Attached files
file | filename |
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EX-32 - HAUPPAUGE DIGITAL INC | v184883_ex32.htm |
EX-31.2 - HAUPPAUGE DIGITAL INC | v184883_ex31-2.htm |
EX-31.1 - HAUPPAUGE DIGITAL INC | v184883_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 March 31,
2010
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the transition period from _______ to ________
Commission
file number 1-13550
HAUPPAUGE DIGITAL
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
11-3227864
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
91 Cabot Court, Hauppauge,
New York 11788
(Address
of principal executive offices)
(631)
434-1600
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
YES ¨
NO
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
YES ¨
NO
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. (See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act).
¨ LARGE
ACCELERATED FILER
|
¨ ACCELERATED FILER
|
¨
NON-ACCELERATED FILER
|
x SMALLER
REPORTING COMPANY
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule12b-2 of the Exchange Act).
¨
YES x NO
As of
April 30, 2010, 10,069,070 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
|
3
|
Consolidated
Balance Sheets –
March
31, 2010 (unaudited) and September 30, 2009
|
3
|
Consolidated
Statements of Operations -
Three
Months ended March 31, 2010 (unaudited) and 2009
(unaudited)
|
4
|
Consolidated
Statements of Operations -
Six
Months ended March 31, 2010 (unaudited) and 2009
(unaudited)
|
5
|
Consolidated
Statements of Other Comprehensive Loss
Three
Months and Six Months ended March 31, 2010 (unaudited) and 2009
(unaudited)
|
6
|
Consolidated
Statements of Cash Flows - Six Months ended March 31, 2010 (unaudited) and
2009 (unaudited)
|
7
|
Notes
to Consolidated Financial Statements
|
8-16
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
17
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risks
|
26
|
Item 4T.
Controls and Procedures
|
26
|
PART II. OTHER
INFORMATION
|
|
Item
6. Exhibits
|
28
|
Signatures
|
29
|
2
PART I. FINANCIAL
INFORMATION
Item
1. Financial Statements
HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March 31,
2010
(unaudited)
|
September 30 ,
2009
|
|||||||
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 8,712,496 | $ | 8,368,342 | ||||
Trade
receivables, net of various allowances
|
7,335,968 | 9,770,584 | ||||||
Other
non trade receivables
|
4,263,465 | 4,116,392 | ||||||
Inventories
|
9,961,418 | 8,616,800 | ||||||
Deferred
tax asset-current
|
1,297,574 | 1,297,574 | ||||||
Prepaid
expenses and other current assets
|
1,145,158 | 928,680 | ||||||
Total
current assets
|
32,716,079 | 33,098,372 | ||||||
Intangible
assets, net
|
4,318,684 | 4,696,102 | ||||||
Property,
plant and equipment, net
|
641,754 | 757,488 | ||||||
Security
deposits and other non current assets
|
108,070 | 108,088 | ||||||
Deferred
tax asset-non current
|
887,611 | 887,611 | ||||||
Total
assets
|
$ | 38,672,198 | $ | 39,547,661 | ||||
Liabilities
and Stockholders’ Equity:
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 12,392,648 | $ | 12,478,625 | ||||
Accrued
expenses fees
|
5,681,983 | 5,753,546 | ||||||
Accrued
expenses
|
9,716,484 | 8,131,263 | ||||||
Note
payable
|
0 | 625,045 | ||||||
Income
taxes payable
|
209,332 | 224,316 | ||||||
Total
current liabilities
|
28,000,447 | 27,212,795 | ||||||
Stockholders'
Equity:
|
||||||||
Common
stock, $.01 par value; 25,000,000 shares authorized, 10,825,296 and
10,814,042 issued, respectively
|
108,253 | 108,140 | ||||||
Additional
paid-in capital
|
17,498,372 | 17,276,651 | ||||||
Retained
earnings (deficit)
|
(441,750 | ) | 795,674 | |||||
Accumulated
other comprehensive loss
|
(4,088,787 | ) | (3,441,262 | ) | ||||
Treasury
Stock, at cost, 759,579 shares
|
(2,404,337 | ) | (2,404,337 | ) | ||||
Total
stockholders' equity
|
10,671,751 | 12,334,866 | ||||||
Total
liabilities and stockholders' equity
|
$ | 38,672,198 | $ | 39,547,661 |
See accompanying notes to
consolidated financial statements
3
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 13,847,079 | $ | 12,733,429 | ||||
Cost
of sales
|
9,981,288 | 9,769,150 | ||||||
Gross
profit
|
3,865,791 | 2,964,279 | ||||||
Selling,
general and administrative expenses
|
3,777,737 | 3,861,671 | ||||||
Research
and development expenses
|
1,005,101 | 1,267,848 | ||||||
Loss
from operations
|
(917,047 | ) | (2,165,240 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
1,435 | 5,156 | ||||||
Interest
expense
|
- | (28,646 | ) | |||||
Foreign
currency gain
|
61,875 | 296,675 | ||||||
Total
other income
|
63,310 | 273,185 | ||||||
Loss
before tax provision
|
(853,737 | ) | (1,892,055 | ) | ||||
Tax
provision
|
49,136 | 40,015 | ||||||
Net
loss
|
$ | (902,873 | ) | $ | (1,932,070 | ) | ||
Net
loss per share:
|
||||||||
Basic
and diluted
|
$ | (0.09 | ) | $ | (0.19 | ) |
See
accompanying notes to consolidated financial statements
4
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six months ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 31,725,437 | $ | 30,022,109 | ||||
Cost
of sales
|
22,637,249 | 24,459,569 | ||||||
Gross
profit
|
9,088,188 | 5,562,540 | ||||||
Selling,
general and administrative expenses
|
8,110,260 | 7,700,567 | ||||||
Research
and development expenses
|
2,175,172 | 2,113,490 | ||||||
Loss
from operations
|
(1,197,244 | ) | (4,251,517 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
2,894 | 9,625 | ||||||
Interest
expense
|
(4,347 | ) | (28,646 | ) | ||||
Foreign
currency gain
|
61,635 | 643,677 | ||||||
Total
other income
|
60,182 | 624,656 | ||||||
Loss
before tax provision
|
(1,137,062 | ) | (3,626,861 | ) | ||||
Tax
provision
|
100,362 | 77,522 | ||||||
Net
loss
|
$ | (1,237,424 | ) | $ | (3,704,383 | ) | ||
Net
loss per share:
|
||||||||
Basic
and diluted
|
$ | (0.12 | ) | $ | (0.37 | ) |
See
accompanying notes to consolidated financial statements
5
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OTHER COMPREHENSIVE LOSS
(UNAUDITED)
Three
months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss
|
$ | (902,873 | ) | $ | (1,932,070 | ) | ||
Foreign
currency translation loss
|
(546,772 | ) | (319,673 | ) | ||||
Forward
exchange contracts marked to market gain (loss)
|
23,911 | (17,060 | ) | |||||
Other
comprehensive loss
|
$ | (1,425,734 | ) | $ | (2,268,803 | ) |
Six
months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss
|
$ | (1,237,424 | ) | $ | (3,704,383 | ) | ||
Foreign
currency translation loss
|
(669,012 | ) | (492,636 | ) | ||||
Forward
exchange contracts marked to market gain
|
21,487 | 37,674 | ||||||
Other
comprehensive loss
|
$ | (1,884,949 | ) | $ | (4,159,345 | ) |
See
accompanying notes to consolidated financial statements
6
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss
|
$ | (1,237,424 | ) | $ | (3,704,383 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
138,468 | 129,878 | ||||||
Amortization
of intangible assets
|
377,418 | 188,709 | ||||||
Stock
compensation expense
|
212,502 | 265,187 | ||||||
Sales
reserve, net
|
223,300 | - | ||||||
Bad
debt reserve
|
40,000 | - | ||||||
Other
non cash items
|
18 | (6,129 | ) | |||||
Changes
in current assets and liabilities, net of effects of
acquisition:
|
||||||||
Accounts
receivable
|
1,354,543 | 2,125,931 | ||||||
Inventories
|
(674,918 | ) | 1,754,778 | |||||
Prepaid
expenses and other current assets
|
(216,478 | ) | (5,193 | ) | ||||
Accounts
payable
|
(1,527,858 | ) | (2,614,412 | ) | ||||
Accrued
expenses and other current liabilities
|
2,826,842 | 1,648,481 | ||||||
Total
adjustments
|
2,753,837 | 3,487,230 | ||||||
Net
cash provided by (used in) operating activities
|
1,516,413 | (217,153 | ) | |||||
Cash
Flows From Investing Activities:
|
||||||||
PCTV
acquisition
|
(511,332 | ) | (2,970,499 | ) | ||||
Purchases
of property, plant and equipment
|
(22,734 | ) | (7,926 | ) | ||||
Net
cash used in investing activities
|
(534,066 | ) | (2,978,425 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from the exercise of stock options and employee stock
purchases
|
9,332 | 19,282 | ||||||
Net
cash provided by financing activities
|
9,332 | 19,282 | ||||||
Effect
of exchange rates on cash
|
(647,525 | ) | (454,962 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
344,154 | (3,631,258 | ) | |||||
Cash
and cash equivalents, beginning of period
|
8,368,342 | 14,191,721 | ||||||
Cash
and cash equivalents, end of period
|
$ | 8,712,496 | $ | 10,560,463 | ||||
Supplemental
disclosures:
|
||||||||
Interest
paid
|
$ | 4,347 | $ | 28,646 | ||||
Income
taxes paid
|
$ | 106,451 | $ | 21,354 | ||||
Note
payable to Avid Technology, Inc.
|
$ | - | $ | 2,500,000 |
See
accompanying notes to consolidated financial statements
7
HAUPPAUGE DIGITAL INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1. Basis of Presentation
The
accompanying unaudited consolidated financial statements for Hauppauge Digital
Inc. and subsidiaries (collectively, the “Company”) included herein have been
prepared in accordance with generally accepted accounting principles for interim
period reporting in conjunction with the instructions to Form 10-Q. Accordingly,
these statements do not include all of the information required by generally
accepted accounting principles for annual financial statements. In the opinion
of management, all known adjustments (consisting of normal recurring accruals
and reserves) necessary to present fairly the Company’s consolidated financial
position, results of operations and cash flows as of and for the interim periods
have been included. It is suggested that these interim statements be read in
conjunction with the financial statements and related notes included in the
Company's September 30, 2009 Form 10-K.
The
operating results for the three and six months ended March 31, 2010 are not
necessarily indicative of the results to be expected for the September 30, 2010
year end.
Certain
reclassifications have been made to prior consolidated financial statements to
conform to the current classifications.
Management
has evaluated subsequent events after the balance sheet date through the
issuance of the financial statements for appropriate accounting and disclosure
through the filing date of this Form 10-Q.
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 March 31, 2010 and September
30, 2009 consisted of:
8
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31,
|
September
30,
|
|||||||
2010
|
2009
|
|||||||
Trade
receivables
|
$ | 12,165,660 | $ | 13,893,804 | ||||
Allowances
and reserves
|
(4,829,692 | ) | (4,123,220 | ) | ||||
Total
trade receivables
|
7,335,968 | 9,770,584 | ||||||
Receivable
from contract manufacturers
|
3,590,656 | 2,933,918 | ||||||
GST
and VAT taxes receivables
|
598,557 | 1,134,331 | ||||||
Other
|
74,252 | 48,143 | ||||||
Total
non trade receivables
|
$ | 4,263,465 | $ | 4,116,392 |
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:
March 31,
|
September
30,
|
||||||||
2010
|
2009
|
||||||||
Component
parts
|
$ | 3,255,847 | $ | 2,799,723 | |||||
Finished
goods
|
6,705,571 | 5,817,077 | |||||||
$ | 9,961,418 | $ | 8,616,800 |
Note
4. Intangible Assets
The
following is a summary of intangible assets as of March 31, 2010:
Net
|
Weighted
|
|||||||||||||||
Purchase
|
Accumulated
|
Book
|
average
remaining
|
|||||||||||||
Asset description
|
cost
|
Amortization
|
Value
|
life (in years)
|
||||||||||||
Customer
relationships
|
$ | 1,644,353 | $ | (171,287 | ) | $ | 1,473,066 | 10.75 | ||||||||
Value
of technology
|
1,849,897 | (330,339 | ) | 1,519,558 | 5.75 | |||||||||||
Covenant
not to compete
|
1,767,979 | (441,919 | ) | 1,326,060 | 3.75 | |||||||||||
Total
intangible assets
|
$ | 5,262,229 | $ | (943,545 | ) | $ | 4,318,684 | 8.03 |
Amortization
expense totaled approximately $377,000 for the six months ended March 31, 2010.
Amortization expense is expected to be approximately $755,000 for each of the
fiscal years ended September 30, 2010, 2011, 2012 and 2013, respectively, and
$490,000 for the year ended September 30, 2014.
9
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
5. 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 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
|
Six
months ended
|
|||||||||||||||
March 31,
|
March 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Weighted
average shares outstanding-basic
|
10,065,344 | 10,043,876 | 10,062,545 | 10,039,434 | ||||||||||||
Number
of shares issued on the assumed exercise of stock options
|
- | - | - | - | ||||||||||||
Weighted
average shares outstanding-diluted
|
10,065,344 | 10,043,876 | 10,062,545 | 10,039,474 |
Options
to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05
to $7.45 and from $1.05 to $8.75 were outstanding for the three months and six
months ended March 31, 2010 and 2009, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive.
Note
6. 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 $3,441,262 recorded on the balance sheet as of September 30,
2009. For the six months ended March 31, 2010 the Company recorded on the
balance sheet translation losses of $669,012, resulting in an accumulated
translation loss of $4,110,274 recorded as a component of accumulated other
comprehensive income as of March 31, 2010.
10
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
7. Derivatives and Hedging Activities
For each
of the fiscal years ended September 30, 2009 and 2008 and the six months ended
March 31, 2010, at least 40 % of the Company’s sales were generated by its
European subsidiary and were invoiced and collected in local currency, which was
primarily the Euro. On the supply side, since the Company predominantly deals
with North American and Asian suppliers and contract manufacturers,
approximately 95% of the Company’s inventory required to support its European
sales are purchased and paid in U.S. Dollars. The combination of sales billed in
Euros supported by inventory purchased in U.S. dollars results in an absence of
a natural local currency hedge. Consequently, the Company’s financial results
are subject to market risks resulting from the fluctuations in the Euro to U.S.
Dollar exchange rates.
The
Company attempts to reduce these risks by entering into foreign exchange forward
contracts with financial institutions. The purpose of these forward contracts is
to hedge the foreign currency market exposures underlying the U.S. Dollar
denominated inventory purchases required to support its European
sales.
The
Company does not try to hedge against all possible foreign currency exposures
because of the inherent difficulty in estimating the volatility of the Euro. The
contracts the Company procures are specifically entered into to as a hedge
against forecasted or existing foreign currency exposure. The Company does not
enter into contracts for speculative purposes. Although the Company maintains
these programs to reduce the short term impact of changes in currency exchange
rates, long term strengthening or weakening of the U.S. Dollar against the Euro
impacts the Company’s sales, gross profit, operating income and retained
earnings. Factors that could impact the effectiveness of the Company’s hedging
program are:
|
·
|
volatility
of the currency markets
|
|
·
|
availability
of hedging instruments
|
|
·
|
accuracy
of the Company’s inventory
forecasts
|
Additionally,
there is the risk that foreign exchange fluctuations will make the Company’s
products less competitive in foreign markets, which would substantially reduce
the Company’s sales.
As
of March 31, 2010, the Company had foreign currency contracts outstanding of
approximately $393,000 against the delivery of the Euro. These contracts expire
each month through June 30, 2010. The Company had no forward exchange contracts
outstanding as of September 30, 2009.
The
Company’s accounting policies for these instruments designate such instruments
as cash flow hedging transactions. The Company does not enter into such
contracts for speculative purposes. The Company records all derivative gains and
losses on the balance sheet as a component of stockholders’ equity under the
caption “Accumulated other comprehensive loss.” For the six months ended March
31, 2010, the Company recorded on the balance sheet a mark to market deferred
forward exchange gain of $21,487.
11
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
8. Revenue recognition
The
Company sells through a sales channel which is comprised of retailers, PC
manufacturers and distributors. The majority of the Company’s customers are
granted lines of credit. The product is shipped on account with the majority of
customers typically given 30 to 45 day payment terms. Those customers deemed as
large credit risks either pay in advance or issue the Company a letter of
credit.
The
Company requires the customer to submit a purchase order to the Company. The
price of the product and payment terms are fixed per the terms of the purchase
order. Upon shipment of the order to the customer, the title to the goods is
passed to the customer. The customer is legally obligated to pay for the order
within the payment terms stated on the customer’s purchase order. The obligation
to insure the boards and the cost of any pilferage while in the customer’s
possession is the responsibility of the customer. The Company sells analog,
hybrid video recorders or digital computer boards that are stocked on the
shelves of retailers and are subject to the normal consumer traffic that retail
stores attract. Aside from normal store promotions such as advertisements in the
store’s circular, the Company has no further obligation to assist in the resale
of the products.
The
Company offers some of its customers a right of return. The Company’s accounting
complies with FASB ASC 605-15 (SFAS 48) Revenue Recognition when Right of Return
Exists, as typically at the end of every quarter the Company, based on
historical data, evaluates its sales reserve level based on the previous six
months sales. Due to the seasonal nature of the business coupled with the
changing economic environment, management exercises some judgment with regard to
the historical data when calculating the reserve.
The
Company offers mail-in rebates on certain products at certain times as
determined by the Company. The rebates are recorded as a reduction to sales. The
Company also participates in limited cooperative advertising programs with
retailers and distributors and accounts for these in accordance with FASB ASC
605-50 ( EITF 01-09), “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products)”.
Note
9. 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.
12
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company’s products fall under three product categories:
|
·
|
Analog
TV tuner boards
|
|
·
|
Digital
TV tuner, and combination analog and digital TV tuner,
boards
|
|
·
|
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.
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 shows on a PC for playback on
portable video players.
Sales by
functional category are as follows:
Three
months ended March 31,
|
Six
months ended March 31,
|
|||||||||||||||
Product line sales
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Analog
TV tuner products
|
$ | 135,719 | $ | 678,880 | $ | 430,189 | $ | 2,044,463 | ||||||||
Digital
and combination analog and digital TV tuner products
|
11,799,562 | 11,210,311 | 27,588,278 | 26,470,036 | ||||||||||||
Other
non-TV tuner products
|
1,911,798 | 844,238 | 3,706,970 | 1,507,610 | ||||||||||||
Total
sales
|
$ | 13,847,079 | $ | 12,733,429 | $ | 31,725,437 | $ | 30,022,109 |
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
percent by geographic region are as follows:
Three
months ended March 31,
|
Six
months ended March 31,
|
|||||||||||||||
Geographic region
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
The
Americas
|
45 | % | 57 | % | 44 | % | 48 | % | ||||||||
Europe
|
52 | % | 40 | % | 53 | % | 48 | % | ||||||||
Asia
|
3 | % | 3 | % | 3 | % | 4 | % | ||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % |
13
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
10. Tax provision
The
Company’s tax provision for the three months and six months ended March 31, 2010
and 2009 is as follows:
Three
months ended March 31,
|
Six
months ended March 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Tax
expense on international operations
|
$ | 39,136 | $ | 30,015 | $ | 80,362 | $ | 57,522 | ||||||||
State
taxes
|
10,000 | 10,000 | 20,000 | 20,000 | ||||||||||||
Tax
provision
|
$ | 49,136 | $ | 40,015 | $ | 100,362 | $ | 77,522 |
Note
11. Accrued expense- fees
The
Company uses technology licensed from third parties in certain products. The
Company enters into agreements to license this technology, and in return for the
use of the technology, the Company incurs a license fee for each unit sold that
includes the licensors’ technology. The licensing amount per unit varies by
licensor. The Company is obligated to provide the licensor with reports which
quantify the licenses used and these reports are subject to audits by the
licensor. The Company recognizes and estimates the amount of licensing fees owed
to third parties based on products sold that include software and technology
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
licensing fees are accounted for as a component of product cost and are charged
to cost of sales. As of March 31, 2010 and September 30, 2009 the amount of
accrued expenses relating to these license agreements amounted to $5,681,983 and
$5,753,546, respectively.
Note
12. Fair Value Measurements
Effective
October 1, 2008 the Company adopted ASC 820-10, Fair Value Measurements, for
financial assets and liabilities. This ASC defines fair value, 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.
14
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
At
March 31, 2010, the Company had forward contracts whose fair value at quarter
end was determined via inputs that included quoted prices for similar foreign
exchange contracts in active markets and were thus considered to be Level 2
inputs under the SFAS 157 hierarchy (see Note 7).
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.
Note
13. Acquisition of PCTV assets from Avid Technology, Inc.
Effective
December 24, 2008, pursuant to an Asset Purchase Agreement, dated as of October
25, 2008, as amended by that certain Amendment No. 1 to the Asset Purchase
Agreement (the “Amendment”) (together with the Amendment, the “Asset Purchase
Agreement”), PCTV Systems, Sarl, a Luxembourg company (“Buyer”) and the
Company’s wholly-owned subsidiary, acquired certain assets and properties (the
“Acquired Assets”) of Avid Technology, Inc. (“Avid”), a Delaware corporation,
Pinnacle Systems, Inc., a California corporation (“Pinnacle”), Avid Technology
GmbH, a limited liability
company organized under the laws of Germany, Avid Development GmbH, a limited
liability company organized under the laws of Germany, and Avid Technology
International BV (collectively, the “Sellers”). The Acquired Assets were used by
the Sellers in the business of, among other things, the development, manufacture
and sale of personal devices containing a television tuner for receiving
over-the-air, satellite and/or cable television signals that are used in
conjunction with personal computers for personal television viewing. The
potential increase in the Company’s customer base, the potential absorption of
the PCTV operations into the existing Hauppauge infrastructure with minimal
incremental costs plus the acquisition of the seller’s technology, reference
designs and product line were among the attributes that were considered in the
Company’s decision to complete the acquisition.
Because
the acquisition was completed on December 24, 2008, results from the operations
of the PCTV business effectively started on January 1, 2009. The following
unaudited pro forma results assume the acquisition occurred on October 1, 2008.
The pro forma results do not purport to represent what the Company’s results of
operations actually would have been if the transactions set forth above had
occurred on the date indicated or what the Company’s results of operations will
be in future periods. The financial results for the periods prior to the
acquisition were based on internal financial statements as provided by the
Sellers.
15
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six
months
|
||||
ended
|
||||
March 31,
|
||||
Pro forma statements:
|
2009
|
|||
Revenue
|
$ | 41,045,109 | ||
Net
loss
|
$ | (4,402,393 | ) | |
Net loss
per share
|
||||
Basic
net loss per share
|
$ | (0.44 | ) | |
Diluted
net loss per share
|
$ | (0.44 | ) |
16
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE
MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTH PERIOD ENDED MARCH
31, 2009
Results
of operations for the three months ended March 31, 2010 compared to March 31,
2009 is as follows:
Three
|
Three
|
|||||||||||||||||||||||
Months
|
Months
|
|||||||||||||||||||||||
Ended
|
Ended
|
Variance
|
Percentage
of sales
|
|||||||||||||||||||||
3/31/10
|
3/31/09
|
$ | 2010 |
2009
|
Variance
|
|||||||||||||||||||
Net
Sales
|
$ | 13,847,079 | $ | 12,733,429 | $ | 1,113,650 | 100.00 | % | 100.00 | % | - | |||||||||||||
Cost
of sales
|
9,981,288 | 9,769,150 | 212,138 | 72.08 | % | 76.72 | % | -4.64 | % | |||||||||||||||
Gross
Profit
|
3,865,791 | 2,964,279 | 901,512 | 27.92 | % | 23.28 | % | 4.64 | % | |||||||||||||||
Gross
Profit %
|
27.92 | % | 23.28 | % | 4.64 | % | ||||||||||||||||||
Expenses:
|
||||||||||||||||||||||||
Sales
& marketing
|
2,406,232 | 2,356,129 | 50,103 | 17.38 | % | 18.50 | % | -1.12 | % | |||||||||||||||
Sales
& marketing-PCTV
|
112,924 | 88,045 | 24,879 | 0.82 | % | 0.69 | % | 0.13 | % | |||||||||||||||
Technical
support
|
123,329 | 135,600 | (12,271 | ) | 0.89 | % | 1.06 | % | -0.17 | % | ||||||||||||||
General &
administrative
|
808,853 | 864,058 | (55,205 | ) | 5.84 | % | 6.79 | % | -0.95 | % | ||||||||||||||
General &
administrative-PCTV
|
69,234 | 143,701 | (74,467 | ) | 0.50 | % | 1.13 | % | -0.63 | % | ||||||||||||||
Amortization
of intangible assets
|
188,709 | 188,709 | 0 | 1.36 | % | 1.48 | % | -0.12 | % | |||||||||||||||
Selling,
general and administrative stock compensation expense
|
68,456 | 85,429 | (16,973 | ) | 0.49 | % | 0.67 | % | -0.18 | % | ||||||||||||||
Total
selling, general and administrative expense
|
3,777,737 | 3,861,671 | (83,934 | ) | 27.28 | % | 30.32 | % | -3.04 | % | ||||||||||||||
Research
and development
|
524,483 | 790,265 | (265,782 | ) | 3.79 | % | 6.21 | % | -2.42 | % | ||||||||||||||
Research
and development-PCTV
|
442,823 | 430,418 | 12,405 | 3.20 | % | 3.38 | % | -0.18 | % | |||||||||||||||
Research
and development stock compensation expense
|
37,795 | 47,165 | (9,370 | ) | 0.27 | % | 0.37 | % | -0.10 | % | ||||||||||||||
Total
expenses
|
4,782,838 | 5,129,519 | (346,681 | ) | 34.54 | % | 40.28 | % | -5.74 | % | ||||||||||||||
Net
loss from operations
|
(917,047 | ) | (2,165,240 | ) | 1,248,193 | -6.62 | % | -17.00 | % | 10.38 | % | |||||||||||||
Other
income :
|
||||||||||||||||||||||||
Interest
income
|
1,442 | 5,156 | (3,714 | ) | 0.01 | % | 0.04 | % | -0.03 | % | ||||||||||||||
Interest
(expense)
|
0 | (28,646 | ) | 28,646 | 0.00 | % | -0.22 | % | 0.22 | % | ||||||||||||||
Foreign
currency
|
61,868 | 296,675 | (234,807 | ) | 0.45 | % | 2.33 | % | -1.88 | % | ||||||||||||||
Total
other income
|
63,310 | 273,185 | (209,875 | ) | 0.46 | % | 2.15 | % | -1.69 | % | ||||||||||||||
Loss
before tax provision
|
(853,737 | ) | (1,892,055 | ) | 1,038,318 | -6.16 | % | -14.85 | % | 8.69 | % | |||||||||||||
Income
tax provision
|
49,136 | 40,015 | 9,121 | 0.35 | % | 0.31 | % | 0.04 | % | |||||||||||||||
Net
loss
|
$ | (902,873 | ) | $ | (1,932,070 | ) | $ | 1,029,197 | -6.51 | % | -15.16 | % | 8.65 | % |
17
Net sales
for the three months ended March 31, 2010 increased $1,113,650 compared to the
three months ended March 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 3/31/10
|
ended 3/31/09
|
variance
|
variance %
|
2010
|
2009
|
|||||||||||||||||||
The
Americas
|
$ | 6,318,133 | $ | 7,233,329 | $ | (915,196 | ) | -13 | % | 45 | % | 57 | % | |||||||||||
Europe
|
7,141,656 | 5,136,179 | 2,005,477 | 39 | % | 52 | % | 40 | % | |||||||||||||||
Asia
|
387,290 | 363,921 | 23,369 | 6 | % | 3 | % | 3 | % | |||||||||||||||
Total
|
$ | 13,847,079 | $ | 12,733,429 | $ | 1,113,650 | 9 | % | 100 | % | 100 | % |
The
sales increase was attributable to increased international sales due to the
addition of customers acquired in the PCTV acquisition, increased sales to
computer manufacturers and a strengthening of the Euro exchange rate against the
U.S. dollar. A favorable mix of higher sales priced product contributed to a
1.67% increase in the average sales price while units sales increased by about
14.50%.
Gross
profit
Gross
profit increased $901,512 for the three months ended March 31, 2010 compared to
the same period in the prior year. The increase in gross profit was due
to:
The
increase in the gross profit is detailed below:
Increase (decrease)
|
||||
Increased
sales
|
$ | 380,244 | ||
Increase
due to strengthening of the Euro exchange rate
|
357,452 | |||
Higher
gross profit due to favorable sales mix, including PCTV
products
|
266,591 | |||
Higher
production and production related expenses
|
(102,775 | ) | ||
Total
increase in gross profit
|
$ | 901,512 |
Gross
profit percentage for the three months ended March 31, 2010 was 27.92 % compared
to 23.28% for the three months ended March 31, 2009, resulting in a gross profit
percentage increase of 4.64%.
The
increase in gross profit percentage is detailed below:
Increase (decrease)
|
||||
Higher
gross profit due to favorable sales mix, including PCTV
products
|
2.68 | % | ||
Increase
due to strengthening of the Euro exchange rate
|
1.83 | % | ||
Production
and production related expenses
|
0.13 | % | ||
Net
increase in gross profit percentage
|
4.64 | % |
18
Selling,
general and administrative expenses
The chart
below illustrates the components of selling, general and administrative
expense.
Three months ended March 31,
|
||||||||||||||||||||||||
Dollar Costs
|
Percentage of Sales
|
|||||||||||||||||||||||
2010
|
2009
|
Decrease
|
2010
|
2009
|
Increase
|
|||||||||||||||||||
Sales
and marketing-HCW
|
$ | 2,406,232 | $ | 2,356,129 | $ | 50,103 | 17.38 | % | 18.50 | % | -1.12 | % | ||||||||||||
Sales
and marketing-PCTV
|
112,924 | 88,045 | 24,879 | 0.82 | % | 0.69 | % | 0.13 | % | |||||||||||||||
Technical
support
|
123,329 | 135,600 | (12,271 | ) | 0.89 | % | 1.06 | % | -0.17 | % | ||||||||||||||
General
and administrative-HCW
|
808,853 | 864,058 | (55,205 | ) | 5.84 | % | 6.79 | % | -0.95 | % | ||||||||||||||
General
and administrative-PCTV
|
69,234 | 143,701 | (74,467 | ) | 0.50 | % | 1.13 | % | -0.63 | % | ||||||||||||||
Amortization
of intangible assets
|
188,709 | 188,709 | 0 | 1.36 | % | 1.48 | % | -0.12 | % | |||||||||||||||
Stock
compensation
|
68,456 | 85,429 | (16,973 | ) | 0.49 | % | 0.67 | % | -0.18 | % | ||||||||||||||
Total
|
$ | 3,777,737 | $ | 3,861,671 | $ | (83,934 | ) | 27.28 | % | 30.32 | % | -3.04 | % |
Selling,
general and administrative expense decreased $83,934 from last year’s second
quarter as follows.
Excluding
the PCTV expenses and amortization of intangible assets acquired in the PCTV
acquisition, selling, general and administrative expense decreased $34,346 from
the prior year’s second quarter. Sales and marketing expense for HCW increased
$50,103, driven by a $94,316 expense increase resulting from the increase in the
Euro exchange rate compared to the U.S. dollar and an increase in sales volume
related expenses, mainly commissions and co-op advertising expense of $72,998,
offset by reductions in trade show expenses of $24,025 and lower sales office
expenses of $92,686, mainly due to personnel and overhead
reductions.
Sales and
marketing expenses related to the PCTV product line increased $24,879, primarily
due to personnel and
overhead expenses.
The
decrease in general and administrative expense for HCW of $55,205 was primarily
due to lower professional fees, primarily for legal, consulting fees and
directors fees of $106,651 and a decrease in compensation expense of $19,147 due
to staff reductions and a 10% salary reduction, offset by higher rent expense of
$5,255, higher bad debt expense of $20,000 and higher credit costs of $45,338
due primarily for premiums paid to purchase Euro denominated option put
contracts.
General
and administrative expenses related to the PCTV product line decreased $74,467,
primarily due to expenses related to a transitional services agreement in effect
with Avid during the second fiscal quarter of 2009. This agreement was
terminated during the third fiscal quarter of 2009.
Research
and development expenses
Research
and development expense for the three months ended March 31, 2010 decreased
$262,747 from the three months ended March 31, 2009 as follows:
HCW
|
PCTV
|
Total
|
||||||||||
Research
and development expense-HCW
|
$ | (265,782 | ) | $ | 0 | $ | (265,782 | ) | ||||
Research
and development expense-PCTV
|
0 | 12,405 | 12,405 | |||||||||
Stock
compensation expense
|
(9,370 | ) | 0 | (9,370 | ) | |||||||
Total
research and development expense
|
$ | (275,152 | ) | $ | 12,405 | $ | (262,747 | ) |
19
Excluding
the expense of the PCTV division, research and development expense decreased
$265,782 from the prior year’s second fiscal quarter. The decrease was primarily
due to personnel and personnel related reductions and the number of development
programs in process.
Offsetting
the expense decreases were increases of $12,405 related to personnel and product
development programs of the PCTV business.
Tax
provision
Our tax
provision for the three months ended March 31, 2010 and 2009 is as
follows:
Three months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Tax expense on
international operations
|
$ | 39,136 | $ | 30,015 | ||||
State
taxes
|
10,000 | 10,000 | ||||||
Tax
provision
|
$ | 49,136 | $ | 40,015 |
Summary
We
recorded a net loss of $902,873, for the three months ended March 31, 2010,
which resulted in basic and diluted net loss per share of $0.09 on weighted
average basic and diluted shares of 10,065,344 compared to a net loss of
$1,932,070 for the three months ended March 31, 2009, which resulted in basic
and diluted net loss per share of $0.19 on weighted average basic and diluted
shares of 10,043,876.
Options
to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05
to $7.45 and from $1.05 to $8.75, were outstanding for the three months ended
March 31, 2010 and 2009, respectively, but were not included in the computation
of diluted earnings per share because they were anti-dilutive.
20
SIX
MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE SIX MONTH PERIOD
ENDED
MARCH 31, 2009
Results
of operations for the six months ended March 31, 2010 compared to March 31, 2009
is as follows:
Six
|
Six
|
|||||||||||||||||||||||
Months
|
Months
|
|||||||||||||||||||||||
Ended
|
Ended
|
Variance
|
Percentage of sales
|
|||||||||||||||||||||
3/31/10
|
3/31/09
|
$
|
2010
|
2009
|
Variance
|
|||||||||||||||||||
Net
Sales
|
$ | 31,725,437 | $ | 30,022,109 | $ | 1,703,328 | 100.00 | % | 100.00 | % | 5.67 | % | ||||||||||||
Cost
of sales
|
22,637,249 | 24,459,569 | (1,822,320 | ) | 71.35 | % | 81.47 | % | -10.12 | % | ||||||||||||||
Gross
Profit
|
9,088,188 | 5,562,540 | 3,525,648 | 28.65 | % | 18.53 | % | 10.12 | % | |||||||||||||||
Gross
Profit %
|
28.65 | % | 18.53 | % | 10.12 | % | ||||||||||||||||||
Expenses:
|
||||||||||||||||||||||||
Sales
& marketing
|
5,307,047 | 5,115,420 | 191,627 | 16.73 | % | 17.04 | % | -0.31 | % | |||||||||||||||
Sales
& marketing-PCTV
|
237,637 | 88,045 | 149,592 | 0.75 | % | 0.29 | % | 0.46 | % | |||||||||||||||
Technical
support
|
244,502 | 270,984 | (26,482 | ) | 0.77 | % | 0.90 | % | -0.13 | % | ||||||||||||||
General &
administrative
|
1,644,530 | 1,722,851 | (78,321 | ) | 5.18 | % | 5.74 | % | -0.56 | % | ||||||||||||||
General
& administrative-PCTV
|
162,214 | 143,701 | 18,513 | 0.51 | % | 0.48 | % | 0.03 | % | |||||||||||||||
Amortization
of intangible assets
|
377,418 | 188,709 | 188,709 | 1.19 | % | 0.63 | % | 0.56 | % | |||||||||||||||
Selling,
general and administrative stock compensation expense
|
136,912 | 170,857 | (33,945 | ) | 0.43 | % | 0.57 | % | -0.14 | % | ||||||||||||||
Total
selling, general and administrative expense
|
8,110,260 | 7,700,567 | 409,693 | 25.56 | % | 25.65 | % | -0.09 | % | |||||||||||||||
Research
and development
|
1,152,240 | 1,588,742 | (436,502 | ) | 3.63 | % | 5.28 | % | -1.65 | % | ||||||||||||||
Research
and development-PCTV
|
947,342 | 430,418 | 516,924 | 2.99 | % | 1.43 | % | 1.56 | % | |||||||||||||||
Research
and development stock compensation expense
|
75,590 | 94,330 | (18,740 | ) | 0.24 | % | 0.30 | % | -0.06 | % | ||||||||||||||
Total
expenses
|
10,285,432 | 9,814,057 | 471,375 | 32.42 | % | 32.66 | % | -0.24 | % | |||||||||||||||
Loss
from operations
|
(1,197,244 | ) | (4,251,517 | ) | 3,054,273 | -3.77 | % | -14.13 | % | 10.36 | % | |||||||||||||
Other
income :
|
||||||||||||||||||||||||
Interest
income
|
2,894 | 9,625 | (6,731 | ) | 0.01 | % | 0.03 | % | -0.02 | % | ||||||||||||||
Interest (expense)
|
(4,347 | ) | (28,646 | ) | 24,299 | -0.01 | % | -0.10 | % | 0.09 | % | |||||||||||||
Foreign
currency
|
61,635 | 643,677 | (582,042 | ) | 0.19 | % | 2.14 | % | -1.95 | % | ||||||||||||||
Total
other income
|
60,182 | 624,656 | (564,474 | ) | 0.19 | % | 2.07 | % | -1.88 | % | ||||||||||||||
Loss
before tax provision
|
(1,137,062 | ) | (3,626,861 | ) | 2,489,799 | -3.58 | % | -12.06 | % | 8.48 | % | |||||||||||||
Income
tax provision
|
100,362 | 77,522 | 22,840 | 0.32 | % | 0.26 | % | 0.06 | % | |||||||||||||||
Net
loss
|
$ | (1,237,424 | ) | $ | (3,704,383 | ) | $ | 2,466,959 | -3.90 | % | -12.32 | % | 8.42 | % |
21
Net sales
for the six months ended March 31, 2010 increased $1,703,328 compared to the six
months ended March 31, 2009 as shown in the table below.
Increase
|
Increase
|
|||||||||||||||||||||||
(decrease)
|
(decrease)
|
Percentage of sales by
|
||||||||||||||||||||||
Six Months
|
Six Months
|
dollar
|
dollar
|
Geographic region
|
||||||||||||||||||||
ended 3/31/10
|
ended 3/31/09
|
variance
|
variance %
|
2010
|
2009
|
|||||||||||||||||||
The
Americas
|
$ | 13,981,231 | $ | 14,506,453 | $ | (525,222 | ) | -4 | % | 44 | % | 48 | % | |||||||||||
Europe
|
16,954,082 | 14,541,478 | 2,412,604 | 17 | % | 53 | % | 48 | % | |||||||||||||||
Asia
|
790,124 | 974,178 | (184,054 | ) | -19 | % | 3 | % | 4 | % | ||||||||||||||
Total
|
$ | 31,725,437 | $ | 30,022,109 | $ | 1,703,328 | 6 | % | 100 | % | 100 | % |
The sales
increase was attributable to increased international sales due to the addition
of customers acquired in the PCTV acquisition, increased sales to computer
manufacturers and a strengthening of the Euro exchange rate against the U.S.
dollar. A favorable mix of higher sales priced product contributed to a 8.09%
increase in the average sales price while units sales increased by about
3.00%.
Gross
profit
Gross
profit increased $3,525,648 for the six months ended March 31, 2010 compared to
the same period in the prior year. The increase in gross profit was due
to:
The
increase in the gross profit is detailed below:
Increase (decrease)
|
||||
Increased
sales
|
$ | 497,446 | ||
Increase
due to strengthening of the Euro exchange rate
|
1,143,879 | |||
Higher
gross profit due to favorable sales mix, including PCTV
products
|
2,081,391 | |||
Higher
production and production related expenses
|
(197,068 | ) | ||
Total
increase in gross profit
|
$ | 3,525,648 |
Gross
profit percentage for the six months ended March 31, 2010 was 28.65 % compared
to 18.53% for the six months ended March 31, 2009, resulting in a gross profit
percentage increase of 10.12%.
The
increase in gross profit percentage is detailed below:
Increase (decrease)
|
||||
Higher
gross profit due to favorable sales mix, including PCTV
products
|
7.61 | % | ||
Increase
due to strengthening of the Euro exchange rate
|
2.56 | % | ||
Production
and production related expenses
|
(0.05 | )% | ||
Net
increase in gross profit percentage
|
10.12 | % |
22
Selling,
general and administrative expenses
The chart
below illustrates the components of selling, general and administrative
expense.
Six months ended March 31,
|
||||||||||||||||||||||||
Dollar Costs
|
Percentage of Sales
|
|||||||||||||||||||||||
2010
|
2009
|
Decrease
|
2010
|
2009
|
Increase
|
|||||||||||||||||||
Sales
and marketing-HCW
|
$ | 5,307,047 | $ | 5,115,420 | $ | 191,627 | 16.73 | % | 17.04 | % | -0.31 | % | ||||||||||||
Sales
and marketing-PCTV
|
237,637 | 88,045 | 149,592 | 0.75 | % | 0.29 | % | 0.46 | % | |||||||||||||||
Technical
support
|
244,502 | 270,984 | (26,482 | ) | 0.77 | % | 0.90 | % | -0.13 | % | ||||||||||||||
General
and administrative-HCW
|
1,644,530 | 1,722,851 | (78,321 | ) | 5.18 | % | 5.74 | % | -0.56 | % | ||||||||||||||
General
and administrative-PCTV
|
162,214 | 143,701 | 18,513 | 0.51 | % | 0.48 | % | 0.03 | % | |||||||||||||||
Amortization
of intangible assets
|
377,418 | 188,709 | 188,709 | 1.19 | % | 0.63 | % | 0.56 | % | |||||||||||||||
Stock
compensation
|
136,912 | 170,857 | (33,945 | ) | 0.43 | % | 0.57 | % | -0.14 | % | ||||||||||||||
Total
|
$ | 8,110,260 | $ | 7,700,567 | $ | 409,693 | 25.56 | % | 25.65 | % | -0.09 | % |
Selling,
general and administrative expense for the six months ended March 31, 2010
increased $409,693 compared to the same period in the prior year.
Excluding
the PCTV expenses and amortization of intangible assets acquired in the PCTV
acquisition, selling, general and administrative expense increased $52,879 over
the prior year. Sales and marketing expense for HCW increased $191,627, driven
by a $302,577 expense increase resulting from the increase in the Euro exchange
rate compared to the U.S. dollar and an increase in sales volume related
expenses, mainly commissions and co-op advertising expense of $170,500, offset
by reductions in trade show expenses of $47,178, lower sales office expenses of
$207,783 mainly due to personnel and overhead reductions, and lower sales
compensation expense due to personnel reductions of $26,489.
Sales and
marketing expenses related to the PCTV product line increased $149,592. The PCTV
acquisition was finalized at the end of December 2008, so the results for six
months ended March 31, 2009 only included three months of PCTV expense while the
results for the six months ended March 31, 2010 included PCTV expenses for
six months.
The
decrease in general and administrative expense for HCW of $78,321 was primarily
due to lower professional fees, mainly for legal, consulting fees and directors
fees of $115,793 and a decrease in compensation expense of $44,640 due to staff
reductions and a 10% salary reduction, offset by higher rent expense of $6,427,
higher bad debt expense of $40,000 and higher credit costs of $35,685 due
primarily for premiums paid to purchase Euro denominated option put
contracts.
General
and administrative expenses related to the PCTV product line increased $18,513.
The PCTV acquisition was finalized at the end of December 2008, so the results
for the six months ended March 31, 2009 only included three months of PCTV
expense, while the results for the six months ended March 31, 2010
included PCTV expenses for six months.
Amortization
of intangible assets of $188,709 was related to intangible assets acquired in
the purchase of the PCTV business. The PCTV acquisition was finalized at
the end of December 2008, so the results for the six months ended March 31, 2009
only included three months of intangible asset amortization while the results
for the six months ended March 31, 2010 included six months of intangible asset
amortization.
23
Research
and development expenses
Research
and development expense for the six months ended March 31, 2010 increased
$61,682 from the six months ended March 31, 2009 as follows:
HCW
|
PCTV
|
Total
|
||||||||||
Research
and development expense-HCW
|
$ | (436,502 | ) | $ | 0 | $ | (436,502 | ) | ||||
Research
and development expense-PCTV
|
0 | 516,924 | 516,924 | |||||||||
Stock
compensation expense
|
(18,740 | ) | 0 | (18,740 | ) | |||||||
Total
research and development expense
|
$ | (455,242 | ) | $ | 516,924 | $ | 61,682 |
Excluding
the expense of the PCTV division, research and development expense decreased
$436,502 from the same period in the prior year. The decrease was primarily due
to personnel and personnel related reductions and the number of development
programs in process.
Offsetting
the expense decreases were $516,924 in expense related to personnel and
development programs of the PCTV business acquired at the end of December 2008.
The PCTV acquisition was
finalized at the end of December 2008, so the results for the six months ended
March 31, 2009 only included three months of research and development expense,
while the results for the six months ended March 31, 2010 included six months of
research and development expense.
Tax
provision
Our tax
provision for the six months ended March 31, 2010 and 2009 is as
follows:
Six months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Tax expense on
international operations
|
$ | 80,362 | $ | 57,522 | ||||
State
taxes
|
20,000 | 20,000 | ||||||
Tax
provision
|
$ | 100,362 | $ | 77,522 |
Summary
We
recorded a net loss of $1,237,424 for the six months ended March 31, 2010, which
resulted in basic and diluted net loss per share of $0.12 on weighted average
basic and diluted shares of 10,062,545 compared to a net loss of $3,704,383 for
the six months ended March 31, 2009, which resulted in basic and diluted net
loss per share of $0.37 on weighted average basic and diluted shares of
10,039,434.
Options
to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05
to $7.45 and from $1.05 to $8.75 were outstanding for the six months ended March
31, 2010 and 2009, respectively, but were not included in the computation of
diluted earnings per share because they were anti-dilutive.
24
Seasonality
As our
sales are primarily to the consumer market, we have experienced certain seasonal
revenue trends. Our peak sales quarter due to holiday season sales of computer
equipment 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 52% of sales for the two years ended
September 30, 2009 and 2008 respectively, and 56% for the six months ended March
31, 2010. 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 March 31, 2010 and
September 30, 2009 is set forth below:
March 31, 2010
|
September 30, 2009
|
|||||||
Cash
|
$ | 8,712,496 | $ | 8,368,342 | ||||
Working
Capital
|
4,715,632 | 5,885,577 | ||||||
Stockholders’
Equity
|
10,671,751 | 12,334,866 |
The
Company had cash and cash equivalents as of March 31, 2010 of $8,712,496, an
increase of $344,154 from September 30, 2009.
The
increase in cash was due to:
Operating
|
Investing
|
Financing
|
||||||||||||||
|
Activities
|
activities
|
Activities
|
Total
|
||||||||||||
Sources
of
cash:
|
||||||||||||||||
Decrease
in accounts receivable
|
$ | 1,354,543 | $ | - | $ | - | $ | 1,354,543 | ||||||||
Increase
in accounts payable and accrued expenses
|
1,298,984 | 1,298,984 | ||||||||||||||
Proceeds
from employee stock purchases
|
- | - | 9,332 | 9,332 | ||||||||||||
Total
sources of cash
|
2,653,527 | - | 9,332 | 2,662,859 | ||||||||||||
Less
cash used for:
|
||||||||||||||||
Increase
in inventory
|
$ | (674,918 | ) | $ | - | $ | - | $ | (674,918 | ) | ||||||
Effect
of exchange rates
|
(647,525 | ) | - | - | (647,525 | ) | ||||||||||
PCTV
acquisition-net of note payable
|
- | (511,332 | ) | - | (511,332 | ) | ||||||||||
Net
loss adjusted for non cash items
|
(245,718 | ) | - | - | (245,718 | ) | ||||||||||
Increase
in prepaid expenses and other current assets
|
(216,478 | ) | - | - | (216,478 | ) | ||||||||||
Capital
equipment purchases
|
- | (22,734 | ) | - | (22,734 | ) | ||||||||||
Total
usages of cash
|
(1,784,639 | ) | (534,066 | ) | - | (2,318,705 | ) | |||||||||
Net
cash increase
|
$ | 868,888 | $ | (534,066 | ) | $ | 9,332 | $ | 344,154 |
25
Net cash
provided by operating activities was due to an increase in accounts payable and
accrued expenses of $1,298,984 and a decrease in accounts receivable of
$1,354,543. The decrease in accounts receivable was primarily due to lower
fiscal second quarter sales compared to fiscal first quarter sales. Offsetting
these cash increases were increases in inventory and prepaid expenses of
$674,948 and $216,478, respectively. The increase in inventory was needed
to cover expected sales volume for the third fiscal quarter. The net loss
adjusted for non cash items consumed $245,718 in cash.
Cash of
$534,066 was used in investing activities. Of this amount, the Company
paid $511,332 on the note payable to Avid Technologies, Inc. and $22,734 was
used to purchase fixed assets. As of December 31, 2009, the note to Avid
Technologies, Inc. was fully paid. Cash of $9,332 from financing
activities came from purchases of stock under our employee stock purchase
plan.
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 March 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 March 31, 2010:
Payments due by period
|
||||||||||||||||
Total
|
Less than 1 year
|
1-3 years
|
3 to 5 years
|
|||||||||||||
Operating
lease obligations
|
$ | 1,450,447 | $ | 730,938 | $ | 587,462 | $ | 132,047 |
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 affect on us.
Item
3. Quantitative and qualitative disclosures about market
risks
Item 305
of Regulation S-K “Quantitative and Qualitative Disclosures About Market Risks”
is not required for Smaller Reporting Companies.
Item
4T. 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.
26
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 March 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 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 may not occur. Generally, these statements
relate to our 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. Factors that could cause
actual results to differ materially from those set forth or implied by any
forward-looking statement include, but are not limited to, the mix of products
sold and the profit margins thereon, order cancellation or a reduction in orders
from customers, competitive product offerings and pricing actions, the
availability and pricing of key raw materials, the availability of financing,
dependence on key members of management, successful integration of acquisitions,
economic conditions in the United States and abroad, 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, 2009, our Form 10-Q for the three months
ended December 31, 2009 and this Quarterly Report. Copies of these filings are
available at www.sec.gov.
Any one
or more of these uncertainties, risks and other influences could materially
affect our results of operations and whether forward-looking statements made by
us ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly
update or revise any forward-looking statements, whether from new information,
future events or otherwise.
27
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
|
|
32.0
|
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.
|
28
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:
May 14,
2010
|
By
|
/s/Kenneth Plotkin
|
|
KENNETH PLOTKIN
|
|||
Chief
Executive Officer, Chairman of the
|
|||
Board,
President (Principal Executive Officer)
|
|||
Date:
May 14,
2010
|
By
|
/s/Gerald Tucciarone
|
|
GERALD
TUCCIARONE
|
|||
Treasurer,
Chief Financial Officer,
|
|||
(Principal
Financial Officer and Principal
|
|||
Accounting
Officer) and
Secretary
|
29