UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | ||
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2019 | ||
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 001-04324 |
ANDREA ELECTRONICS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
New York | 11-0482020 | |
State or other jurisdiction of | I.R.S. Employer Identification No. | |
incorporation or organization | ||
620 Johnson Avenue Suite 1-B, Bohemia, NY | 11716 | |
(Address of Principal Executive Offices) | Zip Code |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act
Large Accelerated Filer ☐ | Accelerated Filer | ☐ |
Non-Accelerated Filer ☐ | Smaller Reporting Company | ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act:
Title of each class | Trading Symbol |
Name of each exchange on which
registered |
||
Common Stock, par value $0.01 per share | ANDR | OTC Bulletin Board |
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 10, 2019, there were 68,104,957 common shares outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2019 |
December 31,
2018 |
|||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 488,917 | $ | 486,521 | ||||
Accounts receivable, net of allowance for doubtful accounts of $4,789 and $4,793, respectively | 272,352 | 418,681 | ||||||
Inventories, net | 167,888 | 213,056 | ||||||
Prepaid expenses and other current assets | 84,472 | 77,593 | ||||||
Total current assets | 1,013,629 | 1,195,851 | ||||||
Property and equipment, net | 47,855 | 55,088 | ||||||
Intangible assets, net | 252,275 | 262,819 | ||||||
Other assets, net | 69,609 | 5,250 | ||||||
Total assets | $ | 1,383,368 | $ | 1,519,008 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Trade accounts payable and other current liabilities | $ | 399,067 | $ | 380,685 | ||||
Accrued Series C Preferred Stock Dividends | 19,168 | 19,168 | ||||||
Total current liabilities | 418,235 | 399,853 | ||||||
Lease liabilities payable | 20,003 | - | ||||||
Long-term debt | 1,569,911 | 1,551,284 | ||||||
Total liabilities | 2,008,149 | 1,951,137 | ||||||
Series B Redeemable Convertible Preferred Stock, $.01 par value; authorized: 1,000 shares; issued and outstanding: 0 shares | - | - | ||||||
Commitments and contingencies | ||||||||
Shareholders’ deficit: | ||||||||
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: 11.5 shares; liquidation value: $114,692 | - | - | ||||||
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: 68,104,957 shares | 681,050 | 681,050 | ||||||
Additional paid-in capital | 78,074,036 | 78,069,200 | ||||||
Accumulated deficit | (79,388,939 | ) | (79,191,451 | ) | ||||
Total shareholders’ deficit | (624,781 | ) | (432,129 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 1,383,368 | $ | 1,519,008 |
See Notes to unaudited condensed consolidated interim financial statements.
2
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended | ||||||||
March 31,
2019 |
March 31,
2018 |
|||||||
Revenues | ||||||||
Net product revenues | $ | 422,680 | $ | 254,390 | ||||
License and service related revenues | 15,160 | 22,155 | ||||||
Total revenues | 437,840 | 276,545 | ||||||
Cost of product revenues | 139,442 | 77,878 | ||||||
Gross margin | 298,398 | 198,667 | ||||||
Patent Monetization expenses | 39,193 | 40,047 | ||||||
Research and development expenses | 141,184 | 153,378 | ||||||
General, administrative and selling expenses | 298,257 | 320,832 | ||||||
Operating loss | (180,236 | ) | (315,590 | ) | ||||
Interest expense, net | (16,712 | ) | (15,911 | ) | ||||
Loss from operations before provision for income taxes | (196,948 | ) | (331,501 | ) | ||||
Provision for income taxes | 540 | 1,134 | ||||||
Net loss | $ | (197,488 | ) | $ | (332,635 | ) | ||
Basic and diluted weighted average shares | 68,104,957 | 64,914,935 | ||||||
Basic and diluted net loss per share | $ | (.00 | ) | $ | (.01 | ) |
See Notes to unaudited condensed consolidated interim financial statements .
3
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(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 Outstanding |
Common
Stock |
Additional
Paid-In Capital |
Accumulated
Deficit |
Total
Shareholders’ Equity (Deficit) |
||||||||||||||||||
Balance, January 1, 2018 | 33.326899 | $ | 1 | 907,144 | $ | 9,072 | 64,914,935 | $ | 649,149 | $ | 77,931,051 | $ | (78,246,343 | ) | $ | 342,930 | ||||||||||
Stock-based Compensation Expense related to Stock Option Grants | - | - | - | - | - | - | 13,335 | - | 13,335 | |||||||||||||||||
Net loss | - | - | - | - | - | - | - | (332,635 | ) | (332,635 | ) | |||||||||||||||
Balance, March 31, 2018 | 33.326899 | $ | 1 | 907,144 | $ | 9,072 | 64,914,935 | $ | 649,149 | $ | 77,944,386 | $ | (78,578,978 | ) | $ | 23,630 | ||||||||||
Balance, January 1, 2019 | 11.469249 | $ | - | 907,144 | $ | 9,072 | 68,104,957 | 681,050 | 78,069,200 | (79,191,451 | ) | (432,129 | ) | |||||||||||||
Stock-based Compensation Expense related to Stock Option Grants | - | - | - | - | - | - | 4,836 | - | 4,836 | |||||||||||||||||
Net loss | - | - | - | - | - | - | - | (197,488 | ) | (197,488 | ) | |||||||||||||||
Balance, March 31, 2019 | 11.469249 | $ | - | 907,144 | $ | 9,072 | 68,104,957 | $ | 681,050 | $ | 78,074,036 | $ | (79,388,939 | ) | $ | (624,781 | ) |
See Notes to unaudited condensed consolidated interim financial statements.
4
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended | ||||||||
March 31, 2019 | March 31, 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (197,488 | ) | $ | (332,635 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 21,868 | 22,239 | ||||||
Stock based compensation expense | 4,836 | 13,335 | ||||||
Inventory net realizable adjustment | (100 | ) | (2,200 | ) | ||||
Provision for income tax withholding | 540 | 1,134 | ||||||
Right-of-use assets | 13,188 | - | ||||||
PIK interest, net | 18,627 | 17,689 | ||||||
Change in: | ||||||||
Accounts receivable, net | 145,789 | 75,024 | ||||||
Inventories | 45,268 | 43,151 | ||||||
Prepaid expenses and other current assets | (6,879 | ) | 2,709 | |||||
Trade accounts payable and other current liabilities and lease liabilities payable | (39,162 | ) | (40,191 | ) | ||||
Net cash provided by (used in) operating activities | 6,487 | (199,745 | ) | |||||
Cash flows from investing activities: | ||||||||
Payments for patents and trademarks | (4,091 | ) | - | |||||
Net cash used in investing activities | (4,091 | ) | - | |||||
Cash flows from financing activities: | ||||||||
Proceeds from long-term notes | - | 100,000 | ||||||
Net cash provided by financing activities | - | 100,000 | ||||||
Net increase (decrease) in cash | 2,396 | (99,745 | ) | |||||
Cash, beginning of year | 486,521 | 1,164,057 | ||||||
Cash, end of period | $ | 488,917 | $ | 1,064,312 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Income Taxes | $ | 800 | $ | 2,647 |
See Notes to unaudited condensed consolidated interim financial statements.
5
Note 1. Basis of Presentation
Basis of Presentation - The accompanying unaudited condensed consolidated interim financial statements include the accounts of Andrea Electronics Corporation and its subsidiaries (“Andrea” or the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2018 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, 2018 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019. The accounting policies used in preparing these unaudited condensed consolidated interim financial statements are consistent with those described in the December 31, 2018 audited consolidated financial statements.
Liquidity - ASC 205-40 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.
The Company’s loss before provision for income taxes was $196,948 for the three months ended March 31, 2019, of which approximately $27,000 represents non-cash stock based compensation, depreciation and amortization expenses. As part of the evaluation, management considered the Company’s cash balance of $488,917 and working capital of $595,394 as of March 31, 2019 as well as the Company’s projected revenues and expenses for the next twelve months. If the Company is not successful in achieving its projected revenues and expenses, it may need to seek other sources of revenue, areas of further expense reduction or additional funding from other sources such as debt or equity raising; however, there is no assurance that the Company would be successful in a debt or equity raise or that such funding would be on terms that it would find acceptable.
Note 2. Summary of Significant Accounting Policies
Loss Per Share - Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss 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 loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
Securities that could potentially dilute basic earnings per share (“EPS”) in the future that were not included in the computation of the diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following:
For the Three Months Ended | ||||
March 31, 2019 | March 31, 2018 | |||
Total potentially dilutive common shares as of: | ||||
Stock options to purchase common stock (Note 7) | 10,008,001 | 15,163,001 | ||
Series C Convertible Preferred Stock and related accrued dividends (Note 4) | 524,736 | 1,524,758 | ||
Series D Convertible Preferred Stock (Note 5) | 3,628,576 | 3,628,576 | ||
Total potentially dilutive common shares | 14,161,313 | 20,316,335 |
6
Cash - Cash includes cash and highly liquid investments with original maturities of three months or less. At various times during the periods ended March 31, 2019 and December 31, 2018, the Company had cash deposits in excess of the maximum amounts insured by the Federal Deposit Insurance Corporation. At March 31, 2019 and December 31, 2018, the Company’s cash was held at four financial institutions.
Concentration of Credit Risk - The following customers accounted for 10% or more of Andrea’s consolidated total revenues during at least one of the periods presented below:
For the Three Months Ended | ||||
March 31, 2019 | March 31, 2018 | |||
Customer A | 12% | 11% | ||
Customer B | 55% | 61% | ||
Customer C | 16% | * |
* | Amounts are less than 10% |
As of March 31, 2019, Customers B and C accounted for approximately 59% and 23%, respectively, of accounts receivable. As of December 31, 2018, Customers A, B and C accounted for approximately 14%, 55% and 13%, respectively of accounts receivable.
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 net realizable value. 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 product revenues.
March 31,
2019 |
December 31,
2018 |
|||||
Raw materials | $ | 51,510 | $ | 12,855 | ||
Finished goods | 116,378 | 200,201 | ||||
$ | 167,888 | $ | 213,056 |
Long-Lived Assets - Andrea accounts for its long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360 “Property, Plant and Equipment” for purposes of determining and measuring impairment of its long-lived assets (primarily intangible assets) other than goodwill. 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 whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If Andrea identifies a permanent impairment such that the carrying amount of Andrea’s long lived assets is not recoverable using the sum of an undiscounted cash flow projection (gross margin dollars from product revenues), the impaired asset is adjusted to its estimated fair value, based on an estimate of future discounted cash flows which becomes the new cost basis for the impaired asset. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates. At March 31, 2019 and December 31, 2018, Andrea concluded that intangibles and long-lived assets were not impaired.
Trade accounts payable and other current liabilities - Trade accounts payable and other current liabilities consist of the following:
March 31,
2019 |
December 31,
2018 |
|||||
Trade accounts payable | $ | 18,814 | $ | 86,706 | ||
Payroll and related expenses | 32,004 | 49,937 | ||||
Operating lease liabilities | 44,356 | - | ||||
Patent monetization expenses | 123,626 | 124,422 | ||||
Deferred revenue | 31,101 | 25,341 | ||||
Professional and other service fees | 149,166 | 94,279 | ||||
Total trade accounts payable and other current liabilities | $ | 399,067 | $ | 380,685 |
7
Revenue Recognition - 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. Based on the Company’s review, management did not need to record a cumulative effect adjustment to retained earnings as of the date of initial application and application of this guidance did not have a material impact on its consolidated financial statements.
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. At March 31, 2019, the Company had $31,101 of deferred revenue, which are advance payments from customers, are expected to be recognized as revenue within one year and are included in trade accounts payable and other current liabilities in the Company’s consolidated balance sheets. See Note 8 for additional description of the Company’s reportable business segments and the revenue reported in each segment.
Income Taxes - Andrea accounts for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes, 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. As of March 31, 2019 and December 31, 2018, the Company had recorded a full valuation allowance. Andrea expects it will reduce its valuation allowance in future periods to the extent that it can demonstrate its ability to utilize the assets. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In 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 taxes payable for the period, withholding of income tax as mandated by the foreign jurisdiction in which the revenues are earned and the change during the period in deferred tax assets and liabilities. The Company has identified its federal tax return and its state tax return in New York as “major” tax jurisdictions. Based on the Company's evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the Company's unaudited condensed consolidated interim financial statements. The Company's evaluation was performed for the tax years ended 2016 through 2019. 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 - Andrea accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.” ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, share-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.
8
Use of Estimates - The preparation of unaudited condensed consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the unaudited 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, and 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 unaudited condensed consolidated interim financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Leases - On January 1, 2019 the Company adopted ASU No. 2016-02, “Leases (Topic 842).” In March 2019, the Company also adopted ASU No. 2019-01, “Lease (Topic 842) Codification Improvements.” All significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use (“ROU”) assets and lease liabilities are recognized at commencement. An ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short term leases) and we recognize lease expense for these leases as incurred over the lease term.
ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We primarily use our incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. See Note 6 for additional Lease related disclosure.
Subsequent Events - The Company evaluates events that occurred after the balance sheet date but before the unaudited condensed consolidated interim financial statements are issued. Based upon that evaluation, the Company, other than what is disclosed, did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated interim financial statements.
Note 3. Revenue Sharing, Note Purchase Agreement and Long-Term Debt
On December 24, 2014, the Company entered into an Amended and Restated Revenue Sharing and Note Purchase Agreement (the “Revenue Sharing Agreement”) with AND34 Funding LLC (“AND34”) (acting as the “Revenue Participants,” the “Note Purchasers,” and the “Collateral Agent”), which was retroactively effective as of February 14, 2014. Under the Revenue Sharing Agreement, the Company granted AND34 a perpetual predetermined share in the rights of the Company’s specified future revenues from patents (“Monetization Revenues”) owned by the Company (the “Patents”) in exchange for $3,500,000, which was fully repaid as of September 30, 2016 and issued certain notes containing the features described in the Revenue Sharing Agreement (the “Notes”), which were repaid in 2016. In 2016, 2017 and 2019, the parties executed and amended a rider to the Revenue Sharing Agreement (the “Rider”) pursuant to which Andrea agreed to issue and sell to AND34 additional Notes up to an aggregate amount of $11,500,000 (the “Additional Notes”), or such greater amount as AND34 may agree to in its sole discretion. The most recent rider executed in 2019 increased the aggregate principal amount from $7,500,000 to $11,500,000, whereby $4,100,000 remains available to the Company for sale and issuance. The Additional Notes have a maturity date of August 31, 2022. The proceeds of the Additional Notes will be used to pay certain expenses related to the Revenue Sharing Agreement and expenses of the Company incurred in pursuing patent monetization. As of March 31, 2019, there was $1,484,422 of Additional Notes principal and $85,489 PIK Interest outstanding.
Any Monetization Revenues will first be applied 100% to the payment of accrued and unpaid interest on, and then to repay outstanding principal of, the Additional Notes. After the Additional Notes are paid in full, the Monetization Revenues will be allocated amongst the Revenue Participants and the Company in accordance with certain predetermined percentages (based on aggregate amounts received by the Revenue Participants) ranging from 50% to the Revenue Participants to ultimately 20%. Monetization Revenues is defined in the Revenue Sharing Agreement to include, but is not limited to, amounts that the Company receives from third parties with respect to the Patents, which may include new license revenues, certain product revenue, payments and judgments. Monetization Revenues and associated expenses are included in the Company’s Patent Monetization Segment (See Note 8).
9
The Revenue Sharing Agreement contains many stipulations between the parties regarding the handling of various matters related to the monetization of the Patents including tax treatment. Following an Event of Default under the Revenue Sharing Agreement, the Note Purchasers and Revenue Participants may proceed to protect and enforce their rights by suit or other appropriate proceeding, either for specific performance or the exercise of any power granted under the Revenue Sharing Agreement or ancillary documents including the Additional Notes.
Long-term debt
March 31,
2019 |
December 31,
2018 |
|||||
Note Payable | $ | 1,484,422 | $ | 1,484,422 | ||
PIK interest | 85,489 | 66,862 | ||||
Total long-term debt | 1,569,911 | 1,551,284 | ||||
Less: current maturities of long-term debt | - | - | ||||
Long-term debt, net of current maturities | $ | 1,569,911 | $ | 1,551,284 |
The unpaid principal amount of the Additional Notes (including any PIK Interest) has an interest rate equal to LIBOR (as defined in the Revenue Sharing Agreement) plus 2% per annum, (totaling 4.80% and 4.40% at March 31, 2019 and December 31, 2018, respectively); provided that upon and during the continuance of an Event of Default (as set forth in the Revenue Sharing Agreement), the interest rate will increase an additional 2% per annum. Interest may be paid in cash at the option of the Company and otherwise shall be paid by increasing the principal amount of the Additional Notes by the amount of such interest (“PIK Interest”). The Company may prepay the Additional Notes from time to time in whole or in part, without penalty or premium. During the three months ended March 31, 2019 and year ended December 31, 2018, $0 and $300,000, respectively, of Additional Notes were issued to AND34. As of March 31, 2019, the remaining amount of Additional Notes that could be issued is $100,000. As a result of the Rider, as of May 10, 2019, the remaining amount of Additional Notes that can be issued is $4,100,000. Amounts reported as current maturities of long-term debt reflect amounts expected to be paid in the next twelve months.
Note 4. Series C Redeemable Convertible Preferred Stock
The Series C Preferred Stock had a stated value of $10,000 plus a $1,671 increase in the stated value, which sum is convertible into Common Stock at a conversion price of $0.2551. The shares of Series C Preferred Stock are subject to antidilution provisions, which are triggered in the event of certain stock splits, recapitalizations, or other dilutive transactions. In addition, issuances of common stock at a price below the conversion price of $0.2551, or the issuance of warrants, options, rights, or convertible securities which have an exercise price or conversion price less than that conversion price, other than for certain previously outstanding securities and certain “excluded securities” (as defined in the certificate of amendment), require the adjustment of the conversion price to that lower price at which shares of common stock have been issued or may be acquired. In the event that Andrea issues securities in the future which have a conversion price or exercise price which varies with the market price and the terms of such variable price are more favorable than the conversion price in the Series C Preferred Stock, the purchasers may elect to substitute the more favorable variable price when making conversions of the Series C Preferred Stock.
As of March 31, 2019, there were 11.469249 shares of Series C Preferred Stock outstanding, which were convertible into 524,736 shares of Common Stock and had remaining accrued dividends of $19,168.
Note 5. Series D Redeemable Convertible Preferred Stock
The Series D Preferred Stock is convertible into Common Stock at a conversion price of $0.25 per share. The shares of Series D Preferred Stock are also subject to antidilution provisions, which are triggered in the event of certain stock splits, recapitalizations, or other dilutive transactions. In addition, issuances of common stock at a price below the conversion price then in effect (currently $0.25), or the issuance of warrants, options, rights, or convertible securities which have an exercise price or conversion price less than that conversion price, other than for certain previously outstanding securities and certain “excluded securities” (as defined in the certificate of amendment), require the adjustment of the conversion price to that lower price at which shares of common stock have been issued or may be acquired. In the event that Andrea issues securities in the future which have a conversion price or exercise price which varies with the market price and the terms of such variable price are more favorable than the conversion price in the Series D Preferred Stock, the purchasers may elect to substitute the more favorable variable price when making conversions of the Series D Preferred Stock. In addition, the Company is required to use its best efforts to secure the inclusion for quotation on the Over the Counter Bulletin Board for the common stock issuable under the Series D Preferred Stock and to arrange for at least two market makers to register with the Financial Industry Regulatory Authority. In the event that the holder of the Series D Preferred Stock and related warrants is unable to convert these securities into Andrea Common Stock, the Company shall pay to each such holder a Registration Delay Payment (as such term is defined in its certificate of amendment). This payment is to be paid in cash and is equal to the product of (i) the stated value of such shares of Series D Preferred Stock 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 that may be considered grace periods as defined by the Registration Rights Agreement).
10
As of March 31, 2019, there were 907,144 shares of Series D Preferred Stock outstanding which were convertible into 3,628,576 shares of Common Stock.
Note 6. Commitments And Contingencies
Leases
Effective January 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective method of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed us to carry forward the historical lease classification. Adoption of this standard resulted in the recording of net operating lease right-of-use (“ROU”) assets and corresponding operating lease liabilities of $77,547, with no material cumulative effect adjustment to equity as of the date of adoption. The financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance.
Our operating lease portfolio includes corporate offices, information technology (IT) equipment, and automobiles with remaining lease terms of 1 year to 2 years. Operating lease ROU assets are presented within other assets. The current portion of operating lease liabilities are presented within trade accounts payable and other current liabilities, and the non-current portion of operating lease liabilities are presented separately on the Consolidated Balance Sheet.
Supplemental balance sheet information related to leases was as follows:
Operating Leases
March 31,
2019 |
|||
Other Assets | $ | 64,359 | |
Trade accounts payable and other current liabilities | $ | 44,356 | |
Lease liabilities payable non-current | 20,003 | ||
Total operating lease liabilities | $ | 64,359 | |
Weighted-average remaining lease term | 15 months | ||
Weighted-average discount rate | 7.8% |
As of March 31, 2019, maturities of operating lease liabilities were as follows:
2019 (April 1 – December 31) | $ | 41,799 | ||
2020 | 37,976 | |||
Total | 79,775 | |||
Less: interest | (15,416 | ) | ||
Total Lease Payments | $ | 64,359 |
Employee Related Agreements
In August 2014, the Company entered into an employment agreement with Mr. Andrea, which was subsequently amended on February 19, 2018, August 9, 2018 and March 22, 2019. The effective date of the original employment agreement was August 1, 2014 and it currently expires on July 31, 2019, subject to renewal as approved by the Compensation Committee of the Board of Directors. Pursuant to his amended employment agreement, Mr. Andrea will receive an annual base salary of $216,000. The employment agreement provides for quarterly bonuses equal to 5% of the Company’s pre-bonus net after tax quarterly earnings for a total quarterly bonus amount not to exceed $12,500; and annual bonuses equal to 9% of the Company’s annual pre-bonus net after tax earnings in excess of $300,000 up to $3,000,000, and 3% of the Company’s annual pre-bonus adjusted net after tax earnings in excess of $3,000,000. Adjustments to net after tax earnings shall be made to remove the impact of change in recognition of accumulated deferred tax asset value. All bonuses shall be payable as soon as the 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. Under certain circumstances, Mr. Andrea is entitled to a change in control payment equal to twelve months of the Executive's most recent Base Salary plus a pro-rated portion of the Executive's most recent annual and four quarterly bonuses paid immediately preceding the Change of Control, continuation of health and medical benefits for twelve months and immediate vesting of all stock options in the event of a change in control during the term of his agreement and subsequent termination of his employment within twelve months following the change of control. In the event of his termination without cause or resignation with the Company’s consent, Mr. Andrea is entitled to a severance payment equal to two months of his base salary, plus the two months pro-rated portion of his most recent annual and quarterly bonuses, payment of $12,500, the un-paid bonus for the quarter ended September 30, 2017 and a continuation of health insurance coverage for Mr. Andrea, his spouse and his dependents for 6 months. At March 31, 2019, the future minimum cash commitments under this agreement aggregate $72,000.
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On November 11, 2008, the Company entered into an amended and restated change in control agreement with Corisa L. Guiffre, Vice President, Chief Financial Officer and Assistant Corporate Secretary of the Company. The change in control agreement provides Ms. Guiffre with a severance benefit upon termination in connection with a change in control (as defined in the agreement). If Ms. Guiffre is terminated following a change in control, the Company will pay Ms. Guiffre a sum equal to three times Ms. Guiffre’s average annual compensation for the five preceding taxable years. All restrictions on any restricted stock will lapse immediately and incentive stock options and stock appreciation rights, if any, will become immediately exercisable in the event of a change in control of the Company. Upon the occurrence of a change in control followed by Ms. Guiffre’s termination of employment, the Company will cause to be continued life, medical, dental and disability coverage. Such coverage and payments shall cease upon the expiration of 36 full calendar months following the date of termination.
Legal Proceedings
In September 2016, the Company filed a complaint with the United States District Court for the Eastern District of New York, alleging patent infringement against Apple Inc. (“Apple”) and requesting monetary and injunctive relief (the “New York Litigation”). The New York Litigation was stayed pending final disposition of a parallel case that the Company filed against Apple with the United States International Trade Commission (“ITC”). The ITC’s final decision finding that Apple did not violate the ITC’s statute was issued on March 22, 2018. Apple informed the New York judge of this final decision on May 30, 2018. The ITC’s final decision does not affect Andrea’s right to continue prosecuting the New York Litigation.
In January 2017, Apple filed four (4) petitions for inter partes review (“IPR”) of the Company’s patents asserted in the New York Litigation with the United States Patent and Trademark Office (PTO). The Company filed its Patent Owner’s Preliminary Response in two of these IPR proceedings on May 1, 2017. The PTO instituted the four IPR proceedings requested by Apple on July 24, 2017. The Company filed its Patent Owner’s Response in two of these IPR proceedings on November 7, 2017. On March 19, 2018, both the Company and Apple requested oral argument in these two IPR proceedings, which occurred on April 25, 2018. On July 12, 2018, the PTO issued its final written decisions in those two IPR proceedings, ruling that claims 6-9 of the Company’s U.S. Patent No. 6,363,345 remain valid and enforceable after the PTO’s review. On September 13, 2018, Apple filed its Notice of Appeal of that ruling to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”). Apple filed its Appeal Brief with the Federal Circuit on January 31, 2019. The Company filed its Response to Apple’s Appeal Brief on March 12, 2019.
On July 20, 2018, after the PTO’s final written decisions, the Company informed the New York judge of the status of the PTO proceedings, and its intention to move forward with the New York Litigation regarding claims 6-9 of the Company’s U.S. Patent No. 6,363,345. Apple asked the New York judge to maintain the previously entered stay of the New York Litigation pending its appeal of the PTO holdings to the Federal Circuit. At the New York judge’s request, the parties fully briefed their competing arguments regarding whether to lift or maintain the stay and submitted those briefs to the New York judge on December 13, 2018. The Company and Apple are still awaiting the New York judge’s ruling on whether to lift the stay.
Andrea intends to vigorously prosecute the New York Litigation and Apple’s appeal of the IPR results to the Federal Circuit.
Note 7. Stock Plans and Stock Based Compensation
In October 2006, the Board adopted the Andrea Electronics Corporation 2006 Equity Compensation Plan (“2006 Plan”), which was subsequently approved by the shareholders. The 2006 Plan, as amended, authorized 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. Awards could be granted to key employees, officers, directors and consultants. As the 2006 Plan has expired, no further awards will be granted under the 2006 Plan. At March 31, 2019, Andrea did not have an authorized and unexpired stock-based compensation plans.
The stock option awards granted under the 2006 Plan 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 noted in the following table. 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.
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Option activity during the three months ended March 31, 2019 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, 2019 | 10,008,001 | $ | 0.08 | $ | 0.08 | 4.81 years | 8,847,351 | $ | 0.08 | $ | 0.08 | 4.41 years | ||||||||
At March 31, 2019 | 10,008,001 | $ | 0.08 | $ | 0.08 | 4.56 years | 8,847,351 | $ | 0.08 | $ | 0.08 | 4.16 years |
During the three months ended March 31, 2019, no additional options vested nor were any options exercised, forfeited or cancelled. Based on the March 31, 2019 fair market value of the Company’s common stock of $0.04 per share, there is no aggregate intrinsic value for the 10,008,001 options outstanding and 8,847,351 options exercisable.
Total compensation expense recognized related to stock option awards was $4,836 and $13,335 for the three months ended March 31, 2019 and 2018, respectively. In the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2019, $4,269 of compensation expense is included in general, administrative and selling expenses and $567 of compensation expense is included in research and development expenses. In the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2018, $11,487 of compensation expense is included in general, administrative and selling expenses and $1,848 of compensation expense is included in research and development expenses.
As of March 31, 2019, there was $12,874 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2006 Plan which is expected to be recognized in 2019.
Note 8. Segment Information
Andrea follows the provisions of ASC 280 “Segment Reporting.” 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) Patent Monetization and (ii) Andrea DSP Microphone and Audio Software Products. Patent Monetization includes Monetization Revenues (as defined in our Amended and Restated Revenue Sharing Agreement). Andrea DSP Microphone and Audio Software Products primarily include products based on the use of some, or all, of the following technologies: Andrea Digital Super Directional Array microphone technology (“DSDA”), Andrea Direction Finding and Tracking Array microphone technology (“DFTA”), Andrea PureAudio noise filtering technology, and Andrea EchoStop, an advanced acoustic echo cancellation technology.
The following represents selected unaudited condensed consolidated interim financial information for Andrea’s segments for the three month periods ended March 31, 2019 and 2018 and the fiscal year ended December 31, 2018.
2019 Three Month Segment Data |
Patent
Monetization |
Andrea DSP
Microphone and Audio Software Products |
2019 Three Month
Segment Data |
|||||||||
Net product revenues | $ | - | $ | 422,680 | $ | 422,680 | ||||||
Service related revenues | - | 7,800 | 7,800 | |||||||||
License revenues | 382 | 6,978 | 7,360 | |||||||||
Operating loss | (97,456 | ) | (82,780 | ) | (180,236 | ) | ||||||
Depreciation and amortization | 7,318 | 14,550 | 21,868 | |||||||||
Assets | 252,540 | 1,130,828 | 1,383,368 | |||||||||
Total long lived assets | 126,138 | 173,992 | 300,130 | |||||||||
Payments for patents and trademarks | 2,045 | 2,046 | 4,091 |
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2018 Three Month Segment Data |
Patent
Monetization |
Andrea DSP
Microphone and Audio Software Products |
2018 Three
Month Segment Data |
|||||||||
Net product revenues | $ | - | $ | 254,390 | $ | 254,390 | ||||||
Service related revenues | - | 9,938 | 9,938 | |||||||||
License revenues | 209 | 12,008 | 12,217 | |||||||||
Operating income (loss) | (147,480 | ) | (168,110 | ) | (315,590 | ) | ||||||
Depreciation and amortization | 7,596 | 14,643 | 22,239 | |||||||||
December 31, 2018 Year End Segment Data |
Patent
Monetization |
Andrea DSP
Microphone and Audio Software Products |
2018 Year End
Segment Data |
|||||||||
Assets | $ | 287,206 | $ | 1,231,802 | $ | 1,519,008 | ||||||
Total long lived assets | $ | 131,410 | $ | 186,497 | $ | 317,907 |
Management assesses non-operating income statement data on a consolidated basis only. International revenues are based on the country in which the end-user is located. For the three-month periods ended March 31, 2019 and 2018 total revenues by geographic area were as follows:
Geographic Data | March 31, 2019 | March 31, 2018 | ||||
Total revenues: | ||||||
United States | $ | 383,262 | $ | 246,971 | ||
Foreign (1) | 54,578 | 29,574 | ||||
$ | 437,840 | $ | 276,545 |
(1) | Net revenues to any one foreign country did not exceed 10% for the three months ended March 31, 2019 or 2018. |
As of March 31, 2019 and December 31, 2018, accounts receivable by geographic area were as follows:
Geographic Data | March 31, 2019 | December 31, 2018 | ||||
Accounts receivable: | ||||||
United States | $ | 183,347 | $ | 293,978 | ||
Foreign | 89,005 | 124,703 | ||||
$ | 272,352 | $ | 418,681 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, develop and manufacture state-of-the-art digital microphone products and noise reduction software that facilitate natural language, human/machine interfaces. Our technologies eliminate unwanted background noise to enable the optimum performance of various speech-based and audio applications. We are incorporated under the laws of the State of New York and have been engaged in the electronic communications industry since 1934. Our patented and patent-pending digital noise canceling technologies enable a speaker to be at a distance from the microphone (we refer to this capability as “far-field” microphone use), and free the speaker from having to use a close talking microphone. We believe that the strength of our intellectual property rights are important to the success of our business. We utilize patent and trade secret protection, confidentiality agreements with customers and partners, disclosure and invention assignment agreements with employees and consultants and other contractual provisions to protect our intellectual property and other proprietary information. As part of our Patent Monetization efforts, we license specific, custom designs to our customers, charging royalties at a fixed amount per product or a percentage of sales, and we intend to vigorously defend and monetize our intellectual property through licensing arrangements and, where necessary, enforcement actions against those entities using our patented solutions in their products.
Our Critical Accounting Policies
Our unaudited condensed consolidated interim financial statements and the notes to our unaudited condensed consolidated interim financial statements contain information that is pertinent to management's discussion and analysis. The preparation of unaudited condensed consolidated interim financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our significant accounting policies are described in Note 2 of the notes to audited condensed consolidated interim financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. A discussion of our critical accounting policies and estimates are also included in Management’s Discussion and Analysis or Plan of Operation in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. 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, 2018 except the new lease accounting standard adopted as of January 1, 2019 as described in Note 2 of the notes to unaudited condensed consolidated interim financial statements included in this Quarterly Report.
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, 2018 and the Company’s quarterly reports on Form 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
15
Results Of Operations
Three Months ended March 31, 2019 compared to the Three Months ended March 31, 2018
Total Revenues
For the Three Months Ended
March 31, |
% | ||||||||||
2019 | 2018 | Change | |||||||||
Patent Monetization revenues | |||||||||||
License revenues | $ | 382 | $ | 209 | 83 | ||||||
Total Patent Monetization revenues | 382 | 209 | 83 | ||||||||
Andrea DSP Microphone and Audio Software Products revenues | |||||||||||
Revenue from automotive array microphone products | 195,087 | 102,606 | 90 | (a) | |||||||
Revenue from OEM array microphone products | 156,774 | 131,216 | 20 | (b) | |||||||
Revenue from customized digital products | 52,124 | 16,589 | 214 | (c) | |||||||
All other Andrea DSP Microphone and Audio Software Products revenues | 18,695 | 3,979 | 365 | (d) | |||||||
License and service related revenues | 14,778 | 21,946 | (33 | ) | (e) | ||||||
Total Andrea DSP Microphone and Audio Software Products revenues | 437,458 | 276,336 | 58 | ||||||||
Total revenues | $ | 437,840 | $ | 276,545 | 58 |
(a) | The approximate $92,000 increase in revenues of automotive array microphone products for the three months ended March 31, 2019, as compared to the same period in 2018 is the result of increased demand from integrators of public safety and mass transit vehicle solutions. |
(b) | The approximate $26,000 increase in revenues of OEM array microphone products for the three months ended March 31, 2019, as compared to the same period in 2018 is primarily the result of timing of sales to integrators of commercial product audio solutions. |
(c) | The increase of approximately $36,000 for the three months ended March 31, 2019, as compared to the same period in 2018 in customized digital products revenue is related to the timing of purchases from an OEM customer for a customized digital product. |
(d) | The approximate $15,000 increase in revenues of all other Andrea DSP Microphone and Audio Software products for the three months ended March 31, 2019, as compared to the same period in 2018 is primarily the result of new customers for new audio solutions. |
(e) | The decrease of approximately $7,000 in license and service related revenues are a result of decreases of royalties for the three month period ended March 31, 2019 as compared to the same period in 2018, which was partially offset by an increase in service related revenue. |
Cost of Product Revenues
Cost of product revenues as a percentage of total revenues for the three months ended March 31, 2019 and 2018 was 32% and 28%, respectively. These changes are primarily the result of the product mix described in “Total Revenues” above as well as the increased cost in manufacturing certain products.
Patent Monetization Expenses
Patent monetization expenses for the three months ended March 31, 2019 decreased 2% to $39,193 from $40,047 for the three months ended March 31, 2018. 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. The decreases in Patent Monetization expenses for the three months ended March 31, 2019 is mainly attributable to the timing of legal services incurred to pursue patent monetization.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2019 decreased 8% to $141,184 from $153,378 for the three months ended March 31, 2018. The expenses primarily relate to costs associated with the development of new products. For the three months ended March 31, 2019, the decrease in research and development expenses reflects a 4% decrease in our Patent Monetization efforts to $7,318, or 5% of total research and development expenses, and an 8% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $133,866, or 95% of total research and development expenses. The decrease in our Andrea DSP Microphone and Audio Software Technology efforts reflects a decrease in salary expenses related to a project that was recently completed. With respect to DSP Microphone and Audio Software technologies, our 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.
16
General, Administrative and Selling Expenses
General, administrative and selling expenses decreased approximately 7% to $298,257 for the three months ended March 31, 2019 from $320,832 for the three months ended March 31, 2018. For the three months ended March 31, 2019, general, administrative and selling expenses related to our Patent Monetization efforts were $51,328, or 17% of the total general, administrative and selling expenses, and general, administrative and selling expenses related to our Andrea DSP Microphone and Audio Software Technology were $246,930, or 83% of total general, administrative and selling expenses. These decreases relate to salary reductions taken by executive management in 2018 as well as decreased spending on travel.
Interest expense, net
Interest expense, net for the three months ended March 31, 2019 was $16,712 compared to $15,911 for the three months ended March 31, 2018. The change in this line item was attributable to an increase in interest expense because of a larger amount of debt outstanding combined with a decrease of interest income related to lower cash balances.
Provision for Income Taxes
The income tax provision for the three months ended March 31, 2019 was $540 compared to a provision of $1,134 for the three months ended March 31, 2018. The provision for the three months ended March 31, 2019 and 2018 is a result of certain licensing revenues that are subject to withholding of income tax as mandated by the foreign jurisdiction in which the revenues are earned.
Net loss
Net loss for the three months ended March 31, 2019 was $197,488 compared to a net loss of $332,635 for the three months ended March 31, 2018. The net loss for the three months ended March 31, 2019 and 2018 principally reflects the factors described above.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Liquidity And Capital Resources
At March 31, 2019, we had cash of $488,917 compared with $486,521 at December 31, 2018. The increase in our cash balance at March 31, 2019 was primarily a result of cash provided by operating activities.
Our working capital balance at March 31, 2019 was $595,394 compared to working capital of $795,998 at December 31, 2018. The decrease in working capital reflects a decrease in total current assets of $182,222 and an increase in total current liabilities of $18,382. The decrease in total current assets of $182,222 reflects an increase in cash of $2,396 offset in part by a decrease in accounts receivable of $146,329, a decrease in inventories of $45,168 and an increase in prepaid expenses and other current assets of $6,879. The increase in total current liabilities of $18,382 reflects an increase in trade accounts payable and other current liabilities.
17
The increase in cash of $2,396 reflects $6,487 of net cash provided by operating activities and $4,091 of net cash used in investing activities.
The cash provided by operating activities of $6,487, excluding non-cash charges for the three months ended March 31, 2019, was attributable to a $145,789 decrease in accounts receivable, a $45,268 decrease in inventories, a $6,879 increase in prepaid expenses and a $39,162 decrease in trade accounts payable and other current liabilities. The changes in accounts receivable, inventories, prepaid expenses and other current assets and trade accounts payable and other current liabilities and lease liabilities payable primarily reflect differences in the timing related to both the payments for and the acquisition of inventory as well as for other services in connection with ongoing efforts related to Andrea’s various product lines including continuing efforts to pursue patent monetization.
The cash used in investing activities of $4,091 reflects an increase in patents and trademarks. The increase in patents and trademarks reflects capital expenditures associated with our intellectual property.
We plan to improve our cash flows by aggressively pursuing monetization of our patents related to our Andrea DSP Microphone Audio Software, increasing the sales of our Andrea DSP Microphone Audio Software Products through the introduction of new products as well as the increased efforts we are putting into our sales and marketing efforts. As of May 10, 2019, Andrea had approximately $400,000 of cash deposits. For discussion regarding management’s evaluation of our ability to meet our obligations as they come due in coming months, see the section titled “Liquidity” in Note 1, Basis of Presentation, of the notes to unaudited condensed consolidated interim financial statements. We cannot provide assurances that demand will continue for any of our products, including future products related to our Andrea DSP Microphone and Audio Software technologies, or, that if such demand does exist, that we will be able to obtain the necessary working capital to increase production and provide marketing resources to meet such demand on favorable terms, or at all.
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 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2016, the Company filed a complaint with the United States District Court for the Eastern District of New York, alleging patent infringement against Apple Inc. (“Apple”) and requesting monetary and injunctive relief (the “New York Litigation”). The New York Litigation was stayed pending final disposition of a parallel case that the Company filed against Apple with the United States International Trade Commission (“ITC”). The ITC’s final decision finding that Apple did not violate the ITC’s statute was issued on March 22, 2018. Apple informed the New York judge of this final decision on May 30, 2018. The ITC’s final decision does not affect Andrea’s right to continue prosecuting the New York Litigation.
In January 2017, Apple filed four (4) petitions for inter partes review (“IPR”) of the Company’s patents asserted in the New York Litigation with the United States Patent and Trademark Office (PTO). The Company filed its Patent Owner’s Preliminary Response in two of these IPR proceedings on May 1, 2017. The PTO instituted the four IPR proceedings requested by Apple on July 24, 2017.
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The Company filed its Patent Owner’s Response in two of these IPR proceedings on November 7, 2017. On March 19, 2018, both the Company and Apple requested oral argument in these two IPR proceedings, which occurred on April 25, 2018. On July 12, 2018, the PTO issued its final written decisions in those two IPR proceedings, ruling that claims 6-9 of the Company’s U.S. Patent No. 6,363,345 remain valid and enforceable after the PTO’s review. On September 13, 2018, Apple filed its Notice of Appeal of that ruling to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”). Apple filed its Appeal Brief with the Federal Circuit on January 31, 2019. The Company filed its Response to Apple’s Appeal Brief on March 12, 2019.
On July 20, 2018, after the PTO’s final written decisions, the Company informed the New York judge of the status of the PTO proceedings, and its intention to move forward with the New York Litigation regarding claims 6-9 of the Company’s U.S. Patent No. 6,363,345. Apple asked the New York judge to maintain the previously entered stay of the New York Litigation pending its appeal of the PTO holdings to the Federal Circuit. At the New York judge’s request, the parties fully briefed their competing arguments regarding whether to lift or maintain the stay and submitted those briefs to the New York judge on December 13, 2018. The Company and Apple are still awaiting the New York judge’s ruling on whether to lift the stay.
Andrea intends to vigorously prosecute the New York Litigation and Apple’s appeal of the IPR results to the Federal Circuit.
ITEM 1A. RISK FACTORS
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:
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the volume of sales of our products under our collaborative marketing arrangements;
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the cost of development of our products;
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the mix of products we sell;
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the mix of distribution channels we use;
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the timing of our new product releases and those of our competitors;
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fluctuations in the computer and communications hardware and software marketplace; and
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| 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 total revenues for the three months ended March 31, 2019 were $437,840 compared to $276,545 for the three months ended March 31, 2018. Net loss for the three months ended March 31, 2019 was $197,488, or $0.00 loss per share on a basic and diluted basis, compared to a net loss of $332,635, or $0.01 loss per share on a basic and diluted basis for the three months ended March 31, 2018. We continue to explore opportunities to grow sales in other business areas and vigorously defend and monetize our intellectual property. However, we cannot predict whether such opportunities and defense of our intellectual property will be successful.
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, 68,104,957 were outstanding as of May 10, 2019. The number of shares outstanding does not include an aggregate of 14,161,313 shares of common stock that are issuable. This number of issuable common shares is equal to approximately 21% of the 68,104,957 outstanding shares. These issuable common shares are comprised of: (a) 10,008,001 shares of our common stock reserved for issuance upon exercise of outstanding awards granted under our 2006 Stock Plan; (b) 524,736 shares of common stock that are issuable upon conversion of the Series C Preferred Stock; and (c) 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, 2018 and quarterly reports on Form 10-Q, 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 and quarterly reports on Form 10-Q 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.
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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
None.
ITEM 6. EXHIBITS
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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: May 15, 2019
/s/ DOUGLAS J. ANDREA | Chairman of the Board, President, Chief | May 15, 2019 |
Douglas J. Andrea | Executive Officer and Corporate Secretary | |
/s/ CORISA L. GUIFFRE | Vice President, Chief Financial Officer and | May 15, 2019 |
Corisa L. Guiffre | Assistant Corporate Secretary |
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FIRST AMENDMENT TO THE RIDER TO AMENDED AND RESTATED
REVENUE SHARING AND NOTE PURCHASE AGREEMENT
October 24, 2017
Reference is hereby made to: (a) the Revenue Sharing and Note Purchase Agreement, originally dated as of February 14, 2014, and amended and restated as of December 24, 2014 (as so amended and restated, the “ Original Agreement ”; and, the Original Agreement, as supplemented by the Amended Rider referred to below and otherwise amended, restated, supplemented or modified from time to time, the “ Agreement ”), by and among ANDREA ELECTRONICS CORPORATION, a New York corporation (the “ Company ”), AND34 FUNDING LLC, as collateral agent (the “ Collateral Agent ”), and the financial institutions party thereto as “Purchasers”; and (b) the Rider to the Amended and Restated Revenue Sharing and Note Purchase Agreement, originally dated as of August 10, 2016 (the “ Original Rider ”), by and among the Company, the Collateral Agent and the Purchasers party thereto. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Original Agreement as supplemented by the Original Rider.
This First Amendment to the Original Rider (this “ First Amendment ”; and, the Original Rider, as amended by this First Amendment, the “ Amended Rider ”) is dated as of October 24, 2017, and, upon execution by the parties identified on the signature pages hereto, will hereafter be part of the Original Agreement and the Original Rider.
WHEREAS, pursuant to the Original Rider, the Original Agreement, as supplemented by the Original Rider, contemplated that the Company may subsequently request up to $7,000,000 in Additional Notes, and the Note Purchasers, in their sole discretion, may agree to the sale and purchase of such Additional Notes; and
WHEREAS, the Company has requested the right to request Additional Notes in an incremental amount of up to $500,000, such that the aggregate amount of all Additional Notes that may be issued and sold pursuant to the Original Agreement (as supplemented by the Amended Rider), does not exceed $7,500,000 (it being acknowledged and agreed by the Company that a portion of such Additional Notes in an aggregate principal amount equal to $6,000,000 have already been purchased and sold under the Original Agreement (as supplemented by the Original Rider) prior to the date first written above), subject to the terms and conditions set forth in the Agreement and herein.
NOW THEREFORE, in consideration of the foregoing and for good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto hereby agree to amend the Original Rider as follows:
1. Amendment to Section C.1 to the Original Rider . Section C.1 of the Original Rider is hereby amended and restated in its entirety as follows:
C.1. Purchase and Sale of Additional Notes .
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C.1.1. On August 10, 2016 (the “ Rider Date ”) and from time to time thereafter as provided herein, the Company agrees to issue and sell, and each Note Purchaser agrees to purchase, for an amount equal to the original principal amount thereof and in accordance with the percentages set forth on Schedule 2.2 , Additional Notes in an aggregate original principal amount of up to $7,500,000 (or such greater amount as the Note Purchasers may agree in their sole discretion). The purchase price of the Additional Notes allocated in accordance with the percentages set forth Schedule 2.2 shall be payable in immediately available funds by wire transfer to the deposit account of the Company as identified in writing by the Company to the Note Purchasers prior to the Rider Date and each subsequent date of issuance of Additional Notes thereafter. No Note Purchaser shall be responsible for any default by any other Note Purchaser in its obligation to acquire Additional Notes hereunder. The Company may subsequently request, and the Note Purchasers may in their sole discretion agree to, the sale and purchase of additional Notes in excess of such amount.
C.1.2. From time to time following the Rider Date and through the fourth anniversary of the Rider Date (or, upon mutual prior agreement of the Company and the Majority Note Purchasers and subject to an extension of the Maturity Date pursuant to Section C.3.1, through the fifth anniversary of the Rider Date), on not less than 10 Business Days prior written notice, the Company may request that the Note Purchasers acquire, and subject to the conditions set forth in Section 3.3 and the delivery of such other documents as reasonably requested by the Collateral Agent and/or the Purchasers (including, without limitation, customary resolutions and legal opinions and confirmation of collateral matters), the Note Purchasers shall acquire, Additional Notes in an aggregate original principal amount of up to $7,500,000 (excluding any PIK Interest) (or such greater amount as the Note Purchasers may agree in their sole discretion). The proceeds of the Additional Notes shall be applied solely to the payment of Monetization Expenses (or to reimburse the Company for the payment of Monetization Expenses). The Company may not request Additional Notes to be acquired more than one time in any calendar month, and any such requests shall be in a minimum amount of $100,000.
2. Reaffirmation of Original Rider and the Agreement . Except as expressly amended hereby, each of the Original Rider and the Original Agreement, as amended by the Original Rider, and the other Documents shall continue in full force and effect. This First Amendment, the Original Agreement and the Original Rider shall hereafter be read and construed together as a single document, and all references in the Agreement, any other Document or any agreement or instrument related to the Agreement shall hereafter refer to the Original Agreement as amended by Amended Rider. This First Amendment and the Amended Rider each shall constitute a Document.
3. Incorporation by Reference . EACH PARTY HERETO HEREBY AGREES THAT THE PROVISIONS OF SECTIONS 9.7, 9.8 and 9.9 OF THE ORIGINAL AGREEMENT SHALL APPLY TO THIS FIRST AMENDMENT AND THE AMENDED RIDER.
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4. Execution in Counterparts . This First Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery by telecopier or by electronic .pdf copy of an executed counterpart of a signature page to this First Amendment shall be effective as delivery of an original executed counterpart of this First Amendment. The Collateral Agent may also require that any such documents and signatures delivered by telecopier be confirmed by a manually signed original thereof; provided that the failure to request or deliver the same shall not limit the effectiveness of any document or signature delivered by telecopier.
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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to the Original Rider to the Original Agreement to be duly executed and delivered as of the day of the year first above written.
ANDREA ELECTRONICS CORPORATION, | ||
as the Company | ||
By |
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Name: Corisa L. Guiffre | ||
Title: Vice President and Chief Financial Officer | ||
AND34 FUNDING LLC, | ||
as a Revenue Participant | ||
By |
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Name: JAMES K. NOBLE III | ||
Title: SECRETARY | ||
AND34 FUNDING LLC , | ||
as a Noteholder | ||
By |
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Name: JAMES K. NOBLE III | ||
Title: SECRETARY | ||
AND34 FUNDING LLC , | ||
as Collateral Agent | ||
By |
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Name: JAMES K. NOBLE III | ||
Title: SECRETARY |
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SECOND AMENDMENT TO THE RIDER TO AMENDED AND RESTATED
REVENUE SHARING AND NOTE PURCHASE AGREEMENT
May 10, 2019
Reference is hereby made to: (a) the Revenue Sharing and Note Purchase Agreement, originally dated as of February 14, 2014, and amended and restated as of December 24, 2014 (as so amended and restated, the Original Agreement ; and, the Original Agreement, as supplemented by the Amended Rider referred to below and otherwise amended, restated, supplemented or modified from time to time, the Agreement ), by and among ANDREA ELECTRONICS CORPORATION, a New York corporation (the Company ), AND34 FUNDING LLC, as collateral agent (the Collateral Agent ), and the financial institutions party thereto as Purchasers; and (b) the Rider to the Amended and Restated Revenue Sharing and Note Purchase Agreement, originally dated as of August 10, 2016 as amended by that certain First Amendment to the Rider to Amended and Restated Revenue Sharing and Note Purchase Agreement dated October 24, 2017 (as amended or modified from time to time, the Original Rider ), by and among the Company, the Collateral Agent and the Purchasers party thereto. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Original Agreement as supplemented by the Original Rider.
This Second Amendment to the Original Rider (this Second Amendment ; together with the Original Rider, as amended by this Second Amendment, the Amended Rider ) is dated as of May 10 , 2019, and, upon execution by the parties identified on the signature pages hereto, will hereafter be part of the Original Agreement and the Original Rider.
WHEREAS, the Company has requested to amend the Original Rider as contemplated hereby; and
WHEREAS, the Collateral Agent, the Revenue Participants party hereto and the Noteholders party hereto are willing to amend the Original Rider, subject to the terms and conditions set forth below.
NOW THEREFORE, in consideration of the foregoing and for good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto hereby agree to amend the Original Rider as follows:
1. Amendment to Recitals to the Original Rider . The parenthetical in the second recital of the Original Rider is hereby amended and restated in its entirety to read as follows:
(including the 2016 Notes (as defined below) and the 2019 Notes (as defined below), hereafter, the Additional Notes )
2. Amendment to Section C.l to the Original Rider . Section C.1 of the Original Rider is hereby amended and restated in its entirety as follows:
C.1. Purchase and Sale of Additional Notes .
C.1.1. On August 10, 2016 (the Rider Date ) and from time to time thereafter as provided herein, the Company agreed to issue and sell, and each Note Purchaser agreed to purchase additional Notes (the 2016 Notes ) in an aggregate original principal amount of up to $7,500,000. The Company acknowledges and agrees that a portion of the 2016 Notes in an aggregate principal amount equal to $7,400,000 has already been purchased and sold under the Original Agreement (as supplemented by the Original Rider).
C.1.2. On and after May 10 , 2019, the Company agrees to issue and sell, and each Note Purchaser agrees to purchase, additional Notes (the 2019 Notes ) in an aggregate original principal amount not to exceed $4,000,000, bringing the total availability of Additional Notes to an aggregate principal amount of $4,100,000 (excluding any PIK Interest).
C.1.3 Any Additional Note shall be in a minimum amount of $100,000, and the Company may not request Additional Notes to be acquired more than one time in any calendar month. The purchase and sale of the Additional Notes will occur at least 10 Business Days after which a written request is received by the Note Purchasers at the addresses set forth on Schedule 9.3 to the Original Agreement or by such other means (including by electronic mail) as may be agreed upon by the parties hereto, subject to the terms and conditions hereof. Additional Notes shall be payable in immediately available funds by wire transfer to the deposit account of the Company as identified in writing by the Company to the Note Purchasers. No Note Purchaser shall be responsible for any default by any other Note Purchaser in its obligation to purchase Additional Notes hereunder. The Company may subsequently request, and the Note Purchasers may in their sole discretion agree to, the sale and purchase of Additional Notes in excess of such amount. The obligation of each Note Purchaser to purchase Additional Notes shall be subject to the satisfaction of the conditions contained in Section 3.3 of the Original Agreement and the delivery of such other documents as reasonably requested by the Collateral Agent and/or the Note Purchasers (including, without limitation, customary resolutions and legal opinions and confirmation of collateral matters). The proceeds of the Additional Notes shall be applied solely to the payment of Monetization Expenses (or to reimburse the Company for the payment of Monetization Expenses).
3. Amendment to Section C.3.1. to the Original Rider . Section C.3.1 of the Original Rider is hereby amended to replace the reference to August 31, 2020 to August 31, 2022.
4. Reaffirmation of Original Rider and the Agreement . Except as expressly amended hereby, each of the Original Rider and the Original Agreement, as amended by the Original Rider, and the other Documents shall continue in full force and effect. This Second Amendment, the Original Agreement and the Original Rider shall hereafter be read and construed together as a single document, and all references in the Agreement, any other Document or any agreement or instrument related to the Agreement shall hereafter refer to the Original Agreement as amended by Amended Rider. This Second Amendment and the Amended Rider each shall constitute a Document.
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5. Incorporation by Reference . EACH PARTY HERETO HEREBY AGREES THAT THE PROVISIONS OF SECTIONS 9.7, 9.8 and 9.9 OF THE ORIGINAL AGREEMENT SHALL APPLY TO THIS SECOND AMENDMENT AND THE AMENDED RIDER.
6. Execution in Counterparts . This Second Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery by telecopier or by electronic .pdf copy of an executed counterpart of a signature page to this Second Amendment shall be effective as delivery of an original executed counterpart of this Second Amendment. The Collateral Agent may also require that any such documents and signatures delivered by telecopier be confirmed by a manually signed original thereof; provided that the failure to request or deliver the same shall not limit the effectiveness of any document or signature delivered by telecopier.
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IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to the Original Rider to the Original Agreement to be duly executed and delivered as of the day of the year first above written.
ANDREA ELECTRONICS CORPORATION,
as the Company
By: |
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Name: Corisal Guiffre | |
Title: Vice President and CFO |
AND34 FUNDING LLC,
as a Revenue Participant
By: |
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Name: CONSTANTINE M. DAKOLIAS | |
Title: PRESIDENT |
AND34 FUNDING LLC,
as a Noteholder
By: |
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Name: CONSTANTINE M. DAKOLIAS | |
Title: PRESIDENT |
AND34 FUNDING LLC,
as Collateral Agent
By: |
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Name: CONSTANTINE M. DAKOLIAS | |
Title: PRESIDENT |
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a)
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Douglas J. Andrea, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Andrea Electronics Corporation; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 15, 2019 |
/s/ DOUGLAS J. ANDREA |
Douglas J. Andrea | |
Chairman of the Board, President, Chief | |
Executive Officer and Corporate Secretary |
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a)
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Corisa L. Guiffre, certify that:
1. |
I have reviewed this report on Form 10-Q of Andrea Electronics Corporation; |
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2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - a5(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the small business issuers disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 15, 2019 |
/s/ CORISA L. GUIFFRE |
Corisa L. Guiffre | |
Vice President, Chief Financial Officer and | |
Assistant Corporate Secretary |
EXHIBIT 32.0
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Andrea Electronics Corporation (the “Company”) on Form 10-Q for the quarter ended March 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), the undersigned certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. |
Date: May 15, 2019 | /s/ DOUGLAS J. ANDREA |
Douglas J. Andrea | |
Chairman of the Board, | |
President, Chief Executive | |
Officer and Corporate Secretary | |
/s/ CORISA L. GUIFFRE | |
Corisa L. Guiffre | |
Vice President, Chief Financial | |
Officer and Assistant Corporate | |
Secretary |