UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

(  )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-4324

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ANDREA ELECTRONICS CORPORATION

---------------------------------------------------------------------

(Exact name of registrant as specified in its charter)

    New York     11-0482020
    (State or other jurisdiction of
incorporation or organization)		     (I.R.S. employer identification no.)
  65 Orville Drive, Bohemia, New York       11716  
  (Address of principal executive offices)       (Zip Code)  
Registrant’s telephone number (including area code):     631-719-1800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer ¨   Accelerated Filer                   ¨
Non-Accelerated Filer   ¨   Smaller Reporting Company x
(Do not check if a smaller reporting company)           

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 9, 2013, there were 63,721,035 common shares outstanding.



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30,    December 31, 
    2013    2012 
     (unaudited)        
ASSETS          
           
Current assets:          
Cash  $1,271,040   $1,746,363 
Accounts receivable, net of allowance for doubtful accounts of $18,425 and $18,980, respectively   628,194    229,025 
Inventories, net   742,794    633,069 
Prepaid expenses and other current assets   101,521    89,327 
Total current assets   2,743,549    2,697,784 
           
Property and equipment, net   220,118    266,137 
Intangible assets, net   530,882    752,973 
Other assets, net   13,198    12,864 
Total assets  $3,507,747   $3,729,758 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities:          
Trade accounts payable  $298,973   $197,954 
Accrued Series C Preferred Stock Dividends   73,921    73,921 
Other current liabilities   162,087    163,286 
Total current liabilities   534,981    435,161 
           
Series B Redeemable Convertible Preferred Stock, $.01 par value; authorized: 1,000 shares; issued and outstanding: 0 shares   —      —   
           
Commitments and contingencies          
           
Shareholders’ equity:          
Preferred stock, $.01 par value; authorized: 2,497,500 shares; none issued and outstanding   —      —   
Series C Convertible Preferred Stock, net, $.01 par value; authorized: 1,500 shares; issued and outstanding: 44.2 shares; liquidation value: $442,314   1    1 
Series D Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000 shares; issued and outstanding: 907,144 shares; liquidation value: $907,144   9,072    9,072 
Common stock, $.01 par value; authorized:  200,000,000 shares; issued and outstanding: 63,721,035 shares   637,210    637,210 
Additional paid-in capital   77,533,026    77,521,216 
Accumulated deficit   (75,206,543)   (74,872,902)
           
Total shareholders’ equity   2,972,766    3,294,597 
           
Total liabilities and shareholders’ equity  $3,507,747   $3,729,758 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

2


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
2013		  June 30,
2012		  June 30,
2013		  June 30,
2012
Revenues                    
Net product revenues  $345,208   $677,963   $871,369   $1,225,212 
License revenues   626,413    206,525    775,832    424,357 
Revenues   971,621    884,488    1,647,201    1,649,569 
                     
Cost of revenues   247,559    393,132    556,367    713,868 
                     
Gross margin   724,062    491,356    1,090,834    935,701 
                     
Research and development expenses   167,357    197,007    346,224    385,049 
                     
General, administrative and selling expenses   494,661    554,021    1,082,123    1,170,692 
                     
Income (loss) from operations   62,044    (259,672)   (337,513)   (620,040)
                     
Interest income, net   1,743    2,118    3,872    4,339 
                     
Income (loss) before provision for income taxes   63,787    (257,554)   (333,641)   (615,701)
                     
Provision for income taxes   —      16    —      16 
                     
Net income (loss)  $63,787   $(257,570)  $(333,641)  $(615,717)
                     
Basic weighted average shares   63,721,035    63,721,035    63,721,035    63,721,035 
                     
Diluted weighted average shares   72,210,532    63,721,035    63,721,035    63,721,035 
                     
Basic and diluted net income (loss) per share  $.00   $(.00)  $(.01)  $(.01)
                     

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

3


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(UNAUDITED)

 

   Series C Convertible Preferred Stock Outstanding  Series C Convertible Preferred Stock  Series D Convertible Preferred Stock Outstanding  Series D Convertible Preferred Stock  Common
Stock
Shares
Outstanding		  Common
Stock		  Additional
Paid-In
Capital		  Accumulated
Deficit		  Total
Shareholders’
Equity
                                              
Balance, January 1, 2013   44.231432   $1    907,144   $9,072    63,721,035   $637,210   $77,521,216   $(74,872,902)  $3,294,597 
                                              
Stock-based Compensation Expense related to Stock Option Grants   —      —      —      —      —      —      11,810    —      11,810 
                                              
Net loss   —      —      —      —      —      —      —      (333,641)   (333,641)
                                              
Balance, June 30, 2013   44.231432   $1    907,144   $9,072    63,721,035   $637,210   $77,533,026   $(75,206,543)  $2,972,766 
                                              
                                              

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

4


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Six Months Ended
   June 30, 2013  June 30, 2012
       
Cash flows from operating activities:          
   Net loss  $(333,641)  $(615,717)
   Adjustments to reconcile net loss to net cash used in operating activities:          
       Depreciation and amortization   280,108    285,013 
       Stock based compensation   11,810    40,632 
       Change in:          
           Accounts receivable   (399,169)   16,303 
           Inventories   (109,725)   87,710 
           Prepaid expenses, other current assets and other assets   (12,528)   4,269 
           Trade accounts payable   101,019    (32,206)
           Other current liabilities   (1,199)   839 
                       Net cash used in operating activities   (463,325)   (213,157)
           
Cash flows used in investing activities:          
   Purchases of property and equipment   —      (29,709)
   Purchases of patents and trademarks   (11,998)   (23,051)
                       Net cash used in investing activities   (11,998)   (52,760)
           
           
Net decrease in cash   (475,323)   (265,917)
           
Cash, beginning of year   1,746,363    2,193,377 
Cash, end of period  $1,271,040   $1,927,460 
           
Supplemental disclosures of cash flow information:          
           
   Cash paid for:          
       Income Taxes  $365   $3,447 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

5


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1.             Basis of Presentation and Management’s Liquidity Plans

 

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, 2012 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, 2012 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 29, 2013. The accounting policies used in preparing these unaudited condensed consolidated interim financial statements are consistent with those described in the December 31, 2012 audited consolidated financial statements.

 

Note 2.             Summary of Significant Accounting Policies

 

Income (loss) Earnings Per Share - Basic income (loss) 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 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  For the Six Months Ended
   June 30, 2013  June 30, 2012  June 30, 2013  June 30, 2012
Total potential common shares as of:            
Options to purchase common stock (Note 6)   10,025,821    17,382,821    17,205,821    17,382,821 
Series C Convertible Preferred Stock and related accrued dividends (Note 3)   —      2,023,658    2,023,658    2,023,658 
Series D Convertible Preferred Stock (Note 4)   —      3,628,576    3,628,576    3,628,576 
                     
Total potential common shares   10,025,821    23,035,055    22,858,055    23,035,055 
                     

The following table sets forth the components used in the computation of basic and diluted earnings (loss) per share:

 

   For the Three Months Ended  For the Six Months Ended
   June 30, 2013  June 30, 2012  June 30, 2013  June 30, 2012
Numerator:                    
Net income (loss)  $63,787   $(257,570)  $(333,641)  $(615,717)
Denominator:                    
Weighted average shares   63,721,035    63,721,035    63,721,035    63,721,035 
Effect of dilutive securities:                    
Series C Convertible Preferred Stock   2,023,658    —      —      —   
Series D Convertible Preferred Stock   3,628,576    —      —      —   
Options to purchase common stock (Note 6)   2,837,263    —      —      —   
Denominator for diluted income (loss) per share-adjusted weighted average shares after assumed conversions   72,210,532    63,721,035    63,721,035    63,721,035 

6


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

Cash - Cash includes cash and highly liquid investments with original maturities of three months or less. At times during the periods ended June 30, 2013 and December 31, 2012, the Company had cash deposits in excess of the maximum amounts insured by the Federal Deposit Insurance Corporation insurance limits. At June 30, 2013 and December 31, 2012, the Company’s cash is held at two financial institutions.

 

Concentration of Credit Risk – The following customers accounted for 10% or more of Andrea’s consolidated net revenues during at least one of the periods presented below:

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
2013		  June 30,
2012		  June 30,
2013		   June 30,
2012
             
Customer A   60%     *   42%    * 
Customer B     *   15%     *    * 
Customer C     *   21%     *  23%
Customer D     *   10%     *   * 
                     

_________________

* Amounts are less than 10%

 

Customer A accounted for approximately 69% of total accounts receivable at June 30, 2013.

 

The following suppliers accounted for 10% or more of Andrea’s purchases during the periods presented below:

 

   For the Three Months Ended  For the Six Months Ended
   June 30,
2013		  June 30,
2012		  June 30,
2013		  June 30,
2012
             
Supplier A   81%   41%   86%   41%
Supplier B   18%   39%   14%   30%
Supplier C       *    22%    *    13%

_________________

* Amounts are less than 10%

 

At June 30, 2013 and December 31, 2012, Supplier A accounted for approximately 50% and 58% of accounts payable, 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 customer’s 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.

 

    June 30,    December 31, 
    2013    2012 
Raw materials  $15,286   $25,484 
Finished goods   1,363,669    1,262,535 
    1,378,955    1,288,019 
Less: reserve for obsolescence   (636,161)   (654,950)
   $742,794   $633,069 

 

Intangible and Lived Assets - Andrea accounts for its long-lived assets in accordance with ASC 360 “Property, Plant and Equipment” for purposes of determining and measuring impairment of its long-lived assets (primarily intangible assets) other than

7


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

goodwill. 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 Andrea identifies a permanent impairment such that the carrying amount of Andrea’s long lived assets are not recoverable using the sum of an undiscounted cash flow projection (gross margin dollars from product revenues), a new cost basis for the impaired asset will be established. If required, an impairment charge is recorded based on an estimate of future discounted cash flows. This new cost basis will be net of any recorded impairment. At June 30, 2013 Andrea concluded that the Andrea DSP Microphone and Audio Software Products business segment was not required to be tested for recoverability.

 

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.

 

During the three months ended March 31, 2013, it was determined that certain royalties related to a customer’s licensing agreement were not reported for 2012 and for the quarter ended March 31, 2013. The amount of unreported royalty revenue due to the Company was determined during the three months ended June 30, 2013. Since the Company was unable to estimate this amount at March 31, 2013, the Company did not record any revenue related to the unreported royalty revenue. During the three months ended June 30, 2013, the Company reported revenue of approximately $445,000, of which $295,000 and $150,000 consisted of royalties related to the licensing agreement from 2012 and for the quarter ended March 31, 2013, respectively.

 

Income Taxes - Andrea accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). 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 Company’s 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. 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 management’s 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 the tax payable for the period 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 2009 through 2012. 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 June 30, 2013, Andrea had two stock-based employee compensation plans, which are described more fully in Note 6. Andrea accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). 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 employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s 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

8


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

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 Company’s 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.

 

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

 

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, except as noted in Note 5, 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.

 

Note 3.             Series C Convertible Preferred Stock

 

On October 10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series C Redeemable Convertible Preferred Stock (the “Series C Preferred Stock”). Each of these shares of 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. On February 17, 2004, Andrea announced that it had entered into an Exchange and Termination Agreement and an Acknowledgment and Waiver Agreement, which eliminated the dividend of 5% per annum on the stated value. The additional amount of $1,671 represents the 5% per annum from October 10, 2000 through February 17, 2004. 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 then in effect (currently $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.

 

In accordance with Sub Topic 815-40, Andrea evaluated the Series C Preferred Stock and concluded that it is not indexed to the Company’s stock because of the conversion price adjustment feature described above. Accordingly, under the provisions of ASC 815, “Derivatives and Hedging” (“ASC 815”), Andrea evaluated the Series C Preferred Stock embedded conversion feature. The Company has concluded that the embedded conversion feature would be classified in stockholders’ equity if it were a freestanding instrument as the Series C Preferred Stock is more akin to equity and as such it should not be bifurcated from the Series C instrument and accounted for separately.

 

As of June 30, 2013, there were 44.231432 shares of Series C Preferred Stock outstanding, which were convertible into 2,023,658 shares of Common Stock and remaining accrued dividends of $73,921.

 

Note 4.             Series D Convertible Preferred Stock

 

On February 17, 2004, Andrea entered into a Securities Purchase Agreement (including a Registration Rights Agreement) with certain holders of the Series C Preferred Stock and other investors (collectively, the “Buyers”) pursuant to which the Buyers agreed to invest a total of $2,500,000. In connection with this agreement, on February 23, 2004, the Buyers purchased, for a purchase price of $1,250,000, an aggregate of 1,250,000 shares of a new class of preferred stock, the Series D Preferred Stock, convertible into 5,000,000 shares of Common Stock (an effective conversion price of $0.25 per share) and Common Stock warrants exercisable for an aggregate of 2,500,000 shares of Common Stock. These warrants were exercisable at any time after August 17, 2004, at an exercise price of $0.38 per share. On February 23, 2009, these warrants expired without being exercised.

 

In addition, on June 4, 2004, the Buyers purchased for an additional $1,250,000, an additional 1,250,000 shares of Series D Preferred Stock convertible into 5,000,000 shares of Common Stock (an effective conversion price of $0.25 per share) and Common Stock warrants exercisable for an aggregate of 2,500,000 shares of Common Stock. The warrants were exercisable at any time after

9


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

December 4, 2004 and before June 4, 2009 at an exercise price of $0.17 per share. On June 4, 2009, these warrants expired without being exercised.

 

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).

 

In accordance with Sub Topic 815-40, Andrea evaluated the Series D Preferred Stock and concluded that it is not considered to be indexed to the Company’s stock because of the conversion price adjustment feature described above. Accordingly, under the provisions of ASC 815, Andrea evaluated the Series D Preferred Stock embedded conversion feature. The Company has concluded that the embedded conversion feature would be classified in stockholders’ equity if it were a freestanding instrument as the Series D Preferred Stock is more akin to equity and as such it should not be bifurcated from the Series D instrument and accounted for separately.

 

As of June 30, 2013, there were 907,144 shares of Series D Preferred Stock outstanding which were convertible into 3,628,576 shares of Common Stock.

 

Note 5.             Commitments And Contingencies

 

Leases

 

Andrea leases its corporate headquarters located in Bohemia, New York. The lease from an unrelated party, which currently expires in April 2015, is for approximately 11,000 square feet and houses Andrea’s warehousing, sales and executive offices. Rent expense under this operating lease was $24,203 and $47,932 for the three and six-month periods ended June 30, 2013, respectively. Rent expense under this operating lease was $23,498 and $46,536 for the three and six-month periods ended June 30, 2012, respectively.

 

As of June 30, 2013, the minimum annual future lease payments, under this lease and all other noncancellable operating leases, are as follows:

 

 2013 (July 1 – December 31)   $61,513 
 2014    123,994 
 2015    49,167 
 2016    6,661 
 Total   $241,335 
        

Employment Agreements

 

In July 2013, the Company entered into an employment agreement with Mr. Andrea. The effective date of the employment agreement is August 1, 2013 and expires July 31, 2014 and is 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 (which is $50,000 less to Mr. Andrea’s salary for the period from August 1, 2011 to December 31, 2012). The employment agreement provides for quarterly bonuses equal to 25% of the Company’s pre-bonus net after tax quarterly earnings in excess of $25,000. The total quarterly bonus amount may not exceed $12,500; and annual bonuses equal to 10% of the Company’s annual pre-bonus net after tax earnings in excess of $300,000. 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 Company’s 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 two times his salary. continuation of health and

10


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

medical benefits for two years and immediate vesting of all stock options in the event of a change in control and subsequent termination of his employment within the later of the term of his employment agreement or 6 months following the change of control. In the event of his termination without cause or resignation with the Company’s consent, Mr. Andrea is also entitled to a severance payment equal to six months of his salary and a continuation for 12 months of health insurance coverage for Mr. Andrea, his spouse and his dependents.

 

In July 2012, the Company entered into an employment agreement with Mr. Andrea. The effective date of the employment agreement was August 1, 2012 and the agreement expired July 31, 2013 and was subject to renewal as approved by the Compensation Committee of the Board of Directors. Pursuant to his employment agreement, Mr. Andrea received an annual base salary of $350,000 (which was identical to Mr. Andrea’s salary for the period from August 1, 2011 to July 31, 2012) through July 31, 2013. In December 2012, Mr. Andrea voluntarily agreed to a $50,000 decrease of his annual salary for the remainder of the term of his employment agreement. The employment agreement provided for quarterly bonuses equal to 25% of the Company’s pre-bonus net after tax quarterly earnings in excess of $25,000. The total quarterly bonus amount may not exceed $12,500; excluding the quarter ended June 30, 2013, as determined by the Compensation Committee due to unreported revenue related to 2012 and the quarter ended March 31, 2013 (see Note 2); and annual bonuses equal to 10% of the Company’s annual pre-bonus net after tax earnings in excess of $300,000. 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 Company’s 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 was also entitled to a change in control payment equal to two times his base salary with continuation of health and medical benefits for two years in the event of a change in control. In the event of his termination without cause or resignation with the Company’s consent, Mr. Andrea was also entitled to a severance payment equal to six months of his base salary and a continuation for 12 months of health insurance coverage for Mr. Andrea, his spouse and his dependents. At June 30, 2013, the future minimum cash commitments under this agreement aggregate $25,000.

 

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 May 2013, Wayne F. Jones and Roberta Jones, filed a law suit in the Superior Court of Providence County, Rhode Island, against 84 Lumber Company and over 120 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 their contraction of asbestos-related mesothelioma and other asbestos-related pathologies. The Company has retained legal counsel and has filed a response to the compliant. The Company believes the lawsuit is without merit. Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the Company’s financial position or results of operations.

 

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. Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the Company’s financial position or results of operations.

 

Note 6.             Stock Plans and Stock Based Compensation

 

In 1998, the Board adopted the 1998 Stock Option Plan (“1998 Plan”), which was subsequently approved by the shareholders. The 1998 Plan, as amended, authorizes the granting of awards, the exercise of which would allow up to an aggregate of 6,375,000 shares of Andrea’s 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, deferred stock, stock reload options or other stock-based awards. Awards may be granted to key employees, officers, directors and consultants. No further awards will be granted under the 1998 Plan.

 

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 Andrea’s 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

11


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

be granted to key employees, officers, directors and consultants. At June 30, 2013, there were 4,386,436 shares available for further issuance 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 Company’s 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. Expected volatilities are based on implied volatilities from historical volatility of the Company’s 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 and six months ended June 30, 2013 and 2012.

 

Option activity during 2013 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, 2013    17,270,321   $0.08   $0.08      4.95 years    16,635,237   $0.08   $0.08      4.85 years 
 Expired    (64,500)  $0.09   $0.07                          
                                           
 At June 30, 2013    17,205,821   $0.08   $0.08      4.46 years    16,570,737   $0.08   $0.08      4.35 years 

Based on the June 30, 2013 fair market value of the Company’s common stock of $0.06, the aggregate intrinsic value for the 17,205,821 options outstanding and 16,570,737 shares exercisable is $122,800. During the three months ended June 30, 2013, no additional options vested.

 

Total compensation expense recognized related to stock option awards was $5,937 and $20,316 for the three months ended June 30, 2013 and 2012, respectively. In the accompanying condensed consolidated statements of operations for the three months ended June 30, 2013, $5,094 of expense is included in general, administrative and selling expenses, $675 is included in research and development expenses and $168 is included in cost of revenues. In the accompanying consolidated statements of operations for the three months ended June 30, 2012, $16,554 of expense is included in general, administrative and selling expenses, $2,607 is included in research and development expenses and $1,155 is included in cost of revenues. Total compensation expense recognized related to all stock option awards was $11,810 and $40,632 for the six months ended June 30, 2013 and 2012, respectively. In the accompanying condensed consolidated statements of operations for the six months ending June 30, 2013, $10,188 of expense is included in general, administrative and selling expenses, $1,350 is included in research and development expenses and $272 is included in cost of revenues. In the accompanying condensed consolidated statements of operations for the six months ending June 30, 2012, $33,108 of expense is included in general, administrative and selling expenses, $5,214 is included in research and development expenses and $2,310 is included in cost of revenues.

 

As of June 30, 2013, there was $2,736 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 1998 and 2006 Plans. This unrecognized compensation cost is expected to be recognized in 2013.

 

Note 7.             Segment Information

 

Andrea follows the provisions of ASC 280 “Segment Reporting” (“ASC 280”). Reportable operating segments are determined based on Andrea’s 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 Andrea’s results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in two segments: (i) Andrea DSP Microphone and Audio Software Products and (ii) Andrea Anti-Noise Products. 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. Andrea Anti-Noise Products include noise cancellation and active noise cancellation computer headset products and related computer peripheral products.

 

12


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

The following represents selected condensed consolidated interim financial information for Andrea’s segments for the three-month periods ended June 30, 2013 and 2012.

2013 Three Month Segment Data  Andrea DSP
Microphone and
Audio Software
Products		  Andrea Anti-
Noise Products		  2013 Three Month
Total
                
Net revenues from external customers  $33,358   $311,850   $345,208 
License revenues   626,413    —      626,413 
Income (loss) from operations   347,773    (285,729)   62,044 
Depreciation and amortization   120,034    19,762    139,796 
Purchases of patents and trademarks   13,018    273    13,291 
Assets   1,897,670    1,610,077    3,507,747 
Total long lived assets   526,264    224,736    751,000 
                
 
 
 
2012 Three Month Segment Data		   

Andrea DSP
Microphone and
Audio Software
Products

    

 

 

Andrea Anti-

Noise Products

    

 

 

2012 Three Month
Total

 
                
Net revenues from external customers  $191,204   $486,759   $677,963 
License revenues   206,525    —      206,525 
Loss from operations   (68,104)   (191,568)   (259,672)
Depreciation and amortization   120,777    23,307    144,084 
Purchases of property and equipment   2,453    27,256    29,709 
Purchases of patents and trademarks   10,457    11,581    22,038 
                
 
 
 
December 31, 2012 Year End Segment Data		   

Andrea DSP
Microphone and
Audio Software
Products

    

 

 

 

Andrea Anti-

Noise Products

    

 

 

 

2012 Year End
Total

 
                
Assets  $1,946,597   $1,783,161   $3,729,758 
Total long lived assets   759,273    259,837    1,019,110 

 

The following represents selected condensed consolidated interim financial information for Andrea’s segments for the six-month periods ended June 30, 2013 and 2012:

2013 Six Month Segment Data  Andrea DSP
Microphone and
Audio Software
Products		  Andrea Anti-
Noise Products		  2013 Six Month
Total
                
Net revenues from external customers  $76,753   $794,616   $871,369 
License revenues   775,832    —      775,832 
Income (loss) from operations   195,420    (532,933)   (337,513)
Depreciation and amortization   240,081    40,027    280,108 
Purchases of patents and trademarks   9,001    2,997    11,998 
                
 
 
 
2012 Six Month Segment Data		   

Andrea DSP
Microphone and
Audio Software
Products

    

 

 

Andrea Anti-

Noise Products

    

 

 

2012 Six Month
Total

 
                
Net revenues from external customers  $311,371   $913,841   $1,225,212 
License revenues   424,357    —      424,357 
Loss from operations   (174,618)   (445,422)   (620,040)
Depreciation and amortization   240,775    44,238    285,013 
Purchases of property and equipment   2,453    27,256    29,709 
Purchases of patents and trademarks   11,223    11,828    23,051 
                

13


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

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 June 30, 2013 and 2012, net revenues by geographic area are as follows:

 

Geographic Data  June 30, 2013  June 30, 2012
           
Net revenues:          
       United States  $330,155   $766,977 
       Foreign(1)   641,466    117,511 
   $971,621   $884,488 

(1)           Net revenue from the People’s Republic of China and Singapore represented 60% of total net revenues for the three months ended June 30, 2013. Net revenues to any one foreign country did not exceed 10% of total net revenues for the three months ended June 30, 2012.

For the six-month periods ended June 30, 2013 and 2012, net revenues by geographic area are as follows:

 

Geographic Data  June 30, 2013  June 30, 2012
           
Net revenues:          
       United States  $800,885   $1,388,467 
       Foreign(1)   846,316    261,102 
   $1,647,201   $1,649,569 

(1)           Net revenue from the People’s Republic of China and Singapore represented 42% of total net revenues for the six months ended June 30, 2013. Net revenues to any one foreign country did not exceed 10% of total net revenues for the six months ended June 30, 2012.

As of June 30, 2013 and December 31, 2012, accounts receivable by geographic area is as follows:

 

Geographic Data  June 30, 2013  December 31, 2012
           
Accounts receivable:          
       United States  $170,451   $206,575 
       Foreign(1)   457,743    22,450 
   $628,194   $229,025 

14


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Our mission is to provide the emerging “voice interface” markets with state-of-the-art communications products that facilitate natural language, human/machine interfaces.

 

Examples of the applications and interfaces for which Andrea DSP Microphone and Audio Software Products and Andrea Anti-Noise Products provide benefit include: Internet and other computer-based speech; telephony communications; multi-point conferencing; speech recognition; multimedia; multi-player Internet and CD ROM interactive games; 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.

 

We outsource to Asia high volume assembly for most of our products from purchased components. We assemble some low volume Andrea DSP Microphone and Audio Software Products from purchased components. As sales of any particular Andrea DSP Microphone and Audio Software Product increases, assembly operations are transferred to a subcontractor in Asia.

 

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 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, 2012. A discussion of our critical accounting policies and estimates are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2012. 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 reported in the Management’s Discussion and Analysis section of the Annual Report on Form 10-K for the year ended December 31, 2012.

 

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, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2012. 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.

15


 

Risk Factors

 

Our operating results are subject to significant fluctuation, period-to-period comparisons of our operating results may not necessarily be meaningful and you should not rely on them as indications of our future performance.

 

Our results of operations have historically been and are subject to continued substantial annual and quarterly fluctuations. The causes of these fluctuations include, among other things:

 

–the volume of sales of our products under our collaborative marketing arrangements;
–the cost of development of our products;
–the mix of products we sell;
–the mix of distribution channels we use;
–the timing of our new product releases and those of our competitors;
–fluctuations in the computer and communications hardware and software marketplace; and
–general economic conditions.

 

We cannot assure that the level of revenues and gross profit, if any, that we achieve in any particular fiscal period will not be significantly lower than in other fiscal periods. Our net revenues for the three months ended June 30, 2013 were $971,621 compared to $884,488 for the three months ended June 30, 2012. Net income for the three months ended June 30, 2013 was $63,787, or $0.00 income per share on a basic and diluted basis compared to net loss of $257,570 or $0.00 loss per share on a basic and diluted basis for the three months ended June 30, 2012. Our revenues for the six months ended June 30, 2013 were $1,647,201 compared to $1,649,569 for the six months ended June 30, 2012. Net loss for the six months ended June 30, 2013 was $333,641 or $.01 loss per share on a basic and diluted basis, compared to net loss of $615,717, or $0.01 loss per share on a basic and diluted basis for the six months ended June 30, 2012. We continue to explore opportunities to grow sales in other business areas. We are also examining additional opportunities for cost reduction, production efficiencies and further diversification of our business.

 

Shares Eligible For Future Sale May Have An Adverse Effect On Market Price and Andrea Shareholders May Experience Substantial Dilution.

 

Sales of a substantial number of shares of our common stock in the public market could have the effect of depressing the prevailing market price of our common stock. Of the 200,000,000 shares of common stock presently authorized, 63,721,035 were outstanding as of August 9, 2013. The number of shares outstanding does not include an aggregate of 27,244,491 shares of common stock that are issuable. This number of issuable common shares is equal to approximately 43% of the 63,721,035 outstanding shares. These issuable common shares are comprised of: a) 17,205,821 shares of our common stock reserved for issuance upon exercise of outstanding awards granted under our 1998 Stock Plan and 2006 Stock Plan; b) 4,386,436 shares reserved for future grants under our 2006 Stock Plan; c) 2,023,658 shares of common stock that are issuable upon conversion of the Series C Preferred Stock; and d) 3,628,576 shares of common stock issuable upon conversion of the Series D Preferred Stock.

 

In addition to the risk factors set forth above and the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

16


 

 

Results Of Operations

 

Three and Six Months ended June 30, 2013 compared to Three and Six Months ended June 30, 2012

 

Net Revenues

 

   For the Three Months
Ended June 30,		  %  For the Six Months
Ended June 30,		  %
   2013  2012  Change  2013  2012  Change
Andrea Anti-Noise Products net Product revenues                              
Sales of products to OEM customers for use with educational software  $7,082   $79,609    (91)  $28,375   $87,588    (68)  (a)
All other Andrea Anti-Noise net product revenues   304,768    407,150    (25)   766,241    826,253    (7)  (b)
Total Andrea Anti-Noise Products net Product revenues  $311,850   $486,759    (36)  $794,616   $913,841    (13)
                               
Andrea DSP Microphone and Audio Software Products revenues                              
Sales of automotive array microphone products   3,996    150,477    (97)   3,996    189,617    (98)  (c)
All other Andrea DSP Microphone and Audio product revenues   29,362    40,726    (28)   72,757    121,753    (40)  (d)
License revenues   626,413    206,526    203    775,832    424,358    83    (e)
Total Andrea DSP Microphone and Audio Software Products revenues   659,771    397,729    66    852,585    735,728    16 
                               
Total Revenues  $971,621   $884,488    10   $1,647,201   $1,649,569    — 
                               

 

(a)The decreases of approximately $73,000 and $59,000 for the three and six months ended June 30, 2013, respectively, as compared to the three and six months ended June 30, 2012 represent decreased product sales to our educational customers for use with their distance learning products. We believe that these changes in product sales relate to the timing of the customers’ demand for our products.
(b)The decreases of approximately $102,000 and $60,000 for the three and six months ended June 30, 2013, respectively, as compared to the three and six months ended June 30, 2012 in all other Andrea Anti-Noise product revenues is primarily related to decreased demand from our distance learning customers as well as distributor and reseller customers.
(c)The decreases of approximately $146,000 and $186,000 for the three and six months ended June 30, 2013, respectively, as compared to the three and six months ended June 30, 2012 in sales of automotive array microphone products are primarily the result of decreased product sales to integrators of public safety vehicle solutions.
(d)The decreases of approximately $11,000 and $49,000 for the three and six months ended June 30, 2013, respectively, as compared to the three and six months ended June 30, 2012 in all other Andrea DSP Microphone and Audio Software product revenues is related to decreased demand from our OEM customers.
(e)The increases of approximately $420,000 and $351,000 for the three and six months ended June 30, 2013, respectively, as compared to the three and six months ended June 30, 2012 are the result of the Company determining that certain royalties related to a customer’s licensing agreement were not reported for 2012 and for the three months ended March 31, 2013 and the Company subsequently recording such royalties during the three months ended June 30, 2013. During the three months ended June 30, 2013, the Company recorded revenue of approximately $445,000 related to this customer’s licensing agreements, of which approximately $295,000 and $150,000 of royalties related to their licensing agreement from 2012 and the quarter ended March 31, 2013, respectively.

 

Cost of Revenues

 

Cost of revenues as a percentage of net revenues for the three months ended June 30, 2013 decreased to 26% from 44% for the three months ended June 30, 2012. The cost of revenues as a percentage of net revenues for the three months ended June 30, 2013 for

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Andrea Anti-Noise Products was 72% compared to 60% for the three months ended June 30, 2012. The cost of revenues as a percentage of net revenues for the three months ended June 30, 2013 for Andrea DSP Microphone and Audio Software Products was 4% compared to 26% for the three months ended June 30, 2012. Cost of revenues as a percentage of net revenues for the six months ended June 30, 2013 decreased to 34% from 43% for the six months ended June 30, 2012. The cost of revenues as a percentage of net revenues for the six months ended June 30, 2013 for Andrea Anti-Noise Products was 64% compared to 60% for the six months ended June 30, 2012. The cost of revenues as a percentage of net revenues for the six months ended June 30, 2013 for Andrea DSP Microphone and Audio Software Products was 6% compared to 22% for the six months ended June 30, 2012. The increases for the Andrea Anti-Noise Products revenues for the three and six month periods was attributable to the different product mix of revenues which resulted in sales of higher margin products combined with decrease in revenues in this segment and therefore decreased revenue to apply to our fixed cost of revenues decreases in revenues related to this segment. The decreases in cost of sales as a percentage of sales for Andrea DSP Microphone and Audio Software products segment for the three and six month periods relate to increased licensing revenues offset in part by increased OEM revenues.

 

Research and Development Expenses

 

Research and development expenses for the three months ended June 30, 2013 decreased 15% to $167,357 from $197,007 for the three months ended June 30, 2012. For the three months ended June 30, 2013, the decrease in research and development expenses reflects a 9% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $97,810, or 58% of total research and development expenses and a 22% decrease in our Andrea Anti-Noise Headset Product efforts to $69,547, or 42% of total research and development expenses. Research and development expenses for the six months ended June 30, 2013 decreased 10% to $346,224 from $385,049 for the six months ended June 30, 2012. For the six months ended June 30, 2013, the decrease in research and development expenses reflects a 5% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $206,583, or 60% of total research and development expenses and a 17% decrease in our Andrea Anti-Noise Headset Product efforts to $139,641, or 40% of total research and development expenses.

 

General, Administrative and Selling Expenses

 

General, administrative and selling expenses decreased 11% to $494,661 for the three months ended June 30, 2013 from $554,021 for the three months ended June 30, 2012. For the three months ended June 30, 2013, the expenses reflect a 26% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $189,953, or 38% of total general, administrative and selling expenses and a 2% increase in our Andrea Anti-Noise Headset Product efforts to $304,708, or 62% of total general, administrative and selling expenses. General, administrative and selling expenses decreased 8% to, $1,082,123 for the six months ended June 30, 2013 from $1,170,692 for the six months ended June 30, 2012. For the six months ended June 30, 2013, the expenses reflect a 25% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $400,159, or 37% of total general, administrative and selling expenses and a 7% increase in our Andrea Anti-Noise Headset Product efforts to $681,964, or 63% of total general, administrative and selling expenses. The quarter over quarter decrease relates to a decrease of stock based compensation expense.

 

Interest Income, net

 

Interest income, net for the three months ended June 30, 2013 was $1,743 compared to $2,118 for the three months ended June 30, 2012. Interest income, net for the six months ended June 30, 2013 was $3,872 compared to $4,339 for the six months ended June 30, 2012.

 

Provision for Income Taxes

 

There was no provision for income taxes for the three months ended June 30, 2013 compared to a provision for income taxes of $16 for the three months ended June 30, 2012. There was no provision for income taxes for the six months ended June 30, 2013 compared to a provision for income taxes of $16 for the three months ended June 30, 2012.

 

Net Loss/Net Income

 

Net income for the three months ended June 30, 2013 was $63,787 compared to net loss of $257,570 for the three months ended June 30, 2012. Net loss for the six months ended June 30, 2013 was $333,641 compared to net loss of $615,717 for the six months ended June 30, 2012. The net income (loss) for the three and six months ended June 30, 2013 and 2012 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.

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Liquidity And Capital Resources

 

At June 30, 2013, we had cash of $1,271,040 compared with $1,746,363 at December 31, 2012. The cash balance at June 30, 2013 was primarily the result of our cash that we historically generated from operations.

 

Our working capital balance at June 30, 2013 was $2,208,568 compared to a working capital of $2,262,623 at December 31, 2012. The decrease in working capital reflects an increase in total current assets of $45,765 and an increase in total current liabilities of $99,820. The increase in total current assets reflects a decrease in cash of $475,323, an increase in accounts receivable of $399,169, an increase in inventories of $109,725, and an increase in prepaid expenses and other current assets of $12,194. The increase in total current liabilities reflects an increase in trade accounts payable of $101,019 and a decrease of $1,199 in other current liabilities.

 

The decrease in cash of $475,323 reflects $463,325 of net cash used in operating activities and $11,998 of net cash used in investing activities.

 

The cash used in operating activities of $463,325, excluding non-cash charges for the six months ended June 30, 2013, was attributable to a $399,169 increase in accounts receivable, a $109,725 increase in inventories, a $12,528 decrease in prepaid expenses, other current assets and other assets, a $101,019 increase in accounts payable, and a $1,199 decrease in other current liabilities. The changes in accounts receivables, inventories, prepaid expenses, other current assets and other assets and 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 various product lines.

 

The cash used in investing activities of $11,998 reflects an increase in patents and trademarks of $11,998. The increase in patents and trademarks reflects capital expenditures associated with our intellectual property.

 

We plan to improve our cash flows in 2013 by aggressively pursuing additional licensing opportunities related to our Andrea DSP Audio Software and increasing the sales of our Andrea Anti-Noise Headset Products through the introduction of new products as well as the increased efforts we are putting into our sales and marketing efforts. However, there can be no assurance that we will be able to successfully execute the aforementioned plans. As of August 9, 2013, Andrea has approximately $1,200,000 of cash deposits. We believe that we have sufficient liquidity available to continue in operation through at least June 2014. To the extent that we do not generate sufficient cash flows from our operations in the next twelve months, additional financing might be required. If our revenues decline, a reduction in overall expenses may impede our ability to be cash flow positive and our net income or loss may be disproportionately affected. We have no commitment for additional financing and may experience difficulty in obtaining additional financing on favorable terms, if at all. Any financing we obtain may contain covenants that restrict our freedom to operate our business or may have rights, preferences or privileges senior to our common stock and may dilute our current shareholders’ ownership interest in Andrea. 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Andrea’s management, including its principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Andrea’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that it files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to Andrea’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that all control issues and instances of fraud, if any, within a company have been detected. Andrea’s disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives.

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonable likely to materially affect the Company’s internal controls over financial reporting during the period covered by this Quarterly Report.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Andrea is involved in routine litigation incidental to the normal course of business. While it is not feasible to predict or determine the final outcome of the claims, Andrea believes any resolution of these matters will not have a material adverse effect on Andrea’s consolidated financial position, results of operations or liquidity.

In May 2013, Wayne F. Jones and Roberta Jones, filed a law suit in the Superior Court of Providence County, Rhode Island, against 84 Lumber Company and over 120 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 their contraction of asbestos-related mesothelioma and other asbestos-related pathologies. The Company has retained legal counsel and has filed a response to the compliant. The Company believes the lawsuit is without merit. Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the Company’s financial position or results of operations.

In addition, 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. Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the Company’s financial position or results of operations.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

The Company will hold its annual meeting of shareholders at the Clarion Hotel, 3845 Veterans Memorial Highway, Ronkonkoma, New York on Tuesday, October 15, 2013 at 3:00 p.m.

ITEM 6. EXHIBITS

a)Exhibits

Exhibit 31.1 – Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

Exhibit 31.2 – Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

Exhibit 32 – Section 1350 Certifications

Exhibit 101.0* The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statement of Shareholders’ Equity; (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Interim Financial Statements.

                          
     *  Furnished, not filed  

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ANDREA ELECTRONICS CORPORATION
By: /s/    DOUGLAS J. ANDREA
  Name: Douglas J. Andrea
  Title: Chairman of the Board, President,
Chief Executive Officer and Corporate Secretary

 

Date: August 14, 2013

 

    
/s/    DOUGLAS J. ANDREA Chairman of the Board, President, Chief August 14, 2013
Douglas J. Andrea Executive Officer and Corporate Secretary  
     
/s/    CORISA L. GUIFFRE Vice President, Chief Financial Officer and August 14, 2013
Corisa L. Guiffre Assistant Corporate Secretary  
     

 

 

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