ANDREA ELECTRONICS CORPORATION Overview
Our primary mission is to provide the emerging "voice interface" markets with state-of-the-art digital microphone products and noise reduction software that facilitate AI natural language processing of the human voice/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 inthe 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, 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 estimates. Revenue Recognition - OnJanuary 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.
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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. 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. AtDecember 31, 2020 and 2019, our allowance for doubtful accounts was$4,789 . 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 occur, 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 had inventories of$114,393 and$210,161 atDecember 31, 2020 and 2019, 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 endedDecember 31, 2020 and 2019. 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. 13
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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 endedDecember 31, 2020 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, such as the ongoing impact of COVID-19 and the PPP Loans, 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
Total Revenues
For the Year Ended
2020 2019 Change
Patent Monetization revenues
License revenues $ 554 $ 950 (42 )
Total Patent Monetization revenues 554 950
Andrea DSP Microphone and Audio Software Products revenues Revenue from automotive array microphone products
334,904 670,236 (50 ) (a)
Revenue from OEM array microphone products 777,487 897,718 (13 ) (b)
Revenue from customized digital product 100,670 125,782 (20 ) (c)
All other Andrea DSP Microphone and Audio Software Product revenues
79,572 158,586 (50 ) (d)
License revenues and service related revenues 62,176 41,968 49 (e)
Total Andrea DSP Microphone and Audio Software Products revenues 1,354,809 1,894,290 (29 )
Total revenues $ 1,355,363 $ 1,895,240 (29 )
(a) The decrease of approximately
compared to the same period in 2019, in revenues from automotive array
microphone products is primarily the result of timing of sales to integrators
of public safety and mass transit vehicle solutions because of COVID-19.
(b) The decrease of approximately
compared to the same period in 2019, in revenues of OEM array microphone
products is primarily the result of decreased product revenues from integrators
of commercial product audio solutions because of COVID-19.
(c) The decrease of approximately
compared to the same period in 2019, from customized digital product revenues
is related to the timing of purchases from an OEM customer because of COVID-19.
(d) The decrease of approximately
compared to the same period in 2019, in all other Andrea DSP Microphone and
Audio Software Product revenues is primarily the result of timing in revenues
from sales to the
(e) The increase of approximately
compared to the same period in 2019, is primarily the result of increased
service revenue of approximately
offset by decreased royalties reported as a result of a decrease in sales of PC
models which feature our technology.
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Cost of Revenues
Cost of revenues as a percentage of total revenues for the year endedDecember 31, 2020 decreased to 23% from 28% for the year endedDecember 31, 2019 . There was no cost of revenues associated with the Patent Monetization revenues of$554 and$950 for the years endedDecember 31, 2020 and 2019, respectively. The cost of revenues as a percentage of total revenue for the year endedDecember 31, 2020 for Andrea DSP Microphone and Audio Software Products was 23% compared to 28% for the year endedDecember 31, 2019 . These changes are primarily the result of the changes in the product mix of revenues as described under "Total Revenues" above.
Patent Monetization Expenses
Patent monetization expenses for the year endedDecember 31, 2020 decreased by 14% to$166,694 from$194,215 for the year endedDecember 31, 2019 , 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 endedDecember 31, 2020 increased by 1% to$573,980 from$568,799 for the year endedDecember 31, 2019 . These expenses primarily relate to costs associated with the development of new products. For the year endedDecember 31, 2020 , research and development expenses reflected a 22% decrease in our Patent Monetization efforts to$18,908 or 3% of total research and development expenses, and a 2% increase in our Andrea DSP Microphone and Audio Software Technology efforts to$555,072 , or 97% of total research and development expenses. With respect to DSP Microphone andAudio 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 1% to$1,058,980 for the year endedDecember 31, 2020 from$1,070,654 for the year endedDecember 31, 2019 . For the year endedDecember 31, 2020 , there was a 1% decrease in our Patent Monetization efforts to$177,206 , or 17% of total general, administrative and selling expenses and a 1% decrease in general, administrative and selling expenses in our Andrea DSP Microphone and Audio Software Technology efforts to$881,774 , or 83% of total general, administrative and selling expenses. The overall 1% decrease of approximately$12,000 is primarily related to decreased stock based compensation expense.
Interest expense, net
Interest expense, net for the year ended
Provision for Income Taxes
The income tax provision for the year endedDecember 31, 2020 was$619 , compared to$1,805 for the year endedDecember 31, 2019 . The provision for income taxes for the years endedDecember 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 of approximately$3,000 and$9,000 for the years endingDecember 31, 2020 and 2019, respectively, are earned.
Net loss
Net loss for the year endedDecember 31, 2020 was$823,835 compared to a net loss of$548,566 for the year endedDecember 31, 2019 . The net loss for the year endedDecember 31, 2020 principally reflects the factors described above.
Inflation
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.
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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
AtDecember 31, 2020 , we had cash of$362,730 compared to$335,790 atDecember 31, 2019 . The increase in our cash balance atDecember 31, 2020 is primarily a result of proceeds of the Additional Notes received in connection with the Revenue Sharing Agreement, the SBA Loan and the PPP Loan partially offset by cash used in operating activities. Our working capital balance atDecember 31, 2020 was$321,491 compared to working capital of$556,850 atDecember 31, 2019 . The decrease in working capital reflects a decrease in total current assets of$196,347 and an increase in total current liabilities of$39,012 . The decrease in total current assets reflects an increase in cash of$26,940 , a decrease in accounts receivable of$195,308 , a decrease in inventories of$95,768 and an increase in prepaid expenses and other current assets of$67,789 . The increase in total current liabilities reflects an increase in trade accounts payable and other current liabilities of$29,033 and an increase in the current portion of long-term debt of$9,979 . The increase in cash of$26,940 reflects$448,543 of net cash used in operating activities, plus$25,292 of net cash used in investing activities, partially offset by$500,775 of net cash provided by financing activities. The cash used in operating activities of$448,543 , excluding non-cash charges, is primarily attributable to the$823,835 net loss for the year endedDecember 31, 2020 , a$194,689 decrease in accounts receivable, a$104,948 decrease in inventories, a$67,790 increase in prepaid expenses, other current assets and other assets, and a$19,078 decrease in trade accounts payable and other current liabilities and lease 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$25,292 reflects a$19,303 increase in patents and trademarks 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 cash provided by financing activities of
We plan to improve our cash flows in 2021 by aggressively pursuing monetization of our patents related to ourAndrea 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 ofMarch 23, 2021 , Andrea had approximately$340,000 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 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.
Market Risk
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 inU.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 endedDecember 31, 2020 , total revenue from sales to customers outsidethe United States accounted for approximately 23% 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
Not applicable.
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