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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to
 Commission File No.: 0-11353
 CIRCUIT RESEARCH LABS, INC.
  Arizona
    
    86-0344671(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1302 W. Drivers Way, Tempe, Arizona 85284
 (480) 403-8300
 þ o
  Class of Common Equity
    
    Number of SharesCommon Stock, par value $.10
    
    
    7,946,337




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Circuit Research Labs, Inc.  Index to Form 10-QSB Filing  For the Quarter Ended June 30, 2005
 Table of Contents
 PagePART I    FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3Consolidated Condensed Balance Sheets 
June 30, 2005 (unaudited) and December 31, 2004
    
    
    3Consolidated Condensed Statements of Operations 
Three and Six Months ended June 30, 2005 and 2004 (unaudited)
    
    
    5Consolidated Condensed Statements of Cash Flows 
Six Months ended June 30, 2005 and 2004 (unaudited)
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    16ITEM 3. CONTROLS AND PROCEDURES.
    
    
    27PART II    OTHER INFORMATION
    
    
    28ITEM
2. CHANGES IN SECURITIES AND ISSUER REPURCHASES OF EQUITY SECURITIES
    
    
    28ITEM
5. OTHER INFORMATION
    
    
    28ITEM 6. EXHIBITS
    
    
    28SIGNATURE
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    95,793
    
    
    $
    108,488Accounts receivable, trade (net of allowance for doubtful
accounts of $33,361 at June 30, 2005 and at December 31, 2004)
    
    
    689,112
    
    
    
    577,571Inventories
    
    
    3,309,677
    
    
    
    2,372,676Other current assets
    
    
    111,929
    
    
    
    159,984Total current assets
    
    
    4,206,511
    
    
    
    3,218,719PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    435,451
    
    
    
    501,793OTHER ASSETS:Goodwill, net
    
    
    7,476,008
    
    
    
    7,476,008Other
    
    
    363,633
    
    
    
    362,9137,839,641
    
    
    
    7,838,921TOTAL
    
    $
    12,481,603
    
    
    $
    11,559,433
  3




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CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
 CONSOLIDATED CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    1,680,846
    
    
    $
    1,228,545Notes payable to stockholders and related parties
    
    
    730,000
    
    
    
    730,000Current portion of long-term debt
    
    
    1,486,291
    
    
    
    1,397,627Accrued salaries and benefits
    
    
    585,023
    
    
    
    506,892Customer deposits
    
    
    572,617
    
    
    
    244,885Other accrued expenses and liabilities
    
    
    840,972
    
    
    
    753,466Total current liabilities
    
    
    5,895,749
    
    
    
    4,861,415NON-CURRENT LIABILITIES :Accrued interest
    
    
    315,362
    
    
    
    0Long-term debt, less current portion
    
    
    2,995,690
    
    
    
    9,009,890Total Liabilities
    
    
    9,206,801
    
    
    
    13,871,305STOCKHOLDERS EQUITY (DEFICIT):Preferred stock, $100 par value  authorized,
500,000 shares, none issuedCommon stock, $.10 par value  authorized,
20,000,000 shares, 7,946,337 and 4,332,533
shares issued and outstanding at June 30, 2005
and December 31, 2004, respectively
    
    
    794,635
    
    
    
    433,254Additional paid-in capital
    
    
    8,386,940
    
    
    
    5,599,498Accumulated deficit
    
    
    (5,906,773
    )
    
    
    (8,344,624
    )Total stockholders equity (deficit)
    
    
    3,274,802
    
    
    
    (2,311,872
    )TOTAL
    
    $
    12,481,603
    
    
    $
    11,559,433
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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
 Three
    
    Months Ended
    
    Six Months EndedJune 30,
    
    
    
    
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004NET SALES
    
    $
    4,374,431
    
    
    $
    3,127,863
    
    
    $
    7,648,923
    
    
    $
    6,419,227COST OF GOODS SOLD
    
    
    1,667,166
    
    
    
    1,298,984
    
    
    
    3,041,093
    
    
    
    2,682,241Gross profit
    
    
    2,707,265
    
    
    
    1,828,879
    
    
    
    4,607,830
    
    
    
    3,736,986OPERATING EXPENSES:Selling, general and administrative
    
    
    1,685,181
    
    
    
    1,444,983
    
    
    
    3,048,789
    
    
    
    2,689,164Research and development
    
    
    372,784
    
    
    
    326,344
    
    
    
    771,021
    
    
    
    701,520Depreciation
    
    
    37,391
    
    
    
    35,808
    
    
    
    76,445
    
    
    
    70,724Total operating expenses
    
    
    2,095,356
    
    
    
    1,807,135
    
    
    
    3,896,255
    
    
    
    3,461,408INCOME FROM OPERATIONS
    
    
    611,909
    
    
    
    21,744
    
    
    
    711,575
    
    
    
    275,578OTHER (INCOME) EXPENSESundry
    
    
    (63,354
    )
    
    
    9,265
    
    
    
    (48,498
    )
    
    
    18,875Gain on debt restructure
    
    
    (2,041,975
    )
    
    
    0
    
    
    
    (2,041,975
    )
    
    
    0Interest
    
    
    98,438
    
    
    
    276,191
    
    
    
    364,197
    
    
    
    557,763Total other (income) expense
    
    
    (2,006,891
    )
    
    
    285,456
    
    
    
    (1,726,276
    )
    
    
    576,638INCOME (LOSS) BEFORE INCOME
TAXES
    
    
    2,618,800
    
    
    
    (263,712
    )
    
    
    2,437,851
    
    
    
    (301,060
    )PROVISION FOR INCOME TAXES
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0NET INCOME (LOSS)
    
    $
    2,618,800
    
    
    
    ($263,712
    )
    
    $
    2,437,851
    
    
    
    ($301,060
    )NET INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED
    
    $
    0.38
    
    
    
    ($0.06
    )
    
    $
    0.44
    
    
    
    ($0.07
    )WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBasic and diluted
    
    
    6,834,397
    
    
    
    4,272,533
    
    
    
    5,590,376
    
    
    
    4,169,333
 
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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,2005
    
    
    2004OPERATING ACTIVITIES:Net income (loss)
    
    $
    2,437,851
    
    
    
    ($301,060
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesDepreciation and amortization
    
    
    114,393
    
    
    
    114,450Gain on debt restructure
    
    
    (2,041,975
    )Stock compensation
    
    
    0
    
    
    
    13,462Changes in assets and liabilities:Accounts receivable
    
    
    (111,541
    )
    
    
    185,221Inventories
    
    
    (937,001
    )
    
    
    (291,199
    )Other current assets
    
    
    47,335
    
    
    
    (39,963
    )Accounts payable and other current liabilities
    
    
    1,288,681
    
    
    
    600,849Net cash provided by operating activities
    
    
    797,743
    
    
    
    281,760INVESTING ACTIVITIES:Capital expenditures
    
    
    (48,051
    )
    
    
    (120,957
    )Net cash used in investing activities
    
    
    (48,051
    )
    
    
    (120,957
    )FINANCING ACTIVITIES:Proceeds from shareholder advances
    
    
    53,000
    
    
    
    50,000Repayment of shareholder advances
    
    
    (53,000
    )
    
    
    (75,000
    )Principal payments on long-term debt
    
    
    (762,387
    )
    
    
    (191,612
    )Net cash used in financing activities
    
    
    (762,387
    )
    
    
    (216,612
    )NET DECREASE IN CASH
    
    
    (12,695
    )
    
    
    (55,809
    )CASH AT BEGINNING OF PERIOD
    
    
    108,488
    
    
    
    222,631CASH AT END OF PERIOD
    
    $
    95,793
    
    
    $
    166,822
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(continued)
 CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Month EndedJune 30,2005
    
    
    2004Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    181,241
    
    
    $
    359,390Supplemental schedule of non-cash investing and
financing activities:Common stock issued for compensation
    
    $
    0
    
    
    $
    13,462Debt settled by issuance of common shares
    
    $
    4,255,000
    
    
    $
    0
  7




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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
    2.
    
    Significant Accounting Policies are as follows:
 a.
    
    Net income (loss) per share
  8




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator
Net income (loss)
    
    $
    2,618,800
    
    
    
    ($263,712
    )
    
    $
    2,437,851
    
    
    
    ($301,060
    )DenominatorWeighted average shares
    
    
    6,834,397
    
    
    
    4,272,533
    
    
    
    5,590,376
    
    
    
    4,169,333Basic and diluted income (loss) per share
    
    $
    0.38
    
    
    
    ($0.06
    )
    
    $
    0.44
    
    
    
    ($0.07
    )
 b.
    
    New accounting pronouncements
 Share-Based Payment , Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
  Inventory Costs
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c.
    
    Concentration of Credit Risk
   d.
    
    Income taxes
  10




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June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Raw materials and supplies
    
    $
    3,082,977
    
    
    $
    2,782,860Work in process
    
    
    1,321,042
    
    
    
    843,279Finished goods
    
    
    715,068
    
    
    
    555,947Total
    
    
    5,119,087
    
    
    
    4,182,086Less obsolescence reserve
    
    
    (1,809,410
    )
    
    
    (1,809,410
    )Inventories, net
    
    $
    3,309,677
    
    
    $
    2,372,676
   June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Orban acquisition note to stockholder
    
    $
    180,000
    
    
    $
    180,000Avocet Instruments, Inc.
    
    
    27,367
    
    
    
    27,367Dialog4 Engineering GmbH (see Note 6)
    
    
    882,232
    
    
    
    1,386,200Harman (see Note 5)
    
    
    3,027,531
    
    
    
    0Solectron GmbH (see Note 6)
    
    
    227,107
    
    
    
    275,527Vendor notes
    
    
    129,744
    
    
    
    16,979Employee note
    
    
    8,000
    
    
    
    18,000Total long-term debt
    
    
    4,481,981
    
    
    
    1,904,073Less current portion
    
    
    1,486,291
    
    
    
    885,127Total long-term debt, less current portion
    
    $
    2,995,690
    
    
    $
    1,018,946
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Notes payable to stockholders and related parties
       12




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5
    
    HARMAN
        13




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6.
    
    DIALOG4
    14




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
 The following discussion of our financial condition and results of operations should be read
together with the financial statements and the accompanying notes included elsewhere in this
report. This discussion contains statements about future events, expectations, risks and
uncertainties that constitute forward-looking statements, as do discussions elsewhere in this
report. Forward-looking statements are based on managements beliefs, assumptions and expectations
of our future economic performance, taking into account the information currently available to
management. These statements are not statements of historical fact. Forward-looking statements
involve risks and uncertainties that may cause actual results, performance or financial condition
to differ materially from the expectations of future results, performance or financial condition we
express or imply in any forward-looking statements. The words believe, may, will, should,
anticipate, estimate, expect, intend, objective, seek, strive or similar words, or
the negative of these words, identify forward-looking statements. Our actual results may differ
materially from those anticipated in those forward-looking statements as a result of certain
factors, including, but not limited to, those described below under this Item 2, Managements
Discussion and Analysis or Plan of Operation  Risk Factors. We qualify any forward-looking
statements entirely by these cautionary factors.
 Overview
    16




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Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Net sales
    
    $
    4,374,431
    
    
    $
    3,127,863
    
    
    $
    7,648,923
    
    
    $
    6,419,227Other income (expense)
    
    
    2,105,329
    
    
    
    (9,265
    )
    
    
    2,090,473
    
    
    
    (18,875
    )Total revenues
    
    $
    6,479,760
    
    
    $
    3,118,598
    
    
    $
    9,739,396
    
    
    $
    6,400,352Gross profit on net sales
    
    $
    2,707,265
    
    
    $
    1,828,879
    
    
    $
    4,607,830
    
    
    $
    3,736,986Gross profit margin
    
    
    62
    %
    
    
    58
    %
    
    
    60
    %
    
    
    58
    %Net cash provided by (used in) operating activities
    
    $
    187,651
    
    
    
    ($39,284
    )
    
    $
    797,743
    
    
    $
    281,760Net cash used in investing activities
    
    $
    23,807
    
    
    $
    63,241
    
    
    $
    48,051
    
    
    $
    120,957Net cash used in financing activities
    
    $
    732,967
    
    
    $
    61,395
    
    
    $
    762,387
    
    
    $
    216,612Net income (loss)
    
    $
    2,618,800
    
    
    
    ($263,712
    )
    
    $
    2,437,851
    
    
    
    ($301,060
    )Net income (loss) as a percent of net sales
    
    
    60
    %
    
    
    (8
    %)
    
    
    32
    %
    
    
    (5
    %)Income (loss) per share  basic & diluted
    
    $
    0.38
    
    
    
    ($0.06
    )
    
    $
    0.44
    
    
    
    ($0.07
    )
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Three And Six Months Ended June 30, 2005
Compared To The Three And Six Months Ended June 30, 2004
      18




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Liquidity and Capital Resources
 
     19




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Risk Factors
 You should carefully consider the following risk factors and all other information contained
in this report in evaluating us and our business. You should also keep these risk factors in mind
when you read and consider the forward-looking statements in this report and other reports we file
with the SEC. The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are unaware of, or that we currently deem less material,
also may become important factors that affect us.
 Our independent auditors have included a going concern qualification in their report on our
financial statements.
  As a result of our outstanding debt obligations, we have significant ongoing debt service
requirements which may adversely affect our financial and operating flexibility.
  Our ability to obtain an outside line of credit is subject to the approval of our current creditors
and, if such approval is withheld, our ability to compete effectively in our industry could be
jeopardized.
  Foreign currency fluctuations could adversely affect our results of operations.
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We serve a market in which there are a limited number of customers and our financial well-being is
directly tied to the financial health of these customers.
  We must adapt to rapid technological change and increased competition if we are going to be able to
compete effectively in our industry.
  We may not be able to retain our existing personnel or hire and retain the additional personnel
that we need to sustain and grow our business.
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We depend on a number of vendors to supply us with component parts that are necessary to the
production of our audio processing and post-production equipment.
  Our President, Chief Executive Officer and Chairman of the Board exercises significant control over
us.
  We depend on a few key management persons.
  The location of our Orban division subjects us to a number of risks that are beyond our control
which could result in production interruptions.
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The market price of our common stock has been volatile and the value of your investment may
decline.
  
    
    changes in general conditions in the economy or the financial markets;
    
    variations in our quarterly operating results;
    
    changes in financial estimates by securities analysts;
    
    other developments affecting us, our industry, customers or competitors;
    
    the operating and stock price performance of companies that investors deem comparable to
us; and
    
    the number of shares available for resale in the public markets under applicable
securities laws.
 The liquidity of our common stock could be restricted because our common stock falls within the
definition of a Penny Stock.
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Because our success depends in part on our ability to protect our intellectual property,
infringement on our proprietary rights could lead to costly litigation and decreased revenues.
  26




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ITEM 3. CONTROLS AND PROCEDURES.
  27




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PART II    OTHER INFORMATION
 
 ITEM
2. CHANGES IN SECURITIES AND ISSUER REPURCHASES OF EQUITY SECURITIES.
 Recent Sales of Unregistered Securities
     ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
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ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).31.2
    
    Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).32.1
    
    Certification of Chief Executive Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).32.2
    
    Certification of Chief Financial Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).
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SIGNATURES
  CIRCUIT RESEARCH LABS, INC.Dated: August 19, 2005
    
    By:
    
    /s/ Robert W. McMartinRobert W. McMartin
Vice President, Treasurer and
Chief Financial Officer
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Exhibit Index
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).31.2
    
    Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).32.1
    
    Certification of Chief Executive Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).32.2
    
    Certification of Chief Financial Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).