Hauppauge Digital (HAUP) 10-Q 2012 Q2 Quarterly report

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 endedMarch 31, 2012

OR

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

For the transition period from _______ to ________

Commission file number1-13550

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	xSMALLER 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).

x YES           ¨ NO

As of April 25, 2012, 10,122,344 shares of .01 par value Common Stock of the issuer were outstanding.

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

INDEX

	Page no.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets – March 31, 2012 (unaudited) and September 30, 2011	3
Consolidated Statements of Operations – Three Months ended March 31, 2012 (unaudited) and 2011 (unaudited)	4
Consolidated Statements of Operations – Six Months ended March 31, 2012 (unaudited) and 2011 (unaudited)	5
Consolidated Statements of Other Comprehensive Income (Loss) Three Months and Six Months ended March 31, 2012 (unaudited) and 2011 (unaudited)	6
Consolidated Statements of Cash Flows - Six Months ended March 31, 2012 (unaudited) and 2011 (unaudited)	7
Notes to Consolidated Financial Statements	8-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 6. Exhibits	24
Signatures	25

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2012 (unaudited)			September 30, 2011
Assets:
Cash and cash equivalents	$	3,999,270		$	4,080,537
Trade receivables, net of various allowances		3,678,785			3,708,696
Other non trade receivables		2,008,208			2,408,326
Inventories		12,048,532			10,092,224
Deferred tax asset-current		1,086,884			1,127,641
Prepaid expenses and other current assets		1,198,453			992,258
Total current assets		24,020,132			22,409,682
Intangible assets, net		2,809,012			3,186,430
Property, plant and equipment, net		313,216			368,703
Security deposits and other non-current assets		113,289			112,813
Deferred tax asset-non current		279,216			789,297
Total assets	$	27,534,865		$	26,866,925
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	5,533,850		$	6,674,900
Accrued expenses fees		4,733,476			4,082,719
Accrued expenses		12,440,377			11,417,895
Income taxes payable		251,873			242,201
Total current liabilities		22,959,576			22,417,715
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823 issued		108,828			108,828
Additional paid-in capital		18,250,882			18,187,595
Retained deficit		(6,803,207	)		(6,899,958	)
Accumulated other comprehensive loss		(4,575,666	)		(4,541,707	)
Treasury Stock, at cost, 760,479 shares		(2,405,548	)		(2,405,548	)
Total stockholders' equity		4,575,289			4,449,210
Total liabilities and stockholders' equity	$	27,534,865		$	26,866,925

See accompanying notes to consolidated financial statements

3

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended March 31,
	2012			2011
Net sales	$	11,320,988		$	10,324,162
Cost of sales		7,721,672			7,102,764
Gross profit		3,599,316			3,221,398
Selling, general and administrative expenses		2,991,170			3,513,871
Research and development expenses		806,211			1,142,913
Loss from operations		(198,065	)		(1,435,386	)
Other income (expense) :
Interest income		1,147			1,616
Foreign currency loss		(309	)		(27,060	)
Total other income (expense)		838			(25,444	)
Loss before tax provision		(197,227	)		(1,460,830	)
Current tax expense		36,047			51,725
Deferred tax expense (benefit)		113,907			(69,188	)
Net loss	$	(347,181	)	$	(1,443,367	)
Net loss per share:
Basic and diluted	$	(0.03	)	$	(0.14	)

See accompanying notes to consolidated financial statements

4

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Six months ended March 31,
	2012		2011
Net sales	$	26,748,215	$	23,187,108
Cost of sales		18,139,136		15,618,472
Gross profit		8,609,079		7,568,636
Selling, general and administrative expenses		6,289,907		7,288,575
Research and development expenses		1,618,593		2,239,692
Income (loss) from operations		700,579		(1,959,631	)
Other income :
Interest income		2,835		3,175
Foreign currency gain		16,570		4,463
Total other income		19,405		7,638
Income (loss) before tax provision		719,984		(1,951,993	)
Current tax expense		72,395		99,056
Deferred tax expense		550,838		130,538
Net income (loss)	$	96,751	$	(2,181,587	)
Net income (loss) per share:
Basic and diluted	$	0.01	$	(0.22	)

See accompanying notes to consolidated financial statements

5

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three months ended March 31,
	2012			2011
Net loss	$	(347,181	)	$	(1,443,367	)
Foreign currency translation gain		102,451			21,771
Forward exchange contracts marked to market gain		-			22,191
Other comprehensive loss	$	(244,730	)	$	(1,399,405	)

	Six months ended March 31,
	2012			2011
Net income (loss)	$	96,751		$	(2,181,587	)
Foreign currency translation gain (loss)		(33,959	)		182,989
Forward exchange contracts marked to market loss		-			(607	)
Other comprehensive income (loss)	$	62,792		$	(1,999,205	)

See accompanying notes to consolidated financial statements

6

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended March 31,
	2012			2011
Net income (loss)	$	96,751		$	(2,181,587	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		89,096			119,899
Amortization of intangible assets		377,418			377,418
Stock compensation expense		63,287			200,938
Deferred tax expense		550,838			130,538
Sales reserve, net		75,029			(110,569	)
Bad debt reserve		40,000			-
Inventory reserve		200,000			179,000
Other items		34,958			(53,620	)
Changes in current assets and liabilities
Accounts receivable and other non trade receivables		130,418			2,511,053
Inventories		(1,987,477	)		(797,091	)
Prepaid expenses and other current assets		(204,346	)		(187,525	)
Accounts payable		(1,144,775	)		(1,380,157	)
Accrued expenses and other current liabilities		1,638,046			(459,560	)
Total adjustments		(137,508	)		530,324
Net cash used in operating activities		(40,757	)		(1,651,263	)
Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(33,609	)		(29,306	)
Net cash used in investing activities		(33,609	)		(29,306	)
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options and employee stock purchases		-			46,798
Net cash provided by financing activities		-			46,798
Effect of exchange rates on cash		(6,901	)		31,299
Net decrease in cash and cash equivalents		(81,267	)		(1,602,472	)
Cash and cash equivalents, beginning of period		4,080,537			7,057,904
Cash and cash equivalents, end of period	$	3,999,270		$	5,455,432
Supplemental disclosures:
Income taxes paid	$	61,608		$	61,816

See accompanying notes to consolidated financial statements

7

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements for Hauppauge Digital Inc. and subsidiaries (collectively, the “Company”) included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these interim statements be read in conjunction with the financial statements and related notes included in the Company's September 30, 2011 Form 10-K.

The operating results for the three months and six months ended March 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2012.

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

Note 2. Trade Accounts and Other Non-Trade Receivables

Trade receivables consist of:

· Trade receivables from sales to customers

· Allowances, consisting of sales and bad debt

Other non trade receivables consist of:

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

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

· Other minor non-trade receivables

8

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

Trade receivables and other non-trade receivables as of March 31, 2012 and September 30, 2011 consisted of:

	March 31,			September 30,
	2012			2011
Trade receivables	$	8,154,109		$	7,893,923
Allowance for doubtful accounts		(463,773	)		(423,773	)
Sales reserve		(4,011,551	)		(3,761,454	)
Net trade receivables	$	3,678,785		$	3,708,696
Receivable from contract manufacturers	$	1,583,735		$	2,030,251
GST and VAT tax receivables		345,244			298,303
Other		79,229			79,772
Total other non trade receivables	$	2,008,208		$	2,408,326

Note 3. Inventories

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

	March 31,		September 30,
	2012		2011
Component parts	$	4,678,738	$	3,504,129
Finished goods		4,381,548		3,774,917
Subtotal		9,060,286		7,279,046
Reserve for anticipated sales returns at cost		2,988,246		2,813,178
Total	$	12,048,532	$	10,092,224

Note 4. Net Income (Loss) Per Share

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

	Three months ended				Six months ended
	March 31				March 31
	2012		2011		2012		2011
Weighted average shares outstanding-basic		10,122,344		10,106,679		10,122,344		10,094,920
Number of shares issued on the assumed exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,122,344		10,160,679		10,122,344		10,094,920

Options to purchase 1,535,567 and 1,501,317 shares of common stock, at prices from $0.77 to $7.45 and from $0.89 to $7.45, were outstanding for the three months and six months ended March 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

9

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

Note 5. Product segment and geographic information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital video products for the personal computer market and Apple iPad® and iPhone® market. The products are similar in function and share commonality of component parts and manufacturing processes. The Company’s products are either sold, or can be sold, by the same retailers and distributors in the Company’s marketing channel. The Company also sells product directly to PC manufacturers.

The Company’s products fall under three product categories:

· Video recorder products, such as USB-Live2, which allows consumers to record video tapes to DVD disc or to some of the Company’s products, such as the HD PVR and Colossus

· TV receivers, which include Broadway and the Company’s WinTV and PCTV TV tuner products

· Non-TV tuner products such as the ImpactVCB, MediaMVP-HD and the Company’s TV applications for the PC and the Apple iPad® and iPhone®

The Company’s TV tuner products enable, among other things, a PC user to watch TV in a resizable window on a PC. The Company’s video recorder products allow consumers to record high definition video from a cable TV or satellite set top box or a game console such as a Xbox 360 or Sony Playstation 3. The Company’s other non-TV tuner products enable, among other things, the ability to watch and listen to PC based videos, music and pictures on a TV set through a home network.

Sales by functional category are as follows:

	Three months ended March 31,				Six months ended March 31
Product line sales	2012		2011		2012		2011
Video recorder products	$	6,264,295	$	4,567,307	$	14,977,716	$	8,244,389
TV tuner products		4,471,833		5,396,100		10,626,263		14,027,646
Other video products and software		584,860		360,755		1,144,236		915,073
Total sales	$	11,320,988	$	10,324,162	$	26,748,215	$	23,187,108

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

	Three months ended March 31,						Six months ended March 31
Geographic region	2012			2011			2012			2011
The Americas		54	%		58	%		57	%		60	%
Europe		41	%		40	%		39	%		38	%
Asia		5	%		2	%		4	%		2	%
Total		100	%		100	%		100	%		100	%

10

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, 2012 and 2011 is as follows:

	Three months ended March 31,					Six months ended March 31,
	2012		2011			2012		2011
Current tax expense on international operations	$	26,047	$	41,725		$	62,395	$	79,056
Current state taxes		10,000		10,000			10,000		20,000
Deferred tax expense		113,907		(69,188	)		550,838		130,538
Tax provision	$	149,954	$	(17,463	)	$	623,233	$	229,594

The increase in deferred tax expense was primarily due to the utilization of net operating losses and the write off and disposal of obsolete inventory.

Note 7. Accrued expense-fees

The Company uses software and technology purchased or licensed from third parties in certain of the Company’s products. The Company enters into agreements for these technologies, and incurs a fee for each product sold that includes the technology. The Company recognizes and estimates the amount of fees owed to third parties based on products sold that include software and technology purchased or licensed from these third parties. The Company uses all available applicable information in determining these estimates and thus the accrued amounts are subject to change as new information is made available to the Company. Accrued expense-fees are accounted for as a component of product cost and are charged to cost of sales. As of March 31, 2012 and September 30, 2011 the amount of accrued expense-fees amounted to $4,733,476 and $4,082,719, respectively.

Note 8. Accrued Expenses

Accrued expenses are for costs incurred for goods and services which are based on estimates, charged as incurred to operations as period costs and for which no invoice has been rendered. Accrued expenses as of March 31, 2012 and September 30, 2011 were $12,440,377 and $11,417,895, respectively. Included in accrued expenses are accruals for product costs, accruals for sales costs relating to sales rebate programs, accruals for freight and duty expenses, accruals for compensation, accruals for warranty repair costs and accruals for advertising and marketing costs.

Note 9. Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value, and expands the related disclosure requirements. The ASC indicates, among other things, that a fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company also follows the provisions of ASC 820-10 with respect to its non-financial assets and liabilities 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:

11

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

12

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

Three Month Period ENDED MARCH 31, 2012 Compared to THE THREE MONTH PERIOD ENDED MARCH 31, 2011

Results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 is as follows:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	03/31/12			03/31/11			$			2012			2011			Variance
Net Sales	$	11,320,988		$	10,324,162		$	996,826			100.00	%		100.00	%		-
Cost of sales		7,721,672			7,102,764			618,908			68.21	%		68.80	%		-0.59	%
Gross Profit		3,599,316			3,221,398			377,918			31.79	%		31.20	%		0.59	%
Gross Profit %		31.79	%		31.20	%		0.59	%
Expenses:
Sales & marketing		1,833,970			2,225,185			(391,215	)		16.20	%		21.55	%		-5.35	%
Sales & marketing-PCTV		61,081			100,591			(39,510	)		0.54	%		0.97	%		-0.43	%
Technical support		95,931			109,230			(13,299	)		0.85	%		1.06	%		-0.21	%
General & administrative		723,343			752,991			(29,648	)		6.39	%		7.29	%		-0.90	%
General & administrative-PCTV		66,205			73,224			(7,019	)		0.58	%		0.71	%		-0.13	%
Amortization of intangible assets		188,709			188,709			-			1.67	%		1.83	%		-0.16	%
Selling, general and administrative stock compensation expense		21,931			63,941			(42,010	)		0.19	%		0.62	%		-0.43	%
Total selling, general and administrative expense		2,991,170			3,513,871			(522,701	)		26.42	%		34.03	%		-7.61	%
Research and development		517,193			685,715			(168,522	)		4.57	%		6.64	%		-2.07	%
Research and development-PCTV		276,489			420,671			(144,182	)		2.44	%		4.07	%		-1.63	%
Research and development stock compensation expense		12,529			36,527			(23,998	)		0.11	%		0.35	%		-0.24	%
Total expenses		3,797,381			4,656,784			(859,403	)		33.54	%		45.09	%		-11.55	%
Loss from operations		(198,065	)		(1,435,386	)		1,237,321			-1.75	%		-13.89	%		12.14	%
Other income (expense):
Interest income		1,147			1,616			(469	)		0.01	%		0.02	%		-0.01	%
Foreign currency		(309	)		(27,060	)		26,751			0.00	%		-0.26	%		0.26	%
Total other income (expense)		838			(25,444	)		26,282			0.01	%		-0.24	%		0.25	%
Loss before tax provision		(197,227	)		(1,460,830	)		1,263,603			-1.74	%		-14.13	%		12.39	%
Current tax expense		36,047			51,725			(15,678	)		0.31	%		0.50	%		-0.19	%
Deferred tax expense		113,907			(69,188	)		183,095			1.01	%		-0.67	%		1.68	%
Net loss	$	(347,181	)	$	(1,443,367	)	$	1,096,186			-3.06	%		-13.96	%		10.90	%

13

Net sales for the three months ended March 31, 2012 increased $996,826 compared to the three months ended March 31, 2011 as shown in the table below.

					Increase
					(decrease)		Increase			Percentage of sales by
	Three Months		Three Months		Dollar		(decrease)			geographic region
	ended 03/31/12		ended 03/31/11		Variance		variance %			2012			2011
The Americas	$	6,092,069	$	5,986,441	$	105,628		2	%		54	%		58	%
Europe		4,703,289		4,112,624		590,665		14	%		41	%		40	%
Asia		525,630		225,097		300,533		134	%		5	%		2	%
Total	$	11,320,988	$	10,324,162	$	996,826		10	%		100	%		100	%

In fiscal 2011 we began a repositioning of our product offeringsfrom lower-end TV tuner products to higher-end video recorder, video streaming and digital TV tuner products. Led by sales of our higher end video recorder and video streaming products our sales increased by approximately 10% over the second quarter of fiscal 2011. As a result of this transition, we experienced an increase in the average unit sales price of approximately 25% while our unit sales declined by approximately 13%.

Gross profit

Gross profit increased $377,918 for the three months ended March 31, 2012 compared to the same quarter in the prior fiscal year. The increase in gross profit was due to:

	Three Months ended
Gross profit in dollars-increase (decrease)	03/31/12
Higher sales	$	416,175
Weaker Euro		(207,315	)
Labor related and other costs		(169,053	)
Mix of higher gross profit retail sales		329,103
License fee adjustment		(80,821	)
Mix of OEM sales		89,829
Total increase in gross profit	$	377,918

The increase in the gross profit percentage was due to:

	Three Months ended
Gross profit percentage-increase (decrease)	03/31/12
Mix of higher gross profit retail sales		2.21	%
Weaker Euro		(1.03	)%
Labor related and other costs		(0.56	)%
License fee adjustment		(0.82	)%
Mix of OEM sales		0.79	%
Total gross profit percentage increase		0.59	%

14

The factors contributing to the gross profit percentage increase of 0.59% for the three months ended March 31, 2012 were primarily:

· Favorable gross profit percentage due to mix of higher average sales price retail sales resulted in an increase of 2.21%.

· A decrease in the Euro to USD exchange rate from $1.3680 for the three months ended March 31, 2011 to $1.3115 for the three months ended March 31, 2011 resulted in a gross profit decrease of 1.03%.

· Mix of lower gross profit OEM sales resulted in a gross profit increase of 0.79%

· Labor related and other costs resulted in a gross profit decrease of 0.56%

· Lower license fee adjustments resulted in a gross profit decrease of 0.82%

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
	2012		2011		(Decrease)			2012			2011			(Decrease)
Sales and marketing-HCW	$	1,833,970	$	2,225,185	$	(391,215	)		16.20	%		21.55	%		-5.35	%
Sales and marketing-PCTV		61,081		100,591		(39,510	)		0.54	%		0.97	%		-0.43	%
Technical support		95,931		109,230		(13,299	)		0.85	%		1.06	%		-0.21	%
General and administrative-HCW		723,343		752,991		(29,648	)		6.39	%		7.29	%		-0.90	%
General and administrative-PCTV		66,205		73,224		(7,019	)		0.58	%		0.71	%		-0.13	%
Amortization of intangible assets		188,709		188,709		0			1.67	%		1.83	%		-0.16	%
Stock compensation		21,931		63,941		(42,010	)		0.19	%		0.62	%		-0.43	%
Total	$	2,991,170	$	3,513,871	$	(522,701	)		26.42	%		34.03	%		-7.61	%

As a result of an expense reduction plan implemented in the fourth quarter of fiscal 2011, selling, general and administrative expense decreased $522,701 from the same quarter in the prior fiscal year as follows:

Sales and marketing expenses decreased $430,725, driven primarily by $25,618 in lower compensation expenses, $467,793 in lower sales office expenses due to office downsizing and office closures, offset somewhat by $62,686 in higher sales related expenses, primarily for commission and co-op advertising.

The decrease in technical support of $13,299 was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $36,667 was due primarily to lower compensation expenses and negotiated rent reductions. The decrease in stock compensation expense was due to lower option grants issued at a lower fair value.

Research and development expenses

Research and development expenses for the three months ended March 31, 2012 decreased $336,702 from the same quarter in the prior fiscal year. The decrease was mainly due to lower compensation and compensation related expenses pursuant to an expense reduction plan implemented in the fourth quarter of fiscal 2011. The decrease in stock compensation expense was due to lower option grants issued at a lower fair value.

15

Tax provision

Our tax provision for the three months ended March 31, 2012 and 2011 is as follows:

	Three months ended March 31,
	2012		2011
Current tax expense on international operations	$	26,047	$	41,725
Current state taxes		10,000		10,000
Deferred tax expense (benefit)		113,907		(69,188	)
Tax provision (benefit)	$	149,954	$	(17,463	)

The increase in deferred tax expense was primarily due to the utilization of net operating losses and the write off and disposal of obsolete inventory.

Summary of operations

We recorded a net loss of $347,181 for the three months ended March 31, 2012, which resulted in basic and diluted net loss per share of $0.03 on weighted average basic and diluted shares of 10,122,344, compared to a net loss of $1,443,367 for the three months ended March 31, 2011, which resulted in basic and diluted net loss per share of $0.14 on weighted average basic and diluted shares of 10,106,679.

Options to purchase 1,535,567 and 1,501,317 shares of common stock, at prices from $0.77 to $7.45 and from $0.89 to $7.45, were outstanding for the three months ended March 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings (loss) per share because they were anti-dilutive.

16

SIX Month Period ENDED MARCH 31, 2012 Compared to THE SIX MONTH PERIOD ENDED MARCH 31, 2011

Results of operations for the six months ended March 31, 2012 compared to the six months ended March 31, 2011 is as follows:

	Six			Six
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	03/31/12			03/31/11			$			2012			2011			Variance
Net Sales	$	26,748,215		$	23,187,108		$	3,561,107			100.00	%		100.00	%		-
Cost of sales		18,139,136			15,618,472			2,520,664			67.81	%		67.36	%		0.45	%
Gross Profit		8,609,079			7,568,636			1,040,443			32.19	%		32.64	%		-0.45	%
Gross Profit %		32.19	%		32.64	%		-0.45	%
Expenses:
Sales & marketing		3,926,587			4,735,515			(808,928	)		14.67	%		20.42	%		-5.75	%
Sales & marketing-PCTV		129,621			197,989			(68,368	)		0.48	%		0.85	%		-0.37	%
Technical support		186,718			219,948			(33,230	)		0.70	%		0.95	%		-0.25	%
General & administrative		1,494,351			1,500,413			(6,062	)		5.59	%		6.47	%		-0.88	%
General & administrative-PCTV		134,935			129,408			5,527			0.50	%		0.56	%		-0.06	%
Amortization of intangible assets		377,418			377,418			0			1.41	%		1.63	%		-0.22	%
Selling, general and administrative stock compensation expense		40,277			127,884			(87,607	)		0.15	%		0.55	%		-0.40	%
Total selling, general and administrative expense		6,289,907			7,288,575			(998,668	)		23.50	%		31.43	%		-7.93	%
Research and development		1,036,978			1,341,665			(304,687	)		3.88	%		5.79	%		-1.91	%
Research and development-PCTV		558,605			824,973			(266,368	)		2.09	%		3.56	%		-1.47	%
Research and development stock compensation expense		23,010			73,054			(50,044	)		0.09	%		0.32	%		-0.23	%
Total expenses		7,908,500			9,528,267			(1,619,767	)		29.56	%		41.10	%		-11.54	%
Income (loss) from operations		700,579			(1,959,631	)		2,660,210			2.63	%		-8.46	%		11.09	%
Other income:
Interest income		2,835			3,175			(340	)		0.01	%		0.01	%		0.00	%
Foreign currency		16,570			4,463			12,107			0.06	%		0.02	%		0.04	%
Total other income		19,405			7,638			11,767			0.07	%		0.03	%		0.04	%
Income (loss) before tax provision		719,984			(1,951,993	)		2,671,977			2.70	%		-8.43	%		11.13	%
Current tax expense		72,395			99,056			(26,661	)		0.27	%		0.43	%		-0.16	%
Deferred tax expense		550,838			130,538			420,300			2.06	%		0.56	%		1.50	%
Net income ( loss)	$	96,751		$	(2,181,587	)	$	2,278,338			0.37	%		-9.42	%		9.79	%

17

Net sales for the six months ended March 31, 2012 increased $3,561,107 compared to the six months ended March 31, 2011 as shown in the table below.

					Increase
					(decrease)		Increase			Percentage of sales by
	Six Months		Six Months		Dollar		(decrease)			geographic region
	ended 03/31/12		ended 03/31/11		Variance		variance %			2012			2011
The Americas	$	15,072,924	$	13,880,328	$	1,192,596		9	%		57	%		60	%
Europe		10,551,779		8,818,755		1,733,024		20	%		39	%		38	%
Asia		1,123,512		488,025		635,487		130	%		4	%		2	%
Total	$	26,748,215	$	23,187,108	$	3,561,107		15	%		100	%		100	%

In fiscal 2011 we began a repositioning of our product offeringsfrom lower-end TV tuner products to higher-end video recorder, video streaming and digital TV tuner products. Led by sales of our higher end video recorder and video streaming products our sales increased by approximately 15% over fiscal 2011. As a result of this transition, we experienced an increase in the average unit sales price of approximately 27% while our unit sales declined by approximately 9%.

Gross profit

Gross profit increased $1,040,443 for the six months ended March 31, 2012 compared to the same period in the prior fiscal year. The increase in gross profit was due to:

	Six Months ended
Gross profit in dollars-increase (decrease)	03/31/12
Higher sales	$	1,531,364
Weaker Euro		(255,613	)
Labor related and other costs		(274,530	)
Mix of higher gross profit retail sales		252,298
License fee adjustment		(283,184	)
Mix of OEM sales		70,108
Total increase in gross profit	$	1,040,443

The decrease in the gross profit percentage was due to:

	Six Months ended
Gross profit percentage-increase (decrease)	03/31/12
Mix of higher gross profit retail sales		0.82	%
Weaker Euro		(0.55	)%
Labor related and other costs		0.36	%
License fee adjustment		(1.34	)%
Mix of OEM sales		0.26	%
Total gross profit percentage decrease		(0.45	)%

18

The factors contributing to the gross profit percentage decrease of 0.45% for the six months ended March 31, 2012 were primarily:

· Favorable gross profit percentage due to mix of higher average sales price retail sales resulted in an increase of 0.82%.

· A decrease in the Euro to USD exchange rate from $1.3636 for the six months ended March 31, 2011 to $1.3297 for the six months ended March 31, 2012 resulted in a gross profit decrease of 0.55%.

· Mix of lower gross profit OEM sales resulted in a gross profit increase of 0.26%

· Labor related and other costs resulted in a gross profit increase of 0.36%

· Lower license fee adjustments resulted in a gross profit decrease of 1.34%

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
	2012		2011		(Decrease)			2012			2011			(Decrease)
Sales and marketing-HCW	$	3,926,587	$	4,735,515	$	(808,928	)		14.67	%		20.42	%		-5.75	%
Sales and marketing-PCTV		129,621		197,989		(68,368	)		0.48	%		0.85	%		-0.37	%
Technical support		186,718		219,948		(33,230	)		0.70	%		0.95	%		-0.25	%
General and administrative-HCW		1,494,351		1,500,413		(6,062	)		5.59	%		6.47	%		-0.88	%
General and administrative-PCTV		134,935		129,408		5,527			0.50	%		0.56	%		-0.06	%
Amortization of intangible assets		377,418		377,418		0			1.41	%		1.63	%		-0.22	%
Stock compensation		40,277		127,884		(87,607	)		0.15	%		0.55	%		-0.40	%
Total	$	6,289,907	$	7,288,575	$	(998,668	)		23.50	%		31.43	%		-7.93	%

As a result of an expense reduction plan implemented in the fourth quarter of fiscal 2011, selling, general and administrative expense decreased $998,668 from the same period in the prior fiscal year as follows:

Sales and marketing expenses decreased $877,296, driven primarily by $59,644 in lower compensation expenses, $954,839 in lower sales office expenses due to office downsizing and office closures, offset somewhat by $137,187 in higher sales related expenses, primarily for commission and co-op advertising.

The decrease in technical support of $33,230 was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $535 was due primarily to decreases in rent and compensation expense offset by an increase in bad debt expense in recognition of potential non-collectible accounts. The decrease in stock compensation expense is due to less options issued at a lower fair value.

Research and development expenses

Research and development expenses for the six months ended March 31, 2012 decreased $621,099 from the same period in the prior fiscal year. The decrease was mainly due to lower compensation and compensation related expenses pursuant to an expense reduction plan implemented in the fourth quarter of fiscal 2011. The decrease in stock compensation expense was due to lower option grants issued at a lower fair value.

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Tax provision (Benefit)

Our tax provision for the six months ended March 31, 2012 and 2011 is as follows:

	Six months ended March 31,
	2012		2011
Current tax expense on international operations	$	62,395	$	79,056
Current state taxes		10,000		20,000
Deferred tax expense		550,838		130,538
Tax provision	$	623,233	$	229,594

The increase in deferred tax expense was primarily due to the utilization of net operating losses and the write off and disposal of obsolete inventory.

Summary of operations

We recorded a net income of $96,751 for the six months ended March 31, 2012, which resulted in basic and diluted net income per share of $0.01 on weighted average basic and diluted shares of 10,122,344, compared to a net loss of $2,181,587 for the six months ended March 31, 2011, which resulted in basic and diluted net loss per share of $0.22 on weighted average basic and diluted shares of 10,094,920.

Options to purchase 1,535,567 and 1,501,317 shares of common stock, at prices from $0.77 to $7.45 and from $0.89 to $7.45, were outstanding for the six months ended March 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings (loss) per share because they were anti-dilutive.

Seasonality

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales is our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international sales, mostly in the European market, were 41% of sales for the fiscal year ended September 30, 2011 and 54% for the fiscal year ended September 30, 2010. Part of our third and fourth quarters (April through June and July 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.

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Liquidity and capital resources

The Company had cash and cash equivalents as of March 31, 2012 of $3,999,270, a decrease of $81,267 from September 30, 2011.

The decrease in cash was due to:

	Operating			Investing			Financing
	Activities			Activities			Activities		Total
Sources of cash:
Net income adjusted for non cash items	$	1,527,377		$	-		$	-	$	1,527,377
Increase in accounts payable and accrued expenses		493,271			-			-		493,271
Decrease in accounts receivable		130,418			-			-		130,418
Total sources of cash		2,151,066			-			-		2,151,066
Less cash used for:
Increase in inventory		(1,987,477	)		-			-		(1,987,477	)
Increase in prepaid expenses and other current assets		(204,346	)		-			-		(204,346	)
Capital equipment purchases		-			(33,609	)		-		(33,609	)
Total cash usage		(2,191,823	)		(33,609	)		-		(2,225,432	)
Effect of exchange rates on cash		-			-			-		(6,901	)
Net cash decrease	$	(40,757	)	$	(33,609	)	$	-	$	(81,267	)

Cash used in operating activities was due to an increase in inventory and increase in prepaid and other current assets of $2,191,823 offset by net income adjusted for non cash items, an increase in accounts payable and accrued expenses and a decrease in accounts receivable of $2,151,066. The increase in inventory was due to higher production required in response to the increased sales. The increase in accounts payable and accrued expenses was due to material purchases required to build the inventory needed to fund the increase in sales. The reduction in accounts receivable of $130,418 was due to collections coupled with lower sales in the second fiscal quarter compared to our first fiscal quarter. Cash of $33,609 was used to purchase capital equipment.

We had working capital of $1,060,556 as of March 31, 2012 compared to a working capital deficit of $8,033 as of September 30, 2011. An increase in current assets of $1,610,450, spurred on by higher business volume, offset somewhat by an increase in current liabilities of $541,861 was responsible for the increase in working capital.

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

21

Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of March 31, 2012:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Operating lease obligations	$	1,767,342	$	601,203	$	752,655	$	413,484

Inflation

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

Recent Accounting Pronouncements

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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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 toensure 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 requireddisclosure.

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, 2012.

Changes in Internal Control Over Financial Reporting

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

Special note regarding forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report on Form 10-Q may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated benefits from acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating results or financial position, and the outcome of any contingencies. Any such forward-looking statements are based on current expectations, estimates and projections of management. We intend for these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements. Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. All cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.Factors that could cause actual results to differ materially from those set forth or implied by any forward-looking statement include, but are not limited to, the mix of products sold and the profit margins thereon, order cancellation or a reduction in orders from customers, the availability and pricing of key raw materials, competitive product offerings and pricing actions, dependence on key members of management, the availability of financing, successful integration of acquisitions, economic conditions in the United States and abroad, fluctuating currency rates, history of operating losses, as well as other risks and uncertainties discussed in our reports filed with the Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, our Form 10-Q for the three months ended December 31, 2011 and this Form 10-Q for the three months ended March 31, 2012. Copies of these filings are available at www.sec.gov.

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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.

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SIGNATURES

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

		HAUPPAUGE DIGITAL INC.
Date:May 14, 2012	By:	/s/Kenneth Plotkin
		KENNETH PLOTKIN
		Chief Executive Officer, Chairman of the Board, President (Principal Executive Officer)
Date:May 14, 2012	By:	/s/Gerald Tucciarone
		GERALD TUCCIARONE
		Treasurer, Chief Financial Officer,
		(Principal Financial Officer and Principal Accounting Officer) and Secretary

25