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[November 14, 2012]
AMBIENT CORP /NY - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our financial statements and the notes thereto. Some of our discussion is forward-looking and involves risks and uncertainties. For information regarding risk factors that could have a material adverse effect on our business, refer to the risk factors section of our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2011 that was filed on September 24, 2012.
OVERVIEW We are a leading provider of a smart grid communications platform that enables utilities to effectively deploy, integrate and communicate with multiple smart grid applications within the electric power grid. Our smart grid communications platform significantly improves the ability of utilities to use advanced technologies to upgrade their electric power grids.
The term "smart grid" refers to the use of advanced technologies to upgrade the electric power grid, or the grid, effectively making the grid more intelligent and efficient. The grid was largely designed and built decades ago to reliably distribute electricity from generators to customers in a manner resulting in sizable capital investments and operating costs. A number of factors are increasingly straining the grid, including rapidly growing electricity demand, two-way power flow, the implementation of renewable and distributed energy sources and advanced pricing plans. As such, the aging grid is prone to reliability, security, and power quality issues, costing utilities and consumers billions of dollars each year. Technology is now revolutionizing the grid and transforming it into an efficient, communicating energy service platform. We believe that the smart grid will address the current shortcomings of the grid and deliver significant benefits to utilities and consumers of energy, including reduced costs, increased power reliability and quality, accommodation of renewable energy technologies, consumer empowerment over energy consumption and a platform for continued integration of new technologies.
The Ambient Smart Grid® communications platform, which includes hardware, software and firmware, enables utilities to effectively manage smart grid applications. Our communications platform provides utilities with a secure, two-way, flexible and open Internet protocol, or IP, architecture that efficiently networks smart grid applications and different technologies within each application and supports multiple communications technologies currently used by utilities, such as Wi-Fi, radio frequency, cellular technologies, power line communications, serial and Ethernet. Today, our communications platform enables the simultaneous integration and parallel communication of multiple smart grid applications provided by a variety of vendors, including smart metering, distribution automation, distribution management, and demand response.
We believe that the Ambient Smart Grid® communications platform delivers significant benefits to utilities, including support of a single network; an open, scalable and interoperable platform; preservation of utility investments; third-party application hosting; remote and distributed intelligence; secure communications; and reduced overall implementation and operating costs.
The Ambient Smart Grid® products and services include communications nodes; a network management system, AmbientNMS®; integrated applications; and maintenance and consulting services. The communications nodes, our principal product, are physical boxes that contain the hardware and software needed for communications and data collection in support of smart grid assets. We have configured our communications nodes to act as individual data processors and collectors that receive signals from other networked devices, enabling smart grid applications.
To date, Duke Energy, our marquee customer, has deployed approximately 113,000 of our communications nodes that receive data from smart electric and gas meters, using a variety of communications technologies, and process and transmit these data to the utility back office over a cellular carrier network for further processing. Furthermore, our communications nodes also accommodate integrated applications that include our own developed technology and third-party technology, thereby substantially increasing their functionality. By enabling such system interoperability, our communications platform both reduces implementation and ongoing communications costs and improves overall power management efficiencies. We believe that, to date, no other single solution or technology has provided the necessary flexibility in a cost-effective manner and proven at commercial scale, enabling a comprehensive digital communications platform while leveraging standards-based technologies.
We developed our communications platform to specifically fill this void.
18 -------------------------------------------------------------------------------- Our long-standing relationship with our marquee customer, which we believe has one of the most forward-looking smart grid initiatives in North America, has historically led to rapid growth in our business, and we entered into a long-term agreement in September 2009 with our marquee customer to supply the utility with our Ambient Smart Grid® communications platform and license our AmbientNMS® through 2015. We increased revenue from $2.2 million in 2009 to $20.2 million in 2010 to $62.1 million in 2011. As of September 30, 2012, we had backlog of approximately $15 million. We believe there continue to be opportunities for additional sales of our products and services to Duke Energy.
We intend to leverage our success with our marquee customer to secure additional customers in the global utility marketplace. We have recently hired senior-level personnel as well as substantially increased our investment in marketing and sales in order to intensify our efforts in securing new customers, and we expect to continue to invest substantially in our marketing and sales efforts for the foreseeable future. As a result of our recently increased marketing and sales activities, we have engaged with several utilities, and we are in active discussions regarding potential target and pilot programs utilizing our technology to address specific challenges and issues of individual utilities and distribution companies.
Our business success in the immediate future will depend largely on our ability to execute on our agreement with Duke Energy and its continual expansion of its existing deployments, as well as our ability to successfully expand our customer base as a result of our investments in sales and marketing. We anticipate that we will continue to work with Duke Energy and continue to support its grid-modernization programs. Nevertheless, we recognize Duke Energy could alter its vision regarding the common communications infrastructure, determine that a competing company offers a more desirable product, or slow its deployments indefinitely, significantly affecting our prospects and outlook.
Additionally, we are unable at this time to assess the effects, if any, that the merger between Duke Energy and Progress Energy, which was finalized in July 2012, will have on the continuation and/or expansion of our deployment by the new combined company following the merger. No assurance can be provided that the post-merger entity will continue with or expand the current deployments.
On July 18, 2011, we implemented a reverse stock split of our issued and outstanding shares of common stock at a ratio of 1-for 100 shares (the "Reverse Split"). The Reverse Split became effective on July 18, 2011 and has been retroactively reflected in this Quarterly Report on Form 10-Q. On August 3, 2011, our common stock began to trade on the NASDAQ Capital Market under our new ticker symbol "AMBT." Prior to August 3, 2011, our common stock was traded on the OTC under the symbol "ABTG".
RESULTS OF OPERATIONS COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 Total Revenue. Total revenue for the three months ended September 30, 2012 was $10.0 million, representing a decrease of 41% from $16.9 million for the same period in 2011. Total revenue for the nine months ended September 30, 2012 was $33.3 million, representing a decrease of 26% from $44.8 million for the same period in 2011. The decrease in total revenue during the three months and nine months ended September 30, 2012 as compared to the same periods in 2011 is primarily attributable to our largest customer's decision to modify their timelines for installation in the field.
Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2012 was $5.8 million, representing a decrease of 38% from $9.4 million for the corresponding period in 2011. Total cost of goods sold for the nine months ended September 30, 2012 was $18.9 million, representing a decrease of 25% from $25.4 million for the corresponding period in 2011. The decrease in cost of goods sold during the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was due primarily to the decrease in sales volume.
Gross Profit. Gross profit for the three months ended September 30, 2012 was $4.2 million, representing a decrease of $3.3 million from $7.5 million for the corresponding period in 2011. Gross profit for the nine months ended September 30, 2012 was $14.3 million, representing a decrease of $5.1 million from $19.4 million for the corresponding period in 2011. Our overall gross margin for each of the three and nine months ended September 30, 2012 and 2011 was between 42% and 44%. Gross margins were stable based upon the commercial scale achieved over the past two years.
19 -------------------------------------------------------------------------------- Research and Development Expenses. Research and development expenses for the three months ended September 30, 2012 were $3.9 million, representing an increase of $975,000 from $3.0 million for the corresponding period in 2011.
Research and development expenses for the nine months ended September 30, 2012 were $10.9 million, representing an increase of $3.2 million from $7.7 million for the corresponding period in 2011. The increase in research and development during the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was due primarily to increased personnel, consultant and other expenses necessary for the continued development of the Company's communication nodes, enhancements to our AmbientNMS® software, and other product development efforts. Research and development expenses consisted of expenses incurred primarily in designing, prototyping and field testing our smart grid communications platform. We believe that our continued development efforts are critical to our strategic objectives of enhancing our technology while reducing costs, and therefore, we expect that our research and development expenses will increase over the next twelve months as we continue to focus our efforts on developing more robust solutions and providing additional value-added functionality for the Ambient Smart Grid® communications platform.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2012 were $2.9 million, representing an increase of $1.1 million from $1.8 million for the corresponding period in 2011. Selling, general and administrative expenses for the nine months ended September 30, 2012 were $7.1 million, representing an increase of $2.1 million from $5.0 million for the corresponding period in 2011. The increase in selling, general and administrative expenses during the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was due primarily to increased personnel costs and increased activity regarding our efforts to market the Ambient Smart Grid® communications platform as well as costs relating to the restatement of our financial statements.
Selling, general and administrative expenses consisted primarily of salaries and other related costs for personnel in executive, marketing and sales and other administrative functions. Other significant costs included professional fees for legal, accounting and other services. We expect that selling, general and administrative expenses will increase over the next twelve months as we hire additional personnel, increase activity associated with business development, and increase activity associated with marketing programs targeted at increasing our overall brand awareness and securing additional customers.
Write-off of Deferred Financing Costs. In August 2011, we filed a Form S-1 registration statement with the Securities and Exchange Commission for a proposed public offering of our common stock, for which we had incurred approximately $389,000 in expenses as of December 31, 2011. Such costs were capitalized and were to be charged to additional paid-in capital upon completion of our proposed public offering. In April 2012, we voluntarily filed an application with the Securities and Exchange Commission requesting the withdrawal of such registration statement. We requested withdrawal of the registration statement based on then current market conditions and management's ensuing determination to not proceed with the contemplated offering at that time. Accordingly, previously capitalized deferred financing costs of approximately $389,000 were written off in the three months ended March 31, 2012.
Interest Income, net and Other Income.Net interest income for the three months ended September 30, 2012 was approximately $3,000 compared to approximately $5,000 for the corresponding period in 2011. Net interest income for the nine months ended September 30, 2012 was approximately $7,000 compared to approximately $17,000 for the corresponding period in 2011. Other income for the three and nine months ended September 30, 2012 was approximately $15,000 and $179,000, respectively, primarily representing the partial recovery of loans made by us to an unrelated company during 2000 and 2001, which had been previously written off in 2001.
Mark-to-Market Adjustment of Warrant Liability. Changes in the fair value of warrant liabilities resulted in a net gain of $120,000 and $111,000 for the three and nine months ended September 30, 2012, respectively, and a loss of approximately $281,000 and a gain of $1.6 million for the three and nine months ended September 30, 2011, respectively.
Provision for Income Taxes. As a result of our net income of $2.4 million and $8.3 million for the three and nine months ended September 30, 2011 respectively, we recorded a provision for income taxes of approximately $54,000 and $163,000 for the same periods, primarily reflecting federal alternative minimum taxes.
20 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily through the sale of our securities and, more recently, through revenue generated from sales of our products. At September 30, 2012, we had working capital of approximately $13.4 million, including cash and cash equivalents of $15.3 million.
Net cash used in operating activities was $2.6 million for the nine months ended September 30, 2012 as compared net cash provided by operating activities of $8.9 million for the same period in 2011. Cash used in operating activities for the nine months ended September 30, 2012 was due primarily to a net loss of $3.8 million (offset by stock-based compensation expense of $2.0 million) and an increase in accounts receivable of $2.5 million (which was subsequently collected during the first week in October 2012).
Net cash used in investing activities for the nine months ended September 30, 2012 was approximately $479,000 as compared to approximately $780,000 for the same period in 2011. Net cash used in investing activities was for additions of fixed assets.
Net cash provided by financing activities for the nine months ended September 30, 2012 was approximately $373,000 as compared to net cash used by financing activities of approximately $260,000 for the same period in 2011. For the nine months ended September 30, 2012 net cash provided by financing activities consisted primarily of proceeds from exercises of warrants. For the nine months ended September 30, 2011, net cash used by financing activities consisted primarily of approximately $421,000 in deferred financing costs offset by proceeds from exercises of warrants and stock options.
We believe that our business plan provides sufficient liquidity to fund our operating needs for the next 12 months. However, there are factors that can impact our ability to continue to fund our operating needs, including: Our ability to maintain product pricing as expected, particularly in light of increased competition and its unknown effects on market dynamics; Our and our contract manufacturer's ability to reduce manufacturing costs as expected; Our ability to maintain and expand sales volume, which is highly dependent on the smart grid implementation plans of Duke Energy and other utilities; and The need for us to continue to invest in operating activities in order to remain competitive or acquire other businesses and technologies in order to complement our products, expand the breadth of our business, enhance our technical capabilities, or otherwise offer growth opportunities.
If we cannot effectively manage these factors, we may need to raise additional capital in order to fund our operating needs. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
21 -------------------------------------------------------------------------------- ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e).
As of June 30, 2012, we reported that management had identified a material weakness in the Company's internal control over financial reporting related to: (1) our accounting for embedded derivatives associated with certain convertible debt and warrants to purchase common stock, (2) the valuation of stock-based compensation, and (3) the selection of appropriate accounting guidance for certain contracts relating to revenue recognition. Specifically, we did not maintain effective controls over the identification and proper accounting treatment of certain terms and conditions in certain convertible notes or warrant agreements as well as certain revenue arrangements. This material weakness resulted in a material misstatement of our liabilities, non-cash expenses relating to the changes in fair value of common stock warrants and embedded derivatives and accumulated deficit accounts and related financial disclosures and the restatement of our consolidated financial statements for the years ended December 31, 2009, 2010 and 2011, and the unaudited interim financial statements for the quarters ended March 31, June 30, and September 30 for such years as discussed in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K/A filed on September 24, 2012. Management concluded that as a result of such material weakness, our internal control over financial reporting was not effective as of June 30, 2012.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. As part of our evaluation, we considered whether the control deficiencies related to the above described material weakness in our internal control over financial reporting continued to exist. Although we have devoted significant time and resources toward remediating the material weakness and made progress in that regard, our management has concluded that the control deficiencies relating to the material weakness had not been remediated as of September 30, 2012.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness described above our disclosure controls and procedures were not effective as of September 30, 2012.
Notwithstanding such material weakness, management, based upon the work performed during the restatement process described in Note 2 of the Notes to the Unaudited Financial Statements and other additional analysis, has concluded that our financial statements for the periods included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles for each of the periods presented herein.
Remediation Plan We are in the process of remediating the above described material weakness by, among other things, augmenting our professional staff, providing additional training for our accounting staff for the development of technical competencies, implementing and modifying certain accounting closing and financial reporting procedures, and seeking assistance from third parties with respect to complex technical accounting issues.
Management believes the foregoing efforts will effectively remediate the material weakness. As we continue to evaluate and work to improve our internal control over financial reporting, management may execute additional measures to address potential control deficiencies or modify the remediation plan described above.
Changes in Internal Control over Financial Reporting During the quarter ended September 30 2012, there were no changes made in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, other than those changes described in the remediation plan described above.
22 -------------------------------------------------------------------------------- PART II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company issued the following shares of common stock to two warrant holders in reliance upon the exemption from the registration requirements of the Securities Act of 1933 as amended, under Section 4(2) of the Securities Act.
Shares of Exercise Common Stock Cash Total Date Issued Per Share Consideration 7/24/2012 14,895 $ 3.50 $ 52,133 7/27/2012 13,000 $ 3.50 $ 45,500 9/10/2012 7,500 $ 3.50 $ 26,250 In claiming the exemption under Section 4(2), the Company relied in part on the following facts: (1) the offers and sales involved two warrant holders; (2) the warrant holders had access to information regarding the Company; and (3) each warrant holder represented that the warrant holder (a) was an accredited investor; and (b) acquired the shares for the warrant holder's own account in a transaction not involving any general solicitation or general advertising, and not with a view to the distribution thereof.
ITEM 6. EXHIBITS Exhibit No. Description 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32 Certification of Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema 101.CAL* XBRL Taxonomy Extension Calculation Linkbase 101.DEF* XBRL Taxonomy Extension Definition Linkbase 101.LAB* XBRL Taxonomy Extension Label Linkbase 101.PRE* XBRL Taxonomy Extension Presentation Linkbase __________ * Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
23-------------------------------------------------------------------------------- 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.
AMBIENT CORPORATION (Registrant) By: /s/ John J. Joyce By: /s/ Mark L. Fidler John J. Joyce, Mark L. Fidler, President and Chief Vice President, Executive Officer Chief Financial Officer and Treasurer (Principal Executive (Principal Financial Officer) Officer and Principal Accounting Officer) Date: November 14, 2012 Date: November 14, 2012 24--------------------------------------------------------------------------------
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