ANDREA ELECTRONICS CORPORATION Overview
We design, develop and manufacture state-of-the-art digital microphone products and noise reduction software that facilitate natural language and human/machine interfaces. Our technologies eliminate unwanted background noise to enable the optimum performance of various speech-based and audio applications. We are incorporated under the laws of theState of New York and have been engaged in the electronic communications industry since 1934. Our patented and patent-pending digital noise canceling technologies enable a speaker to be at a distance from the microphone (we refer to this capability as "far-field" microphone use), and free the speaker from having to use a close talking microphone. We believe that the strength of our intellectual property rights are important to the success of our business. We utilize patent and trade secret protection, confidentiality agreements with customers and partners, disclosure and invention assignment agreements with employees and consultants and other contractual provisions to protect our intellectual property and other proprietary information. As part of our Patent Monetization efforts, we license specific, custom designs to our customers, charging royalties at a fixed amount per product or a percentage of sales, and we intend to vigorously defend and monetize our intellectual property through licensing arrangements and, where necessary, enforcement actions against those entities using our patented solutions in their products.
Our Critical Accounting Policies
Our unaudited condensed consolidated interim financial statements and the notes to our unaudited condensed consolidated interim financial statements contain information that is pertinent to management's discussion and analysis. The preparation of unaudited condensed consolidated interim financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our significant accounting policies are described in Note 2 of the notes to the audited financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . A discussion of our critical accounting policies and estimates are also included in Note 2. Summary of Significant Accounting Policies in notes to condensed consolidated interim financial statements are included elsewhere in this report. Management has discussed the development and selection of these policies with the Audit Committee of the Company's Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company's disclosures of these policies. There have been no material changes to the critical accounting policies or estimates to be disclosed in this Quarterly Report since being reported in the Management's Discussion and Analysis section of the Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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
general economic conditions (including periods of inflation), public health
(including the continuing impact of COVID-19), delays and interruptions in the
supply chain and consumer demand, and the Company's results of operations,
liquidity, capital resources and general performance in the future;
• our ability to obtain financing, and the limitations in the Revenue Sharing
Agreement;
• our limited cash and our history of losses;
• our ability to achieve profitability;
• our ability to continue as a going concern;
• whether we obtain market acceptance and effectively commercialize our
products;
• the adequacy of protections afforded to us by the patents that we own and the
cost of maintaining, enforcing and deeding our patents;
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• receiving an unfavorable ruling in our current litigation proceedings, which
may adversely affect our business, results of operations and financial
condition;
• changes in economic, competitive, governmental, technological and other
factors that may affect our business (including component costs) and
prospects;
• our success at managing the risks involved in the foregoing items; and
• other factors discussed in this report and our other filings with the
Additional factors are discussed under "Risk Factors" and in Part I, "Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 and under Part II, "Item 1A - Risk Factors" in the Company's quarterly reports on Form 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. Results Of Operations Three and Six Months endedJune 30, 2022 compared to the Three and Six Months endedJune 30, 2021 Total Revenues For the Three Months Ended For the Six Months Ended June 30, % June 30, % 2022 2021 Change 2022 2021 Change Patent Monetization revenues License revenues $ 60$ 73 (18 ) $ 98$ 157 (38 ) Total Patent Monetization revenues 60 73 (18 ) 98 157 (38 ) Andrea DSP Microphone and Audio Software Products revenues Revenue from automotive array microphone products 77,828 66,815 17
145,927 146,993 (1 ) (a)
Revenue from OEM
array microphone
products 448,615 273,784 64 789,115 537,608 47 (b)
Revenue from
customized digital
products 22,120 40,510 (45 ) 59,680 104,783 (43 ) (c)
All other Andrea DSP
Microphone and Audio
Software Products
revenues 36,524 2,779 1214 99,833 17,719 463 (d)
License and service
related revenues 6,990 6,634 (5 ) 8,070 9,819 (18 )
Total Andrea DSP
Microphone and Audio
Software Products
revenues 592,077 390,522 52 1,102,625 816,922 35
Total revenues $ 592,137 $ 390,595 52 $ 1,102,723 $ 817,079 35
(a) The approximate $11,000 increase and $1,000 decrease in revenues from
automotive array microphone products for the three and six months ended June
30, 2022,respectively, as compared to the same periods in 2021, is the
result of the timing of sales to integrators of public safety and mass
transit vehicle solutions.
(b) The approximate
microphone products for the three and six months ended
respectively, as compared to the same period in 2021, is primarily the
result of increased sales to existing customers as well as new customers
that are integrating our commercial product audio solutions.
(c) The decreases of approximately
products revenue for the three and six months ended
respectively, as compared to the same period in 2021, are related to the
timing of purchases from an OEM customer for a customized digital product.
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(d) The increases of approximately
Andrea DSP Microphone and Audio Software Products for the three and six
months ended
2021, is the result of increased revenues of USB products coupled with
increased revenues of speaker and amplifier kits, a new addition to our
overall audio solutions.
Cost of Product Revenues
Cost of product revenues as a percentage of total revenues for the three months
ended June 30, 2022 , and 2021 were 32% and 27%, respectively. Cost of product
revenues as a percentage of total revenues for the six months ended June 30,
2022 , and 2021 were 29% and 25%, respectively. There was no cost of product
revenues associated with the Patent Monetization revenues of $60 and $98 for the
three and six months ended June 30, 2022 , respectively, nor the cost of product
revenues associated with the Patent Monetization revenues of $73 and $157 , for
the three and six months ended June 30, 2021 , respectively. The increases in the
cost of product revenues as a percentage of total revenues are primarily the
result of the increased component costs because of supply chain issues as well
as the product mix described in "Total Revenues" above.
Patent Monetization Expenses
Patent monetization expenses for the three months ended June 30, 2022 , increased
4% to $40,002 from $38,352 for the three months ended June 30, 2021 . Patent
monetization expenses for the six months ended June 30, 2022 , increased 3% to
$80,138 from $77,524 for the six months ended June 30, 2021 . These expenses are
a result of our continuing efforts to pursue patent monetization as disclosed
under Part II, Item 1 Legal Proceedings. The increases in Patent Monetization
expenses for the three and six months ended June 30, 2022 is mainly attributable
to the timing of legal services incurred to pursue patent monetization.
Research and Development Expenses
Research and development expenses for the three months endedJune 30, 2022 decreased 25% to$110,035 from$146,656 for the three months endedJune 30, 2021 . Research and development expenses for the six months endedJune 30, 2022 , decreased 15% to$241,833 from$284,380 for the six months endedJune 30, 2021 . These expenses primarily relate to costs associated with the development of new products. For the three months endedJune 30, 2022 , the decrease in research and development expenses reflects a 19% increase in our Patent Monetization efforts to$4,522 , or 4% of total research and development expenses, and a 26% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to$105,513 , or 96% of total research and development expenses. For the six months endedJune 30, 2022 , the decrease in research and development expenses reflects a 20% increase in our Patent Monetization efforts to$9,040 , or 4% of total research and development expenses, and a 16% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to$232,793 , or 96% of total research and development expenses. The increases in our Patent Monetization efforts represent intangible asset amortization expense while the decreases in our Andrea DSP Microphone and Audio Software Technology efforts reflect decreases in compensation expenses related to projects completed in 2021. All of our research efforts primarily focused on the pursuit of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces, incorporating Andrea's digital super directional array microphone technology, and certain other related technologies such as noise suppression and stereo acoustic echo cancellation. We believe that continued research and development spending should benefit Andrea in the future.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased approximately 6% to$264,125 for the three months endedJune 30, 2022 , from$248,617 for the three months endedJune 30, 2021 . For the three months endedJune 30, 2022 , general, administrative and selling expenses related to our Patent Monetization efforts were$15,989 , or 6% 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$248,136 , or 94% of total general, administrative and selling expenses. General, administrative and selling expenses increased approximately 3% to$542,886 for the six months endedJune 30, 2022 , from$524,833 for the six months endedJune 30, 2021 . For the six months endedJune 30, 2022 , general, administrative and selling expenses related to our Patent Monetization efforts were$37,935 , or 7% 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$504,951 , or 93% of total general, administrative and selling expenses. These small increases relate to changes in regular operating expenses.
Income from Employee Retention Tax Credits
Income from Employee Retention Tax Credits for the three and six months endedJune 30, 2022 , was$140,137 . There was no Income from Employee Retention Tax Credits for the three and six months endedJune 30, 2021 . The income from Employee Retention Tax Credits is the result of the recognition of refundable payroll tax credits established by the CARES Act to help businesses retain employees. 18
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Interest expense, net Interest expense, net for the three months endedJune 30, 2022 , was$19,582 compared to$18,642 for the three months endedJune 30, 2021 . Interest expense, net for the six months endedJune 30, 2022 , was$38,497 compared to$36,141 for the six months endedJune 30, 2021 . The small increases in this line item were attributable to increases in interest expense due to a higher amount of debt outstanding, combined with a decreases of interest income related to lower cash balances. Provision for Income Taxes The income tax provision for the three months endedJune 30, 2022 , was$1,268 compared to a$297 tax provision for the three months endedJune 30, 2021 . The income tax provision for the six months endedJune 30, 2022 , was$1,268 compared to$585 for the six months endedJune 30, 2021 . The provision for the three and six months endedJune 30, 2022 and 2021 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 income (loss) Net income for the three months endedJune 30, 2022 , was$109,535 compared to a net loss of$158,511 for the three months endedJune 30, 2021 . Net income for the six months endedJune 30, 2022 , was$16,730 compared to a net loss of$162,434 for the six months endedJune 30, 2021 . The net income for the three and six months endedJune 30, 2022 and the net loss for the three and six months endedJune 30, 2021 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
Our working capital balance atJune 30, 2022 , was$158,050 compared to working capital of$14,940 atDecember 31, 2021 . The increase in working capital reflects an increase in total current assets of$166,098 offset in part by an increase in total current liabilities of$22,988 . The increase in total current assets reflects a decrease in cash of$129,171 , an increase in accounts receivable of$168,139 , an increase in inventories of$53,499 , a$140,137 increase in employee retention tax credit receivable and a decrease in prepaid expenses and other current assets of$66,506 . The increase in total current liabilities reflects an increase in trade accounts payable and other current liabilities of$22,988 . The decrease in cash of$129,171 reflects$188,828 of net cash used in operating activities,$10,343 of net cash used in investing activities and$70,000 of net cash provided by financing activities. The cash used in operating activities of$188,828 , excluding non-cash charges for the six months endedJune 30, 2022 , was attributable to a$168,139 increase in accounts receivable, a$48,273 increase in inventories, a$140,137 increase in employee retention tax credit receivable, a$66,506 decrease in prepaid expenses and other current assets and a$3,874 increase in trade accounts payable and other current liabilities and operating lease liabilities payable. The changes in accounts receivable, inventories, prepaid expenses and other current assets and trade accounts payable and other current liabilities and operating 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$10,343 reflects an increase in patents and trademarks of$540 and purchases of property and equipment of$9,803 . 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 and test equipment.
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The cash provided by financing activities of
We plan to improve our cash flows by aggressively pursuing monetization of our patents related to ourAndrea DSP Microphone Audio Software , increasing the sales of our Andrea DSP Microphone Audio Software Products through the introduction of new products as well as our increased sales and marketing efforts. As ofAugust 9, 2022 , Andrea had approximately$140,000 of cash deposits. For discussion regarding management's evaluation of our ability to meet our obligations as they come due in coming months, see the section titled "Liquidity" in Note 1, Basis of Presentation, of the notes to unaudited condensed consolidated interim financial statements. We cannot provide assurances that demand will continue for any of our products, including future products related to our Andrea DSP Microphone andAudio Software technologies, or, that if such demand does exist, that we will be able to obtain the necessary working capital to increase production and provide marketing resources to meet such demand on favorable terms, or at all.
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