ANDREA ELECTRONICS CORPORATION Overview
Our mission is to provide the emerging "voice interface" markets with state-of-the-art digital microphone products and noise reduction software that facilitate natural language, human/machine interfaces.
Examples of the applications and interfaces for which Andrea DSP Microphone and Audio Software Products provide benefits include: Internet and other computer-based speech; telephony communications; multi-point conferencing; speech recognition; and other applications and interfaces that incorporate natural language processing. We believe that end users of these applications and interfaces will require high quality microphone and earphone products that enhance voice transmission, particularly in noisy environments, for use with personal computers, mobile personal computing devices, cellular and other wireless communication devices and automotive communication systems. Our Andrea DSP Microphone and Audio Software Products use "far-field" digital signal processing technology to provide high quality transmission of voice where the user is at a distance from the microphone. High quality audio communication technologies will be required for emerging far-field voice applications, ranging from continuous speech dictation, to Internet telephony and multiparty video teleconferencing and collaboration, to natural language-driven interfaces for automobiles, home and office automation and other machines and devices into which voice-controlled microprocessors are expected to be introduced during the next several years.
Our Critical Accounting Policies
Our consolidated financial statements and the notes to our consolidated financial statements contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and determination of revenues and expenses in the reporting period. 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. Management considers an accounting estimate to be critical if: 1) it requires assumptions to be made that were uncertain at the time the estimate was made; and 2) changes in the estimate, or the use of different estimating methods that could have been selected and could have a material impact on the Company's consolidated results of operations or financial condition. The following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements have been identified. In addition to the recording and presentation of our convertible preferred stock, we believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our consolidated financial condition and results of operations. We have discussed the application of these critical accounting policies with our Audit Committee. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates. Revenue Recognition - OnJanuary 1, 2018 the Company adopted Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) ("ASU No. 2014-09"), which is described below in Recent Accounting Pronouncements. In accordance with Topic 606, the Company recognizes revenue using the following five-step approach: 1. Identify the contract with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price of the contract. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when the performance obligations are met or delivered. Andrea utilizes the modified retrospective approach when reviewing its current accounting policies to identify potential differences that would result from applying the new requirements to its customer contracts. This approach includes the evaluation of sales terms, performance obligations, variable consideration, and costs to obtain and fulfill contracts. Based on the Company's review, management did not need to record a cumulative effect adjustment to retained earnings as of the date of initial application and application of this guidance did not have a material impact on its consolidated financial statements. The Company disaggregates its revenues into three contract types: (1) product revenues, (2) service related revenues and (3) license revenues and then further disaggregates its revenues by operating segment. Generally, product revenue is comprised of microphones and microphone connectivity product revenues. Product revenue is recognized when the Company satisfies its performance obligation by transferring promised goods to a customer. Product revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods to the customer. Contracts with customers are comprised of customer purchase orders, invoices and written contracts. Customer product orders are fulfilled at a point in time and not over a period of time. The Company does not have arrangements for returns from customers and does not have any future obligations directly or indirectly related to product resale by customers. The Company has no sales incentive programs. Service related and licensing revenues are recognized based on the terms and conditions of individual contracts using the five step approach listed above, which identifies performance obligations and transaction price. Typically, Andrea receives licensing reports from its licensees approximately one quarter in arrears due to the fact that its agreements require customers to report revenues between 30-60 days after the end of the quarter. Under this accounting policy, the licensing revenues reported are not based upon estimates. In addition, service related revenues, which are short-term in nature, are generally performed on a time-and-material basis under separate service arrangements and the corresponding revenue is generally recognized as the services are performed. 12
--------------------------------------------------------------------------------
Table of Contents
Accounts Receivable - We are required to estimate the collectability of our trade receivables. Judgment is required in assessing the realization of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also determined by using percentages applied to certain aged receivable categories. AtDecember 31, 2019 and 2018, our allowance for doubtful accounts was$4,789 and$4,793 , respectively. Inventories - We are required to state our inventories at net realizable value. In assessing the ultimate realization of inventories, we are required to make considerable judgments as to future demand requirements and compare that with our current inventory levels. Our reserve requirements generally increase as our projected demand requirements decrease due to market conditions, technological and product life cycle changes as well as longer than previously expected usage periods. We have evaluated the current levels of inventories, considering historical total revenues and other factors and, based on this evaluation, recorded adjustments to cost of revenues to adjust inventories to net realizable value. We have inventories of$210,161 and$213,056 atDecember 31, 2019 and 2018, respectively. It is possible that additional charges to inventory may occur in the future if there are further declines in market conditions, or if additional restructuring actions are taken. Long Lived Assets - ASC 360 "Property, Plant and Equipment" ("ASC 360") requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. Andrea accounts for its long-lived assets in accordance with ASC 360 for purposes of determining and measuring impairment of its other intangible assets. Andrea's policy is to periodically review the value assigned to its long lived assets to determine if they have been permanently impaired by adverse conditions which may affect Andrea. If required, an impairment charge would be recorded based on an estimate of future discounted cash flows. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates. No impairment charges were recognized during the years endedDecember 31, 2019 and 2018. Deferred Tax Assets - We currently have significant deferred tax assets. ASC 740, "Income Taxes" ("ASC 740"), requires a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Furthermore, ASC 740 provides that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. Accordingly, and after considering changes in previously existing positive and negative evidence, the Company determined that a full valuation allowance against the deferred tax assets was required. Andrea will reduce its valuation allowance in future periods to the extent that we can demonstrate our ability to utilize the assets. The future realization of a portion of our reserved deferred tax assets related to tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the consolidated statement of operations, but rather will result in an increase in additional paid in capital. We will continue to re-assess our reserves on deferred income tax assets in future periods on a quarterly basis. Contingencies - We are subject to proceedings, lawsuits and other claims, including proceedings under laws and government regulations related to securities, environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is based on an analysis of each individual issue with the assistance of legal counsel. The amount of any reserves may change in the future due to new developments in each matter. The impact of changes in the estimates and judgments pertaining to revenue recognition, receivables and inventories is directly reflected in our segments' loss from operations. Although any charges related to our deferred tax provision are not reflected in our segment results, the long-term forecasts supporting the realization of those assets and changes in them are significantly affected by the actual and expected results of each segment. 13
--------------------------------------------------------------------------------
Table of Contents
Cautionary Statement Regarding Forward-Looking Statements
Certain information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations for the year endedDecember 31, 2019 and other items set forth in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipates," "believes," "estimates," "expects," "intends," "plans," "seeks," variations of such words, and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations, estimates and projections about our business and industry, our beliefs and certain assumptions made by our management. Investors are cautioned that matters subject to forward-looking statements involve risks and uncertainties including economic, competitive, governmental, technological and other factors that may affect our business and prospects. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. These statements are based on current expectations and speak as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. In order to obtain the benefits of these "safe harbor" provisions for any such forward-looking statements, we caution investors and prospective investors about the following significant factors, which, among others, have in some cases affected our actual results and are in the future likely to affect our actual results and could cause them to differ materially from those expressed in any such forward-looking statements. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, our ability to enforce our patents, changes in economic, competitive, governmental, technological and other factors that may affect our business and prospects. Additional factors are discussed in Part I, "Item 1A - Risk Factors" of this Form 10-K.
Results Of Operations
Year Ended
Total Revenues
For the Year Ended December 31, %
2019 2018 Change
Patent Monetization revenues
License revenues $ 950 $ 1,241 (23 )
Total Patent Monetization revenues 950 1,241
Andrea DSP Microphone and Audio Software Products revenues Revenue from automotive array microphone products
670,236 480,555 39 (a)
Revenue from OEM array microphone products 897,718 685,203 31 (b)
Revenue from customized digital product 125,782 135,812 (7 ) (c)
All other Andrea DSP Microphone and Audio Software Product revenues
158,586 89,765 77 (d)
License revenues and service related revenues 41,968 71,958 (42 ) (e)
Total Andrea DSP Microphone and Audio Software Products revenues 1,894,290 1,463,293 30
Total revenues $ 1,895,240 $ 1,464,534 29
____________________
(a) The increase of approximately
compared to the same period in 2018, in revenues of automotive array microphone
products is primarily the result of timing of sales to integrators of public
safety and mass transit vehicle solutions.
(b) The increase of approximately
compared to the same period in 2018, in revenues of OEM array microphone
products is primarily the result of increased product revenues from integrators
of commercial product audio solutions.
(c) The decrease of approximately
compared to the same period in 2018, in customized digital product revenues is
related to the timing of purchases from an OEM customer.
(d) The increase of approximately
compared to the same period in 2018, in all other Andrea DSP Microphone and
new audio solutions.
(e) The decrease of approximately
compared to the same period in 2018, is primarily the result of decreased
royalties reported as a result of a decrease in sales of PC models which
feature our technology coupled with a decrease in service related revenue.
14
--------------------------------------------------------------------------------
Table of Contents
Cost of Revenues
Cost of revenues as a percentage of total revenues for the year endedDecember 31, 2019 decreased to 28% from 30% for the year endedDecember 31, 2018 . There was no cost of revenues associated with the Patent Monetization revenues of$950 and$1,241 for the years endedDecember 31, 2019 and 2018, respectively. The cost of revenues as a percentage of total revenue for the year endedDecember 31, 2019 for Andrea DSP Microphone and Audio Software Products was 28% compared to 30% for the year endedDecember 31, 2018 . These changes are primarily the result of the changes in the product mix of revenues as described under "Total Revenues" above. Patent Monetization Expenses Patent monetization expenses for the year endedDecember 31, 2019 increased by 27% to$194,215 from$152,622 for the year endedDecember 31, 2018 , primarily as a result of timing of legal services incurred to pursue patent monetization. These expenses are a result of our continuing efforts to pursue patent monetization, including the filing of the complaints disclosed under Part I, "Item 3 - Legal Proceedings" of this Form 10-K. Such patent monetization is a key component of our business strategy.
Research and Development Expenses
Research and development expenses for the year endedDecember 31, 2019 decreased by 5% to$568,799 from$601,349 for the year endedDecember 31, 2018 . These expenses primarily relate to costs associated with the development of new products. For the year endedDecember 31, 2019 , research and development expenses reflected a 29% decrease in our Patent Monetization efforts to$24,220 or 4% of total research and development expenses, and a 4% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to$544,579 , or 96% of total research and development expenses. With respect to DSP Microphone andAudio Software technologies, research efforts are 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 by approximately 8% to$1,070,654 for the year endedDecember 31, 2019 from$1,167,002 for the year endedDecember 31, 2018 . For the year endedDecember 31, 2019 , there was a 14% decrease in our Patent Monetization efforts to$179,715 , or 17% of total general, administrative and selling expenses and a 7% decrease in general, administrative and selling expenses in our Andrea DSP Microphone and Audio Software Technology efforts to$890,939 , or 83% of total general, administrative and selling expenses. The overall 8% decrease of approximately$96,000 is primarily related to decreased stock based compensation expense and salary reductions taken by executive management inJanuary 2018 .
Interest expense, net
Interest expense, net for the year endedDecember 31, 2019 was$70,133 , compared to interest expense, net of$52,360 for the year endedDecember 31, 2018 . The increase in this line item is attributable to an increase of interest expense related to long-term debt in conjunction with the Revenue Sharing Agreement.
Provision for Income Taxes
The income tax provision for the year ended
Net loss Net loss for the year endedDecember 31, 2019 was$548,566 compared to a net loss of$945,108 for the year endedDecember 31, 2018 . The net loss for the year endedDecember 31, 2019 principally reflects the factors described above.
Inflation
We do not believe that inflation has had a material impact on our business and
operating results during the periods presented, and we do not expect it to have
a material impact in the near future, although there can be no assurances that
our business will not be affected by inflation in the future.
15--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its consolidated financial condition, changes in consolidated financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Liquidity And Capital Resources
AtDecember 31, 2019 , we had cash of$335,790 compared to$486,521 atDecember 31, 2018 . The decrease in our cash balance atDecember 31, 2019 is primarily a result of cash used in operations offset in part by the proceeds of the Additional Notes received in connection with the Revenue Sharing Agreement. Our working capital balance atDecember 31, 2019 was$556,850 compared to working capital of$795,998 atDecember 31, 2018 . The decrease in working capital reflects a decrease in total current assets of$229,275 and an increase in total current liabilities of$9,873 . The decrease in total current assets reflects a decrease in cash of$150,731 , a decrease in accounts receivable of$40,502 , a decrease in inventories of$2,895 and a decrease in prepaid expenses and other current assets of$35,147 . The increase in total current liabilities reflects an increase in trade accounts payable and other current liabilities of$9,873 . The decrease in cash of$150,731 reflects$333,994 of net cash used in operating activities,$16,737 of net cash used in investing activities, partially offset by$200,000 of net cash provided by financing activities. The cash used in operating activities of$333,994 , excluding non-cash charges, is primarily attributable to the$548,566 net loss for the year endedDecember 31, 2019 , a$38,697 decrease in accounts receivable, a$14,083 increase in inventories, a$35,147 decrease in prepaid expenses, other current assets and other assets, and a$83,243 increase in trade accounts payable and other current liabilities. The changes in receivables, inventories and trade accounts 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 operations.
The cash used in investing activities of
The cash provided by financing activities of
We plan to improve our cash flows in 2020 by aggressively pursuing monetization of our patents related to ourAndrea DSP Microphone Audio Software to result in increased licensing arrangements, increasing the sales of our Andrea DSP Microphone Audio Software Products through the introduction of new products, as well as our increased efforts toward our sales and marketing efforts. As ofMarch 23, 2020 , Andrea had approximately$380,000 of cash deposits. We cannot assure you that demand will continue for any of our products, including future products related to our Andrea DSP Microphone andAudio 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.
Market Risk
Historically, our principal source of financing activities had been the issuance of convertible preferred stock with financial institutions. We are affected by market risk exposure primarily through any amounts payable in stock, or cash by us under convertible securities. We do not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. In addition, substantially all transactions entered into by us are denominated inU.S. dollars. As such, we have shifted foreign currency exposure onto our foreign customers. As a result, if exchange rates move against foreign customers, we could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. For the year endedDecember 31, 2019 , total revenue from sales to customers outsidethe United States accounted for approximately 25% of our total revenue. The foregoing could materially adversely affect our business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
© Edgar Online, source
