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

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: March 31, 2011

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: 0 23723

AMBIENT CORPORATION
 (Exact name of registrant as specified in its charter)

 Delaware
 
98-0166007
(State or Other Jurisdiction
of Incorporation)
 
(I.R.S. Employer
Identification No.)
 
7 WELLS AVENUE, NEWTON, MASSACHUSETTS 02459
(Address of Principal Executive Office) (Zip Code)
 
617-332-0004
( Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
———————
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   þ    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes o   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ

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

As of May 9, 2011, there were 1,650,222,783 shares of issuer's common stock, par value $0.001 per share, outstanding.
 


 
 

 
INDEX PAGE
 
 
PART I – FINANCIAL INFORMATION
     
         
Item 1.
Financial Statements
       
           
 
Consolidated Balance Sheets March 31, 2011 (Unaudited) and December 31, 2010 (Audited)
    4  
           
 
Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (Unaudited)
    5  
           
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)
    6  
           
 
Notes to the Unaudited Consolidated Financial Statements
    7  
           
Item 2.
Management's Discussion and Analysis of Financial Condition and  Results of Operation
    10  
           
Item 4.
Controls and Procedures
    13  
           
 
PART II – OTHER INFORMATION
       
           
Item 6.
Exhibits
    14  
           
SIGNATURES
      15  

*The Balance Sheet at December 31, 2010 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All other financial statements are unaudited.
 
 
2

 
 
FORWARD LOOKING STATEMENTS
 
The following discussion should be read in conjunction with the financial statements and related notes contained elsewhere in this quarterly report on Form 10-Q. We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the “SEC”) or that we otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media, and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in Item 2, “Management’s Discussion and Analysis of Financial Condition, and Results of Operations” regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “predict,” “expect,” “intend,” “plan,” “project,” “target,” “continue,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions.  You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, dependence on one key customer, our inability to obtain necessary financing; changes in economic conditions generally and our specific market areas, changes in technology, legislative or regulatory changes that affect us, the availability of working capital, changes in costs and the availability of goods and services, the introduction of competing products, changes in our operating strategy or development plans, our ability to attract and retain qualified personnel, and changes in our acquisition and capital expenditure plans. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC, should be considered in evaluating forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. Moreover, we do not assume the responsibility for the accuracy and completeness of these forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
 
 
3

 
 
PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
AMBIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
    (Unaudited)        
ASSETS
           
CURRENT ASSETS
           
     Cash and cash equivalents
  $ 8,729,310     $ 6,986,881  
     Accounts receivable
    1,588,896       1,731,096  
     Inventory
    964,839       834,117  
     Prepaid expenses and other current assets
    266,059       276,121  
                 
               Total current assets
    11,549,104       9,828,215  
                 
Property and equipment, net
    1,001,877       744,944  
                 
               Total assets
  $ 12,550,981     $ 10,573,159  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
     Accounts payable
  $ 3,603,717     $ 3,608,293  
     Accrued expenses and other current liabilities (including related party interest
               
       of $244,262 and $244,262 respectively)
    739,986       632,994  
     Deferred revenue
    103,440       -  
     Income taxes payable     28,000       -  
     Capital lease obligations, current portion
    6,968       10,325  
                 
               Total current liabilities
    4,482,111       4,251,612  
                 
NON-CURRENT LIABILITIES
               
     Deferred rent
    164,250       185,721  
                 
               Total  liabilities
    4,646,361       4,437,333  
                 
STOCKHOLDERS' EQUITY
               
    Common stock, $.001 par value;
               
      2,000,000,000 shares authorized;
               
        1,650,301,354 and 1,649,376,354
               
        issued; 1,649,301,354 and 1,648,376,354 outstanding, respectively
    1,650,302       1,649,377  
     Additional paid-in capital
    148,798,467       148,114,946  
     Accumulated deficit
    (142,344,149 )     (143,428,497 )
      Less: treasury stock; 1,000,000 shares at cost
    (200,000 )     (200,000 )
                 
               Total stockholders' equity
    7,904,620       6,135,826  
                 
               Total liabilities and stockholders' equity
  $ 12,550,981     $ 10,573,159  
 
See Notes to Consolidated Financial Statements.
 
 
4

 
 
AMBIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
             
             
Revenues
  $ 12,006,483     $ 1,683,925  
                 
Less cost of goods sold
    6,800,970       1,141,038  
                 
Gross profit
    5,205,513       542,887  
                 
Expenses
               
Research and development
    1,869,005       1,564,900  
Operating, general and administrative expenses
    1,577,525       1,156,726  
Stock based compensation - operating, general and administrative
    652,071       29,931  
                 
Total expenses
    4,098,601       2,751,557  
                 
Operating profit (loss)
    1,106,912       (2,208,670 )
                 
Interest and finance expenses
    (1,429 )     (212,474 )
Interest income
    6,865       134  
                 
Income (loss ) before income taxes
    1,112,348       (2,421,010 )
                 
Provision for income taxes     28,000       -  
                 
Net income (loss)   $ 1,084,348     $ (2,421,010 )
                 
Basic income (loss) per share:
               
      Net income (loss)
  $ 0.00     $ 0.00  
                 
Diluted income (loss) per share:
               
      Net income (loss)
  $ 0.00     $ 0.00  
                 
Weighted average number of shares outstanding
               
Basic
    1,648,627,512       1,416,201,387  
Diluted
    1,694,615,736       1,416,201,387  
 
See Notes to Consolidated Financial Statements.
 
 
5

 
 
AMBIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
 
   
Three Month Ended
 
   
March 31,
 
   
2011
   
2010
 
             
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
     Net income (loss)
  $ 1,084,348     $ (2,421,010 )
     Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
         Depreciation and amortization
    97,241       85,884  
         Amortization of beneficial conversion feature of convertible debt
    -       183,609  
         Financing,  consulting and other expenses paid via the
               
                  issuance of common stock and warrants
    652,071       29,931  
         Changes in operating assets and liabilities
               
              (Increase) decrease in:
               
              Accounts receivables
    142,200       841,593  
              Inventory
    (130,722 )     (450,928 )
              Prepaid expenses and other current assets
    10,062       (1,252 )
              Increase (decrease) in:
               
              Accounts payable
    (4,577 )     22,811  
              Deferred rent
    (21,471 )     56,810  
              Accrued expenses and other current liabilities
    106,993       190,996  
              Income taxes payable     28,000       -  
              Deferred revenue
    103,440       (102,102 )
                 
Net cash provided by (used in) operating activities
    2,067,585       (1,563,658 )
                 
CASH FLOWS FROM  INVESTING ACTIVITIES
               
         Purchases of property and equipment
    (354,174 )     (170,217 )
                 
Net cash used in investing activities
    (354,174 )     (170,217 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
         Proceeds from issuance of common stock
    -       1,500,000  
         Proceeds from exercise of warrants
    15,750       75,040  
         Proceeds from exercise of options
    16,625       9,325  
         Payments of capitalized lease obligations
    (3,357 )     (3,044 )
                 
Net cash provided by financing activities
    29,018       1,581,321  
                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    1,742,429       (152,554 )
                 
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
    6,986,881       987,010  
                 
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 8,729,310     $ 834,456  
                 
Noncash financing and investing activities:
               
     Issuance of common stock in connection with conversion of debt
  $ -     $ 10,000,000  
                 
Supplemental disclosures of cash flow information:
               
    Cash paid during the period for:
               
          Interest
  $ 1,429     $ 569  
 
See Notes to Consolidated Financial Statements.
 
 
6

 
 
AMBIENT CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements of Ambient Corporation and its subsidiary (collectively the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission.
 
Throughout the past five years, Ambient has been a key supplier to Duke Energy’s grid efficiency programs, and the leading supplier of the smart grid communications Nodes for their smart grid deployments. In September 2009, we entered into a long-term agreement, running through 2015 to supply Ambient’s X-3100 Node and to license our management software – AmbientNMS® for deployment throughout the utility’s electric power distribution grid. 

NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
On January 1, 2011, the Company adopted Accounting Statement Update (ASU) 2009-13 (ASU 2009-13), “ Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” which eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists and otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. The Company has elected to adopt this guidance prospectively for all revenue arrangements entered into or materially modified after the date of adoption.  The adoption of ASU 2009-13 did not have a material effect on the financial position, results of operations or cash flows of the Company. 

On January 1, 2011, the Company adopted ASU 2010-17 (ASU 2010-17), "Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition." The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal 2011 and thereafter. The adoption of ASU 2010-17 did not have a material effect on the financial position, results of operations or cash flows of the Company. 
 
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.
 
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Substantially all of the Company’s financial instruments, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, and other current liabilities, are carried at, or approximate, fair value because of their short-term nature.
 
 
7

 

NOTE 4 - NET INCOME (LOSS) PER SHARE
 
Basic earnings per share are computed based on the weighted-average number of shares of the Company’s common stock outstanding.  Diluted earnings per share are computed based on the weighted-average number of shares of the Company’s common stock, including common stock equivalents outstanding.  Certain common shares consisting of stock options and warrants that would have an anti-dilutive effect were not included in the diluted earnings per share attributable to common stockholders for the three months ended March 31, 2011 and 2010.

The following is a reconciliation of the denominators of the basic and diluted earnings per share computations:
 
    Three Months Ended  
   
March 31,
2011
   
March 31,
2010
 
    (Unaudited)  
Denominators:            
             
Weighted-average shares outstanding used to compute basic earnings per share
    1,648,627,512       1,416,201,387  
                 
Effect of dilutive stock options     45,988,224       --  
                 
Weighted-average shares outstanding and dilutive securities used to compute dilutive earnings per share
    1,694,615,736       1,416,201,387  
 
For the three months ended March 31, 2011 and 2010 there were outstanding potential common equivalent shares of 192,481,666 and 147,820,831, respectively, which were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive.  These potential dilutive common equivalent shares may be dilutive to future diluted earnings per share. 

NOTE 5 - SALES AND MAJOR CUSTOMER
 
Revenues for three months ended March 31, 2011 and 2010 were as follows:
 
 
Three Months Ended
 
 
March 31,
2011
 
March 31,
2010
 
 
(Unaudited)
 
Products
  $ 11,972,003     $ 1,665,065  
Software and services
    34,480       18,860  
    $ 12,006,483     $ 1,683,925  
 
Duke Energy accounted for 100% of the Product and software and services revenue for the 2011 and 2010 periods and 100% of the accounts receivable balance at March 31, 2011 and December 31, 2010.
 
 
8

 
 
NOTE 6 - INVENTORY

Inventory is valued at the lower of cost or market and is determined on first-in-first-out method (FIFO) basis. Market, with respect to direct materials, is replacement cost and is net realizable value for finished goods. Finished goods also includes shipments in transit which represent the cost of finished goods inventory shipped for which title has yet to pass to our customer. The value of the inventory is adjusted for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Inventory consists of the following:
 
   
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Raw materials
 
$
136,140
   
$
138,722
 
Finished goods
   
828,699
     
695,395
 
   
$
964,839
   
$
834,117
 
 
NOTE 7 – INCOME TAXES

The provision for income taxes at March 31, 2011 is comprised of federal alternative minimum tax. 
 
Significant components of deferred tax assets include net operating loss carryforwards and stock based compensation.  Due to the uncertainty of their realization, no income tax benefit has been recorded by the Company as valuation allowances have been established for any such benefits.
 
NOTE 8 - STOCKHOLDERS' EQUITY
 
Employee Stock Options
 
In February 2011, the Company issued options to various employees from the Company’s 2000 Equity Incentive Plan to purchase up to 300,000 shares of the Company’s Common Stock at a share price of $0.10. The options will be fully vested as of February 2013.   
 
In March 2011, the Company issued 475,000 shares of Common Stock upon the exercise of stock options previously issued. The Company received proceeds of $16,625.

In April 2011, the Company issued options to various employees from the Company’s 2000 Equity Incentive Plan to purchase up to 600,000 shares of the Company’s Common Stock at a share price of $0.085. The options will be fully vested as of April 2013.   

In April 2011, the Company issued 350,000 shares of Common Stock upon the exercise of stock options previously issued. The Company received proceeds of $13,750.
 
Warrant Exercises
 
In February 2011, the Company issued 450,000 shares upon the exercise of Common Stock purchase warrants. The Company received proceeds of $15,750.

In April 2011, the Company issued 571,429 shares upon the exercise of Common Stock purchase warrants. The Company received proceeds of $20,000.

NOTE 9 - SUBSEQUENT EVENTS

The Company reviewed subsequent events through the date of this filing.
 
 
9

 

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATION
 
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 CONTAINED HEREIN AND THE RISK FACTORS SECTION OF OUR ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2010 ON FORM 10-K.
 
OVERVIEW
 
Ambient Corporation (“Ambient” the “Company” “we or “us”) is a pioneering integrator of smart grid communications platforms, creating high-speed Internet Protocols (IP) based data communications networks for the medium and low-voltage distribution grid. The Ambient smart grid platform, known as Ambient Smart Grid®, facilitates a two-way, real-time communications network designed to modernize the power grid infrastructure, making it more receptive to wide-scale adoption of renewable energy sources and supportive of new energy efficiency technologies and programs. The Ambient Smart Grid® platform facilitates a utility’s ability to implement smart grid applications such as Advanced Metering Infrastructures (AMI), Demand Side Management (DSM), Distribution Monitoring and Automation, direct load control and more. When combined, these applications offer economic, operational and environmental benefits for utilities, and ultimately the utility customers.

Ambient has been focused, since 2000, on the collaborative development of communication solutions that meet the needs of utilities to ultimately deploy what is now referred to as the smart grid. From inception, Ambient’s platform, which includes Nodes, management systems, current transformers and a suite of applications, has been designed to function as an open standards-based system intended to support a variety of applications and services simultaneously. Over the years, Ambient has developed and delivered three generations of smart grid communications Nodes that with thousands of our units deployed in the field are already beginning to transform today’s century-old power delivery system into an advanced energy network that provides timely energy usage information and remote grid monitoring, automation and control. With each successive generation, Ambient has continued to support and integrate additional applications, while driving lower the manufacturing costs and price to our customers making our products even more attractive. In December of 2010, Ambient delivered to our marquee customer units of our fourth generation communications Node which are being beta tested in the field.

Throughout the past five years, Ambient has been a key supplier to Duke Energy’s grid efficiency programs, and the leading supplier of the smart grid communications Nodes for their smart grid deployments. During 2008, Ambient received purchase orders from Duke Energy to purchase its X2000 and X-3000 communications Nodes and to license our AmbientNMS®, to enable the building out of an intelligent grid/intelligent-metering platform, which generated approximately $14.8 million in revenues throughout 2008 and 2009.

In September 2009, we entered into a long-term agreement, running through 2015 to supply Ambient’s X-3100 Node and to license our management software – AmbientNMS® for deployment throughout the utility’s electric power distribution grid. Since the execution of the agreement, we have generated, through March 31, 2011, approximately $33 million in revenues from the sale of our product.

With Ambient Smart Grid®, our goal remains to be a leading designer, developer and systems integrator of smart grid communications platforms, incorporating a wide array of communications protocols and smart grid applications such as advanced metering solutions to complement our communications platform and our internally developed energy sensing capabilities. We view a flexible smart grid communications platform to be a key factor for utilities to efficiently integrate the increasing portfolios of smart grid technologies and applications into and on the electrical grid.
 
 
10

 
 
Ambient continues to seek new opportunities for commercial deployments and to bring new and existing networks to full commercialization. Throughout 2011, Ambient’s principal target customers will continue to be electric utilities that seek to both increase efficiencies in the delivery of energy and enable consumers to better understand and manage their energy consumption.  Ambient seeks to continue to extend existing relationships, and develop new relationships to collaborate on efforts to drive the development of new functionality for both utility and consumer applications that further enhance the value of the Ambient Smart Grid® platform.
 
Since inception through December 31, 2010, we have funded operations primarily through the sale of our securities and most recently from the revenue generated from purchase orders received from our marquee customer. In connection with the continued development, upgrade, and marketing of our products, technology, and services, Ambient will continue to emphasize the ongoing research and development efforts necessary to complete development of our fourth generation Node, incorporate additional applications into our platform, and to continue to enhance the capabilities and functionality of our AmbientNMS® system used by customers to scale and manage the network created by the deployment of our Nodes.

In February 2011, our majority stockholder approved a reverse split of our common stock, in the range of 1-for 30 to 1-for 100, which our Board of Directors may implement in its discretion (if at all) before December 31, 2011, without any further stockholder approval.  Our Board approved and recommended the reverse stock split primarily in order to increase Ambient’s prospects of successfully listing its common stock on the NASDAQ Capital Market.  In connection therewith and in an effort to strengthen our balance sheet position in any such listing effort, as discussed below in further detail in December 2010 our majority stockholder applied the $5 million then remaining in the escrow account for our benefit to the purchase of Ambient’s securities.

Prospects and Outlook

Our business success in the immediate future will depend largely on our ability to execute on our agreement with our marquee customer and their continual expansion of  their existing deployments, as well as the deployment decisions of other utilities. Today, Ambient is reliant on one significant marquee customer that shares the Ambient vision for an open standards-based common communications infrastructure. We anticipate that we will continue to collaborate with this customer and continue to support their smart grid deployments.

Notwithstanding the above, Ambient recognizes that our customer could alter their vision regarding the common communications infrastructure, determine that a competing company offers a more desirable product, or slow its deployments indefinitely, significantly affecting the prospects and outlook of the Company.

Additionally, management is unable at this time to assess the effects, if any, that the proposed merger between Duke and Progress Energy, which merger was announced in January 2011 and is subject to shareholder and regulatory approval, 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 at Duke Energy.

As we have demonstrated success over the course of 2010 and beyond, we believe that additional utilities will ultimately begin to accept and endorse the concept of one common communications infrastructure to support many utility and consumer applications, strengthening Ambient’s position. However, no assurance can be given that this development will in fact ultimately occur and even if it does that the Ambient Smart Grid® will be their choice technology.
 
 
11

 

RESULTS OF OPERATIONS
 
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2011 TO THE THREE MONTHS ENDED MARCH 31, 2010

REVENUE. Revenues for the three months ended March 31, 2011 were $12,006,483 compared to $1,683,925 for the corresponding period in 2010. Revenues for each of the 2011 and 2010 periods were attributable to the sales of products and maintenance to our customer. Revenues for the 2011 and 2010 periods related to the sales of Products totaled $11,972,003 and $1,665,065 respectively. The increase in revenue during the 2011 period reflects an increase in the number of communication nodes delivered.

COST OF GOODS SOLD. Cost of goods sold for the three months ended March 31, 2011 was $6,800,970 compared to $1,141,038 during the corresponding period in 2010. Cost of goods sold included all direct costs related to manufacturing of products and consisted primarily of direct material. Cost of goods sold also included expenses related to the write down of inventory to the lower of cost or market.  The increase in cost of goods sold during the 2011 period reflected the increase in production to fill purchase orders placed by our customer as discussed above in REVENUES.
 
GROSS PROFIT. Gross profit for the three months ended March 31, 2011 was $5,205,513 compared to $542,887 for the corresponding period in 2010. The overall gross margins for the 2011 period increased to 43% compared to 32% during the 2010 period.  The increase in the gross margin percentage in the three month period ended March 31, 2011 compared to the corresponding period in 2010 is a reflection of the maturing of our product set, an enhanced ability to plan production and scale based on increased lead-time and transparency in the forecasting and purchasing process of our customer, and a stable and productive relationship with our contract manufacturer.
 
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consisted of expenses incurred primarily in designing, developing and field testing our smart grid solutions. These expenses consisted primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties. Research and development expenses for the three months ended March 31, 2011 were $1,869,005 compared to $1,564,900 during the corresponding period in 2010. The increase in research and development during the 2011 period was due primarily to the increase in personnel and consultants for the continued development of our fourth generation communications Node, and the enhancement of our AmbientNMS® system. We believe that our continued development efforts are critical to our strategic objectives of enhancing our technology while reducing cost 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 additional value-added functionality for the Ambient Smart Grid® communications platforms.

OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and administrative expenses primarily consisted of salaries and other related costs for personnel in executive and other administrative functions. Other significant costs included professional fees for legal, accounting and other services. General and administrative expenses for the three months ended March 31, 2011 were $1,577,525 compared to $1,156,726 for the corresponding period in 2010. The increase in operating, general and administrative expenses was due in efforts to market and commercialize the Ambient Smart Grid® communications platforms and an increase in personnel. As we continue to increase our efforts to market and commercialize the Ambient Smart Grid® communications platform, we expect our operating, general and administrative expenses to increase for the remainder of the fiscal year 2011.
 
STOCK BASED COMPENSATION. A portion of our operating expenses were attributable to non-cash charges associated with the compensation of employees through the issuance of stock options and stock grants. Stock-based compensation is a non-cash expense and will therefore have no impact on our cash flows or liquidity. For the three months ended March 31, 2011, we incurred non-cash stock-based compensation expense of $652,071 compared to $29,931 for the corresponding period in 2010.
 
INTEREST AND FINANCE EXPENSES. For the three months ended March 31, 2011, we incurred interest of $1,429 compared to $212,474 for the corresponding period in 2010. Interest in the 2011 period related primarily to financing of various insurance policies and the 2010 period related primarily to our 8% Secured Convertible Promissory Notes, which were issued in July and November of 2007 and January 2008. Additionally, for the three months ended March 31, 2011 and 2010, we incurred non-cash interest expense of $0 and $183,609 respectively. This interest related to the amortization of the beneficial conversion features and deferred financing costs incurred in connection with the placement of our convertible promissory notes. These costs were amortized to the date of maturity of the debt unless converted earlier. In January 2010, Vicis converted the remaining $10 million outstanding on the notes. Following the conversion of the notes, we no longer had any long-term debt.
 
 
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LIQUIDITY AND CAPITAL RESOURCES

While we have, since inception, funded operations primarily through the sale of our securities, most recently the revenues generated from purchase orders received from our marquee customer have been applied to meet our operating requirement. In addition, the $5 million proceeds from the investment in December 2010 by our majority stockholder formerly on deposit in the escrow account established for our benefit strengthened our cash position. Management believes that cash on hand plus anticipated revenue from purchase orders received from our marquee customer will allow us to meet our operating requirements for the remainder of fiscal year 2011. However, we may need to raise additional funds to expand existing commercial deployments, support strategic acquisitions and/ or joint venture opportunities, and/or to satisfy any additional significant purchase order that it may receive. At the present time, the Company does not have any commitments for additional funding.
 
Cash balances totaled $8,729,310 at March 31, 2011 and $6,986,881 at December 31, 2010.

Net cash provided  by operating activities for the three months ended March 31, 2011 was $2,067,585 and was primarily generated due to the increase in revenue.
 
Net cash used in investing activities totaled $354,174 during the three months ended March 31, 2011 and was for additions to property and equipment.
 
Net cash provided by financing activities totaled $29,018 during the three months ended March 31, 2011 and represented proceeds from the issuances of common stock for the exercise of warrants, options, and was net of the payments on capitalized lease obligations.
 
 ITEM 4.  CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures that are designed to ensure 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 President and Chief Executive Officer (who also serves as our principal executive officer and principal financial and accounting officer) to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e).
 
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 President and Chief Executive Officer (who also serves as our principal executive officer and principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer concluded that our disclosure controls and procedures were effective.
 
During the quarter ended March 31, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.  
 
 
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PART II - OTHER INFORMATION
 
 ITEM 6.  EXHIBITS
 
Exhibit
No.
 
Description
     
31
 
Certification of John J. Joyce, Chief Executive Officer (Principal Executive officer and Principle Financial and Accounting Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32
 
Certification of John J. Joyce, Chief Executive Officer (Principal Executive officer and Principle Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
 
 
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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  
       
Dated: May 9, 2011 
By:
/s/ John J. Joyce  
    John J. Joyce  
    Chief Executive Officer (Principal Executive Officer and  
    Principal Financial and Accounting Officer)  
 
 
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EXHIBIT INDEX

Exhibit
No.
 
Description
     
31
 
Certification of John J. Joyce, Chief Executive Officer (Principal Executive officer and Principle Financial and Accounting Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32
 
Certification of John J. Joyce, Chief Executive Officer (Principal Executive officer and Principle Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
 
 
 
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