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AMBT > SEC Filings for AMBT > Form 10-K on 14-Apr-2014All Recent SEC Filings

Show all filings for AMBIENT CORP /NY

Form 10-K for AMBIENT CORP /NY


Annual Report



Ambient Corporation is a provider of a communication and application platform that incorporates various communication technologies and enables utilities, and other grid managers to implement a grid modernization program, deploying different applications, whether Ambient or third-party developed. 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.

Duke Energy Relationship

We believe that we have demonstrated that our technology is secure, two-way, flexible, open, scalable, reliable and cost-effective through the total deployment of approximately 141,000 communications nodes in the field with Duke Energy. Throughout the past five years, we have worked with Duke Energy to develop our communications platform, which has enabled Duke Energy's ability to deploy its smart grid initiatives.

We believe that we have a potential opportunity to continue to support Duke Energy in their grid modernization efforts, if it were to eventually implement a full deployment of smart grid communications nodes in Indiana, Kentucky, and the Carolinas. While Duke Energy is using information from its North Carolina pilot programs and its Ohio deployment to enhance its customer experience, Duke Energy has not determined to implement a full deployment, and even if such determination is made, Duke Energy has not determined it would primarily use our nodes and communications platform in any such deployment.

Current Focus

Since we established our relationship with Duke Energy, we have focused on developing our technology to meet the needs of their smart grid communications platform. Based upon the success of the relationship and our proven technology, we recently refocused our resources on new business development, marketing and sales programs, and further technology development in order to expand our customer base.

To that end, in 2013, Consolidated Edison selected Ambient for a long standing grid monitoring project collecting power quality data from commercial and industrial meters, and began deploying Ambient product . In late 2013, the scope of work with Consolidated Edison expanded beyond the initial project, which has led to additional sales of our communications nodes. In addition, we are participating in a number of field trials with European utilities and working with partners to introduce our technology to global markets. Subject to raising additional financing or significantly increasing revenues, we expect to increase investment in our marketing and sales efforts over the next twelve months.

We are also an active participant in the Coalition of the Willing (COW) collaboration of seven companies showcasing the interoperability of their hardware, software, and communications. Each vendor's products are linked together using an open source, standards-based field message bus. The COW group, which includes Duke Energy, as well as other leading companies, has developed a demonstration project around voltage management assets to show how interoperable hardware, software, and systems from multiple suppliers can be used to build a distributed intelligence platform that eliminates silos, improves grid performance, enables interoperability between grid assets, reduces costs, and increases security.

In addition, in late 2013, we engaged a financial and strategic advisor to explore a range of alternatives to enhance stockholder value, including, but not limited to, a sale of Ambient, a business combination or collaboration, joint development, and partnership opportunities. Our strategic process is both active and ongoing and includes a range of interactions with potential transaction counterparties. We believe it is in our stockholders' best interest to allow management the opportunity to pursue and consummate one or more such transactions and to consider additional alternatives that may materialize in the near future. In connection with our strategic process, we have implemented the operating cost reductions discussed elsewhere in this report to reduce our overall use of cash and facilitate our pursuit of strategic initiatives. No assurance can be provided that these efforts will successfully result in any transaction.

Our business success in the immediate future will depend largely on our ability to secure additional financing, execute on a strategic alternative and expand our customer base.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, bad debts, investments, intangible assets, and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.

Revenue Recognition

Total revenue consists of primarily sales of hardware, software, and maintenance services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of our product sales, these criteria are met at the time the product is shipped. We record deferred revenue when we receive payments in advance of the delivery of products or the performance of services.

Hardware sales consist of our Ambient Smart Grid® communications nodes which are physical boxes that contain the hardware and embedded software needed for communications and data collection in support of smart grid assets. The system software embedded in our communications nodes is used solely in connection with the operation of the physical boxes.

Our proprietary software AmbientNMS® is our smart grid network management system that controls the large numbers of communications nodes, devices, and customers on a smart grid. NMS software is offered on a stand-alone basis.

We generally include a period of free maintenance services beginning from the sale of the communications nodes and NMS software. As such, we recognize a portion of the revenue from the sales of our products upon delivery to the customer. The revenue allocated to the free period of maintenance services is deferred and recognized ratably over the period of performance.

We offer additional software maintenance service, on a fee basis, that entitles the purchasers of our products and AmbientNMS® software to post-contract customer support, including help desk support and, unspecified updates and upgrades to our products on a when-and-if available basis. Maintenance services are recognized ratably over the period of performance.

We recognize revenue from the sale of (i) hardware products, and (ii) software bundled with hardware that is essential to the functionality of the hardware in accordance with revenue recognition for multiple-element arrangements. The Company recognizes revenue in accordance with applicable industry-specific software accounting guidance for (i) stand-alone sales of software products,
(ii) maintenance renewals, and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.

Revenue Recognition for Arrangements with Multiple Deliverables

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition) (''ASU 2009-13'') (formerly EITF Issue 08-1) and ASU No. 2009-14, Certain Arrangements That Include Software Elements, (amendments to FASB ASC Topic 985, Software) (''ASU 2009-14'') (formerly EITF 09-3). ASU 2009-13 eliminates the residual method and requires arrangement consideration to be allocated using the relative selling price method, which requires entities to allocate revenue in an arrangement using the best estimated selling price ("BESP") of each element when a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"). ASU 2009-14 removes tangible products from the scope of software revenue guidance, and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 are effective for arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-13 and 2009-14 effective January 1, 2011.

We evaluate each deliverable in an arrangement to determine whether it should be accounted for as a separate unit of accounting. The delivered items or item shall be considered a separate unit of accounting if it has stand-alone value to the customer and there are no customer-negotiated refunds or return rights.

We allocate the total arrangement consideration to each unit of accounting in a multiple-element arrangement based on its relative selling price, and include our bundled hardware and software component as one unit of accounting, and the free period of maintenance as a separate unit of accounting. The Company uses a hierarchy to determine the selling price to be used for allocating revenue to each of the deliverables. We determine the selling price for each deliverable using vendor specific objective evidence (VSOE), if it exists or third-party evidence (TPE) if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, we use our best estimate of selling price (BESP) for that deliverable. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.

We determine VSOE of a deliverable based on the price at which we sell the deliverable on a stand-alone basis to third parties, or from the stated renewal rate for the elements contained in the initial arrangement. VSOE has been established for our software maintenance element. When VSOE cannot be established for all deliverables in an arrangement with multiple elements, we attempt to estimate the selling price of each element based on TPE. When we are unable to establish a selling price using VSOE or TPE, we establish the BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone. BESP has been established for our bundled hardware and software portion of the arrangement.

When establishing BESP, We consider multiple factors, including, but not limited to, the relative value of the features and functionality being delivered to the customer, and general pricing practices. Based on our analysis of pricing stated in contractual arrangements for our hardware products in historical multiple-element transactions, we have concluded that we typically price our hardware and embedded software at the contractually agreed-upon amounts. Therefore, we have determined that, for our hardware and embedded software for which VSOE or TPE is not available, our BESP generally comprises prices based on our contractually agreed-upon rates. We have established an annual review process around VSOE, TPE, and BESP.

We account for multiple-element arrangements that consist of only software or software-related products, including the sale of maintenance services to previously sold software, in accordance with industry-specific software accounting guidance. For such multiple-element software transactions, revenue is allocated to each element based on the residual method when VSOE has been established for the undelivered element. If we cannot objectively determine the VSOE of any undelivered element included in such multiple-element arrangements, we defer revenue until VSOE is established.

Inventory Valuation. We value inventory at the lower of cost or market determined on a first-in, first-out basis. We regularly review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on our estimated forecast of product demand. Once our inventory value is written-down and a new cost basis has been established, the inventory value is not increased due to demand increases. Demand for our products can fluctuate significantly. In addition, our industry is subject to technological change, new product development and product technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. For 2013 and 2012, our total charges for excess inventory totaled $540,000 and $0, respectively.

Software Development Costs. We have historically expensed costs incurred in the research and development of new software products and enhancements to existing software products as incurred. After we establish technological feasibility, we capitalize additional development costs. No software development costs have been capitalized as of December 31, 2013, or 2012.

Stock-Based Compensation. We account for stock-based compensation in accordance with accounting guidance now codified as Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 718, "Compensation - Stock Compensation (formerly known as SFAS No. 123(R)." Under the fair value recognition provision of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award. We estimate the fair value of stock options granted using the Black-Scholes option pricing model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock price over the option's expected term, the risk-free interest rate over the stock option's expected term, and the annual dividend yield.

Fair Value of Warrants. Warrants are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income (expense) in the statement of operations in each subsequent period. Fair value of the warrants is determined by management using a multiple-scenario, probability-weighted option-pricing model using the following inputs: the fair value of the underlying common stock at the valuation measurement date, the risk-free interest rates, the expected dividend rates, the remaining contractual terms of the warrants, the expected volatility of the price of the underlying common stock, and the probability of certain events occurring. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liabilities and the change in their estimated fair values could be materially different.

Deferred Income Taxes. We recognize deferred income taxes for the tax consequences of "temporary differences" by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. At December 31, 2013, our deferred income tax assets consisted primarily of net operating loss and tax credit carryforwards and stock-based compensation charges that have been fully offset with a valuation allowance due to the uncertainty that a tax benefit will be realized from the assets in the future. At December 31, 2013, we had available approximately $85.4 million of net operating loss carryforwards, for U.S. income tax purposes which expire at various dates through 2031. However, due to changes in stock ownership resulting from historical investments, the use of the U.S. net operating loss carryforwards are significantly limited under Section 382 of the Internal Revenue Code. As such, approximately $61.4 million of our net operating loss carryforwards will expire and will not be available to use against future tax liabilities.

Warranties. We account for our warranties under the FASB ASC 450, "Contingencies." Our current standard product warranty includes a one-year warranty period for defects in material and workmanship. We currently accrue a liability based on our actual historical return rate for repair of products within the one-year warranty period. We make and revise this estimate based on the number of communications nodes delivered and our historical experience with warranty claims. We continually monitor the rate of actual product returns for repair and the quality of our products including the quality of the products produced by our U.S.-based contract manufacturer in China.

We engage in product quality programs and processes, including monitoring and evaluating the quality of component suppliers, in an effort to ensure the quality of our products and reduce our warranty exposure. The warranty obligation will be affected not only by product failure rates, but also the costs to repair or replace failed products and potential service and delivery costs incurred in correcting a product failure. If our actual product failure rates, repair or replacement costs, or service or delivery costs differ from these estimates, accrued warranty costs would be adjusted in the period that such events or costs become known.

Our software license agreements generally include provisions for indemnifying customers against liabilities if our software infringes upon a third party's intellectual property rights. We have not provided for any reserves for such warranty liabilities. Our software license agreements also generally include a warranty that our software will substantially operate as described in the applicable program documentation. We also warrant that we will perform services in a manner consistent with industry standards. To date, we have not incurred any material costs associated with these product and service performance warranties, and as such we have not provided for any reserves for any such warranty liabilities in our operating results.


Comparison of the Year Ended December 31, 2013 and the Year Ended December 31, 2012

Total Revenue. Total revenue for 2013 was $11.4 million compared to $42.8 million in 2012, representing a decrease of approximately 73%. Substantially all revenue from 2013 and 2012 was derived from one customer. The decrease in total revenue is attributable primarily to the substantial completion by our primary customer of its grid modernization project in Ohio.

Cost of Goods Sold. Cost of goods sold for 2013 was $8.2 million compared to $24.5 million in 2012. The decrease in cost of goods sold primarily reflected a decrease in sales volume year-over-year. Cost of goods sold includes all costs related to the manufacture of our products by our contract manufacturer, accrual for warranty, and other overhead costs. Cost of goods sold for 2013, also includes a provision in the amount of $540,000 for excess finished goods inventory, and a reserve for an adverse purchase commitment in the amount of $1.2 million. Our contract manufacturer is responsible for substantially all aspects of manufacturing, including procuring most of the key components required for assembly.

Gross Profit. Gross profit for 2013 was $3.1 million compared to $18.3 million in 2012, a decrease of approximately 83%. Gross margin for 2013, which was affected by the provision for excess inventory and a reserve for an adverse purchase commitment was 28% compared to 43% in 2012. However, without these items recorded in 2013, gross margin year-over-year for products and service remained flat at approximately 43%.

Research and Development Expenses. Research and development expenses were approximately $11.2 million for 2013 compared to approximately $14.3 million in 2012. The decrease in research and development expenses in 2013 as compared to 2012 was due primarily to the planned restructuring that was implemented in May and October 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 2014.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2013 were approximately $9.1 million compared to $9.7 million for 2012. The decrease in selling, general and administrative expenses in 2013 as compared 2012 was due primarily to the restructuring that was implemented in May and October 2013. As a result of this restructuring, we expect that selling, general, and administrative expenses will continue to decline during 2014.

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.

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. As a result of this initiative, we recorded total restructuring costs of $341,000 primarily representing the cost of severance payments to impacted employees during the three months ended June 30, 2013. These restructuring costs were all incurred and paid during the three months ended June 30, 2013. In a further effort to address the continuing expected operating cash shortfall, on October 29, 2013, we implemented and completed a plan to reduce operating expenses primarily through a further reduction in our workforce of 14 employees. As a result of these measures, the Company recorded restructuring costs of approximately $95,000, primarily representing the cost of severance payments to impacted employees. These restructuring costs were all incurred and paid by December 31, 2013.

Other Income, net. Other income for 2013 was a net loss of approximately $107,000 compared to a net gain of approximately $197,000 for 2012. The 2012 gain, primarily represented the partial recovery of loans made by us to an unrelated company during 2000 and 2001, which had been previously written off in 2001. In 2013, the net loss primarily resulted from a loss of $157,000 resulting from the write-off of approximately $1 million of fixed assets no longer used in operations of the company.

Mark-to-Market Adjustment of Warrant Liability. Changes in the fair value of warrant liabilities resulted in a net non-cash gain of 3,000 and $452,000 for the years ended December 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

Net cash used in operating activities during the year ended December 31, 2013 was approximately $12.3 million compared to $4.4 million for the same period in 2012. Net cash used in operating activities in 2013, was due primarily to the net loss of $17.7 million partially offset by stock-based compensation expense of $2.7 million, and the recognition of an adverse purchase commitment of $1.2 million, a decrease in accounts receivable of $2.1 million and mitigated by a reduction of accounts payable of $1.7 million. Net cash used in operations for the year ended December 31, 2012, was due primarily to a net loss of $5.4 million partially offset by stock-based compensation expense of $2.5 million, an increase in accounts receivable of $2.0 million, and mitigated by a reduction in accounts payable of $1.2 million.

Net cash used in investing activities for the year ended December 31, 2013, was approximately $136,000 compared to approximately $659,000, for the same period in 2012. Net cash used in investing activities for each period was for the addition of fixed assets.

Net cash provided by financing activities for the year ended December 31, 2013, was $0 compared to $376,000 in 2012. For the year ended December 31, 2012, net cash provided by financing activities consisted primarily of proceeds from exercises of warrants.

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 $17.7 million and negative cash flows from operations of $12.3 million for the year ended December 31, 2013. At December 31, 2013, we had negative working capital of $2.3 million, including cash and cash equivalents of $907,000.

In an effort to preserve working capital, we implemented a series of restructuring measures in May and October 2013, principally consisting of reductions in our work force (see Note 12) and a reduction in compensation of our senior management. Additionally, 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 (see Note 13). 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 this report on Form 10-K, we have drawn down $2.0 million under this credit line, the funds from which are being used by the Company for working capital, general corporate purposes, and the funding of the Company's strategic initiatives.

In January 2014, in a further effort to conserve working capital and manage the exposure to increased finished goods inventory, we effectively cancelled the balance of a purchase order placed with Bel Fuse Inc., the principal supplier of our communications nodes, for additional nodes with a contracted value of approximately $1.4 million. Pursuant to the terms of the Master Supply and Alliance Agreement between Ambient and Bel Fuse Inc., entered into in February . . .

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