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, 2014

 

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 April 24, 2014, 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   F-1
     
Item 1. Financial Statements   F-1
     
Consolidated Balance Sheets - March  31, 2014 (unaudited) and September 30, 2013   F-1
     
Consolidated Statements of Operations - Three Months ended March 31, 2014 (unaudited) and 2013 (unaudited)   F-2
     
Consolidated Statements of Operations - Six Months ended March 31, 2014 (unaudited) and 2013 (unaudited)   F-3
     
Consolidated Statements of Other Comprehensive (Loss) Income - Three Months and Six Months ended March 31, 2014 (unaudited) and 2013 (unaudited)   F-4
     
Consolidated Statements of Cash Flows - Six Months ended March 31, 2014 (unaudited) and 2013 (unaudited)   F-5
     
Notes to Consolidated Financial Statements   F-6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   3
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   12
     
Item 4. Controls and Procedures   13
     
PART II. OTHER INFORMATION   14
     
Item 6. Exhibits   14
     
Signatures   15

 

2
 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    March 31, 2014
(unaudited)
    September 30, 2013
(Note 1)
 
Assets:                
Cash and cash  equivalents   $ 1,460,505     $ 1,482,566  
Trade  receivables, net of allowances     2,318,382       2,180,276  
Other non-trade receivables     381,698       278,497  
Inventories     8,316,898       10,479,048  
Deferred tax asset-current     538,369       453,659  
Prepaid expenses and other current assets     1,094,013       1,155,054  
Total current assets     14,109,865       16,029,100  
                 
Property, plant and equipment, net     98,371       144,596  
Security deposits and other non-current assets     105,191       115,589  
Deferred tax asset non-current     470,673       692,225  
Total assets   $ 14,784,100     $ 16,981,510  
                 
Liabilities and  Stockholders’ Deficit:                
Current Liabilities:                
Accounts payable   $ 3,122,100     $ 3,758,876  
Accrued expenses-fees     12,295,464       12,497,060  
Accrued expenses     2,151,325       2,590,291  
Income taxes payable     196,841       188,187  
Total current  liabilities     17,765,730       19,034,414  
                 
Stockholders’ Deficit:                
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823  issued and 10,122,344 outstanding     108,828       108,828  
Additional paid-in capital     18,485,691       18,428,511  
Accumulated deficit     (14,515,640 )     (13,492,346 )
Accumulated other comprehensive loss     (4,654,961 )     (4,692,349 )
Treasury Stock, at cost, 760,479 shares     (2,405,548 )     (2,405,548 )
Total stockholders’ deficit     (2,981,630 )     (2,052,904 )
Total  liabilities and  stockholders’ deficit   $ 14,784,100     $ 16,981,510  

 

See accompanying notes to consolidated financial statements

 

F- 1
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three months ended March 31,  
    2014     2013  
             
Net sales   $ 5,848,229     $ 10,435,935  
Cost  of sales     3,601,843       6,891,508  
Gross profit     2,246,386       3,544,427  
                 
Selling, general and  administrative expenses     2,124,910       3,019,693  
Research and development expenses     697,552       789,911  
Loss from operations     (576,076 )     (265,177 )
                 
Other  expense:                
Interest  income     224       888  
Foreign currency loss     (3,207 )     (8,658 )
Total  other expense     (2,983 )     (7,770 )
Loss  before tax provision     (579,059 )     (272,947 )
Current tax expense     24,592       48,928  
Deferred tax expense     36,433       211,517  
Net loss   $ (640,084 )   $ (533,392 )
                 
Net loss per share:                
Basic and diluted   $ (0.06 )   $ (0.05 )

 

See accompanying notes to consolidated financial statements

 

F- 2
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Six months ended March 31,  
    2014     2013  
             
Net sales   $ 12,317,708     $ 22,366,313  
Cost  of sales     7,559,860       13,429,945  
Gross profit     4,757,848       8,936,368  
                 
Selling, general and  administrative expenses     4,192,608       5,893,467  
Research and development expenses     1,389,334       1,496,838  
(Loss) income  from operations     (824,094 )     1,546,063  
                 
Other  expense:                
Interest  income     422       1,968  
Foreign currency loss     (8,905 )     (6,588 )
Total  other expense     (8,483 )     (4,620 )
(Loss) income  before tax provision     (832,577 )     1,541,443  
Current tax expense     53,875       101,433  
Deferred tax expense     136,842       683,316  
Net (loss) income   $ (1,023,294 )   $ 756,694  
                 
Net (loss) income  per share:                
Basic and diluted   $ (0.10 )   $ 0.07  

 

See accompanying notes to consolidated financial statements

 

F- 3
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

 

    Three months ended March 31,  
    2014     2013  
Net loss   $ (640,084 )   $ (533,392 )
Foreign currency translation gain (loss)     9,437       (142,979 )
Other comprehensive loss   $ (630,647 )   $ (676,371 )

 

    Six months  ended March 31,  
    2014     2013  
Net (loss) income   $ (1,023,294 )   $ 756,694  
Foreign currency translation gain (loss)     37,388       (73,571 )
Other comprehensive (loss) income   $ (985,906 )   $ 683,123  

 

See accompanying notes to consolidated financial statements

 

F- 4
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Six months ended March 31,  
    2014     2013  
Cash Flows From Operating Activities:                
Net (loss) income   $ (1,023,294 )   $ 756,694  
Adjustments to reconcile net (loss) income to net cash used in operating  activities:                
Depreciation and amortization     45,887       59,168  
Amortization of intangible assets     -       377,418  
Stock  compensation expense     57,180       54,931  
Deferred tax expense     136,842       683,316  
Sales reserve, net     -       (174,749 )
Inventory reserve     202,920       200,000  
Other  items     19,965       (8,165 )
Changes in current assets and liabilities:                
Accounts receivable and other non-trade receivables     (212,772 )     (1,904,970 )
Inventories     1,959,230       (1,177,010 )
Prepaid expenses and other current assets     65,502       (62,303 )
Accounts payable     (644,067 )     335,538  
Accrued expenses  and other current liabilities     (636,300 )     (1,086,545 )
Total adjustments     994,387       (2,703,371 )
Net cash used in operating activities     (28,907 )     (1,946,677 )
                 
Cash Flows From Investing Activities:                
Purchases of property, plant and equipment     -       (29,383 )
Net cash used in investing activities     -       (29,383 )
Effect of exchange rates on cash     6,846       12,266  
Net decrease in cash and cash equivalents     (22,061 )     (1,963,794 )
Cash and cash equivalents, beginning of period     1,482,566       5,095,853  
Cash and cash equivalents, end of period   $ 1,460,505     $ 3,132,059  
                 
Supplemental disclosures:                
Income taxes paid   $ 44,441     $ 92,383  

 

See accompanying notes to consolidated financial statements

 

F- 5
 

   

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. The September 30, 2013 consolidated balance sheet has been derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP. 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, 2013 Form 10-K.

 

The operating results for the three and six months ended March 31, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2014.

 

The Company’s cash requirements for the next twelve months will include, among other things, the cash to fund its operating and working capital needs. The Company relies exclusively upon cash generated from operations to fund these needs. The Company’s cash used in operating activities was ($28,907) for the six months ended March 31, 2014. It does not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from operations is insufficient to fund its capital requirements to sustain operations. The Company’s cash and cash equivalents as of March 31, 2014 and its internally generated cash may not be sufficient to fund its operating needs for the next twelve months and this gives rise to a substantial doubt regarding its ability to continue as a “going concern.

 

The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

The Company has incurred operating losses for the last six fiscal years and in the six month period ended March 31, 2014. Those losses are primarily attributable to a continuing decline in sales.

 

Since the fourth quarter of fiscal 2011, the Company has been implementing expense reduction initiatives. The Company switched from air to ocean freight to reduce shipping costs, outsourced most of its shipping and logistics to a third party, reduced personnel, relocated certain facilities to smaller offices, renegotiated certain existing leases to reduce rent and closed certain sales offices. The Company believes that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan.

 

F- 6
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

The Company is working to develop a strategy to address its continuing operating losses and loss of sales, and during the latter part of fiscal 2013 the Company retained Corporate Fuel Advisors, an investment bank and advisory firm, which assisted the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs, expense reductions and the restructuring of its business.

 

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

 

If the Company seeks financing, it may not be able to obtain funding to address its capital needs on commercially reasonable terms, or at all.
     
It may not be able to develop new lines of products or services that will be positively accepted by the marketplace.
     
It may not be able to successfully compete with its competitors’ product and service offerings.
     
Customers and consumers may lose confidence in the Company as a result of its financial condition and performance and their perceptions of its business prospects and competitive position, and they may cease to do business with the Company or buy its products.

 

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

 

The consolidated balance sheet at September 30, 2013 was derived from the audited consolidated balance sheet of Hauppauge Digital Inc. and Subsidiaries, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Note 2. Trade Accounts and Other Non-Trade Receivables

 

Trade receivables consist of:

 

Trade receivables from sales to customers
     
Allowances, for sales returns 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

 

F- 7
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Trade receivables and other non-trade receivables as of March 31, 2014 and September 30, 2013 consisted of:

 

     March 31, 2014      September 30, 2013  
Trade receivables   $ 4,115,453     $ 3,977,347  
Allowance for doubtful accounts     (102,123 )     (102,123 )
Sales return reserve     (1,694,948 )     (1,694,948 )
Net trade receivables   $ 2,318,382     $ 2,180,276  
Receivable from contract manufacturers   $ 162,448     $ 74,797  
GST and VAT tax receivables     161,874       147,816  
Other     57,376       55,884  
Total other non-trade receivables   $ 381,698     $ 278,497  

 

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, 2014     September 30, 2013  
Component parts   $ 3,301,861     $ 3,795,919  
Finished goods     3,634,669       5,302,761  
Subtotal     6,936,530       9,098,680  
Reserve for anticipated sales returns at cost     1,380,368       1,380,368  
Total   $ 8,316,898     $ 10,479,048  

 

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     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    March 31, 2014     March 31, 2013     March 31, 2014     March 31, 2013  
Weighted average shares outstanding-basic     10,122,344       10,122,344       10,122,344       10,122,344  
Number of shares issued on the assumed exercise of stock options     -       -       -       -  
Weighted average shares outstanding-diluted     10,122,344       10,122,344       10,122,344       10,122,344  

 

F- 8
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Options to purchase 1,251,125 and 1,478,125 shares of common stock, at prices from $0.74 to $7.45 were outstanding for the three and six months ended March 31, 2014 and 2013, 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 primarily in one business segment, which is the development, marketing and manufacturing of TV receiver and video recording products for the personal computer market. Most of the Company’s products are similar in function and share commonality of component parts and manufacturing processes. The Company’s products are either sold, or can be sold, by the same retailers and distributors in the Company’s marketing channel. The Company also sells its TV tuner products directly to PC manufacturers. The Company evaluates its product lines under the functional categories:

 

  Video recorder products, such as the USB-Live2, HD-PVR and Colossus
     
  TV tuner products such as the Broadway, digital TV tuners and hybrid digital/analog TV tuners
     
  Other video products and software.

 

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 an 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 March 31,     Six months ended March 31,  
     2014      2013      2014      2013  
Video recorder products   $ 2,614,336     $ 5,617,210     $ 5,313,650     $ 12,177,361  
TV tuner products     2,857,653       3,922,930       6,433,949       8,272,616  
Other video products and software     376,240       895,795       570,110       1,916,336  
Total sales   $ 5,848,229     $ 10,435,935     $ 12,317,708     $ 22,366,313  

 

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

 

    Three months ended March 31,      Six months ended March 31,  
Geographic region   2014     2013     2014     2013  
The Americas     58 %     67 %     55 %     64 %
Europe     37 %     28 %     41 %     32 %
Asia     5 %     5 %     4 %     4 %
Total     100 %     100 %     100 %     100 %

 

F- 9
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Note 6. Tax Provision

 

The Company’s tax provision for the three and six months ended March 31, 2014 and 2013 is as follows:

 

    Three months ended March 31,     Six months ended March 31,  
    2014     2013      2014      2013  
Current federal tax expense     -     $ 28,850       -     $ 28,850  
Current state tax expense   $ 5,000       10,000     $ 15,000       20,000  
Current tax expense on international operations     19,592       10,078       38,875       52,583  
Deferred tax expense     36,433       211,517       136,842       683,316  
Tax provision   $ 61,025     $ 260,445     $ 190,717     $ 784,749  

 

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to its United States subsidiary. The Effective Tax Rate for the quarter is different than the statutory rate of 34% due to the royalty income charged from the U.S. Entity to the International Entities.

 

Note 7. Accrued Expense-Fees

 

The Company uses various software and technologies in certain of its products. In certain cases, the Company purchases or licenses this software and technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees associated with the Company’s sale of the related products. Such fees are estimated and get accrued and are reflected as a component of cost of sales when those sales occur. In certain circumstances, such fees are not specifically covered by contractual arrangements but are nonetheless potentially due to the third party sellers or owners of the software and technologies. The Company uses all available applicable information in determining these estimates, and thus the accrued amounts are subject to change as new information is made available to the Company. Occasionally, third parties audit the Company’s historical determination of fees, and adjustments are made. Accrued fees are subject to elimination after three to seven years if not billed by or requested from the third parties. Based on the Company’s write-off policies and information obtained during a fiscal 2013 third party audit, the Company reduced its accrued expenses - fees balance by $806,201 and $2,108,030 during the first six months of fiscal 2014 and 2013, respectively. These estimated changes resulted in an improved gross margin for the first six months of fiscal 2014 and 2013. As of March 31, 2014 and September 30, 2013, accrued expenses-fees amounted to $12,295,464 and $12,497,060, 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 consist of the following:

 

F- 10
 

 

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

    March 31,  2014     September 30,  2013  
Sales rebate program   $ 702,273     $ 1,232,493  
Freight and duty     803,324       858,933  
Compensation     343,566       222,595  
Warranty repair     78,331       79,667  
Inventory accruals     77,150       -  
Advertising and marketing     146,681       196,603  
Total accrued expenses   $ 2,151,325     $ 2,590,291  

 

Note 9. Fair Value Measurements

 

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

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
     
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
     
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

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

 

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

 

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

 

F- 11
 

   

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued new accounting guidance which amended Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” The amended guidance required entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures in the financial statements. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendments became effective for the Company in the first quarter of fiscal year 2014. As this is disclosure-only guidance, it did not have an impact on the Company’s consolidated financial results.

 

In July 2013, the FASB issued new accounting guidance which requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry forward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry forwards that would be utilized, rather than only against carry forwards that are created by the unrecognized tax benefits. The new guidance is effective prospectively to all existing unrecognized tax benefits, but entities can choose to apply it retrospectively. The guidance will be effective for us in our first quarter of fiscal year 2015, with early adoption permitted. The Company is currently assessing the impact this guidance will have its consolidated statements of financial position and cash flows.

 

F- 12
 

  

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

 

Three Month Period ENDED MARCH 31, 2014 Compared to THE THREE MONTH PERIOD ENDED MARCH 31, 2013

 

Results of operations for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 are as follows:

 

    Three   Three                    
    Months   Months                    
    Ended   Ended   Variance   Percentage of sales  
    03/31/14   03/31/13   $   2014   2013   Variance  
Net Sales   $ 5,848,229     $ 10,435,935     $ (4,587,706 )     100.00 %     100.00 %     -  
Cost of sales     3,601,843       6,891,508     (3,289,665 )     61.59 %     66.04 %     -4.45 %
Gross Profit     2,246,386       3,544,427     (1,298,041 )     38.41 %     33.96 %     4.45 %
Gross Profit %     38.41 %     33.96 %     4.45 %                        
Expenses:                                                
Sales & marketing     1,229,951       1,849,435       (619,484 )     21.03 %     17.72 %     3.31 %
Sales & marketing-PCTV     35,420       47,278       (11,858 )     0.61 %     0.45 %     0.16 %
Technical support     80,391       84,118       (3,727 )     1.37 %     0.81 %     0.56 %
General & administrative     672,387       751,838       (79,451 )     11.50 %     7.20 %     4.30 %
General & administrative-PCTV     88,566       80,019       8,547       1.51 %     0.77 %     0.74 %
Amortization of intangible assets     -       188,709       (188,709 )     0.00 %     1.81 %     -1.81 %
Selling, general and administrative stock compensation expense     18,195       18,296       (101 )     0.31 %     0.18 %     0.13 %
Total selling, general and administrative expense     2,124,910       3,019,693       (894,783 )     36.33 %     28.94 %     7.39 %
Research and development     419,928       499,220       (79,292 )     7.18 %     4.78 %     2.40 %
Research and development-PCTV     267,229       280,240       (13,011 )     4.57 %     2.69 %     1.88 %
Research and development stock compensation expense     10,395       10,451       (56 )     0.18 %     0.10 %     0.08 %
Total expenses     2,822,462       3,809,604       (987,142 )     48.26 %     36.51 %     11.75 %
Loss from operations     (576,076 )     (265,177 )     (310,899 )     -9.85 %     -2.55 %     -7.30 %
                                                 
Other expense:                                                
Interest income     224       888       (664 )     0.00 %     0.01 %     -0.01 %
Foreign currency     (3,207 )     (8,658 )     5,451       -0.05 %     -0.08 %     0.03 %
Total other expense     (2,983 )     (7,770 )     4,787       -0.05 %     -0.07 %     0.02 %
Loss before tax provision     (579,059 )     (272,947 )     (306,112 )     -9.90 %     -2.62 %     -7.28 %
Current tax expense     24,592       48,928       (24,336 )     0.41 %     0.46 %     -0.05 %
Deferred tax expense     36,433       211,517       (175,084 )     0.63 %     2.03 %     -1.40 %
Net loss   $ (640,084 )   $ (533,392 )   $ (106,692 )     -10.94 %     -5.11 %     -5.83 %

 

3
 

 

Net sales for the three months ended March 31, 2014 decreased $4,587,706 compared to the three months ended March 31, 2013 as shown in the table below.

 

                Increase                    
    Three     Three     (decrease)     Increase     Percentage of sales by  
    Months     Months     dollar     (decrease)     geographic region  
    ended 03/31/14     ended 03/31/13     variance     variance %     2014     2013  
The Americas   $ 3,423,162     $ 7,001,911     $ (3,578,749 )     -51 %     58 %     67 %
Europe     2,165,686       2,911,414       (745,728 )     -26 %     37 %     28 %
Asia     259,381       522,610       (263,229 )     -50 %     5 %     5 %
Total   $ 5,848,229     $ 10,435,935     $ (4,587,706 )     -44 %     100 %     100 %

 

Increased competition, tepid economic conditions and a reduction in video gaming product sales, which management believes stemmed from the release of a new generation game players from Sony and Microsoft with recording capabilities, had a negative impact on sales.

 

Gross profit

 

Gross profit decreased $1,298,041 for the three months ended March 31, 2014 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)   03/31/14  
Lower sales   $ (2,021,559 )
Lower labor related and other costs     342,433  
Higher gross profit due to favorable mix of sales     381,085  
Total decrease in gross profit   $ (1,298,041 )

 

The increase in the gross profit percentage was due to:

 

    Three Months ended  
Gross profit percentage-increase (decrease)   03/31/14  
Sales mix of higher gross profit sales     3.63 %
Labor related and other costs as a higher percentage of sales     (2.06 %)
License fee adjustments     2.88 %
Total gross profit percentage increase     4.45 %

 

4
 

 

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  
                Increase                 Increase  
    2014     2013     (Decrease)     2014     2013     (Decrease)  
Sales and marketing-HCW   $ 1,229,951     $ 1,849,435     $ (619,484 )     21.03 %     17.72 %     3.31 %
Sales and marketing-PCTV     35,420       47,278       (11,858 )     0.61 %     0.45 %     0.16 %
Technical support     80,391       84,118       (3,727 )     1.37 %     0.81 %     0.56 %
General and administrative-HCW     672,387       751,838       (79,451 )     11.50 %     7.20 %     4.30 %
General and administrative-PCTV     88,566       80,019       8,547       1.51 %     0.77 %     0.74 %
Amortization of intangible assets     -       188,709       (188,709 )     0.00 %     1.81 %     -1.81 %
Stock compensation     18,195       18,296       (101 )     0.31 %     0.18 %     0.13 %
Total   $ 2,124,910     $ 3,019,693     $ (894,783 )     36.33 %     28.94 %     7.39 %

 

Selling, general and administrative expense for the second fiscal quarter of fiscal 2014 decreased $894,783 from the prior year’s second fiscal quarter as follows:

 

Sales and marketing expenses decreased $631,342, driven primarily by $270,593 in lower commission and co-operative advertising expense, which declined due to lower sales, $46,319 in lower compensation costs due to personnel reductions and $314,430 in lower sales office expense due to closing and downsizing of sales offices.

 

The decrease in general and administrative expenses of $71,005 was mainly from lower compensation expense due to personnel reductions, lower depreciation expense and lower credit card processing fees due to the issuing of credit lines to certain customers who previously purchased product with credit cards. The decrease in the amortization of intangible assets was due to the write-off of the intangible asset to zero in the fourth quarter of fiscal 2013, which eliminated the need for further intangible asset amortization.

 

Research and development expenses

 

Research and development expenses for the second fiscal quarter of 2014 decreased $92,359 from the same quarter in the prior fiscal year. The decrease was mainly due to lower compensation and compensation related expenses of $11,906 and lower product development costs of $80,453.

 

Tax provision

 

Our tax provision for the three months ended March 31, 2014 and 2013 is as follows:

  

    Three months ended March 31,  
    2014     2013  
Current federal tax expense   $ -     $ 28,850  
Current state tax expense     5,000       10,000  
Current tax expense on international operations     19,592       10,078  
Deferred tax expense     36,433       211,517  
Tax provision   $ 61,025     $ 260,445  

 

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to its United States subsidiary. The Effective Tax Rate for the quarter is different than the statutory rate of 34% due to the royalty income charged from the U.S. Entity to the International Entities.

 

Summary of operations

 

We recorded a net loss of $640,084 for the three months ended March 31, 2014, which resulted in basic and diluted net loss per share of $0.06 on weighted average basic and diluted shares of 10,122,344, compared to a net loss of $533,392 for the three months ended March 31, 2013, which resulted in basic and diluted net loss per share of $0.05 on weighted average basic and diluted shares of 10,122,344.

 

Options to purchase 1,251,125 and 1,478,125 shares of common stock, at prices from $0.74 to $7.45 were outstanding for the three months ended March 31, 2014 and 2013, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

 

5
 

 

SIX Month Period ENDED MARCH 31, 2014 Compared to THE SIX MONTH PERIOD ENDED MARCH 31, 2013

 

Results of operations for the six months ended March 31, 2014 compared to the six months ended March 31, 2013 are as follows:

 

    Six     Six                          
    Months     Months                          
    Ended     Ended     Variance     Percentage of sales  
    03/31/14     03/31/13     $     2014     2013     Variance  
Net Sales   $ 12,317,708     $ 22,366,313     $ (10,048,605 )     100.00 %     100.00 %     -  
Cost of sales     7,559,860       13,429,945       (5,870,085 )     61.37 %     60.05 %     1.32 %
Gross Profit     4,757,848       8,936,368       (4,178,520 )     38.63 %     39.95 %     -1.32 %
Gross Profit %     38.63 %     39.95 %     -1.32 %                        
Expenses:                                                
Sales & marketing     2,453,882       3,842,233       (1,388,351 )     19.92 %     17.18 %     2.74 %
Sales & marketing-PCTV     69,751       116,586       (46,835 )     0.57 %     0.52 %     0.05 %
Technical support     160,444       164,698       (4,254 )     1.30 %     0.74 %     0.56 %
General & administrative     1,319,853       1,427,615       (107,762 )     10.72 %     6.38 %     4.34 %
General & administrative-PCTV     152,288       143,750       8,538       1.24 %     0.64 %     0.60 %
Amortization of intangible assets     -       377,418       (377,418 )     0.00 %     1.69 %     -1.69 %
Severance accrual reversal     -       (213,793 )     213,793       0.00 %     -0.96 %     0.96 %
Selling, general and administrative stock compensation expense     36,390       34,960       1,430       0.30 %     0.16 %     0.14 %
Total selling, general and administrative expense     4,192,608       5,893,467       (1,700,859 )     34.05 %     26.35 %     7.70 %
Research and development     838,996       1,076,624       (237,628 )     6.81 %     4.81 %     2.00 %
Research and development-PCTV     529,548       587,147       (57,599 )     4.30 %     2.63 %     1.67 %
Severance accrual reversal     -       (186,904 )     186,904       0.00 %     -0.84 %     0.84 %
Research and development stock compensation expense     20,790       19,971       819       0.17 %     0.09 %     0.08 %
Total expenses     5,581,942       7,390,305       (1,808,363 )     45.33 %     33.04 %     12.29 %
(Loss) income from operations     (824,094 )     1,546,063       (2,370,157 )     -6.70 %     6.91 %     -13.61 %
                                                 
Other expense:                                                
Interest income     422       1,968       (1,546 )     0.00 %     0.01 %     -0.01 %
Foreign currency     (8,905 )     (6,588 )     (2,317 )     -0.07 %     -0.03 %     -0.04 %
Total other expense     (8,483 )     (4,620 )     (3,863 )     -0.07 %     -0.02 %     -0.05 %
(Loss) income before tax provision     (832,577 )     1,541,443       (2,374,020 )     -6.77 %     6.89 %     -13.66 %
Current tax expense     53,875       101,433       (47,558 )     0.43 %     0.45 %     -0.02 %
Deferred tax expense     136,842       683,316       (546,474 )     1.12 %     3.06 %     -1.94 %
Net (loss) income   $ (1,023,294 )   $ 756,694     $ (1,779,988 )     -8.32 %     3.38 %     -11.70 %

 

6
 

 

Net sales for the six months ended March 31, 2014 decreased $10,048,605 compared to the six months ended March 31, 2013 as shown in the table below.

 

                Increase                    
                (decrease)     Increase     Percentage of sales by  
    Six Months     Six Months     dollar     (decrease)     geographic region  
    ended 03/31/14     ended 03/31/13     variance     variance %     2014     2013  
The Americas   $ 6,772,774     $ 14,113,494     $ (7,340,720 )     (52 %)     54 %     63 %
Europe     5,076,858       7,276,704       (2,199,846 )     (30 %)     42 %     33 %
Asia     468,076       976,115       (508,039 )     (52 %)     4 %     4 %
Total   $ 12,317,708     $ 22,366,313     $ (10,048,605 )     (45 %)     100 %     100 %

 

Increased competition, tepid economic conditions and a reduction in video gaming product sales, which management believes stemmed from the release of a new generation game players from Sony and Microsoft with recording capabilities, had a negative impact on sales. In addition, the first quarter of fiscal 2013 included the product rollout of the HD-PVR-2 gaming unit, which resulted in a concentration of sales for fiscal 2013 which did not repeat in fiscal 2014.

 

Gross profit

 

Gross profit decreased $4,178,520 for the six months ended March 31, 2014 compared to the same period in the prior fiscal year. The decrease in gross profit was due to:

 

    Six Months ended  
Gross profit in dollars-increase (decrease)   03/31/14  
Lower sales   $ (5,048,282 )
Lower labor related and other costs     857,183  
Higher gross profit due to favorable mix of sales     1,314,408  
Lower license fee adjustments     (1,301,829 )
Total decrease in gross profit   $ (4,178,520 )

 

The decrease in the gross profit percentage was due to:

 

    Six Months ended  
Gross profit percentage-increase (decrease)   03/31/14  
Sales mix of higher gross profit sales     2.99 %
Labor related and other costs as a higher percentage of sales     (1.43 %)
License fee adjustments     (2.88 %)
Total gross profit percentage decrease     (1.32 %)

 

7
 

 

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  
                Increase                 Increase  
    2014     2013     (Decrease)     2014     2013     (Decrease)  
Sales and marketing-HCW   $ 2,453,882     $ 3,842,233     $ (1,388,351 )     19.92 %     17.18 %     2.74 %
Sales and marketing-PCTV     69,751       116,586       (46,835 )     0.57 %     0.52 %     0.05 %
Technical support     160,444       164,698       (4,254 )     1.30 %     0.74 %     0.56 %
General and administrative-HCW     1,319,853       1,427,615       (107,762 )     10.72 %     6.38 %     4.34 %
General and administrative-PCTV     152,288       143,750       8,538       1.24 %     0.64 %     0.60 %
Amortization of intangible assets     -       377,418       (377,418 )     0.00 %     1.69 %     -1.69 %
Severance accrual reversal     -       (213,793 )     213,793       0.00 %     -0.96 %     0.96 %
Stock compensation     36,390       34,960       1,430       0.30 %     0.16 %     0.14 %
Total   $ 4,192,608     $ 5,893,467     $ (1,700,859 )     34.05 %     26.35 %     7.70 %

 

Selling, general and administrative expense for the six months ended March 31, 2014 decreased $1,700,859 from the prior fiscal year as follows:

 

Sales and marketing expenses decreased $1,435,186 driven primarily by $706,131 in lower commission and co-operative advertising expense, which declined due to lower sales, $100,980 in lower compensation costs due to personnel reductions and $628,075 in lower sales office expense due to closing and downsizing of sales offices.

 

The decrease in general and administrative expenses of $97,794 was mainly from lower compensation expense due to personnel reductions, lower depreciation expense and lower credit card processing fees due to the issuing of credit lines to certain customers who previously purchased product with credit cards.

 

The decrease in the amortization of intangible assets was due to the write-off of the intangible asset to zero in the fourth quarter of fiscal 2013, which eliminated the need for further intangible asset amortization. Offsetting the decrease in expenses was the non-recurring reversal in the first quarter of fiscal 2013 for a severance accrual of $213,793 that had been set up in a prior fiscal year.

 

Research and development expenses

 

Research and development expenses for the six months ended March 31, 2014 decreased $107,504 from the prior fiscal year. The decrease was mainly due to lower compensation and compensation related expenses of $59,556 and lower product development costs of $234,852. Offsetting the decrease in expenses was the non-recurring reversal in the first quarter of fiscal 2013 for a severance accrual of $186,904 that had been set up in a prior fiscal year.

 

8
 

 

Tax provision

 

Our tax provision for the six months ended March 31, 2014 and 2013 is as follows:

 

    Six months ended March 31,  
    2014      2013  
Current federal tax expense     -     $ 28,850  
Current state taxes   $ 15,000       20,000  
Current tax expense on international operations     38,875       52,583  
Deferred tax expense     136,842       683,316  
Tax provision   $ 190,717     $ 784,749  

 

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to its United States subsidiary. The Effective Tax Rate for the six months ended March 31, 2014 is different than the statutory rate of 34% due to the royalty income charged from the U.S. Entity to the International Entities.

 

Summary of operations

 

We recorded a net loss of $1,023,294 for the six months ended March 31, 2014, 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 net income of $756,694 for the six months ended March 31, 2013, which resulted in basic and diluted net income per share of $0.07 on weighted average basic and diluted shares of 10,122,344.

 

Options to purchase 1,251,125 and 1,478,125 shares of common stock, at prices from $0.74 to $7.45 were outstanding for the six months ended March 31, 2014 and 2013, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

 

Seasonality

 

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales is our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international sales, mostly in the European market, were 37% of sales for fiscal year ended September 30, 2013 and 44% for the fiscal year ended September 30, 2012. Part of our third and fourth quarters (April through June and July to September) can be 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.

 

9
 

 

Liquidity and capital resources

 

We had cash and cash equivalents as of March 31, 2014 of $1,460,505, a decrease of $22,061 from September 30, 2013.

 

The decrease in cash was due to:

 

    Operating     Investing     Financing        
    Activities     Activities     Activities     Total  
Sources of cash:                                
Decrease in inventory   $ 1,959,230     $ -     $ -     $ 1,959,230  
Decrease in prepaid expenses and other current assets     65,502     $ -     $ -     $ 65,502  
Total sources of cash     2,024,732       -       -       2,024,732  
Less cash used for:                                
Increase in accounts receivable   $ (212,772 )   $ -     $ -     $ (212,772 )
Net loss adjusted for non cash items     (560,500 )     -       -       (560,500 )
Decrease in accounts payable     (644,067 )     -       -       (644,067 )
Decrease in accrued expenses     (636,300 )     -       -       (636,300 )
Total cash usage     (2,053,639 )     -       -       (2,053,639 )
Effect of exchange rates on cash     -       -       -       6,846  
Net cash decrease   $ (28,907 )   $ -     $ -     $ (22,061 )

 

Cash used in operating activities of $28,907 was due to an increase in accounts receivable of $212,772, the net loss adjusted for non-cash items of $560,500, a decrease in accounts payable of $644,067 and a decrease in accrued expenses of $636,300. Sources of cash came from a decrease in inventory of $1,959,230 and a decrease in prepaid expenses and other assets of $65,502.

 

The increase in accounts receivable was due to a high percentage of sales occurring in the last two months of the quarter. The decrease in accrued expenses was due to payments and adjustments made for licenses and year-end sales rebates. The decrease in accounts payable was due to lower purchases of inventory coupled with payment to suppliers. The decrease in inventory was due to the liquidation of inventory levels through sales and lowered production volume. We had a working capital deficit of $3,655,865 as of March 31, 2014 compared to a working capital deficit of $3,005,314 as of September 30, 2013.

 

Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from operations is insufficient to fund our capital requirements to sustain operations. Our cash and cash equivalents as of March 31, 2014 and our internally generated cash may not be sufficient to fund our operating needs for the next twelve months and this gives rise to a substantial doubt regarding our ability to continue as a “going concern ”.

 

We have incurred operating losses for the last six fiscal years and in the six month period ended March 31, 2014. Those losses are primarily attributable to a continuing decline in sales. In the six months ended March 31, 2014, we experienced an approximate 45% drop in sales from prior fiscal year. We believe that our sales have declined for the following reasons, including, among other things:

 

10
 

  

  Reliance on a small number of our product lines being successful, the failure of any one of which could substantially reduce our sales.
     
  Our potential inability to develop new products or services that will meet our customers’ needs or wants.
     
  Intense competitive pressures from larger companies that have greater resources than we do and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.
     
  Our potential inability to remain ahead of the development of competing technologies, products and services.
     
  Lack of market diversification.
     
  Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute our products.

 

Since the fourth quarter of fiscal 2011, we have been implementing expense reduction initiatives. We switched from air to ocean freight to reduce shipping costs, outsourced most of our shipping and logistics to a third party, reduced personnel, relocated certain facilities to smaller offices, renegotiated certain existing leases to reduce rent and closed certain sales offices. We believe that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan.

 

The Company is working to develop a strategy to address our continuing operating losses and loss of sales, and during the latter part of fiscal 2013 retained Corporate Fuel Advisors, an investment bank and advisory firm, which assisted the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs, expense reductions and the restructuring of its business.

 

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

 

  If we seek financing, we may not be able to obtain funding to address our capital needs on commercially reasonable terms, or at all.
     
  We may not be able to develop new lines of products or services that will be positively accepted by the marketplace.
     
  We may not be able to successfully compete with our competitors’ product and service offerings.
     
  Customers and consumers may lose confidence in us as a result of our financial condition and performance and their perceptions of our business prospects and competitive position, and they may cease to do business with us or buy our products.

 

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

 

11
 

 

Future contractual obligations

 

The following table shows our contractual obligations related to lease obligations as of March 31, 2014:

 

          Payments due by period        
    Total     Less than 1 year   1-3 years     3 to 5 years  
Operating lease obligations   $ 1,160,093     $ 503,812   $ 656,281     $ -  

 

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 February 2013, the FASB issued new accounting guidance which amended Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” The amended guidance required entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures in the financial statements. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendments became effective for us in the first quarter of fiscal year 2014. As this is disclosure-only guidance, it did not have an impact on our consolidated financial results.

 

In July 2013, the FASB issued new accounting guidance which requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry forward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry forwards that would be utilized, rather than only against carry forwards that are created by the unrecognized tax benefits. The new guidance is effective prospectively to all existing unrecognized tax benefits, but entities can choose to apply it retrospectively. The guidance will be effective for us in our first quarter of fiscal year 2015, with early adoption permitted. We are currently assessing the impact this guidance will have on our consolidated statements of financial position and cash flows.

 

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.

 

12
 

 

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 March 31, 2014.

 

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. Factors that could cause actual results to differ materially from those set forth or implied by any forward-looking statement include, but are not limited to, the mix of products sold and the profit margins thereon, order cancellation or a reduction in orders from customers, competitive product offerings and pricing actions, the availability and pricing of key raw materials, continued decline in sales, continued operating losses, our ability to obtain financing on commercial reasonable terms or at all, our ability to formulate and implement a viable restructuring plan, dependence on key members of management, successful integration of acquisitions, economic conditions in the United States and abroad, fluctuation of the value of the Euro versus the U.S. dollar, our ability to make timely filings of the required periodic reports and other reports with the Securities and Exchange Commission, issues relating to our ability to maintain effective internal control over financial reporting and disclosure controls and procedures, the expression of our auditors regarding substantial doubt about our ability to continue as a “going concern .” 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, 2013, this Quarterly Report on Form 10-Q for the three and six months ended March 31 2014, the Quarterly Report on Form 10-Q for the three months ended December 31, 2013, and the risk of litigation or governmental investigations or proceedings relating to any of the foregoing matters. Copies of these filings are available at www.sec.gov . Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. All cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear.

 

13
 

 


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.

 

14
 

 

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 15, 2014 By: /s/ Kenneth Plotkin
    KENNETH PLOTKIN
    Chief Executive Officer, Chairman of the Board, President (Principal Executive Officer)

 

Date: May 15, 2014 By: /s/ Gerald Tucciarone
    GERALD TUCCIARONE
    Treasurer, Chief Financial Officer,
    (Principal Financial Officer and Principal Accounting Officer) and Secretary

 

15
 

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Kenneth Plotkin, certify that:

 

1. I have reviewed this Form 10-Q of Hauppauge Digital Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5 The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 15, 2014 /s/ Kenneth Plotkin
  Kenneth Plotkin
  Principal Executive Officer

 

 
 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Gerald Tucciarone, certify that:

 

1. I have reviewed this Form 10-Q of Hauppauge Digital Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 15, 2014 /s/ Gerald Tucciarone
  Gerald Tucciarone
  Principal Financial Officer

 

 
 

 

Exhibit 32

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The undersigned hereby certifies, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hauppauge Digital Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 15, 2014 /s/ Kenneth Plotkin
   Kenneth Plotkin
  Chief Executive Officer

 

  /s/ Gerald Tucciarone
  Gerald Tucciarone
  Chief Financial Officer, Treasurer and
  Secretary