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 theState 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 inthe 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 endedDecember 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 endedDecember 31, 2019 . 16
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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
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 endedDecember 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. 17
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Results Of Operations
Three and Six Months endedJune 30, 2020 compared to the Three and Six Months endedJune 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
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 throughJune 30, 2020 to be approximately$300,000 less than the same period in 2019.
(a) The approximate
array microphone products for the three and six months ended
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
for the three months ended
2019, is primarily the result of timing of sales to integrators of commercial
product audio solutions. The approximate
array microphone products for the six months ended
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
months because of COVID-19 related decrease.
(c) The decreases of approximately
products revenue for the three and six months, respectively, ended
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
and Audio Software Products for the three months ended
compared to the same period in 2019, is primarily the result of revenues from
sales to the
in revenues of all other Andrea DSP Microphone and Audio Software Products for
the six months ended
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
(e) The approximate
revenues for the three and six months ended
compared to the same period in 2019, is a result of increases in service related revenue. 18
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Cost of Product Revenues
Cost of product revenues as a percentage of total revenues for the three months endedJune 30, 2020 and 2019 was 18% and 27%, respectively. Cost of product revenues as a percentage of total revenues for the six months endedJune 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 endedJune 30, 2020 nor cost of product revenues associated with the Patent Monetization revenues of$155 and$537 , for the three and six months endedJune 30, 2019 . The cost of product revenues as a percentage of total revenues for the three months endedJune 30, 2020 for Andrea DSP Microphone and Audio Software Products was 18% compared to 27% for the three months endedJune 30, 2019 . The cost of product revenues as a percentage of total revenues for the six months endedJune 30, 2020 for Andrea DSP Microphone and Audio Software Products was 21% compared to 29% for the six months endedJune 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 endedJune 30, 2020 decreased 33% to$49,538 from$74,080 for the three months endedJune 30, 2019 . Patent monetization expenses for the six months endedJune 30, 2020 decreased 21% to$88,928 from$113,273 for the six months endedJune 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 endedJune 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 endedJune 30, 2020 increased 1% to$147,245 from$145,176 for the three months endedJune 30, 2019 . Research and development expenses for the six months endedJune 30, 2020 increased 5% to$299,866 from$286,360 for the six months endedJune 30, 2019 . The expenses primarily relate to costs associated with the development of new products. For the three months endedJune 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 endedJune 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 endedJune 30, 2020 from$249,679 for the three months endedJune 30, 2019 . For the three months endedJune 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 endedJune 30, 2020 from$547,936 for the six months endedJune 30, 2019 . For the six months endedJune 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 endedJune 30, 2020 was$16,429 compared to$17,238 for the three months endedJune 30, 2019 . Interest expense, net for the six months endedJune 30, 2020 was$33,896 compared to$33,950 for the six months endedJune 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. 19
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Provision for Income Taxes
The income tax provision for the three months endedJune 30, 2020 was$59 compared to a$782 tax provision for the three months endedJune 30, 2019 . The income tax provision for the six months endedJune 30, 2020 was$565 compared to$1,322 for the six months endedJune 30, 2019 . The provision for the three and six months endedJune 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 endedJune 30, 2020 was$242,457 compared to a net loss of$74,235 for the three months endedJune 30, 2019 . Net loss for the six months endedJune 30, 2020 was$438,718 compared to a net loss of$271,723 for the six months endedJune 30, 2019 . The net loss for the three and six months endedJune 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
AtJune 30, 2020 , we had cash of$411,836 compared with$335,790 atDecember 31, 2019 . The increase in our cash balance atJune 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 atJune 30, 2020 was$386,218 compared to working capital of$556,850 atDecember 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 endedJune 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
We plan to improve our cash flows by aggressively pursuing monetization of our patents related to ourAndrea 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 ofAugust 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 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.
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Subsequent toJune 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.
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