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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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05/14/2020 | 05:49pm 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, 2019. 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 to be
disclosed in this Quarterly Report since being reported in the Management's
Discussion and Analysis section of the Annual Report on Form 10-K for the year
ended December 31, 2019.

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:

? our assumptions, estimates and beliefs regarding the possible effects of the

COVID-19 pandemic on general economic conditions, public health and consumer

demand, and the Company's results of operations, liquidity, capital resources

and general performance in the future;

? our ability to obtain financing, including the possible impact of COVID-19 and

  the limitations in the Revenue Sharing Agreement;


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? our expectations regarding the use of funds from the Company's PPP Loan and the

potential for forgiveness of the PPP Loan under the terms of the PPP;

? changes in economic, competitive, governmental, technological and other factors

that may affect our business and prospects.

? our limited cash and our history of losses;

? our ability to achieve profitability;

? our ability to continue as a going concern;

? whether we obtain market acceptance and effectively commercialize our products;

? the adequacy of protections afforded to us by the patents that we own and the

cost of maintaining, enforcing and deeding our patents;

? receiving an unfavorable ruling in our current litigation proceedings, which

may adversely affect our business, results of operations and financial

condition;

? our success at managing the risks involved in the foregoing items; and

? other factors discussed in this report and our other filings with the SEC.



Additional factors are discussed 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, 2019 and under Part II, "Item 1A - Risk Factors" in 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.

Results Of Operations

Three Months ended March 31, 2020 compared to the Three Months ended March 31,
2019

Total Revenues
                                                                           For the Three Months Ended
                                                                                   March 31,                  %
                                                                              2020             2019         Change
Patent Monetization revenues
License revenues                                                         $          139    $        382       (64 )
Total Patent Monetization revenues                                                  139             382       (64 )

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

                               119,576         195,087       (39 )    (a)
Revenue from OEM array microphone products                                      238,743         156,774        52      (b)
Revenue from customized digital products                                         17,233          52,124       (67 )    (c)
All other Andrea DSP Microphone and Audio Software Products revenues              2,203          18,695       (88 )    (d)
License and service related revenues                                              4,757          14,778       (68 )    (e)
Total Andrea DSP Microphone and Audio Software Products revenues                382,512         437,458       (13 )

Total revenues                                                           $      382,651$    437,840       (13 )


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(a) The approximate $76,000 decrease in revenues from automotive array microphone

products for the three months ended March 31, 2020, as compared to the same

period in 2019, is the result of timing of sales to integrators of public

safety and mass transit vehicle solutions.

(b) The approximate $82,000 increase in revenues from OEM array microphone products

for the three months ended March 31, 2020, as compared to the same period in

2019, is primarily the result of timing of sales to integrators of commercial

product audio solutions.

(c) The decrease of approximately $35,000 in customized digital products revenue

for the three months ended March 31, 2020, as compared to the same period in

2019, is related to the timing of purchases from an OEM customer for a

customized digital product.

(d) The approximate $16,000 decrease in revenues of all other Andrea DSP Microphone

and Audio Software Products for the three months ended March 31, 2020, as

compared to the same period in 2019, is primarily the result of lower revenues

from new customers generated for new audio solutions.

(e) The approximate $10,000 decrease in license and service related revenues for

the three months ended March 31, 2020 as compared to the same period in 2019,

is a result of decreases in service related revenue.

Cost of Product Revenues


Cost of product revenues as a percentage of total revenues for the three months
ended March 31, 2020 and 2019 was 22% and 32%, respectively. There was no cost
of product revenues associated with the Patent Monetization. The decrease in
cost of product revenues as a percentage of total revenues is a result of the
product mix described in "Total Revenues" above, specifically the decrease in
revenue from automotive array microphone products that have higher product cost
as compared to our other product revenues.

Patent Monetization Expenses


Patent monetization expenses for the three months ended March 31, 2020 increased
1% to $39,390 from $39,193 for the three months ended March 31, 2019. 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. Patent Monetization expenses 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 March 31, 2020
increased 8% to $152,621 from $141,184 for the three months ended March 31,
2019. The expenses primarily relate to costs associated with the development of
new products. For the three months ended March 31, 2020, research and
development expenses reflect a 25% decrease in our Patent Monetization efforts
to $5,517, or 4% of total research and development expenses, and a 10% increase
in our Andrea DSP Microphone and Audio Software Technology efforts to $147,104,
or 96% of total research and development expenses. The decrease in our Patent
Monetization efforts represents a decrease in intangible asset amortization
expense. While the increases in our Andrea DSP Microphone and Audio Software
Technology efforts reflect an increase in salary expenses related to a project
that was recently started. Research and development expenses are 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 5% to
$283,056 for the three months ended March 31, 2020 from $298,257 for the three
months ended March 31, 2019. For the three months ended March 31, 2020, general,
administrative and selling expenses related to our Patent Monetization efforts
were $44,364, or 16% 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 $238,692, or 84% 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 March 31, 2020 was $17,467
compared to $16,712 for the three months ended March 31, 2019. 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.

                                                                            

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Provision for Income Taxes

The income tax provision for the three months ended March 31, 2020 was $506 compared to a $540 tax provision for the three months ended March 31, 2019. The provision for the three months ended March 31, 2020 and 2019 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.

Net loss


Net loss for the three months ended March 31, 2020 was $196,261 compared to a
net loss of $197,488 for the three months ended March 31, 2019. The net loss for
the three months ended March 31, 2020 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 March 31, 2020, we had cash of $373,326 compared with $335,790 at December
31, 2019. The increase in our cash balance at March 31, 2020 was primarily the
result of proceeds of the Additional Notes received in connection with the
Revenue Sharing Agreement partially offset by cash used in operating activities.

Our working capital balance at March 31, 2020 was $493,482 compared to working
capital of $556,850 at December 31, 2019. The decrease in working capital
reflects a decrease in total current assets of $28,641 and an increase in total
current liabilities of $34,727. The decrease in total current assets reflects an
increase in cash of $37,536, a decrease in accounts receivable of $43,608, a
decrease in inventories of $35,285 and an increase in prepaid expenses and other
current assets of $12,716. The increase in total current liabilities reflects an
increase in trade accounts payable and other current liabilities of $34,727.

The increase in cash of $37,536 reflects $50,257 of net cash used in operating
activities, $12,207 of net cash used in investing activities and $100,000 of net
cash provided by financing activities.

The cash used in operating activities of $50,257, excluding non-cash charges for
the three months ended March 31, 2020, was attributable to a $43,102 decrease in
accounts receivable, a $36,864 decrease in inventories, a $12,716 decrease in
prepaid expenses and other current assets and a $31,976 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 $12,207 reflects an increase in patents
and trademarks of $6,218 and purchases of property and equipment of $5,989. The
increase in patents and trademarks reflects capital expenditures associated with
our intellectual property. The increase in property and equipment is associated
with the purchases of computer equipment. The increase in patents and trademarks
reflects capital expenditures associated with our intellectual property.

The cash provided by financing activities of $100,000, 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 May 8, 2020, Andrea had
approximately $500,000 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.

Subsequent to March 31, 2020, the Company received proceeds of $142,775 under
the PPP, which was established under the CARES Act. See Part II, "Item 5 - Other
Information" for further details on the PPP Loan. The PPP Loan has certain
limitations and risks as outlined in the risk factor "Our business may be
adversely affected if there is a default on the PPP Loan." in Part II, "Item 1A
- Risk Factors" of this Quarterly Report.

                                                                            

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© Edgar Online, source Glimpses


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