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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Andrea Electronics Corporation    ANDR

ANDREA ELECTRONICS CORPORATION

(ANDR)
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ANDREA ELECTRONICS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/12/2019 | 05:03pm EDT

Overview


We design, develop and manufacture state-of-the-art digital microphone products
and noise reduction software that facilitate natural language, human/machine
interfaces. Our technologies eliminate unwanted background noise to enable the
optimum performance of various speech-based and audio applications. We are
incorporated under the laws of the State of New York and have been engaged in
the electronic communications industry since 1934. Our patented and
patent-pending digital noise canceling technologies enable a speaker to be at a
distance from the microphone (we refer to this capability as "far-field"
microphone use), and free the speaker from having to use a close talking
microphone. We believe that the strength of our intellectual property rights are
important to the success of our business. We utilize patent and trade secret
protection, confidentiality agreements with customers and partners, disclosure
and invention assignment agreements with employees and consultants and other
contractual provisions to protect our intellectual property and other
proprietary information. As part of our Patent Monetization efforts, we license
specific, custom designs to our customers, charging royalties at a fixed amount
per product or a percentage of sales, and we intend to vigorously defend and
monetize our intellectual property through licensing arrangements and, where
necessary, enforcement actions against those entities using our patented
solutions in their products.

Our Critical Accounting Policies


Our unaudited condensed consolidated interim financial statements and the notes
to our unaudited condensed consolidated interim financial statements contain
information that is pertinent to management's discussion and analysis. The
preparation of unaudited condensed consolidated interim financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. On a continual basis, management reviews its estimates utilizing
currently available information, changes in facts and circumstances, historical
experience and reasonable assumptions. After such reviews, and if deemed
appropriate, those estimates are adjusted accordingly. Actual results may vary
from these estimates and assumptions under different and/or future
circumstances. Our significant accounting policies are described in Note 2 of
the notes to the audited financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2018. A discussion of our critical
accounting policies and estimates are also included in Note 2. Summary of
Significant Accounting Policies in notes to consolidated interim financial
statements included elsewhere in this report. Management has discussed the
development and selection of these policies with the Audit Committee of the
Company's Board of Directors, and the Audit Committee of the Board of Directors
has reviewed the Company's disclosures of these policies. There have been no
material changes to the critical accounting policies or estimates reported in
the Management's Discussion and Analysis section of the Annual Report on Form
10-K for the year ended December 31, 2018 except the new lease accounting
standard adopted as of January 1, 2019 as described in Note 2 of the notes to
unaudited condensed consolidated interim financial statements included in this
Quarterly Report.

Cautionary Statement Regarding Forward-Looking Statements


This report contains forward-looking statements that are based on assumptions
and may describe future plans, strategies and expectations of the Company. These
forward-looking statements are generally identified by use of the words
"believe", "expect", "intend", "anticipate", "estimate", "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in economic, competitive, governmental,
technological and other factors that may affect our business and prospects.
Additional factors are discussed below under "Risk Factors" and in Part I, "Item
1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year
ended December 31, 2018 and the Company's quarterly reports on Form 10-Q. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, the Company does not undertake, and
specifically disclaims any obligation, to release publicly the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.

                                                                            

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Results Of Operations

Three and Nine Months ended September 30, 2019 compared to the Three and Nine Months ended September 30, 2018

Total Revenues

          For the Three Months Ended                       For the Nine Months Ended
                                                                                            September 30,                  %                 September 30,                 %
                                                                                         2019             2018          Change            2019            2018          Change
Patent Monetization revenues
License revenues                                                            

$ 202 $ 345 (41 ) $ 739 $ 984 (25 ) Total Patent Monetization revenues

                                                             202             345          (41 )               739     

984 (25 )

Andrea DSP Microphone and Audio Software Products revenues Revenue from automotive array microphone products

                                           30,858         186,385          (83 )           541,556        293,713           84      (a)
Revenue from OEM array microphone products                                                 252,584         186,343           36             610,456        500,094           22      (b)
Revenue from customized digital products                                                    42,864          30,140           42             118,762         63,431           87      (c)

All other Andrea DSP Microphone and Audio Software Products revenues

                 47,718          35,320           35              78,379         64,164           22      (d)
License and service related revenues                                                         8,443          14,357          (41 )            35,750         48,158          (26 )    (e)
Total Andrea DSP Microphone and Audio Software Products revenues                           382,467         452,545          (16 )         1,384,903        969,560           43

Total revenues                                                                      $      382,669$   452,890          (16 )    $    1,385,642$   970,544           43


____________________

(a) The approximate $156,000 decrease in revenues from automotive array microphone

products for the three months ended September 30, 2019, as compared to the same

period in 2018, is the result of timing of sales to integrators of public

safety and mass transit vehicle solutions. The approximate $248,000 increase in

revenues of automotive array microphone products for the nine months ended

September 30, 2019, as compared to the same period in 2018, is the result of

increased demand from integrators of public safety and mass transit vehicle

solutions.

(b) The approximate $66,000 and $110,000 increase in revenues from OEM array

microphone products for the three and nine months ended September 30, 2019,

respectively, as compared to the same periods in 2018, is primarily the result

of timing of sales to integrators of commercial product audio solutions.

(c) The increases of approximately $13,000 and $55,000 in customized digital

products revenue for the three and nine months ended September 30, 2019,

respectively, as compared to the same periods in 2018, is related to the timing

of purchases from an OEM customer for a customized digital product.

(d) The approximate $12,000 and $14,000 increase in revenues of all other Andrea

DSP Microphone and Audio Software Products for the three and nine months ended

September 30, 2019, respectively, as compared to the same periods in 2018, is

primarily the result of revenues from new customers for new audio solutions.

(e) The approximate $6,000 decrease in license and service related revenues for the

three months ended September 30, 2019 as compared to same period in 2018, is a

result of decreases in service related revenue. The approximate $12,000

decrease in license and service related revenues is a result of decreases of

royalties and service related revenues for the nine months ended September 30,

2019 as compared to the same period in 2018.

Cost of Product Revenues


Cost of product revenues as a percentage of total revenues for the three months
ended September 30, 2019 and 2018 was 26% and 33%, respectively. Cost of product
revenues as a percentage of total revenues for the nine months ended September
30, 2019 and 2018 was 28% and 27%, respectively. There was no cost of product
revenues associated with the Patent Monetization revenues of $202 and $739 for
the three and nine months ended September 30, 2019 nor cost of product revenues
associated with the Patent Monetization revenues of $345 and $984, for the three
and nine months ended September 30, 2018. The cost of product revenues as a
percentage of total revenues for the three months ended September 30, 2019 for
Andrea DSP Microphone and Audio Software Products was 28% compared to 27% for
the three months ended September 30, 2018. The cost of product revenues as a
percentage of total revenues for the nine months ended September 30, 2019 for
Andrea DSP Microphone and Audio Software Products was 26% compared to 33% for
the nine months ended September 30, 2018. These changes are primarily the result
of the product mix described in "Total Revenues" above.

                                                                            

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Patent Monetization Expenses


Patent monetization expenses for the three months ended September 30, 2019
decreased 12% to $41,897 from $47,670 for the three months ended September 30,
2018. Patent monetization expenses for the nine months ended September 30, 2019
increased 8% to $155,170 from $143,549 for the nine months ended September 30,
2018. These expenses are a result of our continuing efforts to pursue patent
monetization including the filing of the complaints disclosed under Part II,
Item 1 Legal Proceedings. The changes in Patent Monetization expenses for the
three and nine months ended September 30, 2019 are mainly attributable to the
timing of legal services incurred to pursue patent monetization.

Research and Development Expenses


Research and development expenses for the three months ended September 30, 2019
decreased 8% to $139,137 from $151,400 for the three months ended September 30,
2018. Research and development expenses for the nine months ended September 30,
2019 decreased 5% to $425,497 from $448,068 for the nine months ended September
30, 2018. The expenses primarily relate to costs associated with the development
of new products. For the three months ended September 30, 2019, the decrease in
research and development expenses reflects a 33% decrease in our Patent
Monetization efforts to $5,657, or 4% of total research and development
expenses, and a 7% decrease in our Andrea DSP Microphone and Audio Software
Technology efforts to $133,480, or 96% of total research and development
expenses. For the nine months ended September 30, 2019, the decrease in research
and development expenses reflects an 18% decrease in our Patent Monetization
efforts to $19,476, or 5% of total research and development expenses, and a 4%
decrease in our Andrea DSP Microphone and Audio Software Technology efforts to
$406,021, or 95% of total research and development expenses. The changes in our
Patent Monetization efforts represent intangible asset amortization expense
while the changes in our Andrea DSP Microphone and Audio Software Technology
efforts reflect expenses related to our research efforts primarily focused on
the pursuit of commercializing a natural language-driven human/machine interface
by developing optimal far-field microphone solutions for various voice-driven
interfaces, incorporating Andrea's digital super directional array microphone
technology, and certain other related technologies such as noise suppression and
stereo acoustic echo cancellation. We believe that continued research and
development spending should benefit Andrea in the future.

General, Administrative and Selling Expenses


General, administrative and selling expenses decreased approximately 9% to
$266,326 for the three months ended September 30, 2019 from $291,878 for the
three months ended September 30, 2018. For the three months ended September 30,
2019, general, administrative and selling expenses related to our Patent
Monetization efforts were $50,136, or 19% of the total general, administrative
and selling expenses, and general, administrative and selling expenses related
to our Andrea DSP Microphone and Audio Software Technology were $216,190, or 81%
of total general, administrative and selling expenses. General, administrative
and selling expenses decreased approximately 6% to $814,262 for the nine months
ended September 30, 2019 from $866,673 for the nine months ended September 30,
2018. For the nine months ended September 30, 2019, general, administrative and
selling expenses related to our Patent Monetization efforts were $141,032, or
17% of the total general, administrative and selling expenses, and general,
administrative and selling expenses related to our Andrea DSP Microphone and
Audio Software Technology were $673,230, or 83% of total general, administrative
and selling expenses. These small decreases relate to changes in regular
operating expenses.

Interest expense, net


Interest expense, net for the three months ended September 30, 2019 was $18,397
compared to $13,158 for the three months ended September 30, 2018. Interest
expense, net for the nine months ended September 30, 2019 was $52,347 compared
to $38,137 for the nine months ended September 30, 2018. The change in this line
item was attributable to an increase in interest expense because of a higher
amount of debt outstanding combined with a decrease of interest income related
to lower cash balances.

Provision for Income Taxes

The income tax provision for the three months ended September 30, 2019 was $351
compared to no tax provision for the three months ended September 30, 2018. The
income tax provision for the nine months ended September 30, 2019 was $1,673
compared to $1,863 for the nine months ended September 30, 2018. The provision
for the three and nine months ended September 30, 2019 and 2018 is a result of
certain licensing revenues that are subject to withholding of income tax as
mandated by the foreign jurisdiction in which the revenues are earned.

                                                                            

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Net loss


Net loss for the three months ended September 30, 2019 was $184,248 compared to
a net loss of $200,872 for the three months ended September 30, 2018. Net loss
for the nine months ended September 30, 2019 was $455,971 compared to a net loss
of $793,569 for the nine months ended September 30, 2018. The net loss for the
three and nine months ended September 30, 2019 and 2018, respectively,
principally reflects the factors described above.

Off-Balance Sheet Arrangements


The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.

Liquidity And Capital Resources

At September 30, 2019, we had cash of $362,549 compared with $486,521 at December 31, 2018. The decrease in our cash balance at September 30, 2019 was primarily a result of cash used in operating activities.


Our working capital balance at September 30, 2019 was $609,062 compared to
working capital of $795,998 at December 31, 2018. The decrease in working
capital reflects a decrease in total current assets of $145,564 and an increase
in total current liabilities of $41,372. The decrease in total current assets of
$145,564 reflects a decrease in cash of $123,972, a decrease in accounts
receivable of $56,542, a decrease in prepaid expenses and other current assets
of $39,248 offset in part by an increase in inventories of $74,198. The increase
in total current liabilities of $41,372 reflects an increase in trade accounts
payable and other current liabilities.

The decrease in cash of $123,972 reflects $314,164 of net cash used in operating
activities, $9,808 of net cash used in investing activities and $200,000 of net
cash provided by financing activities.

The cash used in operating activities of $314,164, excluding non-cash charges
for the nine months ended September 30, 2019, was attributable to a $54,869
decrease in accounts receivable, a $73,655 increase in inventories, a $39,248
decrease in prepaid expenses and other current assets and a $45,939 increase in
trade accounts payable and other current liabilities and lease liabilities
payable. The changes in accounts receivable, inventories, prepaid expenses and
other current assets and trade accounts payable and other current liabilities
and lease liabilities payable primarily reflect differences in the timing
related to both the payments for and the acquisition of inventory as well as for
other services in connection with ongoing efforts related to Andrea's various
product lines including continuing efforts to pursue patent monetization.

The cash used in investing activities of $9,808 reflects an increase in patents and trademarks. The increase in patents and trademarks reflects capital expenditures associated with our intellectual property.

The cash provided by financing activities of $200,000, reflects long-term debt.


We plan to improve our cash flows by aggressively pursuing monetization of our
patents related to our Andrea DSP Microphone Audio Software, increasing the
sales of our Andrea DSP Microphone Audio Software Products through the
introduction of new products as well as the increased efforts we are putting
into our sales and marketing efforts. As of November 8, 2019, Andrea had
approximately $400,000 of cash deposits. For discussion regarding management's
evaluation of our ability to meet our obligations as they come due in coming
months, see the section titled "Liquidity" in Note 1, Basis of Presentation, of
the notes to unaudited condensed consolidated interim financial statements. We
cannot provide assurances that demand will continue for any of our products,
including future products related to our Andrea DSP Microphone and Audio
Software technologies, or, that if such demand does exist, that we will be able
to obtain the necessary working capital to increase production and provide
marketing resources to meet such demand on favorable terms, or at all.

© Edgar Online, source Glimpses


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