Item
1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December 31, 2012
(unaudited)
|
|
|
September 30 , 2012
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,604,456
|
|
|
$
|
5,095,853
|
|
Trade receivables, net of various allowances
|
|
|
5,393,503
|
|
|
|
2,618,081
|
|
Other non trade receivables
|
|
|
3,635,480
|
|
|
|
1,995,654
|
|
Inventories
|
|
|
10,386,264
|
|
|
|
9,497,856
|
|
Deferred tax asset-current
|
|
|
776,179
|
|
|
|
977,488
|
|
Prepaid expenses and other current assets
|
|
|
1,147,030
|
|
|
|
1,088,085
|
|
Total current assets
|
|
|
24,942,912
|
|
|
|
21,273,017
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,242,885
|
|
|
|
2,431,594
|
|
Property, plant and equipment, net
|
|
|
219,073
|
|
|
|
235,978
|
|
Security deposits and other non-current assets
|
|
|
107,624
|
|
|
|
109,218
|
|
Deferred tax asset-non current
|
|
|
351,783
|
|
|
|
622,272
|
|
Total assets
|
|
$
|
27,864,277
|
|
|
$
|
24,672,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,324,291
|
|
|
$
|
5,865,085
|
|
Accrued expenses fees
|
|
|
12,274,016
|
|
|
|
12,943,022
|
|
Accrued expenses
|
|
|
3,661,257
|
|
|
|
3,668,491
|
|
Income taxes payable
|
|
|
253,677
|
|
|
|
230,123
|
|
Total current liabilities
|
|
|
24,513,241
|
|
|
|
22,706,721
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 25,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
10,882,823 issued
|
|
|
108,828
|
|
|
|
108,828
|
|
Additional paid-in capital
|
|
|
18,342,269
|
|
|
|
18,316,085
|
|
Retained deficit
|
|
|
(8,153,322
|
)
|
|
|
(9,443,408
|
)
|
Accumulated other comprehensive loss
|
|
|
(4,541,191
|
)
|
|
|
(4,610,599
|
)
|
Treasury Stock, at cost, 760,479 shares
|
|
|
(2,405,548
|
)
|
|
|
(2,405,548
|
)
|
Total stockholders' equity
|
|
|
3,351,036
|
|
|
|
1,965,358
|
|
Total liabilities and stockholders' equity
|
|
$
|
27,864,277
|
|
|
$
|
24,672,079
|
|
See accompanying notes to consolidated
financial statements
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,930,378
|
|
|
$
|
15,427,227
|
|
Cost of sales
|
|
|
6,538,437
|
|
|
|
10,417,464
|
|
Gross profit
|
|
|
5,391,941
|
|
|
|
5,009,763
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,873,775
|
|
|
|
3,298,737
|
|
Research and development expenses
|
|
|
706,926
|
|
|
|
812,382
|
|
Income from operations
|
|
|
1,811,240
|
|
|
|
898,644
|
|
|
|
|
|
|
|
|
|
|
Other income :
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,080
|
|
|
|
1,688
|
|
Foreign currency gain
|
|
|
2,070
|
|
|
|
16,879
|
|
Total other income
|
|
|
3,150
|
|
|
|
18,567
|
|
Income before tax provision
|
|
|
1,814,390
|
|
|
|
917,211
|
|
Current tax expense
|
|
|
52,505
|
|
|
|
36,348
|
|
Deferred tax expense
|
|
|
471,799
|
|
|
|
436,931
|
|
Net income
|
|
$
|
1,290,086
|
|
|
$
|
443,932
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
See accompanying notes to consolidated
financial statements
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(UNAUDITED)
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
1,290,086
|
|
|
$
|
443,932
|
|
Foreign currency translation gain (loss)
|
|
|
69,408
|
|
|
|
(136,410
|
)
|
Other comprehensive income
|
|
$
|
1,359,494
|
|
|
$
|
307,522
|
|
See accompanying notes to consolidated
financial statements
HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
1,290,086
|
|
|
$
|
443,932
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
29,602
|
|
|
|
44,598
|
|
Amortization of intangible assets
|
|
|
188,709
|
|
|
|
188,709
|
|
Stock compensation expense
|
|
|
26,184
|
|
|
|
28,827
|
|
Deferred tax expense
|
|
|
471,799
|
|
|
|
436,931
|
|
Sales reserve, net
|
|
|
15,553
|
|
|
|
75,029
|
|
Bad debt reserve
|
|
|
0
|
|
|
|
40,000
|
|
Inventory reserve
|
|
|
100,000
|
|
|
|
-
|
|
Other items
|
|
|
(22,475
|
)
|
|
|
(18,404
|
)
|
Changes in current assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable and other non trade receivables
|
|
|
(4,343,882
|
)
|
|
|
(3,119,059
|
)
|
Inventories
|
|
|
(988,408
|
)
|
|
|
(1,080,617
|
)
|
Prepaid expenses and other current assets
|
|
|
(53,495
|
)
|
|
|
(165,930
|
)
|
Accounts payable
|
|
|
2,450,106
|
|
|
|
1,681,192
|
|
Accrued expenses and other current liabilities
|
|
|
(673,717
|
)
|
|
|
1,854,226
|
|
Total adjustments
|
|
|
(2,800,024
|
)
|
|
|
(34,498
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(1,509,938
|
)
|
|
|
409,434
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(12,697
|
)
|
|
|
(18,613
|
)
|
Net cash used in investing activities
|
|
|
(12,697
|
)
|
|
|
(18,613
|
)
|
Effect of exchange rates on cash
|
|
|
31,238
|
|
|
|
(49,689
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,491,397
|
)
|
|
|
341,132
|
|
Cash and cash equivalents, beginning of period
|
|
|
5,095,853
|
|
|
|
4,080,537
|
|
Cash and cash equivalents, end of period
|
|
$
|
3,604,456
|
|
|
$
|
4,421,669
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
31,802
|
|
|
$
|
10,276
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
Notes
To Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial
statements for Hauppauge Digital Inc. and subsidiaries (collectively, the “Company”) included herein have been prepared
in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to
Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles
for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and
reserves) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows
as of and for the interim periods have been included. It is suggested that these interim statements be read in conjunction with
the financial statements and related notes included in the Company's September 30, 2012 Form 10-K. Certain prior year amounts have
been reclassified to conform to the current year presentation.
The operating results for the three months
ended December 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2013.
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 December 31, 2012 and September 30, 2012 consisted of:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2012
|
|
Trade receivables
|
|
$
|
8,896,809
|
|
|
$
|
6,319,544
|
|
Allowance for doubtful accounts
|
|
|
(102,123
|
)
|
|
|
(352,123
|
)
|
Sales reserve
|
|
|
(3,401,183
|
)
|
|
|
(3,349,340
|
)
|
Net trade receivables
|
|
$
|
5,393,503
|
|
|
$
|
2,618,081
|
|
Receivable from contract manufacturers
|
|
|
3,211,331
|
|
|
$
|
1,649,444
|
|
GST and VAT taxes receivables
|
|
|
361,230
|
|
|
|
287,446
|
|
Other
|
|
|
62,919
|
|
|
|
58,764
|
|
Total other non trade receivables
|
|
$
|
3,635,480
|
|
|
$
|
1,995,654
|
|
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
Notes
To Consolidated Financial Statements
(Unaudited)
Note 3. Inventories
Inventories have been valued at the lower
of average cost or market on a first in first out basis. The components of inventory consist of:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2012
|
|
Component parts
|
|
$
|
3,983,332
|
|
|
$
|
3,412,673
|
|
Finished goods
|
|
|
3,844,743
|
|
|
|
3,563,284
|
|
Subtotal
|
|
|
7,828,075
|
|
|
$
|
6,975,957
|
|
Reserve for anticipated sales returns at cost
|
|
|
2,558,189
|
|
|
|
2,521,899
|
|
Total
|
|
$
|
10,386,264
|
|
|
$
|
9,497,856
|
|
Note 4. Net Income (Loss) Per Share
Basic net income (loss) per share includes
no dilution and is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding
for the period. Diluted net income (loss) per share reflects, in the periods in which they have a dilutive effect, the dilution
which would occur upon the exercise of stock options. A reconciliation of the shares used in calculating basic and diluted net
income per share is as follows:
|
|
Three months ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Weighted average shares outstanding-basic
|
|
|
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
|
|
Options to purchase 1,396,625 and 1,404,567
shares of common stock, at prices ranging from $0.77 to $7.45 and from $0.86 to $7.45, were outstanding for the three months ended
December 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because they were
anti-dilutive.
Note 5. Product segment and geographic
information
The Company operates
primarily
in one business segment, which is the development, marketing and manufacturing of
analog and digital
TV receiver and
video
recorder products
for the personal computer and
Apple iPad
®
and iPhone
®
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 receiver products
directly to PC manufacturers.
The
Company evaluates its product lines under the functional categories of TV receiver products, video recorder products and other
non TV receiver products.
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
Notes
To Consolidated Financial Statements
(Unaudited)
The Company’s products fall under three product categories:
|
·
|
TV receivers, which include Digital TV receivers for PCs, analog TV receivers, our Broadway Internet streaming TV receiver
and hybrid analog and digital TV receiver products
|
|
·
|
Video recorder products, such as USB-Live2, HD PVR, HD PVR 2 and Colossus
|
|
·
|
Non-TV receiver products such as the ImpactVCB, MediaMVP-HD and our TV applications for the PC and the Apple iPad and iPhone
.
|
The Company’s TV receiver products enable, among other
things, a PC user to watch TV in a resizable window on a PC. The Company’s video recorder products allow consumers to record
high definition video from a cable TV or satellite set top box or a game console such as a Xbox 360 or Sony Playstation 3. The
Company’s other non TV receiver 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 December 31,
|
|
Product line sales
|
|
2012
|
|
|
2011
|
|
Video recorder products
|
|
$
|
7,221,592
|
|
|
$
|
8,965,926
|
|
TV receiver products
|
|
|
4,432,415
|
|
|
|
6,190,210
|
|
Non TV receiver products
|
|
|
276,371
|
|
|
|
271,091
|
|
Total sales
|
|
$
|
11,930,378
|
|
|
$
|
15,427,227
|
|
The Company sells its products through a North
American and international network of distributors, retailers and directly to PC manufacturers. It maintains sales offices in Europe
and Asia. Sales percentages by geographic region are as follows:
|
|
Three months ended December 31,
|
|
Geographic region
|
|
2012
|
|
|
2011
|
|
The Americas
|
|
|
59
|
%
|
|
|
58
|
%
|
Europe
|
|
|
37
|
%
|
|
|
38
|
%
|
Asia
|
|
|
4
|
%
|
|
|
4
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
Notes
To Consolidated Financial Statements
(Unaudited)
Note 6. Tax provision
The Company’s tax provision for the
three months ended December 31, 2012 and 2011 is as follows:
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Current tax expense on international operations
|
|
$
|
42,505
|
|
|
$
|
26,348
|
|
Current state taxes
|
|
|
10,000
|
|
|
|
10,000
|
|
Deferred tax expense
|
|
|
471,799
|
|
|
|
436,931
|
|
Tax provision
|
|
$
|
524,304
|
|
|
$
|
473,279
|
|
Note 7. Accrued expense-fees
The Company uses various software
and technologies in certain of its products. In certain cases, the Company purchases or licenses these software and
technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees
associated with the Company's sale of the related products. Such fees are estimated and get accrued and reflected as
a component of cost of sales when those sales occur. In certain circumstances, such fees are not specifically covered
by contractual arrangements but are nonetheless potentially due to the third party sellers or owners of the software
and technologies. The Company uses all available applicable information in determining these estimates and thus the accrued
amounts are subject to change as new information is made available to the Company. Occasionally, third parties audit the Company's historical
determination of fees and adjustments are made. Accrued fees are subject to elimination after three to seven years if
not billed by or requested from the third parties.
Based on new information obtained in the
first fiscal quarter of 2013, including the completion of a significant third party audit, the Company reduced its September 30,
2012 accrued expenses - fees balance by $1,765,330. This estimate change resulted in an improved gross margin during
the quarter. As of December 31, 2012 and September 30, 2012, the amount of accrued expense-fees amounted to $12,274,016 and
$12,943,022, respectively.
Note 8. Accrued Expenses
Accrued expenses are for costs incurred for
goods and services which are based on estimates, charged as incurred to operations as period costs and for which no invoice has
been rendered. Accrued expenses as of December 31, 2012 and September 30, 2012 were $3,661,257 and $3,668,491, respectively. Included
in accrued expenses are accruals for product costs, accruals for sales costs relating to sales rebate programs, accruals for freight
and duty expenses, accruals for compensation, accruals for warranty repair costs and accruals for advertising and marketing costs.
During the first quarter of fiscal 2013, the Company, using the most recent information available, reviewed its estimates for accruals
for which no invoice has been rendered. As a result of this review, the Company recorded a change in estimate of $400,697 as a
reduction in operating expenses related to unused severance accruals.
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 adopted the provisions of ASC 820-10 with respect to its non-financial assets and
liabilities during the first quarter of fiscal 2010. In order to increase consistency and comparability in fair value measurements,
ASC 820-10 establishes a hierarchy for observable and unobservable inputs used to measure fair value into three broad Levels, which
are described below:
• Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities
. The
fair value hierarchy gives the highest priority to Level 1 inputs.
• Level 2: Observable prices that
are based on inputs not quoted on active markets, but corroborated by market data.
• Level 3: Unobservable inputs are
used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company
utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible as well as considers counterparty credit risk in its assessment of fair value.
Additionally, on a nonrecurring basis,
the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable,
based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated
fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs.
The carrying amount of cash, accounts receivables
and accounts payables and other short-term financial instruments approximate their fair value due to their short-term nature.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three
Month Period ENDED December 31, 2012 Compared to THE THREE MONTH PERIOD ENDED DECEMBER 31, 2011
Results of operations for the three months
ended December 31, 2012 compared to the three months ended December 31, 2011 is as follows:
|
|
Three
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Variance
|
|
|
Percentage of sales
|
|
|
|
12/31/12
|
|
|
12/31/11
|
|
|
$
|
|
|
2012
|
|
|
2011
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
11,930,378
|
|
|
$
|
15,427,227
|
|
|
$
|
(3,496,849
|
)
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
-
|
|
Cost of sales
|
|
|
6,538,437
|
|
|
|
10,417,464
|
|
|
|
(3,879,027
|
)
|
|
|
54.80
|
%
|
|
|
67.53
|
%
|
|
|
-12.73
|
%
|
Gross Profit
|
|
|
5,391,941
|
|
|
|
5,009,763
|
|
|
|
382,178
|
|
|
|
45.20
|
%
|
|
|
32.47
|
%
|
|
|
12.73
|
%
|
Gross Profit %
|
|
|
45.20
|
%
|
|
|
32.47
|
%
|
|
|
12.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales & marketing
|
|
|
1,779,005
|
|
|
|
2,092,617
|
|
|
|
(313,612
|
)
|
|
|
14.91
|
%
|
|
|
13.56
|
%
|
|
|
1.35
|
%
|
Sales & marketing-PCTV
|
|
|
69,308
|
|
|
|
68,540
|
|
|
|
768
|
|
|
|
0.58
|
%
|
|
|
0.44
|
%
|
|
|
0.14
|
%
|
Technical support
|
|
|
80,580
|
|
|
|
90,787
|
|
|
|
(10,207
|
)
|
|
|
0.68
|
%
|
|
|
0.59
|
%
|
|
|
0.09
|
%
|
General & administrative
|
|
|
675,777
|
|
|
|
771,008
|
|
|
|
(95,231
|
)
|
|
|
5.66
|
%
|
|
|
5.00
|
%
|
|
|
0.66
|
%
|
General & administrative-PCTV
|
|
|
63,731
|
|
|
|
68,730
|
|
|
|
(4,999
|
)
|
|
|
0.53
|
%
|
|
|
0.45
|
%
|
|
|
0.08
|
%
|
Amortization of intangible assets
|
|
|
188,709
|
|
|
|
188,709
|
|
|
|
0
|
|
|
|
1.58
|
%
|
|
|
1.22
|
%
|
|
|
0.36
|
%
|
Selling, general and administrative stock compensation expense
|
|
|
16,665
|
|
|
|
18,346
|
|
|
|
(1,681
|
)
|
|
|
0.14
|
%
|
|
|
0.12
|
%
|
|
|
0.02
|
%
|
Total selling, general and administrative expense
|
|
|
2,873,775
|
|
|
|
3,298,737
|
|
|
|
(424,962
|
)
|
|
|
24.08
|
%
|
|
|
21.38
|
%
|
|
|
2.70
|
%
|
Research and development
|
|
|
577,404
|
|
|
|
519,785
|
|
|
|
57,619
|
|
|
|
4.84
|
%
|
|
|
3.37
|
%
|
|
|
1.47
|
%
|
Research and development-PCTV
|
|
|
120,003
|
|
|
|
282,116
|
|
|
|
(162,113
|
)
|
|
|
1.01
|
%
|
|
|
1.83
|
%
|
|
|
-0.82
|
%
|
Research and development stock compensation expense
|
|
|
9,519
|
|
|
|
10,481
|
|
|
|
(962
|
)
|
|
|
0.08
|
%
|
|
|
0.07
|
%
|
|
|
0.01
|
%
|
Total expenses
|
|
|
3,580,701
|
|
|
|
4,111,119
|
|
|
|
(530,418
|
)
|
|
|
30.01
|
%
|
|
|
26.65
|
%
|
|
|
3.36
|
%
|
Income from operations
|
|
|
1,811,240
|
|
|
|
898,644
|
|
|
|
912,596
|
|
|
|
15.19
|
%
|
|
|
5.82
|
%
|
|
|
9.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,080
|
|
|
|
1,688
|
|
|
|
(608
|
)
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
0.00
|
%
|
Foreign currency
|
|
|
2,070
|
|
|
|
16,879
|
|
|
|
(14,809
|
)
|
|
|
0.02
|
%
|
|
|
0.11
|
%
|
|
|
-0.09
|
%
|
Total other income
|
|
|
3,150
|
|
|
|
18,567
|
|
|
|
(15,417
|
)
|
|
|
0.03
|
%
|
|
|
0.12
|
%
|
|
|
-0.09
|
%
|
Income before tax provision
|
|
|
1,814,390
|
|
|
|
917,211
|
|
|
|
897,179
|
|
|
|
15.22
|
%
|
|
|
5.94
|
%
|
|
|
9.28
|
%
|
Current tax expense
|
|
|
52,505
|
|
|
|
36,348
|
|
|
|
16,157
|
|
|
|
0.44
|
%
|
|
|
0.24
|
%
|
|
|
0.20
|
%
|
Deferred tax expense
|
|
|
471,799
|
|
|
|
436,931
|
|
|
|
34,868
|
|
|
|
3.95
|
%
|
|
|
2.83
|
%
|
|
|
1.12
|
%
|
Net income
|
|
$
|
1,290,086
|
|
|
$
|
443,932
|
|
|
$
|
846,154
|
|
|
|
10.83
|
%
|
|
|
2.87
|
%
|
|
|
7.96
|
%
|
Net sales for the three months ended December
31, 2012 decreased $3,496,849 compared to the three months ended December 31, 2011 as shown in the table below.
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(decrease)
|
|
|
(decrease)
|
|
|
Percentage of sales by
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Dollar
|
|
|
dollar
|
|
|
geographic region
|
|
|
|
ended 12/31/12
|
|
|
ended 12/31/11
|
|
|
Variance
|
|
|
variance %
|
|
|
2012
|
|
|
2011
|
|
The Americas
|
|
$
|
7,111,583
|
|
|
$
|
8,980,855
|
|
|
$
|
(1,869,272
|
)
|
|
|
-21
|
%
|
|
|
59
|
%
|
|
|
58
|
%
|
Europe
|
|
|
4,365,290
|
|
|
|
5,848,490
|
|
|
|
(1,483,200
|
)
|
|
|
-25
|
%
|
|
|
37
|
%
|
|
|
38
|
%
|
Asia
|
|
|
453,505
|
|
|
|
597,882
|
|
|
|
(144,377
|
)
|
|
|
-24
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Total
|
|
$
|
11,930,378
|
|
|
$
|
15,427,227
|
|
|
$
|
(3,496,849
|
)
|
|
|
-23
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Sales for the first quarter of fiscal 2012
included the product rollout of the DCR-2650 cable card, the Broadway and the HD-PVR gaming unit. The rollout of these products
resulted in a concentration of sales in the first quarter of fiscal 2012 and was the primary driver in sales decline for the first
fiscal quarter of fiscal 2013 when compared to fiscal 2012.
Gross profit
Gross profit increased $382,178 for the three months ended December
31, 2012 compared to the same period in the prior year. The increase in gross profit was due to:
|
|
Three Months
ended
|
|
Gross profit in dollars-increase (decrease)
|
|
12/31/12
|
|
Lower sales
|
|
$
|
(1,457,175
|
)
|
Weaker Euro
|
|
|
(166,143
|
)
|
Labor related and other costs
|
|
|
172,907
|
|
Mix of higher gross profit retail sales
|
|
|
197,542
|
|
Change in estimates
|
|
|
1,635,047
|
|
Total increase in gross profit
|
|
$
|
382,178
|
|
The increase in the gross profit percentage
was due to:
|
|
Three Months
ended
|
|
Gross profit percentage-increase (decrease)
|
|
12/31/12
|
|
Mix of higher gross profit sales
|
|
|
0.91
|
%
|
Weaker Euro
|
|
|
(0.80
|
)%
|
Labor related and other costs
|
|
|
(1.24
|
)%
|
Change in estimates
|
|
|
13.86
|
%
|
Total gross profit percentage increase
|
|
|
12.73
|
%
|
The factors contributing to the gross profit
percentage increase of 12.73% for the three months ended December 31, 2012 were primarily:
|
·
|
Favorable gross profit percentage due to mix of higher average sales price retail sales resulted
in an increase of 0.91%.
|
|
·
|
A decrease in the Euro to USD exchange rate from $1.3479 for the three months ended December 31,
2011 to $1.2975 for the three months ended December 31, 2012 resulted in a gross profit decrease of 0.80%.
|
|
·
|
Labor related and other costs resulted in a gross profit decrease of 1.24%
|
|
·
|
Change in estimates to reflect their current exposure resulted in a gross profit increase of 13.86%
|
Selling, general and administrative
expenses
T
he chart
below illustrates the components of selling, general and administrative expense.
|
|
Three months ended December 31,
|
|
|
|
Dollar Costs
|
|
|
Percentage of Sales
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
Sales and marketing-HCW
|
|
$
|
1,779,005
|
|
|
$
|
2,092,617
|
|
|
$
|
(313,612
|
)
|
|
|
14.91
|
%
|
|
|
13.56
|
%
|
|
|
1.35
|
%
|
Sales and marketing-PCTV
|
|
|
69,308
|
|
|
|
68,540
|
|
|
|
768
|
|
|
|
0.58
|
%
|
|
|
0.44
|
%
|
|
|
0.14
|
%
|
Technical support
|
|
|
80,580
|
|
|
|
90,787
|
|
|
|
(10,207
|
)
|
|
|
0.68
|
%
|
|
|
0.59
|
%
|
|
|
0.09
|
%
|
General and administrative-HCW
|
|
|
675,777
|
|
|
|
771,008
|
|
|
|
(95,231
|
)
|
|
|
5.66
|
%
|
|
|
5.00
|
%
|
|
|
0.66
|
%
|
General and administrative-PCTV
|
|
|
63,731
|
|
|
|
68,730
|
|
|
|
(4,999
|
)
|
|
|
0.53
|
%
|
|
|
0.45
|
%
|
|
|
0.08
|
%
|
Amortization of intangible assets
|
|
|
188,709
|
|
|
|
188,709
|
|
|
|
0
|
|
|
|
1.58
|
%
|
|
|
1.22
|
%
|
|
|
0.36
|
%
|
Stock compensation
|
|
|
16,665
|
|
|
|
18,346
|
|
|
|
(1,681
|
)
|
|
|
0.14
|
%
|
|
|
0.12
|
%
|
|
|
0.02
|
%
|
Total
|
|
$
|
2,873,775
|
|
|
$
|
3,298,737
|
|
|
$
|
(424,962
|
)
|
|
|
24.08
|
%
|
|
|
21.38
|
%
|
|
|
2.70
|
%
|
Selling, general and administrative expense
for the first quarter of fiscal 2013 decreased $424,962 from prior year’s first fiscal quarter as follows:
Sales and marketing expenses decreased $312,844,
driven primarily by $159,023 in lower commission and co-operative advertising expense, which declined due to lower sales and a
reduction in expenses of $213,783 for a change in estimate for unused severance liabilities. The decrease in expenses was offset
somewhat by $59,972 in higher compensation expenses related to addition of sales resources.
The decrease in technical support of $10,207
was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $100,230 was due primarily
to decreases in rent and utilities due to the relocation of offices to smaller spaces, lower legal fees due to less legal consultation
required during the first quarter of fiscal 2013, lower credit card processing fees due to the issuing lines of credit to certain
customers who previously purchased product with credit cards and lower bad debt expense. The decrease in stock compensation expense
was due to fewer non vested options outstanding issued at a lower fair value price.
Research and development expenses
Research and development expenses for the
three months ended December 31, 2012 decreased $105,456 from the three months ended December 31, 2011. The decrease was mainly
due to lower compensation expenses of $195,853, primarily due to a change in estimate for unused severance liabilities offset by
$71,859 in higher product development related expenses. The decrease in stock compensation expense was due to fewer non vested
options outstanding issued at a lower fair value price.
Tax provision
Our tax provision for the three months
ended December 31, 2012 and 2011 is as follows:
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Current tax expense on international operations
|
|
$
|
42,505
|
|
|
$
|
26,348
|
|
Current state taxes
|
|
|
10,000
|
|
|
|
10,000
|
|
Deferred tax expense
|
|
|
471,799
|
|
|
|
436,931
|
|
Tax provision
|
|
$
|
524,304
|
|
|
$
|
473,279
|
|
The deferred tax expense was primarily
due to the utilization of net operating losses related to our United States subsidiary.
Summary of operations
We recorded a net income of $1,290,086 for
the three months ended December 31, 2012, which resulted in basic and diluted net income per share of $0.13 on weighted average
basic and diluted shares of 10,122,344, compared to a net income of $443,932 for the three months ended December 31, 2011, which
resulted in basic and diluted net income per share of $0.04 on weighted average basic and diluted shares of 10,122,344.
Options to purchase 1,396,625 and 1,404,567
shares of common stock, at prices ranging from $0.77 to $7.45 and from $0.86 to $7.45, were outstanding for the three months ended
December 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because they were
anti-dilutive.
Seasonality
As our sales are primarily to the consumer
market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales is
our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international
sales, mostly in the European market, were 44% of sales for fiscal year ended September 30, 2012 and 41% for the fiscal year ended
September 30, 2011. Part of our third and fourth quarters (April through June and July to September) can be potentially impacted
by the reduction of activity experienced in Europe during the summer holiday period.
We target a wide range of customer types to
attempt to moderate the seasonal nature of our retail sales.
Liquidity and capital resources
The Company had cash and cash equivalents
as of December 31, 2012 of $ 3,604,456, a decrease of $1,491,397 from September 30, 2012.
The decrease in cash was due to:
|
|
Operating
|
|
|
Investing
|
|
|
Financing
|
|
|
|
|
|
|
Activities
|
|
|
Activities
|
|
|
Activities
|
|
|
Total
|
|
Sources of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income adjusted for non cash items
|
|
$
|
2,099,458
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,099,458
|
|
Increase in accounts payable and accrued expenses
|
|
|
1,776,389
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,776,389
|
|
Total sources of cash
|
|
|
3,875,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,875,847
|
|
Less cash used for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(4,343,882
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,343,882
|
)
|
Increase in inventory
|
|
|
(988,408
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(988,408
|
)
|
Increase in prepaid expenses and other current assets
|
|
|
(53,495
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(53,495
|
)
|
Capital equipment purchases
|
|
|
-
|
|
|
|
(12,697
|
)
|
|
|
-
|
|
|
|
(12,697
|
)
|
Total cash usage
|
|
|
(5,385,785
|
)
|
|
|
(12,697
|
)
|
|
|
-
|
|
|
|
(5,398,482
|
)
|
Effect of exchange rates on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,238
|
|
Net cash decrease
|
|
$
|
(1,509,938
|
)
|
|
$
|
(12,697
|
)
|
|
$
|
0
|
|
|
$
|
(1,491,397
|
)
|
Cash used in operating activities was due
to an increase in accounts receivable $4,343,882, an increase in inventory of $988,408 and an increase in prepaid expenses and
other current assets of $53,495. The increase in accounts receivable was due to an increase in sales of approximately 37.50% between
the first quarter of fiscal 2013 and the fourth quarter of fiscal 2012. The increase in inventory was due to higher production
required in response to the increased sales. Sources of cash came from net income adjusted for non cash items of $2,099,458 and
an increase in accounts payable and accrued expenses of $1,776,389. The increase in accounts payable and accrued expenses was due
to material purchased from suppliers on open account that was needed to build inventory. Cash of $12,697 was used to purchase capital
equipment.
We had working capital of $429,671 as of December
31, 2012 compared to a working capital deficit of $1,433,704 as of September 30, 2012. The net increase in current assets of $3,669,895
as of December 31, 2012 compared to September 30, 2012 was a result of increased business volume for the three months ended December
31, 2012.
Our cash requirements for the next twelve
months will include, among other things, the cash needed to fund our operating and working capital needs. With the proper execution
of our business and operating plan, we believe that our cash and cash equivalents as of December 31, 2012 and our internally generated
cash will provide us with sufficient liquidity to meet our capital needs for the next twelve months. Failure to meet the business
and operating plan could require the need for additional sources of capital. In light of the current economic and credit conditions
there can be no assurances that we will be able to find external sources of financing to fund our additional capital needs. In
addition, if we are able to obtain financing, there can be no assurances that it will be on financially reasonable terms.
Future contractual obligations
The following table shows our contractual
obligations related to lease obligations as of December 31, 2012:
|
|
Payments due by period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3 to 5 years
|
|
Operating lease obligations
|
|
$
|
1,743,464
|
|
|
$
|
599,792
|
|
|
$
|
1,143,672
|
|
|
$
|
-
|
|
Inflation
While inflation has not had a material effect
on our operations in the past, there can be no assurance that we will be able to continue to offset the effects of inflation on
the costs of our products or services through price increases to our customers without experiencing a reduction in the demand for
our products; or that inflation will not have an overall effect on the computer equipment market that would have a material effect
on us.
Recent Accounting Pronouncements
In October 2012, the FASB issued ASU 2012-04,
“Technical Corrections and Improvements.” ASU 2012-04 contains amendments to clarify the ASC, correct unintended application
of guidance, or make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice
or create a significant administrative cost to most entities. Additionally, the amendments are intended to make the ASC easier
to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications.
The amendments that do not have transition guidance were effective upon issuance. The amendments that are subject to the transition
guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 will not have a material
impact on our results of operations or our financial position.
In February 2013, the FASB issued ASU 2013-02,
“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”
ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income
on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net
income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period,
an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do
not change the current requirements for reporting net income or other comprehensive income in financial statements. For public
entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is
permitted.
Item 4. Controls and Procedures
Disclosure Controls
and Procedures
We maintain disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) that are designed to
ensure
that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required
disclosure
.
As required by Exchange Act Rule 13a-15(b),
as of the end of the period covered by this Quarterly Report, with the participation of our principal executive officer and principal
financial officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal
executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December
31, 2012.
Changes in Internal Control Over Financial
Reporting
There was no change in our internal control
over financial reporting
, identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred
during our most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Special note regarding forward-looking
statements
This Quarterly Report on Form 10-Q
contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking
statements contained in this Quarterly Report on Form 10-Q may not occur. Generally these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated
benefits from acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating
results or financial position, and the outcome of any contingencies. Any statements contained herein that are not historical facts
are forward-looking statements. Any such forward-looking statements are based on current expectations, estimates and projections
of management. We intend for these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements.
Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “project,”
“plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions
are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance
or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that
may influence the accuracy of the statements and the projections upon which the statements are based. Factors that could cause
actual results to differ materially from those set forth or implied by any forward-looking statement include, but are not limited
to, the mix of products sold and the profit margins thereon, order cancellation or a reduction in orders from customers, competitive
product offerings and pricing actions, the availability and pricing of key raw materials, 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, continued operating losses, our ability to obtain financing, our ability to make timely filings of the
required periodic reports
and other reports with the Securities and Exchange Commission,
issues
relating to our ability to maintain effective internal control over financial reporting and disclosure controls and procedures,
our failure to maintain compliance
with Nasdaq’s continued listing requirements or our
failure to maintain our Nasdaq listing, as well as other risks and uncertainties discussed in our reports filed with the Securities
and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the fiscal year ended September 30,
2012
and this
Quarterly Report on
Form 10-Q for the three months ended
December 31, 2012
,
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.