1. Basis of Presentation and Summary of Significant Accounting Policies and Estimates
As used herein, the Company, SRS Labs, SRS, we, us, and our means SRS Labs, Inc., the parent company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative Office of SRS Labs, Inc. (a Chinese company), Shanghai Representative Office of SRS Labs, Inc. (a Chinese company) and SRS Labs Japan, KK (a Japanese company). The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the rules and regulations of the SEC for interim reporting. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations have been included.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations for presentation of interim financial information. Therefore, the unaudited condensed interim consolidated financial statements should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2010. Current and future financial statements may not be directly comparable to the Companys historical financial statements. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the full year. The condensed consolidated balance sheet as of December 31, 2010 was derived from the Companys audited consolidated financial statements as of December 31, 2010.
The preparation of financial statements in accordance with GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from those estimates. See our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K as of and for the year ended December 31, 2010 for an additional discussion of the significant accounting policies and estimates used in the preparation of our financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of interest rates. Cash and cash equivalents generally consist of cash, money market funds and instruments with original maturities of three months or less when purchased. The Company places its cash in banks and its cash and cash equivalents and money market funds at certain financial institutions in excess of amounts insured by federal agencies. The Company does not believe that it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not experienced any losses on its cash and cash equivalents.
Short-term and Long-term Investments
Short-term investments consist of certificates of deposit and U.S. treasury bills that mature within one year. Long-term investments consist of certificates of deposit of approximately $6.5 million that mature beyond one year and an investment in a long-term fund, which invests in foreign start-up companies, principally based in China. We have a total capital commitment up to $1.0 million in connection with this fund, and our investment in this fund as of September 30, 2011 totaled $443,000. All of the certificates of deposit are fully insured by the Federal Deposit Insurance Corporation (FDIC). The Company has not experienced any losses on its short and long-term investments.
The Companys investments in certificates of deposit and U.S. treasury bills are classified as held to maturity debt securities, and accordingly, are stated at amortized cost. The Companys investment in the foreign start-up companies fund is classified as a cost method investment, as there is no readily determinable market value and the Company does not convey significant influence or control.
Our revenues consist primarily of royalties generated from the license of SRS Labs audio and voice technologies. Our license agreements typically have multi-year or automatic renewal terms, and either require: (a) per-unit royalty payments for all products implementing our technologies and/or solutions; (b) fixed annual or quarterly royalty payments; or (c) a minimum fixed annual or quarterly royalty payment, which allows the licensee to ship up to a pre-determined number of units during the specified time period, with additional per-unit royalty payments thereafter. The majority of our license agreements are per-unit royalty arrangements, which are generally reported by the licensee in the quarter following shipment of the consumer electronics devices and are therefore typically recognized by us following shipment of the devices by the original equipment manufacturer (OEM). Revenues associated with fixed royalty payments are recognized ratably over the term of the license agreement. We also sell some of our products and solutions via the Internet. Revenues associated with those sales are recognized upon shipment. The Company may offer customer support or license support programs in the form of assisting the licensee with implementing the Companys technology into the manufactured products of the licensee to ensure that the licensee receives the maximum benefit from the Companys technology. Such customer support is not contractually mandated and is generally provided on a discretionary basis to assist the customer and to improve customer relations. Such customer support generally does not extend past the time in which the licensed technology is placed in service or implemented in any given device by the licensee. In this regard, support services occur during a finite period prior to the sale or revenue recognition.
For the three months ended September 30, 2011 and 2010, one customer, Samsung, accounted for approximately 35% and 33%, respectively, of our revenues. For the nine months ended September 30, 2011 and 2010, one customer, Samsung, accounted for approximately 40% and 37%, respectively, of our revenues. The revenue from Samsung is derived from multiple technology license agreements with various divisions of Samsung.
The Company currently has net operating loss carryforwards and tax credits to offset income taxes. Due to our licensees being located in foreign countries, they may be obligated to withhold foreign taxes based upon local and country requirements of the taxing authority.