ANDREA ELECTRONICS CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2019
		Or
☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ____________ to ____________
		Commission file number 001-04324

ANDREA ELECTRONICS CORPORATION
---------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

New York		11-0482020
State or other jurisdiction of		I.R.S. Employer Identification No.
incorporation or organization

620 Johnson Avenue Suite 1-B, Bohemia, NY		11716
(Address of Principal Executive Offices)		Zip Code

631-719-1800

________________________________

Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐	Accelerated Filer	☐
Non-Accelerated Filer ☐	Smaller Reporting Company	☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(g) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, par value $0.01 per share		ANDR		OTC Bulletin Board

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 13, 2019, there were 68,104,957 common shares outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2019			December 31, 2018
	(unaudited)
ASSETS

Current assets:
Cash	$	362,549		$	486,521
Accounts receivable, net of allowance for doubtful accounts of $4,789 and $4,793, respectively		362,139			418,681
Inventories, net		287,254			213,056
Prepaid expenses and other current assets		38,345			77,593
Total current assets		1,050,287			1,195,851

Property and equipment, net		33,389			55,088
Intangible assets, net		233,680			262,819
Other assets, net		79,843			5,250
Total assets	$	1,397,199		$	1,519,008

LIABILITIES AND SHAREHOLDERS’ DEFICIT

Current liabilities:
Trade accounts payable and other current liabilities	$	422,057		$	380,685
Accrued Series C Convertible Preferred Stock Dividends		19,168			19,168
Total current liabilities		441,225			399,853

Lease liabilities payable		21,026			-
Long-term debt		1,808,540			1,551,284
Total liabilities		2,270,791			1,951,137

Series B Redeemable Convertible Preferred Stock, $.01 par value; authorized: 1,000 shares; issued and outstanding: 0 shares		-			-

Commitments and contingencies

Shareholders’ deficit :
Preferred stock, $.01 par value; authorized: 2,497,500 shares; none issued and outstanding		-			-
Series C Convertible Preferred Stock, net, $.01 par value; authorized: 1,500 shares; issued and outstanding: 11.5 shares; liquidation value: $114,692		-			-
Series D Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000 shares; issued and outstanding: 907,144 shares; liquidation value: $907,144		9,072			9,072
Common stock, $.01 par value; authorized: 200,000,000 shares; issued and outstanding: 68,104,957 shares		681,050			681,050
Additional paid-in capital		78,083,708			78,069,200
Accumulated deficit		(79,647,422	)		(79,191,451	)

Total shareholders’ deficit		(873,592	)		(432,129	)

Total liabilities and shareholders’ deficit	$	1,397,199		$	1,519,008

See Notes to unaudited condensed consolidated interim financial statements.

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	For the Three months Ended						For the Nine months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Revenues
Net product revenues	$	374,024		$	438,188		$	1,349,153		$	921,402
License and service related revenues		8,645			14,702			36,489			49,142
Total revenues		382,669			452,890			1,385,642			970,544

Cost of product revenues		100,809			149,656			392,664			265,823

Gross margin		281,860			303,234			992,978			704,721

Patent Monetization expenses		41,897			47,670			155,170			143,549

Research and development expenses		139,137			151,400			425,497			448,068

General, administrative and selling expenses		266,326			291,878			814,262			866,673

Operating loss		(165,500	)		(187,714	)		(401,951	)		(753,569	)

Interest expense, net		(18,397	)		(13,158	)		(52,347	)		(38,137	)

Loss from operations before provision for income taxes		(183,897	)		(200,872	)		(454,298	)		(791,706	)

Provision for income taxes		351			-			1,673			1,863

Net loss	$	(184,248	)	$	(200,872	)	$	(455,971	)	$	(793,569	)

Basic and diluted weighted average shares		68,104,957			67,160,062			68,104,957			65,677,212

Basic and diluted net loss per share	$	(.00	)	$	(.00	)	$	(.01	)	$	(.01	)

See Notes to unaudited condensed consolidated interim financial statements.

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)

	Series C Convertible Preferred Stock Outstanding		Series C Convertible Preferred Stock			Series D Convertible Preferred Stock Outstanding	Series D Convertible Preferred Stock		Common Stock Outstanding	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Total Shareholders’ Equity (Deficit)
Balance, January 1, 2018	33.326899		$	1		907,144	$	9,072	64,914,935	$	649,149	$	77,931,051	$	(78,246,343	)	$	342,930
Stock-based Compensation Expense related to Stock Option Grants	-			-		-		-	-		-		13,335		-			13,335
Net loss	-			-		-		-	-		-		-		(332,635	)		(332,635	)
Balance, March 31, 2018	33.326899		$	1		907,144	$	9,072	64,914,935	$	649,149	$	77,944,386	$	(78,578,978	)	$	23,630
Stock-based Compensation Expense related to Stock Option Grants	-			-		-		-	-		-		13,335		-			13,335
Stock option exercises	-			-		-		-	50,000		500		1,500		-			2,000
Net loss	-			-		-		-	-		-		-		(260,062	)		(260,062	)
Balance, June 30, 2018	33.326899		$	1		907,144	$	9,072	64,964,935	$	649,649	$	77,959,221	$	(78,839,040	)	$	(221,097	)
Stock-based Compensation Expense related to Stock Option Grants	-			-		-		-	-		-		12,779		-			12,779
Conversion of Series C Convertible Preferred Stock	(21.857650	)		(1	)	-		-	1,000,022		10,001		26,529		-			36,529
Stock option exercises	-			-		-		-	2,140,000		21,400		64,200		-			85,600
Net loss	-			-		-		-	-		-		-		(200,872	)		(200,872	)
Balance, September 30, 2018	11.469249		$	-		907,144	$	9,072	68,104,957	$	681,050	$	78,062,729	$	(79,039,912	)	$	(287,061	)

Balance, January 1, 2019	11.469249		$	-		907,144	$	9,072	68,104,957	$	681,050	$	78,069,200	$	(79,191,451	)	$	(432,129	)
Stock-based Compensation Expense related to Stock Option Grants	-			-		-		-	-		-		4,836		-			4,836
Net loss	-			-		-		-	-		-		-		(197,488	)		(197,488	)
Balance, March 31, 2019	11.469249		$	-		907,144	$	9,072	68,104,957	$	681,050	$	78,074,036	$	(79,388,939	)	$	(624,781	)
Stock-based Compensation Expense related to Stock Option Grants	-			-		-		-	-		-		4,836		-			4,836
Net loss	-			-		-		-	-		-		-		(74,235	)		(74,235	)
Balance, June 30, 2019	11.469249		$	-		907,144	$	9,072	68,104,957	$	681,050	$	78,078,872	$	(79,463,174	)	$	(694,180	)
Stock-based Compensation Expense related to Stock Option Grants	-			-		-		-	-		-		4,836		-			4,836
Net loss	-			-		-		-	-		-		-		(184,248	)		(184,248	)
Balance, September 30, 2019	11.469249		$	-		907,144	$	9,072	68,104,957	$	681,050	$	78,083,708	$	(79,647,422	)	$	(873,592	)

See Notes to unaudited condensed consolidated interim financial statements.

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the Nine months Ended
	September 30, 2019			September 30, 2018
Cash flows from operating activities:
Net loss	$	(455,971	)	$	(793,569	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		60,646			69,740
Stock based compensation expense		14,508			39,449
Inventory net realizable adjustment		(543	)		(12,665	)
Provision for income tax withholding		1,673			1,863
Right-of-use assets		33,744			-
PIK interest, net		57,256			44,787
Change in:
Accounts receivable, net		54,869			(55,858	)
Inventories		(73,655	)		(94,614	)
Prepaid expenses and other current assets		39,248			(19,456	)
Trade accounts payable and other current liabilities and lease liabilities payable		(45,939	)		52,509
Net cash used in operating activities		(314,164	)		(767,814	)

Cash flows from investing activities:
Purchases of property and equipment		-			(13,938	)
Payments for patents and trademarks		(9,808	)		(45,374	)
Net cash used in investing activities		(9,808	)		(59,312	)

Cash flows from financing activities:
Proceeds from exercise of stock options		-			87,600
Proceeds from long-term notes		200,000			200,000
Net cash provided by financing activities		200,000			287,600

Net decrease in cash		(123,972	)		(539,526	)

Cash, beginning of year		486,521			1,164,057
Cash, end of period	$	362,549		$	624,531

Supplemental disclosures of cash flow information:

Cash paid for:
Income Taxes	$	2,122		$	4,610

Non Cash Investing and Financing Activity:
Conversion of Series C Convertible Preferred Stock and related dividends into common stock	$	-		$	36,529

See Notes to unaudited condensed consolidated interim financial statements.

Note 1. Basis of Presentation

Basis of Presentation - The accompanying unaudited condensed consolidated interim financial statements include the accounts of Andrea Electronics Corporation and its subsidiaries (“Andrea” or the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2018 balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for any other interim period or for the fiscal year.

These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019. The accounting policies used in preparing these unaudited condensed consolidated interim financial statements are consistent with those described in the December 31, 2018 audited consolidated financial statements.

Liquidity - ASC 205-40 requires management to evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued. Based upon the evaluation, management believes the Company has the ability to meet its obligations as they become due within the next twelve months from the date of the financial statement issuance.

The Company’s loss before provision for income taxes was $183,897 and $454,298 for the three and nine months ended September 30, 2019, of which approximately $23,000 and $75,000, respectively, represents non-cash stock based compensation, depreciation and amortization expenses. As part of the evaluation, management considered the Company’s cash balance of $362,549 and working capital of $609,062 as of September 30, 2019 as well as the Company’s projected revenues and expenses for the next twelve months. If the Company is not successful in achieving its projected revenues and expenses, it may need to seek other sources of revenue, areas of further expense reduction or additional funding from other sources such as debt or equity raising; however, there is no assurance that the Company would be successful in a debt or equity raise or that such funding would be on terms that it would find acceptable.

Note 2. Summary of Significant Accounting Policies

Loss Per Share - Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss adjusts basic loss earnings per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. Diluted loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).

Securities that could potentially dilute basic earnings per share (“EPS”) in the future that were not included in the computation of the diluted EPS because to do so would have been anti-dilutive for the periods presented, consisted of the following:

	For the Three months Ended		For the Nine months Ended
	September 30, 2019	September 30, 2018	September 30, 2019	September 30, 2018
Total potentially dilutive common shares as of:
Stock options to purchase common stock (Note 7)	8,100,500	10,008,001	8,100,500	10,008,001
Series C Convertible Preferred Stock and related accrued dividends (Note 4)	524,736	524,736	524,736	524,736
Series D Convertible Preferred Stock (Note 5)	3,628,576	3,628,576	3,628,576	3,628,576
Total potentially dilutive common shares	12,253,812	14,161,313	12,253,812	14,161,313

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

Concentration of Credit Risk - The following customers accounted for 10% or more of Andrea’s consolidated total revenues during at least one of the periods presented below:

	For the Three Months Ended				For the Nine months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Customer A	23	%	*		16	%	*
Customer B	21	%	23	%	16	%	21	%
Customer C	20	%	52	%	44	%	42	%
Customer D	11	%	*		*		*

____________________

Amounts are less than 10%

As of September 30, 2019, Customers A, B, C and D accounted for approximately 20%, 22%, 44% and 10%, respectively, of accounts receivable. As of December 31, 2018, Customers A, B, C and D accounted for approximately 13%, 19%, 55% and 14%, respectively of accounts receivable.

Allowance for Doubtful Accounts - The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company maintains an allowance for doubtful accounts, which is based upon historical experience as well as specific customer collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories - Inventories are stated at the lower of cost (on a first-in, first-out) or net realizable value. The cost of inventory is based on the respective cost of materials. Andrea reviews its inventory reserve for obsolescence on a quarterly basis and establishes reserves on inventories based on the specific identification method as well as a general reserve. Andrea records changes in inventory reserves as part of cost of product revenues.

	September 30, 2019		December 31, 2018
Raw materials	$	21,621	$	12,855
Finished goods		265,633		200,201
	$	287,254	$	213,056

Long-Lived Assets - Andrea accounts for its long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360 “Property, Plant and Equipment” for purposes of determining and measuring impairment of its long-lived assets (primarily intangible assets) other than goodwill. Andrea’s policy is to periodically review the value assigned to its long-lived assets to determine if they have been permanently impaired by adverse conditions which may affect Andrea whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If Andrea identifies a permanent impairment such that the carrying amount of Andrea’s long lived assets is not recoverable using the sum of an undiscounted cash flow projection (gross margin dollars from product revenues), the impaired asset is adjusted to its estimated fair value, based on an estimate of future discounted cash flows which becomes the new cost basis for the impaired asset. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates. At September 30, 2019 and December 31, 2018, Andrea concluded that intangibles and long-lived assets were not impaired.

Trade accounts payable and other current liabilities - Trade accounts payable and other current liabilities consisted of the following:

	September 30, 2019		December 31, 2018
Trade accounts payable	$	56,675	$	86,706
Payroll and related expenses		35,831		49,937
Operating lease liabilities		56,268		-
Patent monetization expenses		121,543		124,422
Deferred revenue		25,341		25,341
Professional and other service fees		126,399		94,279
Total trade accounts payable and other current liabilities	$	422,057	$	380,685

Revenue Recognition - The Company recognizes revenue using the following five-step approach:

	1.		Identify the contract with a customer.
	2.		Identify the performance obligations in the contract.
	3.		Determine the transaction price of the contract.
	4.		Allocate the transaction price to the performance obligations in the contract.
	5.		Recognize revenue when the performance obligations are met or delivered.

This approach includes the evaluation of sales terms, performance obligations, variable consideration, and costs to obtain and fulfill contracts.

The Company disaggregates its revenues into three contract types: (1) product revenues, (2) service related revenues and (3) license revenues and then further disaggregates its revenues by operating segment. Generally, product revenue is comprised of microphones and microphone connectivity product revenues. Product revenue is recognized when the Company satisfies its performance obligation by transferring promised goods to a customer. Product revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods to the customer. Contracts with customers are comprised of customer purchase orders, invoices and written contracts. Customer product orders are fulfilled at a point in time and not over a period of time. The Company does not have arrangements for returns from customers and does not have any future obligations directly or indirectly related to product resale by customers. The Company has no sales incentive programs. Service related and licensing revenues are recognized based on the terms and conditions of individual contracts using the five step approach listed above, which identifies performance obligations and transaction price. Typically, Andrea receives licensing reports from its licensees approximately one quarter in arrears due to the fact that its agreements require customers to report revenues between 30 to 60 days after the end of the quarter. Under this accounting policy, the licensing revenues reported are not based upon estimates. In addition, service related revenues, which are short-term in nature, are generally performed on a time-and-material basis under separate service arrangements and the corresponding revenue is generally recognized as the services are performed. At September 30, 2019, the Company had $25,341 of deferred revenue, which are advance payments from customers, are expected to be recognized as revenue within one year and are included in trade accounts payable and other current liabilities in the Company’s consolidated balance sheets. See Note 8 for an additional description of the Company’s reportable business segments and the revenue reported in each segment.

Income Taxes - Andrea accounts for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes, establishes for all entities a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain expanded disclosures. The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax bases of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2019 and December 31, 2018, the Company had recorded a full valuation allowance. Andrea expects it will reduce its valuation allowance in future periods to the extent that it can demonstrate its ability to utilize the assets. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. Income tax expense consists of taxes payable for the period, withholding of income tax as mandated by the foreign jurisdiction in which the revenues are earned and the change during the period in deferred tax assets and liabilities. The Company has identified its federal tax return and its state tax return in New York as “major” tax jurisdictions. Based on the Company’s evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the Company’s unaudited condensed consolidated interim financial statements. The Company’s evaluation was performed for the tax years ended 2016 through 2019. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.

Stock-Based Compensation - Andrea accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.” ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company expenses stock-based compensation by using the straight-line method.

Use of Estimates - The preparation of unaudited condensed consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting period.

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates, among other things, are used in accounting for allowances for bad debts, inventory valuation and obsolescence, product warranty, depreciation, deferred income taxes, expected realizable values for assets (primarily intangible assets), contingencies, and revenue recognition as well as the recording and presentation of the Company’s convertible preferred stock. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the unaudited condensed consolidated interim financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.

Leases - On January 1, 2019 the Company adopted ASU No. 2016-02, “Leases (Topic 842).” In March 2019, the Company also adopted ASU No. 2019-01, “Lease (Topic 842) Codification Improvements.” All significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use (“ROU”) assets and lease liabilities are recognized at commencement. An ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short term leases) and the Company recognizes lease expense for these leases as incurred over the lease term.

ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We primarily use our incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. See Note 6 for additional lease related disclosure.

Subsequent Events - The Company evaluates events that occurred after the balance sheet date but before the unaudited condensed consolidated interim financial statements are issued. Based upon that evaluation, the Company, except as described below, did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated interim financial statements.

In August 2019, the Board adopted the Andrea Electronics Corporation 2019 Equity Compensation Plan (“2019 Plan”), which was subsequently approved by the shareholders on October 24, 2019. The 2019 Plan authorizes the grant of certain 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. Awards can be granted to key employees, officers, directors and consultants. No awards have been granted under the 2019 Plan.

Note 3. Revenue Sharing, Note Purchase Agreement and Long-Term Debt

On December 24, 2014, the Company entered into an Amended and Restated Revenue Sharing and Note Purchase Agreement (the “Revenue Sharing Agreement”) with AND34 Funding LLC (“AND34”) (acting as the “Revenue Participants,” the “Note Purchasers,” and the “Collateral Agent”), which was retroactively effective as of February 14, 2014. Under the Revenue Sharing Agreement, the Company granted AND34 a perpetual predetermined share in the rights of the Company’s specified future revenues from patents (“Monetization Revenues”) owned by the Company (the “Patents”) in exchange for $3,500,000, which was fully repaid as of September 30, 2016 and issued certain notes containing the features described in the Revenue Sharing Agreement (the “Notes”), which were repaid in 2016. In 2016, 2017 and 2019, the parties executed and amended a rider to the Revenue Sharing Agreement (the “Rider”) pursuant to which Andrea agreed to issue and sell to AND34 additional Notes up to an aggregate amount of $11,500,000 (the “Additional Notes”), or such greater amount as AND34 may agree to in its sole discretion. The most recent rider executed in 2019 increased the aggregate principal amount from $7,500,000 to $11,500,000. The Additional Notes have a maturity date of August 31, 2022. The proceeds of the Additional Notes will be used to pay certain expenses related to the Revenue Sharing Agreement and expenses of the Company incurred in pursuing patent monetization. As of September 30, 2019, there was $1,684,422 of Additional Notes principal and $124,118 PIK Interest outstanding.

Any Monetization Revenues will first be applied 100% to the payment of accrued and unpaid interest on, and then to repay outstanding principal of, the Additional Notes. After the Additional Notes are paid in full, the Monetization Revenues will be allocated amongst the Revenue Participants and the Company in accordance with certain predetermined percentages (based on aggregate amounts received by the Revenue Participants) ranging from 50% to the Revenue Participants to ultimately 20%. Monetization Revenues is defined in the Revenue Sharing Agreement to include, but is not limited to, amounts that the Company receives from third parties with respect to the Patents, which may include new license revenues, certain product revenue, payments and judgments. Monetization Revenues and associated expenses are included in the Company’s Patent Monetization Segment (See Note 8).

The Revenue Sharing Agreement contains many stipulations between the parties regarding the handling of various matters related to the monetization of the Patents including tax treatment. Following an Event of Default under the Revenue Sharing Agreement, the Note Purchasers and Revenue Participants may proceed to protect and enforce their rights by suit or other appropriate proceeding, either for specific performance or the exercise of any power granted under the Revenue Sharing Agreement or ancillary documents including the Additional Notes.

Long-term debt

	September 30, 2019		December 31, 2018
Note Payable	$	1,684,422	$	1,484,422
PIK interest		124,118		66,862
Total long-term debt		1,808,540		1,551,284
Less: current maturities of long-term debt		-		-
Long-term debt, net of current maturities	$	1,808,540	$	1,551,284

The unpaid principal amount of the Additional Notes (including any PIK Interest) has an interest rate equal to LIBOR (as defined in the Revenue Sharing Agreement) plus 2% per annum, (totaling 4.10% and 4.40% at September 30, 2019 and December 31, 2018, respectively); provided that upon and during the continuance of an Event of Default (as set forth in the Revenue Sharing Agreement), the interest rate will increase an additional 2% per annum. Interest may be paid in cash at the option of the Company and otherwise shall be paid by increasing the principal amount of the Additional Notes by the amount of such interest (“PIK Interest”). The Company may prepay the Additional Notes from time to time in whole or in part, without penalty or premium. During the nine months ended September 30, 2019 and year ended December 31, 2018, $200,000 and $300,000, respectively, of Additional Notes were issued to AND34. As of September 30, 2019, the remaining amount of Additional Notes that could be issued was $3,900,000. Amounts reported as current maturities of long-term debt reflect amounts expected to be paid in the next twelve months.

Note 4. Series C Redeemable Convertible Preferred Stock

The Series C Convertible Preferred Stock had a stated value of $10,000 plus a $1,671 increase in the stated value, which sum is convertible into Andrea’s common stock at a conversion price of $0.2551. The shares of Series C Convertible Preferred Stock are subject to antidilution provisions, which are triggered in the event of certain stock splits, recapitalizations, or other dilutive transactions. In addition, issuances of common stock at a price below the conversion price of $0.2551, or the issuance of warrants, options, rights, or convertible securities which have an exercise price or conversion price less than that conversion price, other than for certain previously outstanding securities and certain “excluded securities” (as defined in the certificate of amendment), require the adjustment of the conversion price to that lower price at which shares of common stock have been issued or may be acquired. In the event that Andrea issues securities in the future which have a conversion price or exercise price which varies with the market price and the terms of such variable price are more favorable than the conversion price in the Series C Convertible Preferred Stock, the purchasers may elect to substitute the more favorable variable price when making conversions of the Series C Convertible Preferred Stock.

As of September 30, 2019, there were 11.469249 shares of Series C Convertible Preferred Stock outstanding, which were convertible into 524,736 shares of Andrea’s common stock and had remaining accrued dividends of $19,168.

Note 5. Series D Redeemable Convertible Preferred Stock

The Series D Convertible Preferred Stock is convertible into Andrea’s common stock at a conversion price of $0.25 per share. The shares of Series D Convertible Preferred Stock are also subject to antidilution provisions, which are triggered in the event of certain stock splits, recapitalizations, or other dilutive transactions. In addition, issuances of common stock at a price below the conversion price then in effect (currently $0.25), or the issuance of warrants, options, rights, or convertible securities which have an exercise price or conversion price less than that conversion price, other than for certain previously outstanding securities and certain “excluded securities” (as defined in the certificate of amendment), require the adjustment of the conversion price to that lower price at which shares of common stock have been issued or may be acquired. In the event that Andrea issues securities in the future which have a conversion price or exercise price which varies with the market price and the terms of such variable price are more favorable than the conversion price in the Series D Convertible Preferred Stock, the purchasers may elect to substitute the more favorable variable price when making conversions of the Series D Convertible Preferred Stock. In addition, the Company is required to use its best efforts to secure the inclusion for quotation on the Over the Counter Bulletin Board for the common stock issuable under the Series D Convertible Preferred Stock and to arrange for at least two market makers to register with the Financial Industry Regulatory Authority. In the event that the holder of the Series D Convertible Preferred Stock and related warrants is unable to convert these securities into Andrea Common Stock, the Company shall pay to each such holder a Registration Delay Payment (as such term is defined in its certificate of amendment). This payment is to be paid in cash and is equal to the product of (i) the stated value of such shares of Series D Convertible Preferred Stock multiplied by (ii) the product of (1) .0005 multiplied by (2) the number of days that sales cannot be made pursuant to the Registration Statement (excluding any days that may be considered grace periods as defined by the Registration Rights Agreement).

As of September 30, 2019, there were 907,144 shares of Series D Convertible Preferred Stock outstanding which were convertible into 3,628,576 shares of Andrea’s common stock.

Note 6. Commitments And Contingencies

Leases

Effective January 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective method of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed us to carry forward the historical lease classification. Adoption of this standard resulted in the recording of net operating lease right-of-use (“ROU”) assets and corresponding operating lease liabilities of $77,547, with no material cumulative effect adjustment to equity as of the date of adoption. The financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Our operating lease portfolio includes corporate offices, information technology (IT) equipment, and automobiles with remaining lease terms of 1 year to 2 years. Operating lease ROU assets are presented within other assets. The current portion of operating lease liabilities are presented within trade accounts payable and other current liabilities, and the non-current portion of operating lease liabilities are presented separately on the accompanying condensed consolidated balance sheet.

Supplemental balance sheet information related to leases was as follows:

Operating Leases

	September 30, 2019
Other Assets	$	74,593

Trade accounts payable and other current liabilities	$	56,268
Lease liabilities payable non-current		21,026
Total operating lease liabilities	$	77,294

Weighted-average remaining lease term		19 months
Weighted-average discount rate		7.4	%

As of September 30, 2019, maturities of operating lease liabilities were as follows:

2019 (October 1 – December 31)	$	15,357
2020		48,958
2021		11,970
2022		3,990
Total		80,275
Less: interest		(2,981	)
Total Lease Payments	$	77,294

Employee Related Agreements

In August 2014, the Company entered into an employment agreement with Mr. Andrea, which was subsequently amended on February 19, 2018, August 9, 2018, March 22, 2019 and August 12, 2019. The effective date of the original employment agreement was August 1, 2014 and it currently expires on January 31, 2020, subject to renewal as approved by the Compensation Committee of the Board of Directors. Pursuant to his amended employment agreement, Mr. Andrea will receive an annual base salary of $216,000. The employment agreement provides for quarterly bonuses equal to 5% of the Company’s pre-bonus net after tax quarterly earnings for a total quarterly bonus amount not to exceed $12,500; and annual bonuses equal to 9% of the Company’s annual pre-bonus net after tax earnings in excess of $300,000 up to $3,000,000, and 3% of the Company’s annual pre-bonus adjusted net after tax earnings in excess of $3,000,000. Adjustments to net after tax earnings shall be made to remove the impact of change in recognition of accumulated deferred tax asset value. All bonuses shall be payable as soon as the Company’s cash flow permits. All bonus determinations or any additional bonus in excess of the above will be made in the sole discretion of the Compensation Committee. Under certain circumstances, Mr. Andrea is entitled to a change in control payment equal to twelve months of the Executive’s most recent base salary plus a pro-rated portion of the Executive's most recent annual and four quarterly bonuses paid immediately preceding the change of control, continuation of health and medical benefits for twelve months and immediate vesting of all stock options in the event of a change in control during the term of his agreement and subsequent termination of his employment within twelve months following the change of control. In the event of his termination without cause or resignation with the Company’s consent, Mr. Andrea is entitled to a severance payment equal to two months of his base salary, plus the two months pro-rated portion of his most recent annual and quarterly bonuses, payment of $12,500, the un-paid bonus for the quarter ended September 30, 2017 and a continuation of health insurance coverage for Mr. Andrea and his dependents for 6 months. At September 30, 2019, the future minimum cash commitments under this agreement aggregate $72,000.

On November 11, 2008, the Company entered into an amended and restated change in control agreement with Corisa L. Guiffre, Vice President, Chief Financial Officer and Assistant Corporate Secretary of the Company. The change in control agreement provides Ms. Guiffre with a severance benefit upon termination in connection with a change in control (as defined in the agreement). If Ms. Guiffre is terminated following a change in control, the Company will pay Ms. Guiffre a sum equal to three times Ms. Guiffre’s average annual compensation for the five preceding taxable years. All restrictions on any restricted stock will lapse immediately and incentive stock options and stock appreciation rights, if any, will become immediately exercisable in the event of a change in control of the Company. Additionally, life, medical, dental and disability coverage and payments will be continued for 36 full calendar months following the date of termination.

Legal Proceedings

In September 2016, the Company filed a complaint with the United States District Court for the Eastern District of New York, alleging patent infringement against Apple Inc. (“Apple”) and requesting monetary and injunctive relief (the “New York Litigation”). The New York Litigation was stayed pending final disposition of a parallel case that the Company filed against Apple with the United States International Trade Commission (“ITC”). The ITC’s final decision finding that Apple did not violate the ITC’s statute was issued on March 22, 2018. Apple informed the New York judge of this final decision on May 30, 2018. The ITC’s final decision does not affect Andrea’s right to continue prosecuting the New York Litigation.

In January 2017, Apple filed four (4) petitions for inter partes review (“IPR”) of the Company’s patents asserted in the New York Litigation with the United States Patent and Trademark Office (PTO). The Company filed its Patent Owner’s Preliminary Response in two of these IPR proceedings on May 1, 2017. The PTO instituted the four IPR proceedings requested by Apple on July 24, 2017. The Company filed its Patent Owner’s Response in two of these IPR proceedings on November 7, 2017. On March 19, 2018, both the Company and Apple requested oral argument in these two IPR proceedings, which occurred on April 25, 2018. On July 12, 2018, the PTO issued its final written decisions in those two IPR proceedings, ruling that claims 6-9 of the Company’s U.S. Patent No. 6,363,345 remain valid and enforceable after the PTO’s review. On September 13, 2018, Apple filed its Notice of Appeal of that ruling to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”). Apple filed its Appeal Brief with the Federal Circuit on January 31, 2019. The Company filed its Response to Apple’s Appeal Brief on March 12, 2019. The Federal Circuit held an oral argument on October 1, 2019, during which both the Company and Apple presented arguments through their attorneys. The Federal Circuit has not yet issued a decision on Apple’s appeal.

On July 20, 2018, after the PTO’s final written decisions, the Company informed the New York judge of the status of the PTO proceedings, and its intention to move forward with the New York Litigation regarding claims 6-9 of the Company’s U.S. Patent No. 6,363,345. Apple asked the New York judge to maintain the previously entered stay of the New York Litigation pending its appeal of the PTO holdings to the Federal Circuit. At the New York judge’s request, the parties fully briefed their competing arguments regarding whether to lift or maintain the stay and submitted those briefs to the New York judge on December 13, 2018. On August 6, 2019, the New York judge determined to maintain the stay pending the final resolution of the IPR proceedings by the Federal Circuit.

Andrea intends to vigorously prosecute the New York Litigation and Apple’s appeal of the IPR results to the Federal Circuit.

Note 7. Stock Plans and Stock Based Compensation

In August 2019, the Board adopted the Andrea Electronics Corporation 2019 Equity Compensation Plan (“2019 Plan”), which was subsequently approved by the shareholders on October 24, 2019. The 2019 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. Awards can be granted to key employees, officers, directors and consultants. No awards have been granted under the 2019 Plan.

In October 2006, the Board adopted the Andrea Electronics Corporation 2006 Equity Compensation Plan (“2006 Plan”), which was subsequently approved by the shareholders. The 2006 Plan, as amended, authorized the granting of awards, the exercise of which would allow up to an aggregate of 18,000,000 shares of Andrea’s Common Stock to be acquired by the holders of those awards. Awards could be granted to key employees, officers, directors and consultants. As the 2006 Plan has expired, no further awards will be granted under the 2006 Plan.

The stock option awards granted under the 2006 Plan have been granted with an exercise price equal to the market price of the Company’s stock at the date of grant with vesting periods of up to four years and 10-year contractual terms. The fair values of each stock option grant are estimated on the date of grant using the Black-Scholes option-pricing model that uses the weighted-average assumptions noted in the following table. Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Option activity during the nine months ended September 30, 2019 is summarized as follows:

	Options Outstanding						Options Exercisable
	Options Outstanding	Weighted Average Exercise Price		Weighted Average Fair Value		Weighted Average Remaining Contractual Life	Options Exercisable	Weighted Average Exercise Price		Weighted Average Fair Value		Weighted Average Remaining Contractual Life
At January 1, 2019	10,008,001	$	0.08	$	0.08	4.81 years	8,847,351	$	0.08	$	0.08	4.41 years
Expired	1,907,501	$	0.11	$	0.11
At September 30, 2019	8,100,500	$	0.07	$	0.07	5.05 years	6,939,850	$	0.08	$	0.08	4.70 years

During the three and nine months ended September 30, 2019, no options vested nor were any options exercised or forfeited. Based on the September 30, 2019 fair market value of the Company’s common stock of $0.04 per share, there is no aggregate intrinsic value for the 8,100,500 options outstanding and 6,939,850 options exercisable.

Total compensation expense recognized related to stock option awards was $4,836 and $12,779 for the three months ended September 30, 2019 and 2018, respectively. In the accompanying unaudited condensed consolidated statement of operations for the three months ended September 30, 2019, $4,269 of compensation expense is included in general, administrative and selling expenses and $567 of compensation expense is included in research and development expenses. In the accompanying unaudited condensed consolidated statement of operations for the three months ended September 30, 2018, $10,931 of compensation expense is included in general, administrative and selling expenses and $1,848 of compensation expense is included in research and development expenses.

Total compensation expense recognized related to stock option awards was $14,508 and $39,449 for the nine months ended September 30, 2019 and 2018, respectively. In the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019, $12,807 of compensation expense is included in general, administrative and selling expenses and $1,701 of compensation expense is included in research and development expenses. In the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018, $33,905 of compensation expense is included in general, administrative and selling expenses and $5,544 of compensation expense is included in research and development expenses.

As of September 30, 2019, there was $3,202 of total unrecognized compensation costs related to unvested share-based compensation arrangements granted under the 2006 Plan which is expected to be recognized in 2019.

Note 8. Segment Information

Andrea follows the provisions of ASC 280 “Segment Reporting.” Reportable operating segments are determined based on Andrea’s management approach. The management approach, as defined by ASC 280, is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While Andrea’s results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in two segments: (i) Patent Monetization and (ii) Andrea DSP Microphone and Audio Software Products. Patent Monetization includes Monetization Revenues (as defined in our Amended and Restated Revenue Sharing Agreement). Andrea DSP Microphone and Audio Software Products primarily include products based on the use of some, or all, of the following technologies: Andrea Digital Super Directional Array microphone technology (“DSDA”), Andrea Direction Finding and Tracking Array microphone technology (“DFTA”), Andrea PureAudio noise filtering technology, and Andrea EchoStop, an advanced acoustic echo cancellation technology.

The following represents selected unaudited condensed consolidated interim financial information for Andrea’s segments for the three and nine month periods ended September 30, 2019 and 2018 and the fiscal year ended December 31, 2018.

2019 Three Month Segment Data	Patent Monetization			Andrea DSP Microphone and Audio Software Products			2019 Three Month Segment Data
Net product revenues	$	-		$	374,024		$	374,024
Service related revenues		-			3,711			3,711
License revenues		202			4,732			4,934
Operating loss		(97,488	)		(68,012	)		(165,500	)
Depreciation and amortization		5,657			12,887			18,544
Assets		323,227			1,073,972			1,397,199
Total long lived assets		126,138			140,931			267,069
Payments for patents and trademarks		2,425			2,425			4,850

2018 Three Month Segment Data	Patent Monetization			Andrea DSP Microphone and Audio Software Products			2018 Three Month Segment Data
Net product revenues	$	-		$	438,188		$	438,188
Service related revenues		-			9,600			9,600
License revenues		345			4,757			5,102
Operating loss		(110,444	)		(77,270	)		(187,714	)
Depreciation and amortization		8,500			14,582			23,082
Purchases of property and equipment		-			13,938			13,938
Payments for patents and trademarks		9,812			9,812			19,624

December 31, 2018 Year End Segment Data	Patent Monetization			Andrea DSP Microphone and Audio Software Products			2018 Year End Segment Data
Assets	$	287,206		$	1,231,802		$	1,519,008
Total long lived assets		131,410			186,497			317,907

2019 Nine Month Segment Data	Patent Monetization			Andrea DSP Microphone and Audio Software Products			2019 Nine Month Segment Data
Net product revenues	$	-		$	1,349,153		$	1,349,153
Service related revenues		-			17,271			17,271
License revenues		739			18,479			19,218
Operating loss		(314,939	)		(87,012	)		(401,951	)
Depreciation and amortization		19,476			41,170			60,646
Payments for patents and trademarks		4,904			4,904			9,808

2018 Nine Month Segment Data	Patent Monetization			Andrea DSP Microphone and Audio Software Products			2018 Nine Month Segment Data
Net product revenues	$	-		$	921,402		$	921,402
Service related revenues		-			23,538			23,538
License revenues		984			24,620			25,604
Operating loss		(334,727	)		(418,842	)		(753,569	)
Depreciation and amortization		23,692			46,048			69,740
Purchases of property and equipment		-			13,938			13,938
Payments for patents and trademarks		22,687			22,687			45,374

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

Geographic Data	September 30, 2019		September 30, 2018
Total revenues:
United States	$	237,031	$	359,798
Foreign⁽¹⁾		145,638		93,092
	$	382,669	$	452,890

____________________

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

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

Geographic Data	September 30, 2019		September 30, 2018
Total revenues:
United States	$	1,038,082	$	711,772
Foreign⁽¹⁾		347,560		258,772
	$	1,385,642	$	970,544

____________________

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

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

Geographic Data	September 30, 2019		December 31, 2018
Accounts receivable:
United States	$	222,152	$	293,978
Foreign		139,987		124,703
	$	362,139	$	418,681

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We design, develop and manufacture state-of-the-art digital microphone products and noise reduction software that facilitate natural language, human/machine interfaces. Our technologies eliminate unwanted background noise to enable the optimum performance of various speech-based and audio applications. We are incorporated under the laws of the State of New York and have been engaged in the electronic communications industry since 1934. Our patented and patent-pending digital noise canceling technologies enable a speaker to be at a distance from the microphone (we refer to this capability as “far-field” microphone use), and free the speaker from having to use a close talking microphone. We believe that the strength of our intellectual property rights are important to the success of our business. We utilize patent and trade secret protection, confidentiality agreements with customers and partners, disclosure and invention assignment agreements with employees and consultants and other contractual provisions to protect our intellectual property and other proprietary information. As part of our Patent Monetization efforts, we license specific, custom designs to our customers, charging royalties at a fixed amount per product or a percentage of sales, and we intend to vigorously defend and monetize our intellectual property through licensing arrangements and, where necessary, enforcement actions against those entities using our patented solutions in their products.

Our Critical Accounting Policies

Our unaudited condensed consolidated interim financial statements and the notes to our unaudited condensed consolidated interim financial statements contain information that is pertinent to management's discussion and analysis. The preparation of unaudited condensed consolidated interim financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our significant accounting policies are described in Note 2 of the notes to the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. A discussion of our critical accounting policies and estimates are also included in Note 2. Summary of Significant Accounting Policies in notes to consolidated interim financial statements included elsewhere in this report. Management has discussed the development and selection of these policies with the Audit Committee of the Company’s Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company’s disclosures of these policies. There have been no material changes to the critical accounting policies or estimates reported in the Management’s Discussion and Analysis section of the Annual Report on Form 10-K for the year ended December 31, 2018 except the new lease accounting standard adopted as of January 1, 2019 as described in Note 2 of the notes to unaudited condensed consolidated interim financial statements included in this Quarterly Report.

Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in economic, competitive, governmental, technological and other factors that may affect our business and prospects. Additional factors are discussed below under “Risk Factors” and in Part I, “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the Company’s quarterly reports on Form 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Results Of Operations

Three and Nine Months ended September 30, 2019 compared to the Three and Nine Months ended September 30, 2018

Total Revenues
	For the Three Months Ended September 30,				% Change		For the Nine Months Ended September 30,				% Change
	2019		2018		% Change		2019		2018		% Change
Patent Monetization revenues
License revenues	$	202	$	345	(41	)	$	739	$	984	(25	)
Total Patent Monetization revenues		202		345	(41	)		739		984	(25	)

Andrea DSP Microphone and Audio Software Products revenues
Revenue from automotive array microphone products		30,858		186,385	(83	)		541,556		293,713	84		(a)
Revenue from OEM array microphone products		252,584		186,343	36			610,456		500,094	22		(b)
Revenue from customized digital products		42,864		30,140	42			118,762		63,431	87		(c)
All other Andrea DSP Microphone and Audio Software Products revenues		47,718		35,320	35			78,379		64,164	22		(d)
License and service related revenues		8,443		14,357	(41	)		35,750		48,158	(26	)	(e)
Total Andrea DSP Microphone and Audio Software Products revenues		382,467		452,545	(16	)		1,384,903		969,560	43

Total revenues	$	382,669	$	452,890	(16	)	$	1,385,642	$	970,544	43

____________________

(a)	The approximate $156,000 decrease in revenues from automotive array microphone products for the three months ended September 30, 2019, as compared to the same period in 2018, is the result of timing of sales to integrators of public safety and mass transit vehicle solutions. The approximate $248,000 increase in revenues of automotive array microphone products for the nine months ended September 30, 2019, as compared to the same period in 2018, is the result of increased demand from integrators of public safety and mass transit vehicle solutions.

(b)	The approximate $66,000 and $110,000 increase in revenues from OEM array microphone products for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, is primarily the result of timing of sales to integrators of commercial product audio solutions.

(c)	The increases of approximately $13,000 and $55,000 in customized digital products revenue for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, is related to the timing of purchases from an OEM customer for a customized digital product.

(d)	The approximate $12,000 and $14,000 increase in revenues of all other Andrea DSP Microphone and Audio Software Products for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, is primarily the result of revenues from new customers for new audio solutions.

(e)	The approximate $6,000 decrease in license and service related revenues for the three months ended September 30, 2019 as compared to same period in 2018, is a result of decreases in service related revenue. The approximate $12,000 decrease in license and service related revenues is a result of decreases of royalties and service related revenues for the nine months ended September 30, 2019 as compared to the same period in 2018.

Cost of Product Revenues

Cost of product revenues as a percentage of total revenues for the three months ended September 30, 2019 and 2018 was 26% and 33%, respectively. Cost of product revenues as a percentage of total revenues for the nine months ended September 30, 2019 and 2018 was 28% and 27%, respectively. There was no cost of product revenues associated with the Patent Monetization revenues of $202 and $739 for the three and nine months ended September 30, 2019 nor cost of product revenues associated with the Patent Monetization revenues of $345 and $984, for the three and nine months ended September 30, 2018. The cost of product revenues as a percentage of total revenues for the three months ended September 30, 2019 for Andrea DSP Microphone and Audio Software Products was 28% compared to 27% for the three months ended September 30, 2018. The cost of product revenues as a percentage of total revenues for the nine months ended September 30, 2019 for Andrea DSP Microphone and Audio Software Products was 26% compared to 33% for the nine months ended September 30, 2018. These changes are primarily the result of the product mix described in “Total Revenues” above.

Patent Monetization Expenses

Patent monetization expenses for the three months ended September 30, 2019 decreased 12% to $41,897 from $47,670 for the three months ended September 30, 2018. Patent monetization expenses for the nine months ended September 30, 2019 increased 8% to $155,170 from $143,549 for the nine months ended September 30, 2018. These expenses are a result of our continuing efforts to pursue patent monetization including the filing of the complaints disclosed under Part II, Item 1 Legal Proceedings. The changes in Patent Monetization expenses for the three and nine months ended September 30, 2019 are mainly attributable to the timing of legal services incurred to pursue patent monetization.

Research and Development Expenses

Research and development expenses for the three months ended September 30, 2019 decreased 8% to $139,137 from $151,400 for the three months ended September 30, 2018. Research and development expenses for the nine months ended September 30, 2019 decreased 5% to $425,497 from $448,068 for the nine months ended September 30, 2018. The expenses primarily relate to costs associated with the development of new products. For the three months ended September 30, 2019, the decrease in research and development expenses reflects a 33% decrease in our Patent Monetization efforts to $5,657, or 4% of total research and development expenses, and a 7% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $133,480, or 96% of total research and development expenses. For the nine months ended September 30, 2019, the decrease in research and development expenses reflects an 18% decrease in our Patent Monetization efforts to $19,476, or 5% of total research and development expenses, and a 4% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $406,021, or 95% of total research and development expenses. The changes in our Patent Monetization efforts represent intangible asset amortization expense while the changes in our Andrea DSP Microphone and Audio Software Technology efforts reflect expenses related to our research efforts primarily focused on the pursuit of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces, incorporating Andrea’s digital super directional array microphone technology, and certain other related technologies such as noise suppression and stereo acoustic echo cancellation. We believe that continued research and development spending should benefit Andrea in the future.

General, Administrative and Selling Expenses

General, administrative and selling expenses decreased approximately 9% to $266,326 for the three months ended September 30, 2019 from $291,878 for the three months ended September 30, 2018. For the three months ended September 30, 2019, general, administrative and selling expenses related to our Patent Monetization efforts were $50,136, or 19% of the total general, administrative and selling expenses, and general, administrative and selling expenses related to our Andrea DSP Microphone and Audio Software Technology were $216,190, or 81% of total general, administrative and selling expenses. General, administrative and selling expenses decreased approximately 6% to $814,262 for the nine months ended September 30, 2019 from $866,673 for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, general, administrative and selling expenses related to our Patent Monetization efforts were $141,032, or 17% of the total general, administrative and selling expenses, and general, administrative and selling expenses related to our Andrea DSP Microphone and Audio Software Technology were $673,230, or 83% of total general, administrative and selling expenses. These small decreases relate to changes in regular operating expenses.

Interest expense, net

Interest expense, net for the three months ended September 30, 2019 was $18,397 compared to $13,158 for the three months ended September 30, 2018. Interest expense, net for the nine months ended September 30, 2019 was $52,347 compared to $38,137 for the nine months ended September 30, 2018. The change in this line item was attributable to an increase in interest expense because of a higher amount of debt outstanding combined with a decrease of interest income related to lower cash balances.

Provision for Income Taxes

The income tax provision for the three months ended September 30, 2019 was $351 compared to no tax provision for the three months ended September 30, 2018. The income tax provision for the nine months ended September 30, 2019 was $1,673 compared to $1,863 for the nine months ended September 30, 2018. The provision for the three and nine months ended September 30, 2019 and 2018 is a result of certain licensing revenues that are subject to withholding of income tax as mandated by the foreign jurisdiction in which the revenues are earned.

Net loss

Net loss for the three months ended September 30, 2019 was $184,248 compared to a net loss of $200,872 for the three months ended September 30, 2018. Net loss for the nine months ended September 30, 2019 was $455,971 compared to a net loss of $793,569 for the nine months ended September 30, 2018. The net loss for the three and nine months ended September 30, 2019 and 2018, respectively, principally reflects the factors described above.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Liquidity And Capital Resources

At September 30, 2019, we had cash of $362,549 compared with $486,521 at December 31, 2018. The decrease in our cash balance at September 30, 2019 was primarily a result of cash used in operating activities.

Our working capital balance at September 30, 2019 was $609,062 compared to working capital of $795,998 at December 31, 2018. The decrease in working capital reflects a decrease in total current assets of $145,564 and an increase in total current liabilities of $41,372. The decrease in total current assets of $145,564 reflects a decrease in cash of $123,972, a decrease in accounts receivable of $56,542, a decrease in prepaid expenses and other current assets of $39,248 offset in part by an increase in inventories of $74,198. The increase in total current liabilities of $41,372 reflects an increase in trade accounts payable and other current liabilities.

The decrease in cash of $123,972 reflects $314,164 of net cash used in operating activities, $9,808 of net cash used in investing activities and $200,000 of net cash provided by financing activities.

The cash used in operating activities of $314,164, excluding non-cash charges for the nine months ended September 30, 2019, was attributable to a $54,869 decrease in accounts receivable, a $73,655 increase in inventories, a $39,248 decrease in prepaid expenses and other current assets and a $45,939 increase in trade accounts payable and other current liabilities and lease liabilities payable. The changes in accounts receivable, inventories, prepaid expenses and other current assets and trade accounts payable and other current liabilities and lease liabilities payable primarily reflect differences in the timing related to both the payments for and the acquisition of inventory as well as for other services in connection with ongoing efforts related to Andrea’s various product lines including continuing efforts to pursue patent monetization.

The cash used in investing activities of $9,808 reflects an increase in patents and trademarks. The increase in patents and trademarks reflects capital expenditures associated with our intellectual property.

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

We plan to improve our cash flows by aggressively pursuing monetization of our patents related to our Andrea DSP Microphone Audio Software, increasing the sales of our Andrea DSP Microphone Audio Software Products through the introduction of new products as well as the increased efforts we are putting into our sales and marketing efforts. As of November 8, 2019, Andrea had approximately $400,000 of cash deposits. For discussion regarding management’s evaluation of our ability to meet our obligations as they come due in coming months, see the section titled “Liquidity” in Note 1, Basis of Presentation, of the notes to unaudited condensed consolidated interim financial statements. We cannot provide assurances that demand will continue for any of our products, including future products related to our Andrea DSP Microphone and Audio Software technologies, or, that if such demand does exist, that we will be able to obtain the necessary working capital to increase production and provide marketing resources to meet such demand on favorable terms, or at all.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Andrea’s management, including its principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Andrea’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that it files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to Andrea’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that all control issues and instances of fraud, if any, within a company have been detected. Andrea’s disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives.

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting during the period covered by this Quarterly Report.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Andrea intends to vigorously prosecute the New York Litigation and Apple’s appeal of the IPR results to the Federal Circuit.

ITEM 1A. RISK FACTORS

Risk Factors

Our operating results are subject to significant fluctuation, period-to-period comparisons of our operating results may not necessarily be meaningful and you should not rely on them as indications of our future performance.

Our results of operations have historically been and are subject to continued substantial annual and quarterly fluctuations. The causes of these fluctuations include, among other things:

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

–		the cost of development of our products;

–		the mix of products we sell;

–		the mix of distribution channels we use;

–		the timing of our new product releases and those of our competitors;

–		fluctuations in the computer and communications hardware and software marketplace; and

–		general economic conditions.

We cannot assure that the level of revenues and gross profit, if any, that we achieve in any particular fiscal period will not be significantly lower than in other fiscal periods. Our total revenues for the three months ended September 30, 2019 were $382,669 compared to $452,890 for the three months ended September 30, 2018. Our total revenues for the nine months ended September 30, 2019 were $1,385,642 compared to $970,544 for the nine months ended September 30, 2018. Net loss for the three months ended September 30, 2019 was $184,248, or $0.00 loss per share on a basic and diluted basis, compared to a net loss of $200,872, or $0.00 loss per share on a basic and diluted basis for the three months ended September 30, 2018. Net loss for the nine months ended September 30, 2019 was $455,971, or $0.01 loss per share on a basic and diluted basis, compared to a net loss of $793,569, or $0.01 loss per share on a basic and diluted basis for the nine months ended September 30, 2018. We continue to explore opportunities to grow sales in other business areas and vigorously defend and monetize our intellectual property. However, we cannot predict whether such opportunities and defense of our intellectual property will be successful.

Shares Eligible For Future Sale May Have An Adverse Effect On Market Price and Andrea Shareholders May Experience Substantial Dilution.

Sales of a substantial number of shares of our common stock in the public market could have the effect of depressing the prevailing market price of our common stock. Of the 200,000,000 shares of common stock presently authorized, 68,104,957 were outstanding as of November 8, 2019. The number of shares outstanding does not include an aggregate of 22,253,812 shares of common stock that are issuable. This number of issuable common shares is equal to approximately 33% of the 68,104,957 outstanding shares. These issuable common shares are comprised of: (a) 8,100,500 shares of our common stock reserved for issuance upon exercise of outstanding awards granted under our 2006 Stock Plan; (b) 10,000,000 shares reserved for future grants under our 2019 Plan; (c) 524,736 shares of common stock that are issuable upon conversion of the Series C Convertible Preferred Stock; and (d) 3,628,576 shares of common stock issuable upon conversion of the Series D Convertible Preferred Stock.

In addition to the risk factors set forth above and the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and quarterly reports on Form 10-Q, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K and quarterly reports on Form 10-Q are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

a)	Exhibits
	Exhibit 31.1 –	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	Exhibit 31.2 –	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
	Exhibit 32.0 –	Section 1350 Certifications

Exhibit 101.0 –

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

SIGNATURES

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

	ANDREA ELECTRONICS CORPORATION
	By:	/s/ DOUGLAS J. ANDREA
		Name: Douglas J. Andrea
		Title: Chairman of the Board, President, Chief
		Executive Officer and Corporate Secretary

Date: November 12, 2019

/s/ DOUGLAS J. ANDREA	Chairman of the Board, President, Chief	November 12, 2019
Douglas J. Andrea	Executive Officer and Corporate Secretary

/s/ CORISA L. GUIFFRE	Vice President, Chief Financial Officer and	November 12, 2019
Corisa L. Guiffre	Assistant Corporate Secretary