0001104659-11-026369.txt : 20110505 0001104659-11-026369.hdr.sgml : 20110505 20110505164102 ACCESSION NUMBER: 0001104659-11-026369 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20110331 FILED AS OF DATE: 20110505 DATE AS OF CHANGE: 20110505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SRS LABS INC CENTRAL INDEX KEY: 0001016470 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 330714264 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21123 FILM NUMBER: 11815222 BUSINESS ADDRESS: STREET 1: 2909 DAIMIER ST CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 9494421070 MAIL ADDRESS: STREET 1: 2909 DAIMLER ST CITY: SANTA ANA STATE: CA ZIP: 92705 10-Q 1 a11-9342_110q.htm 10-Q

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 March 31, 2011

 

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

 

GRAPHIC

 

SRS LABS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0714264

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

2909 Daimler Street, Santa Ana, California 92705

(Address of principal executive offices) (Zip Code)

 

(949) 442-1070

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 April 27, 2011, 14,906,799 of the issuer’s common stock, par value $.001 per share, were outstanding.

 

 

 



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SRS LABS, INC.

 

Quarterly Report on Form 10-Q

For the Three Months Ended March 31, 2011

Index

 

PART I-FINANCIAL INFORMATION

 

Item 1.

Financial Statements

4

 

Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010

4

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (Unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2011 (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)

7

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15

Item 4.

Controls and Procedures

15

PART II-OTHER INFORMATION

 

Item 1.

Legal Proceedings

15

Item 1A.

Risk Factors

15

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

Item 6.

Exhibits

20

 

 

 

SIGNATURES

21

 

2



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FORWARD-LOOKING INFORMATION

 

As used herein, the “Company,” “SRS Labs,” “SRS,” “we,” “us,” and “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, 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 industry’s 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.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SRS LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,
2011

 

December 31,
2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

12,301,480

 

$

10,697,827

 

Accounts receivable, net

 

1,893,893

 

1,191,847

 

Prepaid expenses and other current assets

 

1,144,798

 

1,069,900

 

Short-term investments

 

24,436,000

 

19,033,000

 

Total Current Assets

 

39,776,171

 

31,992,574

 

 

 

 

 

 

 

Long-term investments

 

5,568,000

 

13,323,000

 

Property and equipment, net

 

1,101,665

 

672,220

 

Intangible assets, net

 

2,675,393

 

2,761,432

 

Deferred income taxes, net

 

9,409,633

 

8,597,619

 

Total Assets

 

$

58,530,862

 

$

57,346,845

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

722,911

 

$

516,470

 

Accrued liabilities

 

1,423,987

 

1,434,970

 

Deferred revenue

 

526,172

 

601,825

 

Total Current Liabilities

 

2,673,070

 

2,553,265

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock—$0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock—$0.001 par value; 56,000,000 shares authorized; 14,904,085 issued and 14,874,754 outstanding at March 31, 2011 and 14,807,070 shares issued and outstanding at December 31, 2010

 

14,905

 

14,808

 

Additional paid-in capital

 

69,552,431

 

68,520,878

 

Treasury stock at cost, 29,331 and 0 shares at March 31, 2011 and December 31, 2010, respectively

 

(259,805

)

 

Accumulated deficit

 

(13,449,739

)

(13,742,106

)

Total Stockholders’ Equity

 

55,857,792

 

54,793,580

 

Total Liabilities and Stockholders’ Equity

 

$

58,530,862

 

$

57,346,845

 

 

See accompanying notes to the condensed consolidated financial statements

 

4



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SRS LABS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Revenues

 

$

8,181,193

 

$

8,385,391

 

Cost of sales

 

147,131

 

64,484

 

Gross profit

 

8,034,062

 

8,320,907

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

3,801,717

 

3,420,544

 

Research and development

 

2,313,675

 

1,889,993

 

General and administrative

 

1,668,187

 

1,565,298

 

Total operating expenses

 

7,783,579

 

6,875,835

 

 

 

 

 

 

 

Operating income

 

250,483

 

1,445,072

 

Other income, net

 

44,667

 

29,639

 

Income before income taxes

 

295,150

 

1,474,711

 

Income taxes

 

2,783

 

8,367

 

Net income

 

$

292,367

 

$

1,466,344

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.02

 

$

0.10

 

Diluted

 

$

0.02

 

$

0.10

 

 

 

 

 

 

 

Weighted average shares used in the per common share calculation:

 

 

 

 

 

Basic

 

14,866,238

 

14,572,269

 

Diluted

 

15,884,335

 

15,320,917

 

 

 See accompanying notes to the condensed consolidated financial statements

 

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SRS LABS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common Stock

 

Additional
Paid-In

 

Treasury

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Deficit

 

Total

 

BALANCE, December 31, 2010

 

14,807,070

 

$

14,808

 

$

68,520,878

 

$

 

$

(13,742,106

)

$

54,793,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

97,015

 

97

 

403,334

 

 

 

403,431

 

Purchase of treasury stock

 

(29,331

)

 

 

(259,805

)

 

(259,805

)

Share-based compensation

 

 

 

628,219

 

 

 

628,219

 

Net income

 

 

 

 

 

292,367

 

292,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, March 31, 2011

 

14,874,754

 

$

14,905

 

$

69,552,431

 

$

(259,805

)

$

(13,449,739

)

$

55,857,792

 

 

See accompanying notes to the condensed consolidated financial statements

 

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SRS LABS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

292,367

 

$

1,466,344

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

249,698

 

203,320

 

Deferred taxes

 

(812,014

)

(759,000

)

Share-based compensation

 

628,219

 

581,162

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(702,046

)

(855,729

)

Prepaid expenses and other current assets

 

(74,898

)

64,536

 

Accounts payable

 

206,441

 

9,911

 

Accrued liabilities

 

(10,983

)

(109,022

)

Deferred revenue

 

(75,653

)

(199,064

)

Net cash (used in) provided by operating activities

 

(298,869

)

402,458

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchase of short-term and long-term investments

 

(1,644,000

)

(7,506,000

)

Proceeds from sale of short-term investments

 

3,996,000

 

679,000

 

Purchase of property and equipment

 

(508,695

)

(50,978

)

Expenditures related to intangible assets

 

(84,409

)

(186,143

)

Net cash provided by (used in) investing activities

 

1,758,896

 

(7,064,121

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

403,431

 

103,706

 

Purchase of treasury stock

 

(259,805

)

 

Net cash provided by financing activities

 

143,626

 

103,706

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

1,603,653

 

(6,557,957

)

Cash and Cash Equivalents, Beginning of Period

 

10,697,827

 

27,988,164

 

Cash and Cash Equivalents, End of Period

 

$

12,301,480

 

$

21,430,207

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

759,527

 

$

693,095

 

 

See accompanying notes to the condensed consolidated financial statements

 

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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,” and “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 Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Current and future financial statements may not be directly comparable to the Company’s 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.  The condensed consolidated balance sheet as of December 31, 2010 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2010.

 

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 our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 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 that mature beyond one year.  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”).  Revenues associated with fixed royalty payments are recognized ratably over the term of the license agreement.  We also sell some of

 

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our products and solutions via the Internet.  Revenues associated with those sales are recognized upon shipment and were not material in the three months ended March 31, 2011 or 2010. The Company may offer customer support or license support programs in the form of assisting the licensee with implementing the Company’s technology into the manufactured products of the licensee to ensure that the licensee receives the maximum benefit from the Company’s 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 March 31, 2011 and 2010, one customer, Samsung, accounted for approximately 46% and 39%, 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.     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.

 

2.             Intangible Assets

 

Intangible assets consist of the following:

 

 

 

March 31,
2011

 

December 31,
2010

 

Patents

 

$

4,536,326

 

$

4,467,541

 

Accumulated amortization

 

(2,486,659

)

(2,399,801

)

Patents, net

 

2,049,667

 

2,067,740

 

Other intangibles

 

1,693,780

 

1,678,155

 

Accumulated amortization

 

(1,068,054

)

(984,463

)

Other intangibles, net

 

625,726

 

693,692

 

Intangible assets, net

 

$

2,675,393

 

$

2,761,432

 

 

Amortization expense associated with our intangibles was $170,448 and $137,946 in the three months ended March 31, 2011 and 2010, 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 available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share reflects the maximum dilution, based on the average price of the Company’s 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.

 

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Basic and diluted net income per share are as follows:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2011

 

2010

 

BASIC EPS

 

 

 

 

 

Net income

 

$

292,367

 

$

1,466,344

 

Denominator: weighted average common shares outstanding

 

14,866,238

 

14,572,269

 

Basic net income per share

 

$

0.02

 

$

0.10

 

 

 

 

 

 

 

DILUTED EPS

 

 

 

 

 

Net income

 

$

292,367

 

$

1,466,344

 

Denominator: weighted average common shares outstanding

 

14,866,238

 

14,572,269

 

Dilutive common equivalent shares outstanding:

 

 

 

 

 

Options

 

1,018,097

 

748,648

 

Total diluted potential common shares

 

15,884,335

 

15,320,917

 

Diluted net income per share

 

$

0.02

 

$

0.10

 

 

For the three months ended March 31, 2011 and 2010, there were outstanding options to purchase an aggregate of 1,214,420 and 1,548,680 shares, respectively, of the Company’s common stock that were not included in the computation of dilutive net income per share above because they would be anti-dilutive.

 

4.             Commitments and Contingencies

 

From time to time, 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, we currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in aggregate, is expected have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

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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, 2010.  The following schedule presents the Company’s revenue by geographic area.  Licensing-related revenue is summarized based on the location of the licensee’s corporate headquarters.  For product and online sales, revenue is allocated to the United States.  The China region includes all licensees with corporate headquarters located in mainland China.  The Asia Pacific region includes all licensees with corporate headquarters located in Taiwan, Hong Kong and India.

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

%

 

2010

 

%

 

Geographic Area Revenues:

 

 

 

 

 

 

 

 

 

Korea

 

$

3,829,923

 

47

%

$

3,645,082

 

43

%

United States

 

1,993,237

 

24

 

2,193,299

 

26

 

Asia Pacific

 

898,997

 

11

 

446,786

 

5

 

Japan

 

819,277

 

10

 

1,424,908

 

17

 

China

 

468,929

 

6

 

463,738

 

6

 

Europe

 

170,830

 

2

 

211,578

 

3

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,181,193

 

100

%

$

8,385,391

 

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 March 31, 2011.  Financial assets measured at fair value on a recurring basis as of March 31, 2011 are classified below:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,580,000

 

$

 

$

 

$

11,580,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

11,580,000

 

$

 

$

 

$

11,580,000

 

 

7.             Revolving Line of Credit

 

The Company has a $5.0 million revolving line of credit, which is available until June 30, 2011, to be used for working capital purposes.  As of March 31, 2011, the Company has no borrowings from the revolving line of credit.

 

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Item 2.  Management’s 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 Management’s 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, 2010, 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 world’s 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 March 31, 2011 and 2010, licensing revenues from the home entertainment market represented 64% and 67%, 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, 2010. 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 months ended March 31, 2011 and 2010, 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 March 31, 2011 Compared to Three Months Ended March 31, 2010

 

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

 

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Internet.  Revenues associated with those sales are recognized upon shipment and were not material in the three months ended March 31, 2011 or 2010. 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 $8,181,193 for the three months ended March 31, 2011, compared to $8,385,391 for the three months ended March 31, 2010, a decrease of $204,198 or 2%.  Revenues in the personal telecommunications market increased by $336,831 in the current quarter primarily due to increased royalties from higher volumes from Samsung and new licensees. In the automotive market, revenues increased by $128,080 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 from the home entertainment market decreased by $379,631 in the current quarter due to a decrease in royalty recoveries, which was  $261,808 and $643,461 in the three months ended March 31, 2011 and 2010, respectively, from certain customers in the home entertainment market segment. In the personal computer market, our total revenues decreased by $287,439 in the current quarter due to decreased volume shipment of personal computers by our existing licensees.  Overall, we have not experienced a material change in our per unit license rates in the current period other than volume pricing discounts provided pursuant to existing contractual obligations.

 

On March 11, 2011, a 9.0 magnitude earthquake occurred off the coast of Japan, which triggered an extremely destructive tsunami wave that struck Japan shortly after the earthquake.  These events have caused extensive and severe structural damage in Japan, which has resulted in various disruptions to the manufacture of certain consumer electronics products in Asia. During the quarter ended March 31, 2011, we did not experience any significant revenue declines as a result of these events, however, we anticipate that many manufacturers of consumer electronics in Asia may have been adversely impacted by these events, which in turn may adversely impact our revenues in future periods.

 

The following table presents our licensing revenues mix by market:

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Home entertainment (TV, set top box)

 

64

%

67

%

Personal telecommunications (mobile phone, PDA)

 

14

 

10

 

PC (software, hardware)

 

12

 

15

 

Automotive

 

7

 

5

 

Portable media devices (digital media player, headphone)

 

3

 

3

 

 

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 $3,801,717 for the three months ended March 31, 2011, compared to $3,420,544 for the same prior year period, an increase of $381,173 or 11%.  This increase was primarily related to payroll and related costs associated with the net increase of six sales and marketing personnel since March 31, 2010.  Included in sales and marketing expenses is share-based compensation expense of $219,749 and $177,195 for the three months ended March 31, 2011 and 2010, respectively.  Other than continuing to add strategic hires, particularly to address new market opportunities and segments, the Company believes it is currently appropriately staffed based on the hiring efforts over the past couple of years.  As a percentage of total revenues, sales and marketing expenses increased from 41% for the quarter ended March 31, 2010 to 46% 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 $2,313,675 for the three months ended March 31, 2011, compared to $1,889,993 for the same prior year period, an increase of $423,682 or 22%.  This increase was primarily attributable to an increase in payroll and related costs associated with hiring sixteen additional engineers since March 31, 2010.  Included in research and development expenses is share-based compensation expense of $148,806 and $149,508 for the three months ended March 31, 2011 and 2010, respectively.  Other than continuing to add strategic hires, particularly to address new market opportunities and segments, the Company believes it is currently appropriately staffed based on the hiring efforts over the past couple of years.  As a percentage of total revenues, research and development expenses increased from 23% for the quarter ended March 31, 2010 to 28% for the same period this year.

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General and Administrative

 

General and administrative (“G&A”) expenses consist primarily of employee-related expenses, attorneys’ fees, accounting fees, depreciation of the Company’s assets, patent amortization, and other professional fees. G&A expenses were $1,668,187 for the three months ended March 31, 2011, compared to $1,565,298 for the same prior year period, an increase of $102,889 or 7%.  The increase was primarily attributable to an increase in amortization costs due to the issuance of additional patents and purchased technology, and also due to a lesser extent, due to increased payroll and related costs related to the hiring of one additional accountant since the prior year period.  Included in G&A expenses was share-based compensation expense of $259,664 and $254,459 for the three months ended March 31, 2011 and 2010, respectively.  As a percentage of total revenues, G&A expenses increased from 19% for the quarter ended March 31, 2010 to 20% for the same period this year.

 

Other Income, Net

 

Other income, net consists primarily of interest income. Other income, net was $44,667 for the three months ended March 31, 2011, compared to $29,639 for the same prior year period, an increase of $15,028 or 51%.  We have primarily invested our cash in low-risk, highly liquid 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 March 31, 2011 was $2,783, compared to $8,367 for the same prior year period.  We reduced our tax provision and our valuation allowance on our deferred tax assets by $812,014 and $759,000 for the three months ended March 31, 2011 and 2010, 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 March 31, 2011 consisted of cash, cash equivalents and short-and long-term investments of $42,305,480.  At March 31, 2011, we had cash and cash equivalents of $12,301,480, short-term investments of $24,436,000 and long-term investments of $5,568,000.  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 maturities less than 12 months.  Long-term investments consist of certificates of deposit that mature beyond one year.  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 used in operating activities was $298,869 and net cash provided by operating activities was $402,458 for the three months ended March 31, 2011 and 2010, respectively.  The decrease in our cash flows from operating activities was primarily the result of net income of $292,367 during the three months ended March 31, 2011, compared to net income of $1,466,344 during the three months ended March 31, 2010.  This was offset by changes in our operating assets and liabilities specifically, an increase in our accounts payable of $206,441 during the three months ended March 31, 2011 compared to an increase of $9,911 during the three months ended March 31, 2010.  The increase in accounts payable during the three months ended March 31, 2011 was primarily due to timing of payments.

 

Net cash provided by investing activities was $1,758,896 and net cash used in investing activities was $7,064,121 during the three months ended March 31, 2011 and 2010, respectively.  The increase in cash provided by investing activities during the three months ended March 31, 2011 was attributable primarily to the proceeds of short-term investments in the current period.  This was offset by the purchases of short and long-term investments.

 

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.

 

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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 Company’s Annual Report on Form 10-K for the year ended December 31, 2010. As of March 31, 2011, the Company had $30.0 million in short and long-term investments held in certificates of deposit (“CDs”) and U.S. treasuries, 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 March 31, 2011, the Company has $12.3 million in cash and cash equivalents, primarily held in money market funds, which are invested in U.S. government obligations.  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 first quarter ended March 31, 2011 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.

 

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 example, for the quarter ended March 31, 2011, Samsung accounted for approximately 46% 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 cost, our revenues and profitability could be adversely impacted.  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.

 

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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 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 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.

 

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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.

 

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 the Asia region, particularly Korea and Japan. Approximately 74%, 72% and 88% of our revenues were derived from customers with headquarters located in the Asia markets during the years ended December 31, 2010, 2009, and 2008, 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

 

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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 major health concerns  and  natural disasters, including but not limited, to the impact on our future revenues as a result of the recent earthquake, tsunami and related events in Japan.

 

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.

 

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. 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.

 

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Table of Contents

 

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. 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.

 

The consumer electronics industry may be negatively impacted by the devastating effects of the earthquake and tsunami that recently hit Japan.

 

On March 11, 2011, a 9.0 magnitude earthquake occurred off the coast of Japan, which triggered an extremely destructive tsunami wave that struck Japan shortly after the earthquake.  These events have caused extensive and severe structural damage in Japan, including heavy damage to nuclear power plants, manufacturing facilities, roads and railways, as well as fires in many areas.  As a result of these disasters, many manufacturers of consumer electronics in Asia may have been adversely impacted by these events. During the year ended December 31, 2010 and the quarter ended March 31, 2011, a majority of our revenues were derived from licensees with corporate headquarters located in Asia.  While we did not experience any significant revenue declines as a result of these disasters in the quarter ended March 31, 2011, we are not certain what impact these events will have on our future revenues, and it is possible that these events could have a material adverse effect on our business and future revenues.

 

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 18, 2011, the Company’s Board of Directors approved a stock repurchase program.  Under the stock repurchase program, the Company may acquire up to one million shares of the Company’s outstanding common stock on or before December 31, 2011.  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 March 31, 2011:

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number
of Shares
Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

January 1-31, 2011

 

 

 

 

 

February 1-28, 2011

 

 

 

 

 

March 1-31, 2011

 

29,331

 

$

8.89

 

29,331

 

970,669

 

Total

 

29,331

 

$

8.89

 

29,331

 

970,669

 

 

Item 6.  Exhibits

 

The exhibits listed below are hereby filed with the SEC as part of this report.

 

Exhibit
Number

 

Description

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.

 

20



Table of Contents

 

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:  May 5, 2011

By:

/S/ THOMAS C.K. YUEN

 

Thomas C.K. Yuen

 

Chairman of the Board and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date:  May 5, 2011

By:

/S/ ULRICH GOTTSCHLING

 

Ulrich Gottschling

 

Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

21



Table of Contents

 

EXHIBIT INDEX

 

The exhibits listed below are hereby filed with the SEC as part of this Report.

 

Exhibit
Number

 

Description

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


EX-31.1 2 a11-9342_1ex31d1.htm EX-31.1

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Thomas C.K. Yuen, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of SRS Labs, Inc.;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Dated: May 5, 2011

 

 

/s/ Thomas C.K. Yuen

 

Thomas C.K. Yuen

 

Chief Executive Officer

 


EX-31.2 3 a11-9342_1ex31d2.htm EX-31.2

EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Ulrich Gottschling, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of SRS Labs, Inc.;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Dated: May 5, 2011

 

 

/s/ Ulrich Gottschling

 

Ulrich Gottschling

 

Chief Financial Officer

 


EX-32.1 4 a11-9342_1ex32d1.htm EX-32.1

Exhibit 32.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of SRS Labs, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Thomas C.K. Yuen, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

 

1.                                       The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.                                       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 5, 2011

 

 

By:

/s/ Thomas C.K. Yuen

 

Thomas C.K. Yuen

 

Chief Executive Officer

 


EX-32.2 5 a11-9342_1ex32d2.htm EX-32.2

Exhibit 32.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of SRS Labs, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ulrich Gottschling, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

 

1.                                       The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.                                       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 5, 2011

 

 

By:

/s/ Ulrich Gottschling

 

Ulrich Gottschling

 

Chief Financial Officer

 


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