Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended June 30, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
transition period to
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Commission
File Number 0-21123
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SRS LABS, INC.
(Exact name of
registrant as specified in its charter)
Delaware
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33-0714264
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(State or other
jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2909
Daimler Street, Santa Ana, California 92705
(Address of principal executive offices) (Zip
Code)
(949) 442-1070
(Registrants 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. Yes
x
No
o
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. (Check one):
Large accelerated
filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
(Do not check if a smaller
reporting company)
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Smaller
reporting company
o
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
As
of July 28, 2008, 15,776,115 of the issuers common stock, par value $.001
per share, were outstanding.
Table
of Contents
SRS LABS, INC.
Quarterly
Report on Form 10-Q
For the
Three and Six Months Ended June 30, 2008
Index
2
Table
of Contents
FORWARD-LOOKING
INFORMATION
As
used herein, the Company, SRS Labs, SRS, we, us, or our means SRS
Labs, Inc. and its wholly-owned subsidiary SRSWOWcast.com, Inc.
Some of the statements in this Quarterly Report on Form 10-Q
contain forward-looking statements regarding our assumptions, projections,
expectations, targets, intentions or beliefs about future events, which involve
risks and uncertainties. All statements other than statements of historical
facts included in this Quarterly Report relating to expectation of future
financial performance, continued growth, changes in economic conditions or
capital markets and changes in customer usage patterns and preferences, and our
potential stock repurchases are forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as may, will, should,
expect, plan, intend, forecast, anticipate, believe, estimate, predict,
potential, continue or the negative of these terms or other comparable
terminology. The forward-looking statements contained in this Quarterly Report
involve known and unknown risks, uncertainties and situations that
may cause our or our industrys actual results, level of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these statements.
Factors that might cause actual events or results to differ materially from
those indicated by these forward-looking statements may include the
matters listed in our most recently filed Annual Report on Form 10-K and
elsewhere in this Quarterly Report on Form 10-Q, including, but not
limited to, the loss of any one significant customer; the acceptance of new SRS
Labs products and technologies; the import of competitive products and pricing;
the timely development and release of technologies by the Company; general
business and economic conditions, especially in Asia; product and customer concentration
in our business; our high dependence on the consumer electronics market, which
is characterized by short product life cycles, fluctuations in demand and
seasonality; the risk of widespread illness; our dependence on growth in
emerging markets; the length and unpredictable nature of our sales cycle; our
ability to protect our products through patents and other intellectual property
rights; our dependence on key personnel; the volatility of the price of our
common stock; provisions that could discourage transactions resulting in a
change in control contained in our certificate of incorporation and bylaws as
well as Delaware law; competition we face from companies with greater brand
recognition and resources; pricing pressures on the consumer electronics
product manufacturers; and other factors identified from time to time in our
filings with the Securities and Exchange Commission.
Any forward-looking statement speaks only as of the
date on which such statement is made, and, except as required by law, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for management to predict all such factors.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SRS
LABS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
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June 30, 2008
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December 31, 2007
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(unaudited)
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ASSETS
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Current
Assets
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Cash and cash
equivalents
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$
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42,332,790
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$
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39,615,291
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Accounts
receivable, net
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419,808
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1,138,425
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Prepaid expenses
and other current assets
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790,393
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893,388
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Short-term
investments
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4,984,000
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Total
Current Assets
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48,526,991
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41,647,104
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Investments
available for sale
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5,451,875
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Property and
equipment, net
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342,443
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309,727
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Intangible
assets, net
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2,271,816
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2,197,616
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Deferred income
taxes, net
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2,601,131
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1,776,202
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Total
Assets
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$
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53,742,381
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$
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51,382,524
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current
Liabilities
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Accounts payable
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$
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591,826
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$
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529,063
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Accrued
liabilities
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794,779
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689,308
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Deferred revenue
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2,012,476
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1,156,836
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Total
Current Liabilities
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3,399,081
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2,375,207
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Commitments
and Contingencies
(Note 4)
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Stockholders
Equity
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Preferred
stock$.001 par value; 2,000,000 shares authorized; no shares issued or
outstanding
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Common
stock$.001 par value; 56,000,000 shares authorized; 15,790,315 and
16,946,377 shares issued; and 15,776,115 and 15,778,715 shares outstanding at
June 30, 2008 and December 31, 2007, respectively
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15,791
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16,947
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Additional
paid-in capital
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69,130,329
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74,143,772
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Accumulated
other comprehensive loss
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(48,125
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)
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Accumulated
deficit
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(18,705,216
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)
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(19,155,096
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)
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Treasury stock
at cost, 14,200 and 1,167,662 shares at June 30, 2008 and
December 31, 2007, respectively
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(97,604
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)
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(5,950,181
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)
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Total
Stockholders Equity
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50,343,300
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49,007,317
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Total
Liabilities and Stockholders Equity
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$
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53,742,381
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$
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51,382,524
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See accompanying notes to the condensed
consolidated financial statements
4
Table of Contents
SRS LABS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Revenues
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$
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4,178,144
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$
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4,694,852
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$
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9,119,132
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$
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9,767,255
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Cost of sales
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40,370
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40,522
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66,319
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79,062
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Gross profit
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4,137,774
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4,654,330
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9,052,813
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9,688,193
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Operating
expenses:
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Sales and
marketing
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2,483,915
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1,767,717
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4,627,537
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3,644,010
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Research and
development
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852,771
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814,595
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1,779,533
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1,676,220
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General and
administrative
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1,527,597
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1,292,181
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2,965,955
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2,669,608
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Total operating
expenses
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4,864,283
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3,874,493
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9,373,025
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7,989,838
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Operating (loss)
income
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(726,509
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)
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779,837
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(320,212
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)
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1,698,355
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Other income,
net
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333,363
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508,964
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783,324
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1,002,760
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(Loss) income
before income taxes
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(393,146
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)
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1,288,801
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463,112
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2,701,115
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Income taxes
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15,326
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|
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|
13,232
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Net (loss)
income
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|
(408,472
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)
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1,288,801
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|
449,880
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2,701,115
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Net (loss)
income per common share:
|
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Basic
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$
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(0.03
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)
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$
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0.08
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$
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0.03
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$
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0.17
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Diluted
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$
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(0.03
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)
|
$
|
0.08
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|
$
|
0.03
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$
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0.16
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Weighted average
shares used in the per share calculations:
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Basic
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15,777,795
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16,202,909
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15,777,991
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16,106,312
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Diluted
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15,777,795
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16,652,184
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16,280,923
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16,448,156
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|
See accompanying notes to the condensed
consolidated financial statements
5
Table of Contents
SRS LABS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND
COMPREHENSIVE INCOME (Unaudited)
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Common Stock
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Additional
Paid-In
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Accumulated
Other
Comprehensive
|
|
Accumulated
|
|
Treasury
|
|
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|
Comprehensive
Income
for the Period
|
|
|
|
Shares
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|
Amount
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|
Capital
|
|
Loss
|
|
Deficit
|
|
Stock
|
|
Total
|
|
Ended
|
|
BALANCE,
December 31, 2007
|
|
15,778,715
|
|
$
|
16,947
|
|
$
|
74,143,772
|
|
$
|
(48,125
|
)
|
$
|
(19,155,096
|
)
|
$
|
(5,950,181
|
)
|
$
|
49,007,317
|
|
|
|
Proceeds from
exercise of stock options
|
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16,600
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|
17
|
|
42,772
|
|
|
|
|
|
|
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42,789
|
|
|
|
Purchase of
treasury stock
|
|
(19,200
|
)
|
|
|
|
|
|
|
|
|
(122,053
|
)
|
(122,053
|
)
|
|
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Cancellation of
treasury stock
|
|
|
|
(1,173
|
)
|
(5,973,457
|
)
|
|
|
|
|
5,974,630
|
|
|
|
|
|
Stock based
compensation
|
|
|
|
|
|
917,242
|
|
|
|
|
|
|
|
917,242
|
|
|
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Unrealized gain
on investments available for sale, net of tax
|
|
|
|
|
|
|
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48,125
|
|
|
|
|
|
48,125
|
|
48,125
|
|
Net income
|
|
|
|
|
|
|
|
|
|
449,880
|
|
|
|
449,880
|
|
449,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2008
|
|
15,776,115
|
|
$
|
15,791
|
|
$
|
69,130,329
|
|
$
|
|
|
$
|
(18,705,216
|
)
|
$
|
(97,604
|
)
|
$
|
50,343,300
|
|
$
|
498,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial
statements
6
Table of Contents
SRS LABS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
Net income
|
|
$
|
449,880
|
|
$
|
2,701,115
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
347,947
|
|
371,319
|
|
Provision for
doubtful accounts
|
|
7,470
|
|
68,234
|
|
Deferred taxes
|
|
(824,929
|
)
|
(571,915
|
)
|
Stock-based
compensation expense
|
|
917,242
|
|
851,010
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
711,147
|
|
(458,418
|
)
|
Prepaid expenses
and other current assets
|
|
102,995
|
|
232,907
|
|
Accounts payable
|
|
62,763
|
|
(238,286
|
)
|
Accrued
liabilities
|
|
105,471
|
|
(359,134
|
)
|
Deferred revenue
|
|
855,640
|
|
(292,713
|
)
|
Net cash
provided by operating activities
|
|
2,735,626
|
|
2,304,119
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(128,180
|
)
|
(70,225
|
)
|
Purchase of
investments
|
|
(4,984,000
|
)
|
|
|
Proceeds from
sale of investments
|
|
5,500,000
|
|
|
|
Expenditures
related to intangible assets
|
|
(326,683
|
)
|
(444,449
|
)
|
Net cash
provided by (used in) investing activities
|
|
61,137
|
|
(514,674
|
)
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
Proceeds from
exercise of stock options
|
|
42,789
|
|
1,815,555
|
|
Purchase of
treasury stock
|
|
(122,053
|
)
|
|
|
Net cash (used
in) provided by financing activities
|
|
(79,264
|
)
|
1,815,555
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
2,717,499
|
|
3,605,000
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
39,615,291
|
|
35,011,425
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
42,332,790
|
|
$
|
38,616,425
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
|
|
|
Income taxes
|
|
$
|
783,846
|
|
$
|
571,915
|
|
Supplemental
Disclosure of Non-Cash Investing Activities:
|
|
|
|
|
|
Unrealized gain
on investments
|
|
$
|
48,125
|
|
$
|
3,465
|
|
See accompanying notes to the condensed
consolidated financial statements
7
Table of Contents
SRS LABS, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
1.
Basis of
Presentation and Summary of Significant Accounting Policies and Estimates
As used herein, the Company,
SRS Labs, SRS, we, us, or our means SRS Labs, Inc. and its
wholly-owned subsidiary SRSWOWcast.com, Inc. The accompanying unaudited condensed
consolidated financial statements have been prepared by the Company in
conformity with accounting principles generally accepted in the United States
of America (generally accepted accounting principles or GAAP) for interim
financial information and the rules and regulations of the U.S. Securities
and Exchange Commission (SEC) for interim reporting. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation of our financial position and
results of operations have been included.
Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations for presentation of interim
financial information. Therefore, the condensed interim consolidated financial
statements should be read in conjunction with the Companys Annual Report on Form 10-K
for the year ended December 31, 2007. Current and future financial
statements may not be directly comparable to the Companys historical financial
statements. The results of operations for the interim period are not
necessarily indicative of the results to be expected for any other interim
period or for the full year. Amounts
related to disclosure of December 31, 2007 balances within these condensed
consolidated financial statements were derived from the audited 2007
consolidated financial statements.
Estimates
The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make use of certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods. We
base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an
inherent degree of uncertainty. Actual
results could differ materially from those estimates. See the audited
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2007 for an
additional discussion of the significant accounting policies and estimates used
in the preparation of our financial statements.
Cash and Cash Equivalents
Cash
and cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and are so near maturity that they present
insignificant risk of changes in value because of interest rates. Cash and cash
equivalents generally consist of cash, money market funds and instruments with
original maturities of three months or less when purchased. The Company places its cash in banks and its
cash and cash equivalents in commercial paper and money market funds at certain
financial institutions in excess of amounts insured by federal agencies. The Company does not believe that it is
subject to any unusual financial risk
beyond the normal risk associated with commercial banking relationships. The Company performs periodic evaluations of
the relative credit standing of these financial institutions. The Company has not experienced any
significant losses on its cash equivalents or investments.
Customer
Concentrations
Our revenue is primarily
derived from licensing. For the three
months ended June 30, 2008, Samsung accounted for approximately 38% of the
licensing revenue. For the same period
in the prior year, Samsung and Sony accounted for approximately 25% and 12%,
respectively, of the licensing revenue.
For the six months ended June 30, 2008, Samsung accounted for
approximately 40% of the licensing revenue.
For the same period in the prior year, Samsung and Sony accounted for
approximately 24% and 12%, respectively, of the licensing revenue.
8
Table of Contents
Income
Taxes
The Company has net operating loss carryforwards to
offset income taxes. Consequently, no provision is reflected in the
accompanying interim financial statements.
Refer to our Annual Report on Form 10-K for additional disclosure.
2.
Intangible Assets
Intangible assets consist
of the following:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Patents
|
|
$
|
3,537,118
|
|
$
|
3,315,343
|
|
Accumulated
amortization
|
|
(1,767,194
|
)
|
(1,622,954
|
)
|
Patents, net
|
|
1,769,924
|
|
1,692,389
|
|
Other
intangibles:
|
|
|
|
|
|
License
agreements acquired in purchase of SRSWOWcast
|
|
640,071
|
|
640,071
|
|
Capitalized
software and hardware for several technologies
|
|
555,106
|
|
663,310
|
|
Total of other
intangibles
|
|
1,195,177
|
|
1,303,381
|
|
Accumulated
amortization, other intangibles
|
|
(693,285
|
)
|
(798,154
|
)
|
Other
intangibles, net
|
|
501,892
|
|
505,227
|
|
Intangible
assets, net
|
|
$
|
2,271,816
|
|
$
|
2,197,616
|
|
Amortization periods
range from three to ten years depending on the estimated useful life of the
asset. Amortization expense consists of the following:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Patents
|
|
$
|
74,511
|
|
$
|
72,597
|
|
$
|
154,939
|
|
$
|
139,508
|
|
Other intangibles:
|
|
|
|
|
|
|
|
|
|
License
agreements acquired in purchase of SRSWOWcast
|
|
16,002
|
|
16,002
|
|
32,003
|
|
32,004
|
|
Capitalized
software and hardware
|
|
30,894
|
|
44,282
|
|
60,631
|
|
91,983
|
|
Total intangible
amortization expense
|
|
$
|
121,407
|
|
$
|
132,881
|
|
$
|
247,573
|
|
$
|
263,495
|
|
As of June 30,
2008, the weighted average useful life of the Companys patents and intangible
assets was approximately 6.75 years. The following table shows the
estimated amortization expense for those assets for the remaining six months of
the current fiscal year and each of the four succeeding fiscal years and
thereafter:
Years Ending December 31,
|
|
Estimated Expense
|
|
2008
|
|
$
|
226,226
|
|
2009
|
|
384,038
|
|
2010
|
|
347,349
|
|
2011
|
|
315,609
|
|
2012
|
|
292,273
|
|
Thereafter
|
|
706,321
|
|
Total
|
|
$
|
2,271,816
|
|
3.
Net Income Per Common Share
The Company applies Statement of Financial
Accounting Standards (SFAS) No. 128,
Earnings per Share
(SFAS No. 128), which requires the disclosure of basic and diluted net
income or loss per share for all current and prior periods. Basic net income or
loss per common share is computed by dividing net income or loss available to
common stockholders by the weighted average number of common shares outstanding
during each year. Diluted net income or loss per common share reflects the
maximum dilution, based on the average price of the Companys common stock
during each period, and is computed similar to basic income or loss per share
except that the denominator is increased to include the number of additional
shares that would have been outstanding if potentially dilutive stock options
and warrants had been exercised.
9
Table
of Contents
Basic and diluted net income per share computed in
accordance with SFAS No. 128 for the three and six months ended June 30,
2008 and 2007 are as follows:
|
|
For the Three Months
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
BASIC EPS
|
|
|
|
|
|
|
|
|
|
Net (loss)
income
|
|
$
|
(408,472
|
)
|
$
|
1,288,801
|
|
$
|
449,880
|
|
$
|
2,701,115
|
|
Denominator:
weighted average common shares outstanding
|
|
15,777,795
|
|
16,202,909
|
|
15,777,991
|
|
16,106,312
|
|
Net (loss)
income per sharebasic
|
|
$
|
(0.03
|
)
|
$
|
0.08
|
|
$
|
0.03
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EPS
|
|
|
|
|
|
|
|
|
|
(Loss) income
|
|
$
|
(408,472
|
)
|
$
|
1,288,801
|
|
$
|
449,880
|
|
$
|
2,701,115
|
|
Denominator:
weighted average common shares outstanding
|
|
15,777,795
|
|
16,202,909
|
|
15,777,991
|
|
16,106,312
|
|
Common equivalent
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
449,275
|
|
502,932
|
|
341,844
|
|
Total diluted
shares
|
|
15,777,795
|
|
16,652,184
|
|
16,280,923
|
|
16,448,156
|
|
Net (loss)
income per sharediluted
|
|
$
|
(0.03
|
)
|
$
|
0.08
|
|
$
|
0.03
|
|
$
|
0.16
|
|
There
were outstanding options to purchase an aggregate of 3,069,248 and 1,937,419
shares of the Companys common stock for the three months and six months ended June 30,
2008, that were not included in the table above because they would be
anti-dilutive.
There were
outstanding options to purchase an aggregate of 530,670 shares of the Companys
common stock for the three and six months ended June 30, 2007,that were
not included in the table above because they would be anti-dilutive.
4.
Commitments and
Contingencies
The Company is subject to legal proceedings and
claims that arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management does not
believe that the outcome of any of these matters will have a material adverse
effect on the Companys consolidated financial position or results of
operations.
5.
Segment Information
The Company operates in one reportable segment as
disclosed in our Annual Report on Form 10-K. The following schedule presents the Companys
revenue by geographic area. Revenue is summarized based on the location of the
licensees corporate headquarters. The Americas region includes North, Central
and South Americas.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
%
|
|
2007
|
|
%
|
|
2008
|
|
%
|
|
2007
|
|
%
|
|
Geographic
Area Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Korea
|
|
$
|
2,136,306
|
|
51
|
|
$
|
1,770,091
|
|
38
|
|
$
|
4,659,761
|
|
51
|
|
$
|
3,558,011
|
|
37
|
|
Japan
|
|
1,323,778
|
|
32
|
|
1,974,305
|
|
42
|
|
3,019,431
|
|
33
|
|
4,338,814
|
|
44
|
|
Americas
|
|
435,199
|
|
11
|
|
494,595
|
|
11
|
|
793,482
|
|
9
|
|
996,480
|
|
10
|
|
China
|
|
225,750
|
|
5
|
|
442,884
|
|
9
|
|
502,061
|
|
5
|
|
850,328
|
|
9
|
|
Europe
|
|
57,111
|
|
1
|
|
12,977
|
|
|
|
144,397
|
|
2
|
|
23,622
|
|
|
|
Total
|
|
$
|
4,178,144
|
|
100
|
|
$
|
4,694,852
|
|
100
|
|
$
|
9,119,132
|
|
100
|
|
$
|
9,767,255
|
|
100
|
|
10
Table
of Contents
6.
Recent Accounting
Pronouncements
In May 2008, the Financial
Accounting Standards Board (FASB) issued SFAS No. 162,
Hierarchy of Generally Accepted Accounting Principles
(SFAS
No. 162). This statement is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements of nongovernmental
entities that are presented in conformity with GAAP. This statement will be
effective 60 days following the SECs approval of the Public Company Accounting
Oversight Board amendment to AU Section 411,
The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles
.
The Company does not expect that the adoption of SFAS No. 162 will have a
material impact on its financial statements.
In December 2007,
FASB issued SFAS No. 141 (revised 2007),
Business
Combinations
(SFAS No. 141(R)), which replaces SFAS No. 141.
SFAS No. 141(R) retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141(R) is effective for us beginning January 1,
2009 and will apply prospectively to business combinations completed on or
after that date. We do not presently expect the adoption of SFAS No. 141 (R) will
have a material effect on our consolidated financial position or results of
operations.
In December 2007,
the FASB also issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB 51
(SFAS No. 160), which changes the accounting and reporting for minority
interests. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parents equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and, upon
a loss of control, the interest sold, as well as any interest retained, will be
recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160
is effective for us beginning January 1, 2009 and will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively. We do not expect the adoption of SFAS No. 160
will have a material effect on our consolidated financial position or results
of operations.
In February 2007,
the FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159).
SFAS No. 159 permits entities to choose to measure financial assets and
liabilities (except for those that are specifically scoped out of the
statement) at fair value. The election to measure a financial asset or
liability at fair value can be made on an instrument-by-instrument basis and is
irrevocable. The difference between carrying value and fair value at the
election date is recorded as a transition adjustment to opening retained
earnings. Subsequent changes in fair value are recognized in earnings. The
effective date for this statement is as of the beginning of an entitys first
fiscal year that begins after November 15, 2007. Accordingly, we adopted
SFAS No. 159 effective January 1, 2008. The adoption of SFAS No. 159
did not have a material impact on our consolidated financial position or
consolidated results of operations.
In September 2006,
the FASB issued SFAS No. 157,
Fair
Value Measurements
(SFAS No. 157). The purpose of SFAS No. 157
is to define fair value, establish a framework for measuring fair value and
enhance disclosures about fair value measurements. The measurement and
disclosure requirements became effective for us beginning January 1,
2008. The adoption of SFAS No. 157
did not have a material effect on our consolidated financial position or
results of operations.
7.
Share Repurchase Program
On May 19,
2008, the Companys Board of Directors approved a stock repurchase
program. Under the stock repurchase program, the Company was seeking to
acquire up to $10.0 million of the Companys outstanding common stock for a
period from May 20, 2008 to November 19, 2008. During the second fiscal quarter, the
Company repurchased a total of 14,200 shares of the Companys outstanding
common stock. The Company has suspended this repurchase program and announced
its intention to conduct a Dutch auction tender offer in August 2008,
pursuant to which the Company may purchase its common stock with an aggregate
purchase price of up to $10.0 million. There is no guarantee that this tender
offer will be completed and any such tender offer will be subject to the terms
and conditions described in the offer to purchase and related materials that
the Company intends to file with the SEC.
11
Table
of Contents
Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
This information should be read in conjunction with
the audited consolidated financial statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31,
2007, and the unaudited condensed interim consolidated financial statements and
notes thereto included in this Quarterly Report.
Overview
We are
a leading developer and provider of audio and voice technology solutions for
the home entertainment, portable media device, personal telecommunications,
personal computer, automotive, and broadcast markets. Our operations are conducted through SRS Labs, Inc.,
the parent company, and its wholly-owned subsidiary, SRSWOWcast.com, Inc.
Our business is focused on developing and licensing audio, voice and surround
sound technology solutions to many of the worlds leading original equipment
manufacturers, or OEMs, software providers and semiconductor companies, and
licensing and marketing hardware and software products for the
the PC and broadcast audio markets.
Critical Accounting Policies
Our
discussion and analysis of our results
of operations and liquidity and capital resources are based on our consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. We base our
estimates on historical and anticipated results and trends and on various other
assumptions that we believe are reasonable under the circumstances, including assumptions
as to future events. These estimates form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. By their nature, estimates are subject to an inherent degree of
uncertainty. Actual results may materially differ from our estimates.
Refer
to the Companys Annual Report on Form 10-K for the year ended December 31,
2007 for a discussion of critical accounting policies which include revenue
recognition, valuation of accounts receivable, valuation of intangible assets
and capitalization of software, recognition and measurement of current and
deferred income tax assets and liabilities, and stock-based compensation. During the six months ended June 30,
2008, there were no material changes to these policies.
Results of Operations
Three Months Ended June 30, 2008
Compared to Three Months Ended June 30, 2007
Revenues
Our revenues consist primarily of royalties
generated from the license of SRS Labs audio and voice technologies. License and royalty agreements generally
provide for the license of technologies for a fee based on the number of units
distributed by the licensee. However, we
have in the past and may again in the future, enter into a license agreement
for a one-time fee. Also included in licensing revenue are revenues generated
from the sale of hardware and software applications into the PC and broadcast
audio markets.
The following table presents our licensing revenues
mix by market
:
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Home
Entertainment (TV, Set Top Box, A/V Receiver, DVD)
|
|
65
|
%
|
68
|
%
|
Portable Media Devices (Digital Media Player,
Headphone)
|
|
11
|
%
|
9
|
%
|
Automotive
|
|
9
|
%
|
6
|
%
|
Personal
Telecommunications (Mobile Phone, PDA)
|
|
9
|
%
|
7
|
%
|
PC (Software,
Hardware)
|
|
6
|
%
|
10
|
%
|
Our revenues were $
4,178,144
for the three months ended June 30,
2008, compared to $4,694,852 for the three months ended June 30, 2007, a
decrease of $516,708 or 11%. Revenues in
our Home Entertainment market decreased by
12
Table
of Contents
$457,266
or 14%, primarily due to decreased revenues associated with flat panel
televisions and Set-Top Box revenues of $329,861 and $98,502,
respectively. Revenues associated with
advanced displays, which is comprised of LCD and Plasma flat panel televisions
and monitors and projection televisions, decreased by $329,861 or 12% primarily
due to decreased revenue from Sony and Toshiba, offset by increased revenue
from Samsung. Revenues in the PC market
decreased by $223,402 or 48% due to the loss in 2007 of our major customer in
this market. Significant revenues were
received from this customer through the second quarter of 2007 and significantly
decreased thereafter. Therefore, we
expect that the negative trend related to this customer will cease after this
quarter. Revenues in the Automotive
market increased $55,749 or 19% due to increase revenues from several customers
in Japan who provide line install, dealer option and after market automotive
audio systems to many of the significant Japanese automotive
manufacturers. Revenues in the portable
media devices increased by $49,556 or 12% primarily due to an increase in
revenue from Samsung Techwin due to the release of new models.
Sales and
Marketing
Sales
and marketing expenses consist primarily of employee salaries, sales
consultants fees and related expenses, sales commissions and product promotion
costs. Sales and marketing expenses were $2,483,915 for the three months ended June 30,
2008, compared to $1,767,717 for the same prior year period, an increase of
$716,198 or 41%. This increase is
primarily attributable to the hiring of eight additional sales and marketing
personnel and due to increased branding efforts. Included in sales and marketing expenses is
stock based compensation expense of $127,962 and $128,693 for the three months
ended June 30, 2008 and 2007, respectively. We expect that sales and marketing expenses
will continue to increase as we hire additional sales personnel to penetrate
target markets and key regions and as we continue to increase our marketing
efforts to cultivate and elevate the SRS brand globally. As a percentage of total revenues, sales and
marketing expenses increased from 38% for the three months ended June 30,
2007 to 59% for the same period
this year.
Research
and Development
Research and
development expenses consist of salaries and related costs of employees engaged
in ongoing research, design and development activities and costs for
engineering materials and supplies. Research and development expenses were
$852,771 for the three months ended June 30, 2008, compared to $814,595
for the same prior year period, an increase of $38,176 or 5%. This increase is attributable to hiring two
additional engineers at the end of the current quarter and increased travel to
support our global licensees. Included
in research and development expenses is stock based compensation expense of
$85,324 and $114,461 for the three months ended June 30, 2008 and 2007,
respectively. We expect that research
and development expenses will continue to increase as we seek to accelerate the
implementation of our technology with a greater number of customers and devices.
As a percentage of total revenues,
research and development expenses increased from 17% for the three months ended June 30, 2007 to 20% for the
same period this year.
General
and Administrative
General
and administrative (G&A) expenses consist primarily of employee-related
expenses, legal costs associated with the administration of intellectual
property and other professional fees. G&A expenses were $1,527,597 for the
three months ended June 30, 2008, compared to $1,292,181 for the same
prior year period, an increase of $235,416 or 18%. The increase is primarily attributable to an increase in
accounting, legal and other professional fees.
Included in general and administrative expenses is stock based
compensation expense of $200,812 and $181,014 for the three months ended June 30,
2008 and 2007, respectively. As a
percentage of total revenues, G&A expenses increased from 28%
for the quarter ended June 30, 2007 to 37% for the same period this year.
Interest
Income
Interest
income was $333,363 for the three months ended June 30, 2008, compared to
$508,964 for the same prior year period, a decrease of $175,601, or 35%. This
decrease is primarily attributable to lower interest rates earned on cash
balances invested.
Provision
for Income Taxes
The
income tax expense for the three months ended June 30, 2008 was
$15,326
, compared to a tax expense of $0 for the
same prior year period. The prior year
provision consists primarily of taxes paid on licensing revenues sourced from
countries requiring foreign tax withholdings, principally Korea. We reduced our current quarter tax provision
and our valuation allowance on our deferred tax assets by $361,855 and $258,856
for the three months ended June 30, 2008 and 2007, respectively, based on
our assessment of the future estimated realization of such assets.
13
Table
of Contents
Six Months Ended June 30, 2008 Compared to Six
Months Ended June 30, 2007
Revenues
Licensing revenues consist primarily of royalties
generated from the license of our audio and voice technologies. License and royalty agreements generally
provide for the license of technologies for a fee based on the number of units distributed
by the licensee. However, we have
entered into in the past, and may again enter into in the future, a license
agreement for a one-time fee or an annual fixed fee amount. Also included in
licensing revenue are revenues generated from the sale of hardware and software
applications into the PC and broadcast audio markets.
The
following table presents our licensing revenues mix by market:
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Home
Entertainment (TV, Set Top Box, A/V Receiver, DVD)
|
|
71
|
%
|
67
|
%
|
Portable Media Devices (Digital Media Player,
Headphone)
|
|
9
|
%
|
8
|
%
|
Automotive
|
|
8
|
%
|
7
|
%
|
Personal
Telecommunications (Mobile Phone, PDA)
|
|
7
|
%
|
7
|
%
|
PC (Software,
Hardware)
|
|
5
|
%
|
11
|
%
|
Licensing revenues were $9,119,132 for the six
months ended June 30, 2008, compared to $9,767,255 for the six months
ended June 30, 2007, a decrease of $648,123 or 7%. The decrease in licensing revenues was
primarily attributable to a decrease in PC revenue of $578,065 or 56% due to
the loss of our major customer in this market. This customer contributed
$519,384 in revenue during the first six months of 2007. There were no significant amounts of revenue
derived from this customer after the second fiscal quarter of 2007. Revenue from Personal Telecommunications
decreased $90,101 or 12% during the six months ended June 30, 2008, as
compared to the same period in the prior year, due to lower volume shipments by
NEC in the first quarter of 2008.
Revenue from the Home Entertainment market remained flat year over year. Sales in flat panel televisions and monitors
in our Home Entertainment market grew by $224,515 or 4%. Offsetting the increase in flat panel
televisions is a decrease in Set-Top Box and CRT revenue of $207,387 and
$75,647, respectively.
Sales and
Marketing
Sales
and marketing expenses consist primarily of employee salaries, sales
consultants fees and related expenses, sales commissions and product promotion
costs. Sales and marketing expenses were $4,627,537 for the six months ended June 30,
2008, compared to $3,644,010 for the same prior year period, an increase of
$983,527 or 27%. This increase is
primarily attributable to payroll and related costs associated with hiring an
additional eight sales and marketing personnel in the first half of 2008. Included in sales and marketing expenses is
stock based compensation expense of $269,856 and $270,493 for the six months
ended June 30, 2008 and 2007, respectively. As a percentage of total revenues, sales and
marketing expenses increased from 37% for the six months ended June 30,
2007 to 51% for the same period
this year.
Research
and Development
Research and
development expenses consist of salaries and related costs of employees engaged
in ongoing research, design and development activities and costs for engineering
materials and supplies. Research and development expenses were $1,779,533 for
the six months ended June 30, 2008, compared to $1,676,220 for the same
prior year period, an increase of $103,313 or 6%. This increase is attributable to an increase
in head count and payroll related costs. Included in research and development
expenses is stock based compensation expense of $208,950 and $216,186 for the
six months ended June 30, 2008 and 2007, respectively. As a percentage of total revenues, research
and development expenses increased from 17%
for the six months ended June 30, 2007 to 20% for the same period this
year.
General
and Administrative
G&A
expenses consist primarily of employee-related expenses, legal costs associated
with the administration of intellectual property and other professional fees.
G&A expenses were $2,965,955 for the six months ended June 30, 2008,
compared to $2,669,608 for the same prior year period, an increase $296,347 or
11%. The increase is primarily attributable to an increase in professional
fees, associated with legal, accounting and corporate matters, and an increase
in stock based compensation expense.
Included in general and administrative expenses is stock based
compensation expense of $438,436 and $364,331 for the six months ended June 30,
2008 and 2007, respectively. As a
percentage of total revenues, G&A expenses increased from 27% for the six months ended June 30,
2007 to 33% for the same period
this year.
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Interest
Income
Interest
income was $783,324 for the six months ended June 30, 2008, compared to
$1,002,760 for the same prior year period, a decrease of $219,436 or 22%. This
decrease is primarily attributable to lower interest rates earned on cash
balances invested.
Provision
for Income Taxes
The income tax expense for the six months ended June 30,
2008 was
$13,232
,
compared to tax expense of $0 for the same prior year period. The prior year provision consists primarily
of taxes paid on licensing revenues sourced from countries requiring foreign
tax withholdings, principally Korea. We
reduced our current period tax provision and our valuation allowance on our
deferred tax assets by $824,929 and $571,915 for the six months ended June 30,
2008 and 2007, respectively, based on our assessment of the future estimated
realization of such assets.
Liquidity and Capital Resources
Our principal source of liquidity to fund ongoing
operations at June 30, 2008 consisted of cash, cash equivalents and
short-term investments of $47,316,790.
At June 30, 2008, we had cash and cash equivalents of $42,332,790
and short-term investments of $4,984,000. Cash and cash equivalents are short-term
highly liquid investments that are readily convertible to known amounts of cash
and are so near maturity that they present insignificant risk of changes in
value because of interest rates. Cash
and cash equivalents generally consist of cash, money market funds and
instruments with original maturities of three months or less. Short term
investments consist of certificates of deposit with original maturities of six
months.
Net cash provided by operating activities was
$2,735,626 and $2,304,119 during the six months ended June 30, 2008 and June 30,
2007, respectively. The $431,507 increase in net cash provided by operating
activities for the six months ended June 30, 2008, compared to the same
period in the prior year, was primarily a result of an increase of $855,640 in
deferred revenue for the six months ended June 30, 2008 compared to a
decrease of $292,713 during the six months ended June 30, 2008. The increase in deferred revenue during the
six months ended June 30, 2008 was primarily due to the Company entering
into a multi-year license agreement with LG Electronics in October 2007
for the use of our existing technology for television and monitors through December 2010. We received the final lump sum payment under
this agreement in the six months ended June 30, 2008. Additionally, accounts receivable decreased
by $711,147 during the six months ended June 30, 2008 compared to an
increase of $458,418 in the same period in the prior year, due to timing of
billing and cash receipts. Additionally,
accounts payable and accrued liabilities increased $62,763 and $105,471,
respectively, during the six months ended June 30, 2008 as compared to
decreasing $238,286 and $359,134, respectively, in the same period in the prior
year. The changes in liability accounts
generally relate to the timing of payments to vendors and changes in accrued
commissions and amounts due to employees under our Profit Sharing and Bonus
Plan. Offsetting the increases in
working capital, net income for the six months ended June 30, 2008
decreased $2,251,235 from the same period in the prior year.
Our net cash provided by investing activities
was $61,137 during the six
months ended June 30, 2008, and net cash used by investing activities was
$514,674 during the six months ended June 30, 2007. The increase in net
cash provided by investing activities was attributable primarily to the receipt
of $5,500,000 from the sale of investments during the six months ended June 30,
2008. Offsetting this increase, the
Company purchased short-term investments during the six months ended June 30,
2008 totaling $4,984,000.
Our net cash used in financing activities was $
79,264 during the six months ended June 30, 2008, and net cash provided by financing activities was $1,815,555 during the six months ended June 30, 2007. The decrease in net cash provided by financing activities was primarily attributable to a decrease in stock option exercises. The Company expects to continue to use a portion of its cash to purchase treasury stock under the stock repurchase program announced in May 2008.
Based
on current plans and business conditions, we expect that our cash, cash
equivalents and investments together with any amounts generated from operations
will be sufficient to meet our cash requirements for the next twelve months.
However, we cannot guarantee that we will not be required to seek other
financing sooner or that such financing, if required, will be available on
terms satisfactory to us.
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Our
operations and financial results are subject to various risks and uncertainties
that could adversely affect our business, financial condition, results of
operations and trading price of our common stock. Please refer to Item 1A, Risk
Factors in our annual report on Form 10-K for fiscal year 2007 for
information concerning these and other uncertainties that could negatively
impact us.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
There
have been no material changes to the information called for by this Item 3 from
the disclosures set forth in Part II, Item 7A in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures.
Our Chief Executive Officer and President
and our Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e)
under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this Quarterly Report on Form 10-Q and, based on this
evaluation, have concluded that our disclosure controls and procedures are
effective.
Changes
in Internal Controls.
There have been no changes in our internal controls over financial
reporting that occurred during our second quarter ended June 30, 2008 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
PART II:
OTHER INFORMATION
Item 1A. Risk
Factors
You should carefully consider the risk factors
described below, as well as the other information included in this Report,
prior to making a decision to invest in our securities. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known or that we currently
believe to be less significant may also adversely affect us.
Our
business and future prospects depend on the strength of our brand and our
continued recognition as an industry standard in our existing or future
markets. If we do not maintain and
strengthen our brand, our business will be materially harmed.
Maintaining and strengthening the SRS brand and our
position as an industry standard is critical to maintaining and expanding our
licensing revenues and licensing relationships, as well as to our ability to
enter into new markets for our technologies.
Our continued success depends, in part, on our reputation for providing
high quality technologies across a wide range of consumer products, including
home electronics, personal computing devices, automotive entertainment systems,
cell phones, PDAs and PCs. If we fail to
promote, maintain and expand the SRS brand successfully, our business and
future prospects will suffer.
Maintaining and strengthening our brand will depend heavily on our
ability to continue to develop innovative technologies for the entertainment
industry and to continue to provide high quality technologies, which we may not
do successfully. Moreover, we believe that the likelihood that our technologies
will be adopted as industry standards in other markets and for various
applications depends, in large part, upon the strength of our brand, because
professional organizations and industry participants are more likely to accept,
as an industry standard, technologies developed by a well-respected and
well-known brand. If our technologies
are not recognized as industry standards in existing or future markets, our
ability to enter into new licensing arrangements or expand our revenues will be
adversely affected.
We are
exposed to risks in our licensing business related to product and customer
concentration
.
Currently, we generate a majority of our revenue in
the home theater market, principally through the inclusion of SRS technology
inside LCD and Plasma televisions, and set-top boxes. We expect that the
consumer home entertainment market will continue to account for a significant
portion of our licensing revenues for the foreseeable future. While consumer
spending in general on consumer electronic products has increased, retail
prices for certain consumer electronics products that include our audio
technology have decreased significantly. We expect that this trend will
continue for the foreseeable future. In addition, from time to time, certain of
our OEM and semiconductor manufacturer customers may account for a significant
portion of our revenues. For example, for the year ended December 31,
2007, Samsung accounted for approximately 28% of our consolidated revenues.
These manufacturers could develop their own technologies or decide to exclude
our audio rendering technology from their products altogether in an effort to
reduce costs. The loss of any key customer could have a material adverse affect
on our financial condition and results of operations.
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We depend on the sale by our licensees of products
that incorporate our technologies, and a reduction in those sales would
adversely affect our licensing revenue.
We derive most of our revenue from the licensing of
our technologies to manufacturers of consumer electronics products. We do not
manufacture consumer electronics products ourselves and our licensing revenue
is dependent on sales by our licensees of products that incorporate our
technologies and the ability of such licensees to achieve broad market
acceptance for such products. We cannot control these manufacturers product
development or commercialization efforts or predict their success. In addition,
our license agreements, which typically require manufacturers of consumer
electronics products to pay us a specified royalty for products shipped that
incorporate our technologies, do not require these manufacturers to include our
technologies in any specific number or percentage of units. Accordingly, if our
licensees sell fewer products incorporating our technologies, decline to market
products incorporating our technologies, or otherwise face significant economic
difficulties, our revenue will decline. Lower sales of products incorporating
our technologies could occur for a number of reasons including, but not limited
to, new product introductions and technological advancements, the existence of
competing products, changes in consumer tastes or trends, or changes in
industry standards, as well as increased market saturation for the products
incorporating our technologies or alternate consumer entertainment options, any
of which could adversely impact our business.
Our business is highly dependent on the consumer
electronics market, which is characterized by short product life cycles,
fluctuations in demand and seasonality, and is subject to risks related to
product transitions and supply of other components.
The consumer electronics market is characterized by
intense competition, rapidly evolving technology, and ever-changing consumer
preferences. These factors result in the frequent introduction of new products,
short product life cycles and significant price competition. As a result, we
may need to develop new products or technologies to integrate with the new
products and technologies developed by our customers. If we are unable to
develop the necessary technologies to meet the changing needs of our customers
or provide such technologies at competitive prices, our customers may reduce
their use of our technologies and our revenues may decline. In addition, the
dynamic nature of this market limits our, as well as our customers, ability to
accurately forecast quarterly and annual sales. If we, or our customers, are
unable to adequately manage product transitions, our business and results of
operations could be negatively affected.
Pricing pressures on the consumer electronics
product manufacturers, who incorporate our technologies into their products,
could limit the licensing fees we charge for our technologies, which could
reduce our revenues.
The markets for the consumer electronics products in
which our technologies are incorporated are intensely competitive and price
sensitive. Retail prices for consumer electronics products that include our
technologies, have decreased significantly, and we expect prices to continue to
decrease for the foreseeable future. In response, manufacturers have sought to
reduce their product costs, which can result in downward pressure on the
licensing fees we charge our customers who incorporate our technologies into
their products. Alternatively, our customers may seek to eliminate our
technologies in their products in favor of internally developed
17
Table of Contents
technologies. A decline
in the licensing fees we charge could materially and adversely affect our
operating results.
We face intense competition from companies with
greater brand recognition and resources.
The digital audio, consumer electronics and
entertainment markets are intensely competitive, subject to rapid change, and
significantly affected by new product introductions and other market activities
of industry participants
Many of our current and potential competitors enjoy
substantial competitive advantages, including:
·
greater name recognition;
·
a longer operating history;
·
more developed distribution channels and deeper relationships with
consumer electronics products designers and manufacturers;
·
a more extensive customer base;
·
broader product and service offerings;
·
greater resources for competitive activities, such as research and
development, strategic acquisitions, alliances, joint ventures, sales and
marketing, and lobbying industry and government standards; and
·
more technicians and engineers.
As a result, these current and potential competitors
may be able to respond more quickly and effectively than we can to new or
changing opportunities, technologies, standards, or customer requirements.
We are subject to risks associated with substantial
international operations.
We conduct sales and customer support operations in a
number of countries throughout the world that require refinement to adapt to
the changing market conditions on a regional basis. In addition, many of our
significant customers are headquartered in the Asia Pacific region,
particularly Japan and Korea. Approximately 90%, 91% and 84% of our revenues
were derived from customers with headquarters located in the Asia Pacific
markets during the years ended December 31, 2007, 2006 and 2005,
respectively. We expect to continue to derive a significant portion of our
revenues from sales to customers in these markets for the foreseeable future.
Also, a substantial number of products incorporating our technologies are
manufactured, assembled and tested by third parties in Asia. As a result, we
are subject to a number of risks of conducting business outside of the United
States, any of which could have a material adverse impact on our business and
results of operations, including:
18
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·
political, social and economic instability, and the risk of war,
terrorist activities or other international incidents in Asia and elsewhere
abroad;
·
difficulties and costs of staffing and managing foreign operations;
·
unexpected changes in, or impositions of, government requirements;
·
adverse changes in tariffs and other protectionist laws and business
practices that favor local competitors;
·
potentially longer payment cycles and greater difficulty in collecting
receivables from foreign entities;
·
the burdens of complying with a variety of non-U.S. laws and reduced
protection of our intellectual property in some countries;
·
potentially adverse tax consequences and the complexities of foreign
value added tax systems; and
·
other factors beyond our control, including natural disasters and major
health concerns.
General economic or market conditions may reduce
our revenues and harm our business.
Our business is particularly exposed to adverse
changes in general economic and market conditions, because products that
incorporate our technologies are entertainment oriented and often luxury goods.
A slowdown or decline in U.S. or foreign economic growth may adversely affect
consumer confidence, disposable income or retail spending in general. As a result,
sales by our licensees of consumer electronics and other products incorporating
our technologies may not grow as rapidly as in prior periods or may even
decrease if the current economic downturn continues or worsens, which could
adversely affect our licensing revenue.
If the sale of consumer electronics products
incorporating our technologies does not grow in emerging markets, our ability
to increase our licensing revenue may be limited.
We also expect that growth in our licensing revenue
will depend, in part, upon the growth of sales of consumer electronics products
incorporating our technologies in other countries, including China and India,
as consumers in these markets have more disposable income and are increasingly
purchasing entertainment products with surround sound capabilities. These
countries have rapidly expanding and growing economies that are less mature
than economies of other regions in which we derive significant portions of our
revenue. Because of this, changes to employment patterns, currency fluctuations
and political uncertainties could impact our ability to grow our licensing
revenue in these regions.
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We have a long and unpredictable sales cycle, which
can result in uncertainty and delays in generating additional revenues.
Historically, because of the complexity of our
technologies, it can take a significant amount of time and effort to explain
the benefits of our technologies to potential new customers and to negotiate a
sale. For example, it typically takes six to nine months after our first
contact with a prospective customer before we start licensing our technology to
that customer. In addition, purchases of our products are usually made in
connection with new design starts by our customers, the timing of which is
outside of our control. Accordingly, we may be unable to predict accurately the
timing of any significant future sales of our products. We may also spend
substantial time and management attention on potential license agreements that
are not consummated, or in which the consumer electronic product ultimately
does not sell in large quantities, thereby foregoing other higher revenue
opportunities.
If our patents and other intellectual property
rights do not adequately protect our products, we may lose market share to our
competitors and be unable to operate our business profitably.
Our ability to compete may be affected by our ability
to protect our proprietary information. We have filed numerous U.S. and foreign
patent applications and to date have a number of issued U.S. and foreign
patents covering various aspects of our technologies. We cannot guarantee that
the steps taken by us to protect our intellectual property will be adequate to
prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or
superior to our technology. In addition, the laws of certain foreign countries
may not protect our intellectual property rights to the same extent as do the
laws of the U.S. Litigation in the consumer electronics markets is common. It
is possible that third parties may assert claims or initiate litigation against
us or our customers with respect to existing or future products. In addition,
we may initiate claims or litigation against third parties for infringement of
our proprietary rights or to determine the scope and validity of our
proprietary rights. Claims and litigation brought against us or initiated by us
could be costly and time consuming and could divert our management from our
business. The outcome of any such pending or future litigation is uncertain,
and could require us to pay significant damages or could prevent us from
licensing some or all of our technologies, of which could significantly harm
our business and results of operations.
If we lose the services of our key personnel, or if
we are unable to attract and retain other key personnel, we may not be able to
manage our operations or meet our growth objectives.
Our future success depends to a large extent upon the
continued service of key personnel, including engineering, sales and
administrative staff. We anticipate that any future growth will require us to
recruit and hire a number of new personnel in engineering, operations, finance,
sales and marketing. Competition for such personnel can be intense, and it is
possible that we may not be able to recruit and retain necessary personnel to
operate our business and support future growth.
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The market price of our common stock is volatile
and your investment in our common stock could suffer a decline in value.
The trading price of our common stock has been, and
will likely continue to be, subject to wide fluctuations in response to
quarterly variations in our operating results, announcements of new products or
technological innovations by us or our competitors, strategic alliances between
us and third parties, general market fluctuations and other events and factors.
Changes in earnings estimates made by brokerage firms and industry analysts
relating to the markets in which we do business, or relating to us
specifically, have in the past resulted in, and could in the future result in,
an immediate and adverse effect on the market price of the common stock. Even
though our stock is quoted on the NASDAQ Global Market, our stock has had and
may continue to have low trading volume and high volatility. The historically
low trading volume of our stock makes it more likely that a severe fluctuation
in volume, either up or down, will significantly impact the stock price.
Because of the relatively low trading volume of our stock, our stockholders may
have difficulty selling our common stock.
Our certificate of incorporation and bylaws as well
as Delaware law contain provisions that could discourage transactions resulting
in a change in control, which may negatively affect the market price of our
common stock.
Our certificate of incorporation, our bylaws and
Delaware law contain provisions that might enable our management to discourage,
delay or prevent a change in control. In addition, these provisions could limit
the price that investors would be willing to pay in the future for shares of
our common stock.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 19, 2008, the
Companys Board of Directors approved a stock repurchase program. Under
the stock repurchase program, the Company may acquire up to $10.0 million of
the Companys outstanding common stock for a period from May 20, 2008 to
November 19, 2008. Purchases may be made from time to time in the
open market, in block purchases or in privately negotiated transactions,
depending on market conditions, share price and other factors. All repurchased shares are reflected as
treasury stock in the accompanying consolidated balance sheets. The following
table details our common stock repurchases for the three months ended
June 30, 2008:
Issuer
Purchases of Equity Securities
Period
|
|
Total Number of
Shares (or Units)
Purchased
|
|
Average Price Paid
per Share (or Unit)
|
|
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
|
|
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
|
|
April
1-30, 2008
|
|
|
|
$
|
|
|
|
|
$
|
|
|
May 1-31,
2008
|
|
|
|
$
|
|
|
|
|
$
|
10,000,000
|
|
June 1-30,
2008
|
|
14,200
|
|
$
|
6.87
|
|
14,200
|
|
$
|
9,902,396
|
|
Item 4. Submission of Matters to a Vote of Security
Holders
The Annual Meeting of
Stockholders of SRS Labs, Inc. was held on June 18, 2008 for the
purpose of (a) electing two Class III directors to the Board of
Directors, (b) voting on a proposal on an amendment to the SRS
Labs, Inc. 2006 Stock Incentive Plan to increase the number of shares of
common stock available for issuance thereunder by 1,750,000 and (c) voting
on a proposal to ratify the appointment of Squar, Milner, Peterson,
Miranda & Williamson, LLP as independent auditors for the fiscal year
ending December 31, 2008.
21
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Sam Yau and Thomas C.K.
Yuen were elected to serve as Class III directors of the Company for a
three-year term expiring at the 2011 Annual Meeting of Stockholders. Winston Hickman and Carol Miltner continued
as Class I Directors. David Dukes
continued as a Class II Director.
The tabulation of the votes cast for the election of Sam Yau and Thomas
C.K. Yuen were as follows:
Nominee
|
|
Votes For
|
|
Votes Withheld
|
|
Sam Yau
|
|
14,481,392
|
|
899,313
|
|
Thomas C.K. Yuen
|
|
13,952,165
|
|
1,428,540
|
|
The proposal to approve
an amendment to the SRS Labs, Inc. 2006 Stock Incentive Plan to increase
the number of shares of common stock available for issuance thereunder by
1,750,000 was approved. The tabulation of
votes was as follows:
Votes For
|
|
Votes Against &
Abstentions
|
|
8,245,226
|
|
2,318,622
|
|
The proposal to ratify
the appointment of Squar, Milner, Peterson, Miranda & Williamson, LLP
as independent auditors for the fiscal year ending December 31, 2008 was
approved. The tabulation of votes was as
follows:
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
Broker Non-Votes
|
|
15,299,781
|
|
56,131
|
|
24,792
|
|
0
|
|
Item 6.
Exhibits
The exhibits listed below
are hereby filed with the SEC as part of this Report.
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate of Incorporation of the Company,
previously filed with the SEC as Exhibit 3.1 to the Companys
Registration Statement on Form SB-2, specifically included in Amendment
No. 1 to such Registration Statement filed with the SEC on July 3,
1996 (File No. 333-4974-LA), which is incorporated herein by reference.
|
3.2
|
|
Bylaws of the Company, previously filed with the SEC
as Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the period ended September 30, 1999, filed with the SEC on
November 12, 1999, which is incorporated herein by reference.
|
31.1
|
|
Certification of Chief Executive Officer of SRS
Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.
|
31.2
|
|
Certification of Chief Financial Officer of SRS
Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.
|
32.1
|
|
Certification of Chief Executive Officer of SRS
Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification of Chief Financial Officer of SRS
Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
22
Table
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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.
|
SRS LABS, INC., a Delaware corporation
|
|
|
|
Date: August 7, 2008
|
By:
|
/S/ THOMAS C.K.
YUEN
|
|
Thomas C.K. Yuen
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
Date: August 7, 2008
|
By:
|
/S/ ULRICH
GOTTSCHLING
|
|
Ulrich Gottschling
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
23
Table
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EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate of Incorporation of the Company,
previously filed with the SEC as Exhibit 3.1 to the Companys
Registration Statement on Form SB-2, specifically included in Amendment
No. 1 to such Registration Statement filed with the SEC on July 3,
1996 (File No. 333-4974-LA), which is incorporated herein by reference.
|
3.2
|
|
Bylaws of the Company, previously filed with the SEC
as Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the period ended September 30, 1999, filed with the SEC on
November 12, 1999, which is incorporated herein by reference.
|
31.1
|
|
Certification of Chief Executive Officer of SRS
Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.
|
31.2
|
|
Certification of Chief Financial Officer of SRS
Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.
|
32.1
|
|
Certification of Chief Executive Officer of SRS
Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification of Chief Financial Officer of SRS
Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
24
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