Note 1.
Basis of Presentation
Basis of
Presentation
- The accompanying
unaudited condensed consolidated interim financial statements include the
accounts of Andrea Electronics Corporation and its subsidiaries (Andrea or the
Company). All intercompany balances and transactions have been eliminated in
consolidation.
These unaudited condensed
consolidated interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In addition, the December
31, 2016 balance sheet data was derived from the audited consolidated financial
statements, but does not include all disclosures required by GAAP. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations of any interim period are not necessarily indicative of the results
of operations to be expected for any other interim period or for the fiscal
year.
These unaudited condensed
consolidated interim financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended December 31, 2016 included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2016, filed with the Securities and Exchange
Commission (the SEC) on March 24, 2017. The accounting policies used in
preparing these unaudited condensed consolidated interim financial statements
are consistent with those described in the December 31, 2016 audited
consolidated financial statements.
Note 2.
Summary of Significant Accounting Policies
(Loss) income Per
Share
- Basic (loss) income
earnings per share is computed by dividing the net (loss) income by the weighted
average number of common shares outstanding during the period. Diluted (loss)
earnings per share adjusts basic (loss) earnings per share for the effects of
convertible securities, stock options and other potentially dilutive financial
instruments, only in the periods in which such effect is dilutive. Diluted
earnings per share are based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method for the outstanding options, and the
if-converted method for the outstanding convertible instruments. Under the
treasury stock method, options are assumed to be exercised at the beginning of
the period (or at the time of issuance, if later) and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. Under the if-converted method, outstanding convertible instruments
are assumed to be converted into common stock at the beginning of the period (or
at the time of issuance, if later). Securities that could potentially dilute
basic earnings per share (EPS) in the future that were not included in the
computation of the diluted EPS because to do so would have been anti-dilutive
for the periods presented, consist of the following:
|
|
For the
Three Months Ended
|
|
|
March 31,
2017
|
|
March 31,
2016
|
Total potentially dilutive common shares as of:
|
|
|
|
|
|
|
|
Stock options to
purchase common stock (Note 7)
|
|
|
17,329,820
|
|
|
|
11,499,821
|
Series C Convertible
Preferred Stock and related
accrued
dividends (Note 4)
|
|
|
1,524,758
|
|
|
|
-
|
Series D Convertible
Preferred Stock (Note 5)
|
|
|
3,628,576
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Total potentially dilutive common shares
|
|
|
22,483,154
|
|
|
|
11,499,821
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss)
income
|
|
$
|
(2,060,002
|
)
|
|
$
|
856,941
|
Denominator:
|
|
|
|
|
|
|
|
Basic Weighted average shares
|
|
|
64,914,935
|
|
|
|
64,416,035
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
1,786,869
|
Series C Convertible
Preferred Stock and
related
accrued dividends (Note 4)
|
|
|
-
|
|
|
|
2,023,658
|
Series D Convertible
Preferred Stock (Note 5)
|
|
|
-
|
|
|
|
3,628,576
|
|
|
|
|
|
|
|
|
Denominator for diluted
(loss) income per
share-
adjusted weighted average shares after
assumed
conversions
|
|
|
64,914,935
|
|
|
|
71,855,138
|
Cash
- Cash includes cash and highly liquid
investments with original maturities of three months or less. At various times
during the periods ended March 31, 2017 and December 31, 2016, the Company had
cash deposits in excess of the maximum amounts insured by the Federal Deposit
Insurance Corporation insurance limits. At March 31, 2017 and December 31, 2016,
the Companys cash was held at four financial institutions.
6
Concentration of Credit
Risk
- The following customers
accounted for 10% or more of Andreas consolidated total revenues during at
least one of the periods presented below:
|
|
For the Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
Customer
A
|
|
38
|
%
|
|
*
|
|
Customer
B
|
|
31
|
%
|
|
*
|
|
Customer
C
|
|
11
|
%
|
|
*
|
|
Customer
D
|
|
*
|
|
|
16
|
%
|
Customer
E
|
|
*
|
|
|
27
|
%
|
Customer
F
|
|
*
|
|
|
41
|
%
|
____________________
* Amounts are less than 10%
As of March 31, 2017,
Customers A, B and C accounted for approximately 25%, 56% and 16%, respectively,
of accounts receivable. As of December 31, 2016, Customers A and C accounted for
approximately 54% and 22% of accounts receivable, respectively.
Allowance for Doubtful
Accounts
- The Company performs
on-going credit evaluations of its customers and adjusts credit limits based
upon payment history and the customers current credit worthiness, as determined
by the review of their current credit information. Collections and payments from
customers are continuously monitored. The Company maintains an allowance for
doubtful accounts, which is based upon historical experience as well as specific
customer collection issues that have been identified. While such bad debt
expenses have historically been within expectations and allowances established,
the Company cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past. If the financial condition of customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories
- Inventories are stated at the lower of cost (on
a first-in, first-out) or market basis. The cost of inventory is based on the
respective cost of materials. Andrea reviews its inventory reserve for
obsolescence on a quarterly basis and establishes reserves on inventories based
on the specific identification method as well as a general reserve. Andrea
records changes in inventory reserves as part of cost of revenues.
|
|
March
31,
2017
|
|
December
31,
2016
|
Raw
materials
|
|
$
|
17,798
|
|
|
$
|
17,533
|
|
Finished
goods
|
|
|
176,075
|
|
|
|
188,304
|
|
|
|
|
193,873
|
|
|
|
205,837
|
|
Less:
reserve for obsolescence
|
|
|
(112,420
|
)
|
|
|
(119,325
|
)
|
|
|
$
|
81,453
|
|
|
$
|
86,512
|
|
Long-Lived
Assets
- Andrea accounts for its
long-lived assets in accordance with Accounting Standards Codification (ASC)
360 Property, Plant and Equipment for purposes of determining and measuring
impairment of its long-lived assets (primarily intangible assets) other than
goodwill. Andreas 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 whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If Andrea identifies a
permanent impairment such that the carrying amount of Andreas long lived assets
is not recoverable using the sum of an undiscounted cash flow projection (gross
margin dollars from product revenues), the impaired asset is adjusted to its
estimated fair value, based on an estimate of future discounted cash flows which
becomes the new cost basis for the impaired asset. 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. At March 31, 2017 and December 31, 2016, Andrea concluded that
Intangibles and long-lived assets were not required to be tested for
recoverability.
7
Trade accounts payable and
other current liabilities
- Trade
accounts payable and other current liabilities consists of the
following:
|
|
March
31,
2017
|
|
December
31,
2016
|
Trade
accounts payable
|
|
$
|
36,809
|
|
$
|
31,887
|
Payroll and
related expenses
|
|
|
49,813
|
|
|
25,630
|
Patent
monetization expenses
|
|
|
1,880,244
|
|
|
705,964
|
Short-term
deferred revenue
|
|
|
2,030
|
|
|
-
|
Professional
and other service fees
|
|
|
126,551
|
|
|
93,604
|
Total trade accounts
payable and other current liabilities
|
|
$
|
2,095,447
|
|
$
|
857,085
|
Subsequent to March 31, 2017,
Andrea received $2,300,000 in Additional Notes to pay current patent
monetization expenses.
Revenue
Recognition
- Non
software-related revenue, which is generally comprised of microphones and
microphone connectivity product revenues, is recognized when title and risk of
loss pass to the customer, which is generally upon shipment. With respect to
licensing revenues, Andrea recognizes revenue in accordance with ASC 985,
Software and ASC 605 Revenue Recognition. License revenue is recognized
based on the terms and conditions of individual contracts. In addition, fee
based services, 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.
Income
Taxes
- Andrea accounts for
income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires an
asset and liability approach for financial accounting and reporting for income
taxes and establishes for all entities a minimum threshold for financial
statement recognition of the benefit of tax positions, and requires certain
expanded disclosures. The provision for income taxes is based upon income or
loss after adjustment for those permanent items that are not considered in the
determination of taxable income. Deferred income taxes represent the tax effects
of differences between the financial reporting and tax bases of the Companys
assets and liabilities at the enacted tax rates in effect for the years in which
the differences are expected to reverse. The Company evaluates the
recoverability of deferred tax assets and establishes a valuation allowance when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. As of March 31, 2017 and December 31, 2016 the Company had
recorded a full valuation allowance. Andrea expects it will reduce its valuation
allowance in future periods to the extent that it can demonstrate its ability to
utilize the assets. Management makes judgments as to the interpretation of the
tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In managements opinion, adequate provisions for
income taxes have been made for all years. If actual taxable income by tax
jurisdiction varies from estimates, additional allowances or reversals of
reserves may be necessary. Income tax expense consists of taxes payable for the
period, withholding of income tax as mandated by the foreign jurisdiction in
which the revenues are earned withholding of income tax as mandated by the
foreign jurisdiction in which the revenues are earned and the change during the
period in deferred tax assets and liabilities. The Company has identified its
federal tax return and its state tax return in New York as "major" tax
jurisdictions. Based on the Company's evaluation, it has
been concluded that there are no significant uncertain tax positions requiring
recognition in the Company's condensed consolidated interim financial
statements. The Company's evaluation was performed for tax years ended 2013
through 2016. The Company believes that its income tax positions and deductions
will be sustained on audit and does not anticipate any adjustments that will
result in a material change to its financial position.
Stock-Based
Compensation
- At March 31, 2017,
Andrea had one stock-based employee compensation plan, which is described more
fully in Note 7. Andrea accounts for stock-based compensation in accordance with
ASC 718, Compensation Stock Compensation. ASC 718 establishes accounting for
stock-based awards exchanged for employee services. Under the provisions of ASC
718, stock-based compensation cost is measured at the grant date, based on the
fair value of the award, and is recognized as expense over the employees
requisite service period (generally the vesting period of the equity grant). The
fair value of the Companys common stock options
are estimated using the Black Scholes option-pricing model with the following
assumptions: expected volatility, dividend rate, risk free interest rate and the
expected life. The Company expenses stock-based compensation by using the
straight-line method. In accordance with ASC 718, excess tax benefits realized
from the exercise of stock-based awards are classified in cash flows from
financing activities. The future realization of the reserved deferred tax assets
related to these tax benefits associated with the exercise of stock options will
result in a credit to additional paid in capital if the related tax deduction
reduces taxes payable. The Company has elected the with and without approach
regarding ordering of windfall tax benefits to determine whether the windfall
tax benefit did reduce taxes payable in the current year. Under this approach,
the windfall tax benefit would be recognized in additional paid-in-capital only
if an incremental tax benefit is realized after considering all other benefits
presently available.
Use of
Estimates
- The preparation of
condensed consolidated interim financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and disclosures of contingent assets and
liabilities at the date of the condensed consolidated interim financial
statements and the reported amounts of revenues and expenses during the
reporting period.
8
Management bases its estimates
on historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. The most significant estimates, among other
things, are used in accounting for allowances for bad debts, inventory valuation
and obsolescence, product warranty, depreciation, deferred income taxes,
expected realizable values for assets (primarily intangible assets),
contingencies, revenue recognition as well as the recording and presentation of
the Companys convertible preferred stock. Estimates and assumptions are
periodically reviewed and the effects of any material revisions are reflected in
the condensed consolidated interim financial statements in the period that they
are determined to be necessary. Actual results could differ from those estimates
and assumptions.
Recent Accounting
Pronouncements
- In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update
("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which
supersedes the revenue recognition requirements in ASC Topic 605, "Revenue
Recognition," and most industry-specific guidance. This ASU is based on the
principle that revenue is recognized to depict the transfer of goods or services
to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The ASU also
requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments, and assets recognized from costs incurred to
obtain or fulfill a contract. The amendments in the ASU must be applied using
one of two retrospective methods and are effective for annual and interim
periods beginning after December 15, 2016. On July 9, 2015, the FASB modified
ASU 2014-09 to be effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. As
modified, the FASB permits the adoption of the new revenue standard early, but
not before the annual periods beginning after December 15, 2017. A public
organization would apply the new revenue standard to all interim reporting
periods within the year of adoption. The Company will evaluate the effects, if
any, that adoption of this guidance will have on its financial statements.
In August 2014, FASB issued
ASU No. 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic
205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a
Going Concern. This standard is intended to define managements responsibility
to evaluate whether there is substantial doubt about an organizations ability
to continue as a going concern and to provide related footnote disclosures.
Under U.S. GAAP, financial statements are prepared under the presumption that
the reporting organization will continue to operate as a going concern, except
in limited circumstances. Financial reporting under this presumption is commonly
referred to as the going concern basis of accounting.
The going concern basis of
accounting is critical to financial reporting because it establishes the
fundamental basis for measuring and classifying assets and liabilities.
Currently, U.S. GAAP lacks guidance about managements responsibility to
evaluate whether there is substantial doubt about the organizations ability to
continue as a going concern or to provide related footnote disclosures. This ASU
provides guidance to an organizations management, with principles and
definitions that are intended to reduce diversity in the timing and content of
disclosures that are commonly provided by organizations today in the financial
statement footnotes. The amendments are effective for annual periods ending
after December 15, 2016, and interim periods within annual periods beginning
after December 15, 2016. The Company adopted ASU 2014-15 and management has made
the appropriate evaluations and disclosures. The adoption of this standard did
not have a material impact on the Companys financial position and results of
operations.
In November 2015, the FASB
issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU
2015-17). The standard requires that deferred tax assets and liabilities be
classified as noncurrent in a classified statement of financial position. ASU
2015-17 is effective for fiscal years and interim periods within those years,
beginning after December 15, 2016. Early adoption is permitted. ASU 2015-17 may
be applied either prospectively, for all deferred tax assets and liabilities, or
retrospectively. The Company has adopted ASU 2015-17 and the adoption of this
standard did not have a material impact on the Companys financial position and
results of operations.
In January 2016, the FASB
issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU
2016-01). The standard addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. ASU 2016-01 is effective
for fiscal years, and interim periods within those years, beginning after
December 15, 2017. The Company is currently evaluating the impact the adoption
of this new standard will have on its financial statements.
In January 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842). This standard requires that a
lessee recognize the assets and liabilities that arise from operating leases. A
lessee should recognize in the statement of financial position a liability to
make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease
liabilities. In transition, lessees and lessors are required to recognize and
measure leases at the beginning of the earliest period presented using a
modified retrospective approach. ASU 2016-02 is effective for fiscal years, and
interim periods within those years,
beginning after December 15, 2018. The Company is currently evaluating the
impact the adoption of this new standard will have on its financial statements.
9
In March 2016, the FASB issued
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) Principal
versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU
2016-08). ASU No. 2016-08 maintains the core principles of Topic 606 on revenue
recognition, but clarifies whether an entity is a principal or an agent in a
contract and the appropriate revenue recognition principles under each of these
circumstances. The amendments in ASU 2016-08 affect the guidance of ASU 2014-09
which is not yet effective. The Company will evaluate the effects, if any, that
adoption of this guidance will have on its financial statements.
In March 2016, the FASB issued
ASU No. 2016-09, Compensation Stock Compensation (Topic 718) Improvements
to Employee Share-Based Payment Accounting. ASU No. 2016-09 includes provisions
to simplify certain aspects related to the accounting for share-based awards and
the related financial statement presentation. This ASU includes a requirement
that the tax effect related to the settlement of share-based awards be recorded
in income tax benefit or expense in the statements of earnings. This change is
required to be adopted prospectively in the period of adoption. In addition, the
ASU modifies the classification of certain share-based payment activities within
the statements of cash flows and these changes are required to be applied
retrospectively to all periods presented, or in certain cases prospectively,
beginning in the period of adoption. The Company has adopted ASU 2016-09. The
adoption of this standard did not have a material impact on the Companys
financial position and results of operations.
In April 2016, the FASB issued
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) -
Identifying Performance Obligations and Licensing. ASU No. 2016-10 maintains
the core principles of Topic 606 on revenue recognition, but clarifies
identification of performance obligations and licensing implementation guidance.
The amendments in ASU 2016-10 affect the guidance of ASU 2014-09 which is not
yet effective. The Company will evaluate the effects, if any, that adoption of
this guidance will have on its financial statements.
In May 2016, the FASB issued
ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow-
Scope
Improvements and Practical
Expedients. ASU No. 2016-12 maintains the core principles of Topic 606 on
revenue recognition, but addresses collectability, sales tax presentation,
noncash consideration, contract modifications at transition and completed
contracts at transition. The amendments in ASU 2016-12 affect the guidance of
ASU 2014-09 which is not yet effective. The Company will evaluate the effects,
if any, that adoption of this guidance will have on its financial statements.
In June 2016, the FASB issued
ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326)
Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 provides
financial statement readers more decision-useful information about the expected
credit losses on financial instruments and other commitments to extend credit
held by a reporting entity at each reporting date. The Company will evaluate the
effects, if any, that adoption of this guidance will have on its financial
statements.
In August 2016, the FASB
issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of
Certain Cash Receipts and Cash Payments. ASU No. 2016-15 addresses eight
specific cash flow issues with the objective of reducing the existing diversity
in practice. It is effective for annual reporting periods beginning after
December 15, 2017. The Company is currently evaluating the impact, if any, this
guidance will have on its financial statements.
In November 2016, the FASB
issued ASU No. 2016-18, Statement of Cash Flows (230) Restricted Cash. ASU
No. 2016-18 requires an entity to include amounts described as restricted cash
and restricted cash equivalents with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. It is effective for annual reporting periods beginning after
December 15, 2018. The adoption of this standard is not expected to have a
material impact on the Companys financial position and results of operations.
In December 2016, the FASB
issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers. ASU No. 2016-20 amends certain aspects
of ASU No. 2014-09 and clarifies, rather than changes, the core revenue
recognition principles in ASU No. 2014-09. It is effective for annual reporting
periods beginning after December 15, 2018. The adoption of this standard is not
expected to have a material impact on the Companys financial position and
results of operations.
Reclassifications
-
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifications did not have any effect on reported
consolidated net (loss) income for the periods presented.
Subsequent
Events
- The Company evaluates
events that occurred after the balance sheet date but before the condensed
consolidated interim financial statements are issued. Based upon the evaluation
the Company did not identify any recognized or non-recognized subsequent events
that would have required adjustment or disclosure in the condensed consolidated
interim financial statements.
10
Note 3.
Revenue Sharing, Note Purchase Agreement and
Long-Term Debt
On December 24, 2014, the
Company entered into an Amended and Restated Revenue Sharing and Note Purchase
Agreement (the Revenue Sharing Agreement), with AND34 Funding LLC (AND34)
(acting as the Revenue Participants, the Note Purchasers, and the
Collateral Agent), which was retroactively effective as of February 14, 2014.
Under the Revenue Sharing Agreement, the Company granted AND34 a perpetual
predetermined share in the rights of the Companys specified future revenues
from patents (Monetization Revenues) currently owned by the Company (the
Patents) in exchange for $3,500,000, which was originally recorded as an
Advance from Revenue Sharing Agreement on the accompanying consolidated
balance sheet and was fully repaid as of September 30, 2016. AND34s rights to
the Companys Monetization Revenues (as defined in the Revenue Sharing
Agreement) from the Patents and the Notes are secured by the Patents. Under the
terms of the Revenue Sharing Agreement with AND34, Andrea issued and sold to
AND34 Notes of $10,800,000 of which were repaid in 2016. On August 10, 2016,
Andrea and AND34 executed a Rider to the Revenue Sharing Agreement (Rider).
Under the Rider, Andrea has agreed to issue and sell to AND34 Additional Notes
up to an aggregate original amount of $7,000,000, or such greater amount as
AND34 may agree to in its sole discretion, during the four year period beginning
on the date of execution of the Rider. The Additional Notes will have a Maturity
date of August 31, 2020. The proceeds of the Additional Notes will be used to
pay certain expenses related to the Revenue Sharing Agreement, and be used for
expenses of the Company incurred in pursuing patent monetization. As of March
31, 2017, there was $1,400,000 and $20,729 in Additional Notes outstanding and
PIK interest, respectively. Subsequent to March 31, 2017, Andrea received
$2,300,000 in Additional Notes to pay current patent monetization
expenses.
Any Monetization Revenues will
first be applied 100% to the payment of accrued and unpaid interest on, and then
to repay outstanding principal of, the Additional Notes. After the Additional
Notes are paid in full, the Monetization Revenues will be allocated amongst the
Revenue Participants and the Company in accordance with certain predetermined
percentages (based on aggregate amounts received by the Revenue Participants)
ranging from 50% to the Revenue Participants to ultimately 20% to the Revenue
Participants. Monetization Revenues is defined in the Revenue Sharing Agreement
to include, but is not limited to, amounts that the Company receives from third
parties with respect to the Patents, which may include new license revenues,
certain product revenue, payments and judgments. Monetization Revenues and
associated expenses are included in the Companys Patent Monetization Segment
(Note 8). For period ended March 31, 2016 there was approximately $2,944,000 of
non-recurring monetization revenues recognized for patent licensing agreements
entered into during 2016 in which the Company recorded.
The Revenue Sharing Agreement
contains many stipulations between the parties regarding the handling of various
matters related to the monetization of the Patents. The Revenue Participants and
the Company will account for the tax treatment as set forth in the Revenue
Sharing Agreement. Following an Event of Default under the Revenue Sharing
Agreement, the Note Purchasers and Revenue Participants may proceed to protect
and enforce their rights by suit or other appropriate proceeding, either for
specific performance or the exercise of any power granted under the Revenue
Sharing Agreement or ancillary documents including the Notes.
Long-term debt
|
|
|
March
31,
2017
|
|
December
31,
2016
|
|
Note
Payable
|
|
$
|
1,400,000
|
|
$
|
1,400,000
|
|
PIK
interest
|
|
|
20,729
|
|
|
10,153
|
|
Total
long-term debt
|
|
|
1,420,729
|
|
|
1,410,153
|
|
Less:
current maturities of long-term debt
|
|
|
-
|
|
|
-
|
|
Long-term
debt, net of current maturities
|
|
$
|
1,420,729
|
|
$
|
1,410,153
|
The unpaid principal amount of
the Notes (including any PIK Interest) have an interest rate equal to LIBOR (as
defined in the Revenue Sharing Agreement) plus 2% per annum, (3% at March 31,
2017 and December 31, 2016); provided that upon and during the continuance of an
Event of Default (as set forth in the Revenue Sharing Agreement), the interest
rate will increase an additional 2% per annum. Interest may be paid in cash at
the option of the Company and otherwise shall be paid by increasing the
principal amount of the Additional Notes by the amount of such interest (PIK
Interest). The outstanding principal balance of the Additional Notes and all
unpaid interest thereon will be paid within the next twelve months. The Company
may prepay the Additional Notes from time to time in whole or in part, without
penalty or premium.
Note 4.
Series C Redeemable Convertible Preferred Stock
The Series C Preferred Stock
had a stated value of $10,000 plus a $1,671 increase in the stated value, which
sum is convertible into Common Stock at a conversion price of $0.2551. The
shares of Series C Preferred Stock are subject to antidilution provisions, which
are triggered in the event of certain stock splits, recapitalizations, or other
dilutive transactions. In addition, issuances of common stock at a price below
the conversion price of $0.2551, or the issuance of warrants, options, rights,
or convertible securities
which have an
exercise price or conversion price less than that conversion price, other than
for certain previously outstanding securities and certain excluded securities
(as defined in the certificate of amendment), require the adjustment of the
conversion price to that lower price at which shares of common stock have been
issued or may be acquired. In the event that Andrea issues securities in the
future which have a conversion price or exercise price which varies with the
market price and the terms of such variable price are more favorable than the
conversion price in the Series C Preferred Stock, the purchasers may elect to
substitute the more favorable variable price when making conversions of the
Series C Preferred Stock.
11
As of March 31, 2017, there
were 33.326899 shares of Series C Preferred Stock outstanding, which were
convertible into 1,524,758 shares of Common Stock and remaining accrued
dividends of $55,697.
Note 5.
Series D Redeemable Convertible Preferred Stock
The Series D Preferred Stock
is convertible into Common Stock at a conversion price of $0.25 per share. The
shares of Series D Preferred Stock are also subject to antidilution provisions,
which are triggered in the event of certain stock splits, recapitalizations, or
other dilutive transactions. In addition, issuances of common stock at a price
below the conversion price then in effect (currently $0.25), or the issuance of
warrants, options, rights, or convertible securities which have an exercise
price or conversion price less than that conversion price, other than for
certain previously outstanding securities and certain excluded securities (as
defined in the certificate of amendment), require the adjustment of the
conversion price to that lower price at which shares of common stock have been
issued or may be acquired. In the event that Andrea issues securities in the
future which have a conversion price or exercise price which varies with the
market price and the terms of such variable price are more favorable than the
conversion price in the Series D Preferred Stock, the purchasers may elect to
substitute the more favorable variable price when making conversions of the
Series D Preferred Stock. In addition, the Company is required to use its best
efforts to secure the inclusion for quotation on the Over the Counter Bulletin
Board for the common stock issuable under the Series D Preferred Stock and to
arrange for at least two market makers to register with the Financial Industry
Regulatory Authority. In the event that the holder of the Series D Preferred Stock and related
warrants is unable to convert these securities into Andrea Common Stock, the
Company shall pay to each such holder a Registration Delay Payment. This payment
is to be paid in cash and is equal to the product of (i) the stated value of
such Preferred Shares multiplied by (ii) the product of (1) .0005 multiplied by
(2) the number of days that sales cannot be made pursuant to the Registration
Statement (excluding any days during that may be considered grace periods as
defined by the Registration Rights Agreement).
As of March 31, 2017, there
were 907,144 shares of Series D Preferred Stock outstanding which were
convertible into 3,628,576 shares of Common Stock.
Note 6.
Commitments And Contingencies
Leases
In May 2015, Andrea entered
into a lease for its current corporate headquarters located in Bohemia, New
York, where Andrea leases space for research and development, sales and
executive offices from an unrelated party. The lease is for approximately 3,000
square feet and expires in October 2020. Rent expense under this operating lease
was $8,187 and $7,909 for the three months ended March 31, 2017 and March 31,
2016, respectively. The monthly rent under this lease is $2,725 with annual
escalations of 3.5%.
As of March 31, 2017, the
minimum future lease payments under this lease and all other noncancellable
operating leases are as follows:
2017
(April 1 December 31)
|
|
$
|
40,823
|
2018
|
|
|
50,319
|
2019
|
|
|
45,729
|
2020
|
|
|
30,870
|
Total
|
|
$
|
167,741
|
Employment
Agreements
In August 2014, the Company
entered into an employment agreement with Mr. Andrea. The effective date of the
employment agreement was August 1, 2014 and it currently expires on July 31,
2017, subject to renewal as approved by the Compensation Committee of the Board
of Directors. Pursuant to his employment agreement, Mr. Andrea will receive an
annual base salary of $300,000. The employment agreement provides for quarterly
bonuses equal to 5% of the Companys pre-bonus net after tax quarterly earnings
for a total quarterly bonus amount not to exceed $12,500; and annual bonuses
equal to 9% of the Companys annual pre-bonus net after tax earnings in excess
of $300,000 up to $3,000,000, and 3% of the Companys annual pre-bonus
adjusted net after tax
earnings in excess of $3,000,000. Adjustments to net after tax earnings shall be
made to remove the impact of change in recognition of accumulated deferred tax
asset value. All bonuses shall be payable as soon as the Companys cash flow
permits. All bonus determinations or any additional bonus in excess of the above
will be made in the sole discretion of the Compensation Committee. Mr. Andrea is also entitled to a change in
control payment equal to three times the three year average of the cash
incentive compensation paid or accrued as of the date of termination,
continuation of health and medical benefits for three years and immediate
vesting of all stock options in the event of a change in control during the term
of his agreement and subsequent termination of his employment within two years
following the change of control. In the event of his termination without cause
or resignation with the Companys consent, Mr. Andrea is entitled to a severance
payment equal to nine months of his base salary, plus the nine months prorated
portion of his most recent annual and quarterly bonuses, and a continuation of
health insurance coverage for Mr. Andrea, his spouse and his dependents for 12
months. At March 31, 2017, the future minimum cash commitments under this
agreement aggregate $104,080.
12
In November 1999, as amended
August 2008, the Company entered into a change in control agreement with the
Chief Financial Officer, Corisa L. Guiffre. This agreement provides for a change
in control payment equal to three times her average annual compensation for the
five preceding taxable years, with continuation of health and medical benefits
for three years in the event of a change in control of the Company, as defined
in the agreement, and subsequent termination of employment other than for cause.
Legal
Proceedings
In December 2010, Audrey
Edwards, Executrix of the Estate of Leon Leroy Edwards, filed a law suit in the
Superior Court of Providence County, Rhode Island, against 3M Company and over
90 other defendants, including the Company, alleging that the Company processed,
manufactured, designed, tested, packaged, distributed, marketed or sold asbestos
containing products that contributed to the death of Leon Leroy Edwards. The
Company received service of process in April 2011. The Company has retained
legal counsel and has filed a response to the compliant. The Company believes
the lawsuit is without merit and has filed a Motion for Summary Judgment to that
affect. Accordingly, the Company does not believe the lawsuit will have a
material adverse effect on the Companys financial position or results of
operations.
In September 2016, the Company
filed a Complaint with the United States International Trade Commission (ITC),
alleging patent infringement against Apple Inc. (Apple) and Samsung
Electronics Co., Ltd. and Samsung Electronics America, Inc. (together,
Samsung), and requesting injunctive relief. An ITC investigation was
instituted on October 19, 2016. Apple and Samsung answered the Companys
Complaint on November 21, 2016. The Company intends to vigorously prosecute its
claims at the ITC.
Also in September 2016, the
Company filed complaints with the United States District Court for the Eastern
District of New York, alleging patent infringement against Apple and Samsung,
and requesting monetary and injunctive relief. These cases against Apple and
Samsung are stayed pending the outcome of the Companys litigation at the ITC
against Apple and Samsung.
In January 2017, Apple filed
four (4) petitions for inter partes review of the Andrea patents asserted in the
ITC and District Court litigation proceedings with the United States Patent and
Trademark Office (PTO). Andrea intends to vigorously defend its patents in these
PTO proceedings.
Note 7.
Stock Plans and Stock Based Compensation
In October 2006, the Board
adopted the Andrea Electronics Corporation 2006 Equity Compensation Plan (2006
Plan), which was subsequently approved by the shareholders. The 2006 Plan, as
amended, authorizes the granting of awards, the exercise of which would allow up
to an aggregate of 18,000,000 shares of Andreas Common Stock to be acquired by
the holders of those awards. The awards can take the form of stock options,
stock appreciation rights, restricted stock or other stock-based awards. Awards
may be granted to key employees, officers, directors and consultants. No further
awards will be granted under the 2006 Plan.
The stock option awards
granted under these plans have been granted with an exercise price equal to the
market price of the Companys stock at the date of
grant; with vesting periods of up to four years and 10-year contractual terms.
The fair values of each stock option grant is estimated on the date of grant
using the Black-Scholes option-pricing model that uses the weighted-average
assumptions noted in the following table. Expected volatilities are based on
implied volatilities from historical volatility of the Companys stock. The
expected term of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
There were no options granted
during the three months ended March 31, 2017 or March 31, 2016.
13
Option activity during the
three months ended March 31, 2017 is summarized as follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Fair
Value
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Fair
Value
|
|
Weighted
Average
Remaining
Contractual
Life
|
At January 1, 2017
|
|
17,369,820
|
|
|
$
|
0.07
|
|
$
|
0.07
|
|
4.59 years
|
|
12,672,230
|
|
$
|
0.08
|
|
$
|
0.08
|
|
2.79 years
|
Forfeited
|
|
(3,840
|
)
|
|
$
|
0.08
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
(36,160
|
)
|
|
$
|
0.08
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
2017
|
|
17,329,820
|
|
|
$
|
0.07
|
|
$
|
0.07
|
|
4.35
years
|
|
12,636,070
|
|
$
|
0.08
|
|
$
|
0.08
|
|
2.56
years
|
Based on the March 31, 2017,
fair market value of the Companys common stock of $0.05 per share, the
aggregate intrinsic value for the 17,329,820 options outstanding and 12,636,070
shares exercisable is $47,850.
Total compensation expense
recognized related to stock option awards was $34,527 and $17,244 for the three
months ended March 31, 2017 and 2016, respectively. In the accompanying
condensed consolidated statement of operations for the three months ended March
31, 2017, $29,346 of compensation expense is included in general, administrative
and selling expenses and $5,181 of compensation expense is included in research
and development expenses. In the accompanying condensed consolidated statement
of operations and for the three months ended March 31, 2016, $14,427 of
compensation expense is included in general, administrative and selling expenses
and $2,817 of compensation expense is included in research and development
expenses.
As of March 31, 2017, there
was $157,967 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the 2006 Plan which is
expected to be recognized over the weighted-average period of 1.39 years.
Specifically, this unrecognized compensation cost is expected to be recognized
during 2017, 2018 and 2019 in the amounts of $90,168, $49,453 and $18,346,
respectively.
Note 8.
Segment Information
Andrea follows the provisions
of ASC 280 Segment Reporting. Reportable operating segments are determined
based on Andreas management approach. The management approach, as defined by
ASC 280, is based on the way that the chief operating decision-maker organizes
the segments within an enterprise for making operating decisions and assessing
performance. While Andreas results of operations are primarily reviewed on a
consolidated basis, the chief operating decision-maker also manages the
enterprise in two segments: (i) Patent Monetization and (ii) Andrea DSP
Microphone and Audio Software Products. Patent Monetization includes
Monetization Revenues (as defined in our Amended and Restated Revenue Sharing
Agreement). Andrea DSP Microphone and Audio Software Products primarily include
products based on the use of some, or all, of the following technologies: Andrea
Digital Super Directional Array microphone technology (DSDA), Andrea Direction
Finding and Tracking Array microphone technology (DFTA), Andrea PureAudio
noise filtering technology, and Andrea EchoStop, an advanced acoustic echo
cancellation technology.
The following represents
selected condensed consolidated interim financial information for Andreas
segments for the three-month periods ended March 31, 2017 and 2016.
2017 Three Month Segment Data
|
|
Patent
Monetization
|
|
Andrea DSP
Microphone and
Audio
Software
Products
|
|
2017 Three Month
Segment
Data
|
Net product
revenues
|
|
$
|
-
|
|
|
$
|
113,702
|
|
|
$
|
113,702
|
|
License
revenues
|
|
|
464
|
|
|
|
19,613
|
|
|
|
20,077
|
|
Operating
loss
|
|
|
(1,694,534
|
)
|
|
|
(354,573
|
)
|
|
|
(2,049,107
|
)
|
Depreciation
and amortization
|
|
|
6,224
|
|
|
|
11,924
|
|
|
|
18,148
|
|
Assets
|
|
|
276,473
|
|
|
|
2,634,091
|
|
|
|
2,910,564
|
|
Property and
equipment and intangibles
|
|
|
151,644
|
|
|
|
209,560
|
|
|
|
361,204
|
|
Purchases of
patents and trademarks
|
|
|
2,923
|
|
|
|
2,924
|
|
|
|
5,847
|
|
14
2016 Three Month Segment Data
|
|
Patent
Monetization
|
|
Andrea DSP
Microphone and
Audio
Software
Products
|
|
2016 Three
Month
Segment
Data
|
Net product
revenues
|
|
$
|
-
|
|
$
|
95,392
|
|
|
$
|
95,392
|
License
revenues
|
|
|
2,945,862
|
|
|
101,455
|
|
|
|
3,047,317
|
Operating
income (loss)
|
|
|
1,232,042
|
|
|
(333,426
|
)
|
|
|
898,616
|
Depreciation
and amortization
|
|
|
6,025
|
|
|
11,999
|
|
|
|
18,024
|
|
December 31, 2016 Year End Segment
Data
|
|
Patent
Monetization
|
|
Andrea DSP
Microphone and
Audio
Software
Products
|
|
2016 Year End
Segment Data
|
Assets
|
|
$
|
673,295
|
|
$
|
2,973,007
|
|
|
$
|
3,646,302
|
Property and
equipment and intangibles
|
|
|
154,945
|
|
|
218,560
|
|
|
|
373,505
|
Management assesses
non-operating income statement data on a consolidated basis only. International
revenues are based on the country in which the end-user is located. For the
three-month periods ended March 31, 2017 and 2016 total revenues by geographic
area were as follows:
Geographic Data
|
|
March 31, 2017
|
|
March 31, 2016
|
Total revenues:
|
|
|
|
|
|
|
United
States
|
|
$
|
105,303
|
|
$
|
1,431,152
|
Foreign
(1)
|
|
|
28,476
|
|
|
1,711,557
|
|
|
$
|
133,779
|
|
$
|
3,142,709
|
____________________
|
(1)
|
|
Net revenues to any one foreign country did
not exceed 10% of total net revenues for the three months ended March 31,
2017. Total revenue from Israel represented 41% of total revenues for the
three months ended March 31, 2016.
|
As of March 31, 2017 and
December 31, 2016, accounts receivable by geographic area were as follows:
Geographic
Data
|
|
March 31, 2017
|
|
December 31, 2016
|
Accounts
receivable:
|
|
|
|
|
|
|
United
States
|
|
$
|
61,502
|
|
$
|
35,268
|
Foreign
|
|
|
9,562
|
|
|
34,714
|
|
|
$
|
71,064
|
|
$
|
69,982
|
Note 9.
Sale of Andrea Anti-Noise Products Division
On April 2, 2015, Andrea
Electronics Corporation consummated the transactions contemplated by the Asset
Purchase Agreement, by and between Andrea Electronics Corporation and Andrea
Communications LLC dated March 27, 2015. Under the Asset Purchase Agreement, the
Company sold its Anti-Noise Products Division (the Division) and certain
related assets for a selling price of $900,000 which included a cash payment of
$300,000 and a note receivable of $600,000 payable in 18 equal monthly
installments of $34,757 including interest at a rate of 3.25% per annum
beginning in October 2015. The note receivable was paid in full in March 2017.
In addition, under the Asset Purchase Agreement the Company is entitled to
receive an additional $100,000 in the event that the revenues derived from
Andrea Communications LLCs operation of the Division exceed certain thresholds
over a specified time period, as defined in the Asset Purchase Agreement.
Accordingly, the results of operations, the assets and liabilities of the
Division are presented as discontinued operations for both current and prior
periods.
15
The following table reflects
the results of the discontinued operations of the Divisions business segment
for the three months ended March 31, 2017 and 2016 and as of March 31, 2017 and
December 31, 2016, respectively:
|
|
For the Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
Operations
|
|
|
|
|
|
|
Net
Revenues
|
|
$
|
16,728
|
|
$
|
48,772
|
Cost of
Sales
|
|
|
16,728
|
|
|
48,772
|
|
|
|
|
|
|
|
Gross margin
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Research and
Development Expenses
|
|
|
-
|
|
|
-
|
General,
administrative and selling expenses
|
|
|
-
|
|
|
-
|
Gain on sale
of Anti-Noise Products Division
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Income from Discontinued
Operations
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Assets
|
|
|
|
|
|
|
Accounts
Receivable, net
|
|
$
|
15,000
|
|
$
|
36,995
|
Inventories,
net
|
|
|
-
|
|
|
26,304
|
|
|
|
|
|
|
|
Assets from
Discontinued Operations
|
|
$
|
15,000
|
|
$
|
63,299
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Other
current liabilities
|
|
|
7,200
|
|
|
14,700
|
Liabilities
from discontinued operations
|
|
$
|
7,200
|
|
$
|
14,700
|
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 will be 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 plan to 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 Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2016. A discussion of our critical accounting policies and
estimates are included in Managements Discussion and Analysis or Plan of
Operation in our Annual Report on Form 10-K for the year ended December 31,
2016. Management has discussed the development and selection of these policies
with the Audit Committee of the Companys Board of Directors, and the Audit
Committee of the Board of Directors has reviewed the Companys disclosures of
these policies. There have been no material changes to the critical accounting
policies or estimates reported in the Managements Discussion and Analysis
section of the Annual Report on Form 10-K for the year ended December 31, 2016.
16
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
Companys 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, changes in economic, competitive, governmental, technological
and other factors that may affect our business and prospects. Additional factors
are discussed below under Risk Factors and in Part I,
Item 1A Risk Factors
in the Companys Annual Report on Form 10-K for
the year ended December 31, 2016 and the Companys 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.
Results Of Continuing
Operations
Three Months ended March
31, 2017 compared to Three Months ended March 31, 2016
Total
Revenues
|
|
For the Three Months
Ended
March 31,
|
|
%
Change
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
Patent Monetization
revenues
|
|
|
|
|
|
|
|
|
|
|
|
License
revenues
|
|
$
|
464
|
|
$
|
2,945,862
|
|
(100
|
)
|
|
(a)
|
Total Patent
Monetization revenues
|
|
|
464
|
|
|
2,945,862
|
|
(100
|
)
|
|
|
|
Andrea DSP Microphone and
|
|
|
|
|
|
|
|
|
|
|
|
Audio Software Product
revenues
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from automotive array
|
|
|
|
|
|
|
|
|
|
|
|
microphone
products
|
|
|
13,738
|
|
|
4,361
|
|
215
|
|
|
(b)
|
Revenue
from OEM array
|
|
|
|
|
|
|
|
|
|
|
|
microphone
products
|
|
|
45,411
|
|
|
19,969
|
|
127
|
|
|
(c)
|
Revenue
from customized digital
|
|
|
|
|
|
|
|
|
|
|
|
product
|
|
|
50,491
|
|
|
47,743
|
|
6
|
|
|
(d)
|
All
other Andrea DSP
|
|
|
|
|
|
|
|
|
|
|
|
Microphone
and Audio
|
|
|
|
|
|
|
|
|
|
|
|
Software
Product revenues
|
|
|
4,062
|
|
|
23,319
|
|
(83
|
)
|
|
(e)
|
License
revenues
|
|
|
19,613
|
|
|
101,455
|
|
(81
|
)
|
|
(f)
|
Total Andrea
DSP Microphone and
|
|
|
|
|
|
|
|
|
|
|
|
Audio
Software Products revenues
|
|
|
133,315
|
|
|
196,847
|
|
(32
|
)
|
|
|
|
Total
revenues
|
|
$
|
133,779
|
|
$
|
3,142,709
|
|
(96
|
)
|
|
|
____________________
|
(a)
|
The decrease of approximately $2,945,000 in
license revenues is the result of non-recurring revenue recognized for
patent licensing agreements entered into during the three months ended
March 31, 2016.
|
|
(b)
|
The approximate $10,000 increase in sales of
automotive array microphone products is the result of increased product
sales to integrators of public safety and mass transit vehicle solutions
for the three months ended March 31, 2017, compared to the three months
ended March 31, 2016.
|
|
(c)
|
The approximate $25,000 increase in OEM
array microphone products for the three months ended March 31, 2017,
compared to the three months ended March 31, 2016 is primarily the result
of increased product revenues from integrators of commercial product audio
solutions.
|
17
|
(d)
|
The increase of approximately $3,000 for
three months ended March 31, 2017 as compared to same period in 2016 in
customized digital product revenues is related to increased product
revenues to an OEM customer for a customized digital product.
|
|
(e)
|
The approximate $19,000 decrease in all
other Andrea DSP Microphone and Audio product revenues for the three
months ended March 31, 2017 as compared to same period in 2016 is related
to decreased product revenues from all other Andrea DSP Microphone and
Audio product revenues.
|
|
(f)
|
The $82,000 decrease in license revenues is
a result of a decrease of royalties for the three month period ended March
31, 2017 as compared to the three month period ended March 31,
2016.
|
Cost of
Revenues
Cost of revenues as a
percentage of total revenues, from continuing operations, for the three months
ended March 31, 2017 increased to 27% from 1% for the three months ended March
31, 2016. There was no of cost of revenues associated with the Patent
Monetization revenues of $464 for the three months ended March 31, 2017 compared
to no cost of revenues associated with the Patent Monetization revenues of
$2,945,862, for the three months ended March 31, 2016. The cost of revenues as a
percentage of total revenues for the three months ended March 31, 2017 for
Andrea DSP Microphone and Audio Software Products was 28% compared to 15% for
the year ended March 31, 2016. These changes are primarily the result of the
decrease of licensing revenues with no associated cost of revenues as described
under Total Revenues above.
Patent Monetization
Expenses
Patent monetization expenses
for the three months ended March 31, 2017 decreased 5% to $1,565,438 from
$1,650,271 for the three months ended March 31, 2016. The decrease in Patent
Monetization expenses for the three months ended March 31, 2017 is attributable
to the timing of legal services incurred in connections with our patent
monetization efforts.
Research and Development
Expenses
Research and development
expenses for the three months ended March 31, 2017 increased 15% to $225,230
from $195,521 for the three months ended March 31, 2016. The expenses primarily
relate to costs associated with the development of new products. For the three
months ended March 31, 2017, the decrease in research and development expenses
reflects a 3% increase in our Patent Monetization efforts to $6,224, or 3% of
total research and development expenses, and a 16% increase in our Andrea DSP
Microphone and Audio Software
Technology efforts to $219,006, or 97% of total research and development
expenses. These increases are related to an increase in spending with respect to
DSP Microphone and Audio 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 Andreas 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 4% to $355,500 for the three months
ended March 31, 2017 from $369,365 for the three months ended March 31, 2016.
For the three months ended March 31, 2017, general, administrative and selling
expenses related to our Patent Monetization efforts were $123,336, or 35% 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 $232,164, or 65% of total general, administrative and selling
expenses.
Interest expense,
net
Interest expense, net for the
three months ended March 31, 2017 was $7,195 compared to $2,532 for the three
months ended March 31, 2016. The change in this line item was attributable to a
decrease of interest income related to lower cash balances as well as a lower
amount of interest income on the note receivable related to the sale of the
Andrea Anti-Noise Products Division.
Provision for Income
Taxes
The income tax provision for
the three months ended March 31, 2017 was $3,700 compared to $39,143 for the
three months ended March 31, 2016. The provision for the three months ended
March 31, 2017 and 2016 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.
18
Net (loss)
income
Net loss for the three months
ended March 31, 2017 was $2,060,002 compared to a net income of $856,941 for the
three months ended March 31, 2016. The net loss for the three months ended March
31, 2017 and net income for the three months ended March 31, 2016 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 March 31, 2017, we had cash
of $2,343,326 compared with $2,955,129 at December 31, 2016. The decrease in our
cash balance at March 31, 2017 was primarily a result of cash used in
operations.
Our working capital balance at
March 31, 2017 was $400,766 compared to working capital of $2,403,364 at
December 31, 2016. The decrease in working capital reflects a decrease in total
current assets of $771,736 and an increase in total current liabilities of
$1,230,862. The decrease in total current assets of $771,736 reflects a decrease
in cash of $611,803, an increase in accounts receivable of $1,082, an decrease
in inventories of $5,059, a decrease in prepaid expenses and other current
assets of $3,948, a decrease in assets from discontinued operations of $48,299
and a decrease in current note receivable of $103,709. The increase in total
current liabilities of $1,230,862 reflects an increase in trade accounts payable
and other current liabilities of $1,238,362 partially offset by a decrease in
liabilities from discontinued operations of $7,500.
The decrease in cash of
$611,803 reflects $709,665 of net cash used in operating activities and $97,862
cash provided by investing activities.
The cash used by operating
activities of $709,665, excluding non-cash charges for the three months ended
March 31, 2017, was attributable to a $17,213 decrease in accounts receivable, a
$98,123 decrease in inventories, a $3,948 decrease in prepaid expenses, other
current assets and other assets, a $1,230,862 increase in trade accounts payable
and other current liabilities. The changes in accounts receivable, inventories,
prepaid expenses, other current assets and other assets and trade accounts
payable and other current liabilities 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 Andreas
various product lines including continuing efforts to pursue patent
monetization.
The cash provided by investing
activities of $97,862 reflects $103,709 of repayments in note receivable offset
in part by $5,847 in patent and trademark related expenses. The increase in
patent and trademark expenses reflects capital expenditures associated with our
intellectual property.
We plan to improve our cash
flows in 2017 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 May 10, 2017, Andrea had approximately $3,300,000 of cash
deposits. We cannot assure 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.