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, 2015 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, 2015 included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2015, filed with the Securities and Exchange
Commission (the SEC) on March 29, 2016. The accounting policies used in
preparing these unaudited condensed consolidated interim financial statements
are consistent with those described in the December 31, 2015 audited
consolidated financial statements.
Note 2.
Summary of Significant Accounting Policies
Earnings Per
Share
- Basic income (loss) per
share is computed by dividing the net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted income (loss)
adjusts basic income (loss) per share for the effects of convertible securities,
stock options and other potentially dilutive financial instruments, only in the
periods in which such effect is dilutive. Diluted earnings per share are based
on the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method for the outstanding options, and the if-converted method for the
outstanding convertible instruments. Under the treasury stock method, options
are assumed to be exercised at the beginning of the period (or at the time of
issuance, if later) and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. Under the
if-converted method, outstanding convertible instruments are assumed to be
converted into common stock at the beginning of the period (or at the time of
issuance, if later). Securities that could potentially dilute basic earnings per
share (EPS) in the future that were not included in the computation of the
diluted EPS because to do so would have been anti-dilutive for the periods
presented, consist of the following:
|
|
For the Three Months
Ended
|
|
|
March 31,
2016
|
|
March 31,
2015
|
Total potentially dilutive common
shares as of:
|
|
|
|
|
|
|
|
Stock options to purchase
common stock (Note 7)
|
|
|
11,499,821
|
|
|
18,534,821
|
|
Series C Convertible
Preferred Stock and related accrued dividends (Note 4)
|
|
|
-
|
|
|
2,023,658
|
|
Series D Convertible
Preferred Stock (Note 5)
|
|
|
-
|
|
|
3,628,576
|
|
|
Total
potentially dilutive common shares
|
|
|
11,499,821
|
|
|
24,187,055
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
856,941
|
|
$
|
(1,314,553
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Basic Weighted average shares
|
|
|
64,416,035
|
|
|
63,721,035
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,786,869
|
|
|
-
|
|
Series
C Convertible Preferred Stock and related accrued dividends (Note
4)
|
|
|
2,023,658
|
|
|
-
|
|
Series
D Convertible Preferred Stock (Note 5)
|
|
|
3,628,576
|
|
|
-
|
|
|
Denominator
for diluted income (loss) per share-adjusted weighted average
|
|
|
|
|
|
|
|
shares
after assumed conversions
|
|
|
71,855,138
|
|
|
63,721,035
|
|
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, 2016 and December 31, 2015, the Company had
cash deposits in excess of the maximum amounts insured by the Federal Deposit
Insurance Corporation insurance limits. At March 31, 2016 and December 31, 2015,
the Companys cash was held at four financial institutions.
6
Concentration of Credit
Risk
- The following customers
accounted for 10% or more of Andreas consolidated total revenues during at
least one of the periods presented below:
|
|
For the Three Months
Ended
|
|
|
March 31,
2016
|
|
March 31,
2015
|
Customer A
|
|
*
|
|
|
70
|
%
|
Customer B
|
|
*
|
|
|
22
|
%
|
Customer C
|
|
16
|
%
|
|
*
|
|
Customer D
|
|
27
|
%
|
|
*
|
|
Customer E
|
|
41
|
%
|
|
*
|
|
____________________
|
*
|
Amounts are less than
10%
|
As of March 31, 2016, Customer
A, B and E accounted for approximately 6%, 2% and 92%, respectively, of accounts
receivable. As of December 31, 2015, Customer A and B accounted for
approximately 6% and 1%, 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 customers current credit worthiness, as determined
by the review of their current credit information. Collections and payments from
customers are continuously monitored. The Company maintains an allowance for
doubtful accounts, which is based upon historical experience as well as specific
customer collection issues that have been identified. While such bad debt
expenses have historically been within expectations and allowances established,
the Company cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past. If the financial condition of customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories
- Inventories are stated at the lower of cost (on
a first-in, first-out) or market basis. The cost of inventory is based on the
respective cost of materials. Andrea reviews its inventory reserve for
obsolescence on a quarterly basis and establishes reserves on inventories based
on the specific identification method as well as a general reserve. Andrea
records changes in inventory reserves as part of cost of revenues.
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Raw materials
|
|
$
|
14,381
|
|
|
$
|
21,253
|
|
Finished goods
|
|
|
178,452
|
|
|
|
152,050
|
|
|
|
|
192,833
|
|
|
|
173,303
|
|
Less: reserve for obsolescence
|
|
|
(117,807
|
)
|
|
|
(115,275
|
)
|
|
|
$
|
75,026
|
|
|
$
|
58,028
|
|
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. Andreas 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 Andreas 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, 2016 and December 31, 2015, Andrea concluded that
Intangibles and long-lived assets were not required to be tested for
recoverability.
Revenue
Recognition
- Non
software-related revenue, which is generally comprised of microphones and
microphone connectivity product revenues, is recognized when title and risk of
loss pass to the customer, which is generally upon shipment. With respect to
licensing revenues, Andrea recognizes revenue in accordance with ASC 985,
Software and ASC 605 Revenue Recognition. License revenue is recognized
based on the terms and conditions of individual contracts. In addition, fee
based services, which are short-term in nature, are generally performed on a
time-and-material basis under separate service arrangements and the
corresponding revenue is generally recognized as the services are
performed.
7
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 and establishes for all entities a minimum threshold for
financial statement recognition of the benefit of tax positions, and requires
certain expanded disclosures. The provision for income taxes is based upon
income or loss after adjustment for those permanent items that are not
considered in the determination of taxable income. Deferred income taxes
represent the tax effects of differences between the financial reporting and tax
bases of the Companys 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, 2016 and December 31,
2015 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 managements 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 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 been
concluded that there are no significant uncertain tax positions requiring
recognition in the Company's condensed consolidated interim financial
statements. The Company's evaluation was performed for tax years ended 2012
through 2015. The Company believes that its income tax positions and deductions
will be sustained on audit and does not anticipate any adjustments that will
result in a material change to its financial position.
Stock-Based
Compensation
- At March 31, 2016,
Andrea had two stock-based employee compensation plans, which are described more
fully in Note 7. 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, stock-based compensation cost is measured at the grant date, based on the
fair value of the award, and is recognized as expense over the employees
requisite service period (generally the vesting period of the equity grant). The
fair value of the Companys common stock options are estimated using the Black
Scholes option-pricing model with the following assumptions: expected
volatility, dividend rate, risk free interest rate and the expected life. The
Company expenses stock-based compensation by using the straight-line method. In
accordance with ASC 718, excess tax benefits realized from the exercise of
stock-based awards are classified in cash flows from financing activities. The
future realization of the reserved deferred tax assets related to these tax
benefits associated with the exercise of stock options will result in a credit
to additional paid in capital if the related tax deduction reduces taxes
payable. The Company has elected the with and without approach regarding
ordering of windfall tax benefits to determine whether the windfall tax benefit
did reduce taxes payable in the current year. Under this approach, the windfall
tax benefit would be recognized in additional paid-in-capital only if an
incremental tax benefit is realized after considering all other benefits
presently available.
Use of
Estimates
- The preparation of
condensed consolidated interim financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and disclosures of contingent assets and
liabilities at the date of the condensed consolidated interim financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Management bases its estimates
on historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. The most significant estimates, among other
things, are used in accounting for allowances for bad debts, inventory valuation
and obsolescence, product warranty, depreciation, deferred income taxes,
expected realizable values for assets (primarily intangible assets),
contingencies, revenue recognition as well as the recording and presentation of
the Companys convertible preferred stock. Estimates and assumptions are
periodically reviewed and the effects of any material revisions are reflected in
the condensed consolidated interim financial statements in the period that they
are determined to be necessary. Actual results could differ from those estimates
and assumptions.
Recent Accounting
Pronouncements
- In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update
("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which
supersedes the revenue recognition requirements in ASC Topic 605, "Revenue
Recognition," and most industry-specific guidance. This ASU is based on the
principle that revenue is recognized to depict the transfer of goods or services
to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The ASU also
requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments, and assets recognized from costs incurred to
obtain or fulfill a contract. The amendments in the ASU must be applied using
one of two retrospective methods and are effective for annual and interim
periods beginning after December 15, 2016. On July 9, 2015, the FASB modified
ASU 2014-09 to be effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. As
modified, the FASB permits the adoption of the new revenue standard early, but
not before the annual periods beginning after December 15, 2016. A public
organization would apply the
new revenue standard to all interim reporting periods within the year of
adoption. The Company will evaluate the effects, if any, that adoption of this
guidance will have on its financial statements.
8
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes (ASU 2015-17). The standard
requires that deferred tax assets and liabilities be classified as noncurrent in
a classified statement of financial position. ASU 2015-17 is effective for
fiscal years and interim periods within those years, beginning after December
15, 2016. Early adoption is permitted. ASU 2015-17 may be applied either
prospectively, for all deferred tax assets and liabilities, or retrospectively.
The Company is currently evaluating the impact this standard will have on its
financial statements.
In January 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842). This standard requires that a
lessee recognize the assets and liabilities that arise from operating leases. A
lessee should recognize in the statement of financial position a liability to
make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease
liabilities. In transition, lessees and lessors are required to recognize and
measure leases at the beginning of the earliest period presented using a
modified retrospective approach. ASU 2016-02 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2018. The
Company is currently evaluating the impact the adoption of this new standard
will have on its financial statements.
Reclassifications
-
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifications did not have any effect on reported
consolidated net loss for the periods presented.
Subsequent
Events
- The Company evaluates
events that occurred after the balance sheet date but before the condensed
consolidated interim financial statements are issued. Based upon the evaluation,
other than as disclosed in Note 4, the Company did not identify any recognized
or non-recognized subsequent events that would have required adjustment or
disclosure in the condensed consolidated interim financial statements.
Note 3.
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 Companys specified future revenues
from patents currently owned by the Company (the Patents) in exchange for
$3,500,000, which was recorded as an Advance from Revenue Sharing Agreement on
the accompanying consolidated balance sheet with a remaining outstanding balance
of $312,067 at March 31, 2016. The advance is being repaid over the period in
which the Company generates any future monetization revenues in excess of any of
the outstanding long-term debt and accrued interest to AND34. Under the terms of
the Revenue Sharing Agreement with AND34, Andrea has agreed to issue and sell to
AND34 Notes up to an aggregate outstanding amount of $10,700,000 during the four
years after the closing date or such greater amount as AND34 may agree in its
sole discretion. The proceeds of the Notes will be used to pay certain initial
expenses related to the agreement, and going forward will be used for expenses
of the Company incurred in pursuing patent monetization. AND34s rights to the
Companys monetization revenues from the Patents and the Notes are secured by
the Patents.
Any Monetization Revenues (as
defined in the Revenue Sharing Agreement) will first be applied 100% to the
payment of accrued and unpaid interest on, and then to repay outstanding
principal of, the Notes. After the 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 100% to the Revenue
Participants (such percentage to be allocated to the Revenue Participants until
they have received Monetization Revenues of $3,500,000 to repay the Advance from
Revenue Sharing Agreement) to ultimately 20% to the Revenue Participants.
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 Companys Patent Monetization Segment (Note 8). For the
period ending March 31, 2016, there was approximately $2,944,000 of
non-recurring monetization revenues recognized for patent licensing agreements
entered into during 2016.
The Revenue Sharing Agreement
contains many stipulations between the parties regarding the handling of various
matters related to the monetization of the Patents. The Revenue Participants and
the Company will account for the tax treatment as set forth in the Revenue
Sharing Agreement. 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 Notes.
9
Advance from Revenue
Sharing Agreement
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Advance from Revenue Sharing
Agreement
|
|
$
|
312,067
|
|
|
$
|
312,067
|
|
Less: short-term Advance from Revenue Sharing Agreement
|
|
|
(196,477
|
)
|
|
|
(196,477
|
)
|
Long-term Advance from Revenue Sharing
Agreement, net of short-term
|
|
|
|
|
|
|
|
|
Advance from Revenue
Sharing Agreement
|
|
$
|
115,590
|
|
|
$
|
115,590
|
|
Amounts reported as short-term
Advance from the Revenue Sharing Agreement reflect amounts that were paid
subsequent to the three months ended March 31, 2016.
Long-term
debt
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Note Payable
|
|
$
|
4,100,000
|
|
|
$
|
1,900,000
|
|
PIK interest
|
|
|
11,191
|
|
|
|
775
|
|
Total long-term debt
|
|
$
|
4,111,191
|
|
|
$
|
1,900,775
|
|
Less: current maturities of long-term debt
|
|
|
(4,010,182
|
)
|
|
|
(1,900,775
|
)
|
Long-term debt, net of current
maturities
|
|
$
|
101,009
|
|
|
$
|
-
|
|
The unpaid principal amount of
the Notes (including any PIK Interest) will have an interest rate equal to LIBOR
(as defined in the Revenue Sharing Agreement) plus 2% per annum, (3% at March
31, 2016 and December 31, 2015); 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 Notes by the amount of such interest (PIK Interest).
The principal balance of the Notes and all unpaid interest thereon will be due
the earlier of receipt of Monetization Revenues or on June 30, 2020. The Company
may prepay the Notes from time to time in whole or in part, without penalty or
premium. During the three months ended March 31, 2016 $2,200,000 of notes
payable were issued to AND34. Amounts reported as current maturities of
long-term debt reflect amount expected to be paid in the next twelve months.
Note 4.
Series C Redeemable Convertible Preferred Stock
On October 10, 2000, Andrea
issued and sold in a private placement $7,500,000 of Series C Redeemable
Convertible Preferred Stock (the Series C Preferred Stock). Each of these
shares of Series C Preferred Stock had a stated value of $10,000 plus a $1,671
increase in the stated value, which sum is convertible into Common Stock at a
conversion price of $0.2551. On February 17, 2004, Andrea announced that it had
entered into an Exchange and Termination Agreement and an Acknowledgment and
Waiver Agreement, which eliminated the dividend of 5% per annum on the stated
value. The additional amount of $1,671 represents the 5% per annum from October
10, 2000 through February 17, 2004. The shares of Series C Preferred Stock are
subject to antidilution provisions, which are triggered in the event of certain
stock splits, recapitalizations, or other dilutive transactions. In addition,
issuances of common stock at a price below the conversion price then in effect
(currently $0.2551), or the issuance of warrants, options, rights, or
convertible securities which have an exercise price or conversion price less
than that conversion price, other than for certain previously outstanding
securities and certain excluded securities (as defined in the certificate of
amendment), require the adjustment of the conversion price to that lower price
at which shares of common stock have been issued or may be acquired. In the
event that Andrea issues securities in the future which have a conversion price
or exercise price which varies with the market price and the terms of such
variable price are more favorable than the conversion price in the Series C
Preferred Stock, the purchasers may elect to substitute the more favorable
variable price when making conversions of the Series C Preferred Stock.
In accordance with Sub Topic
815-40, Andrea evaluated the Series C Preferred Stock and concluded that it is
not indexed to the Companys stock because of the conversion price adjustment
feature described above. Accordingly, under the provisions of ASC 815,
Derivatives and Hedging, Andrea evaluated the Series C Preferred Stock
embedded conversion feature. The Company has concluded that the embedded
conversion feature would be classified in shareholders equity if it were a
freestanding instrument as the Series C Preferred Stock is more akin to equity
and as such it should not be bifurcated from the Series C instrument and
accounted for separately.
As of March 31, 2016, there
were 44.231432 shares of Series C Preferred Stock outstanding, which were
convertible into 2,023,658 shares of Common Stock and remaining accrued
dividends of $73,921.
On April 4, 2016, 10.904533
shares of Series C Preferred Stock, together with related accrued dividends,
were converted into 498,900 shares of Common Stock at a conversion price of
$0.2551.
10
Note 5.
Series D Redeemable Convertible Preferred Stock
On February 17, 2004, Andrea
entered into a Securities Purchase Agreement (including a Registration Rights
Agreement) with certain holders of the Series C Preferred Stock and other
investors (collectively, the Buyers) pursuant to which the Buyers agreed to
invest a total of $2,500,000. In connection with this agreement, on February 23,
2004, the Buyers purchased, for a purchase price of $1,250,000, an aggregate of
1,250,000 shares of a new class of preferred stock, the Series D Preferred
Stock, convertible into 5,000,000 shares of Common Stock (an effective
conversion price of $0.25 per share) and Common Stock warrants exercisable for
an aggregate of 2,500,000 shares of Common Stock. These warrants were
exercisable at any time after August 17, 2004, at an exercise price of $0.38 per
share. On February 23, 2009, these warrants expired without being exercised.
In addition, on June 4, 2004,
the Buyers purchased for an additional $1,250,000, an additional 1,250,000
shares of Series D
Preferred Stock
convertible into 5,000,000 shares of Common Stock (an effective conversion price
of $0.25 per share) and Common Stock warrants exercisable for an aggregate of
2,500,000 shares of Common Stock. The warrants were exercisable at any time
after December 4, 2004 and before June 4, 2009 at an exercise price of $0.17 per
share. On June 4, 2009, these warrants expired without being exercised.
The shares of Series D
Preferred Stock are also subject to antidilution provisions, which are triggered
in the event of certain stock splits, recapitalizations, or other dilutive
transactions. In addition, issuances of common stock at a price below the
conversion price then in effect (currently $0.25), or the issuance of warrants,
options, rights, or convertible securities which have an exercise price or
conversion price less than that conversion price, other than for certain
previously outstanding securities and certain excluded securities (as defined
in the certificate of amendment), require the adjustment of the conversion price
to that lower price at which shares of common stock have been issued or may be
acquired. In the event that Andrea issues securities in the future which have a
conversion price or exercise price which varies with the market price and the
terms of such variable price are more favorable than the conversion price in the
Series D Preferred Stock, the purchasers may elect to substitute the more
favorable variable price when making conversions of the Series D Preferred
Stock. In addition, the Company is required to use its best efforts to secure
the inclusion for quotation on the Over the Counter Bulletin Board for the
common stock issuable under the Series D Preferred Stock and to arrange for at
least two market makers to register with the Financial Industry Regulatory
Authority. In the event that the holder of the Series D Preferred Stock and
related warrants is unable to convert these securities into Andrea Common Stock,
the Company shall pay to each such holder a Registration Delay Payment. This
payment is to be paid in cash and is equal to the product of (i) the stated
value of such Preferred Shares multiplied by (ii) the product of (1) .0005
multiplied by (2) the number of days that sales cannot be made pursuant to the
Registration Statement (excluding any days during that may be considered grace
periods as defined by the Registration Rights Agreement).
In accordance with Sub Topic
815-40, Andrea evaluated the Series D Preferred Stock and concluded that it is
not considered to be indexed to the Companys stock because of the conversion
price adjustment feature described above. Accordingly, under the provisions of
ASC 815, Andrea evaluated the Series D Preferred Stock embedded conversion
feature. The Company has concluded that the embedded conversion feature would be
classified in shareholders equity if it were a freestanding instrument as the
Series D Preferred Stock is more akin to equity and as such it should not be
bifurcated from the Series D instrument and accounted for separately.
As of March 31, 2016, 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
In May 2015, Andrea entered
into a new lease for its new corporate headquarters located in Bohemia, New
York, where Andrea leases space for research and development, sales and
executive offices from an unrelated party. The lease is for approximately 3,000
square feet and expires in October 2020. The rent expense under this operating
lease was $8,509 for the three month period ended March 31, 2016. The monthly
rent under this lease is $2,625 with annual escalations of 3.5%.
Andreas previous corporate
headquarters were located in Bohemia, New York. The lease from an unrelated
party, which expired in May 2015, was for approximately 11,000 square feet and
housed Andreas warehousing, sales and executive offices. Rent expense under
Andreas previous operating lease was $0 and $25,774 for the three month period
ended March 31, 2016 and 2015, respectively.
11
As of March 31, 2016, the
minimum future lease payments under this lease and all other noncancellable
operating leases are as follows:
2016 (April 1 December 31)
|
|
$
|
38,814
|
2017
|
|
|
44,118
|
2018
|
|
|
38,690
|
2019
|
|
|
39,899
|
2020
|
|
|
30,843
|
Total
|
|
$
|
192,364
|
Employment
Agreements
In August 2014, the Company
entered into an employment agreement with Mr. Andrea. The effective date of the
employment agreement is August 1, 2014 and expires July 31, 2016 and is subject
to renewal as approved by the Compensation Committee of the Board of Directors.
Pursuant to his employment agreement, Mr. Andrea will receive an annual base
salary of $300,000. The employment agreement provides for quarterly bonuses
equal to 5% of the Companys 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 Companys annual pre-bonus net after tax earnings in excess of
$300,000 up to $3,000,000, and 3% of the Companys 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 Companys cash flow permits. All bonus determinations or any additional
bonus in excess of the above will be made in the sole discretion of the
Compensation Committee. Mr. Andrea is also entitled to a change in control
payment equal to three times the three year average of the cash incentive
compensation paid or accrued as of the date of termination, continuation of
health and medical benefits for three years 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 two years following the change
of control. In the event of his termination without cause or resignation with
the Companys consent, Mr. Andrea is entitled to a severance payment equal to
nine months of his base salary, plus the nine months prorated portion of his
most recent annual and quarterly bonuses, and a continuation of health insurance
coverage for Mr. Andrea, his spouse and his dependents for 12 months. At March
31, 2016, the future minimum cash commitments under this agreement aggregate
$333,516.
In November 1999, as amended
August 2008, the Company entered into a change in control agreement with the
Chief Financial Officer, Corisa L. Guiffre. This agreement provides for a change
in control payment equal to three times her average annual compensation for the
five preceding taxable years, with continuation of health and medical benefits
for three years in the event of a change in control of the Company, as defined
in the agreement, and subsequent termination of employment other than for cause.
Legal
Proceedings
In December 2010, Audrey
Edwards, Executrix of the Estate of Leon Leroy Edwards, filed a law suit in the
Superior Court of Providence County, Rhode Island, against 3M Company and over
90 other defendants, including the Company, alleging that the Company processed,
manufactured, designed, tested, packaged, distributed, marketed or sold asbestos
containing products that contributed to the death of Leon Leroy Edwards. The
Company received service of process in April 2011. The Company has retained
legal counsel and has filed a response to the compliant. The Company believes
the lawsuit is without merit and intends to file a Motion for Summary Judgment
to that affect. Accordingly, the Company does not believe the lawsuit will have
a material adverse effect on the Companys financial position or results of
operations.
In July 2014, Andrea filed
three complaints with the United States District Court for the Eastern District
of New York, alleging patent infringement against Acer Inc. and related entities
("Acer"), Lenovo Group Ltd. and related entities ("Lenovo"), and Toshiba Corp.
and related entities ("Toshiba"), and requesting monetary and injunctive relief
(the 2014 District Court Cases).
In January 2015, Andrea filed
seven complaints with the United States District Court for the Eastern District
of New York, alleging patent infringement against Acer, ASUSTeK Computer Inc.
and related entities ("Asus"), Dell Inc. ("Dell"), Hewlett-Packard Co. ("HP"),
Lenovo, Realtek Semiconductor Corp. ("Realtek"), and Toshiba, and requesting
monetary and injunctive relief (the 2015 District Court Cases). The 2014
District Court Cases and 2015 Court Cases were stayed on March 23, 2015 due to
Andreas complaint with the International Trade Commission (ITC) against these
parties.
In February 2015, Andrea filed
a complaint with the ITC, alleging patent infringement and unfair competition
against Acer, Asus, Dell, HP, Lenovo, Realtek, and Toshiba and requesting
injunctive relief. The ITC instituted an investigation on March 12, 2015 (the
ITC Investigation). Conexant Systems, Inc. (Conexant) and Waves Audio, Ltd.
(Waves) intervened as parties in the ITC Investigation.
12
In January 2016, Waves filed
three (3) petitions for inter partes review of certain Andrea patents asserted
in the 2014 and 2015 District Court Cases and the ITC Investigation with the PTO
(Waves IPRs). In connection with the Andrea and Waves settlement the Waves
IPRs were terminated.
Andrea settled its disputes
with Acer, Asus, Conexant, HP, Lenovo, Realtek, Toshiba, and Waves. Therefore,
the 2014 District Court Cases and the 2015 District Court Cases were dismissed
with respect to these parties, and these parties were terminated from the ITC
Investigation. Additionally, because Andrea entered into settlement and/or
licensing agreements with each of Dells software suppliers for Dells products
accused of infringement, the 2015 District Court Case was dismissed with respect
to Dell and Dell was terminated from the ITC Investigation. As a result, the
2014 and 2015 District Court Cases were all dismissed and the ITC Investigation
has been terminated.
Note 7.
Stock Plans and Stock Based Compensation
In 1998, the Board adopted the
1998 Stock Option Plan (1998 Plan), which was subsequently approved by the
shareholders. The 1998 Plan, as amended, authorized the granting of awards, the
exercise of which would allow up to an aggregate of 6,375,000 shares of Andreas
Common Stock to be acquired by the holders of those awards. The awards could
take the form of stock options, stock appreciation rights, restricted stock,
deferred stock, stock reload options or other stock-based awards. Awards could
be granted to key employees, officers, directors and consultants. No further
awards will be granted under the 1998 Plan.
In October 2006, the Board
adopted the Andrea Electronics Corporation 2006 Equity Compensation Plan (2006
Plan), which was subsequently approved by the shareholders. The 2006 Plan, as
amended, authorizes the granting of awards, the exercise of which would allow up
to an aggregate of 18,000,000 shares of Andreas Common Stock to be acquired by
the holders of those awards. The awards can take the form of stock options,
stock appreciation rights, restricted stock or other stock-based awards. Awards
may be granted to key employees, officers, directors and consultants. At March
31, 2016, there were 1,677,436 shares available for further issuance under the
2006 Plan.
The stock option awards
granted under these plans have been granted with an exercise price equal to the
market price of the Companys 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 weighted-average assumptions. Expected
volatilities are based on implied volatilities from historical volatility of the
Companys 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.
The stock option awards
granted under these plans have been granted with an exercise price equal to the
market price of the Companys stock on the date of grant; with vesting periods
of up to four years and 10-year contractual terms.
There were no options granted
during the three month period ended March 31, 2016 or 2015.
Option activity during 2016 is
summarized as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
Average
|
|
|
|
Weighted
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Average
|
|
Average
|
|
Remaining
|
|
|
|
Average
|
|
Average
|
|
Remaining
|
|
|
Options
|
|
Exercise
|
|
Fair
|
|
Contractual
|
|
Options
|
|
Exercise
|
|
Fair
|
|
Contractual
|
|
|
Outstanding
|
|
Price
|
|
Value
|
|
Life
|
|
Exercisable
|
|
Price
|
|
Value
|
|
Life
|
At
January 1, 2016
|
|
16,929,821
|
|
|
$
|
0.09
|
|
$
|
0.08
|
|
3.56
years
|
|
14,895,122
|
|
$
|
0.09
|
|
$
|
0.08
|
|
2.85
years
|
Canceled
|
|
(30,000
|
)
|
|
$
|
0.04
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2016
|
|
16,899,821
|
|
|
$
|
0.09
|
|
$
|
0.08
|
|
3.32
years
|
|
14,865,122
|
|
$
|
0.09
|
|
$
|
0.08
|
|
2.61
years
|
Based on the March 31, 2016,
fair market value of the Companys common stock of $0.11, the aggregate
intrinsic value for the 16,899,821 options outstanding and 14,865,122 shares
exercisable is $459,940 and $395,229, respectively.
Total compensation expense
recognized related to stock option awards was $17,244 and $28,971 for the three
months ended March 31, 2016 and 2015, respectively. In the accompanying
condensed consolidated statement of operations for the three months ended March
31, 2016, $14,427 of compensation expense is included in general, administrative
and selling expenses and $2,817 of compensation expense is included in research
and development expenses. In the accompanying condensed consolidated statement
of operations for the three months ended March 31, 2015, $22,779 of compensation
expense is included in general, administrative and selling expenses and $6,192
of compensation expense is included in research and development
expenses.
13
As of March 31, 2016, there
was $61,766 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the 2006 Plan. This
unrecognized compensation cost is expected to be recognized during 2016, 2017
and 2018 in the amounts of $39,160, $20,660 and $1,946, respectively.
Note 8.
Segment Information
Andrea follows the provisions
of ASC 280 Segment Reporting. Reportable operating segments are determined
based on Andreas 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 Andreas 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 condensed consolidated interim financial information for Andreas
segments for the three-month periods ended March 31, 2016 and 2015.
|
|
|
|
|
|
Andrea DSP
|
|
|
|
|
|
|
|
|
|
|
Microphone and
|
|
|
|
|
|
|
Patent
|
|
Audio
Software
|
|
2016
Three Month
|
2016 Three Month Segment Data
|
|
Monetization
|
|
Products
|
|
Segment Data
|
Net
product revenues
|
|
$
|
-
|
|
|
$
|
95,392
|
|
|
$
|
95,392
|
|
License
revenues
|
|
|
2,945,862
|
|
|
|
101,455
|
|
|
|
3,047,317
|
|
Continuing operating income (loss)
|
|
|
1,232,042
|
|
|
|
(333,426
|
)
|
|
|
898,616
|
|
Depreciation and
amortization
|
|
|
6,025
|
|
|
|
11,999
|
|
|
|
18,024
|
|
Assets
|
|
|
6,303,007
|
|
|
|
4,053,188
|
|
|
|
10,356,195
|
|
Property and
equipment and intangibles
|
|
|
170,055
|
|
|
|
251,041
|
|
|
|
421,096
|
|
Purchases of patents and trademarks
|
|
|
3,401
|
|
|
|
3,400
|
|
|
|
6,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea DSP
|
|
|
|
|
|
|
|
|
|
|
Microphone and
|
|
2015
Three
|
|
|
Patent
|
|
Audio
Software
|
|
Month Segment
|
2015 Three Month Segment Data
|
|
Monetization
|
|
Products
|
|
Data
|
Net
product revenues
|
|
$
|
-
|
|
|
$
|
83,948
|
|
|
$
|
83,948
|
|
License
revenues
|
|
|
1,849
|
|
|
|
210,530
|
|
|
|
212,379
|
|
Continuing operating loss
|
|
|
(1,060,541
|
)
|
|
|
(89,220
|
)
|
|
|
(1,149,761
|
)
|
Depreciation and
amortization
|
|
|
5,937
|
|
|
|
9,156
|
|
|
|
15,093
|
|
|
|
|
|
|
|
|
Andrea DSP
|
|
|
|
|
|
|
|
|
|
|
Microphone and
|
|
|
|
|
|
|
Patent
|
|
Audio
Software
|
|
2015
Year End
|
December 31, 2015 Year End Segment
Data
|
|
Monetization
|
|
Products
|
|
Segment Data
|
Assets
|
|
$
|
2,278,587
|
|
|
$
|
6,282,269
|
|
|
$
|
8,560,856
|
|
Property and
equipment and intangibles
|
|
|
172,677
|
|
|
|
259,642
|
|
|
|
432,319
|
|
14
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, 2016 and 2015 total revenues by geographic
area were as follows:
Geographic
Data
|
|
March 31,
2016
|
|
March 31,
2015
|
Total revenues:
|
|
|
|
|
|
|
United States
|
|
$
|
1,431,152
|
|
$
|
130,176
|
Foreign
(1)
|
|
|
1,711,557
|
|
|
166,151
|
|
|
$
|
3,142,709
|
|
$
|
296,327
|
____________________
(1)
|
Total revenue from
Israel represented 41% of total revenues for the three months ended March
31, 2016. Total revenue from the Peoples Republic of China and Singapore
represented 56% of total revenues for the three months ended March 31,
2015.
|
As of March 31, 2016 and
December 31, 2015, accounts receivable by geographic area were as follows:
Geographic
Data
|
|
March 31,
2016
|
|
December 31,
2015
|
Accounts receivable:
|
|
|
|
|
|
|
United States
|
|
$
|
23,033
|
|
$
|
1,788,500
|
Foreign
|
|
|
1,389,575
|
|
|
113,888
|
|
|
$
|
1,412,608
|
|
$
|
1,902,388
|
Note 9.
Sale of Andrea Anti-Noise Products Division
On April 2, 2015, Andrea
Electronics Corporation consummated the transactions contemplated by the Asset
Purchase Agreement, by and between Andrea Electronics Corporation and Andrea
Communications LLC dated March 27, 2015. Under the Asset Purchase Agreement, the
Company sold its Anti-Noise Products Division (the Division) and certain
related assets for a purchase price of $900,000 which included a cash payment of
$300,000 and a note receivable of $600,000 payable in 18 equal monthly
installments of $34,757 including interest at a rate of 3.25% per annum
beginning in October 2015. In addition, under the Asset Purchase Agreement the
Company is entitled to receive an additional $100,000 in the event that the
revenues derived from Andrea Communications LLCs operation of the Division
exceed certain thresholds over a specified time period, as defined in the Asset
Purchase Agreement.
Accordingly, the results of
operations, the assets and liabilities of the Division are presented as
discontinued operations for both current and prior periods.
The following table reflects
the results of the discontinued operations of the Divisions business segment
for the three month period ended March 31, 2016 and 2015 and as of March 31,
2016 and December 31, 2015, respectively:
|
|
For the Three Months Ended
|
|
|
March 31, 2016
|
|
March 31, 2015
|
Operations
|
|
|
|
|
|
|
|
Net
Revenues
|
|
$
|
48,772
|
|
$
|
368,740
|
|
Cost
of Sales
|
|
|
48,772
|
|
|
252,072
|
|
Gross margin
|
|
|
-
|
|
|
116,668
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses
|
|
|
-
|
|
|
16,943
|
|
General,
administrative and selling expenses
|
|
|
-
|
|
|
215,480
|
|
(Loss) income from
Discontinued Operations
|
|
$
|
-
|
|
$
|
(115,755
|
)
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Assets
|
|
|
|
|
|
|
|
Accounts Receivable,
net
|
|
$
|
27,476
|
|
$
|
27,303
|
Inventories, net
|
|
|
72,059
|
|
|
122,443
|
Assets from
Discontinued Operations
|
|
$
|
99,535
|
|
$
|
149,746
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Other current
liabilities
|
|
|
35,025
|
|
|
40,075
|
Liabilities from discontinued operations
|
|
$
|
35,025
|
|
$
|
40,075
|
15