Enveric Biosciences, Inc. - Quarter Report: 2002 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

OR

Commission File Number:   33-90532

SPATIALIZER AUDIO LABORATORIES, INC.

920 HAMPSHIRE ROAD, SUITE A-34
WESTLAKE VILLAGE, CALIFORNIA 91361

900 LAFAYETTE STREET, SUITE 710
SANTA CLARA, CALIFORNIA 95050

TELEPHONE NUMBER: (408) 296-0600

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:

As of November 7, 2002, there were 47,406,939 shares of the Registrant’s Common Stock outstanding.

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) NATURE OF BUSINESS

Spatializer Audio Laboratories, Inc. and subsidiaries (the “Company”, “our” and “we”) are in the business of developing and licensing technology.

Our wholly owned subsidiary Desper Products, Inc. (“DPI”) is in the business of developing proprietary advanced audio signal processing technologies and products for consumer electronics, entertainment, and multimedia computing.

Our wholly owned subsidiary, MultiDisc Technologies, Inc. (“MDT”) was in the business of developing scalable, modular compact disc (“CD”) and digital versatile disc (“DVD”) server technologies associated with a network based CD / DVD server for internet and intranet applications. Operations of MDT were discontinued in the fourth quarter of 1998. Our efforts to sell these assets, though continuing, have not been successful to date.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim consolidated financial statements of the Company are condensed and do not include some of the information necessary to obtain a complete understanding of the financial data. Management believes that all adjustments necessary for a fair presentation of results have been included in the unaudited consolidated Financial Statements for the interim periods presented. Operating results for the three-month and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. Accordingly, your attention is directed to footnote disclosures found in the December 31, 2001 Annual Report and particularly to Note 2 which includes a summary of significant accounting policies.

Basis of Consolidation

The consolidated financial statements include the accounts of Spatializer Audio Laboratories, Inc. and its wholly owned subsidiary, Desper Products, Inc. MultiDisc Technologies, Inc. has been presented as a discontinued operation. All significant intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

We accrue revenues based on licensee royalty reports, management estimates and reports from third parties. While management endeavors to minimize the use of estimates, any deviation from estimates utilized are adjusted in the subsequent quarter. Royalty income reported is based on the shipment of product incorporating the related technology by the original equipment manufacturer or foundries.

Intangible Assets

Intangible Assets consist primarily of patents. Cost directly attributable to patents, consisting primarily of legal and filing fees, are capitalized and amortized over the remaining life of the patent (which range from 4 to 16 years) using the straight-line method. In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, only intangible assets with definite lives are amortized. Non-amortized intangible assets are instead subject to annual impairment testing.

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Intangible assets consist of the following:

Estimated amortization expense for each of the next five years ended December 31, is as follows:

Research and Development Expenditures

We expense research and development expenditures as incurred.

(3) INCOME (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following table presents contingently issuable shares, options and warrants to purchase shares of common stock that were outstanding during the six month periods ended September 30, 2002 and 2001 which were not included in the computation of diluted loss per share because the impact would have been antidilutive or less than $0.01 per share:

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During the nine months ended September 30, 2002, 1,300,000 options were granted to officers and board members and 162,299 options had expired.

(4) COMPREHENSIVE INCOME (LOSS)

The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income (“SFAS 130”), in June 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. We adopted SFAS No. 130 on January 1, 1998. Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and all other events and circumstances from non-owner sources. Other comprehensive income (loss) includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. We did not have components of other comprehensive (loss) income during the six-month periods ended September 30, 2002 and 2001. As a result, comprehensive (loss) income is the same as the net income for the nine-month periods ended September 30, 2002 and 2001.

(5) SEGMENT REPORTING

The Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), in June 1997. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It replaces the “industry segment” concept of SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, with a “management approach” concept as to basis for identifying reportable segments. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. We adopted SFAS 131 in December 1997. At June 30, 2002, we have only one operating segment, DPI, the Company’s Audio Signal Processing business.

(6) MAJOR CUSTOMERS

A substantial portion of our licensing and royalty revenues are derived from four major customers. The following customers comprised greater than 10% of total revenues during the six months ended September 30, 2002 and 2001:

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(7) CONTINGENCIES

Legal

     In connection with the downsizing of the Company in 1998, a number of employees were terminated and have filed, on various dates, employment and compensation related claims with California State labor authorities, all but two of which claims have been settled. Two former officers and employees of MDT initiated proceedings before the Labor Commissioner in 2000 seeking amounts allegedly due (aggregating approximately $800,000) under their employment agreements, which claims, if resolved in favor of the claimants, could be material to the financial statements of the Company. The Labor Commissioner has postponed those proceedings. In that action, the claimants filed a motion to strike the MDT complaint under the California “anti-Slapp” legislation. The Court rejected that motion and the litigation is in the discovery stages. Separately, MDT initiated litigation in the Superior Court, Orange County seeking declaratory relief to bar the labor claims, as well as return of intellectual property and unspecified damages for breaches of the former officers’ and employees’ employment agreements. These employees, however, have filed for personal bankruptcy and as a result, the claims became inactive. At December 2001, bankruptcy for one such employee had been dismissed and that proceeding could be reactivated. Should further action be taken by the ex-employees in this matter, management does not believe that the final result would have a material impact on its financial condition.

     We also anticipate that, from time to time, we may be named as a party to other legal proceedings that may arise in the ordinary course of our business.

(8) SALE OF PREFERRED STOCK

     In the December 1999, $895,000 in short term loan advances from officers, directors and their affiliates and certain other securities holders, and accrued interest of $134,647, were restructured into the $1,000,000 in new Series B Preferred Stock. The Series B Preferred Stock, and any dividends therefrom not converted into cash, are convertible commencing in 2001 into restricted Common Stock at a 10% discount, based on the 10 day average closing bid price prior to the conversion, but subject to a minimum conversion of $.56 per share and a maximum of $1.12 per share. We have a three year option to redeem any Series B Preferred Stock, not sooner converted, in whole or in part, in cash.

(9) DISCONTINUED OPERATIONS

In September, 1998, the Board of Directors approved a plan to refocus corporate activities on our core audio business, Desper Products, Inc. In conjunction to this strategic refocusing, we permanently suspended operations of MDT and placed the business and its related patent portfolio up for sale. There have been no material operating or terminating expenses of MDT since 1998.

(10) NOTES PAYABLE TO RELATED PARTIES

In June, 2001, we repaid Notes Payable to Related Parties of $225,000 plus accrued interest of approximately $33,000.

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Item 2. Management’s discussion and analysis of financial condition and results of operations

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our Board of Directors and Audit Committee, we have identified three accounting policies that we believe are key to an understanding of our financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.

The first critical accounting policy relates to revenue recognition. We recognize revenue from product sales upon shipment to the customer. License revenues are recognized when earned, in accordance with the contractual provisions. Royalty revenues are recognized upon shipment of products incorporating the related technology by the original equipment manufacturers (OEMs) and foundries.

The second critical accounting policy relates to research and development expenses. We expense all research and development expenses as incurred. Costs incurred to establish the technological feasibility of our algorithms (which is the primary component of our licensing) is expensed as incurred and included in Research and Development expenses. Such algorithms are refined based on customer requirements and licensed for inclusion in the customer’s specific product. There are no production costs to capitalize as defined in Statement on Financial Accounting Standards No. 86.

The third critical accounting policy relates to intangible assets. Our intangible assets consist primarily of patents. We capitalize all costs directly attributable to patents, consisting primarily of legal and filing fees, and amortize such costs over the remaining life of the patent (which range from 4 to 16 years) using the straight-line method. In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, only intangible assets with definite lives are amortized. Non-amortized intangible assets are instead subject to annual impairment testing.

Results of Operations

Revenues

     Revenue increased to $481,000 in the three months ended September 30, 2002 from $303,000 in the comparable period last year, an increase of 59%. Revenues for the nine-months ended September 30, 2002 were $1,392,000 compared to revenues of $1,215,000 in the comparable nine-month period last year, an increase of 15%.

     The increase in the revenues reported in the third quarter compared to the comparable period last year resulted primarily from downward revenue adjustments made in the third quarter of 2001 to conform estimated revenues to actual revenues. These adjustments resulted from changes in the reporting procedures from a chip foundry to two of the Company’s Asian customers and the resulting delays in reports from those customers to the Company during the transition period. No such adjustment was required in the third quarter of 2002. Revenue in 2002 was also impacted by the continued overall softness in the PC market and the uneven sales throughout the consumer electronics market. Revenues for the nine months ended September 30, 2002 increased due to the addition of three new accounts in 2002, as compared to the prior year, partially offset by the uneven business performance in the PC and consumer electronics markets noted above.

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Gross Profit

     Gross profit increased to $443,000 (92% of revenue) in the three months ended September 30, 2002 from $290,000 (96% of revenue) in the comparable period last year, an increase of 53%. Gross profit for the nine-months ended September 30, 2002 was $1,286,000 (92% of revenue) compared to $1,134,000 (93% of revenue) in the comparable period last year. The decrease in gross margin results from a greater mix of foreign revenues, for which we pay a sales commission, compared to domestic revenues, for which no commission applies.

Operating Expenses

     Operating expenses decreased to $432,000 (90% of revenue) in the three months ended September 30, 2002 from $469,000 (155% of revenue) in the comparable period last year, a decrease of 8%. Operating expenses in the nine-months ended September 30, 2002 decreased to $1,249,000 (90% of revenue) from $1,417,000 (117% of revenue) in the comparable period last year, a decrease of 12%. The decrease in operating expenses for the three and nine-months ended September 30, 2002 result primarily from high research and development expenses in Q2 and Q3 2001, which were unusually high. At that time, we reported that we had stepped up our engineering effort and our use of outside consultants to move several projects closer to completion. These projects were completed in 2001 and research and development have returned to normalized levels over the past several quarters.

General and Administrative

     General and administrative expenses increased to $212,000 (44% of revenue) in the three months ended September 30, 2002 from $195,000 (64% of revenue) in the comparable period last year, an increase of 9%. General and administrative expenses decreased to $530,000 (38% of revenue) in the nine-months ended September 30, 2002 from $553,000 (46% of revenue) in the comparable period last year, a decrease of 4%. The increase in such expenses in the three months ended September 30, 2002 result from legal , accounting and printing costs associated with preparing Form S-1 during the period. The decrease in general and administrative expense for the nine month period result from the discontinuation of use of an outside investor relations consultant in May 2001, partially offset by costs of the Form S-1 previously discussed.

Research and Development

     Research and Development expenses decreased to $98,000 (20% of revenue) in the three months ended September 30, 2002 from $173,000 (57% of revenue) in the comparable period last year, a decrease of 43%. Research and Development expenses decreased to $341,000 (24% of revenue) in the nine-months ended September 30, 2002 from $534,000 (44% of revenue) in the comparable period last year, a decrease of 36%. The decrease in research and development in the three and nine month periods result from the expansion of the audio engineering staff and increased use of consultants to complete specialized projects during the second quarter of 2001 and an unfilled position in the third quarter of 2002.

     Research and Development activities comprised the Company’s continued efforts to identify, validate, and develop new products at Desper Products Inc. Specific engineering efforts were directed toward productizing new audio enhancement technology, including Spatializer PCE and Spatializer Natural Headphone, porting support of Spatializer N-2-2 Ultra™ to current and potential licensees during the quarter, developing products to support licensing arrangements which have not yet been announced, and developing new products for future introduction and licensing.

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Sales and Marketing

     Sales and marketing expenses increased to $122,000 (25% of revenue) in the three months ended September 30, 2002 from $101,000 (33% of revenue) in the comparable period last year, an increase of 21%. Sales and marketing expenses increased to $379,000 (27% of revenue) in the nine-months ended September 30, 2002 from $330,000 (27% of revenue) in the comparable period last year, an increase of 15%. The increase is attributed to expanded sales travel and the hiring of a senior sales and marketing executive during the period ending September 30, 2002.

Other Income and Expense

     Income and other expense consist primarily of interest earned on short-term investments and interest paid on related party debt. Net other expense decreased to $228 from net other income of $4,407 in the prior year comparable period. Net other income in the nine- months ended September 30, 2002 decreased to $714 from $17,489 in the comparable period last year. The decrease is due to significantly lower short-term interest rates earned on our cash investments. This was partially offset by the pay-off of $225,000 in term loans to Related Parties in May, 2001.

Net Income (Loss)

     The Company reported net income for the quarter of $11,000, $0.00 basic and diluted per share, compared with a net loss of $175,000, $0.00 basic and diluted per share, in the comparable period last year. Net income for the nine-months ended September 30, 2002 was $36,000, ($0.00) basic and diluted per share, compared to net loss of $267,000, ($0.01) basic and diluted per share, in the comparable nine-month period last year. The net income for the three and nine month periods are primarily the result of the increase in revenue and economies and reductions realized in operating expenses.

Liquidity and Capital Resources

     At September 30, 2002, the Company had $917,000 in cash and cash equivalents as compared to $869,000 at December 31, 2001. The increase in cash and cash equivalents is derived from general operating activities. The Company had working capital of $1,115,000 at September 30, 2002 as compared with a working capital of $1,103,000 at December 31, 2001. The Company’s future cash flows are expected to come primarily from audio signal processing licensing, Foundry and Original Equipment Manufacturers’ (“OEM”) royalties, debt issuances, common and/or preferred stock issuances including warrant and option exercises or through venture and/or strategic investors.

     Like other operating enterprises, the events of September 11, 2001 in the United States brought a degree of uncertainty to our operations and hindered our ability to plan and meet with our contractual partners outside the United States in this dynamic environment. The operations of our business, and those of our competitors, may also be impacted by the continued trend in the semiconductor industry to offer free, but minimal audio solutions to certain product classes to maintain and attract market share. This challenges our ability to convert business opportunities to licensing agreements in those segments that allow us to maintain or rapidly increase revenue. As a result, the Company must develop and license its products and software solutions in a market that treats some audio products, including those of our competitors, on a commodity basis in those cases where the OEM product is considered a commodity product. While our software applications deliver what we and most manufacturers who listen to it believe is a significantly superior audio experience, the competitive market forces that pressure manufacturers to reduce their costs may create some resistance to new technology adoption or use. In addition, certain of our competitors appear to be pursuing a business plan that disregards commercially reasonable pricing to achieve a larger market penetration even if the penetration will not provide for viable margins or returns. The Company has responded by offering additional products targeted to each price/quality segment of the market and continues to aggressively pursue new opportunities in emerging product categories and complements to our existing core business. In addition, our products have been positioned as a means for manufacturers to save money while delivering an enhanced audio experience. Nevertheless, these market conditions and competitive forces make it more challenging for the Company, and its rational commercial competitors, to enhance their operating results.

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     We have a related party obligation of $112,500, which is due upon demand. We repaid related party obligations of $225,000 plus accrued interest of approximately $30,000, which were convertible into Common Stock at our or the Lender’s option in June 2001. The Company owed a total of $112,500 to related parties on December 31, 2001.

     In December 1999, we completed a set of financial transactions (the “December Transactions”) with certain existing holders of our equity and debt and with new institutional investors. The December Transactions included the private placement of 1,884,254 additional shares of our Common Stock ($1.05 million in new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000 shares of Common Stock exercisable for three years at an exercise price of $.67 per share), the cancellation of 500,000 warrants to acquire Common Stock issued in that earlier financing, the conversion of $1 million of short term debt into a new Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”) and the conversion of $225,000 of secured debt into secured convertible debt.

     In the December Transactions, $895,000 in short term loan advances from officers, directors and their affiliates and certain other securities holders, and accrued interest of $134,647, were restructured into the $1,000,000 in new Series B Preferred Stock. The Series B Preferred Stock, and any dividends there from not converted into cash, are convertible commencing in 2001 into restricted Common Stock at a 10% discount, based on the 10 day average closing bid price prior to the conversion, but subject to a minimum conversion of $.56 per share and a maximum of $1.12 per share. We have a three year option to redeem any Series B Preferred Stock, not sooner converted, in whole or in part, in cash.

     In the December Transactions, $225,000 of secured debt, including accrued interest, was converted into secured long term convertible debt. The long term debt is held by existing institutional investors and is secured by essentially all of our assets. The debt, and accrued interest, is convertible at our or the holder’s options into registered Common Stock at a conversion price equal to the average 10 day closing bid price prior to conversion but subject to the same minimum and maximum conversion prices set for the Series B Preferred Stock.

     We have $75,000 in Net Liabilities of Discontinued Operation which represents primarily accrued legal fees and is estimated to be sufficient to pay such fees to address outstanding claims. We do not expect the final liability to be in excess of this balance.

     Funds generated by these financing activities as well as cash generated from our existing operations and customer base is expected to be sufficient for us to meet our operating obligations and the anticipated additional research and development for our audio technology business.

     The Company will also continue to consider and evaluate capital investment or business arrangements with financial or strategic participants or investors as such opportunities become available to the Company on terms that enhance shareholder value and support the Company’s business strategy.

     To the extent the Company maintains or exceeds its projected revenues and is not required to fund significant contingencies, it expects to continue to retain its current cash reserves and therefore, maintain its liquidity position at a consistent level both on a short-term and long-term basis. To the extent that the Company does not achieve current operating levels or is required to fund contingencies, it will be required to use some of its cash reserves and this could impact its longer term liquidity. In addition, we wish to achieve accelerated growth and to take advantage of the dynamic market forces in which we operate, rather than to be affected by them. To address these objectives, our Board of Directors has retained Neveric Capital, a San Francisco based investment banking firm, to identify and evaluate strategic opportunities. We expect them to explore alternatives to enhance shareholder value and support the Company’s growth and overall strategy.

Risk Factors; Forward-Looking Statements

     This report contains forward-looking statements regarding the Company’s future plans, objectives, and expected performance. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause our actual results to differ materially from those expressed in the forward-looking statements referred to above. These factors include, among others, the uncertainties in the semiconductor industry, the trend in electronics to offer audio products as a commodity product, cost and competitor pressures, the overall economic downturn and its impact on consumer buying and industrial innovation and planning and, in turn, on our business.

     We qualify any forward-looking statements entirely by these cautionary factors, and readers are cautioned not to place undue reliance on forward-looking statements.

     The words “believe,” “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “objective,” “seek,” “strive,” “might,” “seeks,” “likely result,” “build,” “grow,” “plan,” “goal,” “expand,” “position,” or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements.

     The forward-looking statements contained in this report only speak as of the date of this report. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statements to reflect any change in management’s expectations or any change in events, conditions or circumstances on which the forward-looking statements are based.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

     Not applicable.

Item 4. Controls and Procedures

     Within the 90-day period prior to the filing of this report, an evaluation was carried out by Henry Mandell, the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, Mr. Mandell concluded that these disclosure controls and procedures were effective and has set forth in this Item 4 information with respect to those controls and the reports thereon to the Board of Directors. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

     Appearing immediately following the Signatures section of this Quarterly Report there is a “Certification” of the CEO and the CFO. The Certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). This section of the Quarterly Report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certification and this information should be read in conjunction with the Section 302 Certification for a more complete understanding of the topics presented.

     Disclosure controls are the procedures that have been undertaken with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this Quarterly Report, is recorded and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. The controls are also designed to ensure that the information is accumulated from the relevant sources and properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

     The company’s management does not expect that our disclosure controls or other internal controls will prevent all errors or possibly improper activities or improper use of our assets. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, we are a small public company with significant resource constraints, and the benefits of controls must be considered in the context of the economic and personnel costs of developing and implementing those controls. Because of these limitations, no evaluation of controls can provide absolute assurance that all matters that would raise internal and disclosure control issues have been detected.

     As noted above, in accordance with SEC requirements, since the date of the controls evaluation to the date of this Quarterly Report, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     In connection with the downsizing of the Company in 1998, a number of employees were terminated and have filed, on various dates, employment and compensation related claims with California State labor authorities, all but two of which claims have been settled. Two former officers and employees of MDT initiated proceedings before the Labor Commissioner in 2000 seeking amounts allegedly due (aggregating approximately $800,000) under their employment agreements, which claims, if resolved in favor of the claimants, could be material to the financial statements of the Company. The Labor Commissioner has postponed those proceedings. In that action, the claimants filed a motion to strike the MDT complaint under the California “anti-Slapp” legislation. The Court rejected that motion and the litigation is in the discovery stages. Separately, MDT initiated litigation in the Superior Court, Orange County seeking declaratory relief to bar the labor claims, as well as return of intellectual property and unspecified damages for breaches of the former officers’ and employees’ employment agreements. These employees, however, have filed for personal bankruptcy and as a result, the claims became inactive. At December 2001, bankruptcy for one such employee had been dismissed and that proceeding could be reactivated. Should further action be taken by the ex-employees in this matter, management does not believe that the final result would have a material impact on its financial condition.

     We also anticipate that, from time to time, we may be named as a party to other legal proceedings that may arise in the ordinary course of our business.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

None

Reports on Form 8-K — None.

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SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 12, 2002

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CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Henry R. Mandell, the Chief Executive Officer and Chief Financial Officer of Spatializer Audio Laboratories, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Spatializer Audio Laboratories, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 11, 2002

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