	%			0.90	%
Net loss		$	(930,231	)		$	(3,773,342	)		$	2,843,111				-2.58	%			-11.77	%			9.19	%

 

 

Net sales for the nine months ended June 30, 2012 increased $3,897,393 compared to the nine months ended June 30, 2011 as shown in the table below.

 

										Increase
										(decrease)				Increase				Percentage of sales by
		Nine Months				Nine Months				Dollar				(decrease)				geographic region
		ended 06/30/12				ended 06/30/11				Variance				variance %				2012				2011
The Americas		$	19,290,328			$	18,916,028			$	374,300				2	%			54	%			59	%
Europe			15,225,059				12,285,865				2,939,194				24	%			42	%			38	%
Asia			1,448,531				864,632				583,899				68	%			4	%			3	%
Total		$	35,963,918			$	32,066,525			$	3,897,393				12	%			100	%			100	%

 

Led by sales of our video recorder and video streaming products, our sales increased by approximately 14.74% before the effect on sales caused by the decline in the Euro. The decline in the Euro resulted in a reduction in sales of approximately 2.58%. The average USD to Euro rate for the nine months ended June 30, 2012 was $1.31420 compared to $1.38910 for the nine months ended June 30, 2011, a reduction of approximately 5.39%.

 

Gross profit

 

Gross profit increased $1,022,798 for the nine months ended June 30, 2012 compared to the same period in the prior fiscal year. The increase in gross profit was due to:

 

		Nine Months ended
Gross profit in dollars-increase (decrease)		06/30/12
Higher sales		$	1,670,582
Weaker Euro			(828,851	)
Labor related and other costs			(323,964	)
Sales mix of higher gross profit retail sales			775,983
License fee adjustment			(379,874	)
Sales mix of OEM sales			108,922
Total increase in gross profit		$	1,022,798

 

The decrease in the gross profit percentage was due to:

 

		Nine Months ended
Gross profit percentage-increase (decrease)		06/30/12
Sales mix of higher gross profit retail sales			1.40	%
Weaker Euro			(1.32	)%
Labor related and other costs			0.29	%
License fee adjustment			(1.28	)%
Sales mix of OEM sales			0.29	%
Total gross profit percentage decrease			(0.62	)%

 

The factors contributing to the gross profit percentage decrease of 0.62% for the nine months ended June 30, 2012 were primarily:

 

 

·

Favorable gross profit percentage due to sales mix of higher average sales price retail sales resulted in an increase of 1.40%.

·

A decrease in the USD to Euro exchange rate from $1.38910 for the nine months ended June 30, 2011 to $1.31420 for the nine months ended June 30, 2012 resulted in a gross profit decrease of 1.32%

·

A decrease in the sales mix of lower gross profit OEM sales resulted in a gross profit increase of 0.29%

·

Labor related and other costs resulted in a gross profit increase of 0.29%

·

Lower license fee adjustments resulted in a gross profit decrease of 1.28%

 

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
		2012				2011				(Decrease)				2012				2011				(Decrease)
Sales and marketing-HCW		$	5,674,601			$	6,713,710			$	1,039,109	)			15.77	%			20.94	%			-5.17	%
Sales and marketing-PCTV			192,686				305,831				(113,145	)			0.54	%			0.95	%			-0.41	%
Technical support			277,659				325,857				(48,198	)			0.77	%			1.02	%			-0.25	%
General and administrative-HCW			2,248,113				2,259,663				(11,550	)			6.25	%			7.05	%			-0.80	%
General and administrative-PCTV			206,102				199,250				6,852				0.57	%			0.62	%			-0.05	%
Amortization of intangible assets			566,127				566,127				0				1.57	%			1.77	%			-0.20	%
Stock compensation			60,414				191,827				(131,413	)			0.17	%			0.60	%			-0.43	%
Total		$	9,225,702			$	10,562,265			$	1,336,563	)			25.64	%			32.95	%			-7.31	%

  

As a result of an expense reduction plan implemented in the fourth quarter of fiscal 2011, selling, general and administrative expense decreased $1,336,563 from the same period in the prior fiscal year as follows:

 

Sales and marketing expenses decreased $1,152,254, driven primarily by $65,868 in lower compensation expenses, $1,316,454 in lower sales office expenses due to office downsizing and office closures, offset somewhat by $230,068 in higher sales related expenses, primarily for commission and co-op advertising.

 

The decrease in technical support of $48,198 was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $4,698 was due primarily to decreases in rent and compensation expense offset by an increase in bad debt expense in recognition of potential non-collectible accounts. The decrease in stock compensation expense is due to fewer options issued at a lower fair value.

 

Research and development expenses

 

Research and development expenses for the nine months ended June 30, 2012 decreased $777,173 from the same period in the prior fiscal year. The decrease was mainly due to lower compensation and compensation related expenses pursuant to an expense reduction plan implemented in the fourth quarter of fiscal 2011. The decrease in stock compensation expense was due to fewer option grants issued at a lower fair value.

 

 

Tax provision (Benefit)

 

Our tax provision for the nine months ended June 30, 2012 and 2011 is as follows:

 

		Nine months ended June 30,
		2012				2011
Current tax expense on international operations		$	77,864			$	108,345
Current state taxes			30,000				30,000
Deferred tax expense			434,211				99,708
Tax provision		$	542,075			$	238,053

 

Deferred tax expense for the nine months ended June 30, 2012 was primarily due to the utilization of net operating losses and write-offs of inventory and bad debt.

 

Summary of operations

 

We recorded 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, compared to a net loss of $3,773,342 for the nine months ended June 30, 2011, which resulted in basic and diluted net loss per share of $0.37 on weighted average basic and diluted shares of 10,104,061.

 

Options to purchase 1,531,567 and 1,501,317 shares of common stock, at prices from $0.77 to $7.45 and from $0.89 to $7.45, were outstanding for the nine months ended June 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings (loss) 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 through December), followed by our second fiscal quarter (January through March). In addition, our international sales, mostly in the European market, were 41% of sales for the fiscal year ended September 30, 2011 and 54% for the fiscal year ended September 30, 2010. Part of our third and fourth quarters (April through June and July through 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, 2012 of $4,149,110, an increase of $68,573 from September 30, 2011.

 

The increase in cash was due to:

 

		Operating				Investing				Financing
		Activities				Activities				Activities				Total
Sources of cash:
Decrease in accounts receivable		$	1,715,178			$	0			$	0			$	1,715,178
Net loss adjusted for non cash items			778,337				0				0				778,337
Total sources of cash			2,493,515				0				0				2,493,515
Less cash used for:
Increase in inventory			(1,134,235	)			0				0				(1,134,235	)
Decrease in accounts payable and accrued expenses			(1,015,442	)			0				0				(1,015,442	)
Increase in prepaid expenses and other current assets			(163,884	)			0				0				(163,884	)
Capital equipment purchases			0				(39,430	)			0				(39,430	)
Total cash usage			(2,313,561	)			(39,430	)			0				(2,352,991	)
Effect of exchange rates on cash			0				0				0				(71,951	)
Net cash increase		$	179,954			$	(39,430	)		$	0			$	68,573

 

Cash provided by operating activities of $179,954 was due to a decrease in accounts receivable of $1,715,178 and the net loss adjusted for non cash items of $778,337 offset somewhat by increases in inventory and prepaid and other current assets of $1,298,119 and a decrease in accounts payable and accrued expenses of $1,015,442. The decrease in receivables was due to collections coupled with lower sales in our third fiscal quarter compared to our second fiscal quarter. The increase in inventory was due to material purchased in response to sales demand. The decrease in accounts payable and accrued expenses was due to payments to suppliers coupled with lower material purchases. Cash of $39,430 was used to purchase capital equipment. We had working capital of $62,947 as of June 30, 2012 compared to a working capital deficit of $8,033 as of September 30, 2011.

 

Our cash requirements for the next twelve months will include, among other things, the cash needed to fund our operating and working capital needs. During the fourth quarter of fiscal 2011 we put into place an expense reduction plan. With the proper execution of this plan and our business and operating plan, we believe that our cash and cash equivalents as of June 30, 2012 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 June 30, 2012:

 

		Payments due by period
		Total				Less than 1 year				1-3 years				3 to 5 years
Operating lease obligations		$	1,613,376			$	554,569			$	725,061			$	333,746

 

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 June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. We do not expect that the adoption of this disclosure-only guidance will have an impact on our consolidated financial results when it becomes effective during the Company’s first quarter of fiscal 2013 as the Company believes it already complies with the guidance.

 

In May 2011, the FASB issued amendments to fair value measurement and disclosure requirements. This guidance amends United States generally accepted accounting principles (“U.S. GAAP”) to conform with measurement and disclosure requirements in International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. This includes clarification of the Board’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions, some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word “shall” rather than “should” to describe the requirements in U.S. GAAP). This amended guidance is to be applied prospectively and became effective during the second quarter of fiscal 2012. This guidance did not have a material impact on results of operations or financial position.

 

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 June 30, 2012.

 

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, fluctuating currency rates, history of operating losses, 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, 2011, our Form 10-Q for the three months ended December 31, 2011, the three months ended March 31, 2012 and this Form 10-Q for the three months ended June 30, 2012.  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 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.

 

 

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, 2012	By:	/s/Kenneth Plotkin
		KENNETH PLOTKIN
		Chief Executive Officer, Chairman of the
		Board, President (Principal Executive Officer)

 

Date: August 14, 2012	By:	/s/Gerald Tucciarone
		GERALD TUCCIARONE
		Treasurer, Chief Financial Officer,
		(Principal Financial Officer and Principal
		Accounting Officer) and Secretary