ANDREA ELECTRONICS CORPORATION Overview
Our primary mission is to provide the emerging "voice interface" markets with state-of-the-art digital microphone products and noise reduction software that facilitate AI natural language processing of the human voice/machine interfaces. Examples of the applications and interfaces for which Andrea DSP Microphone and Audio Software Products provide benefits include: internet and other computer-based speech; telephony communications; multi-point conferencing; speech recognition; and other applications and interfaces that incorporate natural language processing. We believe that end users of these applications and interfaces will require high quality microphone and earphone products that enhance voice transmission, particularly in noisy environments, for use with personal computers, mobile personal computing devices, cellular and other wireless communication devices and automotive communication systems. Our Andrea DSP Microphone and Audio Software Products use "far-field" digital signal processing technology to provide high quality transmission of voice where the user is at a distance from the microphone. High quality audio communication technologies will be required for emerging far-field voice applications, ranging from continuous speech dictation, to internet telephony and multiparty video teleconferencing and collaboration, to natural language-driven interfaces for automobiles, home and office automation and other machines and devices into which voice-controlled microprocessors are expected to be introduced during the next several years.
Our Critical Accounting Policies
Our consolidated financial statements and the notes to our consolidated financial statements contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and determination of revenues and expenses in the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to be critical if: 1) it requires assumptions to be made that were uncertain at the time the estimate was made; and 2) changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on the Company's consolidated results of operations or financial condition. The following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements have been identified. In addition to the recording and presentation of our convertible preferred stock, we believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our consolidated financial condition and results of operations. We have discussed the application of these critical accounting policies with our Audit Committee. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates.
Revenue Recognition - In accordance with Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) ("ASU No. 2014-09"), the Company recognizes revenue using the following five-step approach:
1. Identify the contract with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price of the contract.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when the performance obligations are met or delivered.
This approach includes the evaluation of sales terms, performance obligations, variable consideration, and costs to obtain and fulfill contracts.
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The Company disaggregates its revenues into three contract types: (1) product
revenues, (2) service related revenues and (3) license revenues and then further
disaggregates its revenues by operating segment. Generally, product revenue is
comprised of microphones and microphone connectivity product revenues. Product
revenue is recognized when the Company satisfies its performance obligation by
transferring promised goods to a customer. Product revenue is measured at the
transaction price, which is based on the amount of consideration that the
Company expects to receive in exchange for transferring the promised goods to
the customer. Contracts with customers are comprised of customer purchase
orders, invoices and written contracts. Customer product orders are fulfilled at
a point in time and not over a period of time. The Company does not have
arrangements for returns from customers and does not have any future obligations
directly or indirectly related to product resale by customers. The Company has
no sales incentive programs. Service related and licensing revenues are
recognized based on the terms and conditions of individual contracts using the
five step approach listed above, which identifies performance obligations and
transaction price. Typically, Andrea receives licensing reports from its
licensees approximately one quarter in arrears due to the fact that its
agreements require customers to report revenues between 30-60 days after the end
of the quarter. Under this accounting policy, the licensing revenues reported
are not based upon estimates. In addition, service related revenues, which are
short-term in nature, are generally performed on a time-and-material basis under
separate service arrangements and the corresponding revenue is generally
recognized as the services are performed.
Inventories - We are required to state our inventories at net realizable value.
In assessing the ultimate realization of inventories, we are required to make
considerable judgments as to future demand requirements and compare that with
our current inventory levels. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions, technological
and product life cycle changes occur, as well as longer than previously expected
usage periods. We have evaluated the current levels of inventories, considering
historical total revenues and other factors and, based on this evaluation,
recorded adjustments to cost of revenues to adjust inventories to net realizable
value. We had inventories of $284,159 and $259,007 at December 31, 2022 and
2021, respectively. It is possible that additional charges to inventory may
occur in the future if there are further declines in market conditions, or if
additional restructuring actions are taken.
Long Lived Assets - ASC 360 "Property, Plant and Equipment" ("ASC 360") requires
management judgments regarding the future operating and disposition plans for
marginally performing assets, and estimates of expected realizable values for
assets to be sold. Andrea accounts for its long-lived assets in accordance with
ASC 360 for purposes of determining and measuring impairment of its other
intangible assets. Andrea's policy is to periodically review the value assigned
to its long lived assets to determine if they have been permanently impaired by
adverse conditions which may affect Andrea. If required, an impairment charge
would be recorded based on an estimate of future discounted cash flows.
Considerable management judgment is necessary to estimate undiscounted future
operating cash flows and fair values and, accordingly, actual results could vary
significantly from such estimates. No impairment charges were recognized during
the years ended December 31, 2022 and 2021.
Deferred Tax Assets - We currently have significant deferred tax assets. ASC
740, "Income Taxes" ("ASC 740"), requires a valuation allowance be established
when it is more likely than not that all or a portion of deferred tax assets
will not be realized. Furthermore, ASC 740 provides that it is difficult to
conclude that a valuation allowance is not needed when there is negative
evidence such as cumulative losses in recent years. Therefore, cumulative losses
weigh heavily in the overall assessment. Accordingly, and after considering
changes in previously existing positive and negative evidence, the Company
determined that a full valuation allowance against the deferred tax assets was
required. We will continue to re-assess our reserves on deferred income tax
assets in future periods on a quarterly basis.
Contingencies - We are subject to proceedings, lawsuits and other claims,
including proceedings under laws and government regulations related to
securities, environmental, labor, products and other matters. We are required to
assess the likelihood of any adverse judgments or outcomes to these matters, as
well as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is based on an analysis of
each individual issue with the assistance of legal counsel. The amount of any
reserves may change in the future due to new developments in each matter.
The impact of changes in the estimates and judgments pertaining to revenue
recognition, receivables and inventories is directly reflected in our segments'
loss from operations. Although any charges related to our deferred tax provision
are not reflected in our segment results, the long-term forecasts supporting the
realization of those assets and changes in them are significantly affected by
the actual and expected results of each segment.
Liquidity
ASC 205-40, "Presentation of Financial statements-Going Concern," requires
management to evaluate whether there are relevant conditions and events that, in
the aggregate, raise substantial doubt about the entity's ability to continue as
a going concern and to meet its obligations as they become due within one year
after the date that the financial statements are issued. Based upon the
evaluation, management believes the Company has the ability to meet its
obligations as they become due within the next twelve months from the date of
the financial statement issuance.
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--------------------------------------------------------------------------------Cautionary Statement Regarding Forward-Looking Statements
Certain information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations for the year endedDecember 31, 2022 and other items set forth in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipates," "believes," "estimates," "expects," "intends," "plans," "seeks," variations of such words, and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations, estimates and projections about our business and industry, our beliefs and certain assumptions made by our management. Investors are cautioned that matters subject to forward-looking statements involve risks and uncertainties including economic, competitive, governmental, technological and other factors that may affect our business and prospects. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. These statements are based on current expectations and speak as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. In order to obtain the benefits of these "safe harbor" provisions for any such forward-looking statements, we caution investors and prospective investors about the following significant factors, which, among others, have in some cases affected our actual results and are in the future likely to affect our actual results and could cause them to differ materially from those expressed in any such forward-looking statements. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, our ability to enforce our patents, changes in economic, competitive, governmental, technological and other factors, such as the ongoing impact of COVID-19 and the conflict betweenRussia andUkraine , that may affect our business and prospects. Additional factors are discussed in Part I, "Item 1A - Risk Factors" of this Form 10-K. Results Of Operations
Year Ended
Total Revenues
For the Year Ended December 31, %
2022 2021 Change
Patent Monetization revenues
License revenues $ 183 $ 329 (44 )
Total Patent Monetization revenues 183 329
Andrea DSP Microphone andAudio Software Products revenues Revenue from automotive array microphone products 378,548 307,949 23 (a) Revenue from OEM array microphone products 1,318,360 1,055,152 25 (b) Revenue from customized digital product 104,458 157,159 (34 ) (c) All other Andrea DSP Microphone and Audio Software Product revenues 150,810 101,067 49 License revenues and service related revenues 9,437 41,841 (77 ) (d) Total Andrea DSP Microphone and Audio Software Products revenues 1,961,613 1,663,168 18 (e) Total revenues$ 1,961,796 $ 1,663,497 18
(a) The increase of approximately
as compared to the same period in 2021, in revenues from automotive array
microphone products is primarily the result of timing of sales to
integrators of public safety and mass transit vehicle solutions.
(b) The increase of approximately
as compared to the same period in 2021, in revenues of OEM array microphone
products is primarily the result of an increase in revenues to new customers
that are integrating our commercial product audio solutions.
(c) The decrease of approximately
as compared to the same period in 2021, from customized digital product
revenues is related to the timing of purchases from an OEM customer for a
customized digital product.
(d) The increase of approximately
as compared to the same period in 2021, in all other Andrea DSP Microphone
and Audio Software Product revenues, is the result of increased revenues of
USB products coupled with increased revenues of speaker and amplifier kits,
a relatively new addition to our overall audio solutions
(e) The decrease of approximately
is primarily the result of a specific one time license of
year ended December 31, 2021 .
Cost of Revenues
Cost of revenues as a percentage of total revenues for the year ended December
31, 2022 increased to 29% from 26% for the year ended December 31, 2021 . There
was no cost of revenues associated with the Patent Monetization revenues of $183
and $329 for the years ended December 31, 2022 and 2021, respectively. The cost
of revenues as a percentage of total revenue for the year ended December 31,
2022 for Andrea DSP Microphone and Audio Software Products was 29% compared to
26% for the year ended December 31, 2021 . These increases in cost of product
revenues as a percentage of total revenues are primarily the result of the
increased component costs because of supply chain issues, as well as the product
mix described in "Total Revenues" above.
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--------------------------------------------------------------------------------Patent Monetization Expenses Patent monetization expenses for the year endedDecember 31, 2022 decreased by 5% to$156,016 from$163,439 for the year endedDecember 31, 2021 , primarily as a result of timing of legal services incurred to pursue patent monetization. These expenses are a result of our continuing efforts to pursue patent monetization, including the filing of the complaints disclosed under Part I, "Item 3 - Legal Proceedings" of this Form 10-K. Such patent monetization is a key component of our business strategy.
Research and Development Expenses
Research and development expenses for the year endedDecember 31, 2022 decreased by 22% to$460,318 from$587,499 for the year endedDecember 31, 2021 . These expenses primarily relate to costs associated with the development of new products. For the year endedDecember 31, 2022 , research and development expenses reflected a 19% increase in our Patent Monetization research and development efforts to$18,037 or 4% of total research and development expenses, and a 23% decrease in our Andrea DSP Microphone and Audio Software Technology research and development efforts to$442,281 , or 96% of total research and development expenses. The increases in our Patent Monetization research and development efforts represent intangible asset amortization expense while the decreases in our Andrea DSP Microphone and Audio Software Technology research and development efforts reflect decreases in compensation expenses related to projects completed in 2021 and 2022. With respect to DSP Microphone andAudio Software technologies, research efforts are primarily focused on the pursuit of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces, incorporating Andrea's digital super directional array microphone technology, and certain other related technologies such as noise suppression and stereo acoustic echo cancellation. We believe that continued research and development spending should benefit Andrea in the future.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased by approximately 1% to$1,090,405 for the year endedDecember 31, 2022 from$1,074,589 for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , there was a 37% decrease in our Patent Monetization general, administrative and selling expenses efforts to$104,770 , or 10% of total general, administrative and selling expenses and a 8% increase in general, administrative and selling expenses in our Andrea DSP Microphone and Audio Software Technology general, administrative and selling expenses efforts to$985,635 , or 90% of total general, administrative and selling expenses. The overall 1% increase of approximately$16,000 relates to small increases in ordinary operating expenses. Interest expense, net Interest expense, net for the year endedDecember 31, 2022 was$103,931 , compared to interest expense, net of$73,505 for the year endedDecember 31, 2021 . The change in this line item was attributable to an increase in interest expense because of a higher amount of debt outstanding combined with a decrease of interest income related to lower cash balances.
Income from Employee Retention Tax Credits
Income from Employee Retention Tax Credits for the year endedDecember 31, 2022 , was$140,137 . There was no Income from Employee Retention Tax Credits for the year endedDecember 31, 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. Provision for Income Taxes The income tax provision for the year endedDecember 31, 2022 was$1,268 compared to$585 for the year endedDecember 31, 2021 . The provision for income taxes for the years endedDecember 31, 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, related revenues were approximately$6,000 and$3,000 for the years endingDecember 31, 2022 and 2021, respectively. Net loss Net loss for the year endedDecember 31, 2022 was$288,179 compared to a net loss of$373,796 for the year endedDecember 31, 2021 . The net loss for the year endedDecember 31, 2022 principally reflects the factors described above. 15 --------------------------------------------------------------------------------
Inflation We do not believe that inflation has had a material impact on our business and operating results during the periods presented, and we do not expect it to have a material impact in the near future, although there can be no assurances that our business will not be affected by inflation in the future.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its consolidated financial condition, changes in consolidated financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Liquidity And Capital Resources
AtDecember 31, 2022 , we had cash of$55,622 compared to$148,349 atDecember 31, 2021 . The decrease in our cash balance atDecember 31, 2022 is primarily the result of cash used in operating activities. Our working capital balance atDecember 31, 2022 was$9,636 compared to working capital of$14,940 atDecember 31, 2021 . The decrease in working capital reflects a decrease in total current assets of$180,628 and a decrease in total current liabilities of$175,324 . The decrease in total current assets reflects a decrease in cash of$92,727 , a decrease in accounts receivable of$70,626 , an increase in inventories of$25,152 and a decrease in prepaid expenses and other current assets of$42,427 . The decrease in total current liabilities reflects a decrease in trade accounts payable and other current liabilities of$179,710 partially offset by an increase in the current portion of long-term debt of$4,386 . The decrease in cash of$92,727 reflects$226,187 of net cash used in operating activities, plus$11,540 of net cash used in investing activities, partially offset by$145,000 of net cash provided by financing activities. The cash used in operating activities of$226,187 , excluding non-cash charges, is primarily attributable to the$288,179 net loss for the year endedDecember 31, 2022 , a$69,358 decrease in accounts receivable, a$16,013 increase in inventories, a$42,427 decrease in prepaid expenses, other current assets and other assets, and a$218,412 decrease in trade accounts payable and other current liabilities and operating lease liabilities payable. The changes in receivables, inventories and trade accounts payable primarily reflect differences in the timing related to both the payments for, and the acquisition of, inventory as well as for other services in connection with ongoing efforts related to Andrea's operations. The cash used in investing activities of$11,540 reflects an increase in patents and trademarks of$676 and purchases of property and equipment of$10,864 . The increase in patents and trademarks reflects capital expenditures associated with our intellectual property. The increase in property and equipment is associated with the purchases of computer equipment, upgrades for our general ledger system and test equipment for the production of products.
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 and decreased research and development expenses relating to Andrea DSP Microphone and Audio Software Technology as such upgrades were completed in 2022 and decreased general and administrative expenses as a result of becoming a non-filing entity. As ofMarch 24, 2023 , Andrea had approximately$30,000 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 2, Summary of Significant Accounting Policies, of the notes to consolidated 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. Market Risk Historically, our principal source of financing activities had been the issuance of convertible preferred stock with financial institutions. We are affected by market risk exposure primarily through any amounts payable in stock, or cash by us under convertible securities. We do not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. In addition, substantially all transactions entered into by us are denominated inU.S. dollars. As such, we have shifted foreign currency exposure onto our foreign customers. As a result, if exchange rates move against foreign customers, we could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. For the year endedDecember 31, 2022 , total revenue from sales to customers outsidethe United States accounted for approximately 24% of our total revenue. The foregoing could materially adversely affect our business, financial condition and results of operations. 16 --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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