Company Quick10K Filing
Quick10K
Andrea Electronics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.07 68 $5
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-10-16 Shareholder Vote
SONM Sonim Technologies 153
AXON Axovant Sciences 57
DTST Data Storage 21
SVDN Savden Group 0
GRCR GRCR Partners 0
CTDT Centaurus Diamond Technologies 0
GPFF Grant Park Futures Fund Limited Partnership 0
HCMC Healthier Choices Management 0
RIT Rodin Income Trust 0
LBAO Luboa Group 0
ANDR 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Revenue Sharing, Note Purchase Agreement and Long-Term Debt
Note 4. Series C Redeemable Convertible Preferred Stock
Note 5. Series D Redeemable Convertible Preferred Stock
Note 6. Commitments and Contingencies
Note 7. Stock Plans and Stock Based Compensation
Note 8. Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Security and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 andr3577292-ex101.htm
EX-31.1 andr3577292-ex311.htm
EX-31.2 andr3577292-ex312.htm
EX-32.0 andr3577292-ex32.htm

Andrea Electronics Earnings 2019-06-30

ANDR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 andr3577292-10q.htm QUARTERLY REPORT

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 June 30, 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
---------------------------------------------------------------------
(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

631-719-1800
________________________________
Registrant’s Telephone Number, Including Area 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 August 9, 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

      June 30,
2019
      December 31,
2018
(unaudited)
ASSETS
 
Current assets:
Cash $ 456,343 $ 486,521
Accounts receivable, net of allowance for doubtful accounts of $4,789 and $4,793, respectively 396,420 418,681
Inventories, net 174,416 213,056
Prepaid expenses and other current assets 116,185 77,593
Total current assets 1,143,364 1,195,851
 
Property and equipment, net 40,622 55,088
Intangible assets, net 240,141 262,819
Other assets, net 93,807 5,250
Total assets $ 1,517,934 $ 1,519,008
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
Current liabilities:
Trade accounts payable and other current liabilities $ 370,297 $ 380,685
Accrued Series C Preferred Stock Dividends 19,168 19,168
Total current liabilities 389,465 399,853
 
Lease liabilities payable 33,852 -
Long-term debt 1,788,797 1,551,284
Total liabilities 2,212,114 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 78,078,872 78,069,200
Accumulated deficit (79,463,174 ) (79,191,451 )
 
Total shareholders’ deficit (694,180 ) (432,129 )
 
Total liabilities and shareholders’ deficit $     1,517,934 $     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 For the Six months Ended
      June 30,
2019
      June 30,
2018
      June 30,
2019
June 30,
2018
Revenues            
Net product revenues $ 552,449 $ 228,824 $ 975,129 $ 483,214
License and service related revenues 12,684 12,285 27,844 34,440
Total revenues 565,133 241,109 1,002,973 517,654
 
Cost of product revenues 152,413 38,289 291,855 116,167
 
Gross margin 412,720 202,820 711,118 401,487
 
Patent Monetization expenses 74,080 55,832 113,273 95,879
 
Research and development expenses 145,176 143,290 286,360 296,668
 
General, administrative and selling expenses 249,679 253,963 547,936 574,795
 
Operating loss (56,215 ) (250,265 ) (236,451 ) (565,855 )
 
Interest expense, net (17,238 ) (9,068 ) (33,950 ) (24,979 )
 
Loss from operations before provision for income taxes (73,453 ) (259,333 ) (270,401 ) (590,834 )
 
Provision for income taxes 782 729 1,322 1,863
 
Net loss $ (74,235 ) $ (260,062 ) $ (271,723 ) $ (592,697 )
 
Basic and diluted weighted average shares 68,104,957 64,931,968 68,104,957 64,923,499
 
Basic and diluted net loss per share $     (.00 ) $     (.00 ) $     (.00 ) $     (.00 )

See Notes to unaudited condensed consolidated interim financial statements.

3


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 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
 
Stock-based Compensation Expense related to Stock Option Grants - - - - - - 13,335 - 13,335
 
Stock option exercises - - - - 50,000 500 1,500 - 2,000
 
Net loss - - - - - - - (260,062 ) (260,062 )
 
Balance, June 30, 2018 33.326899 $ 1 907,144 $ 9,072 64,964,935 $ 649,649 $ 77,959,221 $ (78,839,040 ) $ (221,097 )
 
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, June 30, 2019 11.469249 $ - 907,144 $ 9,072 68,104,957 $ 681,050 $ 78,074,036 $ (79,388,939 ) $ (624,781 )
 
Stock-based Compensation Expense related to Stock Option Grants - - - - - - 4,836 - 4,836
 
Net loss - - - - - - - (74,235 ) (74,235 )
 
Balance, June 30, 2019 11.469249 $     - 907,144 $     9,072 68,104,957 $     681,050 $     78,078,872 $     (79,463,174 ) $         (694,180 )

See Notes to unaudited condensed consolidated interim financial statements.

4


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

      For the Six months Ended
June 30, 2019        June 30, 2018
Cash flows from operating activities:
Net loss $          (271,723 ) $         (592,697 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 42,102 46,658
Stock based compensation expense 9,672 26,670
Inventory net realizable adjustment (703 ) (6,635 )
Provision for income tax withholding 1,322 1,863
Right-of-use assets 19,779 -
PIK interest, net 37,513 29,058
Change in:
Accounts receivable, net 20,939 151,561
Inventories 39,343 17,587
Prepaid expenses and other current assets (38,592 ) (162,317 )
Trade accounts payable and other current liabilities and lease liabilities payable (84,872 ) (9,330 )
Net cash used in operating activities (225,220 ) (497,582 )
 
Cash flows from investing activities:
Payments for patents and trademarks (4,958 ) (25,750 )
Net cash used in investing activities (4,958 ) (25,750 )
 
Cash flows from financing activities:
Proceeds from exercise of stock options - 2,000
Proceeds from long-term notes 200,000 200,000
Net cash provided by financing activities 200,000 202,000
 
Net decrease in cash (30,178 ) (321,332 )
 
Cash, beginning of year 486,521 1,164,057
Cash, end of period $ 456,343 $ 842,725
 
Supplemental disclosures of cash flow information:
                 
Cash paid for:
Income Taxes $ 1,330 $ 2,747

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 $73,453 and $270,401 for the three and six months ended June 30, 2019, of which approximately $25,000 and $52,000, respectively, represents non-cash stock based compensation, depreciation and amortization expenses. As part of the evaluation, management considered the Company’s cash balance of $456,343 and working capital of $753,899 as of June 30, 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, consisted of the following:

      For the Three months Ended       For the Six months Ended
June 30, 2019       June 30, 2018 June 30, 2019       June 30, 2018
Total potentially dilutive common shares as of:
Stock options to purchase common stock (Note 7) 10,008,001 15,013,001 10,008,001 15,013,001
Series C Convertible Preferred Stock and related accrued dividends (Note 4) 524,736 1,524,758 524,736 1,524,758
Series D Convertible Preferred Stock (Note 5) 3,628,576 3,628,576 3,628,576 3,628,576
Total potentially dilutive common shares 14,161,313 20,166,335 14,161,313 20,166,335

Cash - Cash includes cash and highly liquid investments with original maturities of three months or less. At various times during the periods ended June 30, 2019 and December 31, 2018, the Company had cash deposits in excess of the maximum amounts insured by the Federal Deposit Insurance Corporation. At June 30, 2019 and December 31, 2018, the Company’s cash was held at four financial institutions.

6


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       For the Six Months Ended
June 30, 2019       June 30, 2018 June 30, 2019       June 30, 2018
Customer A 53 % * 54 %                 32 %

Customer B

                17 %                 36 %                 14 % 20 %
Customer C 12 % * 13 % *
Customer D * 14 % * 12 %
Customer E * 29 % * 14 %
____________________
* Amounts are less than 10%

As of June 30, 2019, Customers A, B and C accounted for approximately 51%, 20% and 17%, respectively, of accounts receivable. As of December 31, 2018, Customers A, B and C accounted for approximately 55%, 14% 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.

      June 30,
2019
      December 31,
2018
Raw materials $       40,153 $            12,855
Finished goods 134,263 200,201
$ 174,416 $ 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 June 30, 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 consisted of the following:

      June 30,
2019
      December 31,
2018
Trade accounts payable   $        33,939 $             86,706
Payroll and related expenses 18,343 49,937
Operating lease liabilities 57,883 -
Patent monetization expenses 112,334 124,422
Deferred revenue 25,341 25,341
Professional and other service fees 122,457 94,279
Total trade accounts payable and other current liabilities $ 370,297 $ 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.

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 to 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 June 30, 2019, the Company had $25,341 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 an 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 June 30, 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.

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.

8


Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates, among other things, are used in accounting for allowances for bad debts, inventory valuation and obsolescence, product warranty, depreciation, deferred income taxes, expected realizable values for assets (primarily intangible assets), contingencies, 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 the Company recognizes 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. 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 June 30, 2019, there was $1,684,422 of Additional Notes principal and $104,375 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).

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.

9


Long-term debt

      June 30,
2019
      December 31,
2018
Note Payable $      1,684,422 $      1,484,422
PIK interest 104,375 66,862
Total long-term debt 1,788,797 1,551,284
Less: current maturities of long-term debt - -
Long-term debt, net of current maturities $ 1,788,797 $ 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 4.59% and 4.40% at June 30, 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 six months ended June 30, 2019 and year ended December 31, 2018, $200,000 and $300,000, respectively, of Additional Notes were issued to AND34. As of June 30, 2019, the remaining amount of Additional Notes that could be issued is $3,900,000. 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 June 30, 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).

As of June 30, 2019, there were 907,144 shares of Series D Preferred Stock outstanding which were convertible into 3,628,576 shares of Common Stock.

10


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 period 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 accompanying condensed consolidated balance sheet.

Supplemental balance sheet information related to leases was as follows:

Operating Leases

June 30,
2019
Other Assets       $      88,557
 
Trade accounts payable and other current liabilities $ 57,883
Lease liabilities payable non-current 33,852
Total operating lease liabilities $ 91,735
 
Weighted-average remaining lease term 21
Weighted-average discount rate 7.4%
 
As of June 30, 2019, maturities of operating lease liabilities were as follows:
 
2019 (July 1 – December 31) $ 30,562
2020 48,958
2021 11,970
2022 3,990
Total 95,480
Less: interest (3,745 )
Total Lease Payments $ 91,735

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, March 22, 2019 and August 12, 2019. The effective date of the original employment agreement was August 1, 2014 and it currently expires on January 31, 2020, 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 June 30, 2019, the future minimum cash commitments under this agreement aggregate $126,000.

11


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. Additionally, life, medical, dental and disability coverage and payments will be continued for 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. On August 6, 2019, the New York judge determined to maintain the stay pending the final resolution of the IPR proceedings by the Federal Court.

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 June 30, 2019, Andrea did not have any authorized and unexpired stock-based employee 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 are 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.

12


Option activity during the six months ended June 30, 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 June 30, 2019 10,008,001 $ 0.08 $ 0.08 4.31 years 8,847,351 $ 0.08 $ 0.08 3.91 years

During the three and six months ended June 30, 2019, no additional options vested nor were any options exercised, forfeited or cancelled. Based on the June 30, 2019 fair market value of the Company’s common stock of $0.05 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 June 30, 2019 and 2018, respectively. In the accompanying unaudited condensed consolidated statement of operations for the three months ended June 30, 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 June 30, 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.

Total compensation expense recognized related to stock option awards was $9,672 and $26,670 for the six months ended June 30, 2019 and 2018, respectively. In the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2019, $8,538 of compensation expense is included in general, administrative and selling expenses and $1,134 of compensation expense is included in research and development expenses. In the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2018, $22,974 of compensation expense is included in general, administrative and selling expenses and $3,696 of compensation expense is included in research and development expenses.

As of June 30, 2019, there was $8,038 of total unrecognized compensation costs 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 and six month periods ended June 30, 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 $      - $      552,449 $              552,449
Service related revenues - 5,760 5,760
License revenues 155 6,769 6,924
Operating (loss) income (119,994 ) 63,779 (56,215 )
Depreciation and amortization 6,501 13,734 20,235
Assets 367,169 1,150,765 1,517,934
Total long lived assets 126,138 154,625 280,763
Payments for patents and trademarks 433 434 867

13



2018 Three Month Segment Data       Patent
Monetization
      Andrea DSP
Microphone and
Audio Software
Products
      2018 Three
Month Segment
Data
Net product revenues $      - $      228,824 $      228,824
Service related revenues - 4,000 4,000
License revenues 430 7,855 8,285
Operating loss (76,803 ) (173,462 ) (250,265 )
Depreciation and amortization 7,596 16,823 24,419
Payments for patents and trademarks 12,875 12,875 25,750
 
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
 
2019 Six Month Segment Data Patent
Monetization
Andrea DSP
Microphone and
Audio Software
Products
2019 Six Month
Segment Data
Net product revenues $ - $ 975,129 $ 975,129
Service related revenues - 13,560 13,560
License revenues 537 13,747 14,284
Operating loss (217,451 ) (19,000 ) (236,451 )
Depreciation and amortization 13,819 28,283 42,102
Payments for patents and trademarks 2,479 2,479 4,958
 
2018 Six Month Segment Data Patent
Monetization
Andrea DSP
Microphone and
Audio Software
Products
2018 Six Month
Segment Data
Net product revenues $ - $ 483,214 $ 483,214
Service related revenues - 13,938 13,938
License revenues 639 19,863 20,502
Operating loss (224,283 ) (341,572 ) (565,855 )
Depreciation and amortization 15,192 31,466 46,658
Payments for patents and trademarks 12,875 12,875 25,750

Management assesses non-operating income statement data on a consolidated basis only. International revenues are based on the country in which the end-user is located. For the three-month periods ended June 30, 2019 and 2018 total revenues by geographic area were as follows:

Geographic Data June 30, 2019 June 30, 2018
Total revenues:            
United States $      417,789 $      105,003
Foreign(1) 147,344 136,106
$ 565,133 $ 241,109
____________________
(1) Net revenues to any one foreign country did not exceed 10% for the three months ended June 30, 2019. Net revenues to People’s Republic of China represented 32% of total net revenues for the three months ended June 30, 2018.

14


For the six-month periods ended June 30, 2019 and 2018 total revenues by geographic area were as follows:

Geographic Data       June 30, 2019       June 30, 2018
Total revenues:
United States $      801,051 $      351,974
Foreign(1) 201,922 165,680
$ 1,002,973 $ 517,654
____________________

(1) Net revenues to any one foreign country did not exceed 10% for the six months ended June 30, 2019. Net revenues to People’s Republic of China represented 15% of total net revenues for the six months ended June 30, 2018.

As of June 30, 2019 and December 31, 2018, accounts receivable by geographic area were as follows:

Geographic Data       June 30, 2019       December 31, 2018
Accounts receivable:
United States $      256,322 $      293,978
Foreign 140,098 124,703
$ 396,420 $ 418,681

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 the audited 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 Note 2. Summary of Significant Accounting Policies in notes to consolidated interim financial statements included elsewhere in this report. Management has discussed the development and selection of these policies with the Audit Committee of the Company’s Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company’s disclosures of these policies. There have been no material changes to the critical accounting policies or estimates 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.

15


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.

Results Of Operations

Three and Six Months ended June 30, 2019 compared to the Three and Six Months ended June 30, 2018

Total Revenues

      For the Three Months Ended
June 30,
      %
Change
      For the Six Months Ended
June 30,
      %
Change
2019       2018 2019       2018      
Patent Monetization revenues
License revenues $      155 $      430        (64 ) $      537 $      639       (16 )
Total Patent Monetization revenues 155 430 (64 ) 537 639 (16 )
 
Andrea DSP Microphone and Audio Software Products revenues
Revenue from automotive array microphone products 315,611 4,722 6,584 510,698 107,328 376 (a)
Revenue from OEM array microphone products 201,098 182,535 10 357,872 313,751 14 (b)
Revenue from customized digital products 23,774 16,702 42 75,898 33,291 128 (c)
All other Andrea DSP Microphone and Audio Software Products revenues 11,966 24,865 (52 ) 30,661 28,844 6 (d)
License and service related revenues 12,529 11,855 6 27,307 33,801 (19 ) (e)
Total Andrea DSP Microphone and Audio Software Products revenues 564,978 240,679 135 1,002,436 517,015 94
Total revenues $ 565,133 $ 241,109 134 $ 1,002,973 $ 517,654 94
____________________

(a) The approximate $311,000 and $403,000 increase in revenues of automotive array microphone products for the three and six months ended June 30, 2019, respectively, as compared to the same periods in 2018 is the result of increased demand from integrators of public safety and mass transit vehicle solutions.
 
(b) The approximate $19,000 and $44,000 increase in revenues of OEM array microphone products for the three and six months ended June 30, 2019, respectively, as compared to the same periods in 2018 is primarily the result of timing of sales to integrators of commercial product audio solutions.
 
(c) The increases of approximately $7,000 and $43,000 for the three and six months ended June 30, 2019, respectively, as compared to the same periods 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 $13,000 decrease in revenues of all other Andrea DSP Microphone and Audio Software Products for the three months ended June 30, 2019, as compared to the same period in 2018 is primarily the result of revenues from new customers for new audio solutions in the three-month period ending June 30, 2018 that have not reordered in 2019. This decrease is partially offset by revenues from other new customers for new audio solutions in the six-month period ended June 30, 2019, as compared to the same period in 2018 resulting in a net $2,000 increase.
 
(e)

The decrease of approximately $7,000 in license and service related revenues is a result of decreases of royalties for the six-month period ended June 30, 2019 as compared to the same period in 2018.

16


Cost of Product Revenues

Cost of product revenues as a percentage of total revenues for the three months ended June 30, 2019 and 2018 was 27% and 16%, respectively. Cost of product revenues as a percentage of total revenues for the six months ended June 30, 2019 and 2018 was 29% and 22%, respectively. There was no cost of product revenues associated with the Patent Monetization revenues of $155 and $537 for the three and six months ended June 30, 2019 nor cost of product revenues associated with the Patent Monetization revenues of $430 and $639, for the three and six months ended June 30, 2018. The cost of product revenues as a percentage of total revenues for the three months ended June 30, 2019 for Andrea DSP Microphone and Audio Software Products was 27% compared to 16% for the three months ended June 30, 2018. The cost of product revenues as a percentage of total revenues for the six months ended June 30, 2019 for Andrea DSP Microphone and Audio Software Products was 29% compared to 22% for the six months ended June 30, 2018. These changes are primarily the result of the product mix described in “Total Revenues” above.

Patent Monetization Expenses

Patent monetization expenses for the three months ended June 30, 2019 increased 33% to $74,080 from $55,832 for the three months ended June 30, 2018. Patent monetization expenses for the six months ended June 30, 2019 increased 18% to $113,273 from $95,879 for the six months ended June 30, 2018. These expenses are a result of our continuing efforts to pursue patent monetization including the filing of the complaints disclosed under Part II, Item 1 Legal Proceedings. The increases in Patent Monetization expenses for the three and six months ended June 30, 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 June 30, 2019 increased 1% to $145,176 from $143,290 for the three months ended June 30, 2018. Research and development expenses for the six months ended June 30, 2019 decreased 3% to $286,360 from $296,668 for the six months ended June 30, 2018. The expenses primarily relate to costs associated with the development of new products. For the three months ended June 30, 2019, the increase in research and development expenses reflects a 15% decrease in our Patent Monetization efforts to $6,501, or 4% of total research and development expenses, and a 2% increase in our Andrea DSP Microphone and Audio Software Technology efforts to $138,675, or 96% of total research and development expenses. For the six months ended June 30, 2019, the decrease in research and development expenses reflects a 9% decrease in our Patent Monetization efforts to $13,819, or 5% of total research and development expenses, and a 3% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $272,541, or 95% of total research and development expenses. The changes in our Patent Monetization efforts represent intangible asset amortization expense while the changes in our Andrea DSP Microphone and Audio Software Technology efforts reflect expenses related to our research efforts primarily focused on the pursuit of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces, incorporating Andrea’s digital super directional array microphone technology, and certain other related technologies such as noise suppression and stereo acoustic echo cancellation. We believe that continued research and development spending should benefit Andrea in the future.

General, Administrative and Selling Expenses

General, administrative and selling expenses decreased approximately 2% to $249,679 for the three months ended June 30, 2019 from $253,963 for the three months ended June 30, 2018. For the three months ended June 30, 2019, general, administrative and selling expenses related to our Patent Monetization efforts were $39,568, or 16% 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 $210,111, or 84% of total general, administrative and selling expenses. General, administrative and selling expenses decreased approximately 5% to $547,936 for the six months ended June 30, 2019 from $574,795 for the six months ended June 30, 2018. For the six months ended June 30, 2019, general, administrative and selling expenses related to our Patent Monetization efforts were $90,896, 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 $457,040, or 83% of total general, administrative and selling expenses. These small decreases relate to changes in regular operating expenses.

Interest expense, net

Interest expense, net for the three months ended June 30, 2019 was $17,238 compared to $9,068 for the three months ended June 30, 2018. Interest expense, net for the six months ended June 30, 2019 was $33,950 compared to $24,979 for the six months ended June 30, 2018. The change in this line item was attributable to an increase in interest expense because of a higher amount of debt outstanding combined with a decrease of interest income related to lower cash balances.

17


Provision for Income Taxes

The income tax provision for the three months ended June 30, 2019 was $782 compared to $729 for the three months ended June 30, 2018. The income tax provision for the six months ended June 30, 2019 was $1,322 compared to $1,863 for the six months ended June 30, 2018. The provision for the three and six months ended June 30, 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 June 30, 2019 was $74,235 compared to a net loss of $260,062 for the three months ended June 30, 2018. Net loss for the six months ended June 30, 2019 was $271,723 compared to a net loss of $592,697 for the six months ended June 30, 2018. The net loss for the three and six months ended June 30, 2019 and 2018, respectively, 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 June 30, 2019, we had cash of $456,343 compared with $486,521 at December 31, 2018. The decrease in our cash balance at June 30, 2019 was primarily a result of cash used in operating activities.

Our working capital balance at June 30, 2019 was $753,899 compared to working capital of $795,998 at December 31, 2018. The decrease in working capital reflects a decrease in total current assets of $52,487 and a decrease in total current liabilities of $10,388. The decrease in total current assets of $52,487 reflects a decrease in cash of $30,178, a decrease in accounts receivable of $22,261, a decrease in inventories of $38,640 offset in part by an increase in prepaid expenses and other current assets of $38,592. The decrease in total current liabilities of $10,388 reflects an decrease in trade accounts payable and other current liabilities.

The decrease in cash of $30,178 reflects $225,220 of net cash used in operating activities, $4,958 of net cash used in investing activities and $200,000 of net cash provided by financing activities.

The cash used in operating activities of $225,220, excluding non-cash charges for the six months ended June 30, 2019, was attributable to a $20,939 decrease in accounts receivable, a $39,343 decrease in inventories, a $38,592 increase in prepaid expenses and other current assets and a $84,872 decrease in trade accounts payable and other current liabilities and lease liabilities payable. 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 $4,958 reflects an increase in patents and trademarks. The increase in patents and trademarks reflects capital expenditures associated with our intellectual property.

The cash provided by financing activities of $200,000, reflects from long-term debt.

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 August 9, 2019, Andrea had approximately $500,000 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.

18


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 reasonably 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. 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. On August 6, 2019, the New York judge determined to maintain the stay pending the final resolution of the IPR proceedings by the Federal Court.

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:

      the volume of sales of our products under our collaborative marketing arrangements;

19



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

We cannot assure that the level of revenues and gross profit, if any, that we achieve in any particular fiscal period will not be significantly lower than in other fiscal periods. Our total revenues for the three months ended June 30, 2019 were $ 565,133 compared to $ 241,109 for the three months ended June 30, 2018. Our total revenues for the six months ended June 30, 2019 were $1,002,973 compared to $517,654 for the six months ended June 30, 2018. Net loss for the three months ended June 30, 2019 was $74,235, or $0.00 loss per share on a basic and diluted basis, compared to a net loss of $ 260,062, or $0.00 loss per share on a basic and diluted basis for the three months ended June 30, 2018. Net loss for the six months ended June 30, 2019 was $271,723, or $0.00 loss per share on a basic and diluted basis, compared to a net loss of $592,697, or $0.00 loss per share on a basic and diluted basis for the six months ended June 30, 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 August 9, 2019. The number of shares outstanding does not include an aggregate of 11,503,812 shares of common stock that are issuable. This number of issuable common shares is equal to approximately 17% of the 68,104,957 outstanding shares. These issuable common shares are comprised of: (a) 7,350,500 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.

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

a)       Exhibits

            Exhibit 10.1  –  +*Seventh Amendment to Executive Employment Agreement, dated as of August 12, 2019, by and between Andrea Electronics Corporation and Douglas J. Andrea
Exhibit 31.1  –  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Exhibit 31.2  –  Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    Exhibit 32.0  –  Section 1350 Certifications

20



            Exhibit 101.0  –  The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statement of Shareholders’ Deficit; (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements.

+ Filed herewith
* Management contract or compensatory plan or arrangement

21


SIGNATURES

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

            ANDREA ELECTRONICS CORPORATION
By:        /s/ DOUGLAS J. ANDREA
    Name: Douglas J. Andrea
    Title: Chairman of the Board, President, Chief
    Executive Officer and Corporate Secretary
         
Date: August 14, 2019
         
/s/ DOUGLAS J. ANDREA Chairman of the Board, President, Chief August 14, 2019
Douglas J. Andrea Executive Officer and Corporate Secretary
         
/s/ CORISA L. GUIFFRE Vice President, Chief Financial Officer and August 14, 2019
Corisa L. Guiffre Assistant Corporate Secretary

22