UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period          to
Commission File Number 0-21123

 

SRS LABS, INC.

(Exact name of registrant as specified in its charter)

 

2909 Daimler Street, Santa Ana, California 92705

(Address of principal executive offices) (Zip Code)

(949) 442-1070

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer  o

Accelerated filer  o

Non-accelerated filer  x

 

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

As of October 25, 2006, 15,819,684 of the issuer’s common stock, par value $.001 per share, were outstanding; of this amount, 674,098 shares of the common stock were held as treasury shares.

SRS LABS, INC.

Form 10-Q
For the Period Ended September 30, 2006
Index

PART I-FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 (Unaudited)
		Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three and nine months ended September 30, 2006 (Unaudited)
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (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.A.		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.		Exhibits
SIGNATURES

 

2

FORWARD-LOOKING INFORMATION

As used herein, the “Company,” “SRS Labs,” “we,” “us,” or “our” means SRS Labs, Inc., its wholly-owned subsidiary SRSWOWcast, Inc.,  and for the applicable periods, its formerly owned subsidiary ValenceTech Limited (including its direct and indirect wholly-owned subsidiaries, collectively “Valence”) and the former joint venture with Coming Home Studios LLC, CHS/SRS LLC.

Some of the statements in this Quarterly Report on Form 10-Q contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events, which involve risks and uncertainties. All statements other than statements of historical facts included in this Quarterly Report relating to expectation of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Quarterly Report involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A in our most recently filed Form 10-K and elsewhere in this Form 10-Q, including, but not limited to, the acceptance of new SRS Labs products and technologies; the import of competitive products and pricing; the timely development and release of technologies by the Company; general business and economic conditions, especially in Asia; product and customer concentration in our business; our high dependence on the consumer electronics market, which is characterized by short product life cycles, fluctuations in demand and seasonality; the risk of widespread illness; our dependence on growth in emerging markets; the length and unpredictable nature of our sales cycle; our ability to protect our products through patents and other intellectual property rights; our dependence on key personnel; the volatility of the price of our common stock; provisions that could discourage transactions resulting in a change in control contained in our certificate of incorporation and bylaws as well as Delaware law; competition we face from companies with greater brand recognition and resources; pricing pressures on the consumer electronics product manufacturers; adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and other factors identified from time to time in our filings with the Securities and Exchange Commission.

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

3

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SRS LABS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30, 2006			December 31, 2005
		(unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	26,126,915		$	8,752,339
Accounts receivable, net		2,289,830			1,886,780
Inventories, net		158,253			80,421
Prepaid expenses and other current assets		910,902			522,426
Investments available for sale		1,993,279			—
Assets held for sale		—			1,859,127
Total Current Assets		31,479,179			13,101,093
Investments available for sale		5,211,295			17,077,170
Furniture, fixtures and equipment, net		441,453			425,288
Intangible assets, net		2,096,507			2,015,605
Deferred income taxes		386,412			380,386
Long term assets held for sale		—			2,065,123
Total Assets		$	39,614,846		$	35,064,665
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	898,289		$	741,811
Accrued liabilities		1,113,929			801,898
Deferred revenue		440,861			537,636
Liabilities related to assets held for sale		—			2,170,701
Total Current Liabilities		2,453,079			4,252,046
Commitments and contingencies (Note 7)
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; 15,657,751 and 14,953,690 shares issued; and 14,983,653 and 14,279,592 shares outstanding at September 30, 2006 and December 31, 2005, respectively		15,659			14,955
Additional paid-in capital		66,239,460			63,574,518
Accumulated other comprehensive loss		(295,131		)	(496,021		)
Accumulated deficit		(25,794,776		)	(29,277,388		)
Treasury stock at cost, 674,098 shares at September 30, 2006 and December 31, 2005		(3,003,445		)	(3,003,445		)
Total Stockholders’ Equity		37,161,767			30,812,619
Total Liabilities and Stockholders’ Equity		$	39,614,846		$	35,064,665

 

See accompanying notes to the condensed consolidated financial statements

4

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SRS LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Revenues		$	4,910,203		$	3,640,134		$	13,505,710		$	10,444,206
Cost of sales		43,998			39,804			127,103			190,987
Gross margin		4,866,205			3,600,330			13,378,607			10,253,219
Operating expenses:
Sales and marketing		1,743,660			1,087,025			5,494,445			3,295,949
Research and development		628,227			584,008			1,914,255			1,708,000
General and administrative		1,277,601			1,198,433			4,272,598			3,898,785
Total operating expenses		3,649,488			2,869,466			11,681,298			8,902,734
Income from continuing operations		1,216,717			730,864			1,697,309			1,350,485
Other income, net		291,236			176,707			694,954			486,318
Income from continuing operations before income tax expense		1,507,953			907,571			2,392,263			1,836,803
Income tax expense		231,620			200,420			558,788			487,950
Income from continuing operations		1,276,333			707,151			1,833,475			1,348,853
Discontinued operations (Note 9):
Income (loss) from discontinued operations before income tax expense (benefit)		859,843			(123,490		)	1,054,095			(24,257		)
Gain on disposal		260,763			—			632,058			—
Income tax expense (benefit)		6,320			(120,533		)	37,016			(114,792		)
Income (loss) from discontinued operations		1,114,286			(2,957		)	1,649,137			90,535
Net income		$	2,390,619		$	704,194		$	3,482,612		$	1,439,388
Income from continuing operations per common share:
Basic		$	0.09		$	0.05		$	0.13		$	0.10
Diluted		$	0.08		$	0.05		$	0.11		$	0.09
Income from discontinued operations per common share:
Basic		$	0.07		$	0.00		$	0.11		$	0.01
Diluted		$	0.07		$	0.00		$	0.10		$	0.01
Net income per common share:
Basic		$	0.16		$	0.05		$	0.24		$	0.10
Diluted		$	0.15		$	0.05		$	0.21		$	0.10
Weighted average shares used in the calculation of net income per common share:
Basic		14,939,806			14,094,690			14,663,767			14,076,833
Diluted		16,479,112			15,300,803			16,428,894			15,070,362

 

See accompanying notes to the condensed consolidated financial statements

5

SRS LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (Unaudited)

		Common Stock					Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Treasury						Comprehensive Income for the Period
		Shares		Amount			Capital			(Loss) Income			Deficit			Stock			Total			Ended
BALANCE, Dec. 31, 2005		14,279,592		$	14,955		$	63,574,518		$	(496,021	)	$	(29,277,388	)	$	(3,003,445	)	$	30,812,619
Proceeds from exercise of stock options		230,370		230			1,014,988			—			—			—			1,015,218
Stock based compensation		—		—			399,738			—			—			—			399,738
Unrealized loss on investments available for sale, net of tax		—		—			—			(58,282		)	—			—			(58,282		)	(58,282		)
Net income		—		—			—			—			162,575			—			162,575			162,575
BALANCE, March 31, 2006		14,509,962		$	15,185		$	64,989,244		$	(554,303	)	$	(29,114,813	)	$	(3,003,445	)	$	32,331,868		$	104,293
Proceeds from exercise of stock options		400,759		401			1,203,311			—			—			—			1,203,712
Stock based compensation		—		—			388,805			—			—			—			388,805
Unrealized gain on investments available for sale, net of tax		—		—			—			48,257			—			—			48,257			48,257
Net income		—		—			—			—			929,418			—			929,418			929,418
BALANCE, June 30, 2006		14,910,721		$	15,586		$	66,581,360		$	(506,046	)	$	(28,185,395	)	$	(3,003,445	)	$	34,902,060		$	1,081,968
Proceeds from exercise of stock options		72,932		73			237,747			—			—			—			237,820
Proceeds from exercise of Valence mgmt stock options (Note 9)		357,625		358			1,151,177			—			—			—			1,151,535
Purchase of Treasury stock		—		—			—			—			—			(2,114,586		)	(2,114,586		)
Cancel Treasury stock		(357,625	)	(358		)	(2,114,228		)	—			—			2,114,586			—
Stock based compensation		—		—			383,404			—			—			—			383,404
Currency Translation Adjustment		—		—			—			81,303			—			—			81,303			81,303
Unrealized gain on investments available for sale, net of tax		—		—			—			129,612			—			—			129,612			129,612
Net income		—		—			—			—			2,390,619			—			2,390,619			2,390,619
BALANCE, September 30, 2006		14,983,653		$	15,659		$	66,239,460		$	(295,131	)	$	(25,794,776	)	$	(3,003,445	)	$	37,161,767		$	3,683,502

 

See accompanying notes to the condensed consolidated financial statements

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SRS LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended September 30,
		2006			2005
Cash Flows From Operating Activities:
Net income		$	3,482,612		$	1,439,388
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		549,259			628,175
Provision for doubtful accounts		(1,588		)	15,906
Deferred taxes		(6,026		)	—
Accretion of discount on investments available for sale		(1,565		)	(1,693		)
Stock-based compensation expense		1,070,804			32,619
Loss on disposition of furniture, fixtures and equipment		1,582			1,417
Equity in income of investee		—			(91,096		)
Gain on sale of discontinued operations		(632,058		)	—
Changes in operating assets and liabilities:
Accounts receivable		(401,462		)	315,621
Inventories		(77,832		)	(116,315		)
Prepaid expenses and other current assets		(388,476		)	152,680
Accounts payable		156,478			88,615
Accrued liabilities		312,031			966,741
Deferred revenue		(96,775		)	(86,838		)
Income taxes payable		—			97,325
Net cash used by operating activities of discontinued operations		(1,922,668		)	(1,172,702		)
Net cash provided by operating activities		2,044,316			2,269,843
Cash Flows From Investing Activities:
Purchase of furniture, fixtures and equipment		(204,790		)	(87,190		)
Proceeds from sale of equipment		—			2,300
Capitalized production costs		—			(601,273		)
Expenditures related to patents and intangible assets		(443,118		)	(341,833		)
Proceeds from sale of investments available for sale		9,993,748			—
Proceeds from the sale of Valence		4,300,000			—
Proceeds from the sale of equity interest in CHS/SRS LLC		371,295			—
Net cash used in investing activities of discontinued operations		(180,216		)	(78,546		)
Net cash provided by (used in) investing activities		13,836,919			(1,106,542		)
Cash Flows From Financing Activities:
Purchase of treasury stock		(2,114,586		)	(1,059,590		)
Proceeds from exercise of stock options		3,607,927			704,710
Net cash provided by (used in) financing activities		1,493,341			(354,880		)
Net Increase in Cash and Cash Equivalents		17,374,576			808,421
Cash and Cash Equivalents, Beginning of Period		8,752,339			7,011,912
Cash and Cash Equivalents, End of Period		$	26,126,915		$	7,820,333
Supplemental Disclosure of Cash Flow Information:
Cash paid for Income taxes		$	506,010		$	546,847
Supplemental Disclosure of Non-Cash Investing Activities:
Unrealized gain (loss) on investments, net		$	33,247		$	(194,890	)

 

See accompanying notes to the condensed consolidated financial statements

7

SRS LABS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.             Basis of Presentation and Summary of Significant Accounting Policies and Estimates

As used herein, the “Company,” “SRS Labs,” “we,” “us,” or “our” means SRS Labs, Inc. and its wholly-owned subsidiary SRSWOWcast, Inc (“SRSWOWcast”), and, for the applicable periods, its formerly owned subsidiary ValenceTech Limited (including its direct and indirect wholly-owned subsidiaries, collectively “Valence”) and the former joint venture with Coming Home Studios LLC, CHS/SRS LLC. 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 (“generally accepted accounting principles”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations have been included. Certain amounts included in the accompanying prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation. All material inter-company accounts and transactions have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations for presentation of interim financial information. Therefore, the condensed interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Current and future financial statements may not be directly comparable to the Company’s historical financial statements. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the full year.

On February 23, 2006, the Board of Directors of the Company (the “Board of Directors” or the “Board”) approved a plan to sell Valence in order to focus increased management attention and financial resources on its licensing business. On July 14, 2006, the Company entered into a definitive Sale and Purchase Agreement to sell Valence to Noblehigh Enterprises Inc. (“Noblehigh”). On September 29, 2006, the Company completed the sale of Valence to Noblehigh. See Note 9.

Additionally, on February 23, 2006, the Board authorized management to take all reasonable steps to divest the Company’s entire equity interest in the CHS/SRS LLC joint venture (the “Joint Venture”) to produce and distribute nine concert videos featuring our Circle Surround Technology. On June 30, 2006 the Company completed the sale of its interest in the Joint Venture to Coming Home Studios, LLC (“CHS”) in exchange for $200,000, the rights to all cash assets of the Joint Venture, and a promissory note in the amount of $175,000. See Note 9.

As a result of our decisions to sell Valence and our entire equity interest in the joint venture, we have accounted for the semiconductor business segment and the joint venture as discontinued operations in the accompanying condensed consolidated financial statements. We have reclassified prior periods to conform to the current period presentation.

Estimates

The preparation of financial statements in accordance with generally accepted accounting principles 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. Actual results could differ materially from those estimates. See the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005 for an additional discussion of the significant accounting policies and estimates used in the preparation of our financial statements.

2.             Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite service period. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which generally resulted in an immaterial amount of compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met. The pro forma impact from recognition of the estimated fair value of stock options granted to employees has been previously disclosed in our footnotes as required under previous accounting rules.

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Effective for the first quarter of fiscal 2006, we adopted SFAS 123R using the modified prospective method, which requires us to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS 123R.

The fair value concepts were not changed significantly in SFAS 123R; however, in adopting SFAS 123R, companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, we are continuing to use both the Black-Scholes-Merton (“BSM”) option-pricing formula and straight-line amortization of compensation expense over the requisite service period of the grant. We will reconsider use of this model if additional information becomes available in the future that indicates another model would be more appropriate for us, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Under SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”), we were not required to estimate forfeitures in our expense calculation for the stock compensation pro forma footnote disclosure; however, SFAS 123R requires an estimate of forfeitures and upon adoption we changed our methodology to include an estimate of forfeitures. The adoption of SFAS 123R had no effect on cash flows from financing activities.

The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of SFAS 123 as of January 1, 2005 to options granted under the Company’s stock option plans. For purposes of this pro forma disclosure, the fair value of the options is estimated using a BSM option-pricing formula and amortized on a straight-line basis to expense over the options’ vesting period:

		Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income - as reported		$	704,194		$	1,439,388
Add: Share-based employee compensation expense included in net income, net of related tax effects - as reported		4,829			19,571
Deduct: Share-based employee compensation expense determined under fair value method, net of related tax effects - pro forma		(273,860		)	(854,137		)
Net income - pro forma		$	435,163		$	604,822
Basic - as reported		$	0.05		$	0.10
Basic - pro forma		$	0.03		$	0.04
Diluted - as reported		$	0.05		$	0.10
Diluted - pro forma		$	0.03		$	0.04

 

Share Option Plans

The Company has in effect several share-based plans under which non-qualified and incentive stock options have been granted to employees, non-employees and board members. The following equity compensation plans have also been approved by our stockholders: the SRS Labs, Inc. 2006 Stock Incentive Plan (the “2006 Plan”), the SRS Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan (the “1996 Plan”), and the SRS Labs, Inc. Amended and Restated 1996 Non-employee Directors’ Stock Option Plan (the “Non-employee Directors Plan”). The Board of Directors determines eligibility, vesting schedules and exercise prices for options granted under the plans. We issue new shares to satisfy stock option exercises under our share-based plans. No income tax benefit was realized from activity in our share-based plans during the three and nine months ended fiscal 2006 and 2005.

A summary of the shares reserved for grant and options available for grant under each plan is as follows:

 

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Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Option awards generally have a term of 10 years and vest and become exercisable over a four-year service period.

The fair value of each share-based award is estimated on the grant date using the BSM option-pricing formula. Expected volatilities are based on the historical volatility of the Company’s stock price. The expected term of options granted subsequent to the adoption of SFAS 123R is derived using the simplified method as defined in the SEC’s Staff Accounting Bulletin 107, “Implementation of FASB 123R.” The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury interest rates in effect at the time of grant. The fair value of options granted was estimated using the following weighted-average assumptions:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2006 *		2005		2006		2005
Expected term (in years)		—		6.25		6.25		6.25
Expected volatility		—		55	%	57	%	60	%
Risk-free interest rate		—		4.2	%	4.9	%	4.0	%
Dividend yield		—		0.00	%	0.00	%	0.00	%

 

* Note: there were no options granted in the three months ended September 30, 2006.

Total compensation cost recognized in the three and nine months ending September 30, 2006 is as follows:

		Three Months			Nine Months
Continuing Operations:
Sales and Marketing		$	140,228		$	438,740
Research and Development		67,383			269,544
General and Administrative		175,793			362,520
Total compensation cost recognized in Continuing Operations		$	383,404		$	1,070,804
Total compensation cost recognized in Discontinued Operations		$	—		$	101,143
Total compensation cost recognized		$	383,404		$	1,171,947

 

A summary of option activity under the stock option plans and changes during the three and nine months ended September 30, 2006 is presented below:

				Weighted-Average
							Remaining		Aggregate
				Exercise			Contractual		Intrinsic
		Shares		Price			Term		Value
Outstanding, January 1, 2006		4,444,254		$	4.41
Granted		110,000		6.20
Cancelled/forfeited		(60,844	)	3.37
Exercised		(230,370	)	4.41
Outstanding, March 31, 2006		4,263,040		$	4.47		5.1		7,171,095
Granted		385,900		5.70
Cancelled/forfeited		(67,619	)	6.28
Exercised		(400,759	)	3.00
Outstanding, June 30, 2006		4,180,562		$	4.69		5.4		3,272,877
Granted		—		—
Cancelled/Forfeited		(491,070	)	5.36
Exercised		(430,557	)	3.23
Outstanding, September 30, 2006		3,258,935		$	4.79		5.0		$	5,039,586
Options exercisable, September 30, 2006		2,387,453		$	4.45		4.6		$	4,623,271

 

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A summary of the grant-date fair value and intrinsic value information is as follows:

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Weighted-average grant-date fair value per share		$	—		$	3.47		$	3.46		$	3.11
Intrinsic value of options exercised		$	1,138,340		$	223,288		$	2,493,367		$	426,131

 

A summary of the activity of the Company’s non-vested shares during the nine months ended September 30, 2006 is presented below:

				Weighted-Average					Remaining
							Remaining		Unrecognized
				Grant-Date			Years		Compensation
		Shares		Fair Value			To Vest		Cost
Nonvested outstanding at beginning of period		1,195,964		$	3.21
Granted		495,900		3.46
Vested		(577,868	)	3.34
Forfeited		(337,019	)	3.54
Nonvested outstanding at end of period		776,977		$	3.46		3.11		$	2,347,772

 

3.             Capitalization of Software Development Costs

Costs incurred in the research, design and development of software for sale to others as a separate product or embedded in a product and sold as part of the product as a whole are charged to expense until technological feasibility is established. Under SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” the Company capitalizes software purchased from third parties if the related software product under development has reached technological feasibility or if there are alternative future uses for the purchased software, provided that capitalized amounts will be realized over a period not exceeding five years. Costs incurred prior to the establishment of technological feasibility are charged to research and development expense.

Capitalized software as of September 30, 2006 and December 31, 2005 is as follows:

		September 30, 2006			December 31, 2005
Capitalized software		$	710,914		$	595,568
Accumulated amortization		(430,899		)	(309,990		)
Capitalized software, net		$	280,015		$	285,578

 

As of September 30, 2006, the weighted average useful life of the Company’s capitalized software is approximately 1.6 years. The following table shows the estimated amortization expense for those assets for the remaining three months of the current fiscal year end and each of the four succeeding fiscal years.

 

4.             Intangible Assets

On January 1, 2002, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” which, among other things, establishes new standards for goodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and identifiable intangibles to be evaluated for impairment on an annual basis.

In accordance with SFAS No. 142, all of our intangible assets that have definite lives are being amortized on a straight-line basis over their estimated useful lives and are evaluated at least annually to determine if fair value of the asset has decreased below its carrying value. At December 31, 2005, we performed our annual assessment and determined that no impairment existed.

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Intangible assets consist of the following:

 

Amortization periods range from three to ten years depending on the estimated useful life of the asset. Amortization expense consists of the following:

		Three months ended September 30,						Nine Months ended September 30,
		2006			2005			2006			2005
Patents		$	62,655		$	53,834		$	180,734		$	155,216
Other intangibles:
License agreements acquired in purchase of our subsidiary SRSWOWcast in February 2003		16,002			16,002			48,005			48,005
Poly Planar purchased technology		—			—			—			4,000
Capitalized software and hardware		48,269			32,746			133,477			94,249
Total intangible amortization expense		$	126,926		$	102,582		$	362,216		$	301,470

 

As of September 30, 2006, the weighted average useful life of the Company’s patents and intangible assets is approximately 2.5 years. The following table shows the estimated amortization expense for those assets for the remaining three months of the current fiscal year and each of the four succeeding fiscal years and thereafter:

 

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