COMPARISON OF THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2010 TO THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009
REVENUE . Revenues for the nine and three months ended September 30, 2010 were $11,233,949 and $4,975,807 respectively, compared to $918,260 and $61,077 for the corresponding periods in 2009. Revenues for each of the 2010 and 2009 periods were attributable to the sales of Products and software and services to our marquee customer. Revenues for the nine and three months ended September 30, 2010 related to the sales of Products totaled $11,177,368 and $4,956,947, respectively, compared to $871,758 and $48,505 for the corresponding periods in 2009. Revenue from the sale of software and services for the nine and three months ended September 30, 2010 were $56,581 and $18,860, respectively, compared to $46,502 and $12,572 for the corresponding periods in 2009. The increase in revenue during the 2010 periods compared to the corresponding periods in 2009 reflects an increase in delivery of Ambient’s X-3100 Product base to fulfill purchase orders received from our marquee customer.
COST OF GOODS SOLD . Cost of goods sold for the nine and three months ended September 30, 2010 were $6,779,743 and $2,997,620, respectively, compared to $935,188 and $178,334 for the corresponding periods in 2009. Cost of goods sold included all costs related to manufacturing and selling Product and consisted primarily of direct material. Cost of goods sold for the 2010 and 2009 periods included an inventory write down of excess and obsolete inventory. The increase in cost of goods sold during the 2010 periods as compared to the corresponding periods in 2009 reflected the increase in sales and production to fill orders placed by our marquee customer.
GROSS PROFIT . Gross profit for the nine and three months ended September 30, 2010 period were $4,454,206 and $1,978,187 respectively, compared to a loss of $16,928 and $117,257 for the corresponding periods in 2009. The gross profit on Product sales amounted to $4,397,625 and $1,959,327, respectively, for the nine and three month periods ended September 30, 2010, compared to a loss of $63,430 and $129,829 for the corresponding periods in 2009. Our overall gross margins increased to 40% for each of the nine and three month periods in 2010 compared to a gross loss of 2% and 192% in the corresponding periods in 2009. The increase in the gross margin percentages in the 2010 periods reflect the introduction of the X-3100 which allowed for a stable production and delivery schedule throughout 2010. The 2009 periods were negatively affected due to low volume pricing from our contract manufacturer, and a write down of inventory of excess and obsolete inventory resulting from the transition from second to third generation technology.
RESEARCH AND DEVELOPMENT EXPENSES . Research and development expenses consisted of expenses incurred primarily in designing, developing and field testing our smart grid solutions. These expenses consisted primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties. Research and development expenses for the nine and three months ended September 30, 2010 period were $4,226,600 and $1,268,046, respectively, compared to $3,265,443 and $1,248,338 for the corresponding periods in 2009. The increase in research and development during the 2010 periods was due primarily to the increase in personnel and consultants for the continued development of smart grid applications to be incorporated into the Ambient platform as well as the continued development of our fourth generation communications node. We expect that our research and development expenses will remain stable and or increase as we continue to focus our efforts on developing more robust solutions and additional value-added functionality for the Ambient Smart Grid® communications platforms.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES . Operating, general and administrative expenses primarily consisted of salaries and other related costs for personnel and executives, business development, and other administrative functions. Other significant costs included professional fees for legal, accounting and other services. General and administrative expenses for the nine and three months ended September 30, 2010 were $3,524,104 and $1,237,616 respectively, compared to $3,143,977 and $1,007,077 for the corresponding periods in 2009 The increase in operating, general and administrative expenses during the 2010 periods as compared to the 2009 periods was due to the increase in efforts to market and commercialize the Ambient Smart Grid® communications platforms. As we continue to increase our efforts to market and commercialize the Ambient Smart Grid® communications platform, we expect our operating, general and administrative expenses to increase for the remainder of the fiscal year 2010.
STOCK BASED COMPENSATION . A portion of our operating expenses were attributable to non-cash charges associated with the compensation of consultants and employees through the issuance of stock options and stock grants. Stock-based compensation is a non-cash expense and will therefore have no impact on our cash flows or liquidity. For the nine and three months ended September 30, 2010, we incurred non-cash stock-based compensation expense of $72,187 and $36,997, respectively, compared to $704,057 and $232,995 for the corresponding periods in 2009.
INTEREST AND FINANCE EXPENSES . For the nine and three months ended September 30, 2010, we incurred interest of $29,775 and $416, respectively, compared to $481,489 and $148,156 for the corresponding periods in 2009. The interest related primarily to our 8% Secured Convertible Promissory Notes, which were issued in July and November of 2007 and January 2008. Additionally, for the nine and three months ended September 30, 2010, we incurred non-cash interest of $183,609 and $0, respectively, compared to $4,310,211 and $281,913 for the corresponding periods in 2009. This interest related to the amortization of the beneficial conversion features and deferred financing costs incurred in connection with the placement of our convertible promissory notes. These costs are 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 have any long-term debt. 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 $0.20 to $0.15 per share. The resulting charge due to the modification was $1,147,167 and was reflected as additional interest expense.
GAIN ON CONVERSION OF DEBENTURES . The Company determined and adjusted the amount of accrued interest owed to Vicis Capital Master Fund after the notes were converted as discussed above. For the three and nine months ended September 30, 2010, the Company recorded a gain on the conversion of the debentures totaling $251,840. Such gain represents the reversal of accrued interest recorded in previous periods.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that cash on hand, plus anticipated revenue from firm purchase orders, and the $5 million remaining and available from our equity based financing arrangement described below, will allow us to meet our operating requirements for at least the next twelve month. As noted above, as of September 30, 2010 we have, received and accepted from Duke Energy, purchase orders for the Product amounting to approximately $46.1 million. However, it is conceivable that we may raise additional funds to expand existing commercial deployments, consider investment opportunities, and/or to satisfy any additional significant purchase order that it may receive and to allow for shortfalls in anticipated revenue. At the present time, we do not have commitments for additional funding beyond the committed equity based financing arrangement described below.
Cash balances totaled $1,041,375 at September 30, 2010 and $987,010 at December 31, 2009.
Net cash used in operating activities for the nine months ended September 30, 2010 was $2,694,851 and was used primarily to pay ongoing research and development and general and administrative expenses.
Net cash used in investing activities totaled $367,118 during the nine months ended September 30, 2010 and was used for additions to property and equipment.
Net cash provided by financing activities totaled $3,116,334 during the nine months ended September 30, 2010 and represented proceeds from the issuances of common stock under the equity based credit line, warrants, options, and was net of the payments on capitalized lease obligations.
A discussion of our recent financings follows.
In July 2007, November 2007 and January 2008, we entered into Securities Purchase Agreements with an institutional investor, Vicis Capital Master Fund ("Vicis"), and raised gross proceeds of $12.5 million. The notes (the “Vicis Notes”) issued under the Securities Purchase Agreements had a term of three years and were payable between July 2010 and January 2011. The outstanding principal amounts of the Vicis Notes were convertible at the option of Vicis into shares of Common Stock at an original conversion price of $0.035 per share subject to certain adjustments. In November 2008, we and Vicis entered into a Debenture Amendment Agreement (the “Debenture Amendment Agreement”), pursuant to which Vicis invested in the Company an additional $8 million. In consideration of Vicis’ investment, we reduced the conversion price on the Vicis Notes from $0.035 per share to $0.015 per share. In November 2008, the conversion rate was reduced to the current rate of $0.015 per shares, subject to certain adjustments. On August 10, 2009, Vicis converted $2.5 million of the Vicis Notes into 166,666,667 shares of our common stock. On January 21, 2010, Vicis converted the remaining $10 million balance of the Vicis Notes into 666,666,667 shares of our common stock. Following the conversion of the Debentures, we no longer have any long-term debt.
On November 16, 2009, we entered into a Securities Purchase Agreement (the "Agreement") with Vicis, which agreement was subsequently amended on January 15, 2010 pursuant to which Vicis furnished to us access to an $8,000,000 equity based credit line. Pursuant to the Agreement, Vicis established an escrow account (the “Holdback Account”) into which it deposited $8,000,000. If our cash resources fall below $1,500,000, we are entitled to make drawdowns in the amount of $500,000 from the Holdback Account in consideration of which, we are obligated to issue to Vicis, 5,000,000 shares of our Common Stock, as well as Series G Warrants for a corresponding number of shares of Common Stock per drawdown. Any amounts in the Holdback Account that are not disbursed on or prior to June 30, 2011 (as such date may be extended by mutual agreement of the parties) will be returned to Vicis.
Between January 19 and November 8, 2010, we effected six draw-downs in the aggregate amount of the $3,000,000. We have remaining at our disposal in the account $5 million. Ambient may draw down on the Holdback account as needed until the entire $8,000,000 is exhausted. The warrants are exercisable through the second anniversary of issuance at a per share exercise price of $0.25.
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