ANDREA ELECTRONICS CORPORATION Overview
We design, develop and manufacture state-of-the-art digital microphone products and noise reduction software that facilitate natural language and 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 17 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, 2020 . A discussion of our critical accounting policies and estimates are also included in Note 2. Summary of Significant Accounting Policies in notes to condensed 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, 2020 .
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 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;
• changes in economic, competitive, governmental, technological and other factors
that may affect our business and prospects.
• 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, 2020 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. 18 Results Of Operations
Three and Nine Months ended
Total Revenues
For the Three Months Ended For the Nine Months Ended
September 30, September 30, %
2021 2020 % Change 2021 2020 Change
Patent Monetization revenues
License revenues $ 93 $ 150 (38 ) $ 250 $ 452 (45)
Total Patent Monetization
revenues 93 150 (38 ) 250 452 (45)
Andrea DSP Microphone and Audio
Software Products revenues
Revenue from automotive array
microphone products 106,904 108,424 (1 ) 253,897 268,089 (5) (a)
Revenue from OEM array
microphone products 250,965 214,220 17 788,573 589,169 34 (b)
Revenue from customized digital
products 42,006 32,595 29 146,789 64,318 128 (c)
All other Andrea DSP Microphone
and Audio Software Products
revenues 37,412 28,983 29 55,131 48,728 13 (d)
License and service related
revenues 11,050 1,928 473 20,869 53,510 (61) (e)
Total Andrea DSP Microphone and
Audio Software Products revenues 448,337 386,150 16 1,265,259 1,023,814 24 Total revenues$ 448,430 $ 386,300 16$ 1,265,509 $ 1,024,266 24
(a) The approximate
array microphone products for the three and nine months ended
2021, respectively, as compared to the same periods in 2020, is the result of
timing of sales to integrators of public safety and mass transit vehicle
solutions.
(b) The approximate
microphone products for the three and nine months ended
respectively, as compared to the same periods in 2020, are primarily the
result of sales to new customers that are integrating our commercial product
audio solutions.
(c) The increases of approximately
products revenue for the three and nine months ended
respectively, as compared to the same periods in 2020, are related to the
timing of purchases from an OEM customer for a customized digital product.
(d) The increases of approximately
Andrea DSP Microphone and Audio Software Products for the three and nine
months ended
periods in 2020, is primarily the result of increased revenues of speaker and
amplifier kits, a new addition to our overall audio solutions.
(e) The approximate
the three months ended
2020 was a result of a limited term license and service agreement. The
approximate
nine months ended
is a result of higher service related revenue in 2020 for a project that was
completed in 2020.
Cost of Product Revenues
Cost of product revenues as a percentage of total revenues for the three months endedSeptember 30, 2021 and 2020 was 27% and 24%, respectively. Cost of product revenues as a percentage of total revenues for the nine months endedSeptember 30, 2021 and 2020 was 26% and 22%, respectively. There was no cost of product revenues associated with the Patent Monetization revenues of 19$93 and$250 for the three and nine months endedSeptember 30, 2021 , respectively, nor cost of product revenues associated with the Patent Monetization revenues of$150 and$452 , for the three and nine months endedSeptember 30, 2020 , respectively. The cost of product revenues as a percentage of total revenues for the three months endedSeptember 30, 2021 for Andrea DSP Microphone and Audio Software Products was 27% compared to 18% for the three months endedSeptember 30, 2020 . The cost of product revenues as a percentage of total revenues for the nine months endedSeptember 30, 2021 for Andrea DSP Microphone and Audio Software Products was 25% compared to 21% for the nine months endedSeptember 30, 2020 . These increases in cost of product revenues as a percentage of total revenues are primarily the result of the increased component costs because of supply chain issues as well as the product mix described in "Total Revenues" above.
Patent Monetization Expenses
Patent monetization expenses for the three months endedSeptember 30, 2021 decreased 2% to$38,400 from$39,039 for the three months endedSeptember 30, 2020 . Patent monetization expenses for the nine months endedSeptember 30, 2021 decreased 9% to$115,924 from$127,967 for the nine months endedSeptember 30, 2020 . 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 nine months endedSeptember 30, 2021 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 endedSeptember 30, 2021 increased 8% to$143,715 from$132,786 for the three months endedSeptember 30, 2020 . Research and development expenses for the nine months endedSeptember 30, 2021 decreased 1% to$428,095 from$432,652 for the nine months endedSeptember 30, 2020 . These expenses primarily relate to costs associated with the development of new products. For the three months endedSeptember 30, 2021 , the increase in research and development expenses reflects a 7% increase in our Patent Monetization efforts to$3,834 , or 3% of total research and development expenses, and an 8% increase in our Andrea DSP Microphone andAudio Software Technology efforts to$139,881 , or 97% of total research and development expenses. For the nine months endedSeptember 30, 2021 , the decrease in research and development expenses reflects a 26% decrease in our Patent Monetization efforts to$11,392 , or 3% of total research and development expenses, and a less than 1% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to$416,703 , or 97% 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 increased approximately 2% to$260,062 for the three months endedSeptember 30, 2021 from$255,313 for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , general, administrative and selling expenses related to our Patent Monetization efforts were$41,364 , 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$218,698 , or 84% of total general, administrative and selling expenses. General, administrative and selling expenses increased approximately 1% to$784,895 for the nine months endedSeptember 30, 2021 from$776,402 for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , general, administrative and selling expenses related to our Patent Monetization efforts were$122,882 , 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$662,013 , or 84% of total general, administrative and selling expenses. These small increases relate to changes in regular operating expenses. Interest expense, net Interest expense, net for the three months endedSeptember 30, 2021 was$18,541 compared to$16,559 for the three months endedSeptember 30, 2020 . Interest expense, net for the nine months endedSeptember 30, 2021 was$54,682 compared to$50,455 for the nine months endedSeptember 30, 2020 . 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. Provision for Income Taxes The income tax provision for the nine months endedSeptember 30, 2021 was$585 compared to$565 for the nine months endedSeptember 30, 2020 . The provision for the nine months endedSeptember 30, 2021 and 2020 is a result of certain licensing revenues 20
that are subject to withholding of income tax as mandated by the foreign
jurisdiction in which the revenues are earned. There was no provision for income
taxes for the three months ended
Net income (loss) Net income for the three months endedSeptember 30, 2021 was$12,329 compared to a net loss of$150,191 for the three months endedSeptember 30, 2020 . Net loss for the nine months endedSeptember 30, 2021 was$150,105 compared to a net loss of$588,909 for the nine months endedSeptember 30, 2020 . The net loss for the three and nine months endedSeptember 30, 2021 and 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
AtSeptember 30, 2021 , we had cash of$255,754 compared with$362,730 atDecember 31, 2020 . The decrease in our cash balance atSeptember 30, 2021 was primarily the result of cash used in operating activities partially offset by proceeds of the PPP Loan Second Draw. Our working capital balance atSeptember 30, 2021 was$235,855 compared to working capital of$321,491 atDecember 31, 2020 . The decrease in working capital reflects an increase in total current liabilities of$152,804 offset by an increase in total current assets of$67,168 . The increase in total current assets reflects a decrease in cash of$106,976 , an increase in accounts receivable of$102,154 , an increase in inventories of$116,011 and a decrease in prepaid expenses and other current assets of$44,021 . The increase in total current liabilities reflects an increase in trade accounts payable and other current liabilities of$160,590 partially offset by a decrease in the current portion of long term debt of$7,786 . The decrease in cash of$106,976 reflects$373,138 of net cash used in operating activities,$16,615 of net cash used in investing activities and$282,777 of net cash provided by financing activities. The cash used in operating activities of$373,138 , excluding non-cash charges for the nine months endedSeptember 30, 2021 , was attributable to a$102,739 increase in accounts receivable, a$137,853 increase in inventories, a$44,021 decrease in prepaid expenses and other current assets and a$129,888 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$16,615 reflects an increase in patents and trademarks of$2,609 and purchases of property and equipment of$14,006 . 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 and test equipment for the production of products. 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 our increased sales and marketing efforts. As ofNovember 8, 2021 , Andrea had approximately$270,000 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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