This increase of approximately $24,000 represents increased product sales to our educational
customers for use with their distance learning products as compared to the three months ended March 31, 2010. We believe that this increase in product
sales relates to the timing of the customers purchases.
The decrease of approximately $104,000 in all other Andrea Anti-noise product revenues is
related to decreased demand from corporate distance learning customers. Approximately $30,000 of this decrease relates to a decrease in sales as a result
of one of our customers changing to distance learning utilizing telephones instead of VoIP. The remaining decrease of approximately $74,000 relates to
decreased demand when compared to the same period in 2010.
The approximate $153,000 decrease in sales of automotive array microphone products is
primarily the result of decreased product sales to integrators of public safety vehicle solutions. The decrease is related to our fulfillment of a
contract in 2010.
The approximate $26,000 increase in all other Andrea DSP Microphone and Audio product
revenues is related to timing of shipments to some of our OEM customers.
The 8% decrease in license revenues is a result of decreased royalties reported for the three
months ended March 31, 2011 as compared to the same period last year. We believe this decrease is related to timing of revenues reported of PC models
which feature our technology.
Cost of revenues as a percentage of net revenues for the three months ended March 31, 2011 decreased to 33% from
36% for the three months ended March 31, 2010. The cost of revenues as a percentage of net revenues for the three months ended March 31, 2011 for Andrea
Anti-Noise Products was 59% compared to 56% for the three months ended March 31, 2010. The cost of revenues as a percentage of net revenues for the three
months ended March 31, 2011 for the Andrea DSP Microphone and Audio Software Products was 5% compared to 17% for the three months ended March 31, 2010.
The increase in cost of revenues as a percentage of sales for the Andrea Anti-Noise Products for the three months ended March 31, 2011 was a result of a
decrease in revenues related to this segment. The decrease in cost of revenues as a percentage of sales for Andrea DSP Microphone and Audio Software
Products for the three months ended March 31, 2011 was a result of the decreased revenues of automotive array products.
Research and Development
Research and development expenses for the three months ended March 31, 2011 increased 21% to $208,312 from
$171,655 for the three months ended March 31, 2010. For the three months ended March 31, 2011, the increase in research and development expenses reflects
a 29% increase in our Andrea DSP Microphone and Audio Software Technology efforts to $122,090, or 59% of total research and development expenses, and a 12%
increase in our Andrea Anti-Noise Headset Product efforts to $86,222, or 41% of total research and development expenses. These increases are related to
ongoing development of new products. With respect to DSP Microphone and Audio Software technologies, research efforts are primarily focused on the pursuit
of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces,
incorporating Andreas 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 provide Andrea with a competitive advantage.
General, Administrative and Selling Expenses
General, administrative and selling expenses decreased approximately 7% to $591,522 for the three months ended
March 31, 2011 from $638,265 for the three months ended March 31, 2010. For the three months ended March 31, 2011, the decrease reflects a 5% decrease in
our Andrea DSP Microphone and Audio Software Technology efforts to $267,370, or 45% of total general, administrative and selling expenses and a 10% decrease in
our Andrea Anti-Noise Headset Product efforts to $324,152, or 55% of total general, administrative and selling expenses. These decreases are the result of
decreased professional and legal expenses during the three months ended March 31, 2011 as compared to same period in 2010.
Interest Income, net
Interest income, net for the three months ended March 31, 2011 was $1,701 compared to $1,806 for the three months
ended March 31, 2010. The year to date decrease in interest income, net was the result of less net interest income.
Provision for Income Taxes
The provision for income taxes for the three months ended March 31, 2011 was $5,336 compared to a provision for
income taxes of $8,285 for the three months ended March 31, 2010. The decrease was a result of decreased estimated taxable income.
Net loss for the three months ended March 31, 2011 was $137,623 compared to net loss of $21,143 for the three
months ended March 31, 2010. The net loss for the three months ended March 31, 2011 and March 31, 2010 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
Andreas principal sources of funds are and are expected to continue to be gross cash flows from operations.
At March 31, 2011, we had cash of $1,978,681 compared with $2,220,994 at December 31, 2010. The decrease in our cash balance at March 31, 2011 was
primarily a result of our cash used in operations.
Our working capital balance at March 31, 2011 was $3,059,600 compared to working capital of $3,039,308 at December
31, 2010. The increase in working capital reflects a decrease in total current assets of $197,358 and a decrease in total current liabilities of $217,650.
The decrease in total current assets reflects a decrease in cash of $242,313, an increase in accounts receivable of $132,479, a decrease in inventory of
$85,819, a decrease in deferred income tax assets of $5,291, and an increase in prepaid expenses of $3,586. The decrease in total current liabilities
reflects a decrease in trade accounts payable of $164,580, an increase in the current portion in long-term debt of $714, and a decrease of $53,784 in other
The decrease in cash of $242,313 reflects $216,317 of net cash used in operating activities, $19,802
of net cash used in investing activities and $6,194 of cash used in financing activities.
The cash used in operating activities of $216,317, excluding non-cash charges for the three months
ended March 31, 2011, was attributable to a $133,172 increase in accounts receivable, a $97,655 decrease in inventories, a $3,586 increase in prepaid expenses
and other current assets, a $164,580 decrease in accounts payable, and a $53,784 decrease in other current liabilities. The changes in receivables,
inventory, prepaid expenses and accounts payable primarily reflect differences in the timing related to both the payments for and the acquisition of inventory
as well as for other services in connection with ongoing efforts related to Andreas various product lines.
The cash used in investing activities of $19,802 reflects purchases of property and equipment of
$9,780 and an increase in patents and trademarks of $10,022. The increase in property and equipment reflects capital expenditures associated with
information technology purchases including and, to a lesser extent, molds associated with our Andrea Anti-Noise Headset Products. The increase in patents
and trademarks reflects capital expenditures associated with our intellectual property.
The cash used in financing activities of $6,194, reflects repayments on our loan from HSBC. We obtained this
loan to finance a significant upgrade to our information technologies systems.
We plan to improve our cash flows in 2011 by aggressively pursuing additional licensing opportunities related to
our Andrea DSP Audio Software and increasing the sales of our Andrea Anti-Noise Headset Products through the introduction of new products as well as the
increased efforts we are putting into our sales and marketing efforts. However, there can be no assurance that we will be able to successfully execute the
aforementioned plans. As of May 11, 2011, Andrea has approximately $2,200,000 of cash deposits. We believe that we have sufficient liquidity
available to continue in operation through at least March 2012. To the extent that we do not generate sufficient cash flows from our operations in the
next twelve months, additional financing might be required. Although we have improved cash flows by reducing overall expenses, if our revenues decline,
these reductions may impede our ability to be cash flow positive and our net income or loss may be disproportionately affected. We have no commitment for
additional financing and may experience difficulty in obtaining additional financing on favorable terms, if at all. Any financing we obtain may contain
covenants that restrict our freedom to operate our business or may have rights, preferences or privileges senior to our common stock and may dilute our current
shareholders ownership interest in Andrea. We cannot assure that demand will continue for any of our products, including future products related to our
Andrea DSP Microphone and Audio Software technologies, or, that if such demand does exist, that we will be able to obtain the necessary working capital to
increase production and provide marketing resources to meet such demand on favorable terms, or at all.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONTROLS AND PROCEDURES
Andreas management, including its principal executive officer and principal
financial officer, have evaluated the effectiveness of the Companys 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, Andreas disclosure controls and
procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that it files or submits under the Exchange
Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and (2) is accumulated and communicated to Andreas 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. Andreas disclosure controls and
procedures are designed to provide reasonable assurance of achieving its objectives.
There have been no changes in the Companys internal controls over financial
reporting that have materially affected, or are reasonable likely to materially affect the Companys internal controls over financial reporting during the
period covered by this Quarterly Report.
Andrea is involved in routine litigation incidental to the normal course of business.
While it is not feasible to predict or determine the final outcome of the claims, Andrea believes any resolution of these matters will not have a material
adverse effect on Andreas consolidated financial position, results of operations or liquidity.
In addition, in December 2010, Audrey Edwards, Executrix of the Estate of Leon Leroy
Edwards, filed a law suit in the Superior Court of Providence County, Rhode Island, against 3M Company and over 90 other defendants, including the Company,
that the Company processed, manufactured, designed, tested, packaged, distributed,
marketed or sold asbestos containing products that contributed to the death of Leon Leroy Edwards. The Company received service of process in April 2011.
The Company has retained legal counsel and has filed a response to the compliant. The Company believes the lawsuit is without merit.
Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the Companys financial position or results of
UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
(REMOVED AND RESERVED)
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications*
Exhibit 32 Section 1350 Certifications*
* Filed herewith
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
/s/ DOUGLAS J. ANDREA
Name: Douglas J. Andrea
Title: Chairman of the Board, President, Chief
Executive Officer and Corporate Secretary
Date: May 13, 2011
/s/ DOUGLAS J. ANDREA
Chairman of the Board, President, Chief
May 13, 2011
Douglas J. Andrea
Executive Officer and Corporate Secretary
/s/ CORISA L. GUIFFRE
Vice President, Chief Financial Officer and
May 13, 2011
Corisa L. Guiffre
Assistant Corporate Secretary