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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 Annual Report on Form 10-K for the year ended December 31, 2012, that was filed on March 11, 2013. OVERVIEW Ambient Corporation is a leading provider of smart grid communications technology for utilities. Our innovative platform enables utilities to deploy and integrate multiple smart grid applications and technologies, in parallel on a single communications infrastructure, supporting smart metering, distribution automation, distribution management, demand response, distributed generation and more. 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 growing electricity demand, two-way power flow requirements, the implementation of renewable and distributed energy sources and advanced pricing plans. As such, the aging grid is prone to reliability, security, availability 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 and applications 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 (RF), cellular technologies, power line communications (PLC), serial and Ethernet. 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 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. Duke Energy, our marquee customer, has deployed to date approximately 141,000 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, in the fourth generation of development, 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, enabling a comprehensive digital communications platform while leveraging standards-based technologies. We developed our communications platform to fill this void. Our long-standing relationship with Duke Energy, which we believe has one of the most forward-looking smart grid initiatives in North America, has been the source of substantially all of our revenue since 2008. In September 2009, we entered into a long-term agreement with Duke Energy to supply the utility with our Ambient Smart Grid ® communications platform and license our AmbientNMS ® through 2015. 14 -------------------------------------------------------------------------------- We intend to leverage our success with our marquee customer to secure additional customers in the global utility marketplace. As a result of our increased marketing and sales activities, we have engaged in discussions 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 secure additional financing and 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. 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. Since inception, we have funded our operations with proceeds from the sale of securities and from 2010,with revenue from sales of products. Since the beginning of 2012, we have experienced a decrease in revenue, negative cash flows from operations and a net loss. We had a net loss of $11.8 million and negative cash flows from operations of $8.7 million for the nine months ended September 30, 2013. In an effort to preserve cash, on May 8, 2013, we implemented a restructuring to reduce our cost structure. In an effort to address expected operating cash shortfall, on October 29, 2013, we implemented additional restructuring measures (discussed in more detail in Note 13). At September 30, 2013, we had working capital of $2.9 million, including cash and cash equivalents of $4.6 million. In August 2013, we entered into a financing arrangement with Vicis Capital Master Fund ("Vicis"), our majority stockholder (see Note 14). The financing provides up to $5 million in available credit, all of which becomes due on June 30, 2014. Management believes that its currently available cash resources together with the financing arrangement entered into with Vicis, the restructuring that was implemented in May and October 2013 (discussed in Note 13), and anticipated revenue will provide sufficient liquidity to fund the Company's operating needs through June 30, 2014, the date any borrowing under the Vicis facility will become due and payable. While the Company will actively seek to identify sources of liquidity to repay the Vicis credit facility, there are no assurances that such additional sources of liquidity can be obtained on terms acceptable to the Company, or at all. However, without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures, the Company will not have the cash resources to remain as a going concern through September 30, 2014. RESULTS OF OPERATIONS COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013, TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 Total Revenue. Total revenue for the three months ended September 30, 2013 was $3.5 million, representing a decrease of 65% from $10.0 million for the same period in 2012. Total revenue for the nine months ended September 30, 2013 was approximately $10.5 million, representing a decrease of approximately 68% from approximately $33.3 million for the same period in 2012. The decrease in total revenue during the three months and nine months ended September 30, 2013 as compared to the same periods in 2012 was attributable primarily to the near completion by the Company's primary customer of its grid modernization project in Ohio. Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2013 was $1.8 million, representing a decrease of 69% from $5.9 million for the corresponding period in 2012. Total cost of goods sold for the nine months ended September 30, 2013 was approximately $5.8 million, representing a decrease of 69% from approximately $18.9 million for the corresponding period in 2012.The decrease in cost of goods sold for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 was primarily due to the decrease in sales volume. Gross Profit. Gross profit for the three months ended September 30, 2013 was $1.7 million, representing a decrease of $2.5 million from $4.2 million for the corresponding period in 2012. Gross profit for the nine months ended September 30, 2013 was approximately $4.6 million, representing a decrease of $9.7 million from approximately $14.3 million for the corresponding period in 2012. Our overall gross margin for the three and nine months ended September 30, 2013 was 49% and 44% compared to 42% and 43%for the three and nine months ended September 30, 2012. The decline in gross profit was primarily due to the lower sales volume and the increase in gross margin was primarily due to the planned restructuring that was implemented on May 8, 2013. Research and Development Expenses. Research and development expenses for the three months ended September 30, 2013 were $2.9 million, representing a decrease of $1.0 million from $3.9 million for the corresponding period in 2012. Research and development expenses for the nine months ended September 30, 2013 were approximately $9.3 million, representing a decrease of $1.6 million from approximately $10.9 million for the corresponding period in 2012. The decrease in research and development expenses for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 was primarily due to the planned restructuring that was implemented on May 8, 2013. The purpose of the restructuring was to reduce overall operating expenses, including research and development. As a result of this restructuring, we expect that research and development expenses will continue to decline during 2013 as we focus our development efforts on specific revenue opportunities. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2013 were $2.2 million, representing a decrease of $700,000 from $2.9 million for the corresponding period in 2012. Selling, general and administrative expenses for the nine months ended September 30, 2013 were approximately $6.7 million, representing a decrease of approximately $400,000 from approximately $7.1 million for the corresponding period in 2012. The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 was primarily due to the restructuring that was implemented in May 2013. As a result of our overall continuing effort to reduce our operating expenses, we expect that selling, general and administration expenses will decline during the remainder of 2013. 15 -------------------------------------------------------------------------------- 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 during the three months ended March 31, 2012. Restructuring Costs. On May 8, 2013, due to general market conditions and our expectation of a significant decrease in revenues for fiscal year 2013, we implemented a plan to reduce operating expenses primarily through a reduction in our workforce of 26 employees and compensation reductions for senior management. We expect cost savings from the restructuring to be approximately $2.0 million per quarter. As a result of this initiative, we recorded total restructuring costs of $341,000 primarily representing the cost of severance payments to impacted employees. These restructuring costs were all incurred and paid during the three months ended June 30, 2013. Interest Income. Interest income for the three months ended September 30, 2013 was $1,000 compared to $3,000 for the corresponding period in 2012. Interest income for the nine months ended September 30, 2013 and 2012 was $7,000. Interest Expense. Interest expense for the three months ended September 30 2013, was $1,000 compared to $0 for the corresponding period in 2012. Interest expense for the nine months ended September 30, 2013 was $6,000 compared to $0 for the corresponding period in 2012. Interest expense represents finance charges related to our extending payment terms of a significant portion of our directors' and officers' liability insurance premiums with a third party. Mark-to-Market Adjustment of Warrant Liability. Changes in the fair value of warrant liabilities resulted in a net gain of zero compared to a net gain of $120,000 for the three months ended September30, 2013 and 2012, respectively. The decrease was due to all of the Company's warrants expiring during the three months ended June 30, 2013. Changes in the fair value of warrant liabilities resulted in a net gain of $3,000 compared to a net gain of $111,000 for the nine months ended September 30, 2013 and 2012, respectively. Other Income. Other income for the three and nine months ended September 30, 2013 was a loss of $64,000 and $7,000, respectively, compared to a gain of $7,000 and $171,000 for the corresponding periods in 2012, primarily representing partial recovery of loans made by us to an unrelated company during 2000 and 2001, which had been previously written off in 2001. 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, 2013, we had working capital of $2.9 million, including cash and cash equivalents of $4.6 million. Net cash used in operating activities was $8.7 million for the nine months ended September 30, 2013 as compared to net cash used in operating activities of $2.6 million for the same period in 2012. Cash used in operating activities for the nine months ended September 30, 2013 was primarily due to a net loss of $11.8 million, offset by non-cash expenses from stock-based compensation expense of $2.2 million and depreciation and amortization of $442,000 and an increase in working capital accounts of $422,000. Net cash used in investing activities for the nine months ended September 30, 2013 was $69,000 compared to $479,000 for the same period in 2012. 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, 2013 was $0 as compared to net cash provided by financing activities of $373,000 for the same period in 2012 which consisted primarily of proceeds from exercises of warrants. On May 8, 2013, due to general market conditions and our expectation of a significant decrease in revenues for fiscal year 2013, we implemented a plan to reduce operating expenses primarily through a reduction in our workforce of 26 employees and compensation reductions for senior management. After careful consideration of industry trends and our expectations of communications and applications needs within the global smart grid market, we believe that we can focus more strategically on our continuing research and development efforts, requiring fewer employees, at the same time recognizing the need to preserve our liquidity. In our continuing efforts to preserve liquidity and address continuing and expected operating cash shortfall, on October 29, 2013, we implemented additional restructuring measures through a further reduction in our workforce of 14 employees. We expect cost savings from the restructuring to be approximately $450,000 per quarter.. 16 -------------------------------------------------------------------------------- On August 12, 2013, we and Vicis Capital Master Fund ("Vicis"), our majority stockholder, entered into an agreement pursuant to which Vicis furnished to us access to a $5.0 million credit line. Pursuant to the arrangement, from time to time through June 30, 2014 as our cash resources fall below $500,000, we are entitled to receive from Vicis $500,000 in consideration for which we will issue to Vicis a promissory note in the principal amount of $500,000. Ambient may draw down on the facility as needed until the entire $5.0 million is exhausted. The arrangement terminates on June 30, 2014, unless the parties elect to extend it by mutual agreement. All notes issued will also be due and payable by June 30, 2014. As of the date of this filing of the quarterly report on Form 10-Q, we have not drawn any amounts under this credit line. Since inception, we have funded our operations with proceeds from the sale of securities and from 2010, with revenue from sales of products. Since the beginning of fiscal year 2012, we have experienced a decrease in revenue, negative cash flows from operations and a net loss. We had a net loss of $11.8 million and negative cash flows from operations of $8.7 million for the nine months ended September 30, 2013. At September 30, 2013, we had working capital of $2.9 million, including cash and cash equivalents of $4.6 million. In August 2013, we entered into a financing arrangement with Vicis Capital Master Fund ("Vicis"), our majority stockholder (see Note 14). The financing provides up to $5 million in available credit, all of which becomes due on June 30, 2014. Management believes that its currently available cash resources together with the financing arrangement entered into with Vicis, the restructuring that we implemented in May and October 2013 (discussed in Note 13), and anticipated revenue will provide sufficient liquidity to fund our operating needs until June 30, 2014. However, without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures, we will not have the cash resources to remain as a going concern through September 30, 2014. However, there are factors that can impact our ability to continue to fund our operating needs through such date, including ? Our ability to expand sales volume, which is highly dependent on the grid modernization plans of utilities; ? Our expectations regarding the continued favorable relationship with Duke Energy, which we expect will continue to be a substantial portion of its revenue for the foreseeable future; ? Our ability to maintain product pricing as expected, particularly in light of increased competition and its unknown effects on market dynamics; ? Our ability and that of our contract manufacturer to maintain manufacturing costs as expected; and ? Our continued need to reduce our cost structure while simultaneously expanding the breadth of our business, enhancing our technical capabilities and pursing new business opportunities. If management cannot effectively manage these factors, including closing new revenue opportunities from existing and new customers and reducing our cost structure further, we will need to raise additional capital to support our business over the next twelve months. Except for the Vicis credit facility discussed in Note 14, we have no commitments for any such funding, and there are no assurances that such additional sources of liquidity can be obtained on terms acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, we will not have the cash resources to continue as a going concern through September 31, 2014. In addition, if we do not have available cash from revenues or additional financing by June 30, 2014, we will not have sufficient cash flow to meet our working capital needs and would be unable to repay amounts due under the Vicis credit facility, if any, when due, which would have a material adverse impact on our business and operations. While we will actively seek to identify sources of liquidity to repay the Vicis credit facility, there are no assurances that such additional sources of liquidity can be obtained on terms acceptable to us, or at all. These factors raise substantial doubt about the Company's ability to continue as a going concern. Such "going concern" qualification may make it more difficult for us to raise funds if and when needed. |