In case nobody saw it...here's the report..
May 15, 1998
SPATIALIZER AUDIO LABORATORIES INC (SPAZ)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the financial condition and results of operations of Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") for the three-month period ended March 31, 1998, compared with the three-month period ended March 31, 1997
RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998, COMPARED TO THE THREE-MONTH
PERIOD ENDED MARCH 31, 1997
Revenues
Revenues increased from $518,000 for the three-month period ended March 31, 1997 to $523,000 for the current period in 1998, an increase of 1%. Revenues include royalties pertaining to the licensing of Spatializer(R) audio signal processing designs and sales of professional recording systems and consumer products.
The increase in revenues is attributed primarily to an increase in recurring royalties for the licensing of the Spatializer technologies and on chip foundry sales incorporating the usage of Spatializer(R) advanced audio solutions by the Company's licensees.
Royalty revenue in the current quarter represented virtually all of the Company's revenue while comparable period sales last year included $121,000 of product sales, which have been virtually discontinued. The Company made the decision late last year to discontinue sales of such products in order to focus its efforts on licensing and software-only products.
Gross profit increased from $454,000 (88% of revenues) for the three-month period ended March 31, 1997, to $503,000, (96% of revenues) in the current period in 1998, an increase of 11%. Gross profit increased due to the increase in revenue as well as the shift in product mix to royalty revenues, which provide a higher margin than product revenues.
Operating Expenses
The operating expenses decreased from $1,483,000 (286% of revenues) for the three-month period ended March 31, 1997 to $1,401,000 (268% of revenue) for the current period in 1998, a decrease of 6%. The reduction in operating costs is a direct result of continued cost controls implemented last year. The effects of these costs controls can be seen primarily in the General and Administrative departments due to lower payroll and legal expenses.
General and Administrative
General and administrative costs declined from $573,000 for the three-month period ending March 31, 1997 to $440,000 for the current period in 1998, a decrease of 23%. The reduction in operating costs is a direct result of continued cost controls implemented last year as well as a reduction in legal fees pertaining to the Q-Sound litigation.
Research and Development
Research and Development costs increased from $569,000 for the three-month period ended March 31, 1997 to $600,000 for the current period in 1998 an increase of 5%. The increase in research and development expense was due to the increased investment in MDT's research and development activity particularly for prototypes of the MultiDisc eXpandable Network Server, XNS(TM)technology partially offset by efficiencies in focusing research and development at DPI.
MDT, which began operations on June 24, 1996, represented approximately 71% or $427,000 of the total research and development costs of $600,000 for the three-month period ended March 31, 1998. In addition, the Company continued efforts to identify, validate, and develop new products at DPI. Specific engineering efforts were directed toward porting support of N-2-2(TM) Digital Virtual Surround technologies to current
and potential licensees during the quarter and toward an advanced version of enCompass(TM), an interactive, real-time 3-D audio positioning technology.
Sales and Marketing
Sales and marketing costs increased from $341,000 for the three-month period ended March 31, 1997 to $361,000 for the current period in 1998, an increase of 6%. The increase is attributed to the hiring of an additional sales executive at DPI, and the initiation of marketing activity at MDT as it enters its next phase of development.
Net Loss
The net loss declined from $1,027,000 (198% of revenues) in the three month period ended March 31, 1997 to $920,000 (176% of revenues) for the current period in 1998, a decrease of 10%. The decreased net loss for the period is primarily a result of the increase in gross profit and cost savings realized by the continuation of the Company's cost cutting measures begun last year.
Liquidity and Capital Resources
At March 31, 1998, the Company had $151,000 in cash and cash equivalents as compared to $577,000 at December 31, 1997. The decrease in cash and cash equivalents is attributed to cash used for the development of MDT's principal technology demonstrators and cash used in other operating activities. The Company had a working capital deficit of $618,000 at March 31, 1998 as compared with working capital of $283,000 at December 31, 1997. The Company's future cash flows are expected to come primarily from the audio signal processing licensing business' Foundry and Original Equipment Manufacturers' ("OEM") royalties, common and/or preferred stock issuances including warrant and option exercises, or through venture or strategic investors in MDT. At March 31, 1998 the Company had five Foundry licensees, sixty-nine OEM Licensees and sixteen authorized customers for its audio signal processing business as compared with five Foundry licensees and sixty-two OEM Licensees and fourteen authorized customers at December 31, 1997. The Company is actively engaged in negotiations for additional audio signal processing licensing arrangements which will generate additional cash flow without imposing any substantial costs on the Company.
The Company continues to have no material long-term obligations and has no present commitments or agreements which would require any long-term debt or obligations to be incurred. The Company owed $762,500 and $112,500 to related parties as of March 31, 1998 and at December 31, 1997, respectively.
On April 14, 1998, the Company entered into a $5 million private placement of which $3 million has been funded. In connection with the private placement, the Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and issued 60,000 shares for the $3 million investment. Of the balance of the $5 million, $1 million will be funded within 45 days of the closing and $1 million will be funded between 60 and 120 days after the effective date of a registration statement covering the common stock into which the Preferred Stock is convertible. In connection with the private placement, the Company agreed to issue 1,000,000 common stock purchase warrants, exercisable for three years and entitling the holders to acquire one share of the Company's common stock for each warrant. Of the warrants, 750,000 are being issued to investors (of which 450,000 were issued) and 250,000 warrants are being issued to placement agents (of which 150,000 were issued). The investor warrants are exercisable at 140% and the placement warrants are exercisable at 120%, respectively, of the average closing bid price of the Company's common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% will be paid. A related party of the Company received 50,000 of the placement agent warrants and $100,000 of the placement agent cash fee for arranging $1 million of the current investment.
In the private placement, the participants were granted certain rights to participate in the separate financing of approximately $6 million currently being pursued by the Company to fund the commercial introduction of its MultiDisc CD/DVD server technology
Funds generated by these financing activities as well as cash generated from the Company's existing operations is expected to be sufficient for the Company to meet its operating obligations and the anticipated additional research, development, and commercial prototype cost for the MultiDisc business during the next twelve months. However, if the $6 million MultiDisc funding is not completed, the Company will require additional capital, and need to identify other debt, equity or strategic investment sources to complete the research development and commercial introduction of the MultiDisc CD/DVD server technology and for marketing costs related to such activities. If the Company is unsuccessful in completing the MultiDisc funding management will be required to modify or delay the timing of the additional MultiDisc development and marketing activities.
The Company has responded to an inquiry from NASDAQ and confirmed that based on the April 14, 1998 financing, the Company meets the requirements for its continued listing on the NASDAQ Small Cap Market. In addition to the private placement, during the first quarter of 1998 the Company received short term unsecured advances of $650,000 from a related party, all of which are intended to be repaid with interest at 10% per annum on or before December 31, 1998. |
