Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
to
Commission
File Number 0-21123
SRS LABS, INC.
(Exact name of registrant as specified in its
charter)
Delaware
|
|
33-0714264
|
(State or other jurisdiction of
incorporation or organization)
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|
(I.R.S. Employer
Identification No.)
|
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 has submitted
electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
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
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
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|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
As
of October 29, 2010, 14,744,441 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 Nine Months Ended September 30,
2010
Index
2
Table of Contents
FORWARD-LOOKING INFORMATION
As
used herein, the Company, SRS Labs, SRS, we, us, or our means SRS
Labs, Inc., the parent company, and its wholly-owned subsidiaries,
SRSWOWcast.com, Inc., Shenzhen Representative Office of SRS
Labs, Inc. (a Chinese company), Shanghai Representative Office of SRS
Labs, Inc. (a Chinese company) and SRS Labs Japan, KK (a Japanese
company).
This
Quarterly Report on Form 10-Q contains forward-looking statements
regarding our assumptions, projections, expectations, targets, intentions or
beliefs about future events. All statements other than statements of historical
facts included in this Quarterly Report, including, but not limited to, those
relating to our future operating results, profitability, growth and capital
requirements, our investment and expansion plans, changes in our competitive
position, the outcome of certain disputes, changes in economic conditions or
capital markets and changes in customer usage patterns and preferences, are
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as may, will, should, could, expect, plan, intend,
forecast, anticipate, believe, estimate, predict, potential, likely or similar
expressions or variations of these terms. 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 Part II, Item 1A, Risk
Factors of this Quarterly Report, including, but not limited to, the loss of
any significant customer; the acceptance of new SRS Labs products and
technologies; our ability to increase our brand awareness and enter into new or
expanded license arrangements; the impact of competitive products and pricing;
general economic and business conditions that may adversely impact sales of consumer
products incorporating our technologies or that otherwise may impact our
operating results and future performance; the timely development and release of
technologies by the Company; and other factors identified from time to time in
our filings with the Securities and Exchange Commission (SEC).
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 SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
2010
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December 31,
2009
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(Unaudited)
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ASSETS
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Current Assets
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|
|
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Cash and cash equivalents
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$
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16,385,081
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$
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27,988,164
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|
Accounts receivable, net
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|
2,091,474
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|
179,114
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|
Prepaid expenses and other current assets
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1,122,492
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1,147,151
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|
Short-term investments
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12,191,000
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12,963,000
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|
Total Current Assets
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31,790,047
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42,277,429
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|
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|
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Long-term investments
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14,261,000
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538,000
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|
Property and equipment, net
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724,769
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599,794
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|
Intangible assets, net
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2,877,244
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2,702,160
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Deferred income taxes, net
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7,826,153
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5,631,442
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|
Total Assets
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$
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57,479,213
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$
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51,748,825
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|
|
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LIABILITIES AND
STOCKHOLDERS EQUITY
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|
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Current Liabilities
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|
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Accounts payable
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$
|
655,374
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|
$
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583,157
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|
Accrued liabilities
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|
1,634,032
|
|
1,577,891
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|
Deferred revenue
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|
798,305
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1,193,454
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Total Current Liabilities
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|
$
|
3,087,711
|
|
$
|
3,354,502
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|
|
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Commitments and Contingencies (Note 4)
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Stockholders Equity
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Preferred stock$0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding
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|
|
|
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|
Common stock$0.001 par value; 56,000,000 shares
authorized; 14,744,441 and 14,563,715 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively
|
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14,745
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|
14,565
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|
Additional paid-in capital
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67,687,825
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65,128,337
|
|
Accumulated deficit
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|
(13,311,068
|
)
|
(16,748,579
|
)
|
Total Stockholders Equity
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54,391,502
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|
48,394,323
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|
Total Liabilities and
Stockholders Equity
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$
|
57,479,213
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|
$
|
51,748,825
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|
See accompanying notes to the condensed consolidated financial
statements
4
Table of
Contents
SRS LABS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2010
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2009
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2010
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2009
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|
|
|
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|
|
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Revenues
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$
|
8,609,140
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|
$
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7,230,118
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|
$
|
24,155,562
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$
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17,989,657
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|
Cost of sales
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63,965
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67,858
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228,320
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202,032
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|
|
|
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Gross profit
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8,545,175
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7,162,260
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23,927,242
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17,787,625
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Operating expenses:
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Sales and marketing
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3,387,781
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2,852,165
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10,029,468
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8,089,263
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|
Research and development
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2,031,511
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1,481,555
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|
5,747,623
|
|
4,059,132
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|
General and administrative
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|
1,800,624
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|
1,411,162
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|
4,797,755
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|
4,217,046
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|
Total operating expenses
|
|
7,219,916
|
|
5,744,882
|
|
20,574,846
|
|
16,365,441
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
1,325,259
|
|
1,417,378
|
|
3,352,396
|
|
1,422,184
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|
Other income, net
|
|
78,042
|
|
82,724
|
|
179,544
|
|
279,543
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|
Income before income taxes
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|
1,403,301
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1,500,102
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|
3,531,940
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1,701,727
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Income taxes
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|
62,966
|
|
25,088
|
|
94,429
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|
39,163
|
|
Net income
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|
$
|
1,340,335
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|
1,475,014
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|
$
|
3,437,511
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$
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1,662,564
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|
|
|
|
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|
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Net income per common share:
|
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Basic
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$
|
0.09
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|
$
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0.10
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$
|
0.23
|
|
$
|
0.12
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|
Diluted
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|
$
|
0.09
|
|
$
|
0.10
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|
$
|
0.22
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|
$
|
0.11
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|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in the per
share calculations:
|
|
|
|
|
|
|
|
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Basic
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|
14,705,275
|
|
14,627,089
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14,638,748
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14,439,228
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|
Diluted
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15,745,667
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|
15,184,824
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|
15,579,175
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|
14,762,281
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|
See accompanying notes to the condensed consolidated financial
statements
5
Table of Contents
SRS LABS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
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|
Common Stock
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Additional
Paid-In
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Accumulated
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Shares
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Amount
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Capital
|
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Deficit
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Total
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|
BALANCE, December 31, 2009
|
|
14,563,715
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$
|
14,565
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$
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65,128,337
|
|
$
|
(16,748,579
|
)
|
$
|
48,394,323
|
|
Proceeds from exercise of stock options
|
|
180,726
|
|
180
|
|
885,330
|
|
|
|
885,510
|
|
Share-based compensation
|
|
|
|
|
|
1,674,158
|
|
|
|
1,674,158
|
|
Net income
|
|
|
|
|
|
|
|
3,437,511
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|
3,437,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2010
|
|
14,744,441
|
|
$
|
14,745
|
|
$
|
67,687,825
|
|
$
|
(13,311,068
|
)
|
$
|
54,391,502
|
|
See accompanying notes to the condensed consolidated financial
statements
6
Table of
Contents
SRS LABS, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
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2009
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net income
|
|
$
|
3,437,511
|
|
$
|
1,662,564
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
694,891
|
|
511,560
|
|
Provision for doubtful accounts
|
|
|
|
60,000
|
|
Deferred taxes
|
|
(2,194,711
|
)
|
(1,540,021
|
)
|
Share-based compensation
|
|
1,674,158
|
|
1,430,339
|
|
Loss on disposition of property and equipment
|
|
|
|
14,626
|
|
Write-off of intangible assets
|
|
|
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5,528
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(1,912,360
|
)
|
(742,204
|
)
|
Prepaid expenses and other current assets
|
|
24,659
|
|
(317,094
|
)
|
Accounts payable
|
|
72,217
|
|
239,091
|
|
Accrued liabilities
|
|
56,141
|
|
400,293
|
|
Deferred revenue
|
|
(395,149
|
)
|
(340,969
|
)
|
Net cash provided by operating activities
|
|
1,457,357
|
|
1,383,713
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
Purchase of short-term and long-term investments
|
|
(15,822,000
|
)
|
(5,665,000
|
)
|
Proceeds from sale of short-term investments
|
|
2,871,000
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
|
17,600
|
|
Purchase of property and equipment
|
|
(336,643
|
)
|
(235,856
|
)
|
Expenditures related to intangible assets
|
|
(658,307
|
)
|
(535,515
|
)
|
Net cash used in investing activities
|
|
(13,945,950
|
)
|
(6,418,771
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
885,510
|
|
229,940
|
|
Net cash provided by financing activities
|
|
885,510
|
|
229,940
|
|
|
|
|
|
|
|
Net Decrease in Cash and Cash
Equivalents
|
|
(11,603,083
|
)
|
(4,805,118
|
)
|
Cash and Cash Equivalents,
Beginning of Period
|
|
27,988,164
|
|
31,599,087
|
|
Cash and Cash Equivalents, End
of Period
|
|
$
|
16,385,081
|
|
$
|
26,793,969
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash
Flow Information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes
|
|
$
|
2,164,050
|
|
$
|
1,539,570
|
|
See accompanying notes to the condensed consolidated financial
statements
7
Table
of Contents
SRS LABS, INC.
AND SUBSIDIARIES
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., the parent company, and its
wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative
Office of SRS Labs, Inc. (a Chinese company), Shanghai Representative
Office of SRS Labs, Inc. (a Chinese company) and SRS Labs Japan, KK (a
Japanese company). 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 (GAAP) for interim financial information and the
rules and regulations of the SEC for interim reporting. In the opinion of
management, all adjustments (which include 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 GAAP have been condensed or omitted pursuant to SEC
rules and regulations for presentation of interim financial information.
Therefore, the unaudited 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, 2009. 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, 2009 balances within these condensed
consolidated financial statements were derived from the audited consolidated
financial statements for the year ended December 31, 2009.
Estimates
The
preparation of financial statements in accordance with GAAP 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, 2009 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 include 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 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 losses on its cash and cash equivalents.
Short-term and Long-term Investments
Short-term
investments consist of certificates of deposit and U.S. treasury bills that
mature within one year. Long-term
investments consist of certificates of deposit with maturities ranging from
eighteen to twenty-four months. All of
the certificates of deposit are fully FDIC insured. The Company has not
experienced any losses on its short and long-term investments.
Revenue
Recognition
Our
revenues consist primarily of royalties generated from the license of SRS Labs
audio and voice technologies. Our license agreements typically have
multi-year or automatic renewal terms, and either require: (a) per-unit
royalty payments for all products implementing our technologies and/or
solutions; (b) fixed annual or quarterly royalty payments; or (c) a
minimum fixed annual or quarterly royalty payment, which allows the licensee to
ship up to a pre-determined number of units during the specified time period,
with additional per-unit royalty payments thereafter. The majority of our
license agreements are per-unit royalty arrangements, which are generally
reported by the licensee in the quarter following shipment of the consumer
electronics devices and are therefore typically recognized by us following
shipment of the devices by the original equipment manufacturer (OEM).
8
Table of
Contents
Revenues
associated with fixed royalty payments are recognized ratably over the term of
the license agreement. We also sell some of our products and solutions
via the Internet. Revenues associated with those sales are recognized
upon shipment and were not material in the three and nine month periods ended
September 30, 2010 or 2009. The Company may offer customer support or
license support programs in the form of assisting the licensee with
implementing the Companys technology into the manufactured products of the
licensee to ensure that the licensee receives the maximum benefit from the
Companys technology. Such customer support is not contractually mandated
and is generally provided on a discretionary basis to assist the customer and
to improve customer relations. Such customer support generally does not
extend past the time in which the licensed technology is placed in service or
implemented in any given device by the licensee. In this regard, any
support services occur during a finite period prior to the sale or revenue
recognition.
Customer
Concentrations
For
the three months ended September 30, 2010 and 2009, one customer, Samsung,
accounted for approximately 33% and 32%, respectively, of our revenues. For the nine months ended September 30,
2010 and 2009, one customer, Samsung, accounted for approximately 37% and 38%,
respectively, of our revenues. The
revenue from Samsung is derived from multiple technology license agreements
with various divisions of Samsung.
Reclassifications
Certain
amounts in the prior year financial statements have been reclassified to
conform to the current presentation.
Income
Taxes
The
Company currently has net operating loss carryforwards and tax credits to
offset income taxes. As a result of the
California extension of the suspension
of the use of net operating loss carryforwards to offset state income taxes,
the Company has recognized additional state income tax in the current
period. Due to our licensees being
located in foreign countries, they may be obligated to withhold foreign taxes
based upon local and country requirements of the taxing authority. Refer to our Annual Report on Form 10-K
for the year ended December 31, 2009 for additional disclosure in this
regard.
2. Intangible Assets
Intangible
assets consist of the following:
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Patents
|
|
$
|
4,393,715
|
|
$
|
4,100,363
|
|
Accumulated amortization
|
|
(2,314,597
|
)
|
(2,072,763
|
)
|
Patents, net
|
|
2,079,118
|
|
2,027,600
|
|
Other intangibles
|
|
1,856,532
|
|
1,491,579
|
|
Accumulated amortization
|
|
(1,058,406
|
)
|
(817,019
|
)
|
Other intangibles, net
|
|
798,126
|
|
674,560
|
|
Intangible assets, net
|
|
$
|
2,877,244
|
|
$
|
2,702,160
|
|
Amortization
expense associated with our intangibles was $181,070 and $125,958 in the three
months ended September 30, 2010 and 2009, respectively, and $483,233 and
$365,134 in the nine months ended September 30, 2010 and 2009,
respectively. Amortization expense is
included in general and administrative expenses in the accompanying condensed
consolidated statements of operations.
3.
Net Income Per Common
Share
Basic
net income 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 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 net income
per common 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 are as follows:
|
|
For the Three Months
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
BASIC EPS
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,340,335
|
|
$
|
1,475,014
|
|
$
|
3,437,511
|
|
$
|
1,662,564
|
|
Denominator: weighted average common shares
outstanding
|
|
14,705,275
|
|
14,627,089
|
|
14,638,748
|
|
14,439,228
|
|
Net income per share
|
|
$
|
0.09
|
|
$
|
0.10
|
|
$
|
0.23
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EPS
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,340,335
|
|
$
|
1,475,014
|
|
$
|
3,437,511
|
|
$
|
1,662,564
|
|
Denominator: weighted average common shares
outstanding
|
|
14,705,275
|
|
14,627,089
|
|
14,638,748
|
|
14,439,228
|
|
Common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
Options
|
|
1,040,392
|
|
557,735
|
|
940,427
|
|
323,052
|
|
Total diluted shares
|
|
15,745,667
|
|
15,184,824
|
|
15,579,175
|
|
14,762,281
|
|
Net income per share
|
|
$
|
0.09
|
|
$
|
0.10
|
|
$
|
0.22
|
|
$
|
0.11
|
|
For
the three months ended September 30, 2010 and 2009, there were outstanding
options to purchase an aggregate of 1,335,940 and 976,507 shares, respectively,
of the Companys common stock, respectively, that were not included in the
table above because they would be anti-dilutive. For the nine months ended September 30,
2010 and 2009, there were outstanding options to purchase an aggregate of
1,373,640 and 2,352,137 shares, respectively, of the Companys common stock
that were not included in the table above because they would be anti-dilutive.
4.
Commitments and
Contingencies
On June 8, 2007, we sent a
letter to Sony Corporation (Sony) relating to the possible infringement of
several SRS patents by Sonys S-Force technology. Sony responded to the letter
by filing a Complaint for Declaratory Relief in the U.S. District Court in the
Southern District of New York on July 6, 2007. In November 2007, Sony
and SRS entered into a standstill agreement for the purpose of conducting
discussions towards an amicable resolution of the dispute, and the Complaint
for Declaratory Relief was dismissed. Effective September 9,
2010, we entered into a Settlement Agreement (the Agreement) with Sony
relating to the SRS patents at issue (Licensed Patents). Pursuant to
the Agreement, in exchange for the payment of $900,000, SRS agreed to grant to
Sony and its subsidiaries a non-transferable, non-assignable, irrevocable,
non-exclusive, fully paid-up worldwide license to the Licensed Patents with
respect to Sonys and/or its subsidiaries products incorporating any
proprietary audio technology designed by Sony and/or its subsidiaries prior to
the date of the Agreement or within three years after the date of the
Agreement, including modifications, derivations or enhancements thereof..
The Agreement is intended to resolve all disputes between the parties based
upon the Licensed Patents and includes a release by SRS of Sony and its
subsidiaries from any and all claims under the Licensed Patents with respect to
the Licensed Products. The Company
recognized all of the settlement amount in the three months ended September 30,
2010.
From
time to time, we may be involved in litigation matters and disputes arising in
the normal course of business. Any such matters and disputes could be costly
and time consuming, subject us to damages or equitable remedies, and divert our
management and key personnel from our business operations.
10
Table of
Contents
5. Segment
Information
The
Company operates in one reportable segment as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2009. The following schedule presents the
Companys revenue by geographic area.
Licensing-related revenue is summarized based on the location of the
licensees corporate headquarters. For
product and online sales, revenue is allocated to the United States. The China region includes all licensees with
their corporate headquarters located in mainland China. The Asia Pacific region includes all
licensees with their corporate headquarters located in Taiwan and Hong Kong.
Substantially all of the Companys revenues during the three and nine months
ended September 30, 2010 and 2009 were denominated in U.S. Dollars.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
%
|
|
2009
|
|
%
|
|
2010
|
|
%
|
|
2009
|
|
%
|
|
Geographic Area Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Korea
|
|
$
|
3,535,925
|
|
41
|
%
|
$
|
2,759,986
|
|
38
|
%
|
$
|
10,566,589
|
|
44
|
%
|
$
|
8,314,666
|
|
46
|
%
|
United
States
|
|
1,920,158
|
|
22
|
|
2,228,614
|
|
31
|
|
5,754,606
|
|
24
|
|
4,242,720
|
|
24
|
|
Asia
Pacific
|
|
809,185
|
|
10
|
|
155,657
|
|
2
|
|
1,752,626
|
|
7
|
|
369,424
|
|
2
|
|
Japan
|
|
1,694,454
|
|
20
|
|
1,688,919
|
|
24
|
|
4,137,986
|
|
17
|
|
3,607,127
|
|
20
|
|
China
|
|
539,146
|
|
6
|
|
299,057
|
|
4
|
|
1,478,280
|
|
6
|
|
1,176,148
|
|
6
|
|
Europe
|
|
110,272
|
|
1
|
|
97,885
|
|
1
|
|
465,475
|
|
2
|
|
279,572
|
|
2
|
|
Total
|
|
$
|
8,609,140
|
|
100
|
%
|
$
|
7,230,118
|
|
100
|
%
|
$
|
24,155,562
|
|
100
|
%
|
$
|
17,989,657
|
|
100
|
%
|
6. Fair Value Measurements
The Company measures the fair value
of applicable financial and non-financial assets based on the following levels
of inputs.
·
Level 1
inputs:
Level 1 inputs are quoted market prices in active markets for
identical assets or liabilities that are accessible at the measurement date.
·
Level 2
inputs:
Level 2 inputs are from other than quoted market prices included in
Level 1 that are observable for the asset or liability, either directly or
indirectly.
·
Level 3
inputs:
Level 3 inputs are unobservable and should be used to measure fair
value to the extent that observable inputs are not available.
The hierarchy noted above requires us to
minimize the use of unobservable inputs and to use observable market data, if
available, when determining fair value. There were no transfers between Level
1, Level 2 and/or Level 3 during the three months ended September 30,
2010. Financial assets carried at fair
value as of September 30, 2010 are classified below:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
15,491,922
|
|
$
|
|
|
$
|
|
|
$
|
15,491,922
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,491,922
|
|
$
|
|
|
$
|
|
|
$
|
15,491,922
|
|
7. Revolving Line of Credit
On
August 12, 2010, we entered into a Revolving Credit Agreement
(collectively with the Revolving Credit Note and related documents, the Loan
Documents) with U.S. Bank N.A. (the Bank). The Loan Documents provide
the Company with a $5.0 million revolving line of credit, which is available
until June 30, 2011, to be used for working capital purposes. Interest on borrowed amounts under the
revolving line of credit is payable monthly at one of the following rates
selected by the Company (and upon notice to the Bank as required by the Loan
Documents): (i) the prime rate announced by the Bank from time to
time minus 1.00% or (ii) 2.00% plus the 1, 2, 3, 6 or 12 month LIBOR rate
quoted by the Bank or any successor thereto. The revolving credit
agreement contains various covenants, the more significant of which require us
to maintain a minimum fixed charge coverage ratio and certain levels of liquid
assets. We were in compliance with all of the Banks covenants as of September 30,
2010. In addition, the Company is obligated to pay an unused line fee of 0.25%
per annum, payable quarterly in arrears, applied to the unused portion of the
revolving line of credit. As of September 30,
2010, the Company has not borrowed from the revolving line of credit.
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, 2009, and the unaudited
condensed interim consolidated financial statements and notes thereto included
in this Quarterly Report.
Overview
We
are the recognized global leader in the practical application of
psychoacoustics
,
the science
behind how the human ear operates, and in the post processing segment of the market
for audio delivery. Our award-winning audio enhancement technologies and
solutions dramatically restore audio and voice to its natural state, the way it
was originally recorded, in both dimension and clarity, thus providing a
superior consumer experience for a wide variety of consumer electronic devices
such as televisions, personal computers and mobile phones.
Our
operations are conducted through SRS Labs, Inc., the parent company, and
its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative
Office of SRS Labs, Inc., Shanghai Representative Office of SRS
Labs, Inc. and SRS Labs Japan, KK. Our business is focused on developing
and licensing audio, voice and surround sound technology solutions to many of
the worlds leading OEMs, software providers and semiconductor companies, and
limited sales and marketing of standalone software and hardware products
through the Internet.
During
the three months ended September 30, 2010 and 2009, licensing revenues
from the home entertainment market represented 66% and 70%, respectively, of
our total revenues in such periods. In
the home entertainment market, our technologies have achieved broad market
acceptance in the television sector. We
plan to continue to leverage our success in the television sector to expand our
audio technologies into a variety of other consumer electronics devices,
including PCs, mobile phones, portable media devices and automotive audio
systems, but our technologies to date have only been incorporated in products representing
only a small portion of the total market opportunity. The consumer electronics market in general is
characterized by rapid technological changes, short product life cycles,
seasonality, significant price erosion and competition, any of which may impede
our ability to gain broad market acceptance for our technologies in other
consumer electronics devices.
Nonetheless, we plan to continue to seek other opportunities where we
can continue to leverage our core technologies and expertise. If we are able to successfully gain broad
market share for our technologies in any other market, it could significantly
improve our revenues and brand name recognition.
Critical
Accounting Policies
Our critical accounting
policies have been disclosed in our Form 10-K for the year ended December 31,
2009.
Our discussion and analysis of
our results of operations and liquidity and capital resources are based on our
unaudited consolidated financial statements for the three and nine months ended
September 30, 2010 and 2009, which have been prepared in accordance with
GAAP.
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.
Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months
Ended September 30, 2009
Revenues
Our
revenues consist primarily of royalties generated from the license of SRS Labs
audio and voice technologies. Our
license agreements typically have multi-year or automatic renewal terms, and
either require: (a) per-unit royalty payments for all products
implementing our technologies and/or solutions; (b) fixed annual or
quarterly royalty payments; or (c) a minimum fixed annual or quarterly
royalty payment, which allows the licensee to ship up to a pre-determined
number of units during the specified time period, with additional per-unit
royalty payments thereafter. The
majority of our license agreements are per-unit royalty arrangements, which are
generally reported by the licensee in the quarter following shipment of the
consumer electronics devices and are therefore typically recognized by us
following shipment of the devices by the OEM.
Revenues associated with fixed royalty payments are recognized ratably
over the term of the license agreement.
We also sell some of our products and solutions via the
12
Table of Contents
Internet. Revenues associated with those sales are
recognized upon shipment and were not material in the three and nine month
periods ended September 30, 2010 or 2009. We may offer customer support or
license support programs in the form of assisting the licensee with
implementing our technology into the manufactured products of the licensee to
ensure that the licensee receives the maximum benefit from our technology. Such customer support is not contractually
mandated and generally provided on a discretionary basis to assist the customer
and improve customer relations. Such
customer support generally does not extend past the time in which the licensed
technology is placed in service or implemented in any given device by the
licensee. In this regard, any support
services are not contractual and occur during a finite period prior to the sale
or revenue recognition.
Our
revenues were $8,609,140 for the three months ended September 30, 2010,
compared to $7,230,118 for the three months ended September 30, 2009, an
increase of $1,379,022 or 19%. Revenues
from the home entertainment market increased by $631,764 in the current
quarter. Within this market, revenues from
televisions increased by $781,397 mainly due to increased royalties due to
volume increases from existing licensees such as Samsung, due to increased
demand for flat panel televisions and, to a lesser extent, due to a new license
agreement with Top Victory. This was
offset by a decrease in set top box revenues.
Included in home entertainment market revenue for the three months ended
September 30, 2010 is $900,000 settlement payment pursuant to the Agreement
with Sony described in Note 4 of Notes to Unaudited Condensed Consolidated
Financial Statements. Additionally, we
recognized approximately $299,715 and $950,000 of previously under reported
royalties in the three months ended September 30, 2010 and 2009, respectively,
from certain customers in the home entertainment market segment. In the
personal computer market, our total revenues increased by $353,745 in the
current quarter, primarily due to revenues generated from Elitegroup Computer
Systems, a new licensee, and increased revenues due to increased volume from
our existing customers, including AsusTek.
In the automotive market, revenues increased by $324,401 in the current
quarter primarily due to higher revenues from our Japanese customers who provide
line install, dealer option and aftermarket automotive audio systems to many of
the significant Japanese automotive manufacturers. Revenues in the personal telecommunications
market increased by $137,447 in the current quarter primarily due to new licensees. Revenues in the portable media devices market
decreased by $93,335 primarily due to decreased revenues from MP3 players. Overall, we have not experienced a material
change in our per unit license rates in the current periods other than volume
pricing discounts provided pursuant to existing contractual obligations.
The
following table presents our licensing revenues mix by market:
|
|
Three Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Home entertainment (TV, set top box)
|
|
66
|
%
|
70
|
%
|
PC (software, hardware)
|
|
15
|
|
12
|
|
Personal telecommunications (mobile phone, PDA)
|
|
10
|
|
10
|
|
Automotive
|
|
7
|
|
4
|
|
Portable media
devices (digital media player, headphone)
|
|
2
|
|
4
|
|
Sales
and Marketing
Sales
and marketing expenses consist primarily of employee salaries and benefits,
sales consultants fees and related expenses, sales commissions, tradeshow
costs and costs associated with branding activities. Sales and marketing
expenses were $3,387,781 for the three months ended September 30, 2010,
compared to $2,852,165 for the same prior year period, an increase of $535,616
or 19%. This increase was primarily
related to payroll and related costs associated with the addition of eight
sales and marketing personnel since September 30, 2009 and to a lesser
extent due to increased commission and bonuses largely related to increased
revenue in the current quarter. Included
in sales and marketing expenses is share-based compensation expense of $167,069
and $134,804 for the three months ended September 30, 2010 and 2009,
respectively. We expect that sales and
marketing expenses will continue to increase as we hire additional sales and
marketing personnel to penetrate target markets and key regions in order to
gain broad market share for our technologies and as we plan to continue to
increase our marketing efforts to cultivate and elevate the SRS brand
globally. As a percentage of total
revenues, sales and marketing expenses remained consistent at 39% for the quarter ended
September 30, 2009 and for the same period this year.
Research
and Development
Research
and development expenses consist primarily of salaries and related costs of
employees engaged in ongoing research, design and development activities and
costs for engineering materials and supplies, and consulting fees. Research and
development expenses were $2,031,511 for the three months ended
September 30, 2010, compared to $1,481,555 for the same prior year period,
an increase of $549,956 or 37%. This
increase was primarily attributable to an increase in payroll and related costs
associated with hiring twelve additional engineers since September 30,
2009. Included in research and
development expenses is share-based compensation expense of $132,165 and
$114,949 for the three months ended September 30, 2010 and 2009,
respectively.
13
Table of
Contents
We
expect that research and development expenses will continue to increase in 2010
as we plan to continue to add to our research and development team in order to
support our global licensees and continue to develop new leading audio
technologies. As a percentage of total revenues, research and development
expenses increased from 20% for the quarter ended September 30, 2009 to
24% for the same period this year.
General
and Administrative
General
and administrative (G&A) expenses consist primarily of employee-related
expenses, attorneys fees, accounting fees, depreciation of the Companys
assets, patent amortization, and other professional fees. G&A expenses were
$1,800,624 for the three months ended September 30, 2010, compared to
$1,411,162 for the same prior year period, an increase of $389,462 or 28%.
Included in G&A expenses was share-based compensation expense of
$248,003 and $233,224 for the three months ended September 30, 2010 and
2009, respectively. As a percentage of
total revenues, G&A expenses increased from 20% for the quarter ended September 30, 2009 to 21% for the same period this year.
Other
Income, Net
Other income, net consists
primarily of interest income. Other income, net was $78,042 for the three
months ended September 30, 2010, compared to $82,724 for the same prior
year period, a decrease of $4,682 or 6%.
Our investment focus continues to be on asset protection of our cash,
and as such we have primarily invested our cash in low-risk, high liquidity
investments such as fully insured certificates of deposits and assets backed by
the United States Treasury. We continue
to monitor our cash assets to maximize our interest income while maintaining an
acceptable level of risk. The Company
did not realize any losses on its investments in the current or prior year
periods.
Income
Taxes
Income tax expense for the three months ended
September 30, 2010 was $62,966, compared to $25,088 for the same prior
year period. The income tax provision
consisted primarily of taxes paid on licensing revenues in the current quarter
that were sourced from countries requiring foreign tax withholdings,
principally Korea. We reduced our tax
provision and our valuation allowance on our deferred tax assets by $710,000
and $521,690 for the three months ended September 30, 2010 and 2009,
respectively, based on our assessment of the future estimated realization of
such assets.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended
September 30, 2009
Revenues
Our
revenues were $24,155,562 for the nine months ended September 30, 2010,
compared to $17,989,657 for the nine months ended September 30, 2009, an
increase of $6,165,906 or 34%. In our
home entertainment market, our total revenues increased by $3,087,715 in the
nine months ended September 30, 2010.
Within this market, flat panel television revenue increased by
$3,072,397 mainly due to increased shipments by Samsung and to a lesser extent
increased shipments by other existing customers. Included in home entertainment market revenue
for the nine months ended September 30, 2010 is $900,000 from the Settlement
Agreement with Sony. Additionally, we
recognized approximately $970,133 and $1,415,626 of previously under reported
royalties in the three months ended September 30, 2010 and 2009, respectively,
from customers in the home entertainment market segment. Our revenues from the personal computer
market increased by $1,958,118, primarily due to increased volume shipments
from our existing customers, such as AsusTek.
In the automotive market, revenues increased by $847,597 primarily due
to higher revenues from increased volume from our Japanese customers who provide
line install, dealer option and aftermarket automotive audio systems to many of
the significant Japanese automotive manufacturers. Our revenues in the personal
telecommunications market increased by $355,234 in the current period due to
increased revenues from new licensees.
Revenues in the portable media devices market decreased by $107,758
primarily due to decreased revenues from MP3 players offset by increased
revenues from docking stations.
The
following table presents our licensing revenues mix by market:
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Home entertainment (TV, set top box)
|
|
64
|
%
|
69
|
%
|
PC (software, hardware)
|
|
16
|
|
10
|
|
Personal telecommunications (mobile phone, PDA)
|
|
10
|
|
12
|
|
Automotive
|
|
7
|
|
5
|
|
Portable media
devices (digital media player, headphone)
|
|
3
|
|
4
|
|
14
Table of
Contents
Sales
and Marketing
Sales
and marketing expenses were $10,029,468 for the nine months ended September 30,
2010, compared to $8,089,263 in the same prior year period, an increase of
$1,940,205 or 24%. This increase was
primarily attributable to an increase in payroll and commissions and related
costs, such as payroll taxes, benefits and recruitment associated with the
addition of eight sales and marketing personnel since September 30, 2009. We also increased participation and promotion
at several trade shows, which resulted in an increase in such expenses of
approximately $250,000 in the nine months ended September 30, 2010. Included in sales and marketing expenses is
share-based compensation expense of $512,858 and $381,721 for the nine months
ended September 30, 2010 and 2009, respectively. As a percentage of total revenues, sales and
marketing expenses decreased from 45% for the nine months ended September 30,
2009 to 42% for the same period this year.
Research
and Development
Research
and development expenses were $5,747,623 for the nine months ended September
30, 2010, compared to $4,059,132 for the same prior year period, an increase of
$1,688,491 or 42%. This increase was
primarily attributable to an increase in payroll and related costs associated
with hiring twelve additional engineers since September 30, 2009. Included in research and development expenses
is share-based compensation expense of $416,911 and $333,768 for the nine
months ended September 30, 2010 and 2009, respectively. As a percentage of total revenues, research
and development expenses increased from 23% for the nine months ended September
30, 2009 to 24% for the same period this year.
General
and Administrative
G&A
expenses were $4,797,755 for the nine months ended September 30, 2010, compared
to $4,217,046 for the same prior year period, an increase of $580,709 or 14%. Included in G&A expenses is
share-based compensation expense of $744,389 and $714,851 for the nine months
ended September 30, 2010 and 2009, respectively. As a percentage of total revenues, G&A expenses
decreased from 23% for the nine
months ended September 30, 2009 to 20%
for the same period this year.
Other
Income, Net
Other income, net was
$179,544 for the nine months ended September 30, 2010, compared to $279,543 for
the same prior year period, a decrease of $99,999 or 36%. This decrease was
primarily attributable to lower interest rates on the Companys investments in
the current period.
Income
Taxes
Income tax expense was $94,429
and $39,163 for the nine months ended September 30, 2010 and 2009,
respectively. The income tax provision consisted primarily of taxes paid on
licensing revenues in the current quarter that were sourced from countries
requiring foreign tax withholdings, principally Korea. We reduced our tax provision and our
valuation allowance on our deferred tax assets by $2,194,711 and $1,540,021 for
the nine months ended September 30, 2010 and 2009, 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
September 30, 2010 consisted of cash, cash equivalents and short-and
long-term investments of $42,837,081. At
September 30, 2010, we had cash and cash equivalents of $16,385,081,
short-term investments of $12,191,000 and long-term investments of
$14,261,000. Cash and cash equivalents
generally consist of cash and money market funds with original maturities of
three months or less. The money market funds are primarily invested in U.S.
government obligations. Short-term
investments consist of certificates of deposit and treasury bills with original
maturities ranging from 6 to 12 months.
Long-term investments consist of certificates of deposit with maturities
ranging from 18 to 24 months. The cash
and certificates of deposit are FDIC insured.
The Company has not experienced any losses on its cash and cash
equivalents or its short and long-term investments in the current period.
Net
cash provided by operating activities was $1,457,357 and $1,383,713 for the
nine months ended September 30, 2010 and 2009, respectively. The increase in our cash flows from operating
activities was primarily the result of net income of $3,437,511 during the nine
months ended September 30, 2010, compared to net income of $1,662,564 during
the nine months ended September 30, 2009.
This was offset by changes in our operating assets and liabilities
specifically, an increase in our accounts receivable of $1,912,360 during the
nine months ended September 30, 2010 compared to an increase of $742,204
during the nine months ended September 30, 2009. The increase in accounts receivable during
the nine months ended September 30, 2010 was primarily due to timing of
payments and increased revenues in the current quarter from new and existing
licensees, as well as the settlement payment due from Sony pursuant to the
Agreement described in Note 4 of Notes to Unaudited Condensed Consolidated
Financial Statements.
15
Table of Contents
Net
cash used in investing activities was $13,945,950
and $6,418,771 during the nine months ended September 30, 2010 and
2009, respectively. The increase in cash
used by investing activities during the nine months ended September 30, 2010
was attributable primarily to the purchase of short and long-term investments
in the current period. The Company
expects to continue to primarily invest in certificates of deposit with
maturities ranging from 6 to 24 months.
We
believe our existing cash, cash equivalents, and short and long-term investment
balances together with cash generated from operating activities, will be
sufficient to meet our anticipated cash needs for at least the next twelve
months. Our future capital requirements
will depend on many factors, including our level of revenues, the timing and
extent of spending to support product development efforts, the impact of existing
adverse economic conditions, the expansion of sales and marketing activities,
the timing of introductions of new products, continuing market acceptance of
our products, and potential acquisitions of businesses or technologies.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Except
as follows, 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,
2009. As of September 30, 2010, the Company had $24.5 million in short and
long-term investments held in certificates of deposit (CDs), all of which are
federally insured. The CDs had stated
interest rates when purchased, and we plan to hold the CDs to maturity. As of September 30, 2010, the Company has
$16.4 million in cash and cash equivalents, primarily held in money market
funds, which are invested in U.S. government obligations, such as U.S.
treasuries and $2.0 million held in treasury bills. We have not realized any losses on any of our
investments in the current or prior year periods. We believe that we have
limited our exposure to interest rate risk as a result of investing in only
federally insured CDs and U.S. government obligations. Because of the conservative nature of these
investments, interest rate fluctuations and exposure to interest rate risk has
been minimal and immaterial.
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 third quarter ended September 30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal
Proceedings
The information set forth
under Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements,
included in Part I, Item 1 of this report, is incorporated herein by
reference. For an additional discussion
of certain risks associated with legal proceedings, see Part II, Item 1A. Risk
Factors.
Item 1A. Risk Factors
You should carefully consider the risk factors
described below, as well as the other information included in this Quarterly
Report on Form 10-Q, and in our other filings with the SEC, 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.
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
entertainment market, principally through the inclusion of SRS technology
inside flat panel LCD and plasma televisions. We expect that the consumer home
entertainment market will continue to account for a significant portion of our
licensing revenues for the foreseeable future. Consumer spending on home
entertainment products is subject to significant fluctuations, and there is
significant price competition for such products. Retail prices for certain
consumer electronics products that include our audio technology have decreased
significantly, and 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 the nine months ended September 30, 2010 and 2009, Samsung accounted
for approximately 37% and 38%, respectively, of our consolidated revenues. Our
technology license agreements with Samsung and most of our other manufacturers
do not obligate them to incorporate our technologies into any of their products
or to continue to do business with us. As a result, Samsung or the other
manufacturers could develop their own technologies, use a competitors
16
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technologies
or decide to exclude our audio rendering technology from their products
altogether in an effort to reduce cost, any of which could adversely impact our
revenues and profitability. For example,
during 2007, we were informed by Sony that they were no longer using our
technology in the majority of their televisions. The loss of any key customer in the future
could have a material adverse affect on our financial condition and results of
operations.
General economic conditions may
reduce our revenues and harm our business.
Our business is exposed to adverse
changes in general economic conditions because products that incorporate our
technologies are entertainment-oriented and generally discretionary goods. The
current slowdown or decline in U.S. and foreign economic growth has adversely
affected consumer confidence, disposable income and spending. 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, which could adversely affect our licensing revenue.
Our business is highly dependent on
the consumer electronics market, which is characterized by short product life
cycles, fluctuations in demand, seasonality and declining retail prices and is
subject to risks related to product transitions.
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 ability and the ability of our
customers 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.
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 consumer electronics product manufacturers.
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. 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 and media software vendors to pay us a specified royalty for every
electronics product shipped that incorporates our technologies, do not require
these manufacturers to include our technologies in any specific number or
percentage of units, and only a few of these agreements guarantee us a minimum
aggregate licensing fee. Accordingly, if our licensees sell fewer products
incorporating our technologies, decline to actively market products
incorporating our technologies or otherwise face significant economic
difficulties, our revenue will decline. Changes in consumer tastes or trends,
changes in industry standards or adverse changes in business and economic
conditions may also adversely affect our licensing revenue.
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 technologies. A decline in the
licensing fees we charge could materially and adversely affect our operating
results.
We may pursue acquisitions in the future,
which could result in integration and assimilation challenges, be expensive and
dilutive to existing stockholders, result in unanticipated accounting charges
and expenses, or otherwise adversely affect our results of operations.
We
may in the future pursue acquisitions of businesses, assets or technologies to
enhance our technological capabilities, to complement our existing product
offerings or to improve our market position. We may not be able to identify or
consummate future acquisitions or realize the desired benefit from these
acquisitions. We face several challenges in the integration of
acquisitions that could disrupt our ongoing business and distract our
management team, including the inability to successfully integrate the acquired
technologies, the management team of the acquired company or diverse corporate
cultures. Acquisitions may also require us to enter into a geographic market
or business segment in which we have little or no prior experience. These
challenges could disrupt our ongoing business, distract our management and
employees, harm our reputation or relationship with our customers and increase
our expenses. These challenges are magnified as the size of the acquisition
increases. Acquisitions can also result in increased dilution to our existing
stockholders or increased debt or contingent liabilities, adverse tax
consequences, additional stock-based compensation expense, and other
unanticipated costs and charges. In addition, we may record goodwill and
other purchased intangible assets in connection with an acquisition and may
incur impairment charges in the future.
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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
Certain of our current and potential competitors enjoy notable
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.
Inaccurate licensee royalty
reporting and unauthorized use of our intellectual property could materially
adversely affect our operating results.
Our licensing revenue is generated
primarily from consumer electronics product manufacturers who license our
technologies and incorporate them in their products. Under a significant
percentage of our existing arrangements, these licensees typically pay us a
specified royalty for every product they ship that incorporates our
technologies. We rely on our licensees to accurately report the number of units
shipped that incorporate our technologies. We calculate our license fees,
prepare our financial reports, projections and budgets, and direct our sales
and product development efforts based on these reports we receive from our
licensees. However, it can be difficult for us to independently determine
whether or not our licensees are reporting shipments accurately. This is
especially true with respect to software incorporating our technologies because
software can be copied relatively easily and we often do not have easy ways to
determine how many copies have been made. Most of our license agreements permit
us to audit our licensees records, but audits are generally expensive and time
consuming and initiating audits could harm our customer relationships. We
expect that we will continue to be subject to understatement and non-reporting
of royalty bearing revenues by licensees, which could adversely affect our
operating results. Conversely, to the extent that our licensees overstate the
number of products incorporating our technologies, negative corrections could
result in reductions of royalty revenue in subsequent periods. Some of our
licensees may begin to more closely scrutinize their past licensing statements
which may result in an increased receipt of negative corrective statements.
We also may experience problems
with non-licensee consumer electronics product manufacturers and media software
vendors, particularly in emerging economies, incorporating our technologies or
incorporating our technologies and trademarks into their products without our
authorization and without paying us any licensing fees. This unauthorized use
of our intellectual property could adversely affect our operating results.
Our business and future prospects
depend upon the strength of our brand. Awareness of our brand depends to a
significant extent upon decisions by our customers to display our trademarks on
their products, and if our customers do not display our trademarks on their
products, our ability to increase our brand awareness may be harmed.
Because we engage in relatively
little direct brand advertising, the promotion of our brand depends upon
consumer electronics industry participants displaying our trademarks on their
products that incorporate our technologies.
Although we do generally require our customers to place our brand on
their products, some are not required to do so. Maintaining the SRS brand and
our position as an industry standard is critical to maintaining and expanding
our licensing revenues and entering into new or broadening existing licensing
relationships. If our customers choose
for any reason not to display our trademarks on their products, our ability to
maintain or increase our brand awareness may be harmed, which would have an
adverse effect on our business and prospects. In addition, if we fail to
maintain high quality standards for our products, or the products that
incorporate our technologies through the quality control evaluation process
that we require of our licensees, the strength of our brand could be adversely
affected.
18
Table of Contents
Licensee
products that incorporate our technologies, from time to time, experience
quality problems that could damage our brand, decrease revenues and increase
operating expenses.
Licensee products that incorporate
our technologies often are complex and sometimes contain undetected software or
hardware errors, particularly when first introduced or when new versions are
released. In addition, those products are often combined with, or incorporated
into, products from other companies, sometimes making it difficult to identify
the source of a problem. Any negative publicity or negative impact relating to
these product problems (even if unrelated to our technologies) could adversely
affect the perception of our brand. In addition, these errors could result in
loss of, or delay in, market acceptance of those products or our technologies,
or cause delays in delivering them and meeting customer demands, any of which
could reduce our revenue and raise significant customer relations issues.
Although we generally attempt to contractually limit our liability for our
licensees defective products, we may elect to help reengineer those products,
which could increase our expenses and adversely affect our operating results.
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 Asia, particularly Korea and Japan.
Approximately 72%, 88% and 90% of our revenues during the years ended December
31, 2009, 2008, and 2007, respectively, were derived from customers with
headquarters located in Asia. We expect to continue to derive a significant
portion of our revenues from sales to customers in these regions 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:
·
global economic downturn;
·
political,
social and economic instability and the risk of war, terrorist activities or
other international incidents in Asia and elsewhere abroad;
·
currency
fluctuations;
·
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.
Our technologies 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 and another six to
nine months to begin generating revenues. 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.
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Table of Contents
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 we will
obtain any additional patents in the future, 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. 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. Litigation in the technology industry is common. 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 litigation is uncertain and
could require us to pay significant damages or could prevent us from licensing
some or all of our technologies, 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.
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 listed 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. In addition, the stock market in general,
and The NASDAQ Global Market and the market for technology and small market cap
companies in particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of those companies. Further, the market prices of securities of technology
companies have been particularly volatile. These broad market and industry
factors may materially harm the market price of our common stock, regardless of
our operating performance.
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.
20
Table of
Contents
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.
|
21
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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: November
4, 2010
|
By:
|
/S/
THOMAS C.K. YUEN
|
|
Thomas
C.K. Yuen
|
|
Chairman
of the Board and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date: November
4, 2010
|
By:
|
/S/
ULRICH GOTTSCHLING
|
|
Ulrich
Gottschling
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
22
Table of
Contents
EXHIBIT INDEX
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.
|
23
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