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 in the 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
Revenue Recognition - On January 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.
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. At December 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 at December 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 ended December 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.
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 ended December 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 December 31, 2019 Compared to Year Ended December 31, 2018
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 $190,000 for the year ended December 31, 2019, as
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 $213,000 for the year ended December 31, 2019, as
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 $10,000 for the year ended December 31, 2019, as
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 $69,000 for the year ended December 31, 2019, as
compared to the same period in 2018, in all other Andrea DSP Microphone and
Audio Software product revenues is primarily the result of new customers for
new audio solutions.
(e) The decrease of approximately $30,000 for the year ended December 31, 2019, as
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.
Table of Contents
Cost of Revenues
Cost of revenues as a percentage of total revenues for the year ended December
31, 2019 decreased to 28% from 30% for the year ended December 31, 2018. There
was no cost of revenues associated with the Patent Monetization revenues of $950
and $1,241 for the years ended December 31, 2019 and 2018, respectively. The
cost of revenues as a percentage of total revenue for the year ended December
31, 2019 for Andrea DSP Microphone and Audio Software Products was 28% compared
to 30% for the year ended December 31, 2018. These changes are primarily the
result of the changes in the product mix of revenues as described under "Total
Patent Monetization Expenses
Patent monetization expenses for the year ended December 31, 2019 increased by
27% to $194,215 from $152,622 for the year ended December 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 ended December 31, 2019 decreased
by 5% to $568,799 from $601,349 for the year ended December 31, 2018. These
expenses primarily relate to costs associated with the development of new
products. For the year ended December 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 and
Audio 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 ended December 31, 2019 from $1,167,002 for the year
ended December 31, 2018. For the year ended December 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 in January 2018.
Interest expense, net
Interest expense, net for the year ended December 31, 2019 was $70,133, compared
to interest expense, net of $52,360 for the year ended December 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 December 31, 2019 was $1,805,
compared to $2,563 for the year ended December 31, 2018. The provision for
income taxes for the year ended December 31, 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 of approximately
$9,000 and $13,000 for the year ending December 31, 2019 and 2018, respectively,
Net loss for the year ended December 31, 2019 was $548,566 compared to a net
loss of $945,108 for the year ended December 31, 2018. The net loss for the year
ended December 31, 2019 principally reflects the factors described above.
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.
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
At December 31, 2019, we had cash of $335,790 compared to $486,521 at December
31, 2018. The decrease in our cash balance at December 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 at December 31, 2019 was $556,850 compared to
working capital of $795,998 at December 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
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 ended December
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 $16,737 reflects an increase in patents
and trademarks for capital expenditures associated with our intellectual
The cash provided by financing activities of $200,000 reflects net proceeds from
We plan to improve our cash flows in 2020 by aggressively pursuing monetization
of our patents related to our Andrea 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 of
March 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 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.
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
in U.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 ended December 31, 2019, total revenue from sales to customers
outside the 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
© Edgar Online, source Glimpses