Advertise with us
[May 13, 2013]
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 135,000 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. We entered into a long-term agreement in September 2009 with Duke Energy to supply the utility with our Ambient Smart Grid ® communications platform and license our AmbientNMS ® through 2015.
14 -------------------------------------------------------------------------------- Table of Contents We intend to leverage our success with our marquee customer to secure additional customers in the global utility marketplace. 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. 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.
RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2013 TO THE THREE MONTHS ENDED MARCH 31, 2012 Total Revenue. Total revenue for the three months ended March 31, 2013 was $5.0 million, representing a decrease of 62% from $13.3 million for the same period in 2012. The decrease in revenue year over year was primarily attributable to the near completion by the Company's largest customer of its grid modernization project in Ohio.
Cost of Goods Sold. Cost of goods sold for the three months ended March 31, 2013 was $2.9 million, representing a decrease of 61% from $7.5 million for the corresponding period in 2012. The decrease in cost of goods sold was primarily due to the decrease in sales volume.
Gross Profit. Gross profit for the three months ended March 31, 2013 was $2.0 million, representing a decrease of $3.8 million from $5.8 million for the corresponding period in 2012. Our overall gross margin for the three months ended March 31, 2013 and 2012 was 41% and 44% respectively. The decline in gross margin was primarily due to the lower sales volume.
Research and Development Expenses. Research and development expenses for the three months ended March 31, 2013 were $3.3 million, representing a decrease of $84,000 from $3.3 million for the corresponding period in 2012. Research and development expenses decreased slightly as a result of reduced costs incurred on the development of our product line. In addition, as part of our effort to reduce our operating expenses discussed below, we expect that research and development expenses will decline during 2013 as we focus our development efforts on more identified opportunities.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2013 were $2.3 million, representing an increase of $140,000 from $2.1 million for the corresponding period in 2012. The increase in selling, general and administrative expenses was primarily due to increased personnel and related costs associated with efforts to market the Ambient Smart Grid® communications platform. In addition, as part of our effort to reduce our operating expenses discussed below, we expect that selling, general and administration expenses will decline during 2013 as we improve our efficiency and take into account market conditions.
15 -------------------------------------------------------------------------------- Table of Contents 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.
Interest Income. Interest income for the three months ended March 31, 2013 was $3,000 compared to $2,000 for the corresponding period in 2012 Interest Expense. Interest expense for the three months ended March 31, 2013 was $2,000 compared to zero for the corresponding period in 2012. Interest expense represents finance charges related to the Company extending payment terms of a significant portion of its 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 $3,000 and a net loss of $189,000 for the three months ended March 31, 2013 and 2012, respectively.
Other Income. Other income for 2013 was $28,000 compared to $73,000 for the corresponding period in 2012, 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.
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 March 31, 2013, we had working capital of $9.2 million, including cash and cash equivalents of $11.0 million.
Net cash used in operating activities was $2.3 million for the three months ended March 31, 2013 as compared to net cash provided by operating activities of $616,000 for the same period in 2012. Cash used in operating activities for the three months ended March 31, 2013 was primarily due to a net loss of $3.5 million (offset by stock-based compensation expense of $438,000) and an increase in working capital accounts of $598,000.
Net cash used in investing activities for the three months ended March 31, 2013 was $27,000 as compared to $48,000 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 three months ended March 31, 2013 was zero as compared to net cash provided by financing activities of $175,000 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 the Company's expectation of a significant decrease in revenues for fiscal year 2013, the Company implemented a plan to reduce operating expenses primarily through a reduction in its workforce and compensation reductions for senior management. After careful consideration of industry trends and the Company's expectations of communications and applications needs within the global smart grid market, the Company believes it can focus more strategically on its research and development efforts, requiring fewer employees, and at the same time recognizing the need to preserve its liquidity. As a result of this initiative, the Company expects total restructuring costs to be approximately $350,000, primarily representing the cost of severance payments to impacted employees. These restructuring costs are expected to be incurred in the quarter ending June 30, 2013.
16 -------------------------------------------------------------------------------- Table of Contents We believe that our business plan will provide sufficient liquidity to fund our operating needs for the next 12 months. However, there are factors that can impact our ability continue to fund our operating needs, including: Our expectations regarding the continued favorable relationship with Duke Energy, which we expect will continue to be a substantial source of our revenue; Our ability to expand sales volume, which is highly dependent on the grid modernization plans of Duke Energy and other utilities; 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 maintain manufacturing costs as expected; and Our need 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 grow or support our business and to respond to business challenges could be significantly limited, and we may be required to implement further spending reduction measures in order to preserve cash.
Back To NFVZone's Homepage