ANDREA ELECTRONICS CORP - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Fiscal Year Ended December 31, 2008
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _________ to _________
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Commission
file number 1-4324
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ANDREA
ELECTRONICS CORPORATION
(Exact
name of registrant as specified in its charter)
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New
York
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11-0482020
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
employer
identification
no.)
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65
Orville Drive, Bohemia, New York
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11716
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number, including area code: 631-719-1800
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, par value $.01 per share
Title
of class
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to by
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one)
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Large
Accelerated Filer ¨
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Accelerated
Filer ¨
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Non-Accelerated
Filer ¨
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Smaller
Reporting Company x
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| (Do not check if a smaller reporting company) |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $2,935,654 based upon the closing price of $0.05 as quoted on
the Over the Counter Market on June 30, 2008.
The number
of shares outstanding of the registrant’s Common Stock as of March 25, 2009, was
60,978,373.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE
OF CONTENTS
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TITLE
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PART
I
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PART
II
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PART
III
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PART
IV
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PART
I
Overview
Andrea
Electronics Corporation (“Andrea”) designs, develops and manufactures
state-of-the-art microphone technologies and products for enhancing speech-based
applications software and communications that require high quality, clear voice
signals. 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.
Andrea’s
products and technologies optimize the performance of speech-based applications
and audio applications in primarily the following markets:
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computer
speech recognition applications;
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computer
voice over the internet protocol (VoIP) applications;
and
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cell
phone accessories.
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Andrea Digital Signal Processing
(“DSP”) Microphone and Audio Software Business – 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. Our Digital Super Directional Array (“DSDA”) and
Pure Audio microphone products convert sound received by an array of microphones
into digital signals that are then processed to cancel background noise from the
signal to be transmitted. These two adaptive technologies represent the core
technologies within our portfolio of far-field technologies. In addition to DSDA
and Pure Audio, Andrea has developed and commercialized several other digital,
far-field noise canceling technologies, including, among others, Andrea
EchoStop, a high-quality acoustic echo canceller which enables speaker phone
functionality with technology for canceling unwanted stationary
noises.
All of our
digital, far-field microphone technologies are software-based and operate using
either a dedicated DSP or a general purpose processor (for example, the Intel
Pentium). The software, which may encompass one or all of our
far-field noise canceling technologies, can be applied to improve the
performance of a single microphone or multiple microphones. In addition, our
digital, far-field, noise canceling technologies can be tailored and implemented
into various form factors, for example, into the monitor of a PC, a personal
digital assistant or a rear view mirror, and can be used individually or
combined depending on particular customer requirements.
We are
currently targeting our far-field technologies at 1) the desktop and laptop
computing market; 2) the video and audio conferencing market and 3) the market
for personal hands free communication designed for use in automobiles, trucks
and buses to control PCs and cellular communication. Our far-field,
digital noise canceling technologies and related products, together with
implementations of other high-end audio technologies (for example, our software
noise cancellation technology) comprise our Andrea DSP Microphone and Audio
Software line of business. Net revenues of such technologies and
products during the years ended December 31, 2008 and 2007 approximated 48% of
our total net revenues. We dedicate the majority of our marketing and research
and development resources to this business segment, as we believe that
communication products will increasingly require high performance, untethered
(hands-free and headset-free) microphone technology.
Andrea Anti-Noise Headset Product
Business – Our headset microphone products help to ensure clear speech in
personal computer and VoIP headset applications. Our Active Noise
Cancellation microphone technology uses electronic circuits that
distinguish a speaker’s voice from background noise in the speaker’s environment
and then cancels the noise from the signal to be transmitted by the microphone.
Our Active Noise Reduction headphone technology uses electronic circuits that
distinguish the signal coming through an earphone from background noise in the
listener’s environment and then reduces the noise heard by the listener.
Together with our standard Noise Canceling headset products, these products
comprise our Andrea Anti-Noise Headset Product segment. During the
years ended December 31, 2008 and 2007, our Andrea Anti-Noise Headset Product
segment approximated 52% of our total net revenues.
For more
financial information regarding our operating segments, see Note 14 of the
accompanying consolidated financial statements.
Industry
Background
Our
primary mission is to provide the emerging “voice interface” markets with
state-of-the-art microphone and communication products. The idea underlying
these markets is that natural language spoken by the human voice will become an
important means by which to communicate and control many types of computing
devices and other appliances and equipment that contain microprocessors. We are
designing and marketing our products and technologies to be used for these
“natural language, human/machine” interfaces with:
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desktop,
laptop and hand-held computers, mobile personal computing devices and
cellular phones;
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video
and audio conferencing systems; and
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automotive
communication systems.
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We believe
that end users of these applications and interfaces will require high quality
microphone and earphone products that enhance voice transmission, particularly
in noisy office and mobile environments. We also believe that these applications
will increasingly require microphones that are located at a distance from the
person speaking, or far-field microphone technology. Applications in this area
include:
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continuous
speech dictation to personal
computers;
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multiparty
video teleconferencing and software that allow participants to see and
jointly communicate; and
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cellular
hands free interfaces for automobiles, home and office
automation.
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We believe
that an increasing number of these devices will be introduced into the
marketplace during the next several years.
Our
Strategy
Our
strategy is to:
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maintain
and extend our market position with our Andrea DSP Microphone and Audio
Software technologies and products and our higher margin Andrea Anti-Noise
products;
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develop
relationships with companies that have significant distribution
capabilities for our Andrea DSP Microphone and Audio Software technologies
and products and Andrea Anti-Noise
products;
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broaden
our Andrea DSP Microphone and Audio Software product lines and Andrea
Anti-Noise product lines through a more modest, but still healthy level of
internal research and development;
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design
our products to satisfy specific end-user requirements identified by our
collaborative partners; and
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outsource
manufacturing of our products in order to reduce fixed overhead and
achieve economies of scale.
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An
important element of our strategy for expanding the channels of distribution and
broadening the base of users for our products is our collaborative arrangements
with manufacturers of computing and communications equipment and software
publishers that are actively engaged in the various markets in which our
products have application. In addition, we have been increasing our own direct
marketing efforts to new market bases such as cell phone accessory distributors
and existing market bases such as those companies increasingly using distance
learning applications.
The
success of our strategy will depend on our ability to, among other
things:
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increase
net revenues of Andrea DSP Microphone and Audio Software products and our
line of existing Andrea Anti-Noise
products;
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continue
to contain costs;
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introduce
additional Andrea DSP Microphone and Audio Software products and Andrea
Anti-Noise products;
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maintain
the competitiveness of our technologies through focused and targeted
research and development; and
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achieve
widespread adoption of our products and technologies through ongoing
marketing efforts.
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Our
Technologies
We design
our Andrea DSP Microphone and Audio Software and Andrea Anti-Noise products to
transmit voice signals with the high level of quality, intelligibility and
reliability required by the broad range of voice-based applications in computing
and telecommunications. We achieve this through the use of several audio
technologies that employ software processes that are proprietary to us. Software
processes of this type are commonly referred to as algorithms.
2
Andrea
DSP Microphone and Audio Software Technology
This set
of technologies is generally based on the use of an array of microphones from
which the analog signals are converted to digital form and then processed using
digital electronic circuitry to eliminate unwanted noise in the speaker’s
environment. Our Andrea DSP Microphone and Audio Software Products provide clear
acoustic and audio input performance where the desired audio signal is at a
distance from the microphone. An example of this is a person using a notebook
computer with embedded web cam and array microphone who wants to video
conference using VIP with a friend in another country. We have also
engineered our Andrea DSP Microphone and Audio Software Products to be
compatible with Universal Serial Bus, or USB, computer architecture. USB is an
industry standard for connecting peripherals, such as microphones, earphones,
headsets, keyboards, mice, joysticks, scanners and printers, to personal
computers. We believe that our Andrea DSP Microphone and Audio Software
technology achieve far-field microphone performance previously unattainable
through microphones based on mechanical acoustic designs and microphones based
on analog signal processing.
Our Andrea
DSP Microphone and Audio Software Products include the use of the following
technologies, among other technologies and techniques:
Digital Super Directional Array
(DSDA®). Andrea’s
patented DSDA adaptive beam forming system powers Andrea’s SuperBeam microphone
which enables more intelligible audio by forming a beam toward the speaker and
eliminating background noises that are outside of the beam. DSDA
microphone technology enables high quality far-field communications by centering
microphone sensitivity on a user’s voice and canceling noise outside of that
signal. DSDA continuously samples the ever changing acoustic properties within
an environment and adaptively identifies interfering noises that are extraneous
to the voice signal, resulting in increased intelligibility of
communications.
PureAudio®. Andrea’s
PureAudio patented and award winning noise reduction speech enhancement
algorithm significantly improves intelligibility of voice audio and accuracy in
speech driven applications, particularly in high noise
environments. PureAudio is especially effective for use with speech
recognition and mobile devices. PureAudio is a noise canceling
algorithm that enhances applications that are controlled by speech by sampling
the ambient noise in an environment and attenuating the noise from sources near
or around the desired speech signals, thus delivering a clear audio signal.
Designed specifically to improve the signal-to-noise ratio, PureAudio is
effective in canceling stationary noises such as computer and ventilation fans,
tires and engines.
EchoStop®. Andrea’s
patented EchoStop provides a full duplex
acoustic echo cancellation algorithm enabling both speakers to broadcast and
microphone to transmit simultaneously turning your PC into a high quality
speakerphone. EchoStop is an advanced acoustic echo canceller (stereo
version available) developed for use with conferencing systems such as group
audio and videoconferencing systems and cellular car phone kits. EchoStop allows
true two-way communication (often referred to as full duplex) over a
conferencing system, even when the system is used in large spatial environments
that may be vulnerable to extensive reverberation. EchoStop incorporates noise
reduction algorithms to reduce the background noise of both the microphone input
and the loudspeaker output, thus preventing the accumulation of interfering
noise over conferencing systems that facilitate communication among multiple
sites.
SuperBeam™. SuperBeam
is a highly accurate digital algorithm that forms an acoustic beam that extends
from the microphone to the speech source in an environment. We believe SuperBeam
provides a fixed noise reduction microphone solution for the typical acoustic
environment found in room environments in which speech is used, such as in
offices and homes. The microphone beam is generated by processing multiple
microphone samples through pre-established digital filters and adding the
outputs. The result is an optimum speech enhancement and noise reduction
solution to a predefined setting. Because the beam is able to adapt to changes
in the acoustic environment, this technology is called adaptive
beamforming.
Direction Finding and Tracking Array
(DFTA®). Our patented DFTA
technology utilizes an array of microphones, unique software algorithms and
digital signal processing to detect the presence of a user’s
voice. DFTA determines the direction of the voice which then tracks
the speaker when he or she moves.
Andrea
Anti-Noise Technologies
Noise Cancellation (“NC”) Microphone
Technology. This technology is based on the use of pressure gradient
microphones to reduce the transmission of noise from the speaker’s location.
Instead of using electronic circuitry to reduce noise, pressure gradient
microphones rely on their mechanical and acoustic design to do so. Our NC
microphones are well-suited for applications in which there is less background
noise in the speaker’s environment.
Active Noise Cancellation (“ANC”)
Microphone Technology. This technology is based on analog signal
processing circuits that electronically cancel the transmission of noise from
the speaker’s location. ANC is particularly well-suited for those environments
in which the speaker is surrounded by high levels of ambient background
noise.
3
Our ANC
and NC microphones are most effectively used in “near-field” applications where
the microphone is next to the speaker’s mouth such as a headset
environment.
Active Noise Reduction (“ANR”)
Earphone Technology. This technology is based on analog signal processing
circuits that electronically reduce the amount of noise in the environment that
the listener would otherwise hear in the earphone. Our ANR earphones improve the
quality of speech and audio heard by a listener in extremely noisy environments,
particularly those characterized by low frequency sounds, such as those in
aircraft, machine rooms, factories, automobiles, trucks and other ground
transportation equipment.
Our Products and their Markets and
Applications
Our Andrea
DSP Microphone and Audio Software Products and Andrea Anti-Noise Products have
been designed for applications that are controlled by or depend on speech across
a broad range of hardware and software platforms. These products incorporate our
DSP, NC, ANC and ANR microphone technologies, and are designed to cancel
background noise in a range of noisy environments, such as homes, offices,
factories and automobiles. We also manufacture a line of accessories for these
products. For the consumer and commercial markets, we have designed our Andrea
DSP Microphone and Audio Software Products and Andrea Anti-Noise Products for
the following applications:
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Speech
recognition for word processing, database, and similar
applications;
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Distance
Learning (education through the use of Internet-based lessons and training
information);
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Audio/videoconferencing;
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Internet
telephony and Voice Chat;
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Professional
audio systems;
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Voice-activated
interactive games;
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Cellular
and other wireless telecommunications;
and
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Telematics,
or in-vehicle computing (the use of computer-controlled systems in
automobiles and trucks)
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We market
and sell our products directly to end users through our website, computer
product distributors, through value-added resellers, to original equipment
manufacturers and to software publishers. For more information about these
collaborative arrangements, please refer to the information under the caption
“Our Collaborative Arrangements.”
Andrea
DSP Microphone and Audio Software Products
We develop
our Andrea DSP Microphone and Audio Software Products primarily through
customer-specific integration efforts, and we either license our related
algorithms, sell a product incorporating our related algorithms, or both. For
example, we have developed technologies that can be, or are, embedded into a PC,
PC monitors, high-end videoconferencing units, IP telephony applications,
automotive interiors and hand-held devices, among others. In addition, we have
developed stand-alone products for specific customers who then sell such
products to end users. As a result, such products are not available from us
directly. However, as part of our strategy to increase sales to prospective
customers desiring high-quality microphone performance for certain
customer-specific environments, we have developed the following products that
may be purchased directly from Andrea:
Andrea Superbeam Array
Microphone. Andrea’s patented DSDA™ (Digital Super Directional Array)
adaptive beam forming system powers Andrea’s SuperBeam Array Microphone which
enables more intelligible audio by forming a beam toward the speaker and
eliminating background noises that are outside of the beam. DSDA is
particularly effective for small office/home office use, providing an untethered
noise cancelling microphone experience while gaining all the benefits of a
regular headset..
Andrea USB-SA External Digital Sound
Card . Andrea’s PureAudio™ USB-SA with patented noise reduction
technology eliminates noise problems by utilizing high quality digital circuitry
and state of the art noise reduction algorithm software. This format bypasses
your desktop or laptop computer’s sound system, providing
increased intelligibility and performance of stereo microphone input and
stereo speaker output for all of your digital audio applications including VoIP
and speech recognition programs. Your headset, microphone or speakers will
perform only as good as the sound card or integrated audio system that you plug
into. Most laptops and PCs today have built-in audio systems that are often
placed close to noisy components like the power supply or high frequency
processors. In addition, PCs may be used in high noise level environments which
can affect the performance of voice applications..
Andrea
AudioCommander™. Andrea’s PC Audio Control Panel,
AudioCommander, includes a speaker volume adjustment with received PureAudio
noise reduction control and a 10-band graphic equalizer with 18 built-in presets
to customize sound for your listening preference. It also includes a
microphone volume adjustment with noise reduction, beam forming, and acoustic
echo cancellation controls. The software also includes an audio wizard
that sets microphone levels to optimize PC audio for speech-enabled applications
including speech recognition, Internet telephony and command and speech control
functions.
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Andrea AutoArray™ Microphone
(“AutoArray”). The AutoArray is a digital, high performance microphone
system designed for computing applications in vehicles such as automobiles and
trucks. It is the first super-directional audio input device designed
specifically for in-vehicle computing. The AutoArray incorporates several
technologies, including DSDA and PureAudio.
Andrea VoiceCenter™
(“VoiceCenter”). The VoiceCenter is a multi-functional, digital voice
recorder software application that enables recorded speech files to be applied
for productivity as well as expressing personality. The digital WAV recorded
files are automatically labeled and can be compressed with WMA for attachment to
e-mail, used as voice memos, voice alarms (with a calendar reminder function)
and even add your voice annotation to documents. The VoiceCenter also includes
Andrea PureAudio noise reduction/speech enhancement technology for increasing
the recording sound quality of any microphone.
Andrea
Anti-Noise Products
Our Andrea
Anti-Noise Products include a line of headsets, handsets and related accessories
that incorporate our NC, ANC and ANR technologies. Our headsets are mostly
differentiated by the various designs of their headband, microphone boom and
earphone components and are available in both single earphone monaural and dual
earphone stereo models.
NC Products. Our NC products
are sold through our internal contact center, as well as to original equipment
manufacturers for incorporation into, or for use with their products. Our
headsets are designed so you can get the most out of your PC audio experience.
In addition, with our new USB headset products, Andrea has combined the benefits
of PureAudio USB digital audio which includes Andrea’s complete PureAudio™ Voice
Solutions Software Suite (including Audio Commander, Voice Center and Pure Audio
Technology) with our noise cancelling PC headsets delivering a high fidelity
audio experience with the highest voice recognition industry rating. With
some of our headsets, customers have the unique ability to mix and match
microphone boom and headband components to meet their specific application and
user comfort preferences. The speaker-housing unit in these models can be used
for digital, CD-quality sound. By removing the speaker-housing unit, we can
offer this headset for simple speech applications at a lower price.
BlueTooth NC
Products. Andrea Electronics is now offering our noise
cancellation boom microphone technology on the new BT-200 Bluetooth headset.
This wireless headset solution enhances sound quality in noisy environments and
provides the user with a PureAudio experience, as well as delivering superior
speech dialing performance. As an added value, these products can be
combined with a USB audio adapter that can be used to seamlessly communicate to
a PC as well as with a cellular phone.
ANC Products. ANC
Products are our premium close talking microphone platform for enhancing speech
recognition applications. All of our ANC products are sold through
our internal contact center. Two of our higher end ANC headset products
incorporate a dual microphone housing design that optimizes the acoustic
performance of the sound.
We have
developed and manufactured a line of accessories for our Andrea Anti-Noise
Products:
Andrea Personal Computer Telephone
Interface (“PCTI”). The PCTI is a comprehensive desktop device that
integrates computer applications controlled by speech and traditional telephony
applications by connecting headset users to the telephone, to the computer, or
to both simultaneously. Users can alternately or simultaneously conduct
telephone conversations and use speech recognition to enter data or dictate into
the PC, without having to pause or toggle between connectivity
devices.
Our
Collaborative Arrangements
An
important element of our strategy is to promote widespread adoption of our
products and technologies by collaborating with large enterprises and market and
technology leaders in telecommunications, computer manufacturing, and software
publishing. In addition to the arrangements we are involved in, we
are currently discussing additional arrangements with other companies, but we
cannot assure that any of these discussions will result in any definitive
agreements.
Patents,
Trademarks, and Other Intellectual Property Rights
We rely on
a combination of patents, patent applications, trade secrets, copyrights,
trademarks, nondisclosure agreements, and contractual restrictions to protect
our intellectual property and proprietary rights. We cannot assure, however,
that these measures will protect our intellectual property or prevent
misappropriation or circumvention of our intellectual property.
Andrea
maintains a number of patents in the United States covering claims to certain of
its products and technology, which expire at various dates ranging from 2012 to
2025. We also have other patent applications currently pending;
however, we cannot assure that patents will be issued with respect to these
currently pending or future applications which we may file, nor can we assure
that the strength or scope of our existing patents, or any new patents, will be
of sufficient scope or strength or provide meaningful protection or commercial
advantage to us.
5
Research
and Development
We
consider our technology to be of substantial importance to our competitiveness.
To maintain this competitiveness, we have organized our research and development
efforts using a “market and applications” approach for meeting the requirements
of new and existing customers. Consistent with this approach, our engineering
staff interacts closely with our sales and marketing personnel and directly with
customers. The engineering staff is responsible for the research and development
of new products and the improvement and support of existing
products. For the years ended December 31, 2008 and 2007, total
research and development expenses were $728,187 and $676,977, respectively.
During 2009, we expect research and development expenses to remain at the same
level when compared to 2008. We expect this will occur as a result of
our overall plan to improve cash flows by containing our
expenses. Additionally, most of Andrea’s core technology is already
developed, therefore, heightened emphasis will be placed on application
engineering, sales and marketing activity and less emphasis will be placed on
research and development. No assurance can be given that our research
and development efforts will succeed. See “Part II – Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Sales
and Marketing
We employ
a sales staff as well as outside sales representatives and sales organizations
to market our Andrea DSP Microphone and Audio Software Products and our Andrea
Anti-Noise Products. Andrea DSP Microphone and Audio Software
Products and Andrea Anti-Noise Products are marketed to computer Original
Equipment Manufacturers (“OEMs”), distributors of personal computers and
telecommunications equipment, software publishers, and end-users in both
business and household environments. These products are sold to end-users
through distributors and value-added resellers, software publishers, Internet
Service Providers and Internet Content Developers. Under our existing
collaborative agreements, our collaborators have various marketing and sales
rights to our Andrea DSP Microphone and Audio Software and Andrea Anti-Noise
Products. We are seeking to enter into additional collaborative
arrangements for marketing and selling our Andrea DSP Microphone and Audio
Software Products and Andrea Anti-Noise Products, but we cannot assure that we
will be successful in these efforts. Market acceptance of the Andrea DSP
Microphone and Audio Software Products and Andrea Anti-Noise Products is
critical to our success.
Production
Operations
In 2008
and 2007, all of our assembly operations were done with subcontractors in Asia
or in the United States. Most of the components for the Andrea DSP
Microphone and Audio Software Products and Andrea Anti-Noise Products are
available from several sources and are not characteristically in short
supply. However, certain specialized components, such as microphones
and DSP boards, are available from a limited number of suppliers and subject to
long lead times. To date, we have been able to obtain sufficient supplies of
these more specialized components, but we cannot assure that we will continue to
be able to do so. Shortages of, or interruptions in, the supply of these more
specialized components could have a material adverse effect on our sales of
Andrea DSP Microphone and Audio Software Products and Andrea Anti-Noise
Products.
Competition
The
markets for our Andrea DSP Microphone and Audio Software Products and Andrea
Anti-Noise Products are highly competitive. Competition in these markets is
based on varying combinations of product features, quality and reliability of
performance, price, sales, marketing and technical support, ease of use,
compatibility with evolving industry standards and other systems and equipment,
name recognition, and development of new products and enhancements. Most of our
current and potential competitors in these markets have significantly greater
financial, marketing, technical, and other resources than us. Consequently,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, marketing, and sale of their products than we
can. We cannot assure that one or more of these competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
We believe
that our ability to compete successfully will depend upon our ability to develop
and maintain advanced technology, develop proprietary products, attract and
retain qualified personnel, obtain patent or other proprietary protection for
our products and technologies and manufacture, assemble and market products,
either alone or through third parties, in a profitable manner.
Employees
At
December 31, 2008, we had 19 employees, of whom 4 were engaged in production and
related operations, 5 were engaged in research and development, and 10 were
engaged in management, administration, sales and customer support duties. None
of our employees are unionized or covered by a collective bargaining agreement.
We believe that we generally enjoy good relations with our
employees. In addition to our regular employees, we utilize 7
independent consultants (3 are sales representatives, one is engaged for
administration purposes and 3 engaged in research and development
activities).
6
Our
operating results are subject to significant fluctuation; period-to-period
comparisons of our operating results may not necessarily be meaningful and you
should not rely on them as indications of our future performance.
Our
results of operations have historically been and are subject to continued
substantial annual and quarterly fluctuations. The causes of these fluctuations
include, among other things:
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the
volume of sales of our products under our collaborative marketing
arrangements;
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–
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the
cost of development of our
products;
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–
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the
mix of products we sell;
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–
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the
mix of distribution channels we
use;
|
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–
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the
timing of our new product releases and those of our
competitors;
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–
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fluctuations
in the computer and communications hardware and software
marketplace;
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–
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general
economic conditions.
|
We cannot
assure that the level of revenues and gross profit, if any, that we achieve in
any particular fiscal period will not be significantly lower than in other
fiscal periods. Our net revenues for the year ended December 31, 2008 were
approximately $4.7 million versus $5 million in the year ended December 31,
2007. Net loss for the year ended December 31, 2008 was approximately $327,000,
or $0.01 per share on a basic and diluted basis, versus net loss of
approximately $390,000, or $0.01 per share on a basic and diluted basis for the
year ended December 31, 2007. We continue to explore opportunities to
grow sales in other business areas; we are also examining additional
opportunities for cost reduction, production efficiencies and further
diversification of our business. Although we have improved cash flows
by reducing overall expenses, if our revenues continue to decline we may not
continue to generate positive cash flows and our net income or loss may be
affected.
If
we fail to maintain access to funds sufficient to meet our operating needs, we
may be required to significantly reduce, sell, or refocus our operations and our
business, results of operations and financial condition could be materially and
adversely effected.
In order
to be a viable entity we need to maintain and increase profitable
operations. To continue to achieve profitable operations we need to
maintain or increase current net revenues and continue to look for ways to
control expenses. We might also need to sell additional assets or
raise capital as a means of funding continued operations. In recent
years, we have sustained significant operating losses. We may have to
raise additional capital from external sources. These sources may
include private or public financings through the issuance of debt, convertible
debt or equity, or collaborative arrangements. Such additional
capital and funding may not be available on favorable terms, if at
all. Additionally, we may only be able to obtain additional capital
or funds through arrangements that require us to relinquish rights to our
products, technologies or potential markets, in whole or in part, or result in
our sale. As a result of past few years of performance, we believe
that we have sufficient liquidity to continue our operations at least through
December 2009, provided our net revenues do not decline and our operating
expenses do not increase. Although we have revised our business
strategies to reduce our expenses and capital expenditures, we cannot assure you
that we will be successful in generating positive cash flows or obtaining access
to additional sources of funding in amounts necessary to continue our
operations. Failure to maintain sufficient access to funding may also
result in our inability to continue operations.
Shares
Eligible For Future Sale May Have An Adverse Effect On Market Price; Andrea
Stockholders 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, 60,978,373 were outstanding as of March 25, 2009. The number of
shares outstanding does not include an aggregate of 25,223,403 shares of common
stock that are issuable. This number of issuable common shares is
equal to approximately 41% of the 60,978,373 outstanding
shares. These issuable common shares are comprised of: a)
14,536,820 shares of our common stock reserved for issuance upon exercise of
outstanding awards granted under our 1991 Performance Equity Plan, 1998 Stock
Plan and 2006 Stock Plan; b) 101,345 shares reserved for future grants under our
2006 Stock Plan; c) 4,103,984 shares of common stock that are issuable upon
conversion of the Series C Preferred Stock; d) 4,200,004 shares of common stock
issuable upon conversion of the Series D Preferred Stock; and e) 2,281,250 of
common stock issuable upon the exercise of warrants relating to the Series D
Preferred stock.
7
Conversions
of our Series C Preferred Stock, Series D Preferred Stock and related warrants
may result in substantial dilution to other holders of our common
stock.
As of
March 25, 2009, we had 89.701477 shares of Series C Preferred Stock, 1,050,001
shares of Series D Preferred Stock and 2,281,250 Common Stock warrants
outstanding. The issuance of shares of common stock upon conversion
of the Series C Preferred Stock is limited to that amount which, after giving
effect to the conversion, would cause the holder not to beneficially own in
excess of 4.99% or, together with other shares beneficially owned during the 60
day period prior to such conversion, not to beneficially own in excess of 9.99%
of the outstanding shares of common stock. The issuance of common
stock upon conversion of the Series D Preferred Stock and the related warrants
also is limited to that amount which, after given effect to the conversion,
would cause the holder not to beneficially own an excess of 4.99% of the
outstanding shares of our common stock, except that each holder has a right to
terminate such limitation upon 61 days notice to us. Beneficial
ownership for purposes of calculation of such percentage limitations does not
include shares whose acquisition is subject to similar
limitations. If all shares of the Series C and Series D Preferred
Stock and warrants, which are outstanding to be issued, are assumed to be
converted into or exercised for shares of common stock, the number of new shares
of common stock required to be issued as a result would aggregate 10,585,238
shares, which would represent 17% of the then outstanding shares of common
stock.
Short
sales of our common stock may be attracted by or accompany conversions of Series
C Preferred Stock and Series D Preferred Stock, which sales may cause downward
pressure upon the price of our common stock.
Short
sales of our common stock may be attracted by or accompany the sale of converted
common stock, which in the aggregate could cause downward pressure upon the
price of the common stock, regardless of our operating results, thereby
attracting additional short sales of the common stock.
If we fail to commercialize and fully
market our Andrea DSP Microphone and Audio Software products, or continue to
develop, and not fully market, Andrea Anti-Noise Headset products, our net
revenues may not increase at a high enough rate to improve our results of
operations or may not increase at all.
Our
business, results of operations and financial condition depend on the successful
commercialization of our Andrea DSP Microphone and Audio Software products and
technologies. We introduced our first Andrea DSP Microphone products
in 1998 and we continued to introduce complementary products and technologies
over the last several years. We are primarily targeting these
products at the desktop computer market, the audio and video conferencing
markets and the market for in-vehicle computing, among others. The
success of these products is subject to the risks frequently encountered by
companies in an early stage of product commercialization, particularly companies
in the computing and communications industries.
If
we are unable to obtain market acceptance of Andrea DSP Microphone and Audio
Software products and technologies, or if market acceptance of these products
and technologies occurs at a slow rate, then our business, results of operations
and financial condition will be materially and adversely affected.
We, and
our competitors, are focused on developing and commercializing products and
technologies that enhance the use of voice, particularly in noisy environments,
for a broad range of computer and communications applications. These
products and technologies have been rapidly evolving and the number of our
competitors has grown, but the markets for these products and technologies are
subject to a high level of uncertainty and have been developing
slowly. We, alone or together with our industry, may be unsuccessful
in obtaining market acceptance of these products and technologies.
If
we fail to develop and successfully introduce new products and technologies in
response to competition and evolving technology, we may not be able to attract
new customers or retain current customers.
The
markets in which we sell our Andrea DSP Microphone and Audio Software and Andrea
Anti-Noise Headset products are highly competitive. We may not
compete successfully with any of our competitors. Most of our current
and potential competitors have significantly greater financial, technology
development, marketing, technical support and other resources than we
do. Consequently, these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
devote greater resources to the development, marketing, and sale of their
products than we can. One or more of these competitors may
independently develop technologies that are substantially equivalent or superior
to our technology. The introduction of products incorporating new
technologies could render our products obsolete and unmarketable and could exert
price pressures on existing products.
We are
currently engaged in the development of digital signal processing products and
technologies for the voice, speech and natural language interface markets. We
may not succeed in developing these new digital signal processing products and
technologies, and any of these new digital signal processing products or
technologies may not gain market acceptance.
Further,
the markets for our products and technologies are characterized by evolving
industry and government standards and specifications that may require us to
devote substantial time and expense to adapt our products and
technologies. For example, certain of our Andrea DSP Microphone and
Audio Software and Andrea Anti-Noise Headset products are subject to the Federal
Communications Commission requirements. We may not successfully
anticipate and adapt our products and technologies in a cost effective and
timely manner to changes in technology and industry standards or to
introductions of new products and technologies by others that render our then
existing products and technologies obsolete.
8
If
our marketing collaborators do not effectively market their products that
include or incorporate our products, our sales growth will be adversely
affected.
We have
entered into collaborative and distribution arrangements with software
publishers and computer hardware manufacturers relating to the marketing and
sale of Andrea DSP Microphone and Audio Software products through inclusion or
incorporation with the products of our collaborators. Our success is
dependent to a substantial degree on the efforts of these collaborators to
market their products that include or incorporate our products. Our
collaborators may not successfully market these products. In
addition, our collaborators generally are not contractually obligated to any
minimum level of sales of our products or technologies, and we have no control
over their marketing efforts. Furthermore, our collaborators may
develop their own microphone, earphone or headset products that may replace our
products or technologies or to which they may give higher priority.
Shortages
of, or interruptions in, the supply of more specialized components for our
products could have a material adverse effect on our sales of these
products.
The
majority of our assembly operations are fulfilled by subcontractors (primarily
in the Far East) using purchased components. Some specialized
components for the Andrea DSP Microphone and Audio Software products and Andrea
Anti-Noise products, such as microphones and digital signal processing boards,
are available from a limited number of suppliers (and in some cases foreign) and
subject to long lead times. We may not be able to continue to obtain
sufficient supplies of these more specialized components, particularly if the
sales of our products increase substantially or market demand for these
components otherwise increases. If our subcontractors fail to meet
our production and shipment schedules, our business, results of operations and
financial condition would be materially and adversely affected.
Our
ability to compete may be limited by our failure to adequately protect our
intellectual property or by patents granted to third parties.
We rely on
a combination of patents, patent applications, trade secrets, copyrights,
trademarks, and nondisclosure agreements with our employees, independent
contractors, licensees and potential licensees, limited access to and
dissemination of our proprietary information, and other measures to protect our
intellectual property and proprietary rights. However, the steps that
we have taken to protect our intellectual property may not prevent its
misappropriation or circumvention. In addition, numerous patents have
been granted to other parties in the fields of noise cancellation, noise
reduction, computer voice recognition, digital signal processing and related
subject matter. We expect that products in these fields will
increasingly be subject to claims under these patents as the numbers of products
and competitors in these fields grow and the functionality of products
overlap. Claims of this type could have an adverse effect on our
ability to manufacture and market our products or to develop new products and
technologies, because the parties holding these patents may refuse to grant
licenses or only grant licenses with onerous royalty
requirements. Moreover, the laws of other countries do not protect
our proprietary rights to our technologies to the same extent as the laws of the
United States.
An
unfavorable ruling in any current litigation proceeding or future proceeding may
adversely affect our business, results of operations and financial
condition.
From time
to time we are subject to litigation incidental to our business. For example, we
are subject to the risk of adverse claims, interference proceedings before the
U.S. Patent and Trademark Office, oppositions to patent applications outside the
United States, and litigation alleging infringement of the proprietary rights of
others. Litigation to establish the validity of patents, to assert infringement
claims against others, and to defend against patent infringement claims can be
expensive and time-consuming, even if the outcome is in our favor.
Changes
in economic and political conditions outside the United States could adversely
affect our business, results of operations and financial condition.
We
generate revenues to regions outside the United States, particularly in Asia.
For the years ended December 31, 2008 and 2007, net revenues to customers
outside the United States accounted for approximately 10% and 28%, respectively,
of our net sales. International sales and operations are subject to a number of
risks, including:
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trade
restrictions in the form of license requirements;
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•
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restrictions on exports and imports and other government controls; |
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•
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changes
in tariffs and taxes;
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•
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difficulties in staffing and managing international operations; |
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•
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problems
in establishing and managing distributor relationships;
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•
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general economic conditions; and |
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•
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political
and economic instability or
conflict.
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9
To date,
we have invoiced our international revenues in U.S. dollars, and have not
engaged in any foreign exchange or hedging transactions. We may not be able to
continue to invoice all of our revenues in U.S. dollars in order to avoid
engaging in foreign exchange or hedging transactions. If we are required to
invoice any material amount of international revenues in non-U.S. currencies,
fluctuations in the value of non-U.S. currencies relative to the U.S. dollar may
adversely affect our business, results of operations and financial condition or
require us to incur hedging costs to counter such fluctuations.
If
we are unable to attract and retain the necessary managerial, technical and
other personnel necessary for our business, then our business, results of
operations and financial condition will be harmed.
Our
performance is substantially dependent on the performance of our executive
officers and key employees. The loss of the services of any of these
executive officers or key employees could have a material adverse effect on our
business, results of operations and financial condition. Our future
success depends on our continuing ability to attract and retain highly qualified
managers and technical personnel. Competition for qualified personnel
is intense and we may not be able to attract, assimilate or retain qualified
personnel in the future.
Compliance
with the Sarbanes-Oxley Act of 2002 will require substantial financial and
management resources and may result in additional expenses, which as a smaller
public company may be disproportionately high.
Section
404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on
our system of internal controls as of December 31, 2008 and requires that we
have such system of internal controls audited beginning with our Annual Report
on 10-K for the year ending December 31, 2009. If we fail to maintain
the adequacy of our internal controls, we could be subject to regulatory
scrutiny, civil or criminal penalties and/or stockholder
litigation. Any inability to provide reliable financial reports could
harm our business. Section 404 of the Sarbanes-Oxley Act of 2002 also
requires that our independent registered public accounting firm report on
management’s evaluation of our system of internal controls. The
documentation and further development of our internal controls to achieve
compliance with the Sarbanes-Oxley Act has been a notable expense in this year
and will continue to be an expense in the future. Additionally, we
devoted a significant amount of our time to ensure that we are compliant with
Sarbanes-Oxley Act of 2002. Furthermore, any failure to implement
required new or improved controls, or difficulties encountered in the
implementation of adequate controls over our new or revised financial processes
and reporting in the future, could harm our operating results or cause us to
fail to meet our reporting obligations which will require us to continue to
devote a large amount of our general and administrative employees’ time to the
continued compliance. Inferior internal controls could also cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our stock.
None.
Andrea has
a lease for its corporate headquarters, which is located in Bohemia, New
York. The lease, which currently expires in February 2014, is for
approximately 11,000 square feet of leased space, which houses our production
operations, research and development activities, sales, administration and
executive offices. We believe that we maintain our machinery,
equipment and tooling in good operating condition and that these assets are
adequate for our current business and are adequately insured. See Notes 5 and 12
to the accompanying Consolidated Financial Statements for further information
concerning our property and equipment and leased facilities.
Andrea is
involved in routine litigation incidental through the normal course of business.
While it is not feasible to predict or determine the final outcome of the
claims, Andrea believes the resolution of these matters will not have a material
adverse effect on Andrea’s financial position, results of operations or
liquidity.
None.
The table
below sets forth the high and low sales prices for Andrea’s Common Stock as
reported by the Over the Counter Bulletin Board for the eight fiscal quarters
ended December 31, 2008. On March 25, 2009, there were approximately 449 holders
of record of Andrea’s Common Stock.
10
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Quarter
Ended
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High
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Low
|
||||||
|
March
31, 2007
|
$ | 0.16 | $ | 0.06 | ||||
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June
30, 2007
|
$ | 0.22 | $ | 0.12 | ||||
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September
30, 2007
|
$ | 0.14 | $ | 0.07 | ||||
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December
31, 2007
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$ | 0.10 | $ | 0.05 | ||||
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March
31, 2008
|
$ | 0.10 | $ | 0.03 | ||||
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June
30, 2008
|
$ | 0.09 | $ | 0.03 | ||||
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September
30, 2008
|
$ | 0.09 | $ | 0.03 | ||||
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December
31, 2008
|
$ | 0.09 | $ | 0.03 | ||||
No cash
dividends were paid on Andrea’s Common Stock in 2008 or 2007.
During the
three months ended December 31, 2008, the Company did not repurchase any of its
common stock.
Not
applicable as Andrea is a smaller reporting company.
Overview
Our
mission is to provide the emerging “voice interface” markets with
state-of-the-art communications products that facilitate natural language,
human/machine interfaces.
Examples
of the applications and interfaces for which Andrea DSP Microphone and Audio
Software Products and Andrea Anti-Noise Products provide benefits include:
Internet and other computer-based speech; telephony communications; multi-point
conferencing; speech recognition; multimedia; multi-player Internet and CD ROM
interactive games; and other applications and interfaces that incorporate
natural language processing. We believe that end users of these applications and
interfaces will require high quality microphone and earphone products that
enhance voice transmission, particularly in noisy environments, for use with
personal computers, mobile personal computing devices, cellular and other
wireless communication devices and automotive communication systems. Our Andrea
DSP Microphone and Audio Software Products use “far-field” digital signal
processing technology to provide high quality transmission of voice where the
user is at a distance from the microphone. High quality audio communication
technologies will be required for emerging far-field voice applications, ranging
from continuous speech dictation, to Internet telephony and multiparty video
teleconferencing and collaboration, to natural language-driven interfaces for
automobiles, home and office automation and other machines and devices into
which voice-controlled microprocessors are expected to be introduced during the
next several years.
We
outsource to Asia high volume assembly for most of our products from purchased
components. We assemble some low volume Andrea DSP Microphone and
Audio Software Products from purchased components. As sales of any particular
Andrea DSP Microphone and Audio Software Product increase, assembly operations
are transferred to a subcontractor in Asia.
Our
Critical Accounting Policies
Our
consolidated financial statements and the notes to our consolidated financial
statements contain information that is pertinent to management's discussion and
analysis. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities and
determination of revenues and expenses in the reporting
period. 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. Management
considers an accounting estimate to be critical if: 1) it requires assumptions
to be made that were uncertain at the time the estimate was made; and 2) changes
in the estimate, or the use of different estimating methods that could have been
selected, could have a material impact on the Company’s consolidated results of
operations or financial condition.
The
following critical accounting policies that affect the more significant
judgments and estimates used in the preparation of the consolidated financial
statements have been identified. In addition to the recording and
presentation of our convertible preferred stock, we believe that the following
are some of the more critical judgment areas in the application of our
accounting policies that affect our financial condition and results of
operations. We have discussed the application of these critical
accounting policies with our Audit Committee. The following critical
accounting policies are not intended to be a comprehensive list of all the
Company’s accounting policies or estimates.
11
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 Statement of Position (“SOP”) 97-2, “Software Revenue
Recognition,” as amended, and Staff Accounting Bulletin Topic 13 “Revenue
Recognition.” License revenue is recognized based on the terms and
conditions of individual contracts (for example, see Note 9 of our consolidated
financial statements). 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.
Accounts
Receivable – We are required to estimate the collectibility of our trade
receivables. Judgment is required in assessing the realization of these
receivables, including the current creditworthiness of each customer and related
aging of the past due balances. We evaluate specific accounts when we become
aware of a situation where a customer may not be able to meet its financial
obligations due to a deterioration of its financial viability, credit ratings or
bankruptcy. The reserve requirements are based on the best facts available to us
and are reevaluated and adjusted as additional information is received. Our
reserves are also determined by using percentages applied to certain aged
receivable categories. At December 31, 2008 and 2007, our allowance for doubtful
accounts were $7,815 and $21,705 respectively.
Inventory
– We are required to state our inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, we are required to make
considerable judgments as to future demand requirements and compare that with
our current inventory levels. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions, technological
and product life cycle changes as well as longer than previously expected usage
periods. We have evaluated the current levels of inventories,
considering historical net revenues and other factors and, based on this
evaluation, recorded adjustments to cost of revenues to adjust inventories to
net realizable value. Inventories of $868,213 and $714,864 at
December 31, 2008 and 2007 are net of reserves of $701,821 and $566,941,
respectively. It is possible that additional charges to inventory may occur in
the future if there are further declines in market conditions, or if additional
restructuring actions are taken.
Long Lived
Assets – Statement of Financial Accounting Standards (“SFAS”), No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”)
requires management judgments regarding the future operating and disposition
plans for marginally performing assets, and estimates of expected realizable
values for assets to be sold. Andrea accounts for its long-lived
assets in accordance with FAS 144 for purposes of determining and measuring
impairment of its other intangible assets. Andrea’s policy is to periodically
review the value assigned to its long lived assets to determine if they have
been permanently impaired by adverse conditions which may affect
Andrea. If required, an impairment charge would be recorded based on
an estimate of future discounted cash flows. In order to test for
recoverability, Andrea compared the sum of an undiscounted cash flow projections
(gross margin dollars from product sales) of the Andrea DSP Microphone and Audio
Software core technology to the carrying value of that
technology. 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. No
impairment charges were recognized during the years ended December 31, 2008 and
2007, respectively.
Deferred
Tax Assets – We currently have significant deferred tax assets. SFAS No. 109,
“Accounting for Income Taxes”(“FAS 109”), requires a valuation allowance be
established when it is more likely than not that all or a portion of deferred
tax assets will not be realized. Furthermore, FAS 109 provides that it is
difficult to conclude that a valuation allowance is not needed when there is
negative evidence such as cumulative losses in recent years. Therefore,
cumulative losses weigh heavily in the overall assessment. Accordingly, and
after considering changes in previously existing positive evidence, we recorded
a full valuation allowance. In addition, we expect to provide a full
valuation allowance on future tax benefits until we can sustain a level of
profitability that demonstrates our ability to utilize the assets, or other
significant positive evidence arises that suggests our ability to utilize such
assets. The future realization of a portion of our reserved deferred tax assets
related to tax benefits associated with the exercise of stock options, if and
when realized, will not result in a tax benefit in the consolidated statement of
operations, but rather will result in an increase in additional paid in capital.
We will continue to re-assess our reserves on deferred income tax assets in
future periods on a quarterly basis.
Contingencies
- We are subject to proceedings, lawsuits and other claims, including
proceedings under laws and government regulations related to securities,
environmental, labor, product and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is based on an analysis of each
individual issue with the assistance of legal counsel. The amount of any
reserves may change in the future due to new developments in each
matter.
The impact
of changes in the estimates and judgments pertaining to revenue recognition,
receivables and inventories is directly reflected in our segments’ loss from
operations. Although any charges related to our deferred tax provision are not
reflected in our segment results, the long-term forecasts supporting the
realization of those assets and changes in them are significantly affected by
the actual and expected results of each segment.
12
Cautionary
Statement Regarding Forward-Looking Statements
Certain
information contained in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 2008 and
other items set forth in this Annual Report on Form 10-K are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”
“seeks,” variations of such words, and similar expressions are intended to
identify forward-looking statements. We have based these forward-looking
statements on our current expectations, estimates and projections about our
business and industry, our beliefs and certain assumptions made by our
management. Investors are cautioned that matters subject to forward-looking
statements involve risks and uncertainties including economic, competitive,
governmental, technological and other factors that may affect our business and
prospects. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. These statements are based on current expectations and speak
of as of the date of such statements. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
future events, new information or otherwise. In order to obtain the
benefits of these “safe harbor” provisions for any such forward-looking
statements, we wish to caution investors and prospective investors about the
following significant factors, which, among others, have in some cases affected
our actual results and are in the future likely to affect our actual results and
could cause them to differ materially from those expressed in any such
forward-looking statements. These factors include the risks noted in Item
1A.
Results
Of Operations
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net
Revenues
|
For
the Year Ended December 31
|
||||||||||||
|
2008
|
2007
|
%
Change
|
||||||||||
|
Andrea
Anti-Noise Products net Product revenues
|
||||||||||||
|
Sales
of products to an OEM customer for use with speech recognition
software
|
$ | 313,243 | $ | 376,699 | (20 | ) (a) | ||||||
|
Sales
of gaming headset products to an OEM customer
|
- | 183,261 | (100 | ) (b) | ||||||||
|
All
other Andrea Anti-Noise net product revenues
|
2,117,693 | 2,058,904 | 3 | (c) | ||||||||
|
Total
Andrea Anti-Noise Products net Product revenues
|
2,430,936 | 2,618,864 | (8 | ) | ||||||||
|
Andrea
DSP Microphone and Audio Software Products revenues
|
||||||||||||
|
Sales
of array microphone products to an OEM customer
|
107,800 | 927,210 | (760 | ) (d) | ||||||||
|
All
other Andrea DSP Microphone and Audio product revenues
|
641,210 | 804,916 | (26 | ) (e) | ||||||||
|
License
revenues
|
1,531,148 | 695,223 | 55 | (f) | ||||||||
|
Total
Andrea DSP Microphone and Audio Software Products revenues
|
2,280,158 | 2,427,349 | (6 | ) | ||||||||
|
Total
Revenues
|
$ | 4,711,094 | $ | 5,046,213 | (7 | ) | ||||||
|
|
(a)
|
The
decrease of revenues of Andrea Anti-Noise Products is directly related to
a speech recognition software OEM’s decreased demand for our
products. We believe this decreased demand is associated with
the timing of the launches of this OEMs software updates during the year
ended 2008 as compared to the same period in
2007.
|
|
|
(b)
|
The
difference of approximately $183,000 relates to the sale of product to one
of our OEM customers for a one-time design and build of a particular
product. These revenues represented one-time revenues that were
only anticipated to be repeated if the OEM’s product was successful in the
marketplace, which it was not.
|
|
|
(c)
|
The
slight increase in Andrea Anti Noise Product revenues of 3% is primarily
associated with increased sales of products to educational customers for
use with their distance learning
products.
|
|
|
(d)
|
The
significant decreases of revenues of microphone array products to an OEM
customer for the year ending December 31, 2008, relates to the decreased
demand from the OEM customer. We believe that this decrease is
result of the OEM deciding not to continue including a microphone array
with all applicable product models. The revenues in 2007 were a
result of the OEM’s introduction of the OEM’s product and the OEM
customers’ need to supply all of its customers for the initial
launch. We do not expect any revenues from the OEM for this
product in 2009.
|
|
|
(e)
|
The
26% decrease in all other Andrea DSP Microphone and Audio product revenues
is primarily associated with decreased sales of our Andrea AutoArray
Microphone products. We believe this decrease is related to the
decreased federal funding to state and local police
departments.
|
|
|
(f)
|
The
55% increase in licensing revenues for the year ended December 31, 2008 is
a result of one of our OEM licensing partner’s initial launch of one of
our licensed products in their product
line.
|
13
Cost of
Revenues
Cost of
revenues as a percentage of net revenues for the year ended December 31, 2008
decreased to 42% from 51% for the year ended December 31, 2007. The
cost of revenues as a percentage of net revenues for the year ended December 31,
2008 for Andrea Anti-Noise Products was 64% as compared to 60% for the year
ended December 31, 2007. The cost of revenues as a percentage of net
revenues for the year ended December 31, 2008 for Andrea DSP Microphone and
Audio Software Products is 20% compared to 42% for the year ended December 31,
2007. The changes are primarily the result of the changes in revenue
as described under “Net Revenues” above. Specifically, the increase
in cost of revenues as a percentage of revenues for the Andrea Anti-Noise
Products is a result of increased overhead costs associated with this
segment. The decrease in cost of revenues as a percentage of revenues
for the Andrea DSP Microphone and Audio Software is the result of the increase
in license revenues coupled with the decrease in the revenues of high volume low
margin microphone array products to an OEM customer.
Research and
Development
Research
and development expenses for the year ended December 31, 2008 increased by 8% to
$728,187 from $676,977 for the year ended December 31, 2007. This
increase primarily relates to the increase in stock-based compensation expense,
as well as employee compensation and related benefit costs related to the hire
of an employee dedicated to engineering and product development. For
the year ended December 31, 2008, research and development expenses in our
Andrea DSP Microphone and Audio Software Technology efforts were approximately
the same as 2007 at $480,994, or 66% of total research and development expenses
and a 26% increase in our Andrea Anti-Noise Headset Product efforts to $247,193,
or 34% of total research and development expenses. 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 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 provide Andrea
with a competitive advantage.
General, Administrative and
Selling Expenses
General,
administrative and selling expenses increased approximately 8% to $2,316,723 for
the year ended December 31, 2008 from $2,143,159 for the year ended December 31,
2007. This increase is principally related to the increase in
stock-based compensation expense related to the employment agreement entered
into with the Company’s President and Chief Executive Officer in August 2008 as
well as the hire of an employee dedicated to the Company’s sales and marketing
efforts. For the year ended December 31, 2008, the increase reflects
a 3% increase in our Andrea DSP Microphone and Audio Software Technology efforts
to $1,297,003, or 56% of total general, administrative and selling expenses and
a 15% increase in our Andrea Anti-Noise Headset Product efforts to $1,019,720,
or 44% of total general, administrative and selling expenses.
Interest Income,
net
Interest
income, net for the year ended December 31, 2008 was $8,992 compared to interest
income, net of $8,623 for the year ended December 31, 2007.
Provision for Income
Taxes
The
provision for income taxes the year ended December 31, 2008 was $4,902 compared
to a provision for income taxes of $29,410 for the year ended December 31,
2007. The decrease is a result of a decrease 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 year ended December 31, 2008 was $326,738 compared to a net loss
$390,124 for the year ended December 31, 2007. The net loss for the
year ended December 31, 2008 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.
14
Liquidity
And Capital Resources
Our
principal sources of funds are and are expected to continue to be gross cash
flows from operations. At December 31, 2008, we had cash of
$1,006,951 compared with $811,403 at December 31, 2007. The balance
of cash at December 31, 2008 is primarily a result of our cash provided from
operations during the year ended December 31, 2008.
Our
working capital balance at December 31, 2008 was $2,196,689 compared to a
working capital of $1,837,521 at December 31, 2007. The increase in
working capital reflects an increase in total current assets of $219,574 and a
decrease in total current liabilities of $139,594. The increase in total current
assets reflects an increase in cash of $195,548, a decrease in accounts
receivable of $190,013, an increase in inventory of $153,349, and an increase in
prepaid expenses of $60,690. The decrease in total current
liabilities reflects a decrease in trade accounts payable of $201,907, a
decrease in accrued interest of $1,672 partially offset by an increase of
$63,984 in other current liabilities.
The
increase in cash of $195,548 reflects $274,681 of net cash provided by operating
activities and $79,133 of net cash used by investing activities.
The cash
provided by operating activities of $274,681, excluding non-cash charges, is
primarily attributable to the $326,738 net loss for the year ended December 31,
2008, a $190,013 decrease in accounts receivable, a $288,229 increase in
inventory, a $60,690 increase in prepaid expenses and other current assets, a
$201,907 decrease in accounts payable, and an increase of $63,985 in other
current liabilities. The changes in receivables, inventory and
accounts payable primarily reflect differences in the timing related to both the
payments for and the acquisition of inventory as well as for other services in
connection with ongoing efforts related to Andrea’s various product
lines.
The cash
used by investing activities of $79,133 reflects an increase in property and
equipment of $35,511 and an increase in patents and trademarks of
$43,622. The increase in property and equipment reflects capital
expenditures associated with molds for our Andrea Anti Noise Headset business
line and computers and related equipment. The increase in
patents and trademarks reflects capital expenditures associated with our
intellectual property.
We plan to
continue to improve our cash flows in 2009 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
refreshed product line introduced in the latter part of 2008 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 March 25, 2009,
Andrea has approximately $1,600,000 of cash deposits. We believe that
we have sufficient liquidity available to continue in operation through at least
December 2009. 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.
Recently Issued Accounting
Pronouncements
For a
discussion of the impact of recent accounting pronouncements, see Note 2 of the
accompanying financial statements.
Market
Risk
Our
principal source of financing activities is the issuance of convertible
preferred stock with financial institutions. We are affected by market risk
exposure primarily through any amounts payable in stock, or cash by us under
convertible securities. We do not utilize derivative financial instruments to
hedge against changes in interest rates or for any other purpose. In addition,
substantially all transactions entered into by us are denominated in U.S.
dollars. As such, we have shifted foreign currency exposure onto our foreign
customers. As a result, if exchange rates move against foreign customers, we
could experience difficulty collecting unsecured accounts receivable, the
cancellation of existing orders or the loss of future orders. The foregoing
could materially adversely affect our business, financial condition and results
of operations.
Not
Applicable.
15
The
financial statements are included in this Report beginning on page
F-1.
None.
(a) Disclosure
Controls and Procedures
The
Company’s management, including the Company’s 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, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company 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 the Company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
(b) Internal
Controls Over Financial Reporting
Management’s
annual report on internal control over financial reporting is included herein by
reference to the section titled “Management’s Annual Report on Internal Control
Over Financial Reporting” immediately preceding the Company’s audited
Consolidated Financial Statements in this Report.
(c) Changes
to Internal Control Over Financial Reporting
There were
no changes in the Company’s internal control over financial reporting during the
three months ended December 31, 2008 that have materially affected, or are
reasonable likely to materially affect, the Company’s internal control over
financial reporting.
None.
Information
on the Directors of the Company follows (all Directors serve one-year terms;
ages are as of December 31, 2008):
Douglas J. Andrea, age 46, has
been Chairman of the Board of Directors since November 2001, a Director of the
Company since 1991, Corporate Secretary since 2003 and Chief Executive Officer
since January 2005. He was Co-Chairman and Co-Chief Executive Officer
of the Company from November 1998 until August 2001. He served as
Co-President of the Company from November 1992 to November 1998, as Vice
President - Engineering of the Company from December 1991 to November 1992, and
as Secretary of the Company from 1989 to January 1993.
Gary A. Jones, age 63, has
been a Director of the Company since April 1996. He has served as President of
Digital Technologies, Inc. since 1994 and was Chief Engineer at Allied Signal
Ocean Systems from 1987 to 1994. From March 1998 to December 2000,
Mr. Jones was the Managing Director of Andrea Digital Technologies, Inc, a
wholly-owned subsidiary of Andrea Electronics Corporation.
Louis Libin, age 50, has been
a Director of the Company since February 2002. He is President of Broad Comm,
Inc., a consulting group specializing in advanced television broadcast,
interactive TV, Internet Protocol and wireless communications. Prior to his
tenure at Broad Comm, Mr. Libin was Chief Technology Officer for NBC, and was
responsible for all business and technical matters for satellite, wireless and
communication issues for General Electric and NBC. Since 1989, Mr. Libin has
represented the United States on satellite and transmission issues at the
International Telecommunications Union in Geneva, Switzerland. Mr. Libin is a
Senior Member of the Institute of Electrical and Electronic Engineers, and is a
member of the National Society of Professional Engineers.
Joseph J. Migliozzi, age 59,
has been a Director of the Company since September 2003. He has operated his own
management consulting firm since 2001. From 1997 to 2001, Mr.
Migliozzi was the Chief Operating and Financial Officer of Voyetra Turtle
Beach. Prior to that, he served in various executive management
positions in the electronics manufacturing industries, with both financial and
operational responsibilities. Mr. Migliozzi is a Certified Public
Accountant.
16
Jonathan D. Spaet, age 52, has
been a Director of the Company since 2003. Jonathan is Executive Vice President
of North American Sales of Vault.com, an internet company in the career and
recruitment space, where he oversees all the revenue generating
units. He joined Vault in August of 2008. Previously, he
was Vice-President/General Manager of Advertising Sales for Time Warner Cable in
New York City, where he had been since 2007. Prior to that
appointment, he was at Time Warner Cable National Advertising Sales since
September 2004, overseeing advertising sales for Time Warner Cable markets
around the country. Previously, he was Vice-President of Sales for
Westwood One Radio Networks, managing ad sales for one of the largest radio
groups in the country. From 2002 to 2003, he was the Chief Operating
Officer of MEP Media, a company that started a digital cable channel devoted to
the music enthusiast. Prior to MEP, he was President of Ad Sales for
USA Networks, supervising ad sales, marketing, research and operations for both
USA and Sci-fi, two top-tier cable channels. Previously, he was
President of Ad Sales for About.com. This followed 15 years at NBC,
where Mr. Spaet’s career included a six-year position in NBC Cable and nine
years in the NBC Television Stations Group.
Information about Executive Officers
Who Are Not Directors
The
following information is provided for the Company’s executive officer who is not
also a director:
Corisa L. Guiffre, age 36, has
been the Company's Vice President and Chief Financial Officer since June 2003
and Assistant Corporate Secretary since October 2003. Ms. Guiffre
joined the Company in November 1999 and served as Vice President and Controller
until June 2003. Prior to joining the Company, she was a member of
the Audit, Tax and Business Advisory divisions at Arthur Andersen
LLP. She is a Certified Public Accountant, a member of the American
Institute of Certified Public Accountants and a member of the New York State
Society of Certified Public Accountants.
Ms.
Guiffre is elected annually and holds office until her successor has been
elected and qualified or until she is removed or replaced.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
directors and officers and persons who beneficially own more than ten percent of
the Company's common stock to file with the Securities and Exchange Commission
("SEC") initial reports of ownership and reports of changes in ownership of
common stock in the Company. Officers, directors and greater-than-ten percent
shareholders are also required to furnish the Company with copies of all Section
16(a) reports they file. Based solely upon a review of Forms 3 and 4
and amendments thereto furnished to the Company under Section 16(a) of the
Securities Exchange Act of 1934, as amended, during the year ended December 31,
2008 and Forms 5 and amendments thereto furnished to the Company with respect to
the year ended December 31, 2008, and written representations provided to the
Company from the individuals required to filed reports, the Company believes
that each of the individuals required to file reports complied with applicable
reporting requirements for transactions in the Company’s common stock during the
year ended December 31, 2008 with the exception of one late filing by Director
Louis Libin with respect to one transaction..
Code of Business Ethics and
Conduct
Andrea
Electronics has adopted a Code of Business Ethics and Conduct. See
“Item 15 – Exhibits” to this Annual Report on Form 10-K.
Audit Committee and Audit Committee
Financial Expert. –
The
Company has a separately designated standing Audit Committee, which currently
consists of Messrs. Jones, Libin, Migliozzi and Spaet. The Board of
Directors has designated Mr. Migliozzi as an audit committee financial expert
under the rules of the Securities and Exchange Commission.
Summary Compensation Table
The
following table sets forth information for the last two fiscal years relating to
compensation earned by each person who served as chief executive officer and the
other most highly compensated executive officers whose total compensation was
over $100,000 during the year ended December 31, 2008, and 2007.
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Option
Awards(1)
|
Total
|
|||||||||||||
|
Douglas
J. Andrea, Chairman of the
|
2008
|
$ | 304,876 | $ | - | $ | 118,463 | $ | 423,339 | |||||||||
| Board, Chief Executive Officer, |
2007
|
300,000 | - | 100,264 | 400,264 | |||||||||||||
| and Corporate Secretary | ||||||||||||||||||
|
Corisa
L. Guiffre, Vice President,
|
2008
|
$ | 133,633 | $ | - | $ | 31,264 | $ | 164,897 | |||||||||
| Chief Financial Officer and |
2007
|
119,712 | - | 27,831 | 147,543 | |||||||||||||
| Assistant Corporate Secretary | ||||||||||||||||||
17
____________________________________
|
|
(1)
|
Reflects
the dollar amount recognized for financial statement reporting purposes in
accordance with FAS 123(R) for the following stock option grants: 1)
3,000,000 and 500,000 options in 2008 for Mr. Andrea and Ms. Guiffre,
respectively, based upon a fair value of each option of $0.04 using the
Black-Scholes option pricing model (the weighted average assumptions used
in the valuation of the options were as follows: dividend yield, 0%;
expected volatility, 101%; risk-free rate, 4.17%; and expected life in
years of 6 years); 2) 1,000,000 and 350,000 options in 2007 for Mr. Andrea
and Ms. Guiffre, respectively, based upon a fair value of each option of
$0.09 using the Black-Scholes option pricing model (the weighted average
assumptions used in the valuation of the options were as follows: dividend
yield, 0%; expected volatility, 101%; risk-free rate, 4.17%; and expected
life in years of 6 years); and 3) 2,000,000 and 400,000 options
in 2006 for Mr. Andrea and Ms. Guiffre, respectively, based upon a fair
value of each option of $0.12 using the Black-Scholes option pricing model
(the weighted average assumptions used in the valuation of the options
were as follows: dividend yield, 0%; expected volatility, 102%; risk-free
rate, 5.07%; and expected life in years of 7
years).
|
Outstanding Equity Awards at December
31, 2008
The
following table provides information concerning unexercised options for each
named executive officer outstanding as of December 31, 2008. None of
the named executive officers had stock awards that have not vested or unearned
equity incentive plan awards at December 31, 2008.
|
Option
Awards
|
||||||||||||||||
|
Name
|
Number
of
securities
underlying
unexercised
options
(#)
exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
unexercisable
|
Option
exercise
price
($/share)
|
Option
expiration
date
|
||||||||||||
|
Douglas
J. Andrea
|
100,000 | - | $ | 6.250 | 3-23-2009 | |||||||||||
| 50,000 | - | $ | 5.375 | 8-17-2009 | ||||||||||||
| 75,000 | - | $ | 6.875 | 4-14-2010 | ||||||||||||
| 50,000 | - | $ | 6.000 | 8-01-2010 | ||||||||||||
| 250,000 | - | $ | 0.690 | 1-31-2012 | ||||||||||||
| 400,000 | - | $ | 0.130 | 6-14-2014 | ||||||||||||
| 250,000 | - | $ | 0.100 | 8-04-2014 | ||||||||||||
| 250,000 | - | $ | 0.040 | 8-04-2015 | ||||||||||||
| 600,000 | - | $ | 0.050 | 8-10-2015 | ||||||||||||
| 666,000 | 334,000 | (1) | $ | 0.120 | 11-02-2016 | |||||||||||
| 666,000 | 334,000 | (2) | $ | 0.120 | 11-16-2016 | |||||||||||
| 333,000 | 667,000 | (3) | $ | 0.110 | 9-12-2017 | |||||||||||
| - | 2,000,000 | (4) | $ | 0.040 | 8-18-2018 | |||||||||||
| - | 1,000,000 | (5) | $ | 0.040 | 8-18-2018 | |||||||||||
|
Corisa
L. Guiffre
|
25,000 | - | $ | 7.125 | 11-22-2009 | |||||||||||
| 10,000 | - | $ | 6.875 | 4-14-2010 | ||||||||||||
| 10,000 | - | $ | 6.000 | 8-01-2010 | ||||||||||||
| 10,000 | - | $ | 1.780 | 3-19-2011 | ||||||||||||
| 25,000 | - | $ | 0.690 | 1-31-2012 | ||||||||||||
| 250,000 | - | $ | 0.050 | 8-10-2015 | ||||||||||||
| 266,400 | 133,600 | (2) | $ | 0.120 | 11-16-2016 | |||||||||||
| 116,550 | 233,450 | (3) | $ | 0.110 | 9-12-2017 | |||||||||||
| - | 500,000 | (6) | $ | 0.040 | 8-18-2018 | |||||||||||
____________________________________
|
|
(1)
|
The
stock options vest 33.3% from and after August 1, 2007, 33.3% from and
after August 1, 2008 and 33.4% from and after August 1,
2009
|
|
|
(2)
|
The
stock options vest 33.3% from and after the first anniversary of the Date
of Grant, 33.3% from and after the second anniversary of the Date of Grant
and 33.4% from and after the third anniversary of the Date of Grant, which
was November 16, 2006.
|
|
|
(3)
|
The
stock options vest 33.3% from and after the first anniversary of the Date
of Grant, 33.3% from and after the second anniversary of the Date of Grant
and 33.4% from and after the third anniversary of the Date of Grant, which
was September 12, 2007.
|
|
|
(4)
|
The
stock options vest 33.3% from and after August 1, 2009, 33.3% from and
after August 1, 2010 and 33.4% from and after August 1,
2011
|
18
|
|
(5)
|
The
stock options vest 33.3% from and after August 1, 2010, 33.3% from and
after August 1, 2011 and 33.4% from and after August 1,
2012.
|
|
|
(6)
|
The
stock options vest 33.3% from and after the first anniversary of the Date
of Grant, 33.3% from and after the second anniversary of the Date of Grant
and 33.4% from and after the third anniversary of the Date of Grant, which
was August 18, 2008.
|
Employment Agreements
In
November 2008, the Company entered into an employment agreement with the
Chairman of the Board, Douglas J. Andrea. The effective date of the
employment agreement is August 1, 2008 and expires July 31, 2010 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 $312,500 through July 31, 2009 and for the
period of August 1, 2009 through July 31, 2010 Mr. Andrea will receive an annual
base salary of $325,000. The employment agreement provides for
quarterly bonuses equal to 25% of the Company’s pre-bonus net after tax
quarterly earnings in excess of $25,000 for a total quarterly bonus amount not
to exceed $12,500; and annual bonuses equal to 10% of the Company’s annual
pre-bonus net after tax earnings in excess of $300,000. 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. On August 8, 2008, the
Board granted Mr. Andrea 2,000,000 stock options and 1,000,000 stock options
with an aggregate fair value of $120,000 (fair value was estimated using the
Black-Scholes option-pricing model). The 2,000,000 grant vests in
three equal annual installments over a three year period commencing August 1,
2009. The 1,000,000 grant vests in three equal annual installments
over a three year period commencing August 1, 2010. All stock options
granted have an exercise price of $0.04 per share, which was fair market value
at the date of grant, and a term of 10 years. Pursuant to the
employment agreement and subject to the approval of the Board, the Compensation
Committee will recommend a second grant of 1,000,000 stock options as soon as
practical after August 1, 2009, with an exercise price equal to the per share
fair market value of the Company’s common stock on the date of
grant. Mr. Andrea is also entitled to a change in control payment
equal to two times his salary with continuation of health and medical benefits
for two years in the event of a change in control. At December 31,
2008, the future minimum cash commitments under this agreement aggregate
$507,292.
On
November 11, 2008, the Company entered into an amended and restated change in
control agreement with Corisa 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. Upon the occurrence of a change in control followed by Ms.
Guiffre’s termination of employment, the Company will cause to be continued
life, medical, dental and disability coverage. Such coverage and payments shall
cease upon the expiration of 36 full calendar months following the date of
termination.
Director Compensation
The
following table provides the compensation received by individuals who served as
non-employee directors of the Company during the 2008 fiscal year.
|
Director
|
Fees
Earned
or
Paid in
Cash
|
Stock
Awards
(1)
|
Stock
Option
Awards
(2)
|
Total
|
||||||||||||
|
Gary
A Jones
|
$ | 2,750 | $ | 5,625 | $ | 2,971 | $ | 11,346 | ||||||||
|
Louis
Libin
|
3,250 | 5,625 | 845 | 9,720 | ||||||||||||
|
Joseph
J. Migliozzi
|
2,750 | 5,625 | 6,149 | 14,524 | ||||||||||||
|
Jonathan
D. Spaet
|
2,750 | 5,625 | 2,971 | 11,346 | ||||||||||||
____________________________________
|
|
(1)
|
Reflects
the dollar amount recognized for financial statement reporting purposes in
accordance with FAS 123(R) for 500,000 shares of Common Stock with a fair
market value of $0.04, 181,820 shares of Common Stock with a fair market
value of $0.11 and 166,668 shares of Common Stock with a fair market value
of $0.12 of stock granted during the years ended December 31, 2008, 2007
and 2006, respectively.
|
|
|
(2)
|
Reflects
the dollar amount recognized for financial statement reporting purposes in
accordance with FAS 123(R) for: 65,000, 15,000, 140,000 and 65,000 options
granted in 2008 for Messrs. Jones, Libin, Migliozzi and Spaet,
respectively, based upon a fair value of each option of $0.04 using the
Black-Scholes option pricing model; 33,182, 15,000, 60,455 and 33,182
options granted in 2007 for Messrs. Jones, Libin, Migliozzi and Spaet,
respectively, based upon a fair value of each option of $0.09 using the
Black-Scholes option pricing model; and 16,667, 16,667 and 41,667 options
in 2006 for Messrs. Jones, Migliozzi and Spaet, respectively, based upon a
fair value of each option of $0.10 using the Black-Scholes option pricing
model. The assumptions used in the valuation of the 2008
options were as follows: dividend yield, 0%; expected
volatility, 101%; risk-free rate, 4.17%; and expected life in years of 6
years The assumptions used in the valuation of the 2007 options
were as follows: dividend yield, 0%; expected volatility, 101%;
risk-free rate, 4.17%; and expected life in years of 6
years. The assumptions used in the valuation of the 2006
options were as follows: dividend yield, 0%; expected
volatility, 102%; risk-free rate, 5.07%; and expected life in years of 7
years. At December 31, 2008, Messrs. Jones, Libin, Migliozzi
and Spaet held 224,849, 180,000, 417,122 and 224,849 options to purchase
shares of common stock.
|
19
Annual Retainer and Meeting Fees for
Non-Employee Directors
The
following tables set forth the applicable retainers and fees that will be paid
to non-employee directors for their service on the Board of Directors of the
Company during 2009. Employee directors do not receive any retainers
or fees for their services on the Boards of Directors.
|
Annual
Retainer
|
$5,000
(paid in the form of common stock)
(1)
|
|
|
Fee
per Board Meeting (Regular or Special)
|
$500
|
|
|
Fee
per Committee Meeting
|
$250
|
|
|
Additional
Annual Retainer for the Chairperson of the
Compensation and Nomination and Governance
Committees
|
$2,500
(paid in the form of stock options) (2)
|
|
|
Additional
Annual Retainer for the Chairperson of the Audit
Committee
|
$5,000
(paid in the form of stock options) (2)
|
____________________________________
|
|
(1)
|
This
stock grant will be granted upon the nomination of each director at the
Annual Meeting of Stockholders.
|
|
|
(2)
|
Stock
option grants will be granted based on the directors past year of service,
and will have an exercise price equal to the fair market value of the
Company’s common stock on the date of grant, an eighteen-month vesting
period and a term of 10 years.
|
Stock Ownership
The
following table sets forth certain information as of March 25, 2009, with
respect to the common stock ownership of (i) each director of the Company, (ii)
each executive officer named in the Summary Compensation Table and (iii) all
directors and executive officers of the Company as a group.
|
Name
of Beneficial Owner
|
Number
of
Shares
Owned
(excluding
options)
|
Number
of
Shares
That May be
Acquired
Within
60
days by
Exercising
Options
|
Percent
of
Common
Stock
Outstanding(1)
|
|||||||||||
|
Douglas
J. Andrea
|
261,014 | (2) | 3,590,000 | 6.0 | % | |||||||||
|
Corisa
L. Guiffre
|
2,750 | 712,950 | 1.2 | % | ||||||||||
|
Gary
A. Jones
|
369,159 | 141,494 | * | |||||||||||
|
Louis
Libin
|
312,122 | 154,995 | * | |||||||||||
|
Joseph
J. Migliozzi
|
351,534 | 308,742 | 1.1 | % | ||||||||||
|
Jonathan
D. Spaet
|
351,534 | 166,494 | * | |||||||||||
|
Current
directors and executive officers as a
group (6 persons)
|
1,644,113 | 5,074,675 | 10.2 | % | ||||||||||
____________________________________
*Less than
1%
|
|
(1)
|
Percentages
with respect to each person or group of persons have been calculated on
the basis of 60,978,373 shares of Company common stock, plus the number of
shares of Company common stock which such person or group of persons has
the right to acquire within 60 days from March 25, 2009, by the exercise
of options. The information concerning the shareholders is
based upon information furnished to the Company by such shareholders.
Except as otherwise indicated none of the shares listed are pledged as
security and all of the shares next to each identified person or group are
owned of record and beneficially by such person or each person within such
group and such persons have sole voting and investment power with respect
thereto.
|
20
|
|
(2)
|
Includes
12,438 and 3,876 shares owned by Mr. Andrea’s spouse and Mr. Andrea’s
daughter, respectively.
|
The
following table sets forth certain information as of March 25, 2009, with
respect to the stock ownership of beneficial owners of more than 5% of the
Company’s outstanding common stock other than Mr. Andrea whose stock ownership
is set forth above:
|
Name
and Address
|
Shares
of
Common
Stock
Owned
|
Common
Stock
Equivalents
(1)
|
Percent
of
Common
Stock
and
Common
Stock
Equivalents
Outstanding
(2)
|
|||||||||
|
Alpha
Capital Anstalt
Pradafant
7,
Furstentums
9490
Vaduz,
Liechtenstein
|
-
|
5,722,159
(3)
|
8.6%
|
|||||||||
|
Nickolas
W. Edwards
937
Pine Ave, Long Beach, CA 90813
|
5,390,000 (4)
|
-
|
8.8%
|
|||||||||
____________________________________
|
|
(1)
|
The
issuance of shares of common stock upon conversion of the Series C
Preferred Stock is limited to that amount which, after given effect to the
conversion, would cause the holder not to beneficially own in excess of
4.99% or, together with other shares beneficially owned during the 60 day
period prior to such conversion, not to beneficially own in excess of
9.99% of the outstanding shares of common stock. The issuance
of common stock upon conversion of the Series D Preferred Stock and the
related warrants also are limited to that amount which, after given effect
to the conversion, would cause the holder not to beneficially own an
excess of 4.99% of the outstanding shares of our common stock, except that
each holder has a right to terminate such limitation upon 61 days notice
to us.
|
|
|
(2)
|
Percentages
with respect to each person or group of persons have been calculated on
the basis of 60,978,373 shares of Company common stock, plus the number of
shares of Company common stock which such person or groups of persons has
the right to acquire within 60 days of the conversion of Series C
Preferred Stock and Series D Preferred
Stock.
|
|
|
(3)
|
Based
on information filed with the Securities and Exchange Commission in a
Schedule 13G (Amendment No. 1) on February 15, 2007. Common
stock ownership of Alpha Capital Anstalt (“Alpha Capital’) is not known as
of March 25, 2009. Based on Company records as of March 25,
2009, Alpha Capital has 4,380,312 common stock equivalents from Series C
Preferred Stock, Series D Preferred Stock and related
warrants. See footnote (1) above, for limitations on the
conversion of such commons stock
equivalents.
|
|
|
(4)
|
Based
on information filed with the Securities and Exchange Commission in a
Schedule 13G (Amendment No. 1) on October 20, 2006 by Nickolas W.
Edwards.
|
The
following table sets forth certain information as of March 25, 2009, for all
compensation plans, including individual compensation arrangements under which
equity securities of the Company are authorized for issuance.
|
Plan Category
|
Number
of securities
to
be issued
upon
exercise of
outstanding
options, warrants
and
rights
(a)
|
Weighted-average
exercise
price
of outstanding options.
warrants
and rights
(b)
|
Number
of
securities
remaining
available
for future issuance under
equity
compensation
plans
(excluding
securities reflected in
column
(a))
(c)
|
|||||||||
|
•Equity
compensation plans approved by security holders
|
14,536,820
|
$ |
0.27
|
101,345
|
||||||||
|
•Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||||
|
Total
|
14,536,820
|
$ |
0.27
|
101,345
|
||||||||
Each
member of the Company’s Board of Directors is independent under the listing
standards of the Nasdaq Stock Market, except for Mr. Andrea, Chairman of the
Board, President and Chief Executive Officer of the Company.
21
Audit
Fees
The
following table sets forth the fees billed or expected to be billed to the
Company for the fiscal years ended December 31, 2008 and 2007 by Marcum &
Kliegman LLP:
|
Marcum & Kliegman LLP
|
2008
|
2007
|
||||||
|
Audit
Fees
|
$ | 136,505 | $ | 134,500 | ||||
|
Audit-related
fees
|
- | - | ||||||
|
Tax
fees
|
- | - | ||||||
|
All
other fees
|
- | - | ||||||
Pre-Approval
of Services by the Independent Auditor
The Audit
Committee has adopted a policy for pre-approval of audit and permitted non-audit
services by the Company’s independent auditor. The Audit Committee
will consider annually and, if appropriate, approve the provision of audit
services by its external auditor and consider and, if appropriate, pre-approve
the provision of certain defined audit and non-audit services. The
Audit Committee also will consider on a case-by-case basis and, if appropriate,
approve specific engagements that are not otherwise pre-approved.
Any
proposed engagement that does not fit within the definition of a pre-approved
service may be presented to the Audit Committee for consideration at its next
regular meeting or, if earlier consideration is required, to the Audit Committee
or one or more of its members. The member or members to whom such
authority is delegated shall report any specific approval of services at its
next regular meeting. The Audit Committee will regularly review
summary reports detailing all services being provided to the Company by its
external auditor.
During the
year ended December 31, 2008, all services were approved, in advance, by the
Audit Committee in compliance with these procedures.
|
Exhibit
Number
|
Description
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant’s Form 10-K for the year ended
December 31, 1992)
|
|
|
3.2
|
Certificate
of Amendment of the Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-K
for the year ended December 31, 1997)
|
|
|
3.3
|
Certificate
of Amendment of the Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed November 30, 1998)
|
|
|
3.4
|
Certificate
of Amendment to the Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed June 22, 1999)
|
|
|
3.5
|
Certificate
of Amendment to the Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed October 12, 2000)
|
|
|
3.6
|
Certificate
of Amendment to the Certificate of Incorporation of the Registrant dated
August 22, 2001 (incorporated by reference to Exhibit 3.6 of the
Registrant’s Annual Report on Form 10-K filed April 1,
2002)
|
|
|
3.7
|
Certificate
of Amendment to the Certificate of Incorporation of the Registrant dated
February 5, 2003 (incorporated by reference to Exhibit 3.1 of the
Registrant’s Registration Statement on Form 8-A/A filed February 6,
2003)
|
|
|
3.8
|
Certificate
of Amendment to the Certificate of Incorporation of the Registrant dated
February 23, 2004 (incorporated by reference to Exhibit 3.1 of the
Registrant’s Registration Statement on Form 8-K filed February 26,
2004)
|
|
|
3.9
|
Amended
By-Laws of Registrant (incorporated by reference to Exhibit 3.2 of the
Registrant’s Current Report on Form 8-K filed November 30,
1998)
|
|
|
4.1
|
Rights
Agreement dated as of April 23, 1999 between Andrea and Continental Stock
Transfer and Trust Company, as Rights Agent, including the form of
Certificate of Amendment to Certificate of Incorporation as Exhibit A, the
form of Rights Certificate as Exhibit B and the Summary of Rights to
Purchase Shares of Series A Preferred Stock (incorporated by reference to
Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed May 7,
1999)
|
22
|
Exhibit
Number
|
Description
|
||
|
10.1
|
*1991
Performance Equity Plan, as amended (incorporated by reference to Exhibit
4 of the Registrant’s Registration Statement on Form S-8, No. 333-45421,
filed February 2, 1998)
|
||
|
10.2
|
*1998
Stock Plan of the Registrant, as amended (incorporated by reference to
Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8, No.
333-82375, filed July 7, 1999)
|
||
|
10.3
|
*Change
in Control Agreement, dated as of November 22, 1999, by and between Corisa
L. Guiffre and the Registrant (incorporated by reference to Exhibit 10.3
of the Registrant’s Form 10-KSB for the year ended December 31,
2006)
|
||
|
10.4
|
Exchange
and Termination Agreement, dated as of February 11, 2004, by and among the
Company and HFTP Investment L.L.C (incorporated by reference to Exhibit
10.1 of the Registrant’s Registration Statement on Form 8-K filed February
17, 2004)
|
||
|
10.5
|
Acknowledgement
and Waiver Agreement, dated as of February 11, 2004, by the Company and
the investors listed in such agreement (incorporated by reference to
Exhibit 10.2 of the Registrant’s Registration Statement on Form 8-K filed
February 17, 2004)
|
||
|
10.6
|
Securities
Purchase Agreement, dated February 20, 2004, by and among the Company and
the investors listed in such agreement (incorporated by reference to
Exhibit 4.1 of the Registrant’s Registration Statement on Form 8-K filed
February 26, 2004)
|
||
|
10.7
|
Registration
Rights Agreement, dated February 23, 2004, by and among the Company and
the investors listed in such agreement (incorporated by reference to
Exhibit 4.2 of the Registrant’s Registration Statement on Form 8-K filed
February 26, 2004)
|
||
|
10.8
|
Form
of Common Stock Warrant (incorporated by reference to Exhibit 4.3 of the
Registrant’s Registration Statement on Form 8-K filed February 26,
2004)
|
||
|
10.9
|
*2006
Equity Compensation Plan of the Registrant (incorporated by reference to
Appendix A of the Registrant’s Schedule 14A filed on October 17,
2006.
|
||
|
10.10
|
*Employment
Agreement, dated as of November 11, 2008, by and between Andrea
Electronics Corporation and Douglas J. Andrea (incorporated by
reference to Exhibit 10.1 of the Registrant’s Form 10-Q filed on November
14, 2008)
|
||
|
10.11
|
*Change
in Control Agreement, dated as of November 11, 2008, by and between Andrea
Electronics Corporation and Corisa L. Guiffre (incorporated by reference
to Exhibit 10.1 of the Registrant’s Form 10-Q filed on
November 14, 2008)
|
||
|
14.0
|
Code
of Business Ethics and Conduct (incorporated by reference to Exhibit 14.0
of the Registrant’s Form
10KSB filed April 15, 2005)
|
||
|
21.0
|
Subsidiaries
of Registrant
|
||
|
23.1
|
Consent
of Independent Public Accountants
|
||
|
31.0
|
Rule
13a-14(a)/15d – 14(a) Certifications
|
||
|
32.0
|
Section
1350 Certifications
|
||
|
*
Management contract or compensatory plan or
arrangement
|
|||
23
Management’s
Report on Internal Control Over Financial Reporting
The management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting. The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
Management conducted an assessment of
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2008, utilizing the framework established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management has
determined that the Company’s internal control over financial reporting as of
December 31, 2008 is effective.
Our internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that accurately and fairly reflect, in reasonable detail, transactions
and dispositions of assets; and provide reasonable assurances
that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and (3) unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the Company’s financial
statements are prevented or timely detected.
All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was
not subject to attestation by the Company’s registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
F-1
To the
Audit Committee of the
Board of
Directors and Stockholders
of Andrea
Electronics Corporation
We have
audited the accompanying consolidated balance sheets of Andrea Electronics
Corporation and Subsidiaries (the “Company”) as of December 31, 2008 and 2007,
and the related consolidated statements of operations, stockholders’ equity and
cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Andrea
Electronics Corporation and Subsidiaries, as of December 31, 2008 and 2007, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with United States generally accepted accounting
principles.
/s/
Marcum & Kliegman LLP
Marcum
& Kliegman LLP
Melville,
NY
March 27,
2009
F-2
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:,
|
||||||||
|
Cash
|
$ | 1,006,951 | $ | 811,403 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $7,815 and $21,705,
respectively
|
804,433 | 994,446 | ||||||
|
Inventories,
net
|
868,213 | 714,864 | ||||||
|
Prepaid
expenses and other current assets
|
124,695 | 64,005 | ||||||
|
Total
current assets
|
2,804,292 | 2,584,718 | ||||||
|
Property
and equipment, net
|
60,904 | 57,751 | ||||||
|
Intangible
assets, net
|
2,543,781 | 2,977,673 | ||||||
|
Other
assets, net
|
12,864 | 12,864 | ||||||
|
Total
assets
|
$ | 5,421,841 | $ | 5,633,006 | ||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Trade
accounts payable
|
$ | 272,439 | $ | 474,346 | ||||
|
Accrued
Series C Preferred Stock Dividends
|
149,912 | 151,583 | ||||||
|
Other
current liabilities
|
185,252 | 121,268 | ||||||
|
Total
current liabilities
|
607,603 | 747,197 | ||||||
|
Series
B Redeemable Convertible Preferred Stock, $.01 par value; authorized:
1,000 shares; issued and outstanding: 0 shares
|
- | - | ||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, $.01 par value; authorized: 2,497,500 shares; none issued and
outstanding
|
- | - | ||||||
|
Series
C Convertible Preferred Stock, net, $.01 par value; authorized: 1,500
shares; issued and outstanding: 89.7 and 90.7 shares, respectively;
liquidation value: $897,015 and $907,015, respectively
|
1 | 1 | ||||||
|
Series
D Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000
shares; issued and outstanding: 1,050,001 and 1,192,858 shares,
respectively; liquidation value: $1,050,001 and $1,192,858,
respectively
|
10,500 | 11,929 | ||||||
|
Common
stock, $.01 par value; authorized: 200,000,000 shares; issued
and outstanding: 60,978,373 and 59,861,193 shares,
respectively
|
609,784 | 598,612 | ||||||
|
Additional
paid-in capital
|
76,814,249 | 76,568,825 | ||||||
|
Accumulated
deficit
|
(72,620,296 | ) | (72,293,558 | ) | ||||
|
Total
shareholders’ equity
|
4,814,238 | 4,885,809 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 5,421,841 | $ | 5,633,006 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Years Ended
|
||||||||
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
|
||||||||
|
Net
product revenues
|
$ | 3,179,946 | $ | 4,350,990 | ||||
|
License
revenues
|
1,531,148 | 695,223 | ||||||
|
Revenues
|
4,711,094 | 5,046,213 | ||||||
|
Cost
of revenues
|
1,997,012 | 2,595,414 | ||||||
|
Gross
margin
|
2,714,082 | 2,450,799 | ||||||
|
Research
and development expenses
|
728,187 | 676,977 | ||||||
|
General,
administrative and selling expenses
|
2,316,723 | 2,143,159 | ||||||
|
Loss
from operations
|
(330,828 | ) | (369,337 | ) | ||||
|
Interest
income, net
|
8,992 | 8,623 | ||||||
|
Loss
before provision for income taxes
|
(321,836 | ) | (360,714 | ) | ||||
|
Provision
for income taxes
|
4,902 | 29,410 | ||||||
|
Net
loss
|
$ | (326,738 | ) | $ | (390,124 | ) | ||
|
Basic
and diluted weighted average shares
|
60,106,249 | 59,559,623 | ||||||
|
Basic
and diluted net loss per share
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
ANDREA ELECTRONICS CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007
|
Series
C
Convertible
Preferred
Stock
Outstanding
|
Series
C
Convertible
Preferred
Stock
|
Series
D
Convertible
Preferred
Stock
Outstanding
|
Series
D
Convertible
Preferred
Stock
|
Common
Stock
Shares
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Shareholders’
Equity
|
||||||||||||||||||||||||||||
|
Balance,
January 1, 2007
|
100.701477 | $ | 1 | 1,242,858 | 12,429 | 59,021,857 | 590,219 | 76,352,407 | (71,903,434 | ) | 5,051,622 | |||||||||||||||||||||||||
|
Conversions
of Series C Convertible Preferred Stock
|
(10.00000 | ) | - | - | - | 457,516 | 4,575 | 12,137 | - | 16,712 | ||||||||||||||||||||||||||
|
Conversions
of Series D Convertible Preferred Stock
|
- | - | (50,000 | ) | (500 | ) | 200,000 | 2,000 | (1,500 | ) | - | - | ||||||||||||||||||||||||
|
Stock
Grant to Outside Directors and related expense
|
- | - | - | - | 181,820 | 1,818 | 20,682 | - | 22,500 | |||||||||||||||||||||||||||
|
Expense
of Stock Option Grants
|
- | - | - | - | - | - | 185,099 | - | 185,099 | |||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (390,124 | ) | (390,124 | ) | |||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
90.701477 | $ | 1 | 1,192,858 | $ | 11,929 | 59,861,193 | $ | 598,612 | $ | 76,568,825 | $ | (72,293,558 | ) | $ | 4,885,809 | ||||||||||||||||||||
|
Conversions
of Series C Convertible Preferred Stock
|
(1.00000 | ) | - | - | - | 45,752 | 458 | 1,214 | - | 1,672 | ||||||||||||||||||||||||||
|
Conversions
of Series D Convertible Preferred Stock
|
- | - | (142,857 | ) | (1,429 | ) | 571,428 | 5,714 | (4,285 | ) | - | - | ||||||||||||||||||||||||
|
Stock
Grant to Outside Directors and related expense
|
- | - | - | - | 500,000 | 5,000 | 17,501 | - | 22,501 | |||||||||||||||||||||||||||
|
Expense
of Stock Option Grants
|
- | - | - | - | - | - | 230,994 | - | 230,994 | |||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (326,738 | ) | (326,738 | ) | |||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
89.701477 | $ | 1 | 1,050,001 | $ | 10,500 | 60,978,373 | $ | 609,784 | $ | 76,814,249 | $ | (72,620,296 | ) | $ | 4,814,238 | ||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For the Years Ended December
31,
|
||||||||
|
Cash
flows from operating activities:
|
2008
|
2007
|
||||||
|
Net loss
|
$ | (326,738 | ) | $ | (390,124 | ) | ||
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
||||||||
|
Depreciation and
amortization
|
509,872 | 487,896 | ||||||
|
Stock based compensation
expense
|
253,495 | 207,599 | ||||||
|
Provision for bad
debt
|
- | 5,001 | ||||||
|
Inventory reserve
|
134,880 | (25,039 | ) | |||||
|
Change in:
|
||||||||
|
Accounts
receivable
|
190,013 | (159,848 | ) | |||||
|
Inventories
|
(288,229 | ) | 398,953 | |||||
|
Prepaid expenses and other
current assets
|
(60,690 | ) | 303,416 | |||||
|
Trade accounts
payable
|
(201,907 | ) | (144,813 | ) | ||||
|
Other current
liabilities
|
63,985 | (123,603 | ) | |||||
|
Net cash provided by operating
operations
|
274,681 | 559,438 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases of property and
equipment
|
(35,511 | ) | (33,870 | ) | ||||
|
Purchases of patents and
trademarks
|
(43,622 | ) | (12,775 | ) | ||||
|
Net
cash used in investing activities
|
(79,133 | ) | (46,645 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments under capital
lease
|
- | (5,068 | ) | |||||
|
Net
cash used in financing activities
|
- | (5,068 | ) | |||||
|
Net
increase in cash and cash equivalents
|
195,548 | 507,725 | ||||||
|
Cash,
beginning of year
|
811,403 | 303,678 | ||||||
|
Cash,
end of year
|
$ | 1,006,951 | $ | 811,403 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Non-cash investing and financing
activities:
|
||||||||
|
Conversion of Series C
Convertible Preferred Stock and related dividends into common
stock
|
$ | 1,671 | $ | 16,712 | ||||
|
Cash paid for:
|
||||||||
|
Interest
|
$ | - | $ | 2,235 | ||||
|
Income Taxes
|
$ | 18,502 | $ | 76,420 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
1. ORGANIZATION AND
BUSINESS
Andrea
Electronics Corporation, incorporated in the State of New York in 1934,
(together with its subsidiaries, “Andrea” or the “Company”) has been engaged in
the electronic communications industry since its inception. Since the early
1990s, Andrea has been primarily focused on developing and manufacturing
state-of-the-art microphone technologies and products for enhancing speech-based
applications software and communications, primarily in the computer and business
enterprise markets that require high quality, clear voice signals. Andrea’s
technologies eliminate unwanted background noise to enable the optimum
performance of various speech-based and audio applications. Andrea
DSP Microphone and Audio Software Products and Andrea Anti-Noise Products have
been designed for applications that are controlled by or depend on speech across
a broad range of hardware and software platforms. These products incorporate
Digital Signal Processing, Noise Cancellation, Active Noise Cancellation and
Active Noise Reduction microphone technologies, and are designed to cancel
background noise in a wide range of noisy environments, such as homes, offices,
factories and automobiles. Andrea also manufactures a line of accessories for
these products for the consumer and commercial markets in the United States as
well as in Europe and Asia.
Management’s Liquidity
Plans
As of
December 31, 2008, Andrea had working capital of $2,196,689, an accumulated
deficit of $72,620,296 and cash of $1,006,951. Andrea’s loss from
operations was $330,828 for the year ended December 31, 2008. Andrea
plans to continue to improve its cash flows during 2009 by aggressively pursuing
additional licensing opportunities related to Andrea DSP Audio Software and
increasing its Andrea Anti-Noise Headset Products sales through sales of
refreshed product line, which they introduced in September 2008, as well as the
increased efforts the Company is dedicating to its sales and marketing
efforts. However, there can be no assurance that Andrea will be able
to successfully execute the aforementioned plans.
As of
March 25, 2009, Andrea has approximately $1,600,000 of cash. Management projects
that Andrea has sufficient liquidity available to operate through at least
December 2009. While Andrea explores opportunities to increase
revenues in new business areas, the Company also continues to examine additional
opportunities for cost reduction and further diversification of its
business. Since the third quarter of 2006, Andrea has generated cash
flows from operations. Although these steps are encouraging, if
Andrea fails to develop additional revenues from sales of its products and
licensing of its technology or to generate adequate funding from operations, or
if Andrea fails to obtain additional financing through a capital transaction or
other type of financing, Andrea will be required to continue to significantly
reduce its operating expenses and/or operations or Andrea may have to relinquish
its products, technologies or markets which could have a materially adverse
effect on revenue and operations. Andrea has no commitment for additional
financing and may experience difficulty in obtaining additional financing on
favorable terms, if at all.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of
Consolidation
The
financial statements include the accounts of Andrea and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Loss (earnings) Per
Share
Basic
(loss) earnings per share is computed by dividing the net (loss) income by the
weighted average number of common shares outstanding during the
period. Diluted (loss) earnings adjusts basic (loss) earnings per
share for the effects of convertible securities, stock options and other
potentially dilutive financial instruments, only in the periods in which such
effect is dilutive. 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:
|
Total
potentially dilutive common shares as of:
|
December
31,
2008
|
December
31,
2007
|
||||||
|
Options
to purchase common stock (Note 13)
|
14,661,820 | 9,686,820 | ||||||
|
Series
C Convertible Preferred Stock and related accrued dividends (Note
7)
|
4,103,984 | 4,149,736 | ||||||
|
Series
D Convertible Preferred Stock and related warrants (Note
8)
|
9,358,348 | 9,929,776 | ||||||
|
Total
potentially dilutive common shares
|
28,124,152 | 23,766,332 | ||||||
Cash
Cash
includes cash and highly liquid investments with original maturities of three
months or less. At times during the years ended December 31, 2008 and 2007, the
Company has cash deposits in excess of the maximum amounts insured by the
Federal Deposit Insurance Corporation insurance limits. At December
31, 2008, the Company’s cash is held at three financial
institutions.
F-7
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Concentration of Credit
Risk
The
following customers accounted for 10% or more of Andrea’s consolidated net
revenues during at least one of the periods presented below:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Customer
A
|
14 | % | 11 | % | ||||
|
Customer
B
|
* | 18 | % | |||||
|
Customer
C
|
22 | % | * | |||||
_________________
* Amounts
are less than 10%
As of
December 31, 2008, Customer C and Customer A accounted for approximately 61% and
13% of accounts receivable and as of December 31, 2007, Customer C and Customer
A accounted for approximately 15% and 5% of accounts receivable.
The
following suppliers accounted for 10% or more of Andrea’s purchases during the
periods presented below:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Supplier
A
|
57 | % | 34 | % | ||||
|
Supplier
B
|
28 | % | 55 | % | ||||
At
December 31, 2008 and December 31, 2007, Supplier A accounted for approximately
$137,000 or 50% and 105,000 or 22 %, respectively of accounts
payable. At December 31, 2007, Supplier B accounted for approximately
$191,000 or 40% of accounts payable.
Allowance for Doubtful
Accounts
The
Company performs on-going credit evaluations of its customers and adjusts credit
limits based upon payment history and the customer’s current credit worthiness,
as determined by the review of their current credit
information. Collections and payments from customers are continuously
monitored. The Company maintains an allowance for doubtful accounts,
which is based upon historical experience as well as specific customer
collection issues that have been identified. While such bad debt
expenses have historically been within expectations and allowances established,
the Company cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past. If the financial condition of
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Inventories
Inventories
are stated at the lower of cost (on a first-in, first-out) or market
basis. The cost of inventory is based on the respective cost of
materials. Andrea reviews its inventory reserve for obsolescence on a
quarterly basis and establishes reserves on inventories based on the specific
identification method as well as a general reserve. Andrea records
charges in inventory reserves as part of cost of revenues.
Property and
Equipment
Property
and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over
the estimated useful lives of the assets ranging from 3 to 7 years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lives of the respective leases or the expected useful lives of those
improvements.
Expenditures
for maintenance and repairs that do not materially prolong the normal useful
life of an asset are charged to operations as incurred. Improvements that
substantially extend the useful lives of the assets are capitalized. Upon sale
or other disposition of assets, the cost and related accumulated depreciation
and amortization are removed from the accounts and the resulting gain or loss,
if any, is reflected in the statement of operations.
Other Intangible
Assets
Andrea
amortizes its core technology and patents and trademarks on a straight-line
basis over their estimated useful lives that range from 15 to 17
years.
F-8
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Long-Lived
Assets
Andrea
accounts for its long-lived assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” for purposes of determining and measuring
impairment of its long-lived assets (primarily intangible assets) other than
goodwill. Andrea’s policy is to 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 sales), 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. No impairment charges were recognized during the
years ended December 31, 2008 and 2007.
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
Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended,
and Staff Accounting Bulletin Topic 13 “Revenue Recognition in Financial
Statement.” 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.
Income
Taxes
The
provision for income taxes 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. For all other income taxes, Andrea
accounts for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes.” SFAS No. 109 requires an asset and liability approach for
financial accounting and reporting for income taxes. 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. If it becomes more likely than not that a tax asset will be
used, the related valuation allowance on such assets would be
reversed. Management makes judgments as to the interpretation of the
tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In management’s opinion, adequate
provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances
or reversals of reserves may be necessary. Income tax expense
consists of the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB) issued Interpretation No. 48 “Accounting for Uncertainty
in Income Taxes”—an Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 establishes for all entities a minimum threshold for
financial statement recognition of the benefit of tax positions, and requires
certain expanded disclosures. The adoption of FIN. 48 did not have a
material effect on the Company’s condensed consolidated financial position or
results of operations or cash flows (Note 11).
Stock-Based
Compensation
At
December 31, 2008, Andrea had three stock-based employee compensation plans,
which are described more fully in Note 13. Effective, January 1, 2006, the
Company adopted the provisions of SFAS No. 123R, “Share-Based
Payment.” SFAS No. 123R establishes accounting for stock-based awards
exchanged for employee services. Under the provisions of SFAS No.
123R, 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. The Company elected
to adopt the modified prospective transition method as provided by SFAS No.
123R. In accordance with the requirements of the modified prospective
transition method, consolidated financial statements for prior year periods have
not been restated to reflect the fair value method of expensing share-based
compensation. Additionally, effective with the adoption of SFAS No.
123R 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 option will result in a credit to
additional paid in capital if the related tax deduction reduces taxes
payable.
Research and
Development
Andrea
expenses all research and development costs as incurred.
F-9
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Shipping and Handling
Costs
Andrea
incurs shipping and handling costs in its operations. These costs are
included in "Cost of revenues" in the consolidated statements of
operations. $90,608 and $79,243 were billed to customers and are
included in net revenues for the years ended December 31, 2008 and 2007,
respectively.
Advertising
Expenses
In
accordance with SOP 93-7, “Reporting on Advertising Costs,” all media costs of
newspaper and magazine advertisements as well as trade show costs are expensed
as incurred. Total advertising and marketing expenses for the years
ended December 31, 2008 and 2007 were $30,249 and $20,677, respectively and are
included in general, administrative and selling expenses.
Fair Value of Financial
Instruments
SFAS No.
157, “Fair Value Measurements” (“SFAS 157”), defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 applies to all assets and liabilities that
are measured and reported on a fair value basis.
SFAS 157
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value as follows:
Level 1 –
Observable inputs such as quoted prices in active markets
Level 2 –
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly
Level 3 –
Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions
SFAS 157
was effective for fiscal years beginning after November 15,
2007. FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB
Statement No. 157”, delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed in the
financial statements on a nonrecurring basis until fiscal years beginning after
November 15, 2008. The Company does not have any assets or
liabilities measured at fair value on a recurring basis at December 31, 2008;
accordingly, the partial adoption of SFAS 157 did not have any impact on the
Company’s financial statements. The Company will apply the provisions
of SFAS 157 to nonfinancial assets and liabilities beginning January 1, 2009 as
required by FSP FAS 157-2.Andrea calculates the fair value of financial
instruments and includes this additional information in the notes to financial
statements when the fair value is different than the book value of those
financial instruments. When the book value approximates fair value, no
additional disclosure is made. Andrea uses quoted market prices whenever
available to calculate these fair values. When quoted market prices are not
available, Andrea uses standard pricing models for various types of financial
instruments which take into account the present value of estimated future cash
flows. As of December 31, 2008 and 2007, the carrying value of all financial
instruments approximated fair value.
Recently Issued Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable to the Company for fiscal 2009. SFAS
141R would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115” (“SFAS No. 159”), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The fair
value option established by this Statement permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting
date. Adoption is required for fiscal years beginning after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provisions of SFAS No. 159. The
adoption of this pronouncement did not have any material effects on the
Company’s consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any noncontrolling
interests as a separate component of stockholders’ equity. The
Company would also be required to present any net income allocable to
noncontrolling interests and net income attributable to the stockholders of the
Company separately in its consolidated statements of operations. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
would have an impact on the presentation and disclosure of the noncontrolling
interests of any non wholly-owned businesses acquired in the
future.
F-10
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133”, which amends and
expands the disclosure requirements of SFAS 133 to require qualitative
disclosure about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. This statement will be effective for the Company
beginning on January 1, 2009. The adoption of this statement will change the
disclosures related to derivative instruments that might be held by the
Company.
In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5
provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not permitted. The
Company is assessing the potential impact of this EITF 07-5 on the financial
condition and results of operations.
Use of
Estimates
The
preparation of 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 financial statements and the reported amounts of revenues and expenses
during the reporting period.
Management
bases its estimates on historical experience and on various assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. The most
significant estimates, among other things, are used in accounting for allowances
for bad debts, inventory valuation and obsolescence, product warranty,
depreciation, deferred income taxes, expected realizable values for assets
(primarily intangible assets), contingencies, revenue recognition as well as the
recording and presentation of the Company’s convertible preferred stock.
Estimates and assumptions are periodically reviewed and the effects of any
material revisions are reflected in the consolidated financial statements in the
period that they are determined to be necessary. Actual results could differ
from those estimates and assumptions.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
3.
INTANGIBLE
ASSETS
Intangible
assets, net, consists of the following:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Core
Technology
|
$ | 8,567,448 | $ | 8,567,448 | ||||
|
Trademarks
and Patents
|
572,893 | 529,271 | ||||||
| 9,140,341 | 9,096,719 | |||||||
|
Less:
accumulated amortization
|
(6,596,560 | ) | (6,119,046 | ) | ||||
| $ | 2,543,781 | $ | 2,977,673 | |||||
The
changes in the carrying amount of intangible assets during the years ended
December 31, 2008 and 2007 were as follows:
|
Core
Technology
|
Trademarks
and Patents
|
Totals
|
||||||||||
|
Balance
as of January 1, 2007
|
3,089,948 | 347,484 | 3,437,432 | |||||||||
|
Additions
during the period
|
- | 12,775 | 12,775 | |||||||||
|
Amortization
|
(441,421 | ) | (31,113 | ) | (472,534 | ) | ||||||
|
Balance
as of December 31, 2007
|
$ | 2,648,527 | $ | 329,146 | $ | 2,977,673 | ||||||
|
Additions
during the period
|
- | 43,622 | 43,622 | |||||||||
|
Amortization
|
(441,421 | ) | (36,093 | ) | (477,514 | ) | ||||||
|
Balance
as of December 31, 2008
|
$ | 2,207,106 | $ | 336,675 | $ | 2,543,781 | ||||||
F-11
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Andrea
accounts for its long-lived assets in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” 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. If Andrea identifies a
permanent impairment such that the carrying amount of Andrea’s long lived assets
are not recoverable using the sum of an undiscounted cash flow projection (gross
margin dollars from product revenues), a new cost basis for the impaired asset
will be established. If required, an impairment charge is recorded based on an
estimate of future discounted cash flows. This new cost basis will be
net of any recorded impairment.
In 2007
because the revenues from the Andrea DSP Microphone and Audio Software Products
business segment were lower than expected and this business segment was still
operating at a loss, management compared the sum of Andrea’s undiscounted cash
flow projections (gross margin dollars from product sales) of the Andrea DSP
Microphone and Audio Software core technology to the carrying value of that
technology. The results of this test indicated that there was not an
impairment. This process utilized probability weighted undiscounted
cash flow projections which include a significant amount of management’s
judgment and estimates as to future revenue. If these probability
weighted projections do not come to fruition, the Company could be required to
record an impairment charge in the near term and such impairment could be
material.
Amortization
expense was $477,514 and $472,534 for the years ended December 31, 2008 and
2007, respectively. Amortization of core technology is expected to be
approximately $441,421 per year for the next six years. Trademarks and patents
are amortized on a straight-line basis over 17 years. Assuming no
changes in the Company's intangible assets, estimated amortization expense for
each of the five succeeding fiscal years ending December 31 is expected to be
approximately $474,905 per year.
4.
INVENTORIES,
net
Inventories,
net, consist of the following:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 31,550 | $ | 62,834 | ||||
|
Work
in Process
|
36,291 | - | ||||||
|
Finished
goods
|
1,502,193 | 1,218,971 | ||||||
| 1,570,034 | 1,281,805 | |||||||
|
Less:
reserve for obsolescence
|
(701,821 | ) | (566,941 | ) | ||||
| $ | 868,213 | $ | 714,864 | |||||
5.
PROPERTY AND
EQUIPMENT, net
Property
and equipment, net, consists of the following:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Machinery
and equipment
|
$ | 528,500 | $ | 492,989 | ||||
|
Less:
accumulated depreciation
|
(467,596 | ) | (435,238 | ) | ||||
| $ | 60,904 | $ | 57,751 | |||||
Depreciation
of property and equipment was $32,358 and $15,362 for the years ended December
31, 2008 and 2007, respectively.
6.
OTHER CURRENT
LIABILITIES
Other
current liabilities consist of the following:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accrued
payroll and related expenses
|
$ | 71,073 | $ | 55,634 | ||||
|
Accrued
professional and other service fees
|
72,425 | 65,451 | ||||||
|
Deferred
Revenue
|
40,000 | - | ||||||
|
Accrued
other
|
1,754 | 183 | ||||||
| $ | 185,252 | $ | 121,268 | |||||
7.
SERIES C CONVERTIBLE
PREFERRED STOCK
On October
10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series C
Redeemable Convertible Preferred Stock (the “Series C Preferred
Stock”). Each of these shares of Series C Preferred Stock had a
stated value of $10,000 plus a $1,671.23 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 $1,671.23 represents the 5% per annum from October 10, 2000
through February 17, 2004.
F-12
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
On April
11, 2007, 10 shares of Series C Preferred Stock, together with related accrued
dividends of $16,712, were converted into 457,516 shares of Common Stock at a
conversion price of $0.2551.
On
November 10, 2008, 1 share of Series C Preferred Stock, together with $1,672 of
previously accrued dividends, were converted into 45,752 shares of Common Stock
at the conversion price of $0.2551.
As of
December 31, 2008, there were 89.701477 shares of Series C Preferred Stock
outstanding, which were convertible into 4,103,984 shares of Common Stock and
remaining accrued dividends of $149,912.
8.
SERIES D CONVERTIBLE
PREFERRED STOCK
On
February 17, 2004, Andrea entered into a Securities Purchase Agreement
(including a Registration Rights Agreement) with certain holders of the Series C
Preferred Stock and other investors (collectively, the “Buyers”) pursuant to
which the Buyers agreed to invest a total of $2,500,000. In
connection with this agreement, on February 23, 2004, the Buyers purchased, for
a purchase price of $1,250,000, an aggregate of 1,250,000 shares of a new class
of preferred stock, the Series D Preferred Stock, convertible into 5,000,000
shares of Common Stock (an effective conversion price of $0.25 per share) and
Common Stock warrants exercisable for an aggregate of 2,500,000 shares of Common
Stock. The warrants are exercisable at any time after August 17, 2004
and before February 23, 2009 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 are exercisable at any time
after December 4, 2004 and before June 4, 2009 at an exercise price of $0.17 per
share.
Knightsbridge
Capital served as a financial advisor to Andrea in connection with the
aforementioned transactions and the initial issuance of the Series D Preferred
Stock and related warrants. In connection with these transactions,
Andrea agreed to pay Knightsbridge Capital $300,000 in cash and to issue
warrants exercisable for an aggregate of 377,094 shares of Common Stock. The
warrants were exercisable at any time after August 17, 2004 and before February
23, 2009 at an exercise price of $0.38 per share. On February 23,
2009, these warrants expired without being exercised.
The
Company is required to maintain an effective registration statement from the
time of issuance until the earlier of (i) the date as of which the investors may
sell all of the registrable securities covered by the registration statement
without restriction under SEC rules or (ii) the date on which the investors
shall have sold all the registrable securities covered by the registration
statement. 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 of such registrable
securities 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).
Prior to
2007, there were 281,250 exercises of Series D Preferred Stock
Warrants. There were no Series D Preferred Stock Warrant exercises
during the year ended December 31, 2008 and 2007.
On March
16, 2007, 25,000 shares of Series D Preferred Stock were converted into 100,000
shares of Common Stock at a conversion price of $0.25. On April 11,
2007, 25,000 shares of Series D Preferred Stock were converted into 100,000
shares of Common Stock at a conversion price of $0.25. On December 5, 2008,
142,857 shares of Series D Preferred Stock were converted into 571,428 shares of
Common Stock at a conversion price of $0.25.
As of
December 31, 2008, there are 1,050,001 shares of Series D Preferred Stock and
5,158,344 related warrants outstanding, which are convertible and exercisable
into 9,358,348 shares of Common Stock. On February 23, 2009,
2,877,094 warrants expired. As of March 25, 2009, there are 1,050,001
shares of Series D Preferred Stock and 2,281,250 related warrants outstanding
which are convertible and exercisable into 6,481,254 shares of Common
Stock.
9.
LICENSING
AGREEMENTS
The
Company has entered into various licensing, production and distribution
agreements with manufacturers of PC and related components. These
agreements provide for revenues based on the terms of each individual
agreement. The Company's three largest licensing customers accounted
for $410,049, $46,641 and $1,037,041 of revenues in 2008 and for $244,558,
$233,033 and $159,525 of revenues in 2007.
F-13
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
10.
RETIREMENT
PLAN
Andrea has
a defined contribution profit sharing plan that is qualified under Section
401(k) of the Internal Revenue Code and is available to substantially all of its
employees. Andrea did not make any contributions to this plan for the years
ended December 31, 2008 and 2007.
11.
INCOME
TAXES
The
Company has adopted the provisions of FIN 48, on January 1, 2007. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement 109,
"Accounting for Income Taxes," and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim period, disclosure and transition. There were
no unrecognized tax benefits as of January 1, 2007.
Upon the
adoption of FIN 48, the Company was required to evaluate all of its tax
positions including any limitations from the result of a change in control under
Section 382. During 2007, the Company performed a preliminary
evaluation as to whether a change in control had taken
place. Management has determined that a change in control may have
taken place. As a result of its preliminary evaluation management has
determined that $30 million of its $50 million of total NOL may be subject to
limitation and accordingly reduced its net deferred tax asset and related
evaluation allowance by $11.7 million.
The
Company has identified its federal tax return and its state tax return in New
York as "major" tax jurisdictions, as defined in FIN 48. Based on the
Company's evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company's financial
statements. The Company's evaluation was performed for tax years
ended 2004 through 2008. 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. In addition, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
The
Company's policy for recording interest and penalties associated with audits is
to record such items as a component of income tax expense. There were
no amounts accrued for penalties or interest as of or during the year ended
December 31, 2008. The Company does not expect its unrecognized tax
benefit position to change during the next twelve months. Management
is currently unaware of any issues under review that could result in significant
payments, accruals or material deviations from its position.
The
components of earnings before income taxes are as follows:
|
For the Years Ended December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Domestic
|
$ | (369,886 | ) | $ | (630,420 | ) | ||
|
Foreign
|
48,050 | 269,705 | ||||||
|
(Loss)
income before income taxes
|
$ | (321,836 | ) | $ | (360,715 | ) | ||
The
provision for income tax consists of the following:
|
For the Years Ended December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | - | $ | - | ||||
|
Foreign
|
4,902 | 29,409 | ||||||
|
State
and Local:
|
- | - | ||||||
|
Deferred
|
||||||||
|
Federal
|
(82,000 | ) | (10,255,000 | ) | ||||
|
Foreign
|
- | - | ||||||
|
State
and Local:
|
(12,000 | ) | (1,508,000 | ) | ||||
|
Adjustment
to valuation allowance related to net deferred tax assets
|
94,000 | 11,763,000 | ||||||
| $ | 4,902 | $ | 29,409 | |||||
F-14
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
A
reconciliation between the effective rate for income taxes and the amount
computed by applying the statutory Federal income tax rate to loss from
continuing operations before provision (benefit) for income taxes is as
follows:
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Tax
provision at statutory rate
|
(34 | )% | (34 | )% | ||||
|
State
and local taxes
|
(5 | )% | (4 | )% | ||||
|
Core
technology amortization
|
46 | % | 42 | % | ||||
|
Stock
Option Expense Related to Incentive Stock Options
|
22 | % | 18 | % | ||||
|
Foreign
income and withholding taxes
|
2 | % | 8 | % | ||||
|
Change
in valuation allowance for net deferred tax assets
|
(29 | )% | (22 | )% | ||||
| 2 | % | 8 | % | |||||
The
effective tax rate for the years ended December 31, 2008 and December 31, 2007
is a result of certain licensing revenues that are subject to withholding of
income tax as mandated by the respective foreign jurisdiction in which the
revenues are earned.
The
components of temporary differences that give rise to significant portions of
the deferred tax asset, net, are as follows:
|
For the Years Ended December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Accrued
expenses
|
$ | 35,000 | $ | 50,000 | ||||
|
Allowance
for doubtful accounts
|
3,000 | 8,000 | ||||||
|
Reserve
for obsolescence
|
274,000 | 221,000 | ||||||
|
Expense
associated with non-qualified stock options
|
43,000 | - | ||||||
|
Deferred
Revenue
|
16,000 | - | ||||||
|
Foreign
tax credit
|
97,000 | 93,000 | ||||||
|
NOL
carryforward
|
7,647,000 | 7,837,000 | ||||||
| 8,115,000 | 8,209,000 | |||||||
|
Less:
valuation allowance
|
(8,115,000 | ) | (8,209,000 | ) | ||||
|
Deferred
tax asset, net
|
$ | - | $ | - | ||||
The change
in the valuation allowance for deferred tax assets are summarized as
follows:
|
For the Years Ended December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Beginning
Balance
|
$ | 8,209,000 | $ | 19,972,000 | ||||
|
Change
in Allowance
|
(94,000 | ) | (11,763,000 | ) | ||||
|
Ending
Balance
|
$ | 8,115,000 | $ | 8,209,000 | ||||
SFAS No.
109 requires that a valuation allowance be established when it is “more likely
than not” that all or a portion of deferred tax assets will not be realized. A
review of all available positive and negative evidence needs to be considered,
including a company’s performance, the market environment in which the company
operates, the length of carryback and carryforward periods, and expectations of
future profits, etc.
SFAS No.
109 further states that forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as cumulative losses in
recent years. Therefore, cumulative losses weigh heavily in the overall
assessment. Andrea will provide a full valuation allowance on future
tax benefits until it can sustain a level of profitability that demonstrates its
ability to utilize the assets, or other significant positive evidence arises
that suggests Andrea’s ability to utilize such assets.
As of
December 31, 2008, Andrea had net operating loss and credit carryforwards of
approximately $19.6 million (net amount after potential Section 382 limitations)
expiring in varying amounts beginning in 2009 through 2027. Andrea
has foreign tax credits of approximately $97,000 expiring in varying amounts
beginning 2016 through 2018. 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.
F-15
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
12.
COMMITMENTS AND
CONTINGENCIES
Leases
Andrea
leases its corporate headquarters located in Bohemia, New York. The
lease from an unrelated party, which currently expires in February 2014, is for
approximately 11,000 square feet and houses Andrea’s warehousing, sales and
executive offices. Rent expense under this operating lease was
approximately $83,717 and $81,279 for the year ended December 31, 2008 and 2007,
respectively.
As of
December 31, 2008, the minimum annual future lease payments, under this lease
and all other noncancellable operating leases, are as follows:
|
2009
|
$ | 98,103 | ||
|
2010
|
93,377 | |||
|
2011
|
95,818 | |||
|
2012
|
98,556 | |||
|
2012
|
96,814 | |||
|
Thereafter
|
133,283 | |||
|
Total
|
$ | 615,951 |
Employment
Agreements
In
November 2008, the Company entered into an employment agreement with the
Chairman of the Board, Douglas J Andrea. The effective date of the
employment agreement is August 1, 2008 and expires July 31, 2010 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 $312,500 through July 31, 2009 and for the
period of August 1, 2009 through July 31, 2010 Mr. Andrea will receive an annual
base salary of $325,000. The employment agreement provides for
quarterly bonuses equal to 25% of the Company’s pre-bonus net after tax
quarterly earnings in excess of $25,000 for a total quarterly bonus amount not
to exceed $12,500; and annual bonuses equal to 10% of the Company’s annual
pre-bonus net after tax earnings in excess of $300,000. 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. On August 8, 2008, the
Board granted Mr. Andrea 2,000,000 stock options and 1,000,000 stock options
with an aggregate fair value of $120,000 (fair value was estimated using the
Black-Scholes option-pricing model). The 2,000,000 grant vests in
three equal annual installments over a three year period commencing August 1,
2009. The 1,000,000 grant vests in three equal annual installments
over a three year period commencing August 1, 2010. All stock options
granted have an exercise price of $0.04 per share, which was the fair market
value of the Company’s common stock at the date of grant, and a term of 10
years. Pursuant to the employment agreement and subject to the
approval of the Board, the Compensation Committee will recommend a second grant
of 1,000,000 stock options as soon as practical after August 1, 2009, with an
exercise price equal to the per share fair market value of the Company’s common
stock on the date of grant. Mr. Andrea is also entitled to a change
in control payment equal to two times his salary with continuation of health and
medical benefits for two years in the event of a change in control, as defined
in the agreement. At December 31, 2008, the future minimum cash
commitments under this agreement aggregate $507,292.
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
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 the resolution of these matters will not have a material
adverse effect on Andrea’s financial position, results of operations or
liquidity.
13.
STOCK PLANS AND
STOCK-BASED COMPENSATION
In 1991,
the Board of Directors of Andrea (the “Board”) adopted the 1991 Performance
Equity Plan (“1991 Plan”), which was approved by the shareholders. The 1991
Plan, as amended, authorizes the granting of awards, the exercise of which would
allow up to an aggregate of 4,000,000 shares of Andrea’s Common Stock to be
acquired by the holders of those awards. Stock options granted to
employees and directors under the 1991 Plan were granted for terms of up to 10
years at an exercise price equal to the market value at the date of
grant. No further awards will be granted under the 1991
Plan.
F-16
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
In 1998,
the Board adopted the 1998 Stock Option Plan (“1998 Plan”), which was
subsequently approved by the shareholders. The 1998 Plan, as amended, authorizes
the granting of awards, the exercise of which would allow up to an aggregate of
6,375,000 shares of Andrea’s Common Stock to be acquired by the holders of those
awards. The awards can take the form of stock options, stock
appreciation rights, restricted stock, deferred stock, stock reload options or
other stock-based awards. Awards may be granted to key employees, officers,
directors and consultants. No further awards will be granted under
the 1998 Plan.
In October
2006, the Board adopted the Andrea Electronics Corporation 2006 Equity
Compensation Plan (“2006 Plan”), which was subsequently approved by the
shareholders. The 2006 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 10,000,000 shares of
Andrea’s Common Stock to be acquired by the holders of those
awards. The awards can take the form of stock options, stock
appreciation rights, restricted stock or other stock-based awards. Awards may be
granted to key employees, officers, directors and consultants. At
December 31, 2008, there were 101,345 shares available for further issuance
under the 2006 Plan.
The stock
option awards granted under these plans have been granted with an exercise price
equal to the market price of the Company’s stock at the date of grant; with
vesting periods of up to four years and 10-year contractual terms.
The fair
values of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model that uses the weighted-average assumptions
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.
The fair
values of the stock options granted were estimated on the date of grant using
the Black-Scholes option-pricing model that uses the following weighted-average
assumptions for the year ended December 31, 2008 and 2007:
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Expected
life in years (based on simplified method)
|
6 | 6 | ||||||
|
Risk-free
interest rates
|
3.38 | % | 4.17 | % | ||||
|
Volatility
(based on historical volatility)
|
146.6 | % | 100.6 | % | ||||
|
Dividend
yield
|
0 | % | 0 | % | ||||
Option
activity during 2008 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, 2008
|
9,686,820 | $ | 0.76 | $ | 0.59 |
7.79 years
|
5,355,590 | $ | 1.29 | $ | 1.00 |
6.57 years
|
||||||||||||||
|
Granted
|
5,185,000 | $ | 0.04 | $ | 0.04 | |||||||||||||||||||||
|
Cancelled
|
(210,000 | ) | $ | 13.89 | $ | 11.33 | ||||||||||||||||||||
|
At
December 31, 2008
|
14,661,820 | $ | 0.32 | $ | 0.24 |
7.89 years
|
6,973,385 | $ | 0.60 | $ | 0.45 |
6.45
years
|
||||||||||||||
During the
year ended December 31, 2008, 1,827,795 options vested with a weighted average
exercise price of $0.12 and a weighted average fair value of $0.10 per
option. Based on the December 31, 2008, fair market value of the
Company’s common stock of $0.04, there is no aggregate intrinsic value for the
14,661,820 options outstanding and 6,973,385 shares exercisable.
During the
year ended December 31, 2007, 1,113,090 options vested with a weighted average
exercise price of $0.12 and a weighted average fair value of $0.10 per
option. Based on the December 31, 2007, fair market value of the
Company’s common stock of $0.06, the aggregate intrinsic value of the 9,686,820
options outstanding and 5,355,590 shares exercisable is $26,500.
F-17
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Total
compensation expense recognized related to stock option awards was $230,994 and
$185,099 for the year ended December 31, 2008 and 2007,
respectively. In the accompanying consolidated statement of
operations for the year ending December 31, 2008, $180,919 of expense is
included in general, administrative and selling expenses, $48,654 is included in
research and development expenses and $1,421 is included in cost of
revenues. In the accompanying consolidated statement of operations
for the year ending December 31, 2007, $145,607 of expense is included in
general, administrative and selling expenses, $38,002 is included in research
and development expenses and $1,490 is included in cost of
revenues.
As of
December 31, 2008, there was $236,614 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
1998 and 2006 Plans. This unrecognized compensation cost is expected
to be recognized over the next 3 years ($166,637 in 2009, $57,056 in 2010 and
$12,921 in 2011).
Pursuant
to Andrea’s compensation policy for outside directors, Andrea granted 400,000
shares of Common Stock with a fair market value of $0.05 per share in 2007 and
500,000 shares of Common Stock with a fair market value of $0.04 per share in
2008. These stock grants were fully vested on the date of
grant. Compensation expense related to these awards was $22,501 and
$22,500 for the years ended December 31, 2008 and 2007,
respectively.
14.
SEGMENT
INFORMATION
Andrea
follows the provisions of SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information.” Reportable operating segments are
determined based on Andrea’s management approach. The management approach, as
defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While Andrea’s results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Andrea DSP Microphone and Audio
Software Products and (ii) Andrea Anti-Noise Products. Andrea DSP
Microphone and Audio Software Products primarily include products based on the
use of some, or all, of the following technologies: Andrea Digital Super
Directional Array microphone technology (DSDA), Andrea Direction Finding and
Tracking Array microphone technology (DFTA), Andrea PureAudio noise filtering
technology, and Andrea EchoStop, an advanced acoustic echo cancellation
technology. Our Andrea Anti-Noise Products include noise cancellation
and active noise cancellation computer headset products and related computer
peripheral products. The following represents selected consolidated
financial information for Andrea’s segments for the years ended December 31,
2008 and 2007:
|
2008 Segment Data
|
Andrea
DSP
Microphone
and
Audio
Software
Products
|
Andrea
Anti-
Noise Products
|
Total 2008
|
|||||||||
|
Net
revenues from external customers
|
$ | 749,010 | $ | 2,430,936 | $ | 3,179,946 | ||||||
|
License
revenues
|
1,531,148 | - | 1,531,148 | |||||||||
|
Income
(loss) from operations
|
54,793 | (385,621 | ) | (330,828 | ) | |||||||
|
Depreciation
and Amortization
|
470,728 | 39,144 | 509,872 | |||||||||
|
Purchases
of property and equipments
|
8,616 | 26,895 | 35,511 | |||||||||
|
Purchases
of patents and trademarks
|
8,862 | 34,760 | 43,622 | |||||||||
|
Assets
|
3,583,439 | 1,838,402 | 5,421,841 | |||||||||
|
Total
long lived assets
|
2,393,721 | 223,828 | 2,617,549 | |||||||||
|
2007 Segment Data
|
Andrea
DSP
Microphone
and
Audio
Software
Products
|
Andrea
Anti-
Noise Products
|
Total 2007
|
|||||||||
|
Net
revenues from external customers
|
$ | 1,732,126 | $ | 2,618,864 | $ | 4,350,990 | ||||||
|
License
revenues
|
695,223 | - | 695,223 | |||||||||
|
Loss
from operations
|
329,097 | 40,240 | 369,337 | |||||||||
|
Depreciation
and Amortization
|
468,706 | 19,190 | 487,896 | |||||||||
|
Capital
expenditures
|
- | 33,870 | 33,870 | |||||||||
|
Purchases
of patents and trademarks
|
3,700 | 9,075 | 12,775 | |||||||||
|
Assets
|
4,021,688 | 1,611,318 | 5,633,006 | |||||||||
|
Total
long lived assets
|
2,858,713 | 189,575 | 3,048,288 | |||||||||
F-18
ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Management
of Andrea assesses assets and 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 years ended December 31, 2008 and 2007,
and as of each respective year-end, net revenues and accounts receivable by
geographic area are as follows:
|
Geographic Data
|
2008
|
2007
|
||||||
|
Net
Revenues:
|
||||||||
|
United
States
|
$ | 4,218,958 | $ | 3,609,523 | ||||
|
Foreign(1)
|
492,136 | 1,436,690 | ||||||
| $ | 4,711,094 | $ | 5,046,213 | |||||
|
Accounts
receivable:
|
||||||||
|
United
States
|
$ | 804,433 | $ | 736,122 | ||||
|
Foreign
|
- | 258,324 | ||||||
| $ | 804,433 | $ | 994,446 | |||||
____________________________________
|
|
(1)
|
Net
revenue to the People’s Republic of China and Singapore represented 19%
and 4%, respectively of total net revenues for year ended December 31,
2007.
|
$45,655 of
our property and equipment, net represents product tools and
molds. These tools and molds are located in Asia at the manufacturing
facility, which produces the respective product. All of our remaining
property and equipment, net is located at our facility in Bohemia, New
York.
F-19
Pursuant
to the requirements of the Section 13 or 15(d) 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: March
30, 2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons in the capacities and on the dates
indicated.
|
/s/ DOUGLAS J.
ANDREA
|
Chairman
of the Board, President, Chief Executive
|
March
30, 2009
|
|
Douglas
J. Andrea
|
Officer
and Corporate Secretary
|
|
|
/s/ CORISA L.
GUIFFRE
|
Vice
President, Chief Financial Officer and
|
March
30, 2009
|
|
Corisa
L. Guiffre
|
Assistant
Corporate Secretary
|
|
|
/s/ GARY A.
JONES
|
Director
|
March
30, 2009
|
|
Gary
A. Jones
|
||
|
/s/ LOUIS
LIBIN
|
Director
|
March
30, 2009
|
|
Louis
Libin
|
||
|
/s/ JOSEPH J.
MIGLIOZZI
|
Director
|
March
30, 2009
|
|
Joseph
J. Migliozzi
|
||
|
/s/ JONATHAN D.
SPAET
|
Director
|
March
30, 2009
|
|
Jonathan
D. Spaet
|