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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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08/14/2020 | 01:28pm 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.

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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;

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

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.

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Results Of Operations


Three and Six Months ended June 30, 2020 compared to the Three and Six Months
ended June 30, 2019

Total Revenues

                                        For the Three Months Ended                      For the Six Months Ended
                                                 June 30,                   %                   June 30,                   %
                                           2020             2019         Change          2020             2019          Change
Patent Monetization revenues
License revenues                      $          163    $        155

5 $ 302 $ 537 (44 ) Total Patent Monetization revenues

               163             155          5               302               537        (44 )

Andrea DSP Microphone and
Audio Software Products revenues
Revenue from automotive array
microphone products                           40,089         315,611        (87 )         159,665           510,698        (68 )    (a)
Revenue from OEM array
microphone products                          136,206         201,098        (32 )         374,949           357,872          4      (b)
Revenue from customized digital
products                                      14,490          23,774        (39 )          31,723            75,898        (58 )    (c)
All other Andrea DSP
Microphone and Audio
Software Products revenues                    17,542          11,966         47            19,745            30,661        (36 )    (d)
License and service related
revenues                                      46,825          12,529        274            51,582            27,307         89      (e)
Total Andrea DSP Microphone and
Audio Software Products revenues             255,152         564,978        (55 )         637,644         1,002,436        (37 )

Total revenues                        $      255,315$    565,133        (55 )    $    637,966$    1,002,973        (37 )


In general, the decrease in revenues detailed above are primarily a result of
customers delaying shipments of products into future months due to COVID-19.
Such product orders have not yet been canceled, but the delay in the shipments
of products has caused the Company's product revenues through June 30, 2020 to
be approximately $300,000 less than the same period in 2019.

(a) The approximate $276,000 and $351,000 decreases in revenues from automotive

array microphone products for the three and six months ended June 30, 2020,

respectively, as compared to the same periods in 2019, is the result of timing

of sales to integrators of public safety and mass transit vehicle solutions.

(b) The approximate $65,000 decrease in revenues from OEM array microphone products

for the three months ended June 30, 2020, as compared to the same period in

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

product audio solutions. The approximate $17,000 increase in revenues from OEM

array microphone products for the six months ended June 30, 2020, as compared

to the same period in 2019, is primarily the result of timing of sales to

integrators of commercial product audio solutions during the first three months

ended March 31, 2020, partially offset by the decrease in the second three

months because of COVID-19 related decrease.

(c) The decreases of approximately $9,000 and $44,000 in customized digital

products revenue for the three and six months, respectively, ended June 30,

2020, as compared to the same periods in 2019, is related to the timing of

purchases from an OEM customer for a customized digital product.

(d) The approximate $6,000 increase in revenues of all other Andrea DSP Microphone

and Audio Software Products for the three months ended June 30, 2020, as

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

sales to the China market for audio solutions. The approximate $11,000 decrease

in revenues of all other Andrea DSP Microphone and Audio Software Products for

the six months ended June 30, 2020, as compared to the same period in 2019, is

primarily the result of a decrease in sales from a corporate customer because

of the COVID-19 related slow down in production partially offset by increased

revenues from the China market for audio solutions.

(e) The approximate $34,000 and $25,000 increases in license and service related

revenues for the three and six months ended June 30, 2020, respectively, as

    compared to the same period in 2019, is a result of increases in service
    related revenue.


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Cost of Product Revenues


Cost of product revenues as a percentage of total revenues for the three months
ended June 30, 2020 and 2019 was 18% and 27%, respectively. Cost of product
revenues as a percentage of total revenues for the six months ended June 30,
2020 and 2019 was 21% and 29%, respectively. There was no cost of product
revenues associated with the Patent Monetization revenues of $163 and $302 for
the three and six months ended June 30, 2020 nor cost of product revenues
associated with the Patent Monetization revenues of $155 and $537, for the three
and six months ended June 30, 2019. The cost of product revenues as a percentage
of total revenues for the three months ended June 30, 2020 for Andrea DSP
Microphone and Audio Software Products was 18% compared to 27% for the three
months ended June 30, 2019. The cost of product revenues as a percentage of
total revenues for the six months ended June 30, 2020 for Andrea DSP Microphone
and Audio Software Products was 21% compared to 29% for the six months ended
June 30, 2019. These changes are primarily the result of the product mix
described in "Total Revenues" above.

Patent Monetization Expenses


Patent monetization expenses for the three months ended June 30, 2020 decreased
33% to $49,538 from $74,080 for the three months ended June 30, 2019. Patent
monetization expenses for the six months ended June 30, 2020 decreased 21% to
$88,928 from $113,273 for the six months ended June 30, 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. The
decreases in Patent Monetization expenses for the three and six months ended
June 30, 2020 is 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 June 30, 2020
increased 1% to $147,245 from $145,176 for the three months ended June 30, 2019.
Research and development expenses for the six months ended June 30, 2020
increased 5% to $299,866 from $286,360 for the six months ended June 30, 2019.
The expenses primarily relate to costs associated with the development of new
products. For the three months ended June 30, 2020, the increase in research and
development expenses reflects a 3% decrease in our Patent Monetization efforts
to $6,283, or 4% of total research and development expenses, and a 2% increase
in our Andrea DSP Microphone and Audio Software Technology efforts to $140,962,
or 96% of total research and development expenses. For the six months ended June
30, 2020, the decrease in research and development expenses reflects a 15%
decrease in our Patent Monetization efforts to $11,800, or 4% of total research
and development expenses, and a 6% increase in our Andrea DSP Microphone and
Audio Software Technology efforts to $288,066, or 96% 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 5% to
$238,033 for the three months ended June 30, 2020 from $249,679 for the three
months ended June 30, 2019. For the three months ended June 30, 2020, general,
administrative and selling expenses related to our Patent Monetization efforts
were $39,753, 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 $198,280, or 83% of total general,
administrative and selling expenses. General, administrative and selling
expenses decreased approximately 5% to $521,089 for the six months ended June
30, 2020 from $547,936 for the six months ended June 30, 2019. For the six
months ended June 30, 2020, general, administrative and selling expenses related
to our Patent Monetization efforts were $84,117, 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
$436,972, 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 June 30, 2020 was $16,429
compared to $17,238 for the three months ended June 30, 2019. Interest expense,
net for the six months ended June 30, 2020 was $33,896 compared to $33,950 for
the six months ended June 30, 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 June 30, 2020 was $59
compared to a $782 tax provision for the three months ended June 30, 2019. The
income tax provision for the six months ended June 30, 2020 was $565 compared to
$1,322 for the six months ended June 30, 2019. The provision for the three and
six months ended June 30, 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 June 30, 2020 was $242,457 compared to a net
loss of $74,235 for the three months ended June 30, 2019. Net loss for the six
months ended June 30, 2020 was $438,718 compared to a net loss of $271,723 for
the six months ended June 30, 2019. The net loss for the three and six months
ended June 30, 2020 and 2019 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 June 30, 2020, we had cash of $411,836 compared with $335,790 at December 31,
2019. The increase in our cash balance at June 30, 2020 was primarily the result
of proceeds of the Additional Notes received in connection with the Revenue
Sharing Agreement and the PPP Loan partially offset by cash used in operating
activities.

Our working capital balance at June 30, 2020 was $386,218 compared to working
capital of $556,850 at December 31, 2019. The decrease in working capital
reflects a decrease in total current assets of $217,355 and a decrease in total
current liabilities of $46,723. The decrease in total current assets reflects an
increase in cash of $76,046, a decrease in accounts receivable of $254,591, a
decrease in inventories of $46,448 and an increase in prepaid expenses and other
current assets of $7,638. The decrease in total current liabilities reflects a
decrease in trade accounts payable and other current liabilities of $100,184
partially offset by an increase in the current portion of long-term debt of
$53,461.

The increase in cash of $76,046 reflects $155,484 of net cash used in operating
activities, $19,245 of net cash used in investing activities and $250,775 of net
cash provided by financing activities.

The cash used in operating activities of $155,484, excluding non-cash charges
for the six months ended June 30, 2020, was attributable to a $254,026 decrease
in accounts receivable, a $49,796 decrease in inventories, a $7,638 increase in
prepaid expenses and other current assets and a $105,732 decrease 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 $19,245 reflects an increase in patents
and trademarks of $13,256 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 $250,775, reflects $100,000 of proceeds from long-term debt, $8,000 from the SBA Loan and $142,775 from the PPP Loan.


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 August 7, 2020, 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.

                                                                            

20

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Subsequent to June 30, 2020, the Company received proceeds of $150,000 under the
Economic Injury Disaster Loan Program, which was expanded under the CARES Act
for COVID-19 relief. See Part II, "Item 5 - Other Information" for further
details on the SBA Loan.

© Edgar Online, source Glimpses


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