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 June 30, 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
SRS LABS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
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33-0714264 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer x |
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|
|
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Non-accelerated filer o |
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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 July 25, 2011, 14,916,246 of the issuer’s common stock, par value $.001 per share, were outstanding.
SRS LABS, INC.
Quarterly Report on Form 10-Q
For the Three Months and Six Months Ended June 30, 2011
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 and hiring needs, 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.
PART I — FINANCIAL INFORMATION
SRS LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
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June 30, |
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December 31, |
| ||
|
|
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(Unaudited) |
|
|
| ||
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ASSETS |
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|
|
|
| ||
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Current Assets |
|
|
|
|
| ||
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Cash and cash equivalents |
|
$ |
9,847,492 |
|
$ |
10,697,827 |
|
|
Accounts receivable, net |
|
1,352,963 |
|
1,191,847 |
| ||
|
Prepaid expenses and other current assets |
|
1,546,511 |
|
1,069,900 |
| ||
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Short-term investments |
|
25,937,000 |
|
19,033,000 |
| ||
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Total Current Assets |
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38,683,966 |
|
31,992,574 |
| ||
|
|
|
|
|
|
| ||
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Long-term investments |
|
6,524,000 |
|
13,323,000 |
| ||
|
Property and equipment, net |
|
1,294,686 |
|
672,220 |
| ||
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Intangible assets, net |
|
2,600,358 |
|
2,761,432 |
| ||
|
Deferred income taxes, net |
|
10,170,288 |
|
8,597,619 |
| ||
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Total Assets |
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$ |
59,273,298 |
|
$ |
57,346,845 |
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|
|
|
|
|
|
| ||
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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|
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| ||
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Accounts payable |
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$ |
976,785 |
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$ |
516,470 |
|
|
Accrued liabilities |
|
1,675,940 |
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1,434,970 |
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|
Deferred revenue |
|
634,549 |
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601,825 |
| ||
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Total Current Liabilities |
|
3,287,274 |
|
2,553,265 |
| ||
|
|
|
|
|
|
| ||
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Commitments and contingencies (Note 4) |
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|
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Stockholders’ Equity |
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|
|
| ||
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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; 14,914,998 issued and 14,885,667 outstanding at June 30, 2011 and 14,807,070 shares issued and outstanding at December 31, 2010 |
|
14,916 |
|
14,808 |
| ||
|
Additional paid-in capital |
|
70,218,809 |
|
68,520,878 |
| ||
|
Treasury stock at cost, 29,331 and 0 shares at June 30, 2011 and December 31, 2010, respectively |
|
(259,805 |
) |
— |
| ||
|
Accumulated deficit |
|
(13,987,896 |
) |
(13,742,106 |
) | ||
|
Total Stockholders’ Equity |
|
55,986,024 |
|
54,793,580 |
| ||
|
Total Liabilities and Stockholders’ Equity |
|
$ |
59,273,298 |
|
$ |
57,346,845 |
|
See accompanying notes to the condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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$ |
7,602,066 |
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$ |
7,161,030 |
|
$ |
15,783,259 |
|
$ |
15,546,422 |
|
|
Cost of sales |
|
191,923 |
|
99,870 |
|
339,054 |
|
164,355 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Gross profit |
|
7,410,143 |
|
7,061,160 |
|
15,444,205 |
|
15,382,067 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
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Sales and marketing |
|
3,986,544 |
|
3,221,144 |
|
7,788,261 |
|
6,641,687 |
| ||||
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Research and development |
|
2,168,692 |
|
1,826,118 |
|
4,482,366 |
|
3,716,112 |
| ||||
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General and administrative |
|
1,843,754 |
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1,431,833 |
|
3,511,941 |
|
2,997,131 |
| ||||
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Total operating expenses |
|
7,998,990 |
|
6,479,095 |
|
15,782,568 |
|
13,354,930 |
| ||||
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|
|
|
|
|
|
|
|
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| ||||
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Operating (loss) income |
|
(588,847 |
) |
582,065 |
|
(338,363 |
) |
2,027,137 |
| ||||
|
Other income, net |
|
50,690 |
|
71,863 |
|
95,357 |
|
101,502 |
| ||||
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(Loss) income before income taxes |
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(538,157 |
) |
653,928 |
|
(243,006 |
) |
2,128,639 |
| ||||
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Income taxes |
|
— |
|
23,096 |
|
2,784 |
|
31,463 |
| ||||
|
Net (loss) income |
|
(538,157 |
) |
$ |
630,832 |
|
(245,790 |
) |
$ |
2,097,176 |
| ||
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|
|
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|
|
|
|
|
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| ||||
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Net (loss) income per common share: |
|
|
|
|
|
|
|
|
| ||||
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Basic |
|
$ |
(0.04 |
) |
$ |
0.04 |
|
$ |
(0.02 |
) |
$ |
0.14 |
|
|
Diluted |
|
$ |
(0.04 |
) |
$ |
0.04 |
|
$ |
(0.02 |
) |
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
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Weighted average shares used in the per share calculations: |
|
|
|
|
|
|
|
|
| ||||
|
Basic |
|
14,879,292 |
|
14,637,238 |
|
14,872,801 |
|
14,604,933 |
| ||||
|
Diluted |
|
14,879,292 |
|
15,642,573 |
|
14,872,801 |
|
15,479,199 |
| ||||
See accompanying notes to the condensed consolidated financial statements
SRS LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
Common Stock |
|
Additional |
|
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 |
|
107,928 |
|
108 |
|
460,315 |
|
— |
|
— |
|
460,423 |
| |||||
|
Purchase of treasury stock |
|
(29,331 |
) |
— |
|
— |
|
(259,805 |
) |
— |
|
(259,805 |
) | |||||
|
Share-based compensation |
|
— |
|
— |
|
1,237,616 |
|
— |
|
— |
|
1,237,616 |
| |||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(245,790 |
) |
(245,790 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
BALANCE, June 30, 2011 |
|
14,885,667 |
|
$ |
14,916 |
|
$ |
70,218,809 |
|
$ |
(259,805 |
) |
$ |
(13,987,896 |
) |
$ |
55,986,024 |
|
See accompanying notes to the condensed consolidated financial statements
SRS LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six Months Ended |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
Cash Flows from Operating Activities: |
|
|
|
|
| ||
|
Net (loss) income |
|
$ |
(245,790 |
) |
$ |
2,097,176 |
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
| ||
|
Depreciation and amortization |
|
530,014 |
|
437,530 |
| ||
|
Deferred taxes |
|
(1,572,669 |
) |
(1,484,711 |
) | ||
|
Share-based compensation |
|
1,237,616 |
|
1,126,921 |
| ||
|
Changes in operating assets and liabilities: |
|
|
|
|
| ||
|
Accounts receivable |
|
(161,116 |
) |
(678,165 |
) | ||
|
Prepaid expenses and other current assets |
|
(476,611 |
) |
161,603 |
| ||
|
Accounts payable |
|
460,315 |
|
20,464 |
| ||
|
Accrued liabilities |
|
240,970 |
|
(219,365 |
) | ||
|
Deferred revenue |
|
32,724 |
|
(388,500 |
) | ||
|
Net cash provided by operating activities |
|
45,453 |
|
1,072,953 |
| ||
|
|
|
|
|
|
| ||
|
Cash Flows from Investing Activities: |
|
|
|
|
| ||
|
Purchase of short-term and long-term investments |
|
(16,299,000 |
) |
(13,822,000 |
) | ||
|
Proceeds from sale of short-term investments |
|
16,194,000 |
|
679,000 |
| ||
|
Purchase of property and equipment |
|
(809,491 |
) |
(236,864 |
) | ||
|
Expenditures related to intangible assets |
|
(181,915 |
) |
(563,711 |
) | ||
|
Net cash used in investing activities |
|
(1,096,406 |
) |
(13,943,575 |
) | ||
|
|
|
|
|
|
| ||
|
Cash Flows from Financing Activities: |
|
|
|
|
| ||
|
Proceeds from exercise of stock options |
|
460,423 |
|
563,454 |
| ||
|
Purchase of treasury stock |
|
(259,805 |
) |
— |
| ||
|
Net cash provided by financing activities |
|
200,618 |
|
563,454 |
| ||
|
|
|
|
|
|
| ||
|
Net Decrease in Cash and Cash Equivalents |
|
(850,335 |
) |
(12,307,168 |
) | ||
|
Cash and Cash Equivalents, Beginning of Period |
|
10,697,827 |
|
27,988,164 |
| ||
|
Cash and Cash Equivalents, End of Period |
|
$ |
9,847,492 |
|
$ |
15,680,996 |
|
|
|
|
|
|
|
| ||
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
| ||
|
Cash paid during the period for: |
|
|
|
|
| ||
|
Income taxes |
|
$ |
1,475,924 |
|
$ |
1,421,276 |
|
See accompanying notes to the condensed consolidated financial statements
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 as of 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 as of and 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 insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses on its short and long-term investments. The Company’s short and long-term investments are classified as held to maturity investments, and are stated at amortized cost, which approximates fair value.
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 our products and solutions via the Internet. Revenues associated with those sales are recognized upon shipment. 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 June 30, 2011 and 2010, one customer, Samsung, accounted for approximately 39% and 42%, respectively, of our revenues. For the six months ended June 30, 2011 and 2010, one customer, Samsung, accounted for approximately 41% and 40%, respectively, of our revenue. The revenue from Samsung is derived from multiple technology license agreements with various divisions of Samsung.
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:
|
|
|
June 30, |
|
December 31, |
| ||
|
Patents |
|
$ |
4,578,212 |
|
$ |
4,467,541 |
|
|
Accumulated amortization |
|
(2,575,152 |
) |
(2,399,801 |
) | ||
|
Patents, net |
|
2,003,060 |
|
2,067,740 |
| ||
|
Other intangibles |
|
1,749,401 |
|
1,678,155 |
| ||
|
Accumulated amortization |
|
(1,152,103 |
) |
(984,463 |
) | ||
|
Other intangibles, net |
|
597,298 |
|
693,692 |
| ||
|
Intangible assets, net |
|
$ |
2,600,358 |
|
$ |
2,761,432 |
|
Amortization expense associated with our intangibles was $172,542 and $164,218 in the three months ended June 30, 2011 and 2010, respectively, and $342,990 and $302,164 in the six months ended June 30, 2011 and 2010, respectively. Amortization expense is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
3. Net (Loss) Income Per Common Share
Basic net (loss) income per common share is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net (loss) 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 (loss) 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 had been exercised.
Basic and diluted net (loss) income per share is as follows:
|
|
|
For the Three Months |
|
For the Six Months |
| ||||||||
|
|
|
Ended June 30, |
|
Ended June 30, |
| ||||||||
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
BASIC EPS |
|
|
|
|
|
|
|
|
| ||||
|
Net (loss) income |
|
$ |
(538,157 |
) |
$ |
630,832 |
|
$ |
(245,790 |
) |
$ |
2,097,176 |
|
|
Denominator: weighted average common shares outstanding |
|
14,879,292 |
|
14,637,238 |
|
14,872,801 |
|
14,604,933 |
| ||||
|
Net (loss) income per share |
|
$ |
(0.04 |
) |
$ |
0.04 |
|
$ |
(0.02 |
) |
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
DILUTED EPS |
|
|
|
|
|
|
|
|
| ||||
|
Net (loss) income |
|
$ |
(538,157 |
) |
$ |
630,832 |
|
$ |
(245,790 |
) |
$ |
2,097,176 |
|
|
Denominator: weighted average common shares outstanding |
|
14,879,292 |
|
14,637,238 |
|
14,872,801 |
|
14,604,933 |
| ||||
|
Common equivalent shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
|
Options |
|
— |
|
1,005,335 |
|
— |
|
874,266 |
| ||||
|
Total diluted shares |
|
14,879,292 |
|
15,642,573 |
|
14,872,801 |
|
15,479,199 |
| ||||
|
Net (loss) income per share |
|
$ |
(0.04 |
) |
$ |
0.04 |
|
$ |
(0.02 |
) |
$ |
0.14 |
|
There were outstanding options to purchase an aggregate of 2,427,005 and 1,207,680 shares of the Company’s common stock for the three months ended June 30, 2011 and 2010, respectively, that were not included in the table above because they would be anti-dilutive. There were outstanding options to purchase an aggregate of 2,274,205 and 1,253,993 shares of the Company’s common stock for the six months ended June 30, 2011 and 2010, respectively, that were not included in the table 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 the aggregate, is expected have a material adverse effect on the Company’s consolidated financial position or results of operations.
5. Segment Information
The Company operates in one reportable segment as disclosed in our Annual Report on Form 10-K 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 |
|
Six Months Ended |
| ||||||||||||||||
|
|
|
2011 |
|
% |
|
2010 |
|
% |
|
2011 |
|
% |
|
2010 |
|
% |
| ||||
|
Geographic Area Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Korea |
|
$ |
3,196,708 |
|
42 |
% |
$ |
3,385,582 |
|
47 |
% |
$ |
7,026,631 |
|
45 |
% |
$ |
7,030,664 |
|
45 |
% |
|
United States |
|
2,286,421 |
|
30 |
|
1,641,150 |
|
23 |
|
4,279,658 |
|
27 |
|
3,834,449 |
|
25 |
| ||||
|
Japan |
|
736,763 |
|
10 |
|
1,018,623 |
|
14 |
|
1,556,040 |
|
10 |
|
2,443,532 |
|
16 |
| ||||
|
Asia Pacific |
|
696,511 |
|
9 |
|
496,655 |
|
7 |
|
1,595,508 |
|
10 |
|
943,441 |
|
6 |
| ||||
|
China |
|
465,501 |
|
6 |
|
475,395 |
|
7 |
|
934,430 |
|
6 |
|
939,133 |
|
6 |
| ||||
|
Europe |
|
220,162 |
|
3 |
|
143,625 |
|
2 |
|
390,992 |
|
2 |
|
355,203 |
|
2 |
| ||||
|
Total |
|
$ |
7,602,066 |
|
100 |
% |
$ |
7,161,030 |
|
100 |
% |
$ |
15,783,259 |
|
100 |
% |
$ |
15,546,422 |
|
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 June 30, 2011. Financial assets measured at fair value on a recurring basis as of June 30, 2011 are classified below:
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Money market funds |
|
$ |
8,788,000 |
|
$ |
— |
|
$ |
— |
|
$ |
8,788,000 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Total |
|
$ |
8,788,000 |
|
$ |
— |
|
$ |
— |
|
$ |
8,788,000 |
|
7. Revolving Line of Credit
The Company has a $5.0 million revolving line of credit, which is available until June 30, 2012, to be used for working capital purposes. As of June 30, 2011, the Company has no borrowings from the revolving line of credit and is in compliance with financial covenants.
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 June 30, 2011 and 2010, licensing revenues from the home entertainment market represented 56% and 59%, 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 and six months ended June 30, 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 June 30, 2011 Compared to Three Months Ended June 30, 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 Internet. Revenues associated with those sales are recognized upon shipment. Revenues from such product sales represented 5% and 1% in the three months ended June 30, 2011 and 2010, respectively. 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 $7,602,066 for the three months ended June 30, 2011, compared to $7,161,030 for the three months ended June 30, 2010, an increase of $441,036 or 6%. The increase was attributable to increased licensing revenue in the personal telecommunications market offset by decreased revenue in the home entertainment and automotive markets. The revenue growth was also attributable to increased product sales during the quarter.
In the personal telecommunications market, our total licensing revenues increased by $476,168 in the current quarter primarily due to incremental revenue from new licensees and also increased volume shipments from existing licensees. In the home entertainment market, licensing revenues decreased by $153,011 in the current quarter mainly due to TV and set top box volume decreases from existing licensees. In the automotive market, licensing revenues decreased by $113,373 in the current quarter primarily due to decreased royalty recoveries and due to the natural disaster in Japan, which severely impacted the Japanese automotive market in March. 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.
Revenue from product sales were $348,987 in the current quarter, an increase of $303,297 reported in the same quarter a year ago. The increase was primarily attributable to the successful launch of the iWOW 3D audio enhancement adapter in late Q1 2011.
The earthquake and subsequent Tsunami in Japan in March 2011 have resulted in various disruptions to the manufacture of certain electronics components in Asia, and in particular, Japanese automobile sales have declined significantly. During the quarter ended June 30, 2011, our royalties generated from the automotive segment were negatively impacted by these events. We have not experienced a significant decline in other segments; however, we anticipate that many manufacturers of consumer electronics in Asia may have been adversely effected 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 June 30, |
| ||
|
|
|
2011 |
|
2010 |
|
|
Home entertainment (TV, set top box) |
|
56 |
% |
59 |
% |
|
Personal telecommunications (mobile phone, PDA) |
|
18 |
|
12 |
|
|
PC (software, hardware) |
|
17 |
|
17 |
|
|
Automotive |
|
7 |
|
9 |
|
|
Portable media devices (digital media player, headphone) |
|
2 |
|
3 |
|
|
|
|
100 |
% |
100 |
% |
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 $3,986,544 for the three months ended June 30, 2011, compared to $3,221,144 for the same prior year period, an increase of $765,400 or 24%. This increase was primarily related to payroll and related costs associated with the addition of eight sales and marketing personnel since June 30, 2010 of which three were hired during the current period. Additionally, the Company increased its participation in global tradeshows and advertising opportunities, and had incremental costs associated with the launch of new retail products in the current period. Included in sales and marketing expenses is share-based compensation expense of $231,248 and $168,594 for the three months ended June 30, 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 45% for the quarter ended June 30, 2010 to 52% for the same period this year.
Research and Development
Research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities and costs for engineering materials and supplies. Research and development expenses were $2,168,692 for the three months ended June 30, 2011, compared to $1,826,118 for the same prior year period, an increase of $342,574 or 19%. This increase was primarily attributable to an increase in payroll and related costs associated with hiring ten additional engineers since June 30, 2010 all of which were hired in prior periods. Included in research and development expenses is share-based compensation expense of $143,974 and $135,238 for the three months ended June 30, 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 26% for the quarter ended June 30, 2010 to 29% 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 Company’s assets, patent amortization, and other professional fees. G&A expenses were $1,843,754 for the three months ended June 30, 2011, compared to $1,431,833 for the same prior year period, an increase of $411,921 or 29%. This increase was primarily related to one-time costs of approximately $200,000 associated with the Company’s separation from its former Chief Financial Officer, increased legal and other professional fees, and incremental costs associated with the expansion of the Company’s headquarter facilities in the current period. Included in G&A expenses was share-based compensation expense of $234,175 and $241,927 for the three months ended June 30, 2011 and 2010, respectively. As a percentage of total revenues, G&A expenses increased from 20% for the quarter ended June 30, 2010 to 24% for the same period this year.
Other Income, Net
Other income, net consists primarily of interest income. Other income, net was $50,690 for the three months ended June 30, 2011, compared to $71,863 for the same prior year period, a decrease of $21,173 or 29%. This decrease was primarily attributed to the lower interest rates on the Company’s investments in the current period. Our investment focus continues to be on asset protection of our cash, and as such we have 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 June 30, 2011 was $0, compared to an income tax expense of $23,095 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 $760,655 and $725,711 for the three months ended June 30, 2011 and 2010, respectively, based on our assessment of the future estimated realization of such assets.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Revenues
Our revenues were $15,783,259 for the six months ended June 30, 2011, compared to $15,546,422 for the six months ended June 30, 2010, an increase of $236,837 or 2%. The increase was primarily attributable to increased licensing revenue in the personal telecommunications market offset by decreased revenue in the home entertainment and personal computer markets. In our personal telecommunications market, licensing revenues increased by $812,999 in the current period due to increased royalties from higher volume shipments from existing licensees and incremental revenue from new licensees. In the home entertainment market, revenues decreased by $534,956 due to TV and set top box volume decreases from existing licensees. In the personal computer market, revenues decreased by $284,920 in the current quarter primarily due to decreased volume shipment of personal computers by our existing licensees.
Revenue from product sales were $460,875 in the current period, an increase of $354,469 over the same period a year ago. The increase was primarily attributable to the successful launch of the iWOW 3D audio enhancement adapter in late Q1 2011.
The following table presents our licensing revenues mix by market:
|
|
|
Six Months Ended June 30, |
| ||
|
|
|
2011 |
|
2010 |
|
|
Home entertainment (TV, set top box) |
|
61 |
% |
63 |
% |
|
Personal telecommunications (mobile phone, PDA) |
|
16 |
|
11 |
|
|
PC (software, hardware) |
|
14 |
|
16 |
|
|
Automotive |
|
7 |
|
7 |
|
|
Portable media devices (digital media player, headphone) |
|
2 |
|
3 |
|
|
|
|
100 |
% |
100 |
% |
Sales and Marketing
Sales and marketing expenses were $7,788,261 for the six months ended June 30, 2011, compared to $6,641,687 in the same prior year period, an increase of $1,146,574 or 17%. 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 June 30, 2010 of which three were hired in 2011. Additionally, the Company had incremental costs associated with the launch of new retail products in the current period. Included in sales and marketing expenses is share-based compensation expense of $450,997 and $345,788 for the six months ended June 30, 2011 and 2010, respectively. As a percentage of total revenues, sales and marketing expenses increased from 43% for the six months ended June 30, 2010 to 49% for the same period this year.
Research and Development
Research and development expenses were $4,482,366 for the six months ended June 30, 2011, compared to $3,716,112 for the same prior year period, an increase of $766,254 or 21%. This increase was primarily attributable to an increase in payroll and related costs associated with hiring ten additional engineers since June 30, 2010 of which six were hired in 2011. Included in research and development expenses is share-based compensation expense of $292,780 and $284,746 for the six months ended June 30, 2011 and 2010, respectively. As a percentage of total revenues, research and development expenses increased from 24% for the six months ended June 30, 2010 to 28% for the same period this year.
General and Administrative
G&A expenses were $3,511,941 for the six months ended June 30, 2011, compared to $2,997,131 for the same prior year period, an increase of $514,810 or 17%. The increase was primarily attributable to one-time costs of approximately $200,000 associated with the Company’s separation from its former Chief Financial Officer, an increase in accounting, legal, and other professional fees, and incremental costs associated with the expansion of the Company’s headquarter facilities in the current period. Included in G&A expenses is share-based compensation expense of $493,839 and $496,386 for the six months ended June 30, 2011 and 2010, respectively. As a percentage of total revenues, G&A expenses increased from 19% for the six months ended June 30, 2010 to 22% for the same period this year.
Other Income, Net
Other income, net was $95,357 for the six months ended June 30, 2011, compared to $101,502 for the same prior year period, a decrease of $6,145 or 6%. This decrease was primarily attributable to lower interest rates on the Company’s investments in the current period.
Income Taxes
Income tax expense was $2,784 and $31,463 for the six months ended June 30, 2011 and 2010, 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 $1,572,669 and $1,484,711 for the six months ended June 30, 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 June 30, 2011 consisted of cash, cash equivalents and short-and long-term investments of $42,308,492. At June 30, 2011, we had cash and cash equivalents of $9,847,492, short-term investments of $25,937,000 and long-term investments of $6,524,000. 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 provided by operating activities was $45,453 and $1,072,953 for the six months ended June 30, 2011 and 2010, respectively. The decrease in our cash flows from operating activities was primarily the result of net loss of $245,790 during the six months ended June 30, 2011, compared to net income of $2,097,176 during the six months ended June 30, 2010. This was offset by changes in our operating assets and liabilities, specifically, an increase in our accounts receivable of $161,116 during the six months ended June 30, 2011 compared to an increase of $678,165 during the six months ended June 30, 2010, and an increase in our prepaid expenses of $476,611 during the six months ended June 30, 2011 compared to a decrease of $161,603 during the six months ended June 30, 2010. Additionally, there was an increase in our accrued liabilities of $240,970 during the six months ended June 30, 2011 compared to a decrease of $219,366 during the six months ended June 30, 2010. The increases in accounts receivable and accrued liabilities during the six months ended June 30, 2011 was primarily due to increased sales and timing of both cash receipts and payments made.
Net cash used in investing activities was $1,096,406 and $13,943,575 during the six months ended June 30, 2011 and 2010, respectively. The decrease in cash used in investing activities during the six months ended June 30, 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, and purchases of fixed assets due to the expansion of the Company’s facilities in May 2011.
We believe our existing cash, cash equivalents, and short and long-term investment balances together with our available line of credit, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2010. As of June 30, 2011, the Company had $32.5 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 June 30, 2011, the Company has $9.8 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 Maria Oppegard, who is currently serving as our acting Principal Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q and, based on this evaluation, have concluded that our disclosure controls and procedures are effective.
Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during our second quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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.
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 six months ended June 30, 2011, Samsung accounted for approximately 41% of our consolidated revenues. OEM and semiconductor 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. The loss of or a material reduction in revenue generated from any key customer in the future could have a material adverse effect 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 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 on 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.
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 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.
The automotive industry and the consumer electronics industry in general may be negatively impacted by the devastating effects of the recent earthquake and subsequent tsunami in Japan.
The earthquake and subsequent Tsunami in Japan in March 2011 have resulted in extensive and severe structural damage in Japan, including heavy damage to manufacturing facilities, roads and railways. As a result, Japanese automobile manufacturers and other manufacturers of consumer electronics products and components in Asia have been adversely impacted by these events. During the quarter ended June 30, 2011, our royalties generated from the automotive segment were negatively impacted by these events. We have not experienced a significant decline in other segments; however, we anticipate that many manufacturers of consumer electronics in Asia may have been adversely effected by these events; which in turn, may adversely impact our revenues in future periods.
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.
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.
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. We did not have any common stock repurchases during the three months ended June 30, 2011.
The exhibits listed below are hereby filed with the SEC as part of this Report.
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Exhibit |
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Description |
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31.1 |
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Certification of Chief Executive Officer of SRS Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act. |
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31.2 |
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Certification of Acting Principal Financial Officer of SRS Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act. |
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32.1 |
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Certification of Chief Executive Officer of SRS Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of Acting Principal Financial Officer of SRS Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* |
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XBRL Instance Document |
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101.SCH* |
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XBRL Taxonomy Extension Schema |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase |
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
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.
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SRS LABS, INC., a Delaware corporation | |
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Date: August 5, 2011 |
By: |
/S/ THOMAS C.K. YUEN |
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Thomas C.K. Yuen | |
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Chairman of the Board and Chief Executive Officer | |
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(Principal Executive Officer) | |
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Date: August 5, 2011 |
By: |
/S/ MARIA OPPEGARD |
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Maria Oppegard | |
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Controller | |
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(Acting Principal Financial and Accounting Officer) | |
EXHIBIT INDEX
The exhibits listed below are hereby filed with the SEC as part of this Report.
|
Exhibit |
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Description |
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31.1 |
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Certification of Chief Executive Officer of SRS Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act. |
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31.2 |
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Certification of Acting Principal Financial Officer of SRS Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act. |
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32.1 |
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Certification of Chief Executive Officer of SRS Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of Acting Principal Financial Officer of SRS Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* |
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XBRL Instance Document |
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101.SCH* |
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XBRL Taxonomy Extension Schema |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase |
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.