Table of Contents

 

 

 

**UNITEDSTATESSECURITIES 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 thequarterly period ended March 31, 2009**

** **

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period          to         **

** **

# **CommissionFile Number 0-21123**

 

 

**SRS LABS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **33-0714264**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**2909Daimler Street, Santa Ana, California 92705**

(Address of principal executive offices) (ZipCode)

 

**(949) 442-1070**

(Registrant’s telephone number, includingarea code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes o No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large  accelerated filer o                                             | Accelerated  filer x         |
|-----------------------------------------------------------------------------|-----------------------------------|
|                                                                        |                              |
| Non-accelerated  filer o(Do not check if a  smaller reporting company) | Smaller  reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o   No x

 

As of April 30,2009, 14,419,418 of the issuer’s common stock, par value $.001 per share, wereoutstanding.

 

 

 

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**SRS LABS, INC.**

 

**QuarterlyReport on Form 10-Q**

**For theThree Months Ended March 31, 2009**

**Index**

 
| **PART I-FINANCIAL  INFORMATION** | ** **                                                                                                                  |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                | Financial  Statements                                                                                                       |   |
|                                   | Condensed  Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and  December 31, 2008                    |   |
|                                   | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2009 and 2008 (Unaudited)       |   |
|                                   | Condensed  Consolidated Statements of Stockholders’ Equity for the three months ended  March 31, 2009 (Unaudited) |   |
|                                   | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2009 and 2008 (Unaudited)       |   |
|                                   | Notes to the  Condensed Consolidated Financial Statements (Unaudited)                                                       |   |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                                 |   |
| Item 4.                                | Controls and  Procedures                                                                                                    |   |
| **PART II-OTHER  INFORMATION**    | ** **                                                                                                                  |
| Item 1.                                | Legal Proceedings                                                                                                           |   |
| Item  1A.                              | Risk  Factors                                                                                                               |   |
| Item  6.                               | Exhibits                                                                                                                    |   |
|                                   |                                                                                                                        |   |
| SIGNATURES                             |                                                                                                                        |

 

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**FORWARD-LOOKINGINFORMATION**

 

Asused herein, the “Company,” “SRS Labs,” “SRS,” “we,” “us,” or “our” means SRSLabs, Inc., its wholly-owned Delaware subsidiary, SRSWOWcast.com, Inc.and its wholly-owned Chinese subsidiary, Shenzhen Representative Office of SRSLabs, Inc.

 

This Quarterly Report on Form 10-Q containsforward-looking statements regarding our assumptions, projections,expectations, targets, intentions or beliefs about future events. Allstatements other than statements of historical facts included in this QuarterlyReport relating to our future operating results, profitability, growth andcapital requirements, our investment and expansion plans, changes in ourcompetitive position, the outcome of certain disputes, changes in economicconditions or capital markets and changes in customer usage patterns andpreferences, are forward-looking statements. In some cases, you can identifyforward-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-lookingstatements contained in this Quarterly Report involve known and unknown risks,uncertainties and situations that may cause our or our industry’s actualresults, level of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these statements. Factors that might causeactual events or results to differ materially from those indicated by theseforward-looking statements may include the matters listed in Item 1A. RiskFactors of this Form 10-Q, including, but not limited to, the loss of anysignificant customer; the acceptance of new SRS Labs products and technologies;our ability to increase our brand awareness and enter into new or expandedlicense arrangements; the impact of competitive products and pricing; generaleconomic and business conditions that may adversely impact sales of consumerproducts incorporating our technologies or that otherwise may impact ouroperating results and future performance; the timely development and release oftechnologies by the Company; and other factors identified from time to time inour filings with the Securities and Exchange Commission (“SEC”).

 

Any forward-looking statement speaks only as of thedate on which such statement is made, and, except as required by law, weundertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for management to predict all such factors.

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**SRSLABS, INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                    | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **(unaudited)**              | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| **Current  Assets**                                                                                                                                           |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                                                                                    |       | $                            | 27,552,884 |                            | $          | 31,599,087 |   |
| Accounts  receivable, net                                                                                                                                     |       | 635,582                      |       | 332,711                         |       |
| Prepaid expenses  and other current assets                                                                                                                    |       | 1,026,648                    |       | 864,095                         |       |
| Short-term  investments                                                                                                                                       |       | 11,505,000                   |       | 7,836,000                       |       |
| **Total  Current Assets**                                                                                                                                     |       | 40,720,114                   |       | 40,631,893                      |       |
|                                                                                                                                                          |       |                         |       |                            |       |
| Property and  equipment, net                                                                                                                                  |       | 412,747                      |       | 423,921                         |       |
| Intangible  assets, net                                                                                                                                       |       | 2,444,260                    |       | 2,354,725                       |       |
| Deferred income  taxes, net                                                                                                                                   |       | 3,988,239                    |       | 3,471,421                       |       |
| **Total  Assets**                                                                                                                                             |       | $                            | 47,565,360 |                            | $          | 46,881,960 |   |
|                                                                                                                                                          |       |                         |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                 | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| **Current  Liabilities**                                                                                                                                      |       |                         |       |                            |       |
| Accounts payable                                                                                                                                              |       | $                            | 439,462    |                            | $          | 314,382 |   |
| Accrued  liabilities                                                                                                                                          |       | 960,659                      |       | 996,268                         |       |
| Deferred revenue                                                                                                                                              |       | 1,543,751                    |       | 1,802,024                       |       |
| **Total  Current Liabilities**                                                                                                                                |       | 2,943,872                    |       | 3,112,674                       |       |
|                                                                                                                                                          |       |                         |       |                            |       |
| **Commitments  and Contingencies (Note 4)**                                                                                                                   | ** ** | ** **                   | ** ** | ** **                      | ** ** |
|                                                                                                                                                          |       |                         |       |                            |       |
| **Stockholders’  Equity**                                                                                                                                |       |                         |       |                            |       |
| Preferred  stock—$.001 par value; 2,000,000 shares authorized; no shares issued or  outstanding                                                          |       | —                       |       | —                          |       |
| Common  stock—$.001 par value; 56,000,000 shares authorized; 14,419,418 shares issued  and outstanding at March 31, 2009 and December 31, 2008 |       | 14,420                       |       | 14,420                          |       |
| Additional  paid-in capital                                                                                                                                   |       | 63,105,475                   |       | 62,639,075                      |       |
| Accumulated  deficit                                                                                                                                          |       | (18,498,407                  | )          | (18,884,209                     | )          |
| **Total  Stockholders’ Equity**                                                                                                                          |       | 44,621,488                   |       | 43,769,286                      |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                          |       | $                            | 47,565,360 |                            | $          | 46,881,960 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Revenues                                                    |       | $                                                | 5,704,010  |   | $ | 4,940,988 |   |
| Cost of sales                                               |       | 71,972                                           |       | 25,949 |   |
| Gross profit                                                |       | 5,632,038                                        |       | 4,915,039 |   |
|                                                        |       |                                             |       |   |   |
| Operating expenses:                                         |       |                                             |       |   |   |
| Sales and  marketing                                        |       | 2,739,140                                        |       | 2,143,622 |   |
| Research and  development                                   |       | 1,174,666                                        |       | 926,762 |   |
| General and  administrative                                 |       | 1,432,127                                        |       | 1,438,358 |   |
| Total operating  expenses                                   |       | 5,345,933                                        |       | 4,508,742 |   |
|                                                        |       |                                             |       |   |   |
| Operating income                                            |       | 286,105                                          |       | 406,297 |   |
| Other income,  net                                          |       | 104,633                                          |       | 449,961 |   |
| Income before  income taxes                                 |       | 390,738                                          |       | 856,258 |   |
| Income taxes                                                |       | 4,936                                            |       | (2,094 | ) |
| Net income                                                  |       | $                                                | 385,802    |   | $ | 858,352 |   |
|                                                        |       |                                             |       |   |   |
| Net income per  common share:                               |       |                                             |       |   |   |
| Basic                                                       |       | $                                                | 0.03       |   | $ | 0.05 |   |
| Diluted                                                     |       | $                                                | 0.03       |   | $ | 0.05 |   |
|                                                        |       |                                             |       |   |   |
| Weighted average  shares used in the per share calculation: |       |                                             |       |   |   |
| Basic                                                       |       | 14,419,418                                       |       | 15,778,188 |   |
| Diluted                                                     |       | 14,648,122                                       |       | 16,305,095 |   |

 

 Seeaccompanying notes to the condensed consolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

** **
| ** **                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE,  December 31, 2008 |       | 14,419,418            |       | $                       | 14,420     |            | $          | 62,639,075  |       | $ | (18,884,209 | ) | $ | 43,769,286 |   |
| Share-based  compensation        |       | —                |       | —                  |       | 466,400         |       | —      |       | 466,400 |   |
| Net income                       |       | —                |       | —                  |       | —          |       | 385,802     |       | 385,802 |   |
|                             |       |                  |       |                    |       |            |       |        |       |   |   |
| BALANCE,  March 31, 2009    |       | 14,419,418            |       | $                       | 14,420     |            | $          | 63,105,475  |       | $ | (18,498,407 | ) | $ | 44,621,488 |   |

 

See accompanying notes to the condensed consolidated financialstatements

 

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**SRS LABS, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Cash  Flows from Operating Activities:**                                                   |       |                                             |       |   |   |
| Net income                                                                                   |       | $                                                | 385,802    |   | $ | 858,352 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                                               |       | 168,511                                          |       | 174,839 |   |
| Provision for  doubtful accounts                                                             |       | 22,500                                           |       | — |   |
| Deferred taxes                                                                               |       | (516,818                                         | )          | (463,074 | ) |
| Share-based  compensation                                                                    |       | 466,400                                          |       | 503,144 |   |
| Gain on  disposition of property and equipment                                               |       | (10,875                                          | )          | — |   |
| Changes in  operating assets and liabilities:                                                |       |                                             |       |   |   |
| Accounts  receivable                                                                         |       | (325,371                                         | )          | 753,940 |   |
| Prepaid expenses  and other current assets                                                   |       | (162,553                                         | )          | (116,967 | ) |
| Accounts payable                                                                             |       | 125,080                                          |       | (75,816 | ) |
| Accrued  liabilities                                                                         |       | (35,609                                          | )          | 107,669 |   |
| Deferred revenue                                                                             |       | (258,273                                         | )          | 1,155,214 |   |
| Net cash (used  in) provided by operating activities                                         |       | (141,206                                         | )          | 2,897,301 |   |
|                                                                                         |       |                                             |       |   |   |
| **Cash  Flows from Investing Activities:**                                                   |       |                                             |       |   |   |
| Proceeds from  sale of investments available for sale                                        |       | —                                           |       | 5,500,000 |   |
| Purchase of  short-term investments                                                          |       | (3,669,000                                       | )          | — |   |
| Expenditures  related to intangible assets                                                   |       | (205,493                                         | )          | (209,482 | ) |
| Purchase of  property and equipment                                                          |       | (48,104                                          | )          | (90,672 | ) |
| Proceeds from  sale of property and equipment                                                |       | 17,600                                           |       | — |   |
| Net cash (used  in) provided by investing activities                                         |       | (3,904,997                                       | )          | 5,199,846 |   |
|                                                                                         |       |                                             |       |   |   |
| **Cash  Flows from Financing Activities:**                                                   |       |                                             |       |   |   |
| Purchase of  treasury stock                                                                  |       | —                                           |       | (24,449 | ) |
| Net cash used in  financing activities                                                       |       | —                                           |       | (24,449 | ) |
|                                                                                         |       |                                             |       |   |   |
| **Net  (Decrease) Increase in Cash and Cash Equivalents**                                    |       | (4,046,203                                       | )          | 8,072,698 |   |
| **Cash  and Cash Equivalents, Beginning of Period**                                          |       | 31,599,087                                       |       | 39,615,291 |   |
|                                                                                         |       |                                             |       |   |   |
| **Cash  and Cash Equivalents, End of Period**                                                |       | $                                                | 27,552,884 |   | $ | 47,687,989 |   |
|                                                                                         |       |                                             |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                       |       |                                             |       |   |   |
| Cash paid during  the period for:                                                            |       |                                             |       |   |   |
| Income taxes                                                                                 |       | $                                                | 534,314    |   | $ | 411,748 |   |
| **Supplemental  Disclosure of Non-Cash Investing Activities:**                               |       |                                             |       |   |   |
| Unrealized gain  on investments, net                                                         |       | $                                                | —     |   | $ | 48,125 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIES****NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

**1.****                                     ****Basis of Presentationand Summary of Significant Accounting Policies and Estimates**

 

As used herein, the “Company,”“SRS Labs,” “SRS,” “we,” “us,” or “our” means SRS Labs, Inc., itswholly-owned Delaware subsidiary, SRSWOWcast.com, Inc., and itswholly-owned Chinese subsidiary, Shenzhen Representative Office of SRS Labs, Inc.  The accompanying unaudited condensedconsolidated financial statements have been prepared by the Company inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) for interim financial information and the rules andregulations of the SEC for interim reporting. In the opinion of management, alladjustments (which include normal recurring adjustments) considered necessaryfor a fair presentation of our financial position and results of operationshave been included.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with GAAP have been condensed or omitted pursuant to SEC rules andregulations for presentation of interim financial information. Therefore, thecondensed interim consolidated financial statements should be read inconjunction with the Company’s Annual Report on Form 10-K for the yearended December 31, 2008. Current and future financial statements may notbe directly comparable to the Company’s historical financial statements. Theresults of operations for the interim period are not necessarily indicative ofthe results to be expected for any other interim period or for the fullyear.  Amounts related to disclosure of December 31,2008 balances within these condensed consolidated financial statements werederived from the audited consolidated financial statements for the year ended December 31,2008.

 

**Estimates**

 

The preparation offinancial statements in accordance with GAAP requires management to make use ofcertain estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reported periods. We base our estimates on historical experience andon various other assumptions that we believe are reasonable under thecircumstances, the results of which form the basis for making judgments aboutcarrying values of assets and liabilities that are not readily apparent fromother sources.  By their nature,estimates are subject to an inherent degree of uncertainty.  Actual results could differ materially fromthose estimates. See the audited consolidated financial statements and notesthereto included in our Annual Report on Form 10-K for the year ended December 31,2008 for an additional discussion of the significant accounting policies andestimates used in the preparation of our financial statements.

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents include short-term, highly liquid investments that arereadily convertible to known amounts of cash and are so near maturity that theypresent insignificant risk of changes in value because of interest rates. Cashand cash equivalents generally consist of cash, money market funds andinstruments with original maturities of three months or less when purchased.  The Company places its cash in banks and itscash and cash equivalents and money market funds at certain financialinstitutions in excess of amounts insured by federal agencies.  The Company does not believe that it issubject to any unusual financial risk beyond the normal risk associated withcommercial banking relationships.  TheCompany performs periodic evaluations of the relative credit standing of thesefinancial institutions.  For the threemonths ended March 31, 2009, the Company did not experience any losses onits cash equivalents.

 

**Short-term Investments**

 

Short-terminvestments consist of certificates of deposit with original maturities rangingfrom six to twelve months.  The Companyhas not experienced any losses on its short-term investments.

 

**CustomerConcentrations**

 

For the three months ended March 31, 2009 and2008, one customer, Samsung, accounted for approximately 41% and 42%,respectively, of our revenue.

 

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**IncomeTaxes**

 

The Company currently has net operating losscarryforwards to offset income taxes. Consequently, no significant provision isreflected in the accompanying interim consolidated financial statements.  Refer to our Annual Report on Form 10-Kfor the year ended December 31, 2008 for additional disclosure in thisregard.

 

**2.****                                      IntangibleAssets**

 

Intangible assets consistof the following:

 
| ** **                                                  | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Patents                                                     |       | $                        | 3,744,091  |                        | $          | 3,618,338 |   |
| Accumulated  amortization                                   |       | (1,852,732               | )          | (1,785,531                  | )          |
| Patents, net                                                |       | 1,891,359                |       | 1,832,807                   |       |
| Other  intangibles:                                         |       |                     |       |                        |       |
| License  agreements acquired in purchase of SRSWOWcast      |       | 640,071                  |       | 640,071                     |       |
| Capitalized  software and hardware for several technologies |       | 662,541                  |       | 582,800                     |       |
| Total of other  intangibles                                 |       | 1,302,612                |       | 1,222,871                   |       |
| Accumulated  amortization, other intangibles                |       | (749,711                 | )          | (700,953                    | )          |
| Other  intangibles, net                                     |       | 552,901                  |       | 521,918                     |       |
| Intangible  assets, net                                     |       | $                        | 2,444,260  |                        | $          | 2,354,725 |   |

 

Amortizationexpense associated with our intangibles was $115,959 and $126,166 in the firstquarter of 2009 and 2008, respectively, and is included in general andadministrative expenses in the accompanying condensed consolidated statementsof operations.

 

**3.**                                      **Net IncomePer Common Share**

 

Basic net income or loss per common share iscomputed by dividing net income or loss available to common stockholders by theweighted average number of common shares outstanding during each year. Dilutednet income or loss per common share reflects the maximum dilution, based on theaverage price of the Company’s common stock during each period, and is computedsimilar to basic income or loss per share except that the denominator isincreased to include the number of additional shares that would have beenoutstanding if potentially dilutive stock options and warrants had beenexercised.

 

Basic and diluted net income per share are asfollows:

 

| ** **                                               | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| BASIC EPS                                                | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net income                                               |       | $                                                                  | 385,802    |   | $ | 858,352 |   |
| Denominator:  weighted average common shares outstanding |       | 14,419,418                                                         |       | 15,778,188 |   |
| Net income per  share                                    |       | $                                                                  | 0.03       |   | $ | 0.05 |   |
|                                                     |       |                                                               |       |   |   |
| DILUTED EPS                                              |       |                                                               |       |   |   |
| Net income                                               |       | $                                                                  | 385,802    |   | $ | 858,352 |   |
| Denominator:  weighted average common shares outstanding |       | 14,419,418                                                         |       | 15,778,188 |   |
| Common  equivalent shares outstanding:                   |       |                                                               |       |   |   |
| Options                                                  |       | 228,704                                                            |       | 526,907 |   |
| Total diluted  shares                                    |       | 14,648,122                                                         |       | 16,305,095 |   |
| Net income per  share                                    |       | $                                                                  | 0.03       |   | $ | 0.05 |   |

 

There were outstanding options to purchase anaggregate of 2,593,821 and 2,086,098 shares of the Company’s common stock as ofMarch 31, 2009 and 2008, respectively, that were not included in the tableabove because they would be anti-dilutive.

 

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**4.**                                      **Commitmentsand Contingencies**

 

On June 8, 2007, wesent a letter to Sony Corporation (“Sony”) relating to the possibleinfringement of several SRS patents by Sony’s S-Force technology. Sonyresponded to the letter by filing a Complaint for Declaratory Relief in theU.S. District Court in the Southern District of New York on July 6, 2007.In November 2007, Sony and SRS entered into a standstill agreement for thepurpose of conducting discussions towards an amicable resolution of thedispute, and the Complaint for Declaratory Relief wasdismissed.  While the standstill agreement has expired, the partiescontinue to negotiate regarding this matter.  In October 2008, anindependent third party hired to evaluate the Sony S-Force technology informedus that they had completed their evaluation based on the information providedby Sony.  Based on their study, they confirmed SRS’ position that theS-Force technology infringes our patents.  The basis for thisinfringement position has been provided to Sony for theirreview.  Sony has not agreed with the position of the independentthird party.  SRS continues to evaluateits alternatives in this matter and cannot assure that it will prevail in thisdispute.  SRS is unable to determine atthis time the impact that this matter may have, if any, on its consolidatedfinancial position, results of operations or cash flows.

 

From time to time, we maybe involved in other litigation matters and disputes arising in the normal courseof business. Any such matters and disputes could be costly and time consuming,subject us to damages or equitable remedies, and divert our management and keypersonnel from our business operations.

 

**5.****                                     ****Segment Information**

 

The Company operates in one reportable segment asdisclosed in our Annual Report on Form 10-K for the year ended December 31,2008.  The followingschedule presents the Company’s revenue by geographic area.  Licensing-related revenue is summarized basedon the location of the licensee’s corporate headquarters.  For product and online sales, revenue isallocated to the Americas.  The Americasregion includes North, Central and South America.  Starting in 2008, the Greater China regionwas broken down into the China and Asia Pacific region.  The China region includes all licensees withtheir corporate headquarters located in mainland China.  The Asia Pacific region includes alllicensees with their corporate headquarters located in Taiwan and Hong Kong.

 

| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| ** **                     | ** ** | **2009**                                         | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** |
| **Geographic  Area Revenues:** |       |                                             |       |   |   |   |   |   |   |
| Korea                          |       | $                                                | 2,760,018  |   | 48 | % | $ | 2,523,455 |   | 51 | % |
| Japan                          |       | 1,245,162                                        |       | 22 |   | 1,695,653 |   | 34 |   |
| Americas                       |       | 908,483                                          |       | 16 |   | 358,282 |   | 7 |   |
| China                          |       | 531,408                                          |       | 9 |   | 202,110 |   | 4 |   |
| Asia Pacific                   |       | 145,442                                          |       | 3 |   | 74,202 |   | 2 |   |
| Europe                         |       | 113,497                                          |       | 2 |   | 87,286 |   | 2 |   |
|                           |       |                                             |       |   |   |   |   |   |   |
| Total                          |       | $                                                | 5,704,010  |   | 100 | % | $ | 4,940,988 |   | 100 | % |

 

**6.**                                      **RecentAccounting Pronouncements**

 

In April 2008, theFASB issued Staff Position (“FSP”) SFAS No. 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP No. 142-3”).This FSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS No. 142, *Goodwilland Other Intangible Assets*(“SFAS 142”). The intent of this FSP isto improve the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measurethe fair value of the asset under SFAS 141 (revised 2007), *BusinessCombinations*(“SFAS 141(R)”) and other GAAP.  This FSP became effective for us beginning January 1,2009.  The adoption of this pronouncementdid not have a material impact on our consolidated financial position, resultsof operations or cash flows.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (“SFAS 141(R)”), which replaces SFAS No. 141.SFAS 141(R) retains the purchase method of accounting for acquisitions,but requires a number of changes, including changes in the way assets andliabilities are recognized in the purchase accounting. It also changes therecognition of assets acquired and liabilities assumed arising fromcontingencies, requires the capitalization of in-process research anddevelopment at fair value, and requires the expensing of acquisition-relatedcosts as incurred. SFAS 141(R) became effective for us beginning January 1,2009 and is applied prospectively to business combinations.  The adoption of SFAS 141(R) did not havea material effect on our consolidated financial position or results ofoperations.

 

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**7.****                                     ****Fair Value Measurements**

 

Effective January 1, 2008,we adopted SFAS No. 157, *Fair ValueMeasurements* (“SFAS 157”). The purpose of SFAS 157 is to define fairvalue, establish a framework for measuring fair value and enhance disclosuresabout fair value measurements.  Thestandard describes three levels of inputs that may be used to measure fairvalue:

 

·                  *Level 1 inputs:* Level 1 inputs are quoted market pricesin active markets for identical assets or liabilities that are accessible atthe measurement date.

 

·                  *Level 2 inputs:* Level 2 inputs are from other thanquoted market prices included in Level 1 that are observable for the asset orliability, either directly or indirectly.

 

·                  *Level 3 inputs:* Level 3 inputs are unobservable andshould be used to measure fair value to the extent that observable inputs arenot available.

 

Thehierarchy noted above requires us to minimize the use of unobservable inputsand to use observable market data, if available, when determining fair value.

 

Financial assets carried at fair value as of March 31, 2009 areclassified below:

 
| ** **               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|--------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| Money market  funds      |       | $           | 27,338,820 |        | $          | —      |       | $          | —     |   | $ | 27,338,820 |   |
| Certificates of  deposit |       | —      |       | 11,505,000  |       | —      |       | 11,505,000 |       |
| Total                    |       | $           | 27,338,820 |        | $          | 11,505,000  |       | $          | —     |   | $ | 38,843,820 |   |

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

This information should be read in conjunction withthe audited consolidated financial statements and notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in our Annual Report on Form 10-K for the year ended December 31,2008, and the unaudited condensed interim consolidated financial statements andnotes thereto included in this Quarterly Report.

 

**Overview**

** **

We are the recognized global leader in the practicalapplication of psychoacoustics*,*the science behind how the human ear operates, and in the post processingsegment of the market for audio delivery.  Our award-winning audioenhancement technologies and solutions dramatically restore audio and voice toits natural state, the way it was originally recorded, in both dimension andclarity, thus providing a superior consumer experience for a wide variety ofconsumer electronic devices such as televisions, personal computers and mobilephones.

 

Our operations are conducted through SRS Labs, Inc.,and its wholly-owned subsidiaries, SRSWOWcast.com, Inc. and ShenzhenRepresentative Office of SRS Labs, Inc. Our business is focused on developing and licensing audio, voice andsurround sound technology solutions to many of the world’s leading original equipmentmanufacturers, or OEMs, software providers and semiconductor companies, andlimited sales and marketing of stand alone software and hardware productsthrough the Internet.

 

#### **Critical Accounting Policies**

####  

Our discussion and analysis of our results ofoperations and liquidity and capital resources are based on our unauditedconsolidated financial statements for the three months ended March 31,2009 and 2008, which have been prepared in accordance with GAAP.

 

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Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and disclosure of contingent assets and liabilities. We base ourestimates on historical and anticipated results and trends and on various otherassumptions that we believe are reasonable under the circumstances, includingassumptions as to future events. These estimates form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. By their nature, estimates are subject toan inherent degree of uncertainty. Actual results may materially differ fromour estimates.

 

**Results of Operations**

 

***Three Months Ended March 31, 2009Compared to Three Months Ended March 31, 2008***

 

*Revenues*

 

Our revenues consist primarily of royaltiesgenerated from the license of SRS Labs’ audio and voice technologies.  Our license agreements typically havemulti-year or automatic renewal terms, and either require: (a) per-unitroyalty payments for all products implementing our technologies and/orsolutions; (b) fixed annual or quarterly royalty payments; or (c) aminimum fixed annual or quarterly royalty payment, which allow the licensee toship 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 areper-unit royalty arrangements, which are generally reported by the licensee inthe quarter following shipment of the consumer electronics device and aretherefore are typically recognized by us following shipment by the OEM.  Revenues associated with fixed royaltypayments are recognized ratably over the term of the license agreement.  We also sell some of our products andsolutions via the Internet.  Revenues associatedwith those sales are recognized upon shipment and were not material in thethree months ended March 31, 2009 or 2008.

 

Our revenues were $5,704,010 for the three months ended March 31,2009, compared to $4,940,988 for the three months ended March 31, 2008, anincrease of $763,022 or 15%.  Ourrevenues in the personal telecommunications market increased by $493,213 in thecurrent quarter primarily due to increased revenues from Samsung Mobile andNEC.  Our revenues from the personalcomputer market increased by $224,896, primarily due to revenue generated fromseveral new licensees, including Hewlett Packard and BenQ.  In our home entertainment market, our totalrevenues increased by $91,560 in the current quarter.  Within this market, revenues from set-topboxes increased $71,228 in the current quarter, while revenues from flat paneltelevisions and monitors in the current quarter were relatively comparable tothe prior year period.  Although flatpanel revenue increased from new licensees such as Vizio and other China basedTV OEMs, such increase was offset by decreased revenue in the current quarterfrom Japanese TV OEMs such as Toshiba, Sony and Panasonic.  In the automotive market, revenues increasedby $54,449 primarily due to increased revenues from two customers in Japan whoprovide line install, dealer option and after market automotive audio systemsto many of the significant Japanese automotive manufactures.  Revenues in the portable media devicesdecreased by $101,097 primarily due to decreased revenues from MP3 players anddocking stations.

 

The following table presents our licensing revenuesmix by market:

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Home  entertainment (TV, set top box)                     |       | 67                                                   | %          | 76 | % |
| Personal  telecommunications (mobile phone, PDA)          |       | 13                                                   |       | 6 |   |
| PC (software,  hardware)                                  |       | 8                                                    |       | 4 |   |
| Automotive                                                |       | 7                                                    |       | 7 |   |
| Portable media devices (digital media player,  headphone) |       | 5                                                    |       | 7 |   |

 

*Sales andMarketing*

 

Salesand marketing expenses consist primarily of employee salaries, salesconsultants’ fees and related expenses, sales commissions and costs associatedwith branding activities. Sales and marketing expenses were $2,739,140 for thethree months ended March 31, 2009, compared to $2,143,622 for the sameprior year period, an increase of $595,518 or 28%.  This increase was primarily attributable toan increase in payroll and related costs associated with the addition of 13sales and marketing personnel since March 31, 2008.  In addition, the Company has also increasedits advertising and branding efforts, which resulted in an increase in expenseof approximately $219,000 in the current quarter.  Included in sales and marketing expenses isshare-based compensation expense of $115,816 and $141,894 for the three monthsended March 31, 2009 and 2008, respectively.  We expect that sales and marketing expenseswill continue to increase as we hire additional sales personnel to penetratetarget markets and key regions and as we continue to increase our marketingefforts to cultivate and elevate the SRS brand globally.  As a percentage of total revenues, sales andmarketing expenses increased from 43%for the quarter ended March 31, 2008 to 48% for the same period this year.

 

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*Researchand Development*

 

Research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs forengineering materials and supplies. Research and development expenses were$1,174,666 for the three months ended March 31, 2009, compared to $926,762for the same prior year period, an increase of $247,904 or 27%.  This increase was primarily attributable toan increase in payroll and related costs associated with hiring an additionalseven engineers since March 31, 2008. Included in research and development expenses is share-basedcompensation expense of $107,723 and $123,626 for the three months ended March 31,2009 and 2008, respectively.  We expectthat research and development expenses will continue to increase in 2009 as wecontinue add to our research and development team in order to support ourglobal licensees and to accelerate the implementation of our technology with agreater number of customers and devices. As a percentage of total revenues,research and development expenses increased from 19% for the quarter ended March 31,2008 to 21% for the same period this year.

 

*Generaland Administrative*

 

Generaland administrative (“G&A”) expenses consist primarily of employee-relatedexpenses, attorneys’ fees, accounting fees and other professional fees. G&Aexpenses were $1,432,127 for the three months ended March 31, 2009,compared to $1,438,358 for the same prior year period, a decrease of $6,231 or 1%. Included in G&A expenses isshare-based compensation expense of $242,861 and $237,624 for the three monthsended March 31, 2009 and 2008, respectively.  As a percentage of total revenues, G&Aexpenses decreased from 29% forthe quarter ended March 31, 2008 to 25% for the same period this year.

 

*OtherIncome, Net*

 

Otherincome, net consists primarily of interest income. Other income, net was$104,633 for the three months ended March 31, 2009, compared to $449,961for the same prior year period, a decrease of $345,328 or 77%. This decreasewas primarily attributable to lower interest rates earned on lower cashbalances.

 

*IncomeTaxes*

 

     Income tax expense for thethree months ended March 31, 2009 was $4,936, compared to an income tax benefit of $2,094for the same prior year period.  The income tax provision consisted primarilyof taxes paid on licensing revenues in the current quarter that were sourcedfrom countries requiring foreign tax withholdings, principally Korea.  We reduced our tax provision and ourvaluation allowance on our deferred tax assets by $516,818 and $463,074 for thethree months ended March 31, 2009 and 2008, respectively, based on ourassessment of the future estimated realization of such assets.

 

**Liquidity and Capital Resources**

 

Our principalsource of liquidity to fund ongoing operations at March 31, 2009 consistedof cash, cash equivalents and short-term investments of $39,057,884.  At March 31, 2009, we had cash and cashequivalents of $27,552,884 and short-term investments of $11,505,000.  Cash and cash equivalents generally consistof cash, money market funds and other money market instruments with originalmaturities of three months or less. The money market funds are primarilyinvested in US government obligations. The cash and certificates of deposit are FDIC insured.  Short-term investments consist ofcertificates of deposit with original maturities ranging from 6 to 12 months.

 

Net cash used in operating activities was$141,206 during the three months ended March 31, 2009, and net cashprovided by operating activities was $2,897,301 during the same period in theprior year.  The decrease in our cashflows from operating activities was primarily the result of changes in ouroperating assets and liabilities specifically, a decrease in our deferredrevenue of $258,273 during the three months ended March 31, 2009 comparedto an increase of $1,155,214 during the three months ended March 31,2008.  The decrease in deferred revenueduring the three months ended March 31, 2009 was due to the Companyrecognizing revenue from customers who prepaid us royalties.  During the three months ended March 31,2008, the Company received the final lump sum payment under the multi-yearlicense agreement with LG Electronics, which caused deferred revenue toincrease.  Additionally, accounts receivableincreased $325,371 during the three months ended March 31, 2009 ascompared to decreasing $753,940 during the three months ended March 31,2008.  The increase in accountsreceivable as of March 31, 2009 was due to increased revenues recorded in thecurrent quarter.  Furthermore, cash flowfrom operating activities decreased due to a decrease in net income of $472,550from $858,352 during the three months ended March 31, 2008 to $385,802during the three months ended March 31, 2009.

 

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Net cash used in investing activities was $3,904,997 during the three months ended March 31, 2009 and net cash provided by investing activities was $5,199,846 during the same period in the prior year.  Net cash used by investing activities during the three months ended March 31, 2009 was attributable primarily to the purchase of short-term investments.

 

We believe our existing cash, cash equivalents andshort-term investment balances together with cash generated from operatingactivities, will be sufficient to meet our anticipated cash needs for at leastthe next twelve months.  Our futurecapital requirements will depend on many factors, including our level ofrevenues, the timing and extent of spending to support product developmentefforts, the impact of existing adverse economic conditions, the expansion ofsales and marketing activities, the timing of introductions of new products andthe continuing market acceptance of our products.

 

Ouroperations and financial results are subject to various risks and uncertaintiesthat could adversely affect our business, financial condition, results ofoperations and trading price of our common stock. Please refer to Item 1A, “RiskFactors” herein for information concerning these and other uncertainties thatcould negatively impact us.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

Therehave been no material changes to the information called for by this Item 3 fromthe disclosures set forth in Part II, Item 7A in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008.

 

**Item 4.  Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures.***Our Chief Executive Officer and Presidentand our Chief Financial Officer have evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15 (e) and15d-15 (e) under the Securities Exchange Act of 1934, as amended) as ofthe end of the period covered by this Quarterly Report on Form 10-Q and,based on this evaluation, have concluded that our disclosure controls andprocedures are effective.

 

*Changesin Internal Controls.***There have been no changes in our internal controls over financialreporting that occurred during our first quarter ended March 31, 2009 thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**PART II:OTHER INFORMATION**

 

**Item 1.  LegalProceedings**

 

The information set forthunder Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements,included in Part I, Item 1 of this Report, is incorporated herein byreference.  For an additional discussionof certain risks associated with legal proceedings, see Item 1A. Risk Factors.

 

**Item 1A. Risk Factors**

 

***You should carefully consider therisk factors described below, as well as the other information included in thisQuarterly Report on Form 10-Q, prior to making a decision to invest in oursecurities. The risks and uncertainties described below are not the only onesfacing our company. Additional risks and uncertainties not presently known orthat we currently believe to be less significant may also adversely affect us.***

*** ***

***We areexposed to risks in our licensing business related to product and customerconcentration.***

*** ***

Currently, we generate a majority of our revenue in the homeentertainment market, principally through the inclusion of SRS technologyinside flat panel LCD and plasma televisions. We expect that the consumer homeentertainment market will continue to account for a significant portion of ourlicensing revenues for the foreseeable future. In addition to significantfluctuations in consumer spending on consumer electronic products, retailprices for certain consumer electronics products that include our audiotechnology have decreased significantly. We expect that this trend willcontinue for the foreseeable future. In addition, from time to time, certain ofour OEM and semiconductor manufacturer customers may account for a significantportion of our revenues. For example, for the year ended December 31,2008, Samsung accounted for approximately 42% of our consolidated revenues.These manufacturers could develop their own technologies or decide to excludeour technologies from their products altogether in an effort to reducecost.  For example, during 2007, we were informed by Sony that they wereno longer using our technology in the majority of their televisions.  Theloss of any key customer could have a material adverse affect on our financialcondition and results of operations.

 

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***Generaleconomic conditions may reduce our revenues and harm our business.***

*** ***

Our business is exposed to adverse changes in general economicconditions, because products that incorporate our technologies areentertainment-oriented and generally discretionary goods. The current slowdownor decline in U.S. and foreign economic growth has adversely affected consumerconfidence, disposable income and spending. As a result, sales by our licenseesof consumer electronics and other products incorporating our technologies maynot grow as rapidly as in prior periods or may even decrease, which couldadversely affect our licensing revenue. Furthermore, deteriorating economic conditions and other factors mayresult in increased under-reporting or non-reporting of royalty bearingrevenues by our licensees as well as increased unauthorized use of ourtechnologies, which could adversely affect our revenues.

 

***Ourbusiness is highly dependent on the consumer electronics market, which ischaracterized by short product life cycles, rapid technological changes,fluctuations in demand and seasonality, and is subject to risks related toproduct transitions and supply of other components.***

*** ***

The consumer electronics market is characterized byintense competition, rapidly evolving technology, and ever-changing consumerpreferences. These factors result in the frequent introduction of new products,short product life cycles and significant price competition. As a result, wemay need to develop new products or technologies or modify our existingtechnologies to integrate with the new products and technologies developed byour customers. We anticipate that we will continue to expend considerableresources on research and development in the future in order to continue tomodify our existing technologies and introduce new products andtechnologies.  If we are unable todevelop or modify the necessary technologies to meet the changing needs of ourcustomers on a timely basis, or at all, or if we are unable to provide suchtechnologies at competitive prices, our customers may reduce their use of ourtechnologies and our revenues may decline. In addition, the dynamic nature ofthis market limits our ability and the ability of our customers to accuratelyforecast quarterly and annual sales. If we, or our customers, are unable toadequately manage product transitions, our business and results of operationscould be negatively affected.

 

***Wedepend on the sale by our licensees of products that incorporate ourtechnologies, and a reduction in those sales would adversely affect ourlicensing revenue.***

*** ***

We derive most of our revenue from the licensing of our technologies toconsumer electronics product manufacturers. We do not manufacture consumerelectronics products ourselves and our licensing revenue is dependent on salesby our licensees of products that incorporate our technologies. We cannotcontrol these manufacturers’ product development or commercialization effortsor predict their success. In addition, our license agreements, which typicallyrequire manufacturers of consumer electronics products and media softwarevendors to pay us a specified royalty for every electronics product shippedthat incorporates our technologies, do not require these manufacturers toinclude our technologies in any specific number or percentage of units, andonly a few of these agreements guarantee us a minimum aggregate licensing fee.Accordingly, if our licensees sell fewer products incorporating ourtechnologies, decline to actively market products incorporating ourtechnologies or otherwise face significant economic difficulties, our revenuewill decline. Changes in consumer tastes or trends, changes in industrystandards or adverse changes in business and economic conditions may alsoadversely affect our licensing revenue.

 

***Pricingpressures on the consumer electronics product manufacturers, who incorporateour technologies into their products, could limit the licensing fees we chargefor our technologies, which could reduce our revenues.***

*** ***

The markets for the consumer electronics products in which ourtechnologies are incorporated are intensely competitive and price sensitive.Retail prices for consumer electronics products that include our technologieshave decreased significantly, and we expect prices to continue to decrease forthe foreseeable future. In response, manufacturers have sought to reduce theirproduct costs, which can result in downward pressure on the licensing fees wecharge our customers who incorporate our technologies into their products. Alternatively,our customers may seek to eliminate our technologies in their products in favorof internally developed technologies. A decline in the licensing fees we chargecould materially and adversely affect our operating results.

 

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***Weface intense competition from companies with greater brand recognition andresources.***

*** ***

The digital audio, consumer electronics and entertainment markets areintensely competitive, subject to rapid change, and significantly affected bynew product introductions and other market activities of industry participants.

 

Some of our current and potential competitors enjoy notable competitiveadvantages, including:

 

·                  Greater name recognition;

 

·                  Larger distribution channels and long standingrelationships with consumer electronics products designers and manufacturers;

 

·                  A more extensive customer base;

 

·                  Broader product and service offerings;

 

·                  Greater resources for competitive activities, such asresearch and development, strategic acquisitions, alliances, joint ventures,sales and marketing, and lobbying industry and government standards; and

 

·                  More technicians and engineers.

 

·                  Decoding and encoding technology offerings that havebecome standards in certain consumer electronic products that may offer them aperceived advantage in licensing competitive products.

 

As a result, these current and potential competitors may be able torespond more quickly and effectively than we can to new or changingopportunities, technologies, standards, or customer requirements.

 

We may also experience competition from certain of our customers whodecide to develop their own sound technologies instead of licensing suchtechnologies.  Any increased competitionmay adversely impact our revenues, margins and earnings.

 

***Inaccuratelicensee royalty reporting and unauthorized use of our intellectual propertycould materially adversely affect our operating results.***

*** ***

Our licensing revenue is generated primarily from consumer electronicsproduct manufacturers who license our technologies and incorporate them intheir products. Under a significant percentage of our existing arrangements,these licensees typically pay us a specified royalty for every product theyship that incorporates our technologies. We rely on our licensees to accuratelyreport the number of units shipped that incorporate our technologies. Wecalculate our license fees, prepare our financial reports, projections andbudgets, and direct our sales and product development efforts based on thesereports we receive from our licensees. However, it can be difficult for us toindependently determine whether or not our licensees are reporting shipmentsaccurately. This is especially true with respect to software incorporating ourtechnologies because software can be copied relatively easily and we often donot have easy ways to determine how many copies have been made. Most of ourlicense agreements permit us to audit our licensees’ records, but audits aregenerally expensive and time consuming and initiating audits could harm ourcustomer relationships. We expect that we will continue to be subject tounderstatement and non-reporting of royalty bearing revenues by licensees,which could adversely affect our operating results. Conversely, to the extentthat our licensees overstate the number of products incorporating ourtechnologies, negative corrections could result in reductions of royaltyrevenue in subsequent periods. Some of our licensees may begin to more closelyscrutinize their past licensing statements, which may result in an increasedreceipt of negative corrective statements

 

We also may experience problems with non-licensee consumer electronicsproduct manufacturers and media software vendors, particularly in emergingeconomies, incorporating our technologies or incorporating our technologies andtrademarks into their products without our authorization and without paying usany licensing fees. This unauthorized use of our intellectual property couldadversely affect our operating results.

 

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*** ***

***Our business and future prospects depend upon thestrength of our brand. Awareness of our brand depends to a significant extentupon decisions by our customers to display our trademarks on their products,and if our customers do not display our trademarks on their products, ourability to increase our brand awareness may be harmed.***

*** ***

Because we engage in relatively little direct brandadvertising, the promotion of our brand depends upon consumer electronicsindustry participants displaying our trademarks on their products thatincorporate our technologies.  Although we do generally require ourcustomers 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 criticalto maintaining and expanding our licensing revenues and entering into new orbroadening existing licensing relationships.  If our customers choose forany reason not to display our trademarks on their products, our ability tomaintain or increase our brand awareness may be harmed, which would have anadverse effect on our business and prospects. In addition, if we fail tomaintain high quality standards for our products, or the products thatincorporate our technologies through the quality control evaluation processthat we require of our licensees, the strength of our brand could be adverselyaffected.

 

***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 technologiesoften are complex and sometimes contain undetected software or hardware errors,particularly when first introduced or when new versions are released. Inaddition, those products are often combined with, or incorporated into,products from other companies, sometimes making it difficult to identify thesource of a problem. Any negative publicity or negative impact relating tothese product problems (even if unrelated to our technologies) could adverselyaffect the perception of our brand. In addition, these errors could result inloss of, or delay in, market acceptance of those products or our technologies,or cause delays in delivering them and meeting customer demands, any of whichcould reduce our revenue and raise significant customer relations issues.Although we generally attempt to contractually limit our liability for ourlicensees’ defective products, we may elect to help reengineer those products,which could increase our expenses and adversely affect our operating results.

 

***We may engage in acquisition activities, which couldrequire significant capital infusions and may result in operating challenges,dilution to our stockholders and other adverse consequences.***

*** ***

We may in the future acquire, or consider theacquisition of, complementary businesses, products and/or technologies.Acquisitions may require significant capital infusions and, in general, involvea number of special risks, including, but not limited to, the following:

 

·                  Potential disruption of our ongoing business and thediversion of our resources and management’s attention to acquisition activitiesand integration challenges;

 

·                  The failure to retain or integrate key acquiredpersonnel;

 

·                  The challenge of assimilating diverse businesscultures, and the difficulties in integrating the operations, technologies andinformation systems of the acquired companies;

 

·                  Increased costs to integrate and improve managerial,operational, financial and other administrative systems and to eliminateduplicative services;

 

·                  The need to implement or improve internal controls,procedures and policies appropriate for a public company at businesses thatprior to the acquisition were privately-held or otherwise lacked such adequatecontrols, procedures or policies;

 

·                  Unanticipated or unknown obligations or liabilitiesrelating to an acquisition;

 

·                  Possible write-offs, impairment charges, compensationcharges or other adverse tax or accounting consequences related to anacquisition; and

 

·                  Integration challenges across diverse geographies,cultures, economies or regulatory environments.

 

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Our competitors are also soliciting potentialacquisition candidates, which could both increase the price of any acquisitiontargets and decrease the number of attractive available acquisitions.  We cannot assure you that we will pursue anacquisition or be able to identify or consummate any acquisition, successfullyintegrate any acquisition or realize the benefits anticipated from anyacquisition.  Future acquisitions may alsorequire us to obtain additional equity or debt financing, which may not beavailable on favorable terms, on a timely basis or at all.

 

***We are subject to risks associated with substantialinternational operations.***

*** ***

We conduct sales and customer support operations in anumber of countries throughout the world that require refinement to adapt tothe changing market conditions on a regional basis. In addition, many of oursignificant customers are headquartered in the Asia Pacific region,particularly Korea and Japan. Approximately 88%, 90% and 91% of our revenueswere derived from customers with headquarters located in the Asia Pacificmarkets during the years ended December 31, 2008, 2007 and 2006,respectively. We expect to continue to derive a significant portion of ourrevenues from sales to customers in these markets for the foreseeable future.Also, a substantial number of products incorporating our technologies aremanufactured, assembled and tested by third parties in Asia. As a result, weare subject to a number of risks of conducting business outside of the UnitedStates, any of which could have a material adverse impact on our business andresults of operations, including:

 

·                  global economic downturn;

 

·                  political, social and economic instability, and therisk of war, terrorist activities or other international incidents in Asia andelsewhere abroad;

 

·                  currency fluctuations;

 

·                  difficulties and costs of staffing and managingforeign operations;

 

·                  unexpected changes in, or impositions of, governmentrequirements;

 

·                  adverse changes in tariffs and other protectionistlaws and business practices that favor local competitors;

 

·                  potentially longer payment cycles and greaterdifficulty 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 thecomplexities of foreign value added tax systems; and

 

·                  Other factors beyond our control, including naturaldisasters and major health concerns.

 

***We have a long and unpredictable sales cycle, whichcan result in uncertainty and delays in generating additional revenues.***

*** ***

Historically, because of the complexity of ourtechnologies, it can take a significant amount of time and effort to explainthe benefits of our technologies to potential new customers and to negotiate asale. For example, it typically takes six to nine months after our firstcontact with a prospective customer before we start licensing our technology tothat customer and another six to nine months to begin generating revenues. Inaddition, purchases of our products are usually made in connection with newdesign starts by our customers, the timing of which is outside of our control.Accordingly, we may be unable to predict accurately the timing of anysignificant future sales of our products. We may also spend substantial timeand management attention on potential license agreements that are notconsummated, or in which the consumer electronic product ultimately does notsell in large quantities, thereby foregoing other higher revenue opportunities.

 

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***If our patents and other intellectual property rightsdo not adequately protect our products, we may lose market share to ourcompetitors and be unable to operate our business profitably.***

*** ***

Our ability to compete may be affected by our abilityto protect our proprietary information. We have filed numerous U.S. and foreignpatent applications and to date have a number of issued U.S. and foreignpatents covering various aspects of our technologies. We cannot guarantee thatthe steps taken by us to protect our intellectual property will be adequate toprevent misappropriation of our technology or that our competitors will notindependently develop technologies that are substantially equivalent orsuperior to our technology. In addition, the laws of certain foreign countriesmay not protect our intellectual property rights to the same extent as do thelaws of the U.S. It is possible that third parties may assert claims orinitiate litigation against us or our customers with respect to existing orfuture products. In addition, we may initiate claims or litigation againstthird parties for infringement of our proprietary rights or to determine thescope and validity of our proprietary rights. Litigation in the technologyindustry is common.  We are currently engagedin a dispute with Sony concerning the possible infringement of several SRSpatents by Sony’s S-Force technology, but cannot assure that we will besuccessful in such dispute. Claims and litigation brought against us orinitiated by us could be costly and time consuming and could divert ourmanagement from our business. The outcome of any litigation is uncertain andcould require us to pay significant damages or could prevent us from licensingsome or all of our technologies, which could significantly harm our businessand results of operations.

 

***If we lose the services of our key personnel, or if weare unable to attract and retain other key personnel, we may not be able tomanage our operations or meet our growth objectives.***

*** ***

Our future success depends to a large extent upon thecontinued service of key personnel, including engineering, sales andadministrative staff. We anticipate that any future growth will require us torecruit and hire a number of new personnel in engineering, operations, finance,sales and marketing. Competition for such personnel can be intense, and it ispossible that we may not be able to recruit and retain necessary personnel tooperate our business and support future growth.

 

***The market price of our common stock is volatile andyour investment in our common stock could suffer a decline in value.***

*** ***

The trading price of our common stock has been, andwill likely continue to be, subject to wide fluctuations in response toquarterly variations in our operating results, announcements of new products ortechnological innovations by us or our competitors, strategic alliances betweenus and third parties, general market fluctuations and other events and factors.Changes in earnings estimates made by brokerage firms and industry analysts relatingto the markets in which we do business, or relating to us specifically, have inthe past resulted in, and could in the future result in, an immediate andadverse effect on the market price of the common stock. Even though our stockis quoted on the NASDAQ Global Market, our stock has had and may continue tohave low trading volume and high volatility. The historically low tradingvolume 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 therelatively low trading volume of our stock, our stockholders may havedifficulty selling our common stock. In addition, the stock market in general,and the NASDAQ Global Market and the market for technology and small market capcompanies in particular, has experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performanceof those companies. Further, the market prices of securities of technologycompanies have been particularly volatile. These broad market and industryfactors may materially harm the market price of our common stock, regardless ofour operating performance.

 

***Our certificate of incorporation and bylaws as well asDelaware law contain provisions that could discourage transactions resulting ina change in control, which may negatively affect the market price of our commonstock.***

*** ***

Our certificate of incorporation, our bylaws andDelaware law contain provisions that might enable our management to discourage,delay or prevent a change in control. In addition, these provisions could limitthe price that investors would be willing to pay in the future for shares ofour common stock.

 

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**Item6.  Exhibits**

 

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

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                  |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Certificate of  Incorporation of the Company, previously filed with the SEC as  Exhibit 3.1 to the Company’s Registration Statement on Form SB-2,  specifically included in Amendment No. 1 to such Registration Statement  filed with the SEC on July 3, 1996 (File No. 333-4974-LA), which is  incorporated herein by reference. |
| 3.2             |       | Bylaws of the  Company, previously filed with the SEC as Exhibit 3.1 to the Company’s  Quarterly Report on Form 10-Q for the period ended September 30,  1999, filed with the SEC on November 12, 1999, which is incorporated  herein by reference.                                                                                     |
| 31.1            |       | Certification of  Chief Executive Officer of SRS Labs, Inc., pursuant to Rule 13a-14  of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 31.2            |       | Certification of  Chief Financial Officer of SRS Labs, Inc., pursuant to Rule 13a-14  of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 32.1            |       | Certification of  Chief Executive Officer of SRS Labs, Inc., pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |
| 32.2            |       | Certification of  Chief Financial Officer of SRS Labs, Inc., pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                                    | SRS  LABS, INC., a Delaware corporation       |
|------------------------------------|----------------------------------------------------|
|                               |                                               |
| Date:  May 7,  2009 | By:                                                | /S/ THOMAS C.K. YUEN |
|                               | Thomas C.K. Yuen                                   |
|                               | Chairman of the  Board and Chief Executive Officer |
|                               | (Principal  Executive Officer)                     |
| ** **                         | ** **                                         |
| ** **                         | ** **                                         |
| Date:  May 7,  2009 | By:                                                | /S/ ULRICH GOTTSCHLING |
|                               | Ulrich  Gottschling                                |
|                               | Chief Financial  Officer                           |
|                               | (Principal Financial  and Accounting Officer)      |

 

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**EXHIBIT INDEX**

 

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

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                  |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Certificate of  Incorporation of the Company, previously filed with the SEC as Exhibit 3.1  to the Company’s Registration Statement on Form SB-2, specifically  included in Amendment No. 1 to such Registration Statement filed with  the SEC on July 3, 1996 (File No. 333-4974-LA), which is  incorporated herein by reference. |
| 3.2             |       | Bylaws of the  Company, previously filed with the SEC as Exhibit 3.1 to the Company’s Quarterly  Report on Form 10-Q for the period ended September 30, 1999, filed  with the SEC on November 12, 1999, which is incorporated herein by  reference.                                                                                     |
| 31.1            |       | Certification of  Chief Executive Officer of SRS Labs, Inc., pursuant to Rule 13a-14  of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 31.2            |       | Certification of  Chief Financial Officer of SRS Labs, Inc., pursuant to Rule 13a-14  of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 32.1            |       | Certification of  Chief Executive Officer of SRS Labs, Inc., pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |
| 32.2            |       | Certification of  Chief Financial Officer of SRS Labs, Inc., pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |

 

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