As filed with the Securities and Exchange Commission on August 19, 2011

Registration No. 333-      

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

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

AMBIENT CORPORATION

 

(Exact name of registrant as specified in its charter)

 

 

7 WELLS AVENUE

NEWTON, MASSACHUSETTS 02459

(617) 332-0004

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

JOHN J. JOYCE

7 WELLS AVENUE

NEWTON, MASSACHUSETTS 02459

(617) 332-0004

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

 

Approximate Date of Proposed Sale to the Public:  As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED AUGUST 19, 2011

 

PRELIMINARY PROSPECTUS

 

 

           Shares

Common Stock

$      per share

 

 

We are offering           shares of our common stock. Our common stock is listed on the NASDAQ Capital Market under the symbol “AMBT.” On August 18, 2011, the last reported sale price of our common stock on the NASDAQ Capital Market was $8.20 per share.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

 

 

We have granted the underwriters a 30-day option to purchase up to an additional           shares of common stock to cover over-allotments, if any.

 

Delivery of the shares is expected to be made on or about          , 2011.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

Stifel Nicolaus Weisel

 

 

The date of this prospectus is          , 2011.

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you in this prospectus when you make a decision about whether to invest in our common stock. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. This prospectus is not an offer to sell, nor is it seeking offers to buy, shares of our common stock in any circumstance under which the offers, sales or solicitations are unlawful or in jurisdictions where offers, sales or solicitations are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock. Our business, prospects, financial condition and results of operations may have changed since that date.

 

In this prospectus, “company,” “we,” “us,” and “our” refer to Ambient Corporation and its subsidiary.

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates.

 

PROSPECTUS SUMMARY

	•	We currently depend on one customer, Duke Energy, for substantially all of our revenue, and any material delay, reduction or cancellation of orders from this customer would significantly reduce our revenue and have a material negative impact on our business.
	•	We have never achieved profitability on an annual basis, and we may be unable to achieve or maintain profitability in future periods.
	•	Utility industry sales cycles can be lengthy and unpredictable, which can negatively impact our ability to expand the deployment of our products with Duke Energy and to secure new customers.
	•	The market for our products and services, and smart grid technology generally, is still developing and we will have difficulty expanding our business and securing new customers if the market develops less extensively or more slowly than we expect.
	•	Because the markets for our products are highly competitive, we may lose sales to our competitors, which would harm our revenue and operating results.

	•	If we are unable to keep pace with technological innovations and are unable to continue to develop new products and product enhancements, we may be unable to expand our business with Duke Energy or secure new customers.

	•	Our inability to protect our intellectual property could impair our competitive advantage, reduce our revenue and increase our costs.
	•	Our principal stockholder will continue to be able to exert substantial influence over us.

Common stock offered by us		shares
Over-allotment option offered by us		shares
Common stock to be outstanding after this offering		shares
Use of proceeds		We intend to use the net proceeds from this offering for general corporate purposes, which may include working capital and capital expenditures.
Risk factors		You should read the “Risk Factors” section of this prospectus for a discussion of the factors to consider carefully before deciding to invest in shares of our common stock.
NASDAQ Capital Market symbol		“AMBT”

	•	an aggregate of 1,174,715 shares issuable upon the exercise of then outstanding stock options at a weighted average exercise price of $11.18 per share;
	•	an aggregate of 1,151,807 shares issuable upon the exercise of then outstanding warrants at a weighted average exercise price of $16.29 per share; and
	•	an aggregate of 2,322,916 shares reserved for issuance under our 2000 Equity Incentive Plan and 2002 Non-Employee Directors Stock Option Plan.

		Year Ended December 31,																				Six Months Ended June 30,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenue		$	2,337			$	2,265			$	12,622			$	2,193			$	20,358			$	6,258			$	27,993
Cost of goods sold			1,751				1,806				9,942				1,836				12,023				3,782				15,963
Gross profit			586				459				2,680				357				8,335				2,476				12,030
Operating expenses:
Research and development expenses			3,559				3,675				4,351				4,946				6,314				2,975				4,893
Selling, general and administrative expenses			3,530				4,012				3,600				4,662				5,239				2,305				3,507
Total operating expenses			7,089				7,687				7,951				9,608				11,553				5,280				8,400
Operating (loss) income			(6,503	)			(7,228	)			(5,271	)			(9,251	)			(3,218	)			(2,804	)			3,630
Interest (expense) income, net			(482	)			(1,102	)			(3,116	)			(4,963	)			(214	)			(213	)			12
Amortization of beneficial conversion feature of convertible debt			(2,194	)			(2,657	)			—				—				—				—				—
Amortization of deferred financing costs			(3,560	)			(4,943	)			—				—				—				—				—
Loss on extinguishment of debt			—				—				(2,789	)			—				—				—				—
Other income (expense), net			—				174				(118	)			(32	)			246				—				—
Total other (loss) income			(6,236	)			(8,528	)			(6,023	)			(4,995	)			32				(213	)			12
Provision for income taxes			—				—				—				—				—				—				109
Net (loss) income		$	(12,739	)		$	(15,756	)		$	(11,294	)		$	(14,246	)		$	(3,186	)		$	(3,017	)		$	3,533
Net (loss) income per share (basic)		$	(7.29	)		$	(6.55	)		$	(3.75	)		$	(1.81	)		$	(0.21	)		$	(0.20	)		$	0.21
Net (loss) income per share (diluted)		$	(7.29	)		$	(6.55	)		$	(3.75	)		$	(1.81	)		$	(0.21	)		$	(0.20	)		$	0.21
Weighted average shares used in computing basic net (loss) income per share			1,747				2,405				3,016				7,891				15,385				15,022				16,496
Weighted average shares used in computing diluted net (loss) income per share			1,747				2,405				3,016				7,891				15,385				15,022				16,936

		As of December 31,																				As of June 30,
		2006				2007				2008				2009				2010				2010				2011
BALANCE SHEET DATA:
Cash and cash equivalents		$	2,386			$	546			$	8,012			$	987			$	6,987			$	1,374			$	12,545
Total assets			5,429				2,816				10,622				3,393				10,573				3,041				16,798
Working capital, net(1)			2,197				(253	)			7,688				(225	)			5,577				(411	)			10,203
Convertible debt (current and long-term portion)			1,164				2,672				755				9,816				—				—				—
Total stockholders’ equity (deficit)			2,795				(1,465	)			7,454				(9,535	)			6,136				109				11,109
CASH FLOW DATA:
Cash flows from operations			(6,362	)			(6,697	)			(5,549	)			(7,720	)			(1,592	)			(1,969	)			5,940
Cash flows from investing activities			(360	)			50				(576	)			(269	)			(527	)			(264	)			(511	)
Cash flows from financing activities			8,713				4,807				13,591				964				8,119				2,620				129

(1)		Excluding current portion of convertible debt

 

An investment in our common stock involves a substantial risk of loss. You should read and carefully consider the following risks, together with the financial and other information contained in this prospectus, before you decide to invest in shares of our common stock. Our business, operating results and financial condition may be materially and adversely affected by any of these risks. As a result, the market price of our common stock could decline, and you could lose all or part of your investment.

 

Risks Related to our Business

 

We currently depend on one customer for substantially all of our revenue, and any material delay, reduction or cancellation of orders from this customer would significantly reduce our revenue and have a material negative impact on our business.

 

Duke Energy accounted for substantially all of our revenue for each of our last five fiscal years and for the first six months of our current fiscal year. Any material delay, reduction or cancellation of orders from Duke Energy would have a material adverse effect on our business, including significantly reduced revenue, unabsorbed overhead and incurred net losses.

 

Although we have a long-term contract that stipulates the general terms of our relationship, Duke Energy does not provide us with firm purchase commitments for the duration of the contract. Instead, Duke Energy provides us with 12-month rolling order forecasts and monthly purchase orders. Duke Energy, can delay, reduce or cancel purchase orders at any time prior to the anticipated lead time for delivery of the products (typically three months), subject to Duke Energy’s payment of a cancellation fee not to exceed the price of the products cancelled. Duke Energy may also delay, reduce or cancel its purchase orders without penalty if we are unable to deliver the products ordered thereunder within a specified time from the scheduled delivery date.

 

Our immediate business opportunities continue to be primarily dependent on the success of our deployments with Duke Energy and the future decisions of Duke Energy relating to its smart grid deployment in its service territories. Our goal is to increase our business with Duke Energy and to attract new customers. We may not achieve this goal within an acceptable period of time or at all. The failure to increase our business with Duke Energy or to attract new customers would have a material adverse effect on our business and prospects.

 

In January 2011, Duke Energy and Progress Energy announced a proposed merger that is subject to stockholder and regulatory approval. Since the merger of Duke Energy and Progress Energy is complex and each company has its own smart grid related investment plans, we are unable to assess the effects, if any, that the proposed merger will have on our business. We cannot assure you that the post-merger entity will continue or expand its business with us.

 

We have never achieved profitability on an annual basis, and we may be unable to achieve or maintain profitability in future periods.

 

We have never achieved profitability on an annual basis. We incurred net losses of $15.8 million in 2007, $11.3 million in 2008, $14.2 million in 2009 and $3.2 million in 2010. At December 31, 2010, we had an accumulated deficit of $143.4 million. We had net income of $1.1 million in the first quarter of our current fiscal year and $2.4 million in the second quarter of our current fiscal year. We may not, however, be able to maintain profitability in our current or future fiscal years. To grow our revenue and customer base, we also plan to increase spending associated with technology and business development, thereby increasing our operating expenses. These increased costs may cause us to incur net losses in the foreseeable future, and we may be unable to grow our revenue and expand our customer base to become profitable on an annual basis.

We depend on factors affecting the utility industry.

 

We expect to continue to derive substantially all of our revenue from sales of products to utilities. Purchases of our products may be deferred as a result of many factors, including economic downturns, slowdowns in new residential and commercial construction, access to capital at acceptable terms, utility specific financial circumstances, mergers and acquisitions, regulatory decisions, weather conditions and interest rates. We may experience variability in operating results on an annual and a quarterly basis as a result of these factors.

 

Utility industry sales cycles can be lengthy and unpredictable, which can negatively impact our ability to expand the deployment of our products with Duke Energy and to secure new customers.

 

Sales cycles for smart grid projects are generally long and unpredictable due to budgeting, procurement and regulatory approval processes that can take up to several years to complete. Utility customers typically issue requests for quotes and proposals, establish evaluation committees, review different technical options, require pilot programs prior to commercial deployments, analyze cost and benefit metrics, consider regulatory factors and follow their normal budget approval processes. In addition, many electric utilities tend to be risk averse and tend to follow industry trends rather than be the first to purchase new products or services. These tendencies can extend the lead time for, or prevent acceptance of, new products or services, including those for smart grid initiatives despite the support of the federal government through grants and other incentives.

 

Accordingly, potential customers may take longer to reach a decision to initiate smart grid programs or to purchase our products or services. It is not unusual for a utility customer to go through the entire sales process and not accept any proposal or quote. This extended sales process requires the dedication of significant time by our personnel to develop relationships at various levels and within various departments of utilities and our use of significant financial resources, with no certainty of success or recovery of our related expenses. Long and unpredictable sales cycles with utility customers could have a material adverse effect on our business, operating results or our financial condition.

 

The market for our products and services, and smart grid technology generally, is still developing and we will have difficulty expanding our business and securing new customers if the market develops less extensively or more slowly than we expect.

 

The market for our products and services, and smart grid technology generally, is still developing, and it is uncertain whether our products and services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness and ability of utilities to implement smart grid technology. Many utilities lack the financial resources and/or technical expertise required to evaluate, deploy and operate smart grid technology. Regulatory agencies, including public utility commissions, govern utilities’ activities, and they may not create a regulatory environment that is conducive to the implementation of smart grid technologies in a particular jurisdiction. Furthermore, some utilities may be reluctant or unwilling to adopt smart grid technology because they may be unable to develop a business case to justify the up-front and ongoing expenditures. If utilities do not widely adopt smart grid technologies or do so more slowly than we expect, we will have difficulty expanding our business and securing new customers, which will adversely affect our business and operating results.

 

Because the markets for our products are highly competitive, we may lose sales to our competitors, which would harm our revenue and operating results.

 

Competition in the smart grid market is intense and involves rapidly changing technologies, evolving industry standards, frequent new product introductions, changes in customer or regulatory requirements and localized market requirements. Competitive pressures require us to keep pace with the evolving needs of utilities; to continue to develop and introduce new products, features and services in a timely, efficient and cost-effective manner; and to stay abreast of regulatory factors affecting the utility industry.

We compete with a wide array of manufacturers, vendors, strategic alliances, systems developers and other businesses, including other smart grid communications technology companies, ranging from relatively smaller companies focusing mainly on communications technology to large Internet and software-based companies. In addition, some providers of smart meters may add communications capabilities to their existing business in the future, which could decrease our base of potential customers and could decrease our revenue and profitability. “Early adopters,” or customers that have sought out new technologies and services, have largely comprised the target market for our products. Because the number of early adopters is limited, we will need to expand our target markets by marketing and selling our products to mainstream customers to continue our growth.

 

Some of our present and potential future competitors have, or may have, greater name recognition, experience and customer bases as well as substantially greater financial, technical, sales, marketing, manufacturing and other resources than we possess and that afforded them competitive advantages. These potential competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers and exert more influence on sales channels than we do. Competitors may sell products at lower prices in order to obtain market share. Competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Competitors may also be able to devote greater resources to the development, promotion and sale of their products and services than we can. Competitors may introduce products and services that are more cost-efficient, provide superior performance or achieve greater market acceptance than our products and services. Our competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Other companies may also drive technological innovation and develop products that are equal or superior in quality and performance to our products and render our products non-competitive or obsolete.

 

Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete and reduce our market share and revenue, any of which could have a material adverse effect on our operating results and financial condition. If we fail to compete successfully with current or future competitors, we could experience material adverse effects on our business, financial condition, results of operations and cash flows.

 

If we are unable to keep pace with technological innovations and are unable to continue to develop new products and product enhancements, we may be unable to expand our business with Duke Energy or secure new customers.

 

We operate in a new and evolving market. Technological advances, the introduction of new products, evolving industry standards, changing industry preferences and changes in utility industry regulatory requirements could adversely affect our business unless we are able to adapt to the changing conditions. Technological advances or changing industry preferences could render our products less desirable or obsolete, and we may not be able to respond effectively to the requirements of evolving market conditions. As a result, we may need to commit significant financial and other resources to the following:

 

 

Our future success depends on our ability to address the changing market needs by developing and introducing new products and product updates that compare favorably on the basis of timely introduction, cost and performance

with the products of competitive suppliers and evolving technologies. We must also extend and keep pace with technological developments and emerging industry standards that address the needs of customers. We intend to commit substantial resources to developing new products, product enhancements and technological advances for the smart grid market. The smart grid market is relatively new, and industry standards for this market are evolving and changing. If the smart grid market does not develop as anticipated, or if demand for our products in this market does not materialize or occurs more slowly than we expect, we will have expended substantial resources and capital without realizing sufficient revenue, which will adversely affect our business and operating results.

 

Existing and future regulations concerning the electric utility industry may present technical, regulatory and economic barriers that may significantly impact future demand for our products.

 

International, federal, state and local government regulations and policies, as well as internal policies and regulations promulgated by electric utilities, heavily influence the market for the electric utility industry. These regulations and policies often relate to investment initiatives, including decisions relating to investment in smart grid technologies, as well as building codes, public safety regulations and licensing requirements. In addition, certain of our contracts with our potential utility customers may be subject to approval by federal, state or local regulatory agencies, which may not be obtained or be issued on a timely basis. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified and have a substantial impact on the market for our and other smart grid related technologies. If such regulations or policies do not continue to gain acceptance for smart grid initiatives or the adoption of such initiatives takes substantially longer than expected, our prospects for developing new customers could be significantly limited.

 

Duke Energy and some potential utility customers have applied for government grants and may also seek to participate in other government incentive programs, and if those grants or other incentives are not received or are significantly delayed, our results of operations could suffer.

 

Many utilities, including Duke Energy and some of our potential utility customers, have applied for grants and may seek to participate in other government incentive programs designed to stimulate the U.S. economy and support environmental initiatives, including smart grid technologies. In certain cases, such as with the American Reinvestment and Recovery Act of 2009, or ARRA, the U.S. government has approved the funds, and the government and the utilities have entered into agreements under which the government has agreed to award funds to the utilities, but significant portions of the funds have not yet been distributed. Duke Energy has applied for and been granted funding under ARRA programs, which may account for a significant portion of our current and anticipated future revenue and billings. Duke Energy and our potential utility customers that seek these government grants or incentives may delay or condition the purchase of our products and services upon receipt of such funds or upon their confidence in the future disbursement and tax treatment of those funds. If Duke Energy and our potential utility customers do not receive these funds or if their receipt of funds is significantly delayed, our operating results could suffer. Similarly, the receipt of government funds or incentives may be conditioned upon utilities meeting milestones and other requirements, some of which may not be known until a future point in time. If our products and services do not meet the requirements necessary for receipt of government funds or other incentives, Duke Energy and our potential utility customers may delay or condition the purchase of our products and services until they meet these requirements, and our results of operations could suffer. Furthermore, there may not be government funds or incentives for utilities in future periods. As a result, Duke Energy and our potential utility customers may not have the resources or incentives to purchase our products and services in those future periods.

 

The adoption of industry standards applicable to our products or services could limit our ability to compete in the marketplace.

 

Standards bodies, which are formal and informal associations that seek to establish voluntary, non-governmental product and technology standards, are influential in the United States and abroad. We participate in voluntary standards organizations in order to both help promote non-proprietary, open standards for interoperability with our products and to prevent the adoption of exclusionary standards. However, we are not able to control the content of adopted voluntary standards and do not have the resources to participate in all voluntary standards processes that

may affect our markets. The adoption, or expected adoption, of voluntary standards that are incompatible with our products or technology or that favor our competitors’ products or technology could limit the market opportunity for our products and services or render them obsolete, any of which could materially and adversely affect our revenue, results of operations and financial condition.

 

If we become subject to product returns and product liability claims resulting from defects in our products, we may fail to achieve market acceptance of our products, and our business could be harmed.

 

We develop complex products for use in an evolving marketplace and generally warrant our products for a period of 12 months from the date of sale. Despite testing by us and customers, our products may contain or may be alleged to contain undetected errors or failures. In addition, a customer or its installation partners may improperly install or implement our products. The integration of our products in smart grid networks or applications may entail the risk of product liability or warranty claims based on disruption to these networks or applications. Any such manufacturing errors or product defects could result in a delay in recognition or loss of revenue, loss of market share or failure to achieve market acceptance. Additionally, these defects could result in financial or other damages to a customer; cause us to incur significant warranty, support and repair costs; and divert the attention of our engineering personnel from our product development efforts. A product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend. The occurrence of these problems would likely harm our business.

 

We currently maintain property, general commercial liability, errors and omissions and other lines of insurance. Such insurance may be insufficient in amount to cover any particular claim, or we might not carry insurance that covers a specific claim. In addition, such insurance may not be available in the future or the cost of such insurance may increase substantially.

 

Our ability to provide bid bonds, performance bonds or letters of credit may be limited and could negatively affect our ability to bid on or enter into significant long-term agreements.

 

We may be required to provide bid bonds or performance bonds to secure our performance under customer contracts or, in some cases, as a prerequisite to submit a bid on a potential project. Our ability to obtain such bonds will depend upon our capitalization, working capital, past performance, management expertise and reputation, and external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time. Surety companies may require that we collateralize a percentage of the bond with our cash or other form of credit enhancement. Events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. In addition, utilities may require collateral guarantees in the form of letters of credit to secure performance or to fund possible damages as the result of an event of default under any contracts with them. If we enter into significant long-term agreements that require the issuance of letters of credit, our liquidity could be negatively impacted. Our inability to obtain adequate bonding or letters of credit and, as a result, to bid or enter into significant long-term agreements, could have a material adverse effect on our ability to effectively compete and could impact our future business.

 

We currently rely on a single contract manufacturer to produce our products, and a loss of our sole contract manufacturer or its inability to satisfy our quality and other requirements could severely disrupt the production and supply of our products.

 

We utilize one contract manufacturer for all of our production requirements. This manufacturing is conducted in China by a U.S.-based company that also performs services for numerous other companies. We depend on our manufacturer to maintain high levels of productivity and satisfactory delivery schedules. Our reliance on our manufacturer reduces our control over the manufacturing process, exposing us to risks, including reduced control over quality assurance, product costs and product supply. Any financial, operational or other difficulties involving our manufacturer could adversely affect us. We provide our manufacturer with up to 12-month rolling forecasts of our production requirements. We do not, however, have long-term agreements with our manufacturer that

guarantees production capacity, prices, lead times or delivery schedules. Since our manufacturer serves other customers, a number of which have greater production requirements than we do, our manufacturer could determine to prioritize production capacity for other customers or reduce or eliminate production for us on short notice. We could also encounter lower manufacturing productivity and longer delivery schedules in commencing volume production of new products. Any of these problems could result in our inability to deliver our products in a timely manner and adversely affect our operating results. The loss of our relationship with our manufacturer or its inability to conduct its manufacturing services for us as anticipated in terms of cost, quality and timeliness could adversely affect our ability to fill customer orders in accordance with required delivery, quality and performance requirements. If this were to occur, the resulting decline in revenue would harm our business.

 

If any one of these risks materializes, it could significantly impact our operations and our ability to fulfill our obligations under purchase orders with Duke Energy as well as future orders from Duke Energy or other customers. Qualifying new manufacturers is time consuming and might result in unforeseen manufacturing and operational problems. If we had to transition to an alternative contract manufacturer we could experience operational delays, increased product costs and increased operating costs which could irreparably harm our relationship with Duke Energy, harm our reputation and could potentially impact our ability to secure new customers.

 

Shortages of components and materials may delay or reduce our sales and increase our costs, thereby harming our results of operations.

 

The inability of our manufacturer to obtain sufficient quantities of components and other materials necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Some of the materials used in the production of our products are available from a limited number of foreign suppliers, particularly suppliers located in Asia. In most cases, neither we nor our manufacturer has long-term supply contracts with these suppliers. As a result, we are subject to increased costs, supply interruptions and difficulties in obtaining materials.

 

Security breaches involving our smart grid products or services, publicized breaches in smart grid products and services offered by others or the public perception of security risks or vulnerability created by the deployment of the smart grid in general, whether or not valid, could harm our business.

 

The security technologies we have integrated into our communications platform and products that are designed to detect unauthorized activity and prevent or minimize security breaches may not function as expected and our products and services, those of other companies with whose products our products and services are integrated or interact, or even the products of other smart grid solutions providers may be subject to significant real or perceived security breaches.

 

Our communications platform allows utilities to monitor, compile and analyze sensitive information related to consumers’ energy usage, as well as the performance of different parts of the electric power distribution grid. As part of our data transfer and managed services, we may store and/or come into contact with sensitive consumer information and data when we perform operational, installation or maintenance functions for a utility customer. If, in handling this information, we, our partners or a utility customer fails to comply with privacy or security laws, we could face significant legal and financial exposure to claims of government agencies, utility customers and consumers whose privacy is compromised. Even the perception that we, our partners or a utility customer has improperly handled sensitive, confidential information could have a negative effect on our business. In addition, third parties may, through computer viruses, physical or electronic break-ins and other means, attempt to breach our security measures or inappropriately use or access our AmbientNMS^® or the communications nodes we have in the field. If a breach is successful, sensitive information may be improperly obtained, manipulated or corrupted, and we may face legal and financial exposure. In addition, a breach could lead to a loss of confidence in our products and services, and our business could suffer.

 

Our current and anticipated future products and services allow authorized personnel to remotely control equipment at residential and commercial locations, as well as at various points on the grid. For example, our software could allow a utility to remotely connect and disconnect electricity at specific customer locations. If an

unauthorized third party were to breach our security measures and disrupt, gain access to, or take control of, any of our products or services, our business and reputation could be severely harmed.

 

Our products and services may also be integrated or interface with products and services sold by third parties, and rely on the security of those products and their secure transmission of proprietary data over the Internet and other networks. Because we do not have control over the security measures implemented by third parties in their products or in the transmission of data over the Internet and other networks, we cannot ensure the complete integrity or security of such third-party products and transmissions.

 

Concerns about security or customer privacy may result in the adoption of state or federal legislation that restricts the implementation of smart grid technology or requires us to make modifications to our products, which could significantly limit the deployment of our technologies or result in significant expense to modify our products.

 

Any real or perceived security breach could seriously harm our reputation and result in significant legal and financial exposure, inhibit market acceptance of our products and services, halt or delay the deployment by utilities of our products and services, cause us to lose sales, trigger unfavorable legislation and regulatory action and inhibit the growth of the overall market for smart grid products and services. Any of these risks could have a material adverse effect on our business, operating results and financial condition.

 

Developments in data protection laws and regulations may affect technology relating to smart grid products and solutions, which could adversely affect the demand for our products and services.

 

Our products and services may be subject to data protection laws and regulations that impose a general framework for the collection, processing and use of personal data. Our communications platform relies on the transfer of data relating to individual energy use and may be affected by these laws and regulations. It is unclear how the regulations governing the transfer of personal data in connection with privacy requirements will further develop in the United States and internationally, and to what extent this may affect technology relating to smart grid products and services. This could have a material adverse effect on our business, financial condition and results of operations.

 

We use some open source software in our products and services that may subject our products and services to general release or require us to re-engineer our products and services, which may cause harm to our business.

 

We use some open source software in connection with our products and services. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. We monitor the use of open source software in our products and services and try to ensure that none of the open source software is used in a manner that would require us to disclose the source code to the related product or that would otherwise breach the terms of an open source agreement. However, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our products, discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.

Our quarterly results are inherently unpredictable and subject to substantial fluctuations, and, as a result, we may fail to meet the expectations of securities analysts and investors, which could adversely affect the trading price of our common stock.

 

Our revenue and other operating results may vary significantly from quarter to quarter as a result of a number of factors, many of which are outside of our control. While our revenue has increased in recent periods, there can be no assurances that our revenue will continue to increase or will not decrease on a quarterly or annual basis.

 

The factors that may affect the unpredictability of our quarterly results and cause our stock price to fluctuate include the following:

 

 

As a result, we believe that quarter to quarter comparisons of operating results are not necessarily indicative of what our future performance will be. In future quarters, our operating results may be below the expectations of securities analysts or investors, in which case the price of our common stock may decline.

 

Negative economic conditions in the United States and globally may have a material and adverse effect on our operating results, cash flow and financial condition.

 

The economies in the United States and countries around the world have been recovering from a global financial crisis and recession, which began in 2008, but financial markets and world economies continue to be volatile. Significant long-term effects will likely result from the financial crisis and recession, including slower and more volatile future global economic growth than during the years prior to the financial crisis of 2008. A lower future economic growth rate could result in reductions in sales of our products and services, slower adoption of new technologies and an increase price competition. Any of these events would likely harm our business, results of operations and financial condition.

 

International manufacturing and sales risks could adversely affect our operating results.

 

Our products are produced in China by a U.S.-based, third-party contract manufacturer. We may also expand our addressable market by pursuing opportunities to sell our products in international markets. We have had no experience operating in markets outside of the United States. Accordingly, new markets may require us to respond to new and unanticipated regulatory, marketing, sales and other challenges. We may not be successful in responding to these and other challenges that we may face as we enter and attempt to expand in international markets. International operations also entail a variety of other risks. The manufacture of our products abroad and our

potential expansion into international markets expose us to various economic, political and other risks that could adversely affect our operations and operating results, including the following:

 

 

International operations are also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. One or more of these factors could adversely affect any international operations and result in lower revenue than we expect and could significantly affect our profitability.

 

Growth in our business may be impacted if international trade is hindered, disrupted or economically disadvantaged.

 

Political and economic conditions abroad may adversely affect the foreign production of our products as well as the sale of our products if we expand our business internationally. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws or other trade policies, could adversely affect our ability to obtain product production from foreign manufacturers and to sell our products in foreign countries.

 

Changes in policies by the U.S. or foreign governments resulting in, among other things, higher taxation, currency conversion limitations, restrictions on the transfer of funds or the expropriation of private enterprises also could have a material adverse effect on us. Any actions by countries in which we conduct business to reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our services to our U.S. customers and adversely impact our operating results.

 

Our operating results could be adversely affected by fluctuations in the value of the U.S. dollar against foreign currencies.

 

We currently transact business in U.S. dollars with our U.S.-based manufacturer that produces our products in China. A weakening of the dollar could cause our overseas manufacturer to require renegotiation of either the prices or currency we pay for its services. In the future, our manufacturer and international customers, if any, could negotiate pricing and make or require payments in non-U.S. currencies.

 

If our overseas vendors or customers require us to transact business in non-U.S. currencies, fluctuations in foreign currency exchange rates could affect our cost of goods, operating expenses and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results. We currently do not hedge any foreign currencies.

Our inability to protect our intellectual property could impair our competitive advantage, reduce our revenue and increase our costs.

 

Our success and ability to compete depend in part on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of trade secrets, patents, copyrights, trademarks, confidentiality agreements and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. We generally enter into written confidentiality and non-disclosure agreements with our employees, consultants, customers, manufacturers and other recipients of our technologies and products and assignment of invention agreements with our employees and consultants. We may not always be able to enforce these agreements and may fail to enter into any such agreement in every instance when appropriate. We license from third parties certain technology used in and for our products. These third-party licenses are granted with restrictions; therefore, such third-party technology may not remain available to us on terms beneficial to us. Our failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, operating results and financial condition. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.

 

Patents may not issue from the patent applications that we have filed or may file in the future. Our issued patents may be challenged, invalidated or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have not applied for, and do not have, any copyright registration on our technologies or products. We have applied to register certain of our trademarks in the United States and other countries. We cannot assure you that we will obtain registrations of principle or other trademarks in key markets. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands.

 

We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us.

 

We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of others. While we are not currently subject to any infringement claim, any future claim, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty and licensing agreements, any of which could have a material adverse effect on our business. We may not be able to obtain such licenses on commercially reasonable terms, if at all, or the terms of any offered licenses may be unacceptable to us. If forced to cease using such technology, we may be unable to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing, using or selling certain of our products, which could have a material adverse effect on our business, operating results, and financial condition.

 

Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to make, use or sell our products in the United States or abroad. Such a judgment could have a material adverse effect on our business, operating results and financial condition. In addition, we are obligated under certain agreements to indemnify the other party in connection with infringement by us of the proprietary rights of third parties. In the event we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition and results of operations.

 

We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights.

 

Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies or design around our patents and may have or obtain patents or other

proprietary rights that would prevent, limit or interfere with our ability to make, use or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we may do business, such as China. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may not be adequate or competitors may independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.

 

Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.

 

In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition and results of operations.

 

We depend on key personnel who would be difficult to replace, and our business will likely be harmed if we lose their services or cannot hire additional qualified personnel.

 

Our success depends substantially on the efforts and abilities of our senior management and key personnel. The competition for qualified management and key personnel, especially engineers, is intense. Although we maintain noncompetition and nondisclosure covenants with most of our key personnel, we do not have employment agreements with most of them. The loss of services of one or more of our key employees or the inability to hire, train and retain key personnel, especially engineers and technical support personnel, could delay the development and sale of our products, disrupt our business and interfere with our ability to execute our business plan.

 

Potential strategic alliances may not achieve their objectives, and the failure to do so could impede our growth.

 

We anticipate that we will enter into strategic alliances. Among other matters, we continually explore strategic alliances designed to enhance or complement our technology or to work in conjunction with our technology; to provide necessary know-how, components or supplies; to attract additional customers; and to develop, introduce and distribute products utilizing our technology. Any strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products and expand our business.

 

Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.

 

We may pursue opportunities to acquire other businesses and technologies in order to complement our products, expand the breadth of our business, enhance our technical capabilities or otherwise grow our business. While we have no current definitive agreements underway, we may acquire businesses, products or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute existing stockholders’ percentage ownership, incur substantial debt, assume contingent liabilities or experience higher operating expenses. We have no experience in acquiring other businesses or technologies. Potential acquisitions also involve numerous risks, including the following:

 

 

We cannot assure you that we would be successful in overcoming problems encountered in connection with any acquisitions, and our inability to do so could disrupt our operations and adversely affect our business.

 

Our compliance with the Sarbanes-Oxley Act of 2002 and SEC rules concerning internal controls may be time consuming, difficult and costly, and the failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.

 

Under SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we anticipate that we will be required to furnish a report by our management on our internal control over financial reporting with our Form 10-K for the fiscal year ending December 31, 2012 that includes a statement that our independent auditors have issued an attestation report on management’s assessment of internal control over financial reporting. We have not previously been required to provide an attestation report of our independent auditors. While we have spent considerable time and effort in documenting and testing our internal control procedures in order to provide management’s assessment of our internal control over financial reporting, we may need to spend additional financial and other resources improving our processes, which may result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. Despite our efforts, we can provide no assurance as to our independent auditors’ conclusions with respect to the effectiveness of our internal control over financial reporting. There is a risk that our independent auditors will not be able to conclude that our internal controls over financial reporting are effective.

 

If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information, limit our ability to raise needed capital and have a negative effect on the trading price of our common stock.

 

We expect to incur increased costs as a result of our recent NASDAQ listing, this offering and our anticipated loss of our SEC filing status as a smaller reporting company.

 

We expect to incur increased legal, accounting and other expenses as a result of our NASDAQ listing, the additional stockholders and other consequences of this offering and our anticipated loss of our SEC filing status as a smaller reporting company. Our NASDAQ listing will require changes in our corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly. We will incur additional costs associated with our expanded public company reporting requirements. These new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain our desired coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

 

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to secure additional debt or equity financing in a timely basis or on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we raise additional funds through further issuances

of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

 

Risks Related to Our Common Stock

 

Our principal stockholder will continue to be able to exert substantial influence over us.

 

Vicis Capital Master Fund, or Vicis, owns approximately 84% of the outstanding shares of our common stock. Immediately after consummation of this offering, Vicis will beneficially own approximately     % of our outstanding shares of common stock. Consequently, Vicis will be able to exert substantial influence over our company and control matters requiring approval by our stockholders, including the election of all our directors, approving any amendments to our certificate of incorporation, increasing our authorized capital stock, effecting a merger or sale of our assets and determining the number of shares available for issuance under our stock plans. As a result of Vicis’ control, no change of control of our company can occur without Vicis’ consent.

 

Vicis’ voting control may discourage transactions involving a change of control of our company, including transactions in which you as a holder of our common stock might otherwise receive a premium for your shares over the then current market price. Vicis is not prohibited from selling a controlling interest in our company to a third party and may do so without your approval and without providing for a purchase of your shares of common stock. Accordingly, your shares of common stock may be worth less than they would be if Vicis did not maintain voting control over us.

 

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

 

If you purchase shares of our common stock in this offering, your interest will be diluted by the amount by which the offering price per share exceeds our pro forma net tangible book value per share following this offering. Net tangible book value equals total tangible assets minus total liabilities. As of June 30, 2011, our net tangible book value was $0.67 per share. After giving effect to this offering and assuming an offering price of $     , our pro forma net tangible book value would be $      per share, or $      per share if the underwriters exercise their over-allotment option in full. This represents an immediate dilution of $      per share to new investors purchasing shares of common stock in this offering, or $      per share if the underwriters exercise their over-allotment option in full. The exercise of substantial options and future equity issuances, including future public offerings or private placements of equity securities and any additional shares issuances in connection with any acquisitions, could result in further dilution to investors.

 

Because there has not been an active trading market for our common stock, the offering price in this offering may not be indicative of the market price of our common stock after this offering, which may decrease significantly.

 

Prior to this offering, there has not been an active public market for our common stock. Our common stock was quoted on the OTC Bulletin Board until August 3, 2011 when our common stock was listed on the NASDAQ Capital Market. The weekly trading volume of our common stock averaged approximately 18,425 shares per week during 2010 and approximately 14,030 shares per week during the first six months of 2011. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NASDAQ Capital Market or otherwise or how liquid that market might become. The lack of an active market may reduce the value of your shares and impair your ability to sell your shares at the time or price at which you wish to sell them. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to acquire or invest in other companies, products or technologies by using our common stock as consideration.

The market price of our common stock may be volatile, which could result in substantial losses for investors.

 

The market price of our common stock is likely to be volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:

 

 

In addition, the securities markets have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies. Public announcements by various companies concerning, among other things, their performance, accounting practices or legal problems could cause the market price of our common stock to decline regardless of our actual operating performance.

 

We will have broad discretion over the use of proceeds from this offering and could spend or invest those proceeds in ways with which you might not agree.

 

We will have broad discretion with respect to the use of the net proceeds of this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We currently expect to use these proceeds for general corporate purposes, which may include working capital and capital expenditures.

 

Future sales of common stock by Vicis or others or other dilutive events may adversely affect the market price of our common stock, even if our business is doing well.

 

Immediately after consummation of this offering, we will have outstanding           shares of common stock outstanding. Vicis and our directors and officers have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of Stifel, Nicolaus & Company, Incorporated. All of our outstanding shares are freely transferable except to

the extent covered by the 180-day lock-up and if held by affiliates such as Vicis subject to additional restrictions as to the manner of sale and volume of shares that may be sold in any three month period. Subject to these various restrictions, our existing stockholders could sell any or all of the shares of common stock owned by them from time to time for any reason. Issuance of additional shares upon exercise of options and warrants will further dilute your ownership in the company.

 

Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sales, will have on the market price of our stock. As of August 15, 2011, we had the following outstanding securities:

 

 

We do not expect to pay any dividends for the foreseeable future.

 

We have never declared or paid cash dividends on our common stock, and we do not anticipate doing so in the foreseeable future. We currently intend to return future earnings, if any, to fund our operations and support our growth strategies. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our common stock and may lose some or all of the amount of your investment. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, capital requirements and other factors our board of directors deems relevant.

 

Our ability to use U.S. net operating loss carryforwards might be limited, subjecting our corporate income to earlier taxation.

 

At December 31, 2010, we had available approximately $77 million of net operating loss carryforwards, for U.S. income tax purposes which expire in the years 2016 through 2029. However, due to changes in stock ownership resulting from historical investments provided by Vicis, we expect that the use of the U.S. net operating loss carryforwards are significantly limited under Section 382 of the Internal Revenue Code. As such, we estimate that $61 million or more of our net operating loss carryforwards will expire and will not be available to use against future tax liabilities. In addition, our ability to utilize the current net operating loss carryforwards might be further limited by the issuance of common stock in this offering. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

 

Certain statements included in this prospectus are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act. Such forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “project,” “potential,” “plan,” “continue,” “anticipate,” “appear” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

 

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.”

 

These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

We estimate that we will receive net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, of approximately $      million (or approximately $      million, if the underwriters exercise their over-allotment option in full). A $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, after deducting the underwriting discount and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering for general corporate purposes, which may include working capital and capital expenditures. If the opportunity arises, we may use a portion of the net proceeds from this offering to acquire or invest in businesses, products or technologies that are complementary to our own, although we have no commitments with respect to any such acquisition or investment at this time.

Pending the use of proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. We will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on our judgment regarding the application of the proceeds.

 

Our common stock has been listed on the NASDAQ Capital Market under the symbol “AMBT” since August 3, 2011. Prior to August 3, 2011, our common stock was quoted on the OTC Bulletin Board under the symbol “ABTG.”

 

Although trading in our common stock has occurred on a relatively consistent basis, the volume of shares traded has been sporadic. There can be no assurance that an established trading market will develop, that the current market will be maintained or that a liquid market for our common stock will be available in the future. Investors should not rely on historical stock price performance as an indication of future stock price performance.

 

The following table shows the quarterly high and low bid prices or sales prices for our common stock over the last two completed fiscal years and subsequent interim periods, as quoted on the OTC Bulletin Board (prior to August 3, 2011) and as reported on the NASDAQ Capital Market (beginning on August 3, 2011). In the case of OTC Bulletin Board quotes, the prices represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions. The last reported sale price of our common stock on August 18, 2011 was $8.20 per share.

 

 

As of August 15, 2011, there were 137 holders of record of our common stock. Other than our shares held by Vicis, a significant number of shares of our common stock are held in either nominee name or street name brokerage accounts, and consequently, we are unable to determine the number of beneficial owners of our stock.

 

We have paid no dividends on our common stock and do not expect to pay cash dividends in the foreseeable future. We plan to retain all earnings to provide funds for the growth of our company. In the future, our board of directors will decide whether to declare and pay dividends based upon our earnings, financial condition, capital requirements and other factors that our board of directors may consider relevant. We are not under any contractual restriction as to present or future ability to pay dividends.

 

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011:

 

 

The information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. As of June 30, 2011, our net tangible book value was approximately $11.1 million, or $0.67 per share of common stock. Our net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of 16,522,228 shares of our common stock outstanding as of June 30, 2011. After giving effect to our sale in this offering of shares of our common stock at the public offering price of $      per share, after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2011 would have been approximately $      million, or $      per share of our common stock. This amount represents an immediate increase in net tangible book value of $      per share to our existing stockholders and an immediate dilution of $     per share to new investors purchasing shares of common stock in this offering. The following table illustrates this per share dilution:

 

 

A $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $      per share and the dilution to new investors by $      per share, assuming the number of shares offered, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $      per share and the dilution to new investors by $      per share, assuming the assumed public offering price remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

 

The following table sets forth, on the pro forma basis described above, at June 30, 2011, the difference between the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the existing stockholders and by new investors in this offering at an assumed public offering price of $      per share, before deducting the underwriting discount and estimated offering expenses payable by us.

 

 

The above discussion and tables also assume no exercise of any outstanding stock options or warrants. As of June 30, 2011, there were

 

 

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value, as adjusted to give effect to this offering would be $      per share, and the dilution to investors would be $      per share.

 

The following consolidated financial data should be read together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We have derived the following consolidated statement of operations data and cash flow data for the years ended December 31, 2008, 2009 and 2010 and consolidated balance sheet data as of December 31, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following consolidated statement of operations data and cash flow data for the years ended December 31, 2006 and 2007 and consolidated balance sheet data as of December 31, 2006, 2007 and 2008 from our audited financial statements which are not included in this prospectus. We have derived the following consolidated statement of operations data and cash flow data for the six months ended June 30, 2010 and 2011 and the consolidated balance sheet data as of June 30, 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated balance sheet data as of June 30, 2010 from our unaudited consolidated financial statements which are not included in this prospectus. The unaudited consolidated financial statements include, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for the fair presentation of the financial information set forth in those statements. Share and per share information have been adjusted to reflect the 1-for-100 reverse stock split of our common stock that became effective on July 18, 2011. Our historical results are not necessarily indicative of our results to be expected for the remainder of 2011 or in any future period.

 

 

 

 

You should read the following discussion in conjunction with our consolidated financial statements and the notes related to those statements. Some of our discussion is forward-looking and involves risks and uncertainties. For more information regarding risk factors that could have a material adverse effect on our business, refer to the “Risk Factors” section of this prospectus. For a general overview of our business, refer to the “Our Business” section of this prospectus.

 

Overview

 

We are a leading provider of a smart grid communications platform that enables utilities to effectively deploy, integrate and communicate with multiple smart grid applications within the electric power grid. Our smart grid communications platform significantly improves the ability of utilities to use advanced technologies to upgrade their electric power grids, effectively making the grids more intelligent.

 

Company History

 

We were incorporated in 1996 in the state of Delaware. Through the third quarter of 2008, we were a development stage company. We are focused on the development of a communications platform that meets the needs of utilities, including specifically for the implementation of smart grid applications.

 

Duke Energy Relationship

 

Since 2005, we have been a key strategic partner of Duke Energy and we believe the leading supplier of its smart grid communications technology in connection with its smart grid implementation. With what we believe is one of the most forward-looking smart grid initiatives in North America, Duke Energy has announced plans to invest $1 billion over the next five years in smart grid equipment for its service territories, including Ohio, Indiana, Kentucky and the Carolinas. Specifically, Duke Energy’s smart grid deployment includes digital and automated technology, such as communications nodes, smart meters and automated power delivery equipment.

 

Duke Energy is actively deploying our communications nodes and is licensing our AmbientNMS^® for its deployment in Ohio. We believe that we are the predominant provider of communications nodes and network management system software for Duke Energy’s Ohio deployment.

 

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 55,000 communications nodes in the field with Duke Energy, and we believe that Duke Energy will continue to predominantly use our communications platform for the remainder of its Ohio smart grid deployment. Furthermore, Duke Energy’s pilot deployment of approximately 3,000 communications nodes in the Carolinas predominantly uses our communications platform as well. Throughout the past five years, we have worked with Duke Energy to develop our communications platform, which has enabled Duke Energy’s ability to rapidly deploy its smart grid initiatives. Duke Energy has accelerated its historical deployment rates and is presently deploying approximately 6,000 of our communications nodes each month.

 

We believe that we have a substantial opportunity to grow our business with Duke Energy. In January 2011, Duke Energy and Progress Energy announced a proposed merger that is subject to stockholder and regulatory approval. Together, Duke Energy and Progress Energy have committed to spend a combined $1.5 billion in smart grid initiatives, partially funded by approximately $400 million in total grants awarded to them in 2010 under the American Recovery and Reinvestment Act of 2009, or ARRA, and required to be spent by 2013. In addition to the 130,000 communications nodes scheduled for deployment in Ohio, we estimate that Duke Energy would require over 670,000 communications nodes if it implements a full deployment of smart grid communications nodes in

Indiana, Kentucky and the Carolinas. According to Duke Energy, it is currently working through the planning process to finalize full-scale deployment plans in Kentucky and the Carolinas and has filed with the North Carolina Public Utilities Commission for the required approvals. Duke Energy is using information from its North Carolina pilot programs and its Ohio deployment to enhance its customer experience in its other service territories. We believe that substantially all communications nodes deployed by Duke Energy to date are our communications nodes. If Duke Energy and Progress Energy complete their proposed merger and the combined company adopts Duke Energy’s deployment strategy relating to smart grid initiatives, we estimate a potential deployment of 620,000 additional communications nodes in Progress Energy’s territories in Florida and the Carolinas.

 

Revenue History

 

We have grown total revenue from $2.2 million in 2009 to $20.4 million in 2010 and to $28.0 million for the six-month period ended June 30, 2011 due to increased sales of our communications nodes to Duke Energy. Our total revenue of $2.2 million in 2009 declined from $12.6 million in 2008 due mainly to the impact of the introduction of the ARRA. Although the ARRA was passed in September 2009, by late 2008 and early 2009, there was widespread speculation that a significant amount of funding would be made available for smart grid related initiatives. As a result, many utilities with smart grid projects underway, including Duke Energy, substantially slowed their spending until there was further clarity regarding the amount of funding available under the federal program. Furthermore, the language of the Smart Grid Investment Grants, which are part of the ARRA, also provided initial guidance regarding certain technical criteria required for grant eligibility. As such, utilities needed further clarity that the technology in their smart grid programs would qualify for funding. As soon as the ARRA was passed in September 2009, sales of our communications nodes to Duke Energy increased significantly as Duke Energy resumed its smart grid implementation in Ohio. Correspondingly, our total revenue realized for the end of 2009 also began to increase. This phenomenon impacted revenue trends across the entire smart grid sector.

 

Backlog

 

We define our backlog as products that we are obligated to deliver based on firm commitments relating to purchase orders received from customers, currently solely Duke Energy. As of June 30, 2011, we had backlog of approximately $68 million, consisting of products that we expect to deliver into 2012.

 

Capitalization History

 

Since inception, we have primarily funded our operations with proceeds from the sale of our securities and with revenue from the sale of our products. Until the third quarter of 2008, we were a development stage company focused on developing and piloting our technology with utilities. Since 1998, we have raised a total of $69.5 million in gross proceeds from financing transactions to fund our operations and development efforts. Of the $69.5 million in total gross proceeds raised to date, approximately $4.2 million was raised from our initial public offering of our common stock in 1998, approximately $33.8 million in gross proceeds from the sale of shares of our common stock and the issuance of convertible debt from 2000 to 2006 and approximately $31.5 million in gross proceeds from the sale of shares of our common stock and the issuance of convertible debt to Vicis Capital Master Fund, or Vicis, from 2007 to 2010. As of December 31, 2010, all convertible debt had converted into common stock. Vicis is currently our largest stockholder, owning approximately 84% of our outstanding common stock before taking into account the effect of this offering.

 

Critical Accounting Policies and Use of Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated 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 on-going 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. Hardware sales consist of smart grid communications nodes as well as system software embedded in the communications nodes. The system software embedded in our communications nodes is used solely in connection with the operation of the products. Upon the sale and shipment of our products, we are not required to update the embedded software for newer versions that are subsequently developed. In addition, we do not offer or provide any free post-contract customer support. There is an original warranty period, which may run for a period of up to 12 months from the sale of the products, in which we may repair or replace products when and if appropriate. As such, we recognize revenue from the sales of our products upon delivery to the customer.

 

Our proprietary software consists of AmbientNMS^®, which may be sold on a stand-alone basis. The sale or license of AmbientNMS^® does not include post-contract customer support unless the customer enters into a maintenance agreement with us. As a result, we recognize revenue from the sale of this software product when shipped. We classify amounts billed to customers before software is shipped as deferred revenue.

 

We offer maintenance service, on a fee basis, that entitles the purchasers of our products and AmbientNMS^® software to benefits including telephone support, updates and upgrades to our products. We amortize such revenue when received over the appropriate period based on the terms of individual agreements and contracts.

 

Inventory Valuation. We value inventory at the lower of cost or market determined on a first-in, first-out basis. Certain factors may impact the net realizable value of our inventory, including technological changes, market demand, new product introductions and significant changes to our cost structure. We make estimates of reserves for obsolescence based on the current product mix on hand and its expected net realizable value. If actual market conditions are less favorable or other factors arise that are significantly different than those anticipated by us, additional inventory write-downs or increases in obsolescence reserves may be required. We consider lower of cost or market adjustments and inventory reserves as an adjustment to the cost basis of the underlying inventory. Accordingly, we do not record favorable changes in market conditions to inventory in subsequent periods.

 

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, 2009 or 2010.

 

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 over the option’s expected term, the risk-free interest rate over the stock option’s expected term and the annual dividend yield.

 

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, 2010, our deferred income tax assets consisted primarily of net operating loss 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, 2010, we had available approximately $77 million of net operating loss carryforwards, for U.S. income tax purposes which expire in the years 2016 through 2029. However, due to changes in stock ownership resulting from historical investments provided by Vicis, we expect that the use of the U.S. net operating loss carryforwards are significantly limited under Section 382 of the Internal Revenue Code. As such, we estimate that $61 million or more 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.” We generally warrant that our products will be free from defects in material and workmanship for a period of one year from the date of initial acceptance by our customers. The warranty does not cover any losses or damage that occur as a result of improper installation, misuse or neglect or repair or modification by anyone other than us or our authorized repair agent. Our policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. Because the repair rate of products under warranty has been minimal, we have not established an historical percentage; therefore, we have not provided for any warranty liability reserves. We continue to monitor the rate of actual product returns each quarter to determine whether a provision for such warranty liability is required.

 

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.

Results of Operations

 

The following table sets forth, for the periods indicated, our results of operations:

 

 

The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of total revenue:

 

 

Comparison of the Six Months Ended June 30, 2011 and the Six Months Ended June 30, 2010

 

Total Revenue. Total revenue for the six months ended June 30, 2011 was approximately $28.0 million, an increase of approximately 344% from approximately $6.3 million for the corresponding period in 2010. The increase in total revenue during each of the three and six months ended June 30, 2011, as compared with the corresponding periods in 2010, reflected a substantial increase in the number of communications nodes delivered as part of Duke Energy’s Ohio smart grid initiative, as well as increased software maintenance fees related to our AmbientNMS^®.

 

Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2011 was approximately $16.0 million, an increase of $12.2 million from $3.8 million for the corresponding period in 2010. The increase in cost of goods sold was due primarily to the increase in sales volume associated with increased activity related to the Duke Energy Ohio smart grid initiative.

 

Our policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. Because the repair rate of products under warranty has been minimal, we have not established an historical percentage; therefore, we have not provided for any warranty liability reserves for the six months ended June 30, 2010 and 2011.

 

Gross Profit. Gross profit for the six months ended June 30, 2011 was approximately $12.0 million, an increase of $9.5 million from approximately $2.5 million for the corresponding period in 2010. Our overall gross margin for the six months ended June 30, 2011 increased to approximately 43% compared with approximately 40% for the corresponding period in 2010. Gross margin improved over 2010 primarily because of improved manufacturing costs associated primarily with increased volumes.

 

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2011 were approximately $4.9 million, an increase of $1.9 million from approximately $3.0 million for the corresponding period in 2010. The increase in research and development during the 2011 periods was due primarily to increased personnel and consultant expenses for the continued development of our fourth generation

communications platform, and the enhancement of our AmbientNMS^®. We believe that our continued development efforts are critical to our strategic objectives of enhancing our technology while reducing costs, and therefore, we expect that our research and development expenses will increase over the next 12 months as we continue to focus our efforts on developing more robust solutions and providing additional value-added functionality for our communications platform. Research and development expenses consisted of expenses incurred primarily in designing, developing and field testing our smart grid communications platform. 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.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2011 were approximately $3.5 million, an increase of $1.2 million from approximately $2.3 million for the corresponding period in 2010. The increase in selling, general and administrative expenses was due primarily to increased personnel costs and increased activity regarding our efforts to market the Ambient Smart Grid^® communications platform. Selling, general and administrative expenses consisted primarily 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. We expect that selling, general and administrative expenses will increase over the next 12 months as we hire additional personnel associated with business development activities, incur more expenses associated with our listing on the NASDAQ Capital Market, incur increased costs associated with compliance with Sarbanes-Oxley and increase activity associated with marketing programs targeted at increasing our overall brand awareness.

 

Interest Income and Expense. Net interest income for the six months ended June 30, 2011 was approximately $11,500 as compared with net interest expense of approximately $213,000 for the corresponding period in 2010. Interest expense during the six months ended June 30, 2010 related primarily to our 8% Secured Convertible Promissory Notes, which were issued in July and November of 2007 and January 2008 and included non-cash charges associated with the amortization of the beneficial conversion features and deferred financing costs incurred in connection with the placement of the convertible promissory notes. As of January 31, 2010, all of the outstanding convertible promissory notes were converted into shares of our common stock, for which we will no longer incur interest expenses.

 

Provision for Income Taxes. As a result of our net income of approximately $3.5 million for the six months ended June 30, 2011, we recorded a provision for income taxes of approximately $109,000 for the six months ended June 30, 2011. The provision reflected federal alternative minimum taxes. At December 31, 2010, we had available approximately $77 million of net operating loss carryforwards for federal income tax purposes, which expire in the years 2016 through 2029. However, due to changes in stock ownership resulting from historical investments provided by Vicis, we expect that the use of the U.S. net operating loss carryforwards are significantly limited under Section 382 of the Internal Revenue Code. As such, we estimate that $61 million or more of our net operating loss carryforwards will expire and will not be available to use against future tax liabilities.

 

Comparison of the Year Ended December 31, 2010 and the Year Ended December 31, 2009

 

Total Revenue. Total revenue for 2010 was $20.4 million compared with $2.2 million for 2009. Total revenue for each of 2009 and 2010 represented the sale of products and license of software to, and maintenance fees from, Duke Energy. The increase in total revenue for 2010 compared with 2009 reflected an increase in the number of communications nodes delivered as part of Duke Energy’s Ohio smart grid initiative as well as increased software license fees from the licensing of our AmbientNMS^®.

 

Costs of Goods Sold. Cost of goods sold for 2010 was $12.0 million compared with $1.8 million for 2009. The increase in cost of goods sold during 2010 primarily reflected the increase in sales volume to Duke Energy. Cost of goods sold included all costs related to the manufacture of our products by a contract manufacturer. The contract manufacturer is responsible for all aspects of manufacturing, including procuring most of the key components required for assembly. Additionally, we recorded approximately $152,000 in charges associated with the write-off of obsolete inventory during 2009.

Our policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. Because the repair rate of products under warranty has been minimal, we have not established an historical percentage; therefore, we have not provided for any warranty liability reserves for the years ended December 31, 2010 and 2009.

 

Gross Profit. Gross profit for 2010 was $8.3 million compared with $357,000 for 2009. Gross margin for 2010 increased to approximately 41% compared with approximately 16% for 2009. The increase in the gross margin for 2010 compared with 2009 was a reflection of the maturing of our product offering and more stable manufacturing costs, our 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 were approximately $6.3 million for 2010 compared with $4.9 million for 2009. Research and development expenses were incurred primarily in designing, developing and field testing our smart grid communications platform and 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. The increase in research and development during 2010 was primarily due to increased personnel and consultant expenses required for the continued development of our fourth generation communications nodes and enhancement of our AmbientNMS^®. We believe that our continued development efforts are critical to our strategic objectives of enhancing our technology while simultaneously reducing costs. We expect that our research and development expenses will increase in 2011 as we continue to develop and improve our communications platform.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2010 were approximately $5.2 million compared with $4.7 million for 2009. The selling, general and administrative expenses consisted primarily 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. The increase in selling, general and administrative expenses for 2010 compared with 2009 was due to increased efforts to market and commercialize our communications platform. In 2011, we expect our selling, general and administrative expenses to increase as we continue to increase our efforts to market and commercialize our communication platform.

 

Interest Income and Expense. We incurred interest expense of approximately $32,000 for 2010 compared with approximately $617,000 for 2009. Interest expense related primarily to our 8% Secured Convertible Promissory Notes, which were issued in July 2007, and November 2007 and January 2008. Additionally, we incurred non-cash interest expense of approximately $184,000 and approximately $4.4 million, for 2010 and 2009, respectively. This non-cash interest expense related to the amortization of the beneficial conversion features and deferred financing costs incurred in connection with the placement of our convertible promissory notes with Vicis. 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 outstanding. In addition, on June 30, 2009, we agreed to modify the terms of the expiring Class A warrants. Under the new terms, the warrants were exercisable through August 31, 2009 and the exercise prices were reduced from $20.00 to $15.00 per share. The resulting charge of approximately $1.1 million due to this modification was reflected as additional interest expense during 2009.

 

Comparison of the Year Ended December 31, 2009 and the Year Ended December 31, 2008

 

Total Revenue. Total revenue for 2009 was approximately $2.2 million compared with approximately $12.6 million for 2008. Total revenue for 2009 was attributable to the sales of equipment, software and services to Duke Energy. Total revenue of $2.2 million in 2009 declined from $12.6 million in 2008 due mainly to the impact of the introduction of the ARRA. Although the ARRA was passed in September 2009, by late 2008 and early 2009, there was widespread speculation that a significant amount of funding would be made available for smart grid related initiatives. As a result, many utilities with smart grid projects underway, including Duke Energy, substantially slowed their spending until there was further clarity regarding the amount of funding available under the federal program. Furthermore, the language of the Smart Grid Investment Grants, which are part

of the ARRA, also provided initial guidance regarding certain technical criteria required in order for grant eligibility. As such, utilities needed further clarity that the technology in their smart grid programs would qualify for funding. As soon as the ARRA was passed in September 2009, sales of our communications nodes to Duke Energy increased significantly as Duke Energy resumed its smart grid implementation in Ohio. Correspondingly, our total revenue realized for the end of 2009 also began to increase. This phenomena impacted revenue trends across the entire smart grid sector.

 

Cost of Goods Sold. Cost of goods sold for 2009 was approximately $1.8 million compared with approximately $9.9 million for 2008. The decrease in cost of goods sold during 2009 was due primarily to a decrease in sales volume compared with 2008. For 2008 and 2009, cost of goods sold included inventory write-offs of approximately $482,000 and approximately $152,000, respectively, for excess, obsolete and surplus inventory resulting from the transition from the second generation to the third generation of our technology.

 

Our policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. Because the repair rate of products under warranty has been minimal, we have not established an historical percentage; therefore, we have not provided for any warranty liability reserves for the years ended December 31, 2009 and 2008.

 

Gross Profit. Gross profit for 2009 was approximately $357,000 compared with approximately $2.7 million for 2008. Our overall gross margin also decreased to 16% in 2009 from 21% in 2008. The decrease in gross margin in 2009 compared with 2008 was primarily due to changes to our product mix, higher associated cost of our older generation products and higher inventory markdowns.

 

Research and Development Expenses. Research and development expenses were approximately $4.9 million for 2009 compared with $4.4 million for 2008. The increase in research and development expenses during 2009 was primarily due to the increased personnel and consultant expenses for the development of our X-3100 communications nodes. Research and development expenses consisted of expenses incurred primarily in designing, developing and field testing our smart grid communications platform. 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.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses consisted primarily of salaries and other related costs for personnel in executive and other functions. Other significant costs included insurance and professional fees for legal, accounting and other services. General and administrative expenses for 2009 were approximately $4.7 million compared with $3.6 million for 2008. The increase in operating, general and administrative expenses was due to the increase in efforts to market and commercialize our communications platform.

 

Interest Income and Expense. Interest expense totaled approximately $5.0 million and $3.1 million, respectively for 2009 and 2008. Interest totaling approximately $617,000 for 2009 and approximately $674,000 for 2008 related primarily to our 8% Secured Convertible Promissory Notes, which were issued in July 2007, November 2007 and January 2008, and our 8% Convertible Debentures, which were issued in May 2006 and were retired in their entirety as of January 2, 2008. Additionally, for 2009 and 2008, we incurred non-cash interest expense of approximately $4.4 million and $2.5 million, 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 debentures and notes. These costs were amortized to the date of maturity of the debt unless converted earlier. In addition, on June 30, 2009, we agreed to modify the terms of the expiring Class A warrants. Under the new terms, the warrants were exercisable through August 31, 2009 and the exercise prices were reduced from $20.00 to $15.00 per share. The resulting charge due to the modification was approximately $1.1 million and was reflected as additional interest expense.

 

Loss on Extinguishment of Debt. We accounted for the November 2008 modification of the convertible promissory notes that we issued to Vicis between July 2007 and January 2008 as an extinguishment of debt. We deemed the terms of the amendment to be substantially different and treated the notes as extinguished and

exchanged for new notes. As such, it was necessary to reflect the convertible promissory notes at fair market value and record a loss on extinguishment of debt of approximately $2.8 million.

 

Liquidity and Capital Resources

 

Since inception, we have primarily funded our operations with proceeds from the sale of our securities and, most recently, with revenue from sales of our products. At June 30, 2011, we had working capital of $10.2 million, including cash and cash equivalents of $12.5 million. Our cash and cash equivalents were $8.1 million, $1.0 million and $7.0 million as of December 31, 2008, 2009 and 2010, respectively.

 

Net cash used in operating activities during the years ended December 31, 2008, 2009 and 2010 was approximately $5.6 million, $7.7 million and $1.6 million, respectively. Cash used in operations for the years ended December 31, 2008, 2009 and 2010 was primarily due to funding operating losses attributed to spending in research and development and general and administrative expenses associated with the development of our technologies and products and to support the growth of our business. Cash provided by operating activities was $5.9 million for the six months ended June 30, 2011 compared with net cash used in operating activities of $2.0 million for the corresponding period in 2010. Cash provided by operating activities for the six months ended June 30, 2011 was primarily due to an increase in product revenue of $21.7 million over the corresponding period in 2010, thereby significantly increasing gross profit and generating cash to pay our ongoing operating expenses.

 

Net cash used in investing activities during the years ended December 31, 2008, 2009 and 2010 was approximately $576,000, $269,000 and $527,000, respectively. Net cash used in investing activities for the six months ended June 30, 2010 and 2011 was approximately $264,000 and $511,000, respectively. Net cash used in investing activities for all periods was primarily for additions to fixed assets.

 

Net cash provided by financing activities during the years ended December 31, 2008, 2009 and 2010 was approximately $13.6 million, $964,000 and $8.1 million, respectively. Net cash provided by financing activities for the six months ended June 30, 2010 and 2011 was approximately $2.6 million and $129,000, respectively. Net cash provided by financing activities for all periods consisted primary of sales of our securities, which are described in more detail in the section titled “Capitalization History.”

 

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:

 

 

If we cannot effectively manage these factors, we may need to raise additional capital in order to fund our operating needs. We currently do not have any commitments for additional funding. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2009 and 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or

limited purposes. Other than our operating leases for office space and certain other capital lease obligations, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations as of December 31, 2010. These contractual obligations require us to make future cash payments.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Exchange Risk. We bill our customers predominately in U.S. dollars and receive payment predominately in U.S. dollars. Additionally, although our products are manufactured by our contract manufacturer in China, we pay our obligations to it in U.S. dollars. Accordingly, our results of operations and cash flows are not materially subject to fluctuations due to changes in foreign currency exchange rates. If we increase sales of our products outside of the United States, our contracts with foreign customers may be denominated in foreign currency and may become subject to changes in currency exchange rates.

 

Interest Rate Sensitivity. Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our investments, which are primarily cash and cash equivalents, we believe there is no material risk of exposure.

 

Seasonality

 

Historically, we have not experienced significant seasonal fluctuations or variations in sales. Since our communications nodes are physical devices that are manually installed by utilities, weather conditions may temporarily impact the timing of deployment. However, we do not expect that adverse weather conditions will result in substantial fluctuations or variations of sales in any particular reporting period.

 

Recently Issued Accounting Pronouncements

 

The FASB ratified Accounting Statement Update, or ASU, 2009-13, “Revenue Recognition-Milestone Method (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. ASU 2009-13 shall be effective in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Companies may elect to adopt this guidance prospectively for all

revenue arrangements entered into or materially modified after the date of adoption, or retrospectively for all periods presented. We have adopted this standard effective January 1, 2011. We do not expect the provisions of ASU 2010-13 to have a material effect on our financial position, results of operations or cash flows.

 

In April 2010, the FASB issued ASU 2010-17, or 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 years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. We have adopted this standard effective January 1, 2011. We do not expect the provisions of ASU 2010-17 to have a material effect on our financial position, results of operations or cash flows.

 

We do not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.

 

Quarterly Results of Operations

 

The following tables set forth selected unaudited quarterly statements of operations data for the last ten quarters. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in our opinion, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.