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, 2020. 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, 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 expectations regarding the use of funds from the Company's PPP Loan and the
potential for forgiveness of the PPP Loan Second Draw 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;
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? 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, 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 results 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, 2021 compared to the Three Months ended March 31,
2020
Total Revenues
For the Three Months Ended
March 31, %
2021 2020 Change
Patent Monetization revenues
License revenues $ 84 $ 139 (40 )
Total Patent Monetization revenues 84 139 (40 )
Andrea DSP Microphone and
Audio Software Products revenues
Revenue from automotive array
microphone products 80,178 119,576 (33 ) (a)
Revenue from OEM array
microphone products 263,824 238,743 11 (b)
Revenue from customized digital
products 64,273 17,233 273 (c)
All other Andrea DSP
Microphone and Audio
Software Products revenues 14,940 2,203 578 (d)
License revenues 3,185 4,757 (33 ) (e)
Total Andrea DSP Microphone and
Audio Software Products revenues 426,400 382,512 11
Total revenues $ 426,484 $ 382,651 11
(a) The approximate $40,000 decrease in revenues from automotive array microphone
products for the three months ended March 31, 2021, as compared to the same
period in 2020, is the result of timing of sales to integrators of public
safety and mass transit vehicle solutions.
(b) The approximate $25,000 increase in revenues from OEM array microphone products
for the three months ended March 31, 2021, as compared to the same period in
2020, is primarily the result of timing of sales to integrators of commercial
product audio solutions.
(c) The increase of approximately $47,000 in customized digital products revenue
for the three months ended March 31, 2021, as compared to the same period in
2020, is related to the timing of purchases from an OEM customer for a
customized digital product.
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(d) The approximate $13,000 increase in revenues of all other Andrea DSP Microphone
and Audio Software Products for the three months ended March 31, 2021, as
compared to the same period in 2020, is primarily the result of increased
revenues from new customers generated for new audio solutions.
(e) The approximate $2,000 decrease in license and service related revenues for the
three months ended March 31, 2021 as compared to the same period in 2020, 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, 2021 and 2020 was 24% and 22%, respectively. There was no cost
of product revenues associated with the Patent Monetization. The increase 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 increase in
revenue from customized digital 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, 2021 decreased
1% to $39,172 from $39,390 for the three months ended March 31, 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. 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, 2021
decreased 10% to $137,724 from $152,621 for the three months ended March 31,
2020. The expenses primarily relate to costs associated with the development of
new products. For the three months ended March 31, 2021, research and
development expenses reflect a 32% decrease in our Patent Monetization efforts
to $3,759, or 3% of total research and development expenses, and a 9% decrease
in our Andrea DSP Microphone and Audio Software Technology efforts to $133,965,
or 97% of total research and development expenses. The decrease in our Patent
Monetization efforts represents a decrease in intangible asset amortization
expense. While the decrease in our Andrea DSP Microphone and Audio Software
Technology efforts reflects a decrease in intangible asset amortization expense
and a decrease in salary expenses related to current projects. 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 2% to
$276,216 for the three months ended March 31, 2021 from $283,056 for the three
months ended March 31, 2020. The approximate $7,000 decrease relates to changes
in regular operating expenses. For the three months ended March 31, 2021,
general, administrative and selling expenses related to our Patent Monetization
efforts were $41,215, or 15% 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 $235,001, or 85% of total
general, administrative and selling expenses.
Interest expense, net
Interest expense, net for the three months ended March 31, 2021 remained
relatively unchanged at $17,499 compared to $17,467 for the three months ended
March 31, 2020.
Provision for Income Taxes
The income tax provision for the three months ended March 31, 2021 was $288
compared to a $506 tax provision for the three months ended March 31, 2020. The
provision for the three months ended March 31, 2021 and 2020 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, 2021 was $3,923 compared to a net
loss of $196,261 for the three months ended March 31, 2020. The net loss for the
three months ended March 31, 2021 principally reflects the factors described
above largely offset, in comparison to the three months ended March 31, 2020, by
a gain from the forgiveness of the PPP Loan First Draw and related interest of
$143,641.
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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 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, 2021, we had cash of $389,995 compared with $362,730 at December
31, 2020. The increase in our cash balance at March 31, 2021 was primarily the
result of proceeds of the PPP Loan Second Draw largely offset by cash used in
operating activities.
Our working capital balance at March 31, 2021 was $446,340 compared to working
capital of $321,491 at December 31, 2020. The increase in working capital
reflects an increase in total current assets of $172,034 and partially offset by
an increase in total current liabilities of $47,185. The increase in total
current assets reflects an increase in cash of $27,265, an increase in accounts
receivable of $102,147, an increase in inventories of $104,476 and a decrease in
prepaid expenses and other current assets of $61,854. The increase in total
current liabilities reflects an increase in trade accounts payable and other
current liabilities of $50,585 partially offset by a decrease in the current
portion of long term debt of $3,400.
The increase in cash of $27,265 reflects $215,152 of net cash used in operating
activities, $360 of net cash used in investing activities and $242,777 of net
cash provided by financing activities.
The cash used in operating activities of $215,152, excluding non-cash charges
for the three months ended March 31, 2021, was attributable to a $102,435
increase in accounts receivable, a $104,317 increase in inventories, a $61,854
decrease in prepaid expenses and other current assets and a $38,807 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 $360 reflects capital expenditures
associated with our intellectual property.
The cash provided by financing activities of $242,777, reflects $100,000 of
proceeds from long-term notes and $142,775 from the PPP Loan Second Draw.
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 our increased sales and marketing
efforts. As of May 11, 2021, Andrea had approximately $350,000 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.
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