-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IaJpzx5UvQjhNKqwKKzFdpTk5Fm5NLiuG5rQAjHd3d5O5r62xIA+p49SFwgX4JQn nuCicEwK5QqRVyMOPJl8cw== 0001188112-06-000518.txt : 20060224 0001188112-06-000518.hdr.sgml : 20060224 20060224165107 ACCESSION NUMBER: 0001188112-06-000518 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060224 DATE AS OF CHANGE: 20060224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBIENT CORP /NY CENTRAL INDEX KEY: 0001047919 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 980166007 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23723 FILM NUMBER: 06643544 BUSINESS ADDRESS: STREET 1: 270 MAIDOSN AVENUE STREET 2: BUILDING ONE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 6173320004 MAIL ADDRESS: STREET 1: 79 CHAPEL ST CITY: NEWTON STATE: MA ZIP: 02458 10KSB 1 t10ksb-9094.txt 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB MARK ONE: [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-23723 AMBIENT CORPORATION (Exact name of Small Business Issuer as specified in its chapter) Delaware 98-0166007 (State or Other Jurisdiction (IRS Employer Identification No.) of Incorporation) 79 CHAPEL STREET, NEWTON, MASSACHUSETTS, 02458 (Address of Principal Executive Offices) 617-332-0004 (Small Business Issuer's Telephone Number, including Area Code) Securities Registered Pursuant to Section 12(b) of the Exchange Act: None Securities Registered Pursuant to Section 12(g) of the Exchange Act: $.001 Par Value Common Stock Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | | Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure contained herein of delinquent filers in response to Item 405 of Regulation S-B, and will not be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]. The issuer's revenues for the year ended December 31, 2005: $236,903 As of February 23, 2006, there were 167,434,381 outstanding shares of the issuer's Common Stock. The aggregate market value of the shares of the issuer's Common Stock held by non-affiliates was $31,812,532. Such market value was calculated using the closing price of such Common Stock as of such date as quoted on the OTC Bulletin Board. DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits hereto have been specifically incorporated by reference herein in Item 13 under Part III hereof. Certain portions of issuer's definitive proxy statement, which will be filed with the Securities and Exchange Commission in connection with the issuer's 2006 annual meeting of stockholders, are incorporated by reference in Items 9-12 and 14 of Part III hereof. Transitional Small Business Disclosure Format (Check one): Yes |_| No |X| AMBIENT CORPORATION 2005 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS PART I ITEM 1. DESCRIPTION OF BUSINESS...............................................1 ITEM 2. DESCRIPTION OF PROPERTY..............................................21 ITEM 3. LEGAL PROCEEDINGS....................................................21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................21 PART II ITEM 5. MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.......................21 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............22 ITEM 7. FINANCIAL STATEMENTS.................................................27 ITEM 8. CONTROLS AND PROCEDURES..............................................28 ITEM 8A. OTHER INFORMATION....................................................28 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT....................29 ITEM 10. EXECUTIVE COMPENSATION...............................................29 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................................29 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................29 ITEM 13. EXHIBITS.............................................................29 ITEM 14. PRINCIPAL ACCOUNTANT FEES & SERVICES.................................29 FORWARD LOOKING STATEMENTS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-KSB. CERTAIN STATEMENTS MADE IN THIS DISCUSSION ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS", "ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S INTENDED BUSINESS PLANS; EXPECTATIONS AS TO CONTINUING IN BUSINESS; EXPECTATIONS AS TO PRODUCT PERFORMANCE; EXPECTATIONS AS TO MARKET ACCEPTANCE OF THE COMPANY'S TECHNOLOGY; AND BELIEF AS TO THE SUFFICIENCY OF CASH RESERVES. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S INABILITY TO CONTINUE OPERATIONS; THE COMPANY'S INABILITY TO OBTAIN NECESSARY FINANCING; THE EFFECT OF A GOING CONCERN STATEMENT BY THE COMPANY'S AUDITORS; THE COMPETITIVE ENVIRONMENT GENERALLY AND IN THE COMPANY'S SPECIFIC MARKET AREAS; CHANGES IN TECHNOLOGY; THE AVAILABILITY OF AND THE TERMS OF FINANCING, INFLATION, CHANGES IN COSTS AND AVAILABILITY OF GOODS AND SERVICES, ECONOMIC CONDITIONS IN GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREAS, DEMOGRAPHIC CHANGES, CHANGES IN FEDERAL, STATE AND /OR LOCAL GOVERNMENT LAW AND REGULATIONS AFFECTING THE TECHNOLOGY; CHANGES IN OPERATING STRATEGY OR DEVELOPMENT PLANS; AND THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS. PART I ITEM 1. DESCRIPTION OF BUSINESS INTRODUCTION Ambient Corporation (herein "Ambient" or "the Company") is solely focused on the design, development, commercialization, and marketing of Broadband over Power Lines (BPL) equipment, technologies, and services. BPL technology enables electric utilities and other owners of electrical distribution systems, and their system operators to deliver a suite of Internet Protocol (IP) based services using their existing power distribution infrastructure. The proprietary equipment, services, and technologies that compose the BPL networks that we are designing, developing, testing, and marketing, will be referred to throughout this Annual Report as the "BPL Solutions." A slower version of BPL has been used by utilities for several decades for basic internal utility operations, primarily system control and information feedback over the medium voltage distribution grid. However, the distribution transformers that reduce the medium voltage on the distribution circuits to the lower voltage levels normally delivered to households and businesses effectively block the transmission of high-speed data signals. We have designed, developed and successfully tested, on a limited basis, our proprietary and patent protected technology and equipment designed to overcome this limitation. We are currently working with leading utilities and technology companies to further develop, test and demonstrate the equipment, components and technologies that comprise our BPL Solutions. First generation components and technologies presently are being evaluated in field trials and pilot programs. Our BPL Solutions are designed to take advantage of the existing utility distribution network architecture by overlaying a communications network that is scalable, adaptable and able to deliver a wide variety of applications and services to a diverse population. Our goal is to become a leading designer, developer and systems integrator for commercially deployed BPL networks that focus on providing broadband services to utility and other customers and maximizing internal utility functions (i.e. efficient systems control and monitoring.) We intend to generate revenues from the design and management of BPL systems and from the sale, support, and installation of the equipment and technologies comprising our BPL Solutions. GENERAL BACKGROUND Since the onset of the Internet revolution, significant resources have been invested in technologies designed to deliver ever greater amounts of data to end users. The rising demand from consumers, businesses, and governments for dependable and cost effective high-speed communications services has spawned the introduction of several broadband technologies. "Broadband" generally refers to technologies that can enable network connections in excess of the standard dial-up 56 Kilobytes per second (Kbps) limit of traditional telephone lines. Growing consumer and business demand for high-speed communications, as well as the desire of local, state and federal governments to promote Internet access, has dramatically changed the communications industry. Based on published reports, the number of subscribers in the United States with broadband Internet access is currently estimated at 36 million and by 2008 that figure is expected to increase to approximately 69.4 million. Traditionally, technology advances have been first implemented in what is called "the core" of a network; that is, where signal traffic from individual users is grouped together in increasingly larger and larger bundles of traffic, and transported from one centralized aggregation point to another. For example, fiber optics was first used in intercontinental communications, in which a single cable carried signals 1 from thousands and thousands of individuals. Typically, newer communications technologies have reached the access network (or the "edge" of the network the so called "last mile" where the subscribers are located) only after the costs associated with using the new technologies (at the subscriber level) have been substantially reduced. Over the last several years, the cost of deploying different broadband access technologies has generally declined to the point where telephone companies and cable companies could and have increased the amount of bandwidth that they provide to their subscribers. Subscribers who previously had access to only 28.8 Kbps or up to 56 Kbps over their analog phone lines for very limited data services, now can access networks at rates greater than 1.5 Megabits per second (Mbps), enabling voice, data, music, Internet based multiplayer gaming and some video transfers over the Internet. Consumer demand for high-speed communications has been filled by various access methods, including modems connected to conventional telephone lines, higher speed digital subscriber telephone lines (DSL), cable TV with data modems in set-top boxes and, more recently, wireless networks. However, these currently deployed high-speed access solutions have inherent technical and economic drawbacks. While DSL technology can range from 154 Kbps to 1.5 Mbps or higher, it requires a dedicated network connection and may be unavailable for areas that are more than 18,000 feet from the central office. DSL technology is also typically expensive to implement and to maintain. Cable speeds can reach peaks of 1.5 Mbps or higher, but cable technology is also expensive to implement. Cable is also characterized by individual loss of bandwidth at various peak times when the number of subscribers reaches critical mass. Broadband wireless is another access technology that has recently been pursued to bridge the last mile problem. Broadband wireless technologies use over-the-air transmission and consequently they require no new wire-line infrastructure to connect to the end-user. However, wireless solutions also suffer from significant drawbacks, including line of sight limitations, security concerns, weather effects, and the need to access licensed radio frequency spectrum in some cases. BENEFITS OF BROADBAND OVER POWER LINES In addition to delivering end-user bandwidth that is competitive to other broadband technologies, BPL has the following significant advantages: o UNIQUE UTILITY APPLICATIONS. BPL will provide a wide range of cost-effective, utility specific applications and benefits not offered by other broadband technologies. Utilities can deploy a dedicated BPL network, or leverage one deployed for consumer broadband, to provide automated meter reading (AMR), remote outage detection, substation monitoring, remote re-connect and disconnect, real-time pricing, intelligent demand-side management (IDSM), and direct load control. These services can enable utilities to significantly reduce operating costs while improving customer service. o UBIQUITY. BPL technology can be deployed worldwide, anywhere there is an electrical distribution network. A BPL network can extend broadband to thousands of rural consumers in North America, as well as to large segments of the world's population, that do not have access to cable or DSL. o "LAST 100 YARD". In addition to having nearly 100% consumer penetration in the United States, and a physical medium conducive to carrying a robust signal, power lines provide a direct connection to each and every end user. Unlike cable and DSL, there is no additional wiring required to the end user's premises, often called the "last 100 yards". Nor is there any wiring within the premises - users access the BPL network directly through an appropriate modem plugged into virtually any electrical outlet. 2 o ROBUSTNESS. Atmospheric challenges and line of sight requirements ordinarily associated with wireless communication systems are not issues with power line based options. o NETWORK FLEXIBILITY. As with all networks, a BPL network can experience individual loss of bandwidth at times of peak usage. However, the BPL network is designed to permit sequential installations and expansions corresponding to actual customer demand. To maintain bandwidth at higher subscriber densities, the network can be segmented into new cells and the signal re-injected at additional wired or wireless backhaul connectivity points. o INITIAL EXPENSE. The initial capital expenditure required to implement a BPL network is expected to be less than that for other types of broadband services, due in part to the existence of the electric distribution system. This can translate to a lower cost basis to amortize and enable delivery of a lower cost service to the end-user. CURRENT STATUS OF BPL Utilities have used low speed BPL to monitor and control certain functions for some time. During the past decade, utilities and technology companies in the United States, Europe and South America have experimented with higher-bandwidth data transfer via electric distribution systems. The recent advances in BPL technology allow for the delivery of high-speed communications over medium and low voltage power lines. Internationally, many utilities are conducting commercial pilot programs and a few utilities are already offering limited commercial services. Fueled by recognition of the potential financial, operational and public benefits derived from deploying BPL technologies, interest in BPL has grown significantly over the past few years. Conferences on the subject are frequent, and are attended by regulators, electric power providers, and persons from other relevant fields including telecommunications and networking. BPL technologies and modems for in-house networking are maturing and a number of companies are vying for the in-house market. We believe that utilities have been reluctant to implement high-speed BPL over their distribution infrastructure primarily because of two technical limitations inherent to existing electric distribution grids. The first and less significant limitation is radio interference. Data signals, which travel in radio waves, can disrupt, and be disrupted by, radio and mobile communications transmissions that have been licensed by the FCC to operate at specific frequencies. Emerging BPL technologies and solutions have addressed and are increasingly solving these problems. The second and more significant limitation is that the distribution transformers that convert medium voltage to the low voltage that is delivered to commercial and residential premises may also weaken or interfere with the transmission of high frequency data signals. Other developers of BPL technologies have tried to solve this problem by using capacitive couplers to bypass the distribution transformers. Capacitive coupling has been found to be of severely limited use on overhead medium voltage power lines. We have addressed many of these limitations and issues by using inductive couplers to bypass the distribution transformers. Our patent protected method has proven to be a breakthrough, allowing efficient exploitation of overhead and underground lines in a manner that is safe and acceptable to utilities and line crews. While some utilities may be reluctant to become Internet service providers (ISPs) or otherwise directly deliver broadband services to their customers, we believe that action taken by the Federal Communications Commission (FCC) has encouraged ISPs and other network service providers (NSPs) to examine the option of reselling BPL services to end-users in partnership with utilities. See "Government Regulations" 3 AMBIENT'S BPL SOLUTIONS Our BPL network is overlaid on the medium-voltage and low-voltage segments of the power distribution system. High-speed backhaul connections can be brought to the BPL network at substations (where many utilities have already installed fiber-optic or other high-speed data links), elsewhere along the medium voltage circuit, or at the curb for in-building BPL networks. The high speed data is coupled to, and then travels over, the medium voltage line. At remote locations, it is transferred to the low-voltage segment, or to a wireless interface, for the final leg to the end user. A simplified view f our BPL network is shown is Figure 1. [PICTURE] FIGURE 1 AMBIENT BPL NETWORK ARCHITECTURE The entire network is built from a few basic components: COUPLERS that transfer the communications signal to and from power lines, NODES that transmit the communications signal to, and receive the communications signal from, the medium- and low-voltage power lines, and MODEMS that transfer the communications signal to and from end users. COUPLERS transfer the communications signal to and from power lines. Our proprietary patented inductive coupler technology successfully overcomes the longstanding challenges to the commercialization of BPL networks: previous technologies were not able to transfer the high speed signal through the medium to low voltage transformer, requiring a new line to be run from the distribution transformer to the end user. Our coupling technology allows the low voltage transformer to be easily bypassed. Earlier BPL implementations required the necessary equipment to be installed on de-energized lines, seen as a serious deficiency by the utility companies. Our equipment is easily installed on energized medium-voltage and low-voltage lines by standard utility crews and in multiple dwelling unit installations by electricians. Other high speed systems implemented to date have involved equipment, installation, and maintenance costs that were not in line with the revenue potentials. Our development efforts are directed towards improving these economics, and the Ambient system now represents a cost-effective implementation of a high-speed data network. 4 In September 2002, the USPTO issued our first patent with a priority date of December 1999, primarily covering inductive coupling of data signals onto overhead and underground power distribution cables. Subsequent patents further developed and protected this key technology. Our expanding patent portfolio currently includes six patents on the core data coupling technology and its application. Several others patent applications are either allowed, pending, or under review by the USPTO, and we have applied for corresponding patents in key markets worldwide. We anticipate that the alternative choke-based coupling technologies described in other patent applications will provide less efficient coupling, and cost more to produce. We further anticipate that compared to the capacitive couplers used in other BPL networks, the production and installation costs of our couplers will be lower. Therefore, we believe that our inductive couplers offer a preferred, cost effective, and technologically advantageous BPL implementation. NODES are electronic devices that transmit the signal to and receive the signal from the medium- and low-voltage power lines. Our node is a modular low cost device that can be configured for different roles. It can accept the communications signal from the backhaul network, repeat (regenerate) the signal at any point on a network segment, accept additional backhaul or end-user connections with an integrated wireless (802.11 a/b/g, 900 MHz, etc) access point, and transfer the signal to the low voltage line for delivery to the end user wherever a medium to low voltage transformer is located. Our standard node is powered from the low voltage line and can have an optional battery to allow operation in the event of power outages. The node can be remotely accessed over the BPL network to detect system status (such as power and low battery conditions) and perform management functions. MODEMS transmit the signal to and receive the signal from the low-voltage power line at the end-user's location. The modem is typically connected to either a router or the user's personal computer. In addition to an Ethernet interface, some models of our BPL modems contain a standard telephone jack for internet telephony applications. Our BPL Solutions use modems from Toyo Network Systems, a leading BPL company whose equipment and technologies have been deployed in large-scale BPL pilots in Spain and Portugal. Our BPL Solution offers other functional and competitive advantages: o POTENTIAL FOR INCREASE IN BANDWIDTH. Our BPL networks have successfully demonstrated consistent delivery of bandwidth of 3 to 5 Mbps to the customer. Future network and modem technologies are expected to allow the same frequency bands to carry at least three times more data. o A FLEXIBLE AND EXPANDABLE NETWORK ARCHITECTURE. Our BPL Solutions have a versatile system build out and expansion capability that permits sequential installations and expansions corresponding to actual customer demand. This allows the BPL network owner to initially build just the capacity it needs, with future expansions requiring little, if any, modification of the existing network. o A COMPLETE BPL NETWORK MANAGEMENT SOLUTION. Recognizing the market opportunity in the management of deployed BPL networks, in late 2005 we began development of our scalable, reliable Network Management System software solution ("NMS"). NMS will support auto-discovery of network resources, event logging, alerts, and correlation, data collection and reporting. The beta release of NMS is scheduled for the second quarter of 2006. 5 PILOTS, DEPLOYMENTS, AND OTHER COLLABORATIVE ARRANGEMENTS We are is currently conducting field trials and pilot demonstrations that are evaluating the components and technologies that compose our BPL Solutions. Since 2002 we have had a Research and Development Agreement with Consolidated Edison Company of New York Inc. ("Con Edison"), a leading utility service provider and our principle collaborative partner. Under this agreement we have sole rights to any jointly developed BPL technology, and we are jointly operating several BPL pilot, trial, and demonstration networks on Con Edison's electric distribution system. EarthLink, Inc.("EarthLink"), a leading ISP, has agreed to participate in and support our trials with Con Edison. We are also conducting limited field trials and joint cooperative efforts with several other electric utilities. In addition we are working with leading BPL technology companies, such as Design of Systems on Silicon ("DS2")and Toyo Network Systems("TNS"), to further develop, deploy, and commercialize our BPL technology. o A UTILITY APPLICATIONS BPL PILOT NETWORK IN PEARL RIVER, NEW YORK. In early 2004, we installed a BPL network that spans approximately one and one half miles at Orange and Rockland Utilities, Inc., a Con Edison subsidiary headquartered in Pearl River, New York. This network is used to demonstrate substation monitoring to an energy control center facility and can be used for other potential core utility applications. o AN INDUSTRIAL APPLICATIONS BPL PILOT NETWORK IN MANHATTAN, NEW YORK CITY. In 2004, we installed a BPL network in Con Edison's First Avenue steam tunnel in Manhattan in New York City. Con Edison uses the network to monitor environmental conditions and the state of the steam main and to provide telephony service in the tunnel using Voice over Internet Protocol (VoIP) technology. This single BPL network provides a variety of services that would have otherwise required multiple technologies and wiring systems. o A CONSUMER ORIENTED AND UTILITY APPLICATION BPL PILOT DEMONSTRATION NETWORK IN WESTCHESTER COUNTY, NEW YORK. In 2002, Ambient and Con Edison deployed a BPL network in the Village of Briarcliff Manor, New York, a suburb located north of New York City. This network spans a distance of approximately one mile and has achieved speed from 10 to 16 Mbps over the medium voltage lines and 3.5 to 7 Mbps delivered to consumers. The initial pilot now passes over 700 residences, and currently provides consumer broadband Internet access to pilot participants and allows for video monitoring of a local intersection. o PILOT PHASE OF AN ADVANCED GRID MANAGEMENT TRIAL. Since 2004, Ambient and Con Edison have been conducting phased development trials of utility service and management applications, and have successfully completed a small field trial phase. On January 27, 2006, Con Edison and Ambient entered into an agreement with NYSERDA (the New York State Energy Research and Development Authority) (the "NYSERDA Agreement") pursuant to which they undertook to conduct medium and low voltage electric systems monitoring activities to detect incipient or impending failures and related activities, for which Con Edison was awarded a $200,000 grant from NYSERDA. The NYSERDA Agreement necessitated an amendment to the Research and Development Agreement to modify the implementation plan contained therein to encompass the objectives of the NYSERDA Agreement. In the amendment, Con Edison and Ambient certified the completion of the Small Field Trial Phase, agreed that the $325,000 advance owing from Ambient to Con Edison was subsumed into the revenue royalty granted to Con Edison in the Research and Development Agreement, and agreed to move forward to an Advanced Grid Management Pilot Phase that encompassed the statement of work contained in the NYSERDA Agreement. Additionally, in the amendment, Con Edison committed to remit to Ambient not less than $180,000 of the grant monies received from NYSERDA to compensate Ambient for its equipment and other costs to be incurred in performing the Advanced Grid Management Pilot Phase. NYSERDA is a public benefit corporation created by the New York State Legislature to administer the State's energy program. 6 The $325,000 advance will be recorded as revenue by Ambient during the first quarter of 2006. o A CONSUMER ORIENTED MULTIPLE DWELLING UNIT BPL NETWORK IN MANHATTAN, NEW YORK CITY. In March 2005, we installed and activated a pilot Multiple Dwelling Unit (MDU) BPL network in a 16 floor, 213 unit condominium building located on Manhattan's upper west side. This network initially offered consumer high-speed Internet service. In October 2005 we deployed EarthLink's next generation Voice over Internet Protocol (VoIP) service, trueVoice(TM). Video surveillance, intercom services, cached video-on-demand capability, and remote load management and control applications are currently in development. o BPL NETWORK PILOT WITH SAN DIEGO GAS & ELECTRIC COMPANY. In July 2005, we undertook a pilot demonstration with San Diego Gas & Electric Company (SDG&E) to install a BPL-network on the SDG&E grid. This pilot will allow SDG&E to evaluate several consumer and utility based applications including BPL-enabled meter reading, and demonstrate how our solution may help to fulfill the California Advanced Metering Initiative (AMI). SDG&E has also licensed our new Network Management System (NMS) to monitor and manage the BPL network. This pilot was showcased at the United Power Line Council (UPLC) conference in February 2006. o BPL NETWORK PILOT IN THE SOUTHEASTERN UNITED STATES. After successful completion of a proof of concept phase, in January 2006 we entered into a pilot demonstration agreement with a large investor-owned utility in the southeastern United States. The pilot, which will service approximately 700 homes, is being designed to encompass a comprehensive, end-to-end solution for high-speed transmission and reception of data and voice services via electric power lines for both broadband carrier and core utility applications/services. Included in the pilot is a demonstration of the Company's ability to simultaneously support utility applications as well as provide an infrastructure for the utility to offer its electricity customers a choice of multiple ISPs over the same power lines. The network will be monitored and managed by the Company Network Management System, a proprietary software management system. The pilot is expected to continue for approximately 8 weeks, at the conclusion of which the parties will separately evaluate the results of the pilot and the feasibility of commencing an initial commercial build out and deployment of the Company BPL Solutions to approximately 10,000 homes on the utility's electrical power distribution system (the "Phase 1 Deployment"). The pilot demonstration agreement contemplates that the Company will enter into negotiations with the utility regarding an agreement respecting the Phase 1 Deployment with the goal of completing this agreement on or about the time of the expected completion of the pilot. No assurance can be given, however, that the company will in fact agree with the utility on the feasibility of proceeding to Phase I Deployment or consummate an agreement respecting Phase I Deployment on mutually acceptable terms. In January and February of 2006, revenue from the pilot program amounted to approximately $400,000. No assurance can be given that we will agree with the utility on the feasibility of proceeding to Phase I Deployment or consummate an agreement respecting Phase I Deployment on mutually acceptable terms. o LICENSING AGREEMENT WITH DESIGN OF SYSTEMS ON SILICON. In 2001, we entered into an initial licensing agreement with Design of Systems on Silicon S.A. (DS2), the world leader in the development of BPL chipset products, to incorporate DS2's chipsets and software into our BPL 7 Solution. In January 2004, we entered into a new agreement that strengthens and builds upon this relationship. We are now working with DS2 to further develop its technology and are integrating DS2's next-generation 200 Mbps chipsets, which feature 10 to 40 times faster performance than other broadband technologies, integrated support for Quality and Class of Service (QoS and CoS) for latency-sensitive and bandwidth-intensive services such as delivery of multiple streams of video content (HDTV and SDTV), and support for new interoperability standards. o ALLIANCE AND DISTRIBUTION AGREEMENT WITH TOYO NETWORK SYSTEMS CO., LTD.: In February 2005, we entered into an alliance and distribution agreement with Toyo Network Systems ("TNS") of Japan formerly known as Toyo Communication Equipment Co. Ltd. TNS is a subsidiary of NEC. This agreement is intended to lead to our collaboration with TNS in the commercialization of our respective BPL technologies. TNS has been a licensee of DS2 technologies since 2002, and its equipment and technologies have been deployed in large-scale BPL pilots in Spain and Portugal. OUR STRATEGY Our goal is to become a leading designer, developer and systems integrator for commercially deployed BPL networks that deliver broadband services to electric utilities, commercial, governmental, and residential customers. We intend to generate revenues from the design of these BPL networks, as well as the sales, installation, and support of the necessary equipment and technologies and licensing of our Network Management System. Our efforts are focused on the following: o EXPAND THE RANGE OF UTILITY AND CONSUMER APPLICATIONS. The applications create the need for the network, and our goal is to drive the development of new applications to create this need. One example is our provision of EarthLink's VoIP telephone service over a BPL network installed in a New York City multiple dwelling unit ("MDU") in 2005. This high-speed network now enables streaming video, alarm monitoring and other consumer services. Utility and industrial applications also advanced during 2005 include video surveillance sub-station monitoring and communications (VoIP).Future utility applications such as BPL enabled Automatic Meter Reading (AMR), remote outage detection, and Intelligent Demand Side Management (IDSM) may help to make BPL deployment cost-effective even in the absence of consumer broadband service. We intend to continue to work with other technology companies to expand the range of applications that will economically justify BPL deployments. o EXPAND OUR STRATEGIC RELATIONSHIPS AS DESCRIBED IN DETAIL UNDER "PILOTS, DEPLOYMENTS AND OTHER COLLABORATIVE ARRANGEMENTS." We are currently working with several utilities, as well as other technology companies, to further develop our BPL Solutions. We will continue to strengthen these existing relationships and to seek out new strategic and commercial relationships with utilities and other technology companies. o PURSUE OUR ROLE AS A LEADING SYSTEMS INTEGRATOR. During 2005, we further developed our role as a leading BPL systems designer, integrator, and coordinator. These activities position us to generate revenue from systems design in addition to the sale and installation of BPL components and technologies. o DEVELOP, DEPLOY, AND LICENSE OUR NETWORK MANAGEMENT SOLUTION. Recognizing the market opportunity in the management of deployed BPL networks, in late 2005 we began development of our proprietary Network Management System software ("NMS") our scalable, reliable BPL network management software solution. NMS will support auto-discovery of network resources, utility applications, diagnostic tools, event logging and 8 correlation alerts, data collection and reporting. The beta release of NMS is scheduled for the second quarter of 2006. o DIVERSIFY OUR MARKET OPPORTUNITIES. Although we have identified several specific markets and solutions, in 2005 we continued to identify and address new opportunities. One example is our MDU installation discussed above for which our BPL Solutions have proven to be well suited. Our BPL Solutions can utilize a building's existing infrastructure to provide high-speed Internet access to commercial, residential, hospitality, and other locations. Experience with this installation will enable us to further develop and market our BPL Solutions to MDUs. In 2006 we will continue our efforts to identify and develop other diversified market opportunities. o EXPAND AND PROTECT OUR INTELLECTUAL PROPERTY. We believe that our future success depends on the continued development and protection of our proprietary technologies. In addition to enabling us to take a leading position in the BPL marketplace, a large intellectual property base opens up revenue generating licensing possibilities. Our expanding patent portfolio increased in size in 2005 and currently includes six patents on the core data coupling technology and its application. Several others patent applications are either allowed, pending, or under review by the USPTO, and we have applied for corresponding patents in key markets worldwide. We will continue to expand our patent portfolio and, when necessary, aggressively protect our proprietary technologies. o LEAD INDUSTRY STANDARDIZATION EFFORTS. We believe that open standards and interoperability will benefit consumers, hasten the deployment of BPL technology, and lead to greater success for both the company and the industry as a whole. We are a founding member of the Universal Powerline Association (UPA), an association of industry players created to promote BPL global interoperability standards. John J. Joyce, our President and Chief Executive Officer also serves as Vice Chairman of the UPA Board of Directors. We are also a member of the United Power Line Council (UPLC), an alliance of electric utilities and technology companies working together to drive BPL development. Mr. Joyce serves on the UPLC Board and Ram Rao, our Chief Network Architect, is Co-chair of the UPLC Technical Action Committee. Additionally, our key technical personnel currently chair two working groups of the Institute of Electrical and Electronics Engineers (IEEE), and participate with one another, to drive the development of BPL safety, electromagnetic compatibility and system interoperability standards. We intend to continue our active role in the establishment of national and international BPL standards and ensure that our BPL Solutions conform to these evolving standards. No assurance can be provided that we will be successful in our strategic efforts in marketing our BPL Solutions (including all of the integral components/technologies to be created by third parties) in further developing and designing these technologies to meet market demands, or that our BPL Solutions can or will be integrated into commercially deployed BPL networks. Additionally, we face capital constraints. The additional $1.3 million that we raised from the placement of secured debt in January 2006 will enable us to continue to initiate and complete new and existing pilot programs for the short term. However, our existing cash resources are not sufficient to support the commercial introduction, production, and delivery of our BPL Solutions as contemplated in our business plan and we will need to raise additional capital for that purpose on an a immediate basis. In addition, this secured debt matures in June 2006. Accordingly our business and strategy are subject to many risk factors. See "Risk Factors". 9 PRODUCTION AND SUPPLIES During the past year we have transitioned both our source of supply and manufacturing processes from lab based to pilot production. We have expanded our use of local contract manufacturing capabilities and suppliers in positioning the products and processes to scale with the business. In 2006, we intend to continue the transition toward a full out-sourced model extending from electronic manufacturing and testing to include systems and fulfillment operations. Through our pilot efforts we have demonstrated the effectiveness of both the materials specifications along with manufacturing processes in support of our propriety couplers. We have cultivated "strategic" relationships with key suppliers with both the processing expertise and capacity to support our forecasted needs. Our outlook is to continue leveraging technology and distribution alliances along with value-add manufacturing services to ensure we are positioned to support the commercial role out of our products. MARKETING PLAN To date our efforts have been devoted primarily to the design, development, testing and certification of the technologies and components comprising our BPL Solutions as well as raising the capital needed to maintain our business and begin to develop the infrastructure to support wider BPL adoption. We anticipate that we will be able to generate revenue principally from, but not limited to, one or more of the following: BPL network design, engineering and installation: sale and support of the underlying components; licensing and support of our NMS; and potential license and related maintenance fees collected from utilities, technology companies or network operators. We have identified initial opportunities to focus our business development efforts with several large Investor Owned Utilities (IOUs) and Multi-Dwelling Unit (MDUs) landlords and service providers. We will be able to refine our strategy and the potential and likely sources of revenue as the state regulatory environments and standards development processes progress and potential customers refine their respective business models with the introduction of next generation systems. While we have recorded revenues during 2005 in connection with the sale and license of certain equipment being used in our on-going pilots, we presently have no agreement with any utility, ISP or reseller or other party respecting any significant revenue generating arrangement for our BPL Solutions and no assurance can be provided that we will in fact be able to enter into such agreements or arrangements on terms that are commercially acceptable to us. Our success in concluding any revenue generating commercial agreements is premised, in part, on the integration and deployment by one or more leading utilities or other potential customers of our BPL Solutions into a commercially deployed BPL network. Our principal target customers are electric utilities in North America and elsewhere that are interested in developing the potential for BPL communications in their respective markets. However, we are also exploring the MDU market, including residential landlords, hotels and other commercial businesses in an effort to expand our addressable market and diversify our potential revenue base. We also continue to strive to develop relations with industry and other technology companies to expand the awareness and reach of the BPL Solutions as enablers of new applications and a viable component of hybrid communications networks. 10 COMPETING COMPANIES AND TECHNOLOGIES We face significant competition from other providers of power line based systems, as well as from telephone, wireless, and cable companies. BPL PROVIDERS. Several other companies, including some with greater resources than us, provide partial or full power line based high-speed solutions. We believe that our technology provides a distinct advantage, and we believe that our strategy of collaboration with communications, technology, and utilities partners will enable us to provide the most adaptable and viable BPL solution. Additionally, our proprietary and patented technologies may enable us to generate additional revenue from these competitors through licensing agreements. INCUMBENT TELEPHONE SERVICE PROVIDERS. Many local and regional telephone companies have provided several types of DSL technology for over 15 years and some are now deploying fiber optic service. Many of these providers, such as the regional Bell operating companies, have greater resources than us and have well established brand awareness in their service areas. We expect that our BPL Solutions will provide to utilities and electricity distribution operators a host of cost-effective, utility specific applications and benefits not offered by these competitors. Our alliances with existing and prospective utility partners will equalize the resource imbalance and compensate for the competitors' brand awareness. WIRELESS AND SATELLITE SERVICE PROVIDERS. Several fixed-wireless and satellite service providers are currently offering, or planning to offer, competing communications services, particularly in underserved areas. However, services based on these technologies historically offer significantly lower communication speeds than does BPL. SUBSCRIPTION TELEVISION HARDWIRE CABLE. Traditional cable television operators have offered high speed access for close to ten years, and are now starting to bundle services such as VoIP telephony, to enhance their offerings. As with some telephone companies, cable television operators also have greater resources than us and well established brand awareness. Although the technology is mature, older cable systems require significant capital expenditures to provide these services. We expect our BPL Solutions to compete by offering competitive speeds, similar bundled services, and by again leveraging our utility partners' resources and brand recognition. PROPRIETARY RIGHTS We currently rely on a combination of patent, trade secret, copyright and trademark law, as well as non-disclosure agreements and invention assignment agreements, to protect the technologies used in our BPL Solutions and other proprietary information. However, such methods may not afford complete protection and there can be no assurance that other competitors will not independently develop such processes, concepts, ideas and documentation. We have filed several provisional and formal patent applications in the United States with respect to the different applications on the medium and low voltage overhead distribution grid and building wiring, as well as underground distribution infrastructures. Beginning with our initial filing for the inductive coupling of a data signal to a power transmission cable with the USPTO in 1999, we have made several additional filing in the United States and internationally to protect our technology and enhancements. Between September 2002, and December 31, 2005, the USPTO issued us six patents with respect to the technology employed in our BPL Solutions. Our policy is to require our employees, consultants, other advisors, as well as utility and design collaborators, to execute confidentiality and assignment of invention agreements upon the commencement of employment, consulting or advisory relationships. These agreements generally provide that all confidential information developed or made known to a party by us during the course of the party's association with the Company is to be kept confidential and not to be disclosed to third parties except in 11 specific circumstances. In the case of employees and consultants, the agreements also provide that all inventions conceived by the individual in the course of their employment or consulting relationship will be our exclusive property. EMPLOYEES We currently employ 32 employees, all of whom work out of our offices in Newton, Massachusetts and Briarcliff Manor, New York. Our future performance depends highly upon the continued retention and service of certain members of our management team as well as our ability to identify, attract, train and retain other highly skilled managerial, technical, business development and marketing personnel. Hiring for such personnel is competitive. RESEARCH AND DEVELOPMENT From the date of inception through December 31, 2005, we have expended approximately $12.1 million on research and development. During our 2005 and 2004 fiscal years, we expended approximately $2.6 million and $2.5 million, respectively, on the research and development of our BPL Solutions. GOVERNMENT REGULATIONS Utilities and other providers of electric power are subject to significant governmental oversight and regulations, on both the state and federal level. Foreign utilities and other providers of electric power are also subject to significant governmental oversight and regulations in their respective home countries. In certain countries, there may be regulations restricting the transmission of high frequency over power lines, necessitating governmental permission. These regulations may inhibit, delay or preclude the provision of BPL Solutions or to require modifications thereto. In addition, regulations in the telecommunications field may also adversely affect the provision of our BPL Solutions. We are addressing these regulatory challenges. In October 2004, the FCC adopted changes to Part 15 of its Rules to encourage the development of Access Broadband over Power Line (Access BPL) systems while safeguarding existing licensed services against harmful interference. The FCC took this important step in order to increase the availability of broadband services because power lines reach virtually every home and community. The FCC also acknowledged important benefits for electric utilities to enable them to dynamically manage the power grid itself, thereby increasing network reliability by remote diagnosis of electrical system failures. Specifically, the FCC adopted a framework including: (1) new operational requirements for Access BPL to promote avoidance and resolution of harmful interference; (2) new administrative requirements to aid in identifying Access BPL installations; and (3) specific measurement guidelines and certification requirements to ensure accurate and repeatable evaluations of emissions from Access BPL and all other carrier current systems. The foregoing changes in the FCC's rules took effect in February 2005. That month, petitions for reconsideration were filed by Amateur Radio Relay League (ARRL), American Petroleum Institute, Cohen, Dippell and Everist, P.C. and Aeronautical Radio Incorporation (ARINC) challenging the FCC's October rulemaking and requesting expanded interference protection rights for amateurs, critical infrastructure licensees, television broadcasters and aeronautical mobile licensees. Petitions were also filed by members of the BPL industry requesting modifications to the FCC's mandated interference mitigation requirements and to aspects of its BPL equipment compliance rules. The FCC's new rules remain subject to challenge and possible modification by the FCC as a result of the filing of the foregoing petitions and, in addition, remain subject to challenge in court. There is no assurance that any changes proposed by the FCC will be ultimately favorable to us in our effort to commercialize the BPL Solutions, nor is the likelihood of the adoption of changes by the FCC to these new rules, or the timing thereof, predictable at this time. 12 BPL deployment could also eventually require the resolution of additional issues by federal and state regulatory authorities arising from the regulation of electric companies and from the regulation of communications provided over BPL networks. The FCC did not address a number of these regulatory issues in its October 2004 rulemaking which it could revisit in future proceedings. It also has proceedings pending relating to the regulation of broadband information and telecommunications services over other non-BPL technologies which could be made applicable to broadband services provided over BPL technologies. In addition, while few states have formal dockets open to examine BPL regulatory issues, the National Association of Regulatory Utility Commissioners is sponsoring a task force comprised of state regulators which it has formed to research BPL regulatory issues and to advise state regulators on its findings which could result in new or expanded state regulation of the deployment of BPL. ADVISORY BOARD Our advisory board provides us with the advice of experienced, knowledgeable business people and professionals on an as needed basis in areas in which we may require assistance. Our advisory board has no control or direct influence over our policies, management or board of directors. The chairman of our advisory board is Senator J. Bennett Johnston. Senator Johnston is a former Chairman of the U.S. Senate's Energy and Natural Resources Committee (1986 - 1992) and former Chairman of the Energy Appropriations sub-committee. He served for 24 years in the U.S. Senate (1972 - 1996) and served his entire career on the Energy and Natural Resources Committee, chairing it from 1986 - 1992. During this period, Senator Johnston chaired or was a ranking member of the Energy and Water Appropriations Sub-Committee. In this dual assignment, Senator Johnston was author and principal sponsor of literally hundreds of energy bills and legislation. Senator Johnston was the principal sponsor of the Natural Gas De-regulation Act and authored the Energy Policy Act of 1992, the first electricity re-structuring legislation adopted in the United States. In February 2004, a representative of EarthLink joined our advisory board. Other members of the advisory board include individuals with experience in finance, government regulatory relations and utility engineering. AVAILABLE INFORMATION Our Internet website is located at http://www.ambientcorp.com. The reference to our Internet website does not constitute incorporation by reference of the information contained on or hyperlinked from our Internet website and should not be considered part of this document. The public may read and copy any materials we file with the Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC's Internet website is located at http://www.sec.gov. RISK FACTORS Our business and strategy are subject to many risks discussed below. If any of these risks occurs, our business, financial condition or operating results could be adversely affected. RISKS CONCERNING OUR BUSINESS OUR NEED FOR ADDITIONAL FINANCING IS ACUTE AND FAILURE TO OBTAIN ADEQUATE FINANCING COULD LEAD TO THE FINANCIAL FAILURE OF OUR COMPANY. As of February 24, 2006, we had cash balances of approximately $1 million. We will require 13 additional funds to repay a $1.62 million secured loan that matures in June 2006, to continue to meet our other liquidity needs throughout 2006 and to satisfy our current business plan. We will need to raise additional funds on an ongoing basis to pay existing current liabilities as they come due, as well as to meet our operating requirements, prior to the receipt of revenues from the commercialization of our BPL Solutions. At the present time, we have no commitments for any additional financing, and there can be no assurance that additional capital will be available to us on commercially acceptable terms or at all. We may have difficulty obtaining additional funds as and when needed, and we may have to accept terms that would adversely affect our stockholders. Additional equity financings are likely to be dilutive to holders of our Common Stock and debt financing, if available, may involve significant payment obligations and covenants that restrict how we operate our business or contain rights, preferences and privileges senior to our Common Stock. Even after we begin to recognize revenue we also may be required to seek additional financing in the future to respond to increased expenses or shortfalls in anticipated revenues, accelerate product development and deployment, respond to competitive pressures, develop new or enhanced products, or take advantage of unanticipated acquisition opportunities. We cannot be certain we will be able to find such additional financing on commercially reasonable terms, or at all. If we are unable to obtain additional financing when needed, we could be required to modify our business plan in accordance with the extent of available financing. We also may not be able to accelerate Fthe development and deployment of our products, respond to competitive pressures, develop new or enhanced products or take advantage of unanticipated acquisition opportunities. Finally, we may be required to sell out assets or shut down the company and cease operations. Our independent registered public accountants have included an explanatory paragraph in their report accompanying our audited consolidated financial statements for the years ended December 31, 2005 and 2004 relating to the uncertainty of our ability to continue as a going concern. This qualification may make it more difficult for us to raise additional capital when needed. Our auditors believe that there are conditions that raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of reported assets or liabilities should we be unable to continue as a going concern. WE HAVE A LIMITED NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE AND, IF OUR STOCKHOLDERS DO NOT APPROVE AN INCREASE IN THE AUTHORIZED NUMBER OF SHARES OF OUR COMMON STOCK, OUR ABILITY TO RAISE ADDITIONAL CAPITAL WILL BE SEVERELY LIMITED. We currently have a limited number of shares of Common Stock available for issuance in future financings. Prior to a future financing, we may need to obtain stockholder approval to increase the authorized number of such shares so as to have sufficient availability for an equity or convertible security offering of the magnitude necessary to yield proceeds to the Company sufficient to meet liquidity needs and to commence commercialization efforts contemplated by our business plan. As of February 24, 2006, there were 300,000,000 shares of Common Stock authorized for issuance under our Certificate of Incorporation, of which 167,434,381 shares of Common Stock were outstanding and an additional 75,040,314 shares of Common Stock were reserved for possible future issuance upon the exercise or conversion of outstanding options, warrants, and convertible debentures. Thus, we have only 57,525,305 shares of Common Stock available for issuance. We intend to propose at our 2006 annual meeting of stockholders that our stockholders approve an increase in our authorized number of shares of Common Stock. If our stockholders do not approve the increase in the number of authorized shares of Common Stock, our ability to raise additional capital through the issuance of Common Stock or securities convertible into or exercisable for our Common Stock will be severely limited. 14 A DEFAULT BY US UNDER OUR BRIDGE LOAN WOULD ENABLE THE LENDER TO TAKE CONTROL OF ALL OF OUR ASSETS. In January 2006, we entered into a bridge loan agreement pursuant to which an institutional investor loaned us $1,500,000 (net principal amount of $1,335,000 after transactions costs) and we issued to the investor a secured promissory note in the aggregate principal amount of $1,620,000, which reflects an original issue discount on the principal amount of the loan of 15.5%. The note will mature on the date that is the earlier of (i) the date on which we consummate a subsequent financing that generates, on a cumulative basis together with any other interim financings, gross proceeds to us of at least $2 million or (ii) June 24, 2006. To secure our obligations under the bridge loan agreement, we granted the investor a security interest in all of our assets (including, without limitation, our intellectual property) The security interest terminates upon payment or satisfaction of all of our obligations under the bridge loan agreement. A default by us under the bridge loan agreement would enable the investor to foreclose on all of our assets. The investor has no operating experience in our line of business and any foreclosure could force us to substantially curtail or cease our operations. WE HAVE A HISTORY OF LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE THROUGH THE FORESEEABLE FUTURE. We are a late stage development stage company engaged in the design, development and marketing of our BPL Solutions. We incurred net losses of $11,226,555 and $7,514,113 for the years ended December 31, 2005 and 2004, respectively. From inception through December 31, 2005, we reported an accumulated deficit of approximately $86,206,000. We have been funding our operations primarily through the sale of our securities and expect to continue doing so for the foreseeable future. We expect to continue to incur net losses for the foreseeable future as we continue to further develop and test our BPL Solutions and intensify our commercialization efforts. Our ability to generate and sustain significant additional revenues or achieve profitability will depend upon the factors discussed elsewhere in this "Risk Factors" section. We cannot assure you that we will achieve or sustain profitability or that our operating losses will not increase in the future. If we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. WE HAVE A LIMITED OPERATING HISTORY. We were incorporated in June 1996 and have been engaged in the BPL field since 1999. We are subject to all of the risks inherent in the establishment of a new business enterprise in a nascent and evolving field. Our limited operating history makes it difficult to evaluate our financial performance and prospects. No assurance can be made at this time that we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. OUR COMMERCIAL SUCCESS IS CONTINGENT UPON OUR BPL SOLUTIONS BEING COMMERCIALLY DEPLOYED OVER THE UTILITIES DISTRIBUTION NETWORK OR IN ALTERNATIVE MARKETS. Our activities to date have primarily focused on the design, development, testing and marketing of our BPL Solutions for use on low and medium voltage distribution systems. We have established contractual relationships with leading technology companies and electric utilities for the design, development, evaluation and testing of our BPL Solutions. No assurance can be given that these arrangements will achieve their intended results or that they will result in our BPL Solutions being commercially deployed over an electrical power distribution network. We are in the process of integrating our BPL Solutions with various other complementary and necessary technologies. While our couplers and the other principal equipment and components comprising our BPL Solutions have been successfully tested in field trials and are being used in on-going pilots, no assurance can be given that these components or technologies will be successfully developed or technologically feasible for deployment on a commercial scale over an electric utility distribution network. In addition, the costs of developing and 15 commercializing our BPL Solutions may far outweigh the revenues, if any, that we may generate from such commercialization. To date, we have provided our BPL Solutions primarily to electric utilities and ISPs on a pilot basis, and have earned limited revenues from these efforts. Our marketing success is dependent, initially, on the deployment by electric utilities of a communications network over their powerline distribution system utilizing our BPL Solutions or on our ability to develop other market applications for our technologies. If a significant number of electric utilities ultimately elect not to commercially deploy a power line communications system not to utilize our BPL Solutions or to favor other technologies or providers of similar services, our business may be adversely affected and we may be required to cease operations. Moreover, our BPL Solutions may not achieve or sustain market acceptance under emerging industry standards or may not meet, or continue to meet, the changing demands of the media access and technology service companies. If the market for our BPL Solutions does not develop or expand as we anticipate, our business, financial condition and results of operations would be materially adversely affected and we may be required to cease operations. GOVERNMENTAL REGULATIONS MAY DELAY OR PRECLUDE COMMERCIAL DEPLOYMENT OF A POWER LINE COMMUNICATIONS NETWORK. Electric utilities are ordinarily subject to significant governmental oversight and regulations, on both the state and federal level. Foreign utilities and other providers of electric power are also subject to significant governmental oversight and regulations in their respective home countries. In certain countries, there may be regulations restricting the transmission of high frequency signals over power lines, necessitating governmental permission. These regulations, as well as regulations in the telecommunications field, may inhibit, delay or preclude the commercial deployment of BPL networks or the utilization of our BPL Solutions. In October 2004, the Federal Communications Commission (the "FCC") adopted rules and regulations that, in our view, are favorable to the development of BPL. These regulations are being challenged. No assurance can be given that these regulations will not be modified by FCC in a manner adverse to our business or become subject to legal challenges. See "Governmental Regulations." IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS AND OPERATIONS WOULD BE HARMED. Subject to raising additional funds, we intend to expand management, design and development, testing, quality control, marketing, sales and service and support operations, as well as financial and accounting controls, in order to further the commercialization of our BPL Solutions. The pace of any expansion, together with the level of expertise and technological sophistication required to provide implementation and support services, will demand an unusual amount of focus on the operational needs of our future prospective customers for quality and reliability. We anticipate that this development may strain our existing managerial, operational and financial resources. We may be unable to develop and expand our business and operations for one or more of the following reasons: o We may not be able to locate or hire at reasonable compensation rates qualified and experienced sales staff and other employees necessary to expand our capacity on a timely basis; o We may not be able to integrate new management and employees into our overall operations; and 16 o We may not be able to successfully integrate our internal operations with the operations of product manufacturers and suppliers to produce and market commercially viable products or solutions. If we cannot manage our growth effectively, our business and operating results will suffer. WE HAVE NO AGREEMENT RELATING TO SIGNIFICANT REVENUE GENERATING ACTIVITIES. While certain of our on-going pilot programs have resulted in limited revenues to us, we presently have no agreement or understanding with any electric utility or any other person relating to commercial exploitation of our BPL Solutions and no assurance can be provided that we will be successful in entering into any significant-revenue generating agreement on terms commercially acceptable to us. WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL. We are highly dependent on the principal members of our management and technology staff. The loss of their services might significantly delay or prevent the achievement of development or strategic objectives. Our success depends on our ability to retain key employees and to attract additional qualified employees. No assurance can be provided that we will be able to retain existing personnel or attract and retain additional highly qualified employees in the future. RISKS CONCERNING OUR BPL SOLUTIONS AN INTERRUPTION IN THE SUPPLY OF COMPONENTS AND SERVICES THAT WE OBTAIN FROM THIRD PARTIES COULD HAMPER OR IMPEDE THE COMMERCIALIZATION OF OUR BPL SOLUTIONS. The principal components comprising our BPL Solutions include our proprietary and patent protected couplers, which we designed and developed in-house, and the nodes or communications controllers that are designed to interface with the existing power lines. To manufacture and assemble our end products and components, we depend on third parties to deliver and support reliable components, enhance their current products and components, develop new components on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. Any significant interruption in the supply of any of these components, products or services could hamper or impede our commercialization efforts and, following any commercialization, , may cause a decline in sales of our products and services, unless and until we are able to replace the functionality provided by these suppliers and services. WE FACE COMPETITION FROM SEVERAL SOURCES. As we are proposing an alternative broadband option, the competition for our BPL Solutions includes other non-power line based broadband providers, and to a lesser extent, other providers of BPL systems. Some of the providers of broadband access, including other providers of Powerline communications systems, have substantially greater financial, research and development, technological and marketing resources than we do. Numerous companies claim to provide non-power line based high-speed data transmission. In particular, ISPs provide Internet access over existing networks and have nationwide marketing presence and strategic or commercial licenses with telecom carriers. Wireless and satellite service providers have announced plans to expand fixed-wireless networks for high-speed data customers. Cellular operators are establishing portals facilitating access to web and information services. Certain companies, including some with significantly greater resources than we have, provide partial or complete power line based solutions. We believe that our core strategy, which attempts 17 principally to collaborate with appropriate parties in the communications and service technology areas as well as utilities, provides the most viable prospect for deploying a commercially viable power line communications network. However, there can be no assurance that this strategy will be successful or that we will be able to compete successfully in this market. There can also be no assurance that other companies will not enter the market in the future. There can be no assurance that development by others of similar or more effective technologies or solutions will not render our BPL Solutions non-competitive or obsolete. In addition, our BPL Solutions may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS. We have filed with the United States Patent and Trademark Office ("USPTO"), and with the appropriate agencies in foreign countries and other jurisdictions, patent applications with respect to the different BPL Solutions and applications on the medium and low voltage distribution grid and for in-building wiring. Our expanding patent portfolio includes six patents issued or allowed by the USPTO and several pending patent applications in the United States and in other jurisdictions. However, our BPL Solutions include several components and technologies for which we may not have intellectual property rights. Accordingly, we periodically undertake products and technology clearance review of the technologies comprising our BPL Solutions. While we rely on a combination of copyright and trade secret laws, nondisclosure and other contractual provisions and technical measures to protect our intellectual property rights, it is possible that our rights relating to our BPL Solutions may be challenged and invalidated or circumvented. Further, effective intellectual property protection may be unavailable or limited in certain foreign countries. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise use aspects of processes and devices that we may regard as proprietary. Policing unauthorized use of proprietary information is difficult, and there can be no assurance that the steps we have taken will prevent misappropriation of our technologies. In the event that our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for technologies, which could have a material adverse effect on our business, financial condition and results of operations. Litigation may be necessary in the future to enforce our patent portfolio and intellectual property rights, to protect trade secrets, or to determine the validity and scope of the proprietary rights of others. There can be no assurance that any such litigation will be successful. Litigation could result in substantial costs, including indemnification of customers and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, whether or not this litigation is determined adversely to us. In the event of an adverse ruling in any litigation, we might be required to pay substantial damages, discontinue the use and sale of infringing products, and expend significant resources to develop non-infringing technology or obtain licenses to infringed technology. FAILURE TO IMPLEMENT AND /OR MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS OPERATIONS. Beginning in fiscal 2007, we must perform an annual evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of those internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules adopted by the SEC. Our compliance with Section 404 will require that we incur substantial accounting expenses and expend significant management efforts. If we are not able to 18 comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies a deficiency in our internal controls over financial reporting that is deemed to be a material weakness, corrective actions will be required, the market price of our Common Stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, all of which would require the expenditure of additional financial and management resources. RISKS CONCERNING OUR CAPITAL STRUCTURE CONSOLIDATED EDISON, INC., AN AFFILIATE OF THE CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., OUR PRINCIPAL UTILITY COLLABORATOR, CONTROLS A SIGNIFICANT PORTION OF OUR COMMON STOCK AND COULD CONTROL OR INFLUENCE OUR ACTIONS IN A MANNER THAT CONFLICTS WITH OUR INTERESTS AND THE INTERESTS OF OTHER STOCKHOLDERS. As of February 24, 2006, Consolidated Edison, Inc. ("CEI"), an affiliate of the Consolidated Edison Company of New York, Inc., our leading utility development collaborator, beneficially owned approximately 20.9% of the outstanding shares of our Common Stock (prior to the exercise of outstanding warrants and options). In addition, CEI is contractually entitled to designate a member of our board of directors, so long as it continues to beneficially hold, in the aggregate, 20% of our issued and outstanding equity capital. To date CEI has not exercised this right. When and if this right is exercised, CEI may be able to exercise considerable influence over matters requiring board approval. In addition, as a major stockholder, CEI currently is able to exercise significant influence over matters requiring approval of our stockholders, including the election of directors and the sale of our company. Such a concentration of ownership may also have the effect of delaying or preventing a change in control of our company, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. Any of these facts could decrease the market price of our Common Stock. FUTURE SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT PREVAILING MARKET PRICES FOR OUR COMMON STOCK. As of February 24, 2006, we are authorized to issue up to 300,000,000 shares of Common Stock, of which 167,434,381 shares are outstanding. As of February 24, 2006, an additional 75,040,314 shares of Common Stock are reserved for issuance upon conversion of outstanding convertible debentures, the exercise of warrants issued to the holders of these convertible debentures or exercise of outstanding options or warrants to purchase Common Stock. Many of the above options, warrants and convertible securities contain provisions that require the issuance of increased numbers of shares of common stock upon exercise or conversion in the event of stock splits, redemptions, mergers or other transactions. The occurrence of any such event or the exercise or conversion of any of the options, warrants or convertible securities described above would dilute the interest in our company represented by each share of Common Stock and may adversely affect the prevailing market price of our Common Stock. Additionally, our board of directors has the authority, without further action or vote of our stockholders, to issue authorized shares of our Common Stock that are not reserved for issuance. Such stock issuances may be made at a price that reflects a discount from the then-current trading price of our Common Stock. In addition, in order to raise the amount of capital that we need at the current market price of out Common stock, we may need to issue a significant number of shares of Common Stock or securities that are convertible into or exercisable for a significant number of shares of our Common Stock. Any of these issuances will dilute the percentage ownership interests of our current stockholders, which will have the effect of reducing their influence on matters on which our stockholders vote, and might dilute the book value and market value of our Common Stock. Our stockholders may incur additional dilution upon the exercise of currently outstanding or subsequently granted options or warrants to purchase shares of our Common Stock. 19 IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Provisions of Delaware law, as well as the presence of CEI, our largest stockholder, could make it more difficult for a third party to acquire us, even if such acquisition would be beneficial to our stockholders. OUR STOCK PRICE MAY FLUCTUATE. The market price of our Common Stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include: o Quarterly variations in operating results; o The progress or perceived progress of our research, development and marketing efforts; o Changes in accounting treatments or principles; o Announcements by us or our competitors of new product and service offerings, significant contracts, acquisitions or strategic relationships; o Additions or departures of key personnel; o Future public and private offerings or resale of our common stock or other securities; o Stock market price and volume fluctuations of publicly-traded companies in general and development companies in particular; and o General political, economic and market conditions. VOLATILITY OF TRADING MARKET. The market price for our Common Stock is highly volatile. The factors enumerated above, as well as various factors affecting the telecommunications/broadband industry generally, and price and volume volatility unrelated to operating performance affecting small and emerging growth companies generally, may have a significant impact on the market price of our Common Stock. PENNY STOCK REGULATIONS ARE APPLICABLE TO SHARES OF OUR COMMON STOCK. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to penny stock rules. Many brokers will not deal with penny stocks; this restricts the market. BECAUSE WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR SHARES OF COMMON STOCK, OUR STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR SHARES UNLESS THEY SELL THEM. We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. 20 Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. ITEM 2. DESCRIPTION OF PROPERTY We do not own any real property. Our corporate office in Newton, Massachusetts comprised of 14,477 square feet leased at a monthly rental of $15,395 with a scheduled expiration date of February 28, 2008. We have improved this facility to meet our design and development activities. We believe that this facility is sufficient to meet our current requirements and that we would be able to renew our present lease or obtain suitable replacement facilities. In addition, we also rent office space in Briarcliff, New York at a monthly rental of $800 with a scheduled expiration date of July 5, 2006. We use this office space primarily in connection with the on-going pilots and testing being conducted at Con Edison's premises. ITEM 3. LEGAL PROCEEDINGS We are not involved in any pending legal proceedings that we anticipate can result in a material adverse effect on our business or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of stockholders during the three-month period ended December 31, 2005. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is 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 price performance. The following table shows the quarterly high and low bid prices for our Common Stock over the last two completed fiscal years as quoted on the OTC Electronic Bulletin Board. The prices represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commission and may not represent actual transactions. The closing price of our Common Stock on February 23, 2006, was $0.19 per share. LOW HIGH ------ ------ Year Ended December 31, 2005 First Quarter $0.25 $0.45 Second Quarter $0.185 $0.28 Third Quarter $0.18 $0.279 Fourth Quarter $0.092 $0.188 Year Ended December 31, 2004 First Quarter $0.12 $0.48 Second Quarter $0.25 $0.40 Third Quarter $0.195 $0.275 Fourth Quarter $0.225 $0.505 21 As of February 24, 2006, there were 158 holders of record of our Common Stock. 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. DIVIDEND POLICY The Company has paid no dividends on its Common Stock and does not expect to pay cash dividends in the foreseeable future. It is the present policy of the Board to retain all earnings to provide funds for the growth of the Company. The declaration and payment of dividends in the future will be determined by the Board based upon the Company's earnings, financial condition, capital requirements and such other factors as the Board may deem relevant. The Company is not under any contractual restriction as to its present or future ability to pay dividends. ITEM 6. PLAN OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE RISK FACTORS SECTION OF THIS ANNUAL REPORT. OVERVIEW We are primarily focused on the design, development, commercialization, and marketing of BPL equipment, technologies, and services. BPL technology enables power line infrastructure landlords (electric utilities & property owners) to use their existing medium voltage and low voltage power distribution infrastructure for the delivery of high-speed data services including consumer Internet access and utility, governmental, and industrial applications. During our fiscal year 2005, we increased our staffing level, primarily in product development, manufacturing, testing, and marketing. We increased the number of and expanded the scope of the field trials and pilots that are evaluating the components and technologies that compose our BPL Solutions. We strengthened our existing partnerships and strategic relationships with utilities and other technology companies to develop, deploy, and commercialize our BPL technology and entered into new ones. Our patent portfolio increased in size in 2005 to include six patents on the core data coupling technology and its application, with several other patent applications allowed, pending, or under review. During 2005, our technical personnel led key industry committees working on BPL standardization and safety. We identified and address new marketing opportunities and started development of a software solution for the management of BPL networks. Subject to raising additional funds to meet our obligations as they come due and realize our business plan, our objective over the next twelve months is to continue our development, testing, commercialization, and marketing efforts. We plan to continue to operate field trials and pilots of our BPL Solutions and to actively seek new ones. Aided by our partnerships and strategic relationships we plan to continue development of the next generation of BPL equipment and technology. We plan to continue to expand our patent portfolio and to continue to drive industry standardization efforts. We will continue to seek new alliances and to identify and address new marketing opportunities. We shall pursue a role as a leading BPL systems designer, integrator, and coordinator, and continue to develop our network management solution, to position the company to generate revenue from all phases of the BPL product life cycle. 22 We are a late-stage development stage company that has generated significant losses since our inception, and we expect to continue to incur substantial losses for the foreseeable future. As of December 31, 2005, we had an accumulated deficit of approximately $86.2 million (which includes approximately $40.7 million in stock based charges and other non-cash charges). MANAGEMENT DISCUSSION AND ANALYSIS REVENUE. Revenue for the year ended December 31, 2005 was $236,903 and was attributable to the sales of equipment, software and related network design and installation services from new pilots that were launched in 2005. No revenues were recorded for the year ended December 31, 2004. If and when our BPL Solutions are commercially deployed in a BPL system, we anticipate that we will be able to generate revenue principally from one or more of the following: BPL network design and installation, sale and support of our BPL components and our Network Management System and potential license fees collected from utilities, technology companies or Internet service providers. Our management believes that we will be able to refine our strategy and the potential sources of revenue as the industry nears significant commercial deployment. COST OF SALES. Costs of sales for year ended December 31, 2005 were $501,707. No costs of sales were recorded for the year ended December 31, 2004. Cost of sales include all costs related to manufacturing and selling products and services and consist primarily of direct material costs and salaries and related expenses for personnel. Cost of sales also includes expenses related to the write down of inventory to the lower of cost or market. For the year ended December 31, 2005 cost of sales included an inventory write down of $151,278 related to lower of cost or market adjustments and an inventory reserve of $146,314 for excess, obsolete, and surplus inventory resulting from the transition from first to second generation technology. GROSS MARGIN. Gross margin for the year ended December 31, 2005 was a loss of $264,804. There was no gross margin recorded during 2004. Gross margin for the year was negative as a result of inventory write-downs of $151,278 for lower of cost of market adjustments and an inventory reserve of $146,413 in excess, obsolete and surplus inventory. Because we are still a development stage company, the allocation of fixed manufacturing costs to cost of goods sold may continue to result in negative gross margins until we reach commercial viability. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist of expenses incurred primarily in designing, developing and field testing our BPL Solutions. These expenses consist primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties cash expenditures. Research and development expenses for the years ended December 31, 2005 and 2004 were approximately $2.6 million and $2.5 million, respectively. The increase in research and development expenses in 2005 compared to 2004 is primarily attributable to an increase in the product design and development efforts. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of salaries and other related costs for personnel in executive and other functions. Other significant costs include insurances, professional fees for legal, accounting and other services. General and administrative expenses for the years ended December 31, 2005 and 2004 were approximately $3.6 million and $2.4 million, respectively. The increase in general and administrative expenses during 2005 is primarily attributable to to an increase in personnel and related costs. We expect that our general and administrative expenses will increase over the next twelve months as we increase our efforts to market and commercialize our BPL Solutions. 23 A portion of our operating expenses are attributable to non-cash charges associated with the compensation of consultants through the issuance of stock options and stock grants. Stock-based compensation is non-cash and will therefore have no impact on our cash flows or liquidity. OTHER OPERATING EXPENSES. A portion of our operating expenses is attributable to non-cash charges associated with the compensation of consultants through the issuance of stock options and stock grants. Stock-based compensation is non-cash and will therefore have no impact on our cash flows or liquidity. For the years ended December 31, 2005 and 2004 we incurred non-cash stock-based compensation expense of $39,477 and $80,464 respectively NON-CASH EXPENSES. For the year ended December 31, 2005, we incurred non-cash expenses of approximately $2.31 million and $2.38 million related to the amortization of the beneficial conversion feature of convertible debt and the amortization of deferred financing costs as a result of the conversion of approximately 79% of our convertible 2004 Debentures during fiscal 2005. For the year ended December 31, 2004, we incurred non-cash expenses of approximately $20,000 and $2.53 million related to the amortization of the beneficial conversion feature of convertible debt and the amortization of deferred financing costs as a result of the conversion of our convertible 2003 Debentures during fiscal 2004. 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. We recognize revenue from product sales upon shipment to customers and when all requirements related to the shipments have occurred. We recognized revenue from design and installation services at the time services are performed. Revenue from software licensing is deferred and recognized over the life of the license agreement. INVENTORY VALUATION. Inventory is valued at the lower of cost or market determined on the first-in, first-out (FIFO) basis. Market, with respect to direct materials, is replacement cost and is net realizable value for work-in-process and finished goods. The value of the inventory is adjusted for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Further, as the Company is still in late stage development, fixed manufacturing costs may produce negative gross margins. As such, inventories are reviewed for lower of cost or market valuation. STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB Interpretation 44, "Accounting for Certain Transactions Involving Stock Compensation." Pursuant to these accounting standards, the Company records deferred compensation for share options granted to employees at the date 24 of grant based on the difference between the exercise price of the options and the market value of the underlying shares at that date. Deferred compensation is amortized to compensation expense over the vesting period of the underlying options. No compensation expense is recorded for fixed stock options that are granted to employees and directors at an exercise price equal to the fair market value of the common stock at the time of the grant. Stock options granted to non-employees are recorded at their fair value, as determined in accordance with SFAS No. 123 and Emerging Issues Task Force Consensus No. 96-18, and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured as the options vest. The Company accounts for stock-based compensation (see Note 2 of the Notes to the Consolidated Financial statements) in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB Interpretation 44, "Accounting for Certain Transactions Involving Stock Compensation." Pursuant to these accounting standards, the Company records deferred compensation for share options granted to employees at the date of grant based on the difference between the exercise price of the options and the market value of the underlying shares at that date. Deferred compensation is amortized to compensation expense over the vesting period of the underlying options. No compensation expense is recorded for fixed stock options that are granted to employees and directors at an exercise price equal to the fair market value of the common stock at the time of the grant. Stock options granted to non-employees are recorded at their fair value, as determined in accordance with SFAS No. 123 and Emerging Issues Task Force Consensus No. 96-18, and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured as the options vest. We use the Black-Scholes option-pricing model to estimate the fair value of options we have granted for purposes of making the disclosure required by SFAS 123. In order to calculate the fair value of the options, assumptions are made for certain components of the model, including risk-free interest rate, volatility, expected dividend yield rate and expected option life. Although we use available resources and information when setting these assumptions, changes to the assumptions could cause significant adjustments to the valuation. DEFERRED INCOME TAXES. Deferred income taxes are recognized 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, 2005, our deferred income tax assets consisted primarily of net operating loss carry forwards and stock based compensation charges which 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. LIQUIDITY AND CAPITAL RESOURCES Cash balances totaled approximately $1 million on February 24, 2006, $393.513 at December 31, 2005 and $6,954,512 at December 31, 2004. Net cash used in operating activities during the year ended December 31, 2005 was approximately $6.1 million and is primarily attributable to ongoing research and development and general and administrative expenses. To facilitate the expansion of ongoing pilots and to further prepare for the commercialization phase of our BPL Solutions, we have inventory of $629,035 as of December 31, 2005. From inception through December 31, 2005, we have funded our operations primarily through the issuance of our securities. Our recent financings are discussed below. In February 2004, EarthLink invested $500,000 in Ambient though the purchase of (i) a three-year 25 convertible debenture in the aggregate amount of $250,000 and (ii) 2,083,333 shares of Common Stock. In March 2004, the outstanding principal amount and accrued interest on EarthLink's debenture were converted into 2,087,100 shares of Common Stock. In December 2004, we sold $5,500,000 aggregate principal amount of our convertible debentures and warrants, receiving net proceeds of approximately $4.9 million after the payment of offering related fees and expenses. In January 2006, we entered into a bridge loan agreement pursuant to which an institutional investor loaned us $1,500,000 (less $165,000 in offering related fees and expenses). Pursuant to the bridge loan agreement, we issued to the investor a secured promissory note in the aggregate principal amount of $1,620,000, which reflects an original issue discount on the principal amount of the loan of 15.5%. The note is scheduled to mature on the date that is the earlier of (i) the date on which we consummates a subsequent financing that generates, on a cumulative basis together with any other interim financings, gross proceeds to us of at least $2 million or (ii) June 24, 2006. In connection with the loan, we issued to the investor a five-year warrant to purchase 3,000,000 shares of our Common Stock at an exercise price of $0.15 per share, subject to certain specified adjustments. This loan is secured by a lien on all of our assets. We will require additional funds to repay the bridge loan upon maturity and continue to meet our other liquidity and operating needs to satisfy our current business plan. Management is aggressively seeking to raise capital that will provide the funds needed for these purposes and to support the commercial introduction, production and delivery of our BPL Solutions. At the present time, we have no commitments for any such financing, and there can be no assurance that additional capital will be available to us on commercially acceptable terms or at all. Our auditors have included a "going concern" qualification in their auditors' report for the year ended December 31, 2005. Such a "going concern" qualification may make it more difficult for us to raise funds when needed. Additional equity financings may be dilutive to holders of our Common Stock and debt financing, if available, may involve significant payment obligations and covenants that restrict how we operate our business. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123R. This standard requires all share-based payments to employees, including grants of employee stock options, to be expensed in the financial statements based on their fair values beginning with the first annual period beginning after June 15, 2005 (the first quarter of fiscal year 2006 for the Company). The pro forma disclosures permitted under SFAS No. 123 will no longer be allowed as an alternative presentation to recognition in the financial statements. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company expects to adopt SFAS No. 123R in its first quarter of fiscal year 2006 on a modified prospective basis, which will require recognition of compensation expense for all stock option or other equity-based awards that vest or become exercisable after the effective date. The Company expects such adoption will not have a material impact on its results of operations and its net income per common share in 2006 and forward, but as yet has not quantified the effects of adoption. 26 In March 2005, the SEC issued guidance on FASB SFAS 123(R), "Share-Based Payments" ("SFAS No. 123R"). Staff Accounting Bulletin No. 107 ("SAB 107") was issued to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two themes: (a) considerable judgment will be required by preparers to successfully implement SFAS No. 123R, specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models - SAB 107 reinforces the flexibility allowed by SFAS No. 123R to choose an option-pricing model that meets the standard's fair value measurement objective; (b) expected volatility - SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term - the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS No. 123R. In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The provisions of SFAS 154 are effective for accounting changes and corrections of errors made in fiscal periods beginning after December 15, 2005. The adoption of the provisions of SFAS 154 is not expected to have a material impact on the Company's financial position or results of operations. In March 2005, the Securities and Exchange Commission announced that the compliance dates for non-accelerated filers pursuant to Section 404 of the Sarbanes-Oxley Act has been extended. Under the latest extension, a company that is not required to file its annual and quarterly reports on an accelerated basis must begin to comply with the internal control over financial reporting requirements for its first fiscal year ending on or after July 15, 2006. The Commission similarly has extended the compliance date for these companies relating to requirements regarding evaluation of internal control over financial reporting and management certification requirements contained in section 404 of the Sarbanes-Oxley Act to January 1, 2007. ITEM 7. FINANCIAL STATEMENTS The information called for by this Item 7 is included following the "Index to Financial Statements" contained in this Annual Report on Form 10-KSB. 27 ITEM 8. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our President and Chief Executive Officer (who also serves as our principal executive officer and principal financial and accounting officer) to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-14(c). As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our President and Chief Executive Officer (who also serves as our principal executive officer and principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer concluded that our disclosure controls and procedures were effective. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended December 31, 2005, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls. ITEM 8A. OTHER INFORMATION None 28 PART III The information called for by Items 9, 10, 11, 12 and 14 will be contained in the Company's definitive proxy statement which the Company intends to file within 120 days after the end of the Company's fiscal year ended December 31, 2005 and such information is incorporated herein by reference. 3.1 Certificate of Incorporation of the Company, as amended. (1) 3.2 Bylaws of the Company, as amended. (1) 4.1 Specimen Stock Certificate. (1) 4.2 Form of Three-Year Warrant issued by the Company to the holders of the 6% Convertible Debentures in October and November 2003. (4) 4.3 Form of 6% Three-Year Convertible Debenture issued by the Company on December 23, 2004. (5) 4.4 Form of Common Stock Purchase Warrant issued by the Company to certain investors on December 23, 2004. (5) 4.5 Secured Promissory Note in the Principal Amount of $1,620,000 issued by the Company on January 25, 2006. 4.6 Common Stock Purchase Warrant issued by the Company on January 25, 2006 10.1 Ambient Corporation 2000 Equity Incentive Plan. (3) 10.2 Stock Purchase Agreement dated as of September 30, 2002 between the Company and Consolidated Edison, Inc. (2) 10.3 Ambient Corporation 2002 Non-Employee Directors' Stock Option Plan. (3) 10.4 Amended and Restated Employment Agreement effective as of May 22, 2004 between the Company and John Joyce. (6) + 10.5 Amended and Restated Employment Agreement effective as of August 11, 2004 between the Company and Ramdas Rao. (6) + 10.6 Form of Securities Purchase Agreement dated as of December 23, 2004 among the Company and certain investors. (5) 10.7 Form of Registration Rights Agreement dated as of December 23, 2004 among the Company and certain investors. (5) 10.8 Bridge Loan Agreement dated as of January 18, 2006 between the Company and Double U Master Fund LP. 10.9 Security Interest Agreement dated as of January 18, 2006 between the Company and Double U Master Fund LP. 14 Code of Conduct and Ethics. (7) 23.1 Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. 31. Certification of Chief Executive and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32. Section 1350 Certification. (1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 (File No. 333-40045) and incorporated herein by reference. (2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the three month period ended September 30, 2002 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Definitive Proxy Statement on Form 14-A filed on December 10, 2002 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Registration Statement on Form SB-2 (File No. 333-110112) and incorporated herein by reference. (5) Filed as an exhibit to the Company's Current Report on Form 8-K filed on December 27, 2004. (6) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the three month period ended June 30, 2004 and incorporated herein by reference. (7) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference. + Management Agreement 29 SIGNATURES In accordance with the requirements of the Exchange Act, the issuer caused this report to be signed by the undersigned thereunto duly authorized. /S/ JOHN J. JOYCE DATE: February 24, 2006 JOHN J. JOYCE CHIEF EXECUTIVE OFFICER AND DIRECTOR In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ JOHN JOYCE CHIEF EXECUTIVE OFFICER, JOHN JOYCE DIRECTOR February 24, 2006 /S/ MICHAEL WIDLAND DIRECTOR February 24, 2006 MICHAEL WIDLAND /S/ D. HOWARD PIERCE DIRECTOR February 24, 2006 D. HOWARD PIERCE 30 AMBIENT CORPORATION (A DEVELOPMENT STAGE COMPANY) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE REPORT OF ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C. F-1 CONSOLIDATED FINANCIAL STATEMENTS: Balance Sheets F-2 Statements of Operations F-3 Statement of Changes in Stockholders' Equity (Deficit) F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM To the Board of Directors and Stockholders of Ambient Corporation We have audited the accompanying consolidated balances sheets of Ambient Corporation and Subsidiaries (a development stage company) (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the years then ended and for the period from June 1, 1996 (date of inception) through December 31, 2005. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated statements of operations, changes in stockholders' equity and cash flows of the Company for the period from June 1, 1996 (date of inception) through December 31, 2002 were audited by other auditors whose report dated March 25, 2003 on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Company's ability to continue as a going concern. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004 and the results of their operations and cash flows for the years then ended and for the period from June 1, 1996 (date of inception) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. The financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company's recurring losses and negative cash flows from operations raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 3. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C. - ----------------------------------------------------- ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C. Saddle Brook, New Jersey February 3, 2006 F-1
AMBIENT CORPORATION (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, December 31, 2005 2004 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 393,513 $ 6,954,512 Accounts receivable 5,894 12,487 Inventory 629,035 354,497 Prepaid expenses and other current assets 169,534 198,639 ------------- ------------- Total current assets 1,197,976 7,520,135 Property and equipment, net 695,992 343,407 Prepaid licensing fees 237,606 316,808 ------------- ------------- Total assets $ 2,131,574 $ 8,180,350 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 914,143 $ 654,223 Accrued expenses and other current liabilities 212,711 242,752 Advance from stockholder 325,000 325,000 ------------- ------------- Total current liabilities 1,451,854 1,221,975 NON-CURRENT LIABILITIES Convertible debentures (net of discount of $758,263 and $5,459,813) 391,737 40,187 ------------- ------------- Total liabilities 1,843,591 1,262,162 ------------- ------------- STOCKHOLDERS' EQUITY Common stock, $.001 par value; 300,000,000 shares authorized; 165,153,882 and 146,639,766 issued; 164,153,882 and 145,639,766 outstanding, respectively 165,154 146,640 Additional paid-in capital 86,562,899 82,031,660 Deficit accumulated during the development stage (86,206,000) (74,979,445) Less: deferred compensation (34,070) (80,667) Less: treasury stock; 1,000,000 shares at cost (200,000) (200,000) ------------- ------------- Total stockholders' equity 287,983 6,918,188 ------------- ------------- Total liabilities and stockholders' equity $ 2,131,574 $ 8,180,350 ============= ============= See Notes to Consolidated Financial Statements F-2
AMBIENT CORPORATION (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS Cumulative Year From Inception Ended to December 31, December 31, 2005 2004 2005 ---- ---- ---- Revenues $ 236,903 $ - $ 359,903 Less Cost of goods sold (includes inventory markdowns of $297,592 and $-0-) 501,707 - 501,707 -------------- ------------- ---------------- Gross margin (264,804) - (141,804) Expenses Research and Development (1) 2,647,828 2,522,522 12,142,494 Less - Participation by the Office of the Chief Scientist of the State of Israel - - 558,195 2,647,828 2,522,522 11,584,299 Operating, general and administrative expenses (1) 3,573,622 2,387,598 20,281,799 Stock based compensation - net 39,477 80,464 17,565,114 -------------- ------------- ---------------- Total expenses 6,260,927 4,990,584 49,431,212 -------------- ------------- ---------------- Operating loss (6,525,731) (4,990,584) (49,573,016) Interest expense (102,833) (31,451) (839,366) Amortization of beneficial conversion feature of convertible debt (2,317,912) (19,810) (6,433,398) Amortization of deferred financing costs (2,383,637) (2,525,295) (13,314,129) Interest income 103,558 53,027 482,642 Legal settlement - - (1,512,500) Noncash financing expense - - (1,600,000) Write-off of convertible note receivable - - (490,000) Company's share in net losses of affiliate - - (1,352,207) -------------- ------------- ---------------- Loss before minority interest and extraordinary item (11,226,555) (7,514,113) (74,631,974) Minority interest in subsidiary loss - - 25,000 -------------- ------------- ---------------- Loss before extraordinary item (11,226,555) (7,514,113) (74,606,974) Extraordinary item - loss on extinguishment of debt - - (9,778,167) -------------- ------------- ---------------- Net loss (11,226,555) (7,514,113) (84,385,141) Deemed dividends on convertible preferred stock - - (1,820,859) -------------- ------------- ---------------- Net loss attributable to common stockholders $ (11,226,555) $ (7,514,113) $ (86,206,000) ============== ============= ================ Basic and diluted loss per share: Net loss before extraordinary item $ (0.07) $ (0.06) Extraordinary loss from extinguishment of debt - - -------------- ------------- Net loss $ (0.07) $ (0.06) ============== ============= Weighted average number of shares outstanding 161,200,562 135,252,696 ============== ============= (1) Excludes non-cash, stock based compensation expense as follows: Research and development, net $ - $ - $ 1,454,192 Operating, general and administrative, net 39,477 80,464 16,110,922 -------------- ------------- ---------------- $ 39,477 $ 80,464 $ 17,565,114 ============== ============= ================ See Notes to Consolidated Financial Statements F-3
AMBIENT CORPORATION (A Development Stage Company) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Convertible Preferred Stock Common Stock Shares Amount Shares Amount ----------- ------------ ------------ ------------ Common stock issued to founders for nominal consideration $ 2,028,833 $ 2,029 Common Stock issued to employees for services 200,333 200 Net loss ----------- ------------ ------------ ------------ Balance - December 31, 1996 - - 2,229,166 2,229 Common Stock issued to employees for services 104,167 104 Common stock issued in connection with private placement of notes 80,000 80 Common stock issued to advisor for services 6,000 6 Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 1997 - - 2,419,333 2,419 Common stock issued pursuant to consulting agreement 75,000 75 Initial public offering in February 1998 525,000 525 Common stock issued in connection with short-term debt financing 20,000 20 Additional common stock pursuant to founders agreement for nominal consideration 35,000 35 Warrants issued pursuant to private placement of units Options granted pursuant to consulting agreement Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 1998 - - 3,074,333 3,074 Common stock issued pursuant to consulting agreement 56,500 57 Warrants issued pursuant to consulting agreement Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 1999 - - 3,130,833 3,131 Common stock issued in respect of extinguishment of debt 3,490,000 3,490 Common stock issued pursuant to consulting agreements 2,761,000 2,761 Warrants issued pursuant to consulting agreements Warrants issued to convertible debenture holders Common stock issued for services 67,250 67 Common stock issued pursuant to settlement agreement 250,000 250 Common stock issued in private placement, net of offering costs 1,000,000 1,000 Preferred stock issued in private placement, net of offering costs 1,125,000 1,125 Warrants issued to convertible debenture holders Warrants issued in connection with private placement Common stock and options issued pursuant to severance agreement 200,000 200 Common stock issued upon conversion of debentures 8,711,711 8,712 Common stock issued upon conversion of preferred stock (1,125,000) (1,125) 1,125,000 1,125 Stock options issued to employees Stock options issued to consultants Stock options and warrants exercised 640,000 640 Beneficial conversion feature of debentures issued Deemed dividend on convertible preferred stock Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 2000 - - 21,375,794 21,376 Common stock issued in private placement, net of offering costs 1,649,090 1,649 Common stock issued for purchase of minority interest 400,000 400 Common stock issued pursuant to consulting agreement 852,500 853 Common stock issued as finders fee 250,000 250 Warrants issued pursuant to consulting agreement Common stock issued for services 650,000 650 Common stock issued for note receivable 1,000,000 1,000 Re-measurement of deferred compensation Cancellation of options and warrants Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 2001 - - 26,177,384 26,178 Common stock and warrants issued for rent reduction 562,500 563 Common stock and warrants issued in private placement 400,000 400 Common stock and warrants issued as repayment of loans 1,500,000 1,500 Common stock issued as payment accrued salaries 4,104,000 4,104 Common stock and warrants issued upon conversion of debt 2,599,500 2,600 Common stock issued for cash 27,250,000 27,250 Exercise of warrants 1,125,000 1,125 Stock options and warrants issued Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 2002 - $ - $ 63,718,384 $ 63,719 Common stock issued for cash 13,039,062 13,039 Common stock issued upon conversion of debt 100,000 100 Common stock and warrants issued for rent reduction 532,888 533 Warrants issued as reduction in accounts payable Issuance of warrants in connection with convertible debentures Common stock issued upon conversion of debentures 18,918,192 18,918 Cashless exercise of warrants 883,721 884 Stock options and warrants issued Exercise of stock options 30,000 30 Amortization of deferred stock - based compensation Beneficial conversion feature of debentures issued Cancellation of note receivable Net loss ----------- ------------ ------------ ------------ Balance - December 31, 2003 - - 97,222,247 97,222 Common stock issued for amounts payable 964,286 964 Warrants issued as reduction in accounts payable Common stock and warrants issued for cash 2,083,333 2,083 Issuance of warrants in connection with convertible debentures Common stock issued upon conversion of debentures and interest 22,357,778 22,358 Common stock issued upon exercise of warrants 23,366,372 23,366 Beneficial conversion feature of debentures issued Stock options issued Exercise of stock options 645,750 646 Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 2004 - $ - 146,639,766 $ 146,640 Common stock issued upon conversion of debentures 17,400,000 17,400 Common stock issued upon exercise of warrants 296,875 297 Common stock issued for interest 315,991 316 Exercise of stock options 501,250 501 Stock options issued (forfeited) Amortization of deferred stock - based compensation Net loss ----------- ------------ ------------ ------------ Balance - December 31, 2005 - $ - 165,153,882 $ 165,154 =========== ============ ============ ============ Additional Note Paid-in Receivable Deferred Capital Stockholder Compensation ------------- ------------- -------------- Common stock issued to founders for nominal consideration $ $ $ Common Stock issued to employees for services Net loss ------------- ------------- -------------- Balance - December 31, 1996 - - - Common Stock issued to employees for services 386,668 (386,668) Common stock issued in connection with private placement of notes 319,920 Common stock issued to advisor for services 23,994 Amortization of deferred stock - based compensation 145,556 Net loss ------------- ------------- -------------- Balance - December 31, 1997 730,582 - (241,112) Common stock issued pursuant to consulting agreement 654,925 (655,000) Initial public offering in February 1998 3,432,502 Common stock issued in connection with short-term debt financing 99,980 Additional common stock pursuant to founders agreement for nominal consideration Warrants issued pursuant to private placement of units 21,600 Options granted pursuant to consulting agreement 1,600 (1,600) Amortization of deferred stock - based compensation 658,029 Net loss ------------- ------------- -------------- Balance - December 31, 1998 4,941,189 - (239,683) Common stock issued pursuant to consulting agreement 90,146 (90,188) Warrants issued pursuant to consulting agreement 10,260 Amortization of deferred stock - based compensation 325,808 Net loss ------------- ------------- -------------- Balance - December 31, 1999 5,041,595 - (4,063) 75,328 Common stock issued in respect of extinguishment of debt 10,466,510 Common stock issued pursuant to consulting agreements 11,186,318 (11,189,079) Warrants issued pursuant to consulting agreements 1,500,000 (1,500,000) Warrants issued to convertible debenture holders 1,144,805 Common stock issued for services 130,196 Common stock issued pursuant to settlement agreement 1,312,250 Common stock issued in private placement, net of offering costs 1,799,000 Preferred stock issued in private placement, net of offering costs 1,819,734 Warrants issued to convertible debenture holders 3,447,147 Warrants issued in connection with private placement 410,495 Common stock and options issued pursuant to severance agreement 1,756,042 (1,756,242) Common stock issued upon conversion of debentures 9,286,225 Common stock issued upon conversion of preferred stock Stock options issued to employees 4,059,080 (4,059,080) Stock options issued to consultants 1,999,329 (1,999,329) Stock options and warrants exercised Beneficial conversion feature of debentures issued 3,878,260 Deemed dividend on convertible preferred stock 1,820,859 Amortization of deferred stock - based compensation 16,067,085 Net loss ------------- ------------- -------------- Balance - December 31, 2000 61,133,173 - (4,440,708) Common stock issued in private placement, net of offering costs 1,441,684 Common stock issued for purchase of minority interest 862,000 (862,400) Common stock issued pursuant to consulting agreement 1,302,036 (1,302,888) Common stock issued as finders fee (250) Warrants issued pursuant to consulting agreement 120,643 (120,643) Common stock issued for services 109,850 (110,500) Common stock issued for note receivable 199,000 (200,000) Re-measurement of deferred compensation (5,235,512) 3,526,232 Cancellation of options and warrants (614,941) 614,941 Amortization of deferred stock - based compensation 2,122,931 Net loss ------------- ------------- -------------- Balance - December 31, 2001 59,317,682 (200,000) (573,035) Common stock and warrants issued for rent reduction 44,438 Common stock and warrants issued in private placement 68,918 Common stock and warrants issued as repayment of loans 98,500 Common stock issued as payment accrued salaries 201,096 Common stock and warrants issued upon conversion of debt 336,841 Common stock issued for cash 1,122,750 Exercise of warrants 10,125 Stock options and warrants issued 296,955 (296,955) Amortization of deferred stock - based compensation 817,751 Net loss ------------- ------------- -------------- Balance - December 31, 2002 $ 61,497,304 $ (200,000) $ (52,239) Common stock issued for cash 892,273 Common stock issued upon conversion of debt 9,900 Common stock and warrants issued for rent reduction 42,098 Warrants issued as reduction in accounts payable 120,000 Issuance of warrants in connection with convertible debentures 4,315,693 Common stock issued upon conversion of debentures 2,251,265 Cashless exercise of warrants (884) Stock options and warrants issued 83,639 (83,639) Exercise of stock options 270 Amortization of deferred stock - based compensation 135,878 Beneficial conversion feature of debentures issued 217,416 Cancellation of note receivable 200,000 Net loss ------------- ------------- -------------- Balance - December 31, 2003 69,428,974 - - Common stock issued for amounts payable 134,036 Warrants issued as reduction in accounts payable 15,000 Common stock and warrants issued for cash 247,917 Issuance of warrants in connection with convertible debentures 2,443,411 Common stock issued upon conversion of debentures and interest 2,381,942 Common stock issued upon exercise of warrants 4,390,391 Beneficial conversion feature of debentures issued 2,711,554 Stock options issued 161,131 (161,131) Exercise of stock options 117,304 Amortization of deferred stock - based compensation 80,464 Net loss ------------- ------------- -------------- Balance - December 31, 2004 $ 82,031,660 $ - $ (80,667) Common stock issued upon conversion of debentures 4,332,600 Common stock issued upon exercise of warrants 35,328 Common stock issued for interest 78,682 Exercise of stock options 91,749 Stock options issued (forfeited) (7,120) 7,120 Amortization of deferred stock - based compensation 39,477 Net loss ------------- ------------- -------------- Balance - December 31, 2005 $ 86,562,899 $ - $ (34,070) ============= ============= ============== Deficit Accumulated During Treasury Development Stock Stage Total ------------- ------------- -------------- Common stock issued to founders for nominal consideration $ $ 2,029 Common Stock issued to employees for services 200 Net loss (693,995) (693,995) ------------- ------------- -------------- Balance - December 31, 1996 - (693,995) (691,766) Common Stock issued to employees for services 104 Common stock issued in connection with private placement of notes 320,000 Common stock issued to advisor for services 24,000 Amortization of deferred stock - based compensation 145,556 Net loss (1,432,815) (1,432,815) ------------- ------------- -------------- Balance - December 31, 1997 - (2,126,810) (1,634,921) Common stock issued pursuant to consulting agreement - Initial public offering in February 1998 3,433,027 Common stock issued in connection with short-term debt financing 100,000 Additional common stock pursuant to founders agreement for nominal consideration 35 Warrants issued pursuant to private placement of units 21,600 Options granted pursuant to consulting agreement - Amortization of deferred stock - based compensation 658,029 Net loss (2,820,314) (2,820,314) ------------- ------------- -------------- Balance - December 31, 1998 - (4,947,124) (242,544) Common stock issued pursuant to consulting agreement 15 Warrants issued pursuant to consulting agreement 10,260 Amortization of deferred stock - based compensation 325,808 Net loss (1,131,404) (1,131,404) ------------- ------------- -------------- Balance - December 31, 1999 - (6,078,528) (1,037,865) 75,328 Common stock issued in respect of extinguishment of debt 10,470,000 Common stock issued pursuant to consulting agreements - Warrants issued pursuant to consulting agreements - Warrants issued to convertible debenture holders 1,144,805 Common stock issued for services 130,263 Common stock issued pursuant to settlement agreement 1,312,500 Common stock issued in private placement, net of offering costs 1,800,000 Preferred stock issued in private placement, net of offering costs 1,820,859 Warrants issued to convertible debenture holders 3,447,147 Warrants issued in connection with private placement 410,495 Common stock and options issued pursuant to severance agreement - Common stock issued upon conversion of debentures 9,294,937 Common stock issued upon conversion of preferred stock - Stock options issued to employees - Stock options issued to consultants - Stock options and warrants exercised 640 Beneficial conversion feature of debentures issued 3,878,260 Deemed dividend on convertible preferred stock 1,820,859 Amortization of deferred stock - based compensation 16,067,085 Net loss (42,640,886) (42,640,886) ------------- ------------- -------------- Balance - December 31, 2000 - (48,719,414) 7,994,427 Common stock issued in private placement, net of offering costs 1,443,333 Common stock issued for purchase of minority interest - Common stock issued pursuant to consulting agreement - Common stock issued as finders fee - Warrants issued pursuant to consulting agreement - Common stock issued for services - Common stock issued for note receivable - Re-measurement of deferred compensation (1,709,280) Cancellation of options and warrants - Amortization of deferred stock - based compensation 2,122,931 Net loss (10,029,583) (10,029,583) ------------- ------------- -------------- Balance - December 31, 2001 - (58,748,997) (178,172) Common stock and warrants issued for rent reduction 45,000 Common stock and warrants issued in private placement 69,318 Common stock and warrants issued as repayment of loans 100,000 Common stock issued as payment accrued salaries 205,200 Common stock and warrants issued upon conversion of debt 339,440 Common stock issued for cash 1,150,000 Exercise of warrants 11,250 Stock options and warrants issued - Amortization of deferred stock - based compensation 817,751 Net loss (3,480,373) (3,480,373) ------------- ------------- -------------- Balance - December 31, 2002 $ - (62,229,370) $ (920,586) Common stock issued for cash 905,312 Common stock issued upon conversion of debt 10,000 Common stock and warrants issued for rent reduction 42,631 Warrants issued as reduction in accounts payable 120,000 Issuance of warrants in connection with convertible debentures 4,315,693 Common stock issued upon conversion of debentures 2,270,183 Cashless exercise of warrants - Stock options and warrants issued - Exercise of stock options 300 Amortization of deferred stock - based compensation 135,878 Beneficial conversion feature of debentures issued 217,416 Cancellation of note receivable (200,000) - Net loss (5,235,962) (5,235,962) ------------- ------------- -------------- Balance - December 31, 2003 (200,000) (67,465,332) 1,860,865 Common stock issued for amounts payable 135,000 Warrants issued as reduction in accounts payable 15,000 Common stock and warrants issued for cash 250,000 Issuance of warrants in connection with convertible debentures 2,443,411 Common stock issued upon conversion of debentures and interest 2,404,300 Common stock issued upon exercise of warrants 4,413,757 Beneficial conversion feature of debentures issued 2,711,554 Stock options issued - Exercise of stock options 117,950 Amortization of deferred stock - based compensation 80,464 Net loss (7,514,113) (7,514,113) ------------- ------------- -------------- Balance - December 31, 2004 $ (200,000) $(74,979,445) $ 6,918,188 Common stock issued upon conversion of debentures 4,350,000 Common stock issued upon exercise of warrants 35,625 Common stock issued for interest 78,998 Exercise of stock options 92,250 Stock options issued (forfeited) - Amortization of deferred stock - based compensation 39,477 Net loss (11,226,555) (11,226,555) ------------- ------------- -------------- Balance - December 31, 2005 $ (200,000) $(86,206,000) $ 287,983 ============= ============= ============== See Notes to Consolidated Financial Statements. F-4
AMBIENT CORPORATION (A Development Stage Company) STATEMENTS OF CASH FLOWS Cumulative Year From Inception Ended to December 31, December 31, 2005 2004 2005 ---- ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (11,226,555) $ (7,514,113) $ (86,206,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 246,730 89,737 803,617 Amortization of note discount 2,383,637 2,525,295 12,669,258 Beneficial conversion feature of convertible debt 2,317,912 19,810 6,433,398 Financing, consulting and other expenses paid via the issuance of common stock and warrants 118,475 123,402 31,036,111 Cancellation of officer loans in settlement of employment contract - - 724,447 Loss on sale of fixed assets - - 20,135 Deemed dividends on convertible preferred stock - - 1,820,859 Increase in net liability for severance pay - - 15,141 Accrued interest on loans and notes payable - - 210,016 Company's share in net losses of affiliates - - 1,352,207 Minority interest in subsidiary loss - - (25,000) Write-off of convertible note receivable - - 400,000 Write-down of long term investment - - 835,000 Write-off of fixed assets - - 136,066 Increase (decrease) in cash attributable to changes in assets and liabilities Accounts receivables 6,593 40,647 14,631 Inventory (274,538) (212,802) (629,035) Prepaid expenses and other current assets 29,105 (114,217) (100,829) Prepaid licensing fees 79,202 (181,808) (102,606) Accounts payable 259,921 200,633 1,190,438 Accrued expenses and other current liabilities (30,041) 46,934 363,367 -------------- ------------- ---------------- Net cash used in operating activities (6,089,559) (4,976,482) (29,038,779) -------------- ------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Loan provided to another company - - (835,000) Purchase of convertible promissory note - - (400,000) Investment in affiliated company - - (375,000) Additions to property and equipment (599,315) (348,688) (1,697,045) Proceeds from disposal of fixed assets - - 42,100 Loans to Officers - - (2,137,677) Repayment of loans to Officer - - 1,431,226 -------------- ------------- ---------------- Net cash used in investing activities (599,315) (348,688) (3,971,396) -------------- ------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of share capital 127,875 4,503,074 11,291,128 Proceeds from loans and advances - - 690,000 Proceeds from issuance of notes payable - - 1,360,000 Net proceeds from issuance of convertible debentures - 5,154,965 18,455,133 Repayment of notes payable - - (800,000) Proceeds of loans from shareholders, net - - 919,600 Repayment of loans from shareholders - - (968,000) Proceeds from long-term bank credit - - 95,969 Repayment of long-term bank credit - - (87,996) Increase (decrease) in short term bank credit - - (32,004) Public offering of common stock - - 3,433,027 Repayment of short-term debt - - (250,000) Proceeds from short-term debt - - 274,038 Loans to affiliate - - (977,207) -------------- ------------- ---------------- Net cash provided by financing activities 127,875 9,658,039 33,403,688 -------------- ------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,560,999) 4,332,869 393,513 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,954,512 2,621,643 - -------------- ------------- ---------------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 393,513 $ 6,954,512 $ 393,513 ============== ============= ================ Noncash financing and investing activities: Issuance of common stock and warrants in respect of amounts payable $ - $ 150,000 ============== ============= Issuance of common stock upon conversion of debentures $ 4,350,000 $ 2,682,933 ============== ============= See Notes to Consolidated Financial Statements F-5
AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 NOTE 1 - DESCRIPTION OF BUSINESS Ambient Corporation (herein "Ambient" or "the Company") is primarily focused on the design, development, commercialization, and marketing of Broadband over Power Lines (BPL) equipment, technologies, and services. BPL technology enables power line infrastructure landlords (electric utilities & property owners) to use their existing medium and low voltage power distribution infrastructure for the delivery of high-speed data services. In addition to consumer oriented broadband Internet access and Voice over Internet Protocol (VoIP) telephony services, BPL can also provide utility services such as automated meter reading, remote outage detection, real-time pricing, and direct load control, and government and industry applications such as video security surveillance and industrial process monitoring. The components and technologies that comprise Ambient's BPL solution are presently being evaluated in several field trials and pilots that are running a range of consumer, utility, and industrial applications. Ambient is a late-stage development company and its success is subject to the risks and uncertainties frequently encountered by development stage companies in new and rapidly evolving markets. These risks include the technical feasibility and the commercial viability of the Company's equipment and technologies, as well as their adoption by utilities and or other potential customers. Ambient was incorporated under the laws of the State of Delaware in June 1996. To date, the Company has funded operations through the sale of its securities. The Company anticipates that it will continue to incur significant operating costs and losses in connection with the development, marketing, and deployment of its products, technology, and services as the Ambient BPL Solution approaches commercialization. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Ambient Ltd. and Insulated Connections Corporation Limited. These subsidiaries have been inactive since 2001. All inter-company balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements. Actual results may differ from those estimates. CASH EQUIVALENTS Cash and cash equivalents consist of cash and short-term investments with insignificant interest rate risk and original maturities of 90 days or less. Cash and cash equivalents are carried at cost, which approximates market value. F-6 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments, consisting primarily of cash equivalents, account receivables, accounts payable and accrued expenses, other current liabilities and convertible debentures are carried at, or approximate, fair value because of their short-term nature or because they carry market rates of interest. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB Interpretation 44, "Accounting for Certain Transactions Involving Stock Compensation." Pursuant to these accounting standards, the Company records deferred compensation for share options granted to employees at the date of grant based on the difference between the exercise price of the options and the market value of the underlying shares at that date. Deferred compensation is amortized to compensation expense over the vesting period of the underlying options. No compensation expense is recorded for fixed stock options that are granted to employees and directors at an exercise price equal to the fair market value of the common stock at the time of the grant. Stock options granted to non-employees are recorded at their fair value, as determined in accordance with SFAS No. 123 and Emerging Issues Task Force Consensus No. 96-18, and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured as the options vest. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options issued to employees:
Year ended December 31, 2005 2004 -------------- -------------- Net loss, as reported ($11,226,555) ($7,514,113) Add: Stock based compensation expense, as reported, net -- -- Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net (2,344,746) (850,313) -------------- -------------- Pro forma net loss ($13,571,301) ($8,346,426) ============== ============== Basic and diluted loss per share, as reported ($0.07) ($0.06) Basic and diluted loss per share, pro forma ($0.08) ($0.06)
For the purpose of providing pro forma disclosures, the fair values of stock options granted were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2005 and 2004, respectively: a risk-free interest rate of 4.14% and F-7 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 3.65%; an expected life of 7.3 and 8 years; an expected volatility of 157% and 116%; and no expected dividends. On December 29, 2005, the Board of Directors approved the repricing to $0.20 per share each outstanding stock option with an exercise price of greater than $0.20 per share that was previously granted under the Company's 2000 Equity Incentive Plan or 2002 Non-Employee Directors Stock Option Plan and certain non-plan options currently held by current non-employee directors and all current employees other than the Company's Chief Executive Officer. As a result of the repricing, options to purchase 10,829,500 shares of the Company's common stock par value $0.001 per share (the "Common Stock") with existing exercise prices ranging from $0.30 to $2.50 and a weighted average exercise price of $0.46 were repriced to $0.20 per share. The Board of Directors also accelerated the vesting of all outstanding stock options previously awarded to and currently held by non-employee directors and all current employees other than the Company's Chief Executive Officer. As a result of the acceleration, options to acquire 10,043,750 shares of the Company's Common Stock became exercisable in full on December 31, 2005. The repricing and acceleration and of the options had no effect on the Company's financial position. The accelerated amortization expense and incremental value recognized due to the changes are included in the disclosure above. In December 2004, the FASB issued SFAS No. 123R. This standard requires all share-based payments to employees, including grants of employee stock options, to be expensed in the financial statements based on their fair values beginning with the first annual period beginning after June 15, 2005 (the first quarter of fiscal year 2006 for the Company). The pro forma disclosures permitted under SFAS No. 123 will no longer be allowed as an alternative presentation to recognition in the financial statements. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company expects to adopt SFAS No. 123R in its first quarter of fiscal year 2006 on a modified prospective basis, which will require recognition of compensation expense for all stock option or other equity-based awards that vest or become exercisable after the effective date. The Company expects such adoption will not have a material impact on its results of operations and its net income per common share in 2006 and forward, but as yet has not quantified the effects of adoption. In March 2005, the SEC issued guidance on FASB SFAS 123(R), "Share-Based Payments" ("SFAS No. 123R"). Staff Accounting Bulletin No. 107 ("SAB 107") was issued to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two themes: (a) considerable judgment will be required by preparers to successfully implement SFAS No. 123R, specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by F-8 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 SAB 107 include: (a) valuation models - SAB 107 reinforces the flexibility allowed by SFAS No. 123R to choose an option-pricing model that meets the standard's fair value measurement objective; (b) expected volatility - SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term - the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS No. 123R. NET LOSS PER SHARE Basic earnings (loss) per share EPS is computed by dividing net income (loss) applicable to common shares by the weighted-average of common shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the effects of convertible securities, stock options and other potentially dilutive instruments, only in the periods in which such effect is dilutive. The following securities have been excluded from the calculation of net loss per share, as their effect would be antidilutive. 2005 2004 ---- ---- Stock options 22,148,250 19,317,000 Warrants 36,733,505 43,562,405 Convertible debentures 4,600,000 22,000,000 PROPERTY AND EQUIPMENT Equipment, furniture and fixtures are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from two to five years. REVENUE RECOGNITION We recognize revenue from product sales upon shipment to customers and when all requirements related to the shipments have occurred. We recognized revenue from design and installation services at the time services are performed. Revenue from software licensing is deferred and recognized over the life of the license agreement. INVENTORY Inventory is valued at the lower of cost or market determined on the first-in, first-out (FIFO) basis. Market, with respect to direct materials, is replacement cost and is net realizable value for work-in-process and finished goods. The value of the inventory is adjusted for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Further, as the Company is still in development stage, fixed manufacturing costs may produce negative gross margins. As such, inventories are reviewed for lower of cost or market valuation RESEARCH AND DEVELOPMENT AND PATENT COSTS Both research and development and patent costs are charged to operations as incurred. F-9 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 INCOME TAXES The Company uses the liability method to determine its income tax. This method requires the establishment of a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss carry forwards. Deferred tax expense or benefit is recognized as a result of the changes in the assets and liabilities during the year. Valuation allowances are established when necessary, to reduce deferred tax assets, if it is more likely than not that all or a portion of it will not be realized. CONCENTRATIONS Cash and cash equivalents are, for the most part, maintained with major financial institutions in the United States. Deposits held with these banks at times exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk. IMPAIRMENT OF LONG-LIVED ASSETS The Company adopted the provisions of SFAS No. 144 "Accounting for Impairment of Disposal of Long-lived Assets." The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the excess, if any, of the carrying value over the fair value of the long-lived assets. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The provisions of SFAS 154 are effective for accounting changes and corrections of errors made in fiscal periods beginning after December 15, 2005. The adoption of the provisions of SFAS 154 is not expected to have a material impact on the Company's financial position or results of operations. In March 2005, the Securities and Exchange Commission announced that the compliance date for non-accelerated filers pursuant to Section 404 of the Sarbanes-Oxley Act have been extended. Under the latest extension, a company that is not required to file its annual and quarterly reports on an accelerated basis must begin to comply with the internal control over financial reporting requirements for its first fiscal year ending on or after July 15, 2006. The Commission similarly has extended the compliance date for these companies relating to requirements regarding evaluation of internal control over financial reporting and management certification requirements. The Company will be required to comply with Section 404 of the Sarbanes-Oxley Act beginning on January 1, 2007. F-10 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 NOTE 3 - BASIS OF PRESENTATION The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in the development stage, has a limited operating history and has sustained losses since its inception. These losses have produced operating cash flow deficiencies, and negative working capital. As indicated in the accompanying consolidated financial statements, as of December 31, 2005, the Company had a cash balance of $393,513 and incurred a net loss applicable to common stockholders of approximately $11.2 million for the year ended December 31, 2005. The Company expects to incur additional losses for the foreseeable future and will need to raise additional funds in order to realize its business plan. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company funded its operations during fiscal year 2005 from the proceeds of its private placement of convertible debentures that were placed in December 2004 and the exercise of outstanding warrants. Such net proceeds totaled approximately $8.8 million. In addition, in January 2006, the Company raised net proceeds of $1,335,000 from the issuance of Short Term Loans. See Note 13 (Subsequent Events). The Company's future operations are dependent upon management's ability to find sources of additional equity capital. The Company needs to raise additional funds to continue to meet its liquidity needs, repay short-term loans that mature in June 2006, realize its current business plan and maintain operations. Management of the Company is continuing its efforts to secure funds through equity and/or debt instruments for its operations. Presently, the Company does not have any financing commitment from any person and there can be no assurance that additional capital will be available to the Company on commercially acceptable terms or at all. NOTE 4 - INVENTORY Inventory consists of the following: DECEMBER 31, 2005 2004 ---- ---- Raw material $270,833 $159,003 Finished goods 358,202 195,494 -------- -------- $629,035 $354,497 ======== ======== F-11 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 NOTE 5 - PROPERTY AND EQUIPMENT DECEMBER 31, 2005 2004 ---- ---- Computers $272,326 $231,687 Software 214,246 - Machinery and equipment 594,606 256,918 Furniture and office equipment 152,032 158,731 ------- ------- 1,233,210 647,336 Less - accumulated depreciation 537,218 303,929 ------- ------- $695,992 $343,407 ======== ======== Depreciation expense was $246,727 and $89,737 for the years ended December 31, 2005 and 2004, respectively. NOTE 6 - PREPAID LICENSING FEES Effective January 31, 2004, the Company entered into a five-year licensing agreement with Design of Systems on Silicon ("DS2"), a supplier of components of the Company's power line communications technology, pursuant to which DS2 has granted Ambient a license of the DS2 power line related technology on a world wide nonexclusive basis. The license fee is being amortized over the five year term on a straight-line basis. Amortization was $79,200 per year for the years ended December 31, 2005 and 2004. Annual amortization expense is estimated to be $79,200 in each of the years ended December 31, 2006, 2007 and 2008. NOTE 7 - OTHER CURRENT LIABILITIES DECEMBER 31, 2005 2004 ---- ---- Accrued payroll and payroll taxes $ 88,793 $ - Accrued professional fees 85,831 158,146 Accrued liabilities 38,087 77,373 Accrued interest - 7,233 -------- -------- $212,711 $242,752 ======== ======== NOTE 8 - CONVERTIBLE DEBENTURES o In October and November 2003, the Company raised net proceeds of $4.2 million in a private placement of $4,655,000 principal amount of its three-year 6% Convertible Debentures (the "2003 Debentures"). The 2003 Debentures are convertible into shares of Common Stock at a conversion rate equal to $0.12 per F-12 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 share. In November and December 2003, $2,270,000 of principal and accrued interest of the 2003 Debentures was converted into approximately 18.9 million shares of the Company's Common Stock. In January through June 2004, the remaining principal of $2,385,000 and accrued interest was converted into approximately 22.4 million shares of Common Stock. For financial reporting purposes, the Company recorded a discount of $4,638,470 to reflect the value of the Warrants and amortized this amount to the date of maturity. In addition, in accordance with EITF No. 00-27, the Company recorded additional discount on the debentures of $11,664 to reflect the beneficial conversion feature of the warrants. Accordingly, all of the proceeds from this financing have been credited to stockholders' equity. o In December 2004, the Company raised net proceeds of $4.9 million in a private placement of $5,500,000 principal amount of its three-year 6% Convertible Debentures (the "2004 Debentures"). The 2004 Debentures are convertible into shares of Common Stock at a conversion rate equal to $0.25 per share (subject to adjustment if there are certain capital adjustments or similar transactions, such as a stock split or merger). In February through July 2005, $4,350,000 of principal of the 2004 Debentures was converted into 17.4 million shares of Common Stock. In January 2006, $820,000 of principle were converted into 3,280,000 shares of Common Stock. By their terms, the Debentures are convertible into shares of Common Stock at a per share conversation rate of $0.25 For financial reporting purposes, the Company recorded a discount of $2,193,411 to reflect the value of the warrants issued in connection with the 2004 Debentures and in accordance with EITF No. 00-27, an additional discount on the 2004 Debentures of $2,711,554 to reflect the beneficial conversion feature of the debentures. Accordingly, all of the net proceeds from this financing have been credited to stockholders' equity. The discounts are being amortized to the date of maturity unless converted earlier. NOTE 9 - INCOME TAXES At December 31, 2005, the Company had available $49 million of net operating loss carry forwards, for U.S. income tax purposes which expire in the years 2016 through 2025. However, due to changes in stock ownership the use of the U.S. net operating loss carry forwards is severely limited under Section 382 of the Internal Revenue Code pertaining to changes in stock ownership. As such, approximately $32 million of these net operating loss carry forwards will expire as worthless. The Company has ceased its foreign operations and has abandoned the foreign net operating loss carry forwards. Due to the uncertainty of their realization, no income tax benefit has been recorded by the Company for these loss carry forwards as valuation allowances have been established for any such benefits. F-13 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 Significant components of the Company's deferred tax assets for U.S. income taxes are as follows: DECEMBER 31, 2005 2004 ---- ---- Net operating loss carry forwards $6,980,518 $4,907,180 Stock based compensation 148,590 239,597 Other 438,414 282,986 ------- ------- Total deferred tax assets 7,567,523 5,429,763 Valuation allowance (7,567,523) (5,429,763) ---------- ---------- Net deferred tax assets $ -- $ -- ========== ========== The increase in the valuation allowance was primarily due to the increase in the net operating loss and the stock compensation costs of the Company. NOTE 10 - STOCKHOLDERS' EQUITY STOCK OPTION PLANS In November 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Incentive Plan"). A total of 5 million shares of Common Stock were originally reserved for issuance under the 2000 Incentive Plan. The 2000 Incentive Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The 2000 Incentive Plan also permits cash payments under certain conditions. In December 2002, the number of shares of Common Stock reserved for issuance under the 2000 Incentive Plan was increased from 5,000,000 to 15,000,000 and in June 2005 the 2000 Incentive Plan was further amended to increase the total number of shares available for grant to 25,000,000. The compensation committee of the Board of Directors is responsible for determining the type of award, when and to who awards are granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed ten years from the date of grant. Vesting periods range from immediately to four years. In December 2002, the Company adopted the 2002 Non-Employee Directors Stock Option Plan (the "2002 Directors Plan") providing for the issuance of up to 2,000,000 shares of Common Stock to non-employee directors. Under the 2002 Directors Plan, only non-qualified options may be issued and they will be exercisable for a period of six years from the date of grant. In June 2005, the number of shares of Common Stock reserved for issuance under the 2002 Directors Plan was increased from 2,000,000 to 4,000,000. F-14 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 OTHER OPTION GRANTS In addition to the options granted under the stock option plans discussed above (the "Plans), the Company has issued options outside of the plans, pursuant to various employment, consulting and separation agreements. Option activity for 2005 and 2004 is summarized as follows:
Weighted Average Options Exercise Plans Non-plan Total Price ----- -------- ----- ----- Options outstanding, January 1, 2004 5,752,000 5,590,000 11,342,000 $ .68 Granted 10,275,000 200,000 10,475,000 .28 Exercised (646,250) - (646,250) .18 Forfeited (753,750) (1,100,000) (1,853,750) -76 ---------- ---------- ---------- ----- Options outstanding, December 31, 2004 14,627,000 4,690,000 19,317,000 .46 Granted 3,400,000 1,600,000 5,000,000 .32 Exercised (501,250) - (501,250) -.18 Forfeited (976,250) (691,250) (1,667,500) -.35 ---------- --------- ---------- ----- Options outstanding, December 31, 2005 16,549,500 5,598,750 22,148,250 $ .33 ========== ========= ========== ===== Shares of Common Stock available for Future grant under the plan 11,643,000 ==========
The following table summarizes information about stock options outstanding at December 31, 2005:
Options Exercisable Weighted Average Remaining Number Contractual Exercise Number Exercise Ranges of price Outstanding Life Price Exercisable Price $.10 - $.12 615,000 5.34 $.11 615,000 $.11 $.20 15,748,250 7.95 .20 15,748,250 .20 $.30 - $.40 825,000 8.82 .31 650,000 .32 $.50 2,235,000 6.53 .50 2,325,000 .50 $1.00 2,560,000 4.83 1.00 2,560,000 1.00 $2.00 75,000 4.75 2.00 75,000 2.00 ------ ---- ---- ------ ---- $.10-$2.00 22,148,250 7.39 $.33 21,973,250 $.33 ========== ==== ==== ========== ====
F-15 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 Weighted-average grant date fair value of options granted under the Plans in 2005 and 2004, under the Black-Scholes option pricing model, was $.32 and $.18 per option, respectively. WARRANTS o In October and November 2003, in connection with the sale of the 2003 Debentures (See Note 8, Convertible Debentures) the Company issued three-year warrants to purchase up to 19,395,833 shares of the Company's Common Stock with a per share exercise price of $0.25. The exercise period of the warrants is subject to reduction upon certain events. As of December 31, 2005 there were 2,104,167 warrants still outstanding. o In February 2004, in connection with a private placement, the Company issued three-year warrants to purchase up to an additional 2,083,333 shares of the Company's Common Stock. The warrants are exercisable at a per share exercise price of $0.25 provided that the exercise period may be reduced under certain conditions. As of December 31, 2005, all of these warrants are still outstanding. o In December 2004, in connection with the sale of its 2004 Debentures (See Note 8, Convertible Debentures) the Company issued three-year warrants to purchase up to 22,000,000 shares of the Company's Common Stock with a per share exercise price of $0.50. The Company also issued to placement agents three-year warrants to purchase up to 4,400,000 shares of Common Stock, of which 2,200,000 have an exercise price of $0.25 per share and 2,200,000 with an exercise price of $.50 per share. As of December 31, 2005, all of these warrants were outstanding. A summary of the warrants outstanding at December 31, 2005 is as follows: Exercise Expiration Warrants Price Date -------- ----- ---- 250,000 $0.12 2006 100,000 $0.17 2006 11,562,505 $0.25 2006-2008 40,000 $0.30 2007 24,256,000 $0.50 2006-2007 145,000 $1.00 2007 100,000 $1.25 2007 140,000 $1.50 2006-2007 70,000 $2.00 2006-2007 70,000 $2.50 2006-2007 ------ 36,733,505 ============= F-16 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 STOCK ISSUANCES o In June and December 2005, the Company issued 315,991 shares of Common Stock in payment of interest totaling $78,998 on their 6% convertible debentures. NOTE 11 - RESEARCH AND DEVELOPMENT AGREEMENT Effective February 7, 2002, the Company and Consolidated Edison Company of New York, Inc. ("Con Edison"), an affiliate of Consolidated Edison, Inc, a major stockholder of the Company, entered into a Research and Development Agreement (the "Research and Development Agreement") to further develop and test the Company's PLC technology on Con Edison's grid system. Pursuant to the Research and Development Agreement, Con Edison advanced $325,000 to the Company, which will only be repayable if the Small Field Trial Phase, as defined therein, is deemed unsuccessful. The Company will have sole rights to any jointly developed intellectual property. Con Edison is entitled to a 2.5% royalty, based on the Company's total net revenues for a ninety-nine year period. Royalty payments are only due if the Company has positive cash flow and will be payable quarterly, in arrears, and does not accrue from one quarter to another during periods of negative cash flow. On January 27, 2006, Con Edison and Ambient entered into an agreement with NYSERDA (the New York State Energy Research and Development Authority) (the "NYSERDA Agreement") pursuant to which they undertook to conduct medium and low voltage electric systems monitoring activities to detect incipient or impending failures and related activities, for which Con Edison was awarded a $200,000 grant from NYSERDA. The NYSERDA Agreement necessitated an amendment to the Research and Development Agreement to modify the implementation plan contained therein to encompass the objectives of the NYSERDA Agreement. In the amendment, Con Edison and Ambient certified the completion of the Small Field Trial Phase, agreed that the $325,000 advance owing from Ambient to Con Edison was subsumed into the revenue royalty granted to Con Edison in the Research and Development Agreement, and agreed to move forward to an Advanced Grid Management Pilot Phase that encompassed the statement of work contained in the NYSERDA Agreement. Additionally, in the amendment, Con Edison committed to remit to Ambient not less than $180,000 of the grant monies received from NYSERDA to compensate Ambient for its equipment and other costs to be incurred in performing the Advanced Grid Management Pilot Phase. NYSERDA is a public benefit corporation created by the New York State Legislature to administer the State's energy program. The $325,000 advance will be recorded as revenue by Ambient during the first quarter 2006. NOTE 12 - COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS On July 8, 2004, the Board of Directors approved an amended and restated employment agreement with the Company's Chief Executive Officer. The agreement is for an initial term ending December 31, 2007 and provides for an annual base salary of $285,000, subject to annual cost of living adjustments. After expiration of the initial term, the agreement will automatically renew for additional one-year terms, unless terminated by the Company upon written notice given F-17 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 not less than 90 days prior to the expiration of the term. The agreement also contains certain provisions for early termination, including in the event of a change in control, which may result in a severance payment equal to two years of base salary then in effect and the continuation of certain benefits. On August 11, 2004, the Company entered into an amended and restated employment agreement with its Chief Network Architect. The agreement is for an initial term of two years and provides for an annual base salary of $171,000, subject to review. After expiration of the initial term, the agreement provides for the renewal of the agreement for additional one-year terms, unless terminated in accordance with the agreement upon 60 days prior notice. The agreement also contains certain provisions for early termination, which may result in a severance payment equal to one year of base salary then in effect. OPERATING LEASES The Company does not own any real property. The Company's corporate office in Newton, Massachusetts comprised of approximately 14,477 square feet leased at a monthly rental of $15,395 with a scheduled expiration date of February 28, 2008. The Company have improved this facility to meet its design and development activities. The Company believes that this facility is sufficient to meet its current requirements and that it would be able to renew its present lease or obtain suitable replacement facilities. In addition, the Company also rents office space in Briarcliff, New York at a monthly rental of $800 with a scheduled expiration date of July 5, 2006. The Company uses this office space primarily in connection with the on-going pilots and testing being conducted at Con Edison's premises. Rent expense for 2005 and 2004 was $190,127 and $101,607, respectively. Future minimum rentals on this lease as of December 31, 2005 are as follows: Year ended December 31, 2006 $ 189,536 2007 184,736 2008 30,789 --------- Total $ 405,061 ========= NOTE 13 - SUBSEQUENT EVENTS BRIDGE LOAN In January 2006, the Company entered into a bridge loan agreement pursuant to which an institutional investor loaned to it $1,500,000 (net principal amount of $1,335,000 after transactions costs) and the Company issued to the investor a secured promissory note in the aggregate principal amount of F-18 AMBIENT CORPORATION (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 $1,620,000, which reflects an original issue discount on the principal amount of the loan of 15.5%. The note is scheduled to mature on the date that is the earlier of (i) the date on which the Company consummate a subsequent financing that generates, on a cumulative basis together with any other interim financings, gross proceeds to the Company us of at least $2 million or (ii) June 24, 2006. To secure its obligations under the bridge loan agreement, the Company granted the investor a security interest in all of the Company's assets (including, without limitation, its intellectual property) The security interest terminates upon payment or satisfaction of all of the Company's obligations under the bridge loan agreement. A default by the Company under the bridge loan agreement would enable the investor to foreclose on all of the Company's assets. The Company may repay the loan in whole or in part at any time without penalty. The Company issued to the investor five year warrants to purchase 3,000,000 shares of its Common Stock at an exercise price of $0.15 per share, subject to adjustments in certain specified circumstances COMMERCIAL PILOTS In January 2006, the Company entered into a pilot demonstration agreement with a large investor-owned utility in the southeastern United States. In January and February of 2006, revenue from the pilot program amounted to approximately $400,000. F-19 EX-4.5 2 tex4_5-9094.txt EX-4.5 EXHIBIT 4.5 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. No. 06-01-1 US $1,620,000.00 ---------------- AMBIENT CORPORATION SECURED PROMISSORY NOTE DUE JUNE 24, 2006 THIS NOTE is one of a duly authorized issue of up to $1,620,000 of AMBIENT CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Company"), designated as its Secured Promissory Note Series 06-01. FOR VALUE RECEIVED, the Company promises to pay to DOUBLE U MASTER FUND L.P., the registered holder hereof (the "Holder"), the principal sum of One Million Six Hundred Twenty Thousand and 00/100 Dollars (US $1,620,000.00) on the Maturity Date (as defined below). TIME IS OF THE ESSENCE WITH RESPECT TO THE COMPANY'S FULFILLMENT OF ALL OF ITS PAYMENT OBLIGATIONS HEREUNDER. The Holder shall not be required to give the Company any notice of default of payment if any such payment is not timely paid or otherwise satisfied. All provisions of this Note which apply in the event of the Company's not timely fulfilling any of its payment obligations hereunder shall apply whether or not such notice of default is given. The Holder's giving of any notice to the Company shall not be deemed a waiver, modification or amendment of this provision with respect to the failure referred to in that notice or to any other failure by the Company timely to make any other payment due hereunder. This Note or its predecessor was originally issued on January __, 2006 (the "Issue Date"). This Note is being issued pursuant to the terms of the Bridge Loan Agreement, dated as of January 18, 2006 (the "Bridge Loan Agreement"), to which the Company and the Holder (or the Holder's predecessor in interest) are parties. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Bridge Loan Agreement. This Note is subject to the following additional provisions: 1. The Note will initially be issued in denominations determined by the Company, but are exchangeable for an equal aggregate principal amount of Note of different denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration or transfer or exchange. 2. No interest will accrue on this Note until the Maturity Date. If any portion of this Note is outstanding on the Maturity Date, interest at the rate of fourteen percent (14%) per annum or the highest rate allowed by law, whichever is lower, shall accrue on the outstanding principal of this Note from the Maturity Date to and including the date of payment by the Company. Such interest shall accrue on a daily basis and shall be payable in cash. The Holder may demand payment of all or any part of this Note, together with accrued interest, if any, and any other amounts due hereunder, as of the Maturity Date or any date thereafter. 3. The Company shall be entitled to withhold from all payments of principal of, and, if applicable, interest on, this Note any amounts required to be withheld under the applicable provisions of the United States income tax laws or other applicable laws at the time of such payments, and Holder shall execute and deliver all required documentation in connection therewith. 4. This Note has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (the "Act"), and other applicable state and foreign securities laws and the terms of the Bridge Loan Agreement. In the event of any proposed transfer of this Note, the Company may require, prior to issuance of a new Note in the name of such other person, that it receive reasonable transfer documentation that is sufficient to evidence that such proposed transfer complies with the Act and other applicable state and foreign securities laws and the terms of the Bridge Loan Agreement. Prior to due presentment for transfer of this Note, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Company's Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. 5 (a) The term "Maturity Date" means the earliest of (i) June ___, 2006 (the "Stated Maturity Date"), (ii) the New Transaction Threshold Date (as defined below), or (iii) the Default Maturity Date (as defined below). (b) The term "New Transaction Threshold Date" means the date on which the Company consummates the first New Transaction in which the Company receives, on a cumulative basis after taking into account the gross proceeds from all prior New Transactions, if any, after the Issue Date, gross proceeds of at least Two Million Dollars ($2,000,000). All such gross proceeds are determined before deduction of any fees or other expenses or disbursements of any kind in connection with the relevant New Transaction. 6. (a) Any payment made on account of this Note shall be applied in the following order of priority: (i) first, to any amounts due hereunder other than principal and accrued interest, (ii) then, to accrued interest, if any, through and including the date of payment, and (iii) then, to principal of this Note. (b) Subject to the provisions of Section 6(a) hereof, the outstanding principal of this Note may be prepaid in whole or in part at the option of the Company at any time prior to the Maturity Date. 7. All payments contemplated hereby are to be made "in cash" and shall be made in immediately available good funds of United States of America currency by wire transfer to an account designated in writing by the Holder to the Company (which account may be changed by notice similarly given). For purposes of this Note, the phrase "date of payment" means the date good funds are received in the account designated by the notice which is then currently effective. 8. (a) Subject to the terms of the Bridge Loan Agreement, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and, if applicable, interest on, this Note at the time, place, and rate, and in the coin or currency, as herein prescribed. This Note is a direct obligation of the Company. (b) Payment of this Note is secured pursuant to the terms of the Security Interest Agreement, dated as of January 18, 2006 (the "Security Interest Agreement"), executed by the Company, as debtor, in favor of the Lender, as secured party. The terms of the Security Interest Agreement are incorporated herein by reference. 9. No recourse shall be had for the payment of the principal of, or, if applicable, the interest on, this Note, or for any claim based hereon, or otherwise in respect hereof, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. 10. The Holder of the Note, by acceptance hereof, agrees that this Note is being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Note except under circumstances which will not result in a violation of the Act or any applicable state Blue Sky or foreign laws or similar laws relating to the sale of securities. 11. Any notice required or permitted hereunder shall be given in manner provided in the Section headed "NOTICES" in the Bridge Loan Agreement, the terms of which are incorporated herein by reference. 12. (a) This Note shall be governed by and interpreted in accordance with the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the City of Wilmington or the state courts of the State of Delaware sitting in the City of Wilmington in connection with any dispute arising under this Note and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Holder in enforcement of or protection of any of its rights under this Note. (b) JURY TRIAL WAIVER. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the Parties hereto against the other in respect of any matter arising out of or in connection with this Note. 13. (a) The following shall constitute an "Event of Default": i. The Company shall default in the timely payment of principal on this Note or any other amount due hereunder (without the requirement of any further notice with respect thereto from the Holder); or ii. Any of the representations or warranties made by the Company herein, in the Bridge Loan Agreement or any of the other Transaction Agreements shall be false or misleading in any material respect at the time made; or iii. The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of any Note in this series and such failure shall continue uncured for a period of thirty (30) days after the Company's receipt of written notice thereof from the Holder; or iv. The Company shall fail to perform or observe, in any material respect, any covenant, term, provision, condition, agreement or obligation of the Company under any of the Transaction Agreements and such failure shall continue uncured for a period of thirty (30) days after the Company's receipt of written notice thereof from the Holder; or v. The Company shall (1) admit in writing its inability to pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or vi. A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or vii. Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; or viii. Any money judgment, writ or warrant of attachment, or similar process in excess of Seven Hundred Fifty Thousand ($750,000) Dollars in the aggregate shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or ix. Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding. (b) If an Event of Default shall have occurred and is continuing, then, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been cured or waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default), at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Note immediately due and payable (and the Maturity Date shall be accelerated accordingly; the "Default Maturity Date"), without presentment, demand, protest or notice of any kinds, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law, including, but not necessarily limited to, the equitable remedy of specific performance and injunctive relief. 14. In the event for any reason, any payment by or act of the Company or the Holder shall result in payment of interest which would exceed the limit authorized by or be in violation of the law of the jurisdiction applicable to this Note, then IPSO FACTO the obligation of the Company to pay interest or perform such act or requirement shall be reduced to the limit authorized under such law, so that in no event shall the Company be obligated to pay any such interest, perform any such act or be bound by any requirement which would result in the payment of interest in excess of the limit so authorized. In the event any payment by or act of the Company shall result in the extraction of a rate of interest in excess of a sum which is lawfully collectible as interest, then such amount (to the extent of such excess not returned to the Company) shall, without further agreement or notice between or by the Company or the Holder, be deemed applied to the payment of principal, if any, hereunder immediately upon receipt of such excess funds by the Holder, with the same force and effect as though the Company had specifically designated such sums to be so applied to principal and the Holder had agreed to accept such sums as an interest-free prepayment of this Note. If any part of such excess remains after the principal has been paid in full, whether by the provisions of the preceding sentences of this Section or otherwise, such excess shall be deemed to be an interest-free loan from the Company to the Holder, which loan shall be payable immediately upon demand by the Company. The provisions of this Section shall control every other provision of this Note. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: January , 2006 AMBIENT CORPORATION By:/s/ John J. Joyce John J. Joyce (Print Name) President and Chief Executive Officer (Title) EX-5.6 3 tex5_6-9094.txt EX-5.6 EXHIBIT 4.6 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. AMBIENT CORPORATION COMMON STOCK PURCHASE WARRANT 1. ISSUANCE. In consideration of good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by AMBIENT CORPORATION, a Delaware corporation (the "Company"), DOUBLE U MASTER FUND L.P., or registered assigns (the "Holder") is hereby granted the right to purchase at any time, on or after the Commencement Date (as defined below) until 5:00 P.M., New York City time, on January 31, 2011 (the "Expiration Date"), Three Million (3,000,000) fully paid and nonassessable shares of the Company's Common Stock, $0.001 par value per share (the "Common Stock"), at an initial exercise price per share (the "Exercise Price) of $0.15 per share, subject to further adjustment as set forth herein. This Warrant is being issued pursuant to the terms of that certain Bridge Loan Agreement, dated as of January 18, 2006 (the "Agreement"), to which the Company and Holder (or Holder's predecessor in interest) are parties. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This Warrant was originally issued to the Holder of the Holder's predecessor in interest on January ____, 2006 (the "Issue Date"). 2. EXERCISE OF WARRANTS. 2.1 GENERAL. (a) This Warrant is exercisable in whole or in part at any time and from time to time commencing on the Commencement Date (as defined below). Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof) a completed and duly executed Notice of Exercise (substantially in the form attached to this Warrant Certificate) as provided in the Notice of Exercise (or revised by notice given by the Company as contemplated by the Section headed "NOTICES" in the Agreement). The date such Notice of Exercise is faxed to the Company shall be the "Exercise Date," provided that, if such exercise represents the full exercise of the outstanding balance of the Warrant, the Holder of this Warrant tenders this Warrant Certificate to the Company within five (5) Trading Days thereafter. The Notice of Exercise shall be executed by the Holder of this Warrant and shall indicate (i) the number of shares then being purchased pursuant to such exercise and (ii) if applicable (as provided below), whether the exercise is a cashless exercise. . (b) The provisions of this Section 2.1(b) shall only be applicable (i) on or after the first anniversary of the Issue Date, and (ii) if, and only if, on the Exercise Date there is no eff ective Registration Statement covering the resale of the Warrant Shares by the Holder. If the Notice of Exercise form elects a "cashless" exercise, the Holder shall thereby be entitled to receive a number of shares of Common Stock equal to (w) the excess of the Current Market Value (as defined below) over the total cash exercise price of the portion of the Warrant then being exercised, divided by (x) the Market Price of the Common Stock as of the trading day immediately prior to the Exercise Date. For the purposes of this Warrant, the terms (y) "Current Market Value" shall mean an amount equal to the Market Price of the Common Stock as of the Trading Day immediately prior to the Exercise Date, multiplied by the number of shares of Common Stock specified in such Notice of Exercise Form, and (z) "Market Price of the Common Stock" shall mean the Closing Price (as defined below) of the Common Stock. (c) If the Notice of Exercise form elects a "cash" exercise (or if the cashless exercise referred to in the immediately preceding paragraph (b) is not available in accordance with its terms), the Exercise Price per share of Common Stock for the shares then being exercised shall be payable, at the election of the Holder, in cash or by certified or official bank check or by wire transfer in accordance with instructions provided by the Company at the request of the Holder. (d) The Exercise Price per share of Common Stock for the shares then being exercised shall be payable, at the election of the Holder, in cash or by certified or official bank check or by wire transfer in accordance with instructions provided by the Company at the request of the Holder. (e) Upon the appropriate payment, if any, of the Exercise Price for the shares of Common Stock purchased, together with the surrender of this Warrant Certificate (if required), the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. The Company shall deliver such certificates representing the Warrant Shares in accordance with the instructions of the Holder as provided in the Notice of Exercise (the certificates delivered in such manner, the "Warrant Share Certificates") within three (3) Trading Days (such third Trading Day, a "Delivery Date") of (i) with respect to a "cashless exercise," the Exercise Date or, (ii) with respect to a "cash" exercise, the later of the Exercise Date or the date the payment of the Exercise Price for the relevant Warrant Shares is received by the Company. (f) The Holder shall be deemed to be the holder of the shares issuable to it in accordance with the provisions of this Section 2.1 on the Exercise Date. 2.2 LIMITATION ON EXERCISE. Notwithstanding the provisions of this Warrant, the Agreement or of the other Transaction Agreements, in no event (except (i) as specifically provided in this Warrant as an exception to this provision, (ii) during the forty-five (45) day period prior to the Expiration Date, or (iii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock) shall the Holder be entitled to exercise this Warrant, or shall the Company have the obligation to issue shares upon such exercise of all or any portion of this Warrant to the extent that, after such exercise the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrants or other rights to purchase Common Stock or through the ownership of the unconverted portion of convertible securities), and (2) the number of shares of Common Stock issuable upon the exercise of the Warrants with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to the Holder upon such exercise). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided in clause (1) of such sentence. The Holder, by its acceptance of this Warrant, further agrees that if the Holder transfers or assigns any of the Warrants to a party who or which would not be considered such an affiliate, such assignment shall be made subject to the transferee's or assignee's specific agreement to be bound by the provisions of this Section 2.2 as if such transferee or assignee were the original Holder hereof. 2.3 CERTAIN DEFINITIONS. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires: (a) "Commencement Date" means the date which is sixty-five (65) days after the Issue Date. (b) "Closing Price" means the 4:00 P.M. closing bid price of the Common Stock on the Principal Trading Market on the relevant Trading Day(s), as reported by the Reporting Service for the relevant date. (c) "Reporting Service" means Bloomberg LP or if that service is not then reporting the relevant information regarding the Common Stock, a comparable reporting service of national reputation selected by a Majority in Interest of the Holders and reasonably acceptable to the Company. (d) "Majority in Interest of the Holders" means, as of the relevant date, one or more Holders whose respective outstanding principal amounts of the Notes held by each of them, as of such date, aggregate more than fifty percent (50%) of the aggregate outstanding principal amounts of the outstanding Notes held by all Holders on that date. 3. RESERVATION OF SHARES. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant one hundred percent (100%) of the number of shares of its Common Stock as shall be required for issuance of the Warrant Shares for the then unexercised portion of this Warrant. For the purposes of such calculations, the Company should assume that the outstanding portion of this Warrant was exercisable in full at any time, without regard to any restrictions which might limit the Holder's right to exercise any portion of this Warrant held by the Holder. 4. MUTILATION OR LOSS OF WARRANT. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. PROTECTION AGAINST DILUTION AND OTHER ADJUSTMENTS. 6.1 ADJUSTMENT MECHANISM. If an adjustment of the Exercise Price is required pursuant to this Section 6 (other than pursuant to Section 6.4), the Holder shall be entitled to purchase such number of shares of Common Stock as will cause (i) (x) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant following such adjustment, multiplied by (y) the adjusted Exercise Price per share, to equal the result of (ii) (x) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment, multiplied by (y) the total Exercise Price before adjustment.(1) 6.2 CAPITAL ADJUSTMENTS. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation (where the Company is not the surviving entity), the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original Exercise Price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. The Company will not effect any consolidation or merger, unless prior to the consummation thereof, the successor or acquiring entity (if other than the Company) and, if an entity different from the successor or acquiring entity, the entity whose capital stock or assets the holders of the Common Stock of the Company are entitled to receive as a result of such consolidation or merger assumes by written instrument the obligations under this Warrant (including under this Section 6) and the obligations to deliver to the holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the holder may be entitled to acquire. 6.3 ADJUSTMENT FOR SPIN OFF. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the Trading Day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares, multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants. - ------------------ (1) Example: Assume 100,000 shares remain under Warrant at original stated Exercise Price of US$0.15. Total exercise price (clause (y) in text) is (i) 10,000 x (ii) US$0.15, or US$15,000. Company effects 2:1 stock split. Exercise Price is adjusted to US$0.075. Number of shares covered by Warrant is adjusted to 200,000, because (applying clause (x) in text) (i) 200,000 x (ii) US$0.075 = US$15,000. 6.4 ADJUSTMENT FOR CERTAIN TRANSACTIONS. Reference is made to the provisions of Appendix A to this Warrant, the terms of which are incorporated herein by reference. The Exercise Price shall be adjusted as provided in the applicable provisions of said Appendix A. 7. TRANSFER TO COMPLY WITH THE SECURITIES ACT; REGISTRATION RIGHTS. 7.1 TRANSFER. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 7.2 REGISTRATION RIGHTS. Reference is made to the provisions of Section 4(h) of the Agreement, the terms of which are incorporated herein by reference. 8. BUY-IN AMOUNT. (a) If, by the relevant Delivery Date, the Company fails for any reason to deliver the relevant Warrant Share Certificates, and after such Delivery Date, the Holder who has exercised this Warrant (an "Exercising Holder") purchases, in an arm's-length open market transaction or otherwise, shares of Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by the Exercising Holder (the "Sold Shares"), which delivery such Exercising Holder anticipated to make using the shares to be issued upon such exercise (a "Buy-In"), the Exercising Holder shall have the right to require the Company to pay to the Exercising Holder, in addition to and not in lieu of all other amounts contemplated in other provisions of the Transaction Agreements, the Warrant Share Buy-In Adjustment Amount (as defined below). The Company shall pay the Warrant Share Buy-In Adjustment Amount to the Exercising Holder in immediately available funds immediately upon demand by the Exercising Holder. (b) The term "Warrant Share Buy-In Adjustment Amount" means the amount equal to the excess, if any, of (i) the Exercising Holder's total purchase price (including brokerage commissions, if any) for the Covering Shares over (ii) the net proceeds (after brokerage commissions, if any) received by the Exercising Holder from the sale of the Sold Shares. By way of illustration and not in limitation of the foregoing, if the Exercising Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net proceeds of $10,000, the Warrant Share Buy-In Adjustment Amount which the Company will be required to pay to the Exercising Holder will be $1,000. 9. NOTICES. Any notice required or permitted hereunder shall be given in manner provided in the Section headed "NOTICES" in the Agreement, the terms of which are incorporated herein by reference. 10. SUPPLEMENTS AND AMENDMENTS; WHOLE AGREEMENT. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 11. GOVERNING LAW. This Warrant shall be deemed to be a contract made under the laws of the Stater of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of Wilmington or the state courts of the Stater of Delaware sitting in the City of Wilmington in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Holder in enforcement of or protection of any of its rights under any of the Transaction Agreements. 12. JURY TRIAL WAIVER. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the Parties hereto against the other in respect of any matter arising out or in connection with this Warrant. 13. REMEDIES. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 14. COUNTERPARTS. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Balance of page intentionally left blank] 15. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the th day of January, 2006. AMBIENT CORPORATION By: /s/ John J. Joyce John J. Joyce (Print Name) President and Chief Executive Officer (Title) APPENDIX A TO COMMON STOCK PURCHASE WARRANT OF AMBIENT CORPORATION 1. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement or in the Warrant. 2. (a) The term "Lower Price Transaction" means a New Transaction offered or consummated during the New Transaction Period (as defined below), where the lowest New Transaction Price (as defined below) is, or by its terms or by an existing understanding of the Company and the New Investor, could subsequently be adjusted or revised to be, lower than the then effective Exercise Price of the Warrants (such Exercise Price, in each case, subject to adjustment in the same manner as the initial Exercise Price of the Warrant is adjusted, other than as a result of the application of this Appendix A). (b) "New Transaction Price" means the Basic New Transaction Price (as defined below) except that if the New Transaction Exercise Price is lower than the Basic New Transaction Price, it means the New Transaction Exercise Price. (c) "Basic New Transaction Price" means, as may be applicable, on a per share basis, the lower of (1) the lowest fixed purchase price of any shares of the New Common Stock contemplated in the New Transaction, or (2) the lowest conversion price or put or call price which would be applicable under the terms of the New Transaction; in each such case, whether such purchase or conversion price or put or call price is stated or otherwise specified or is determined on the closing date of the New Transaction by the application of a formula set in the documents reflecting the New Transaction or could result from adjustments or revisions contemplated in the relevant agreements for the New Transaction and whenever such adjustment or revision would be applicable (and if no minimum purchase price, conversion price or put or call price, as the case may be, is set, it shall be assumed that such minimum purchase price or conversion price is $.01); and provided, further, that, if the securities issued in the New Transaction are issued at a Face Value Discount (as defined below), the New Transaction Price shall be adjusted to reflect such discount.(2) (d) "New Transaction Exercise Price" means the lowest exercise price per share applicable to the warrants, option or similar instrument (howsoever denominated; collectively, "New Transaction Warrants") included in such New Transaction, whether such exercise price is stated or could result from adjustments or revisions contemplated in the relevant agreements for the New Transaction and whenever such exercise price would be applicable (and, if no minimum exercise price is set, it shall be assumed that such minimum exercise price is $.01). - ------------------ (2) By way of illustration, if convertible preferred shares having a stated value of $1 million and a fixed conversion price of $0.50 (resulting in 2,000,000 shares) were sold for a purchase price of $800,000, the effective New Transaction Price would be $0.40 (the conversion price at which $800,000 would convert into 2,000,000 shares). (e) "Face Value Discount" means consideration less than, as the case may be, (x) the number of shares being issued multiplied by the stated purchase price, (y) the stated principal amount of a debenture, note or similar instrument or (z) the stated value of the shares of convertible stock. (f) The term "New Transaction Period" means the period commencing on the Issue Date and continuing until the earlier of (i) the Expiration Date or (ii) the date on which this Warrant has been fully exercised. 4. The Company covenants and agrees that, if there is a Lower Price Transaction during the New Transaction Period, then the Exercise Price on the unexercised portion of this Warrant shall be adjusted to equal the lowest New Transaction Price applicable to the Lower Price Transaction. Dated: ______________________ _____________________________ [Name of Holder] By: _________________________ EX-10.8 4 tex10_8-9094.txt EX-10.8 EXHIBIT 10.8 BRIDGE LOAN AGREEMENT THIS BRIDGE LOAN AGREEMENT, dated as of January 18, 2006, is entered into by and between AMBIENT CORPORATION, a Delaware corporation with headquarters located at 79 Chapel Street, Newton, Massachusetts 02458 (the "Company"), and each individual or entity named on an executed counterpart of the signature page hereto (each such signatory is referred to as a "Buyer") (each agreement with a Buyer being deemed a separate and independent agreement between the Company and such Buyer, except that each Buyer acknowledges and consents to the rights granted to each other Buyer [each, an "Other Buyer"] under such agreement and the Transaction Agreements, as defined below, referred to therein). W I T N E S S E T H: WHEREAS, the Company and the Buyer are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration for offers and sales to accredited investors afforded, INTER ALIA, by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and WHEREAS, each Buyer wishes to lend funds in the amount of the Purchase Price (as defined below) to the Company, subject to and upon the terms and conditions of this Agreement and acceptance of this Agreement by the Company, the repayment of which will be represented by a Secured Promissory Note of the Company (the "Note"), on the terms and conditions referred to herein; and WHEREAS, in connection with the loan to be made by the Buyer, the Company has agreed to issue the Note and the Warrant (as defined below) to the Buyer; NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO PURCHASE; PURCHASE PRICE. A. PURCHASE. (i) Subject to the terms and conditions of this Agreement and the other Transaction Agreements (as defined below), the Buyer hereby agrees to loan to the Company the principal amount specified on the Buyer's signature page of this Agreement (the "Purchase Price"), out of the aggregate amount being loaned by all Buyers of US $1,500,000 (the "Aggregate Purchase Price"). (ii) The obligation to repay the loan of the relevant Purchase Price from the Buyer shall be evidenced by the Company's issuance of one or more Notes to the Buyer in the principal amount of one hundred eight percent (108%) of the Purchase Price paid by the Buyer on or in connection with the Closing Date. Each Note shall be payable on the date (the "Stated Maturity Date") which is one hundred fifty (150) days after the Closing Date or the date on which the New Transaction Threshold (as defined in the Note) occurs. Each Note shall be in the form of ANNEX I annexed hereto. Repayment of the Note shall be secured under the terms of a Security Interest Agreement between the Company, as debtor, and the Buyer, as secured party (the "Security Interest Agreement"), substantially in the form annexed hereto as ANNEX V. (iii) In consideration of the loan to be made by the Buyer, the Company will issue to such Buyer the Warrant to purchase the number of shares of the Company's Common Stock as provided in Section 4 hereof. (iv) The loan to be made by the Buyer and the issuance of the Note and the Warrant to the Buyer and the other transactions contemplated hereby are sometimes referred to herein and in the other Transaction Agreements as the purchase and sale of the Securities (as defined below), and are referred to collectively as the "Transactions." B. CERTAIN DEFINITIONS. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires: "Affiliate" means, with respect to a specific Person referred to in the relevant provision, another Person who or which controls or is controlled by or is under common control with such specified Person. "Buyer Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Buyer pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act. "Buyer's Allocable Share" means the fraction, of which the numerator is the Buyer's Purchase Price and the denominator is the Aggregate Purchase Price. "Certificates" means the ink-signed Note and the Warrant, each duly executed by the Company and issued on the Closing Date in the name of the Buyer. "Closing Date" means the date of the closing of the Transactions, as provided herein. "Company Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Company pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act (as defined below). "Disclosure Letter" means a letter and any modifications thereof, the latest of which is dated at least one Trading Day prior to the Closing Date, from the Company to the Buyer; provided, however, that the Disclosure Letter shall be arranged in sections corresponding to the identified Sections of this Agreement, but the disclosure in any such section of the Disclosure Letter shall qualify other provisions in this Agreement to the extent that it would be readily apparent to an informed reader from a reading of such section of the Disclosure Letter that it is also relevant to other provisions of this Agreement. "Escrow Agent" means Krieger & Prager LLP, the escrow agent identified in the Joint Escrow Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions"). "Escrow Funds" means the Purchase Price delivered to the Escrow Agent as contemplated by Sections 1(c) and (d) hereof. "Escrow Property" means the Escrow Funds and the Certificates delivered to the Escrow Agent as contemplated by Section 1(c) hereof. "Holder" means the Person holding the relevant Securities at the relevant time. "Last Audited Date" means December 31, 2004. "Material Adverse Effect" means an event or combination of events, which individually or in the aggregate, would reasonably be expected to (x) materially adversely affect the legality, validity or enforceability of the Purchased Securities or any of the Transaction Agreements, (y) have or result in a material adverse effect on the results of operations, assets, or financial condition of the Company and its subsidiaries, taken as a whole, or (z) materially adversely impair the Company's ability to perform fully on a timely basis its material obligations under any of the Transaction Agreements or the transactions contemplated thereby. "New Common Stock" means shares of Common Stock and/or securities convertible into, and/or other rights exercisable for, Common Stock, which are offered or sold in a New Transaction. "New Investor" means the third party investor, purchaser or lender (howsoever denominated) in a New Transaction. "New Transaction" means (i) the offer or sale of New Common Stock by or on behalf of the Company to a New Investor and/or (ii) the grant of a security interest in or pledge of (x) any or all of the Company's assets by the Company and/or (y) shares of the Company's Common Stock or securities convertible into or exercisable for the Company's Common Stock by any other party in connection with a transaction in which the Company borrows or is otherwise obligated to pay funds to a third party, in a transaction offered or consummated after the date hereof; provided, however, that it is specifically understood that the term "New Transaction" (1) includes, but is not limited to, a sale of Common Stock or of a security convertible into Common Stock or an equity or credit line transaction, but (2) does not include (a) the issuance of Common Stock upon the exercise or conversion of options, warrants or convertible securities outstanding on the date hereof, or in respect of any other financing agreements as in effect on the date hereof and identified in the Disclosure Letter (provided the same is not amended after the date of the Disclosure Letter) or the Company SEC Documents (provided the same is not amended after the date hereof), (b) the issuance of Common Stock pursuant to an Employee Stock Option Plan (an "ESOP") of the Company, such ESOP having been properly approved by the shareholders of the Company, (c) the issuance of Common Stock pursuant to a non-employee director or consultants' stock option plan of the Company, (d) the issuance of Common Stock upon the exercise of any options or warrants referred to in the preceding clauses of this paragraph (provided the same is not amended after the date hereof), or (e) the issuance of shares to a Strategic Partner. "Person" means any living person or any entity, such as, but not necessarily limited to, a corporation, partnership or trust. "Principal Trading Market" means the Over the Counter Bulletin Board or such other market on which the Common Stock is principally traded at the relevant time, but shall not included the "pink sheets." "Purchased Securities" means the Note and the Warrant. "Registrable Securities" means the Warrant Shares, unless such shares can then be sold by the Holder under Rule 144(k) promulgated under the 1933 Act. "Registration Rights Provisions" means the piggy-back registration rights contemplated by the terms of this Agreement, including, but not necessarily limited to, Section 4(h) hereof, and of the other Transaction Agreements. "Registration Statement" means an effective registration statement covering the Registrable Securities. "Securities" means the Note, the Warrant and the Shares. "Shares" means the shares of Common Stock representing any of the Warrant Shares. "State of Incorporation" means Delaware. "Strategic Partner" means a third party, whether or not currently affiliated with the Company, which party (i) is engaged in a business which is the business in which the Company is engaged or a similar or related business, and (ii) either (a) subsequently purchases equity securities of the Company (or securities convertible into equity securities of the Company), or (b) enters into an agreement for one or more of the following: the licensing by the Company of all or any portion of its technology to such third party, the licensing by such third party of all or any portion of its technology to the Company, or any other coordination of all or a portion of their respective business activities or operations by the Company and such third party. "Trading Day" means any day during which the Principal Trading Market shall be open for business. "Transfer Agent" means, at any time, the transfer agent for the Company's Common Stock. "Transaction Agreements" means this Bridge Loan Agreement, the Note, the Security Interest Agreement, the Joint Escrow Instructions, and the Warrant, and includes all ancillary documents referred to in those agreements. "Warrant" means the warrant issued to the Buyer as contemplated by Section 4 of this Agreement. "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrant. C. FORM OF PAYMENT; DELIVERY OF CERTIFICATES. (i) The Buyer shall pay the Purchase Price by delivering immediately available good funds in United States Dollars to the Escrow Agent no later than the date prior to the Closing Date. (ii) No later than the Closing Date, but in any event promptly following payment by the Buyer to the Escrow Agent of the Purchase Price, the Company shall deliver the Certificates, each duly executed on behalf of the Company and issued in the name of the Buyer, to the Escrow Agent. (iii) By signing this Agreement, each of the Buyer and the Company, subject to acceptance by the Escrow Agent, agrees to all of the terms and conditions of, and becomes a party to, the Joint Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. D. METHOD OF PAYMENT. Payment into escrow of the Purchase Price shall be made by wire transfer of funds to: Bank of New York 350 Fifth Avenue New York, New York 10001 ABA# 021000018 For credit to the account of Krieger & Prager LLP Account No.: [To be provided to the Buyer by Krieger & Prager LLP] Re: Ambient 1/06 Bridge Transaction For: [Name of Buyer] 2. LENDER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. The Buyer represents and warrants to, and covenants and agrees with, the Company as follows: A. Without limiting Buyer's right to sell the Securities pursuant to an effective registration statement or otherwise in compliance with the 1933 Act, the Buyer is purchasing the Securities for its own account for investment only and not with a view towards the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof. B. The Buyer is (i) an "accredited investor" as that term is defined in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3), (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its Affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and to evaluate the merits and risks of an investment in the Securities, and (iv) able to afford the entire loss of its investment in the Securities. C. All subsequent offers and sales of the Securities by the Buyer shall be made pursuant to registration of the relevant Securities under the 1933 Act or pursuant to an exemption from registration. D. The Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of the 1933 Act and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. E. The Buyer and its advisors, if any, have been furnished with or have been given access to all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer, including those set forth on any annex attached hereto. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management and have received complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, the Buyer has also had the opportunity to obtain and to review the Company's filings on EDGAR listed on ANNEX VI hereto (the documents listed on such Annex VI, to the extent available on EDGAR or otherwise provided to the Buyer as indicated on said Annex VI, collectively, the "Company's SEC Documents"). F. The Buyer understands that its investment in the Securities involves a high degree of risk. G. The Buyer hereby represents that, in connection with its purchase of the Securities, it has not relied on any statement or representation by the Company or any of its officers, directors and employees or any of its attorneys or agents, except as specifically set forth herein. H. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities. I. This Agreement and the other Transaction Agreements to which the Buyer is a party, and the transactions contemplated thereby, have been duly and validly authorized, executed and delivered on behalf of the Buyer and are valid and binding agreements of the Buyer enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 3. COMPANY REPRESENTATIONS, ETC. The Company represents and warrants to the Buyer as of the date hereof and as of the Closing Date that, except as otherwise provided in the Disclosure Letter or in the Company's SEC Documents: A. RIGHTS OF OTHERS AFFECTING THE TRANSACTIONS. There are no preemptive rights of any shareholder of the Company, as such, to acquire the Note, the Warrant or the Shares. No party has a currently exercisable right of first refusal which would be applicable to any or all of the transactions contemplated by the Transaction Agreements. B. STATUS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Incorporation and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have or result in a Material Adverse Effect. The Company has registered its stock and is obligated to file reports pursuant to Section 12 or Section 15(d) of the Securities and Exchange Act of 1934, as amended (the "1934 Act"). The Common Stock is quoted on the Principal Trading Market. The Company has received no notice, either oral or written, with respect to the continued eligibility of the Common Stock for such quotation on the Principal Trading Market, and the Company has maintained all requirements on its part for the continuation of such quotation. C. AUTHORIZED SHARES. (i) The authorized capital stock of the Company consists of 300,000,000 shares of Common Stock, $.001 par value per share, of which approximately 66,554,381 are outstanding as of January 18, 2006. (ii) There are no outstanding securities which are convertible into shares of Common Stock, whether such conversion is currently exercisable or exercisable only upon some future date or the occurrence of some event in the future. If any such securities are listed on the Disclosure Letter, the number or amount of each such outstanding convertible security and the conversion terms are set forth in said Disclosure Letter. (iii) All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Company has sufficient authorized and unissued shares of Common Stock as would be necessary to effect the issuance of the Shares on the Closing Date, were the Warrant fully exercised on that date. (iv) As of the Closing Date, the Shares shall have been duly authorized by all necessary corporate action on the part of the Company, and, when issued upon exercise of the Warrant, in accordance with its terms, will have been duly and validly issued, fully paid and non-assessable and will not subject the Holder thereof to personal liability by reason of being such Holder. D. TRANSACTION AGREEMENTS AND STOCK. This Agreement and each of the other Transaction Agreements, and the transactions contemplated thereby, have been duly and validly authorized by the Company, this Agreement has been duly executed and delivered by the Company and this Agreement is, and the Note, the Warrant and each of the other Transaction Agreements, when executed and delivered by the Company, will be, valid and binding agreements of the Company enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally. E. NON-CONTRAVENTION. The execution and delivery of this Agreement and each of the other Transaction Agreements by the Company, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated by this Agreement, the Note, the Warrant and the other Transaction Agreements do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the certificate of incorporation or by-laws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock except as herein set forth, or (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, except such conflict, breach or default which would not have or result in a Material Adverse Effect. F. APPROVALS. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the shareholders of the Company is required to be obtained by the Company for the issuance and sale of the Securities to the Buyer as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained. G. FILINGS. None of the Company's SEC Documents contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. Since November 1, 2004, the Company has timely filed all requisite forms, reports and exhibits thereto required to be filed by the Company with the SEC. H. ABSENCE OF CERTAIN CHANGES. Since the Last Audited Date, there has been no Material Adverse Effect, except as disclosed in the Company's SEC Documents. Since the Last Audited Date, except as provided in the Company's SEC Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to shareholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other tangible assets, or canceled any debts owed to the Company by any third party or claims of the Company against any third party, except in the ordinary course of business consistent with past practices; (v) waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any increases in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment. I. FULL DISCLOSURE. To the best of the Company's knowledge, there is no fact known to the Company (other than general economic conditions known to the public generally or as disclosed in the Company's SEC Documents) that has not been disclosed in writing to the Buyer that would reasonably be expected to have or result in a Material Adverse Effect. J. ABSENCE OF LITIGATION. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company before or by any governmental authority or nongovernmental department, commission, board, bureau, agency or instrumentality or any other person, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Agreements. The Company is not aware of any valid basis for any such claim that (either individually or in the aggregate with all other such events and circumstances) could reasonably be expected to have a Material Adverse Effect. There are no outstanding or unsatisfied judgments, orders, decrees, writs, injunctions or stipulations to which the Company is a party or by which it or any of its properties is bound, that involve the transaction contemplated herein or that, alone or in the aggregate, could reasonably be expect to have a Material Adverse Effect. K. ABSENCE OF EVENTS OF DEFAULT. Except as set forth in Section 3(e) hereof, (i) neither the Company nor any of its subsidiaries is in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material indenture, mortgage, deed of trust or other material agreement to which it is a party or by which its property is bound, and (ii) no Event of Default (or its equivalent term), as defined in the respective agreement to which the Company or its subsidiary is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (or its equivalent term) (as so defined in such agreement), has occurred and is continuing, which would have a Material Adverse Effect. L. ABSENCE OF CERTAIN COMPANY CONTROL PERSON ACTIONS OR EVENTS. To the Company's knowledge, none of the following has occurred during the past five (5) years with respect to a Company Control Person: (1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such Company Control Person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) Such Company Control Person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: (i) acting as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, any other Person regulated by the Commodity Futures Trading Commission ("CFTC") or engaging in or continuing any conduct or practice in connection with such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; (4) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such Company Control Person to engage in any activity described in paragraph (3) of this item, or to be associated with Persons engaged in any such activity; or (5) Such Company Control Person was found by a court of competent jurisdiction in a civil action or by the CFTC or SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the CFTC or SEC has not been subsequently reversed, suspended, or vacated. M. NO UNDISCLOSED LIABILITIES OR EVENTS. To the best of the Company's knowledge, the Company has no liabilities or obligations other than those disclosed in the Transaction Agreements or the Company's SEC Documents or those incurred in the ordinary course of the Company's business since the Last Audited Date, or which individually or in the aggregate, do not or would not have a Material Adverse Effect. No event or circumstance has occurred or exists with respect to the Company or its properties, business, operations, condition (financial or otherwise), or results of operations, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. There are no proposals currently under consideration or currently anticipated to be under consideration by the Board of Directors or the executive officers of the Company which proposal would (x) change the articles or certificate of incorporation or other charter document or by-laws of the Company, each as currently in effect, with or without shareholder approval, which change would reduce or otherwise adversely affect the rights and powers of the shareholders of the Common Stock or (y) materially or substantially change the business, assets or capital of the Company, including its interests in subsidiaries. N. NO INTEGRATED OFFERING. Neither the Company nor any of its Affiliates nor any Person acting on its or their behalf has, directly or indirectly, at any time since July 1, 2005, made any offer or sales of any security or solicited any offers to buy any security under circumstances that would eliminate the availability of the exemption from registration under Regulation D in connection with the offer and sale of the Securities as contemplated hereby. O. DILUTION. The number of shares issuable upon exercise of the Warrant may have a dilutive effect on the ownership interests of the other shareholders (and Persons having the right to become shareholders) of the Company. The Company's executive officers and directors fully understand the nature of the Securities being sold hereby and recognize that they have such a potential dilutive effect. The Company specifically acknowledges that its obligation to issue the Warrant Shares upon exercise of the Warrant is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company, and the Company will honor such obligation, including honoring every Notice of Exercise (as contemplated by the Warrant), unless the Company is subject to an injunction (which injunction was not sought by the Company) prohibiting the Company from doing so. P. FEES TO BROKERS, FINDERS AND OTHERS. The Company has taken no action which would give rise to any claim by any Person for brokerage commission, finder's fees or similar payments by Buyer relating to this Agreement or the transactions contemplated hereby. Notwithstanding the foregoing, the Company acknowledges that it has agreed to pay the Due Diligence Fees to the Due Diligence Reviewers (as those terms are defined in ANNEX VII hereto) for providing due diligence services to the Buyers in connection with the transactions contemplated hereby. Buyer shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this paragraph that may be due in connection with the transactions contemplated hereby. The Company shall indemnify and hold harmless each of the Buyer, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as and when incurred. Q. CONFIRMATION. The Company confirms that all statements of the Company contained herein shall survive acceptance of this Agreement by the Buyer for a period of eighteen (18) months from the Closing Date. The Company agrees that, if any events occur or circumstances exist prior to the Closing Date or the release of the Purchase Price to the Company which would make any of the Company's representations, warranties, agreements or other information set forth herein materially untrue or materially inaccurate as of such date, the Company shall immediately notify the Buyer (directly or through its counsel, if any) and the Escrow Agent in writing prior to such date of such fact, specifying which representation, warranty or covenant is affected and the reasons therefor. 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. A. TRANSFER RESTRICTIONS. (i) The Buyer acknowledges that (1) the Securities have not been and are not being registered under the provisions of the 1933 Act and, except as provided in the Registration Rights Provisions or otherwise included in an effective registration statement, the Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (3) neither the Company nor any other Person is under any obligation to register the Securities (other than pursuant to the Registration Rights Provisions) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder. (ii) In addition to the foregoing, and not in lieu thereof, the Buyer agrees that, without the express written consent of the Company in each instance, it will not transfer any of the Purchased Securities to any Person (x) which is known to the Buyer to be in substantially the same business as the Company or which the Company reasonably identifies as a competitor, or (y) which is known to be a subsidiary or affiliate of such a Person. B. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that, until such time as the relevant Shares have been registered under the 1933 Act, as contemplated by the Registration Rights Provisions and sold in accordance with an effective Registration Statement or otherwise in accordance with another effective registration statement, the certificates and other instruments representing any of the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of any such Securities): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. C. FILINGS. The Company undertakes and agrees to make all filings required to be made by it in connection with the sale of the Securities to the Buyer under the 1933 Act, the 1934 Act or any United States state securities laws and regulations thereof applicable to the Company, or by any domestic securities exchange or trading market, and, unless such filing is publicly available on the SEC's EDGAR system (via the SEC's web site at no additional charge), to provide a copy thereof to the Buyer promptly after such filing. D. REPORTING STATUS. So long as the Buyer beneficially owns any of the Securities and for at least twenty (20) Trading Days thereafter, the Company shall file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, shall take all reasonable action under its control to ensure that adequate current public information with respect to the Company, as required in accordance with Rule 144(c)(2) of the 1933 Act, is publicly available, and shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company will take all reasonable action under its control to maintain the continued listing and quotation and trading of its Common Stock (including, without limitation, all Registrable Securities) on the Principal Trading Market or a listing on the NASDAQ/Small Cap or National Markets and, to the extent applicable to it, will comply in all material respects with the Company's reporting, filing and other obligations under the by-laws or rules of the Principal Trading Market and/or the National Association of Securities Dealers, Inc., as the case may be, applicable to it at least through the date which is sixty (60) days after the Warrant has been exercised in full or has expired. E. USE OF PROCEEDS. The Company will use the proceeds received hereunder (i) first, as provided in ANNEX VII attached hereto, and (ii) then, for general corporate purposes. F. WARRANT. The Company agrees to issue to each Buyer on the Closing Date a transferable warrant (the "Warrant") for the purchase of the Buyer's Allocable Share of 3,000,000 shares of Common Stock. The exercise price of the Warrant will be equal to $0.15, subject to adjustment as provided in the Warrant and herein. The Warrant shall be exercisable initially on the Commencement Date specified in the Warrant and shall expire on the last day of the calendar month in which the fifth anniversary of the Closing Date occurs. Except as specified above, each Warrant shall generally be in the form annexed hereto as ANNEX IV, and shall have the benefit of the Registration Rights Provisions. G. CERTAIN AGREEMENTS. Any other provision of this Agreement or any of the other Transaction Agreements to the contrary notwithstanding, the Company shall not engage in any offers, sales or other transactions of its securities which would adversely affect the exemption from registration available for the transactions contemplated by the Transaction Agreements. H. PIGGY-BACK RIGHTS; RULE 144. (i) The Holder shall have piggy-back registration rights with respect to the Registrable Securities subject to the conditions set forth below. If the Company participates (whether voluntarily or by reason of an obligation to a third party) in the registration of any shares of the Company's stock (other than a registration on Form S-8 or on Form S-4), the Company shall give written notice thereof to the Holder and the Holder shall have the right, exercisable within ten (10) Trading Days after receipt of such notice, to demand inclusion of all or a portion of the Holder's Registrable Securities in such registration statement. If the Holder exercises such election, the Registrable Securities so designated shall be included in the registration statement (without any holdbacks) at no cost or expense to the Holder (other than any commissions, if any, relating to the sale of Holder's shares). The Holder's rights under this Section 4(h)(i) shall expire at such time as such Holder can sell all of such Holder's remaining Registrable Securities under Rule 144 (as defined below) without volume or other restrictions or limit. (ii) With a view to making available to the Holder the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit Holder to sell securities of the Company to the public without registration (collectively, "Rule 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; and (c) furnish to the Holder so long as such party owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) if not available on the SEC's EDGAR system, a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Holder to sell such securities pursuant to Rule 144 without registration; and (d) at the request of any Holder then holding Registrable Securities, give the Transfer Agent instructions (supported by an opinion of Company counsel, if required or requested by the Transfer Agent) to the effect that, upon the Transfer Agent's receipt from such Holder of (i) a certificate (a "Rule 144 Certificate") certifying (A) that the Holder's holding period (as determined in accordance with the provisions of Rule 144) for the Shares which the Holder proposes to sell (the "Securities Being Sold") is not less than one (1) year and (B) as to such other matters as may be appropriate in accordance with Rule 144 under the Securities Act, and (ii) an opinion of counsel acceptable to the Company (for which purposes it is agreed that Krieger & Prager LLP shall be deemed acceptable if not given by Company counsel) that, based on the Rule 144 Certificate, Securities Being Sold may be sold pursuant to the provisions of Rule 144, even in the absence of an effective registration statement, the Transfer Agent is to effect the transfer of the Securities Being Sold and issue to the buyer(s) or transferee(s) thereof one or more stock certificates representing the transferred Securities Being Sold without any restrictive legend and without recording any restrictions on the transferability of such shares on the Transfer Agent's books and records (except to the extent any such legend or restriction results from facts other than the identity of the relevant Holder, as the seller or transferor thereof, or the status, including any relevant legends or restrictions, of the shares of the Securities Being Sold while held by the Buyer). If the Transfer Agent reasonably requires any additional documentation at the time of the transfer, the Company shall deliver or cause to be delivered all such reasonable additional documentation as may be necessary to effectuate the issuance of an unlegended certificate. (iii) Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the registration statement, the Company notifies the Holder in writing of the existence of a Potential Material Event (as defined below), the Holder shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until the Holder receives written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event. The term "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company; or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. I. AVAILABLE SHARES. The Company shall have at all times authorized and reserved for issuance, free from preemptive rights, a number of shares (the "Minimum Available Shares") at least equal to one hundred percent (100%) of the number of shares which would be issuable upon exercise of the outstanding Warrants held by all Holders (in each case, whether such Warrant were originally issued to the Holder, the Buyer or to any other party). For the purposes of such calculations, the Company should assume that the Warrant were then exercisable without regard to any restrictions which might limit any Holder's right to exercise the Warrant held by any Holder. J. PUBLICITY, FILINGS, RELEASES, ETC. Each of the parties agrees that it will not disseminate any information relating to the Transaction Agreements or the transactions contemplated thereby, including issuing any press releases, holding any press conferences or other forums, or filing any reports (collectively, "Publicity"), without giving the other party reasonable advance notice and an opportunity to comment on the contents thereof. Neither party will include in any such Publicity any statement or statements or other material to which the other party reasonably objects, unless in the reasonable opinion of counsel to the party proposing such statement, such statement is legally required to be included. In furtherance of the foregoing, the Company will provide to the Buyer drafts of the applicable text of the first filing of a Current Report on Form 8-K or a Quarterly or Annual Report on Form 10-Q or 10-K intended to be made with the SEC which refers to the Transaction Agreements or the transactions contemplated thereby as soon as practicable (but at least two (2) Trading Days before such filing will be made) and will not include in such filing any statement or statements or other material to which the other party reasonably objects, unless in the reasonable opinion of counsel to the party proposing such statement, such statement is legally required to be included. Notwithstanding the foregoing, each of the parties hereby consents to the inclusion of the text of the Transaction Agreements in filings made with the SEC as well as any descriptive text accompanying or part of such filing which is accurate and reasonably determined by the Company's counsel to be legally required. Notwithstanding, but subject to, the foregoing provisions of this Section 4(j), the Company will, after the Closing Date, promptly issue a press release and file a Current Report on Form 8-K or, if appropriate, a quarterly or annual report on the appropriate form, referring to the transactions contemplated by the Transaction Agreements. 5. TRANSFER AGENT INSTRUCTIONS. A. The Company warrants that, with respect to the Securities, other than the stop transfer instructions to give effect to Section 4(a) hereof, it will give the Transfer Agent no instructions inconsistent with instructions to issue Common Stock from time to time upon exercise of the Warrant in such amounts as specified from time to time by the Company to the Transfer Agent, bearing the restrictive legend specified in Section 4(b) of this Agreement prior to registration of the Shares under the 1933 Act, registered in the name of the Buyer or its nominee and in such denominations to be specified by the Holder in connection with each exercise of the Warrant. Except as so provided, the Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the other Transaction Agreements. Nothing in this Section shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the 1933 Act, the Company shall (except as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer of the Securities and, in the case of the Warrant Shares, promptly instruct the Transfer Agent to issue one or more certificates for Common Stock without legend in such name and in such denominations as specified by the Buyer. B. Subject to the provisions of this Agreement, the Company will permit the Buyer to exercise the Warrant in the manner contemplated by the Warrant. C. (i) The Company understands that a delay in the issuance of the Shares of Common Stock beyond the Delivery Date (as defined in the Warrant) could result in economic loss to the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay late payments to the Buyer for late issuance of Shares upon exercise in accordance with the following schedule (where "No. Business Days Late" refers to the number of Trading Days which is beyond two (2) Trading Days after the Delivery Date):(3) Late Payment For Each $10,000 of Exercise Price of Warrant No. Business Days Late Being Exercised ---------------------- --------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000 + $200 for each Business Day Late beyond 10 days The Company shall pay any payments incurred under this Section in immediately available funds upon demand as the Buyer's exclusive remedy (other than the following provisions of this Section 5(c)) for such delay. Furthermore, in addition to any other remedies which may be available to the Buyer, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock by close of business on the tenth Trading Day after the Delivery Date, the Buyer will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company, whereupon the Company and the Buyer shall each be restored to their respective positions - ---------------------------- (3) Example: Notice of Exercise is delivered on Monday, May 1, 2006. The Delivery Date would be Thursday, May 4 (the third Trading Day after such delivery). If the certificate is delivered by Monday, May 8 (2 Trading Days after the Delivery Date), no payment under this provision is due. If the certificates are delivered on May 9, that is 1 "Business Day Late" in the table below; if delivered on May 16, that is 6 "Business Days Late" in the table. immediately prior to delivery of such Notice of Exercise; provided, however, that an amount equal to any payments contemplated by this Section 5(c) which have accrued through the date of such revocation notice shall remain due and owing to the Exercising Holder notwithstanding such revocation. (ii) If, by the close of business on the fifth Trading Day after the Delivery Date, the Company fails for any reason to deliver the Shares to be issued upon exercise of the Warrant and after such fifth Trading Day, the Holder of the Warrant being exercised (an "Exercising Holder") purchases, in a BONA FIDE arm's-length transaction, shares of Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by the Exercising Holder (the "Sold Shares"), which delivery such Exercising Holder anticipated to make using the Shares to be issued upon such exercise (a "Buy-In"), the Exercising Holder shall have the right, in addition to and not in lieu of all other amounts contemplated in other provisions of the Transaction Agreements, including, but not limited to, the provisions of the immediately preceding Section 5(c)(i), the Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the amount equal to the number of Sold Shares multiplied by the excess, if any, of (x) the Exercising Holder's total purchase price per share (including brokerage commissions, if any) for the Covering Shares over (y) the net proceeds per share (after brokerage commissions, if any) received by the Exercising Holder from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Exercising Holder in immediately available funds immediately upon demand by the Exercising Holder. By way of illustration and not in limitation of the foregoing, if the Exercising Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required to pay to the Exercising Holder will be $1,000. D. The provisions of this paragraph apply on or after the effective date of the registration statement covering the resale of the Shares. After such effective date, the Company will issue Shares without legend and without transfer restrictions on the books of the Transfer Agent, and, at the request of the Holder, will use it best efforts to have previously issued certificates representing the Shares re-issued without legend and without transfer restrictions on the books of the Transfer Agent. In lieu of delivering physical certificates representing the Common Stock issuable upon exercise of a Warrant or at the request of the Holder with respect to any Shares previously issued, provided the Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the Holder and its compliance with the provisions contained in this paragraph, so long as the certificates therefor do not bear a legend and the Holder thereof is not obligated to return such certificate for the placement of a legend thereon, the Company shall use its best efforts to cause the Transfer Agent to electronically transmit to the Holder the Common Stock issuable upon exercise of the Warrant or in replacement of any Shares previously issued by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system. In connection therewith, it will be the Holder's obligation to obtain formal requirements, such as medallion guaranty, if necessary. E. The Company shall assume any fees or charges of the Transfer Agent or Company counsel regarding (i) the removal of a legend or stop transfer instructions with respect to Registrable Securities, and (ii) the issuance of certificates or DTC registration to or in the name of the Holder or the Holder's designee or to a transferee as contemplated by an effective Registration Statement. F. The Holder of the Warrant shall be entitled to exercise its exercise privilege with respect to the Warrant notwithstanding the commencement of any case under 11 U.S.C. ss.101 ET SEQ. (the "Bankruptcy Code"). In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. ss.362 in respect of such holder's exercise privilege. The Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. ss.362 in respect of the exercise of the Warrant. The Company agrees, without cost or expense to such Holder, to take or to consent to any and all action necessary to effectuate relief under 11 U.S.C. ss.362. G. The Company will authorize the Transfer Agent to give information relating to the Company directly to the Holder or the Holder's representatives upon the request of the Holder or any such representative, to the extent such information relates to (i) the status of shares of Common Stock issued or claimed to be issued to the Holder in connection with a Notice of Exercise, or (ii) the aggregate number of outstanding shares of Common Stock of all shareholders (as a group, and not individually) as of a current or other specified date. At the request of the Holder, the Company will provide the Holder with a copy of the authorization so given to the Transfer Agent. 6. CLOSING DATE. A. The Closing Date shall occur on the date which is the first Trading Day after each of the conditions contemplated by Sections 7 and 8 hereof shall have either been satisfied or been waived by the party in whose favor such conditions run. B. The closing of the Transactions shall occur on the Closing Date at the offices of the Escrow Agent and shall take place no later than 3:00 P.M., New York time, on such day or such other time as is mutually agreed upon by the Company and the Buyer. C. Notwithstanding anything to the contrary contained herein, the Escrow Agent will be authorized to release the Escrow Funds to the Company and to others and to release the other Escrow Property on the Closing Date upon satisfaction of the conditions set forth in Sections 7 and 8 hereof and as provided in the Joint Escrow Instructions. 7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Buyer understands that the Company's obligation to sell the Note and the Warrant to the Buyer pursuant to this Agreement on the Closing Date is conditioned upon: A. The execution and delivery of this Agreement by the Buyer; B. Delivery by the Buyer to the Escrow Agent of good funds as payment in full of an amount equal to the Purchase Price in accordance with this Agreement; C. The accuracy on such Closing Date of the representations and warranties of the Buyer contained in this Agreement, each as if made on such date, and the performance by the Buyer on or before such date of all covenants and agreements of the Buyer required to be performed on or before such date; and D. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained. 8. CONDITIONS TO THE LENDER'S OBLIGATION TO PURCHASE. The Company understands that the Buyer's obligation to purchase the Note and the Warrant on the Closing Date is conditioned upon: A. The execution and delivery of this Agreement and the other Transaction Agreements by the Company; B. Delivery by the Company to the Escrow Agent of the Certificates in accordance with this Agreement; C. The accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained in this Agreement, each as if made on such date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date; D. On the Closing Date, the Buyer shall have received an opinion of counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to the Buyer, substantially to the effect set forth in ANNEX III attached hereto; E. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained; and F. From and after the date hereof to and including the Closing Date, each of the following conditions will remain in effect: (i) the trading of the Common Stock shall not have been suspended by the SEC or on the Principal Trading Market; (ii) trading in securities generally on the Principal Trading Market shall not have been suspended or limited; (iii) no minimum prices shall been established for securities traded on the Principal Trading Market; and (iv) there shall not have been any material adverse change in any financial market. 9. JURY TRIAL WAIVER. The Company and the Buyer hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the Parties hereto against the other in respect of any matter arising out or in connection with the Transaction Agreements. 10. GOVERNING LAW: MISCELLANEOUS. A. (i) This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the City of Wilmington or the state courts of the State of Delaware sitting in the City of Wilmington in connection with any dispute arising under this Agreement or any of the other Transaction Agreements and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions or to any claim that such venue of the suit, action or proceeding is improper. To the extent determined by such court, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Agreements. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law. (ii) The Company and the Buyer acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement or the other Transaction Agreements were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and the other Transaction Agreements and to enforce specifically the terms and provisions hereof and thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. B. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. C. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. D. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. E. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. F. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. G. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. H. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. I. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. J. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. K. All dollar amounts referred to or contemplated by this Agreement or any other Transaction Agreement shall be deemed to refer to US Dollars, unless otherwise explicitly stated to the contrary. 11. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of (a) the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile transmission, (b) the fifth Trading Day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or (c) the third Trading Day after mailing by domestic or international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days' advance written notice similarly given to each of the other parties hereto): COMPANY: At the address set forth at the head of this Agreement. Attn: President Telephone No.: (617) 332-0004 Telecopier No.: (617) 332-7260 with a copy to: Aboudi & Brounstein Attn: David Aboudi, Esq. Rechov Gavish 3, POB 2432 Kfar Saba Industrial Zone 44641 Israel Telephone No.: (011-972-9) 764-4833 Telecopier No.: (011-972-9) 764-4834 LENDER: At the address set forth on the signature page of this Agreement. with a copy to: Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 Attn: Ronald J. Nussbaum, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 ESCROW AGENT: Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel Krieger, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the Buyer's representations and warranties herein shall survive the execution and delivery of this Agreement and the delivery of the Certificates and the payment of the Purchase Price, and shall inure to the benefit of the Buyer and the Company and their respective successors and assigns. [Balance of page intentionally left blank] IN WITNESS WHEREOF, with respect to the Purchase Price specified below, this Agreement has been duly executed by the Buyer and the Company as of the date set first above written. PURCHASE PRICE: $1,500,000 BUYER: ------ ________________________________ Double U Master Fund LP Address Printed Name of Buyer ________________________________ By: ____________________________ Telecopier No. _________________ (Signature of Authorized Person) ________________________________________ ________________________________ Printed Name and Title Jurisdiction of Incorporation or Organization COMPANY ------- AMBIENT CORPORATION By: /s/ John J. Joyce (Signature of Authorized Person) John J. Joyce President and Chief Executive Officer Printed Name and Title ANNEX I FORM OF NOTE ANNEX II JOINT ESCROW INSTRUCTIONS ANNEX III OPINION OF COUNSEL OF COMPANY ANNEX IV FORM OF WARRANT ANNEX V SECURITY INTEREST AGREEMENT ANNEX VI COMPANY'S SEC DOCUMENTS AVAILABLE ON EDGAR ANNEX VII USE OF PROCEEDS EX-10.9 5 tex10_9-9094.txt EX-10.9 EXHIBIT 10.9 SECURITY INTEREST AGREEMENT SECURITY INTEREST AGREEMENT ("Security Interest Agreement"), dated as of January 18, 2006, by and among the persons set forth on Schedule 1 (each a "Secured Party" and collectively, the "Secured Parties"), AMBIENT CORPORATION, a Delaware corporation with headquarters located at 79 Chapel Street, Newton, Massachusetts 02458 (the "Company" or the "Debtor"), and KRIEGER & PRAGER, LLP, as agent for the Secured Parties (the "Agent"). RECITALS A. Reference is made to (i) that certain Bridge Loan Agreement of even date herewith (the "Bridge Loan Agreement") to which the Debtor and each of the Secured Party are parties, and (ii) the Transaction Agreements, including, without limitation, the Notes. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the relevant Transaction Agreements. B. Pursuant to the Notes, the Debtor has certain obligations to each of the Secured Parties (all such obligations, the "Obligations"). C. In order to induce each of the Secured Parties to execute and deliver the Transaction Agreements and to make the advances to the Debtor contemplated thereby, and as contemplated by the Bridge Loan Agreement and the Notes, the Debtor has agreed to grant to each of the Secured Parties a security interest in the Collateral (as defined below) to secure the due and punctual fulfillment of the Obligations. Each of the Secured Parties is willing to enter into the Bridge Loan Agreement and the other Transaction Agreements only upon receiving the Debtor's execution of this Security Interest Agreement. NOW, THEREFORE, in consideration of the premises, the mutual covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. GRANT OF SECURITY INTEREST. (a) In order to secure the due and punctual fulfillment of the Obligations, the Debtor hereby grants, conveys, transfers and assigns to the Secured Parties (and to each of them based on their respective Allocable Shares, as defined below) a continuing security interest in the Collateral. (b) For purposes of this Agreement, the following terms shall have the meanings indicated: "COLLATERAL" is all right, title and interest of Debtor in and to all of the following, whether now owned or hereafter arising or acquired and wherever located: All assets of the Debtor, including, but not limited to: all personal and fixture property of every kind and nature, including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts (including accounts receivable), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, and all general intangibles (including all payment intangibles); all Equipment; all Intellectual Property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above, and all Debtor's books relating to any and all of the above and includes, without limiting the generality of the above, the Equipment (and related IP) listed in Exhibit B. "CODE" is the Uniform Commercial Code, in effect in the State of Delaware as in effect from time to time. "COPYRIGHTS" are all copyrights, copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held. "EQUIPMENT" has the meaning set forth in the Code and includes all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Debtor has any interest. "INTELLECTUAL PROPERTY" is all present and future (a) Copyrights, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) Patents; (e) Trademarks; (f) computer software and computer software products; (g) designs and design rights; (h) technology; (i) all claims for damages by way of past, present and future infringement of any of the rights included above; (j) all licenses or other rights to use any property or rights of a type described above. "PATENTS" are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "TRADEMARKS" are trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Debtor connected with and symbolized by any such trademarks. (c) The security interests granted pursuant to this Section (the "Security Interests") are granted as security only and shall not subject any of the Secured Parties to, or transfer or in any way affect or modify, any obligation or liability of the Debtor under any of the Collateral or any transaction which gave rise thereto. (d) The term "Allocable Share" means, with respect to each Secured Party (if there is more than one Secured Party), as of the relevant date, the fraction equal to (i) the outstanding principal of the Notes then held by such Secured Party, divided by (ii) the aggregate outstanding principal of the Notes then held by all Secured Parties. SECTION 2. FILING; FURTHER ASSURANCES. (a) The Debtor will, at its expense, cause to be searched the public records with respect to the Collateral and will execute, deliver, file and record (in such manner and form as each of the Secured Parties may require), or permit each of the Secured Parties to file and record, as its attorney in fact, any financing statement, any carbon, photographic or other reproduction of a financing statement or this Security Agreement (which shall be sufficient as a financing statement hereunder), any specific assignments or other paper that may be reasonably necessary or desirable, or that the Secured Parties may request, in order to create, preserve, perfect or validate any Security Interest or to enable each of the Secured Parties to exercise and enforce its rights hereunder with respect to any of the Collateral. The Debtor hereby appoints each Secured Party as Debtor's attorney-in-fact to execute in the name and behalf of Debtor such additional financing statements as such Secured Party may request. (b) Each Secured Party has designated an Agent as provided in the Section titled "Agent" below. Among other things, such Agent shall be agent of each such Secured Party for execution of and identification on any financing statement or similar instrument referring to or describing the Collateral. (c) The Agent is authorized to execute and file any and all financing statements desired to be filed by the relevant Secured Party to reflect the security interest in the Collateral in any and all jurisdictions. For such purposes, the Debtor irrevocably appoints the Agent (acting by Samuel M. Krieger and Ronald Nussbaum, or either one of them), with full power of substitution to execute and file such financing statements naming the Debtor as debtor thereon. SECTION 3. REPRESENTATIONS AND WARRANTIES OF DEBTOR. The Debtor hereby represents and warrants to each Secured Party (a) that, except as set forth in Exhibit A attached hereto, the Debtor is, or to the extent that certain of the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral free from any adverse lien, security interest or encumbrance; (b) that except for such financing statements as may be described on Exhibit A attached hereto and made a part hereof, no financing statement covering the Collateral is on file in any public office, other than the financing statements filed pursuant to this Security Agreement; and (c) that all additional information, representations and warranties contained in Exhibit B attached hereto and made a part hereof are true, accurate and complete on the date hereof. SECTION 4. COVENANTS OF DEBTOR. The Debtor hereby covenants and agrees with each Secured Party that the Debtor (a) will, at the Debtor's sole cost and expense, defend the Collateral against all claims and demands of all persons at any time claiming any interest therein junior to the Secured Party's interest; (b) will provide the Secured Party with prompt written notice of (i) any change in the chief executive officer of the Debtor or the office where the Debtor maintains its books and records pertaining to the Collateral; (ii) the movement or location of all or a material part of the Collateral to or at any address other than as set forth in said Exhibit B; and (iii) any facts which constitute a Debtor Event of Default (as such term is defined below), or which, with the giving of notice and/or the passage of time, could or would constitute a Debtor Event of Default, pursuant to the Section titled "Debtor Events of Default" below; (c) will promptly pay any and all taxes, assessments and governmental charges upon the Collateral prior to the date penalties are attached thereto, except to the extent that such taxes, assessments and charges shall be contested in good faith by the Debtor; (d) will immediately notify the Secured Party of any event causing a substantial loss or diminution in the value of all or any material part of the Collateral and the amount or an estimate of the amount of such loss or diminution; (e) will have and maintain adequate insurance at all times with respect to the Collateral, for such other risks as are customary in the Debtor's industry for the respective items included in the Collateral, such insurance to be payable to the Secured Party and the Debtor as their respective interests may appear, and shall provide for a minimum of ten (10) days prior written notice of cancellation to the Secured Party, and Debtor shall furnish the Secured Party with certificates or other evidence satisfactory to the Secured Party of compliance with the foregoing insurance provisions; (f) will not sell or offer to sell or otherwise assign, transfer or dispose of the Collateral or any interest therein, without the prior written consent of the Secured Party, except in the ordinary course of business; (g) will keep the Collateral free from any adverse lien, security interest or encumbrance (except for encumbrances specified in Exhibit A attached hereto) and in good order and repair, reasonable wear and tear excepted, and will not waste or destroy the Collateral or any part thereof; and (h) will not use the Collateral in material violation of any statute or ordinance the violation of which could materially and adversely affect the Debtor's business. SECTION 5. RECORDS RELATING TO COLLATERAL. The Debtor will keep its records concerning the Collateral at its offices designated in the caption of this Security Interest Agreement or at such other place or places of business of which the Secured Party shall have been notified in writing no less than ten (10) days prior thereto. The Debtor will hold and preserve such records and chattel paper and will permit representatives of the Secured Party at any time during normal business hours upon reasonable notice to examine and inspect the Collateral and to make abstracts from such records and chattel paper, and will furnish to the Secured Party such information and reports regarding the Collateral as the Secured Party may from time to time reasonably request. SECTION 6. GENERAL AUTHORITY. From and during the term of any Debtor Event of Default, the Debtor hereby appoints the Secured Party the Debtor's lawful attorney, with full power of substitution, in the name of the Debtor, for the sole use and benefit of the Secured Party, but at the Debtor's expense, to exercise, all or any of the following powers with respect to all or any of the Collateral: (a) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due; (b) to receive, take, endorse, assign and deliver all checks, notes, drafts, documents and other negotiable and non- negotiable instruments and chattel paper taken or received by the Secured Party; (c) to settle, compromise, prosecute or defend any action or proceeding with respect thereto; (d) to sell, transfer, assign or otherwise deal in or with the same or the proceeds thereof or the related goods securing the Collateral, as fully and effectually as if the Secured Party were the sole and absolute owner thereof; (e) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto; and (f) to discharge any taxes, liens, security interests or other encumbrances at any time placed thereon; provided that the Secured Party or the Agent shall give the Debtor not less than ten (10) business days prior written notice of the time and place of any sale or other intended disposition of any of the Collateral. The exercise by the Secured Party or the Agent of or failure to so exercise any authority granted herein shall in no manner affect Debtor's liability to the Secured Party, and provided, further, that the Secured Party and the Agent shall be under no obligation or duty to exercise any of the powers hereby conferred upon them and they shall be without liability for any act or failure to act in connection with the collection of, or the preservation of, any rights under any of the Collateral. SECTION 7. DEBTOR EVENTS OF DEFAULT. (a) The Debtor shall be in default under this Security Agreement upon the occurrence of an Event of Default (as defined in the Note) by the Debtor (a "Debtor Event of Default"). (b) The Debtor hereby irrevocably agrees that, upon the occurrence of a Debtor Event of Default, the Debtor shall be deemed to have consented to an immediate conveyance and transfer to the Secured Party of the copyrights and all other rights the Debtor may have in the software included in the Collateral, including, but not necessarily limited to, the software identified in Schedule B attached hereto. In furtherance of the foregoing, and not in limitation thereof, the Debtor will, upon the occurrence of a Debtor Event of Default, deliver to the Secured Party copies of the source code of the relevant software, with accompanying written assignment of the software to the Secured Party. Without limiting the foregoing, such source code and assignment shall be in form sufficient to enable the Secured Party to register the software in Secured Party's name with the Copyright Register. The Debtor hereby agrees to take all steps necessary or appropriate, as requested by the Secured Party, to effectuate and reflect such conveyance and transfer or assignment to Secured Party. In all events, such conveyance, transfer or assignment shall be deemed to vest title in such software in the Secured Party. (c) In furtherance of the foregoing and not in limitation thereof, the Debtor acknowledges and agrees that the Secured Party may, upon the occurrence of a Debtor Event of Default, seek the immediate entry of a preliminary injunction prohibiting the Debtor's use of such software in any shape, way or manner, including, but not necessarily limited to, through the sale of products that use any of such software, and the Debtor hereby irrevocably agrees that it will not contest an application seeking entry of a preliminary injunction and that it will accept the entry of such injunction. SECTION 8. REMEDIES UPON DEBTOR EVENT OF DEFAULT. If any Debtor Event of Default shall have occurred, then in addition to the provisions of Section 7 hereof, the Secured Party may exercise all the rights and remedies of a secured party under the Code. The Secured Party may require the Debtor to assemble all or any part of the Collateral and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient. The Secured Party shall give the Debtor ten (10) business days prior written notice of the Secured Party's intention to make any public or private sale or sale at a broker's board or on a securities exchange of the Collateral. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Secured Party, in its sole discretion, may determine. The Secured Party shall not be obligated to make any such sale pursuant to any such notice. The Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be adjourned. The Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. SECTION 9. APPLICATION OF COLLATERAL AND PROCEEDS. The proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied in the following order of priorities: (a) first, to pay the reasonable expenses of such sale or other realization, including, without limitation, reasonable attorneys' fees, and all expenses, liabilities and advances reasonably incurred or made by the Secured Party in connection therewith, and any other unreimbursed expenses for which the Secured Party is to be reimbursed pursuant to the Section titled "Expenses; Secured Party's Lien" below; (b) second, to the payment of the Obligations in such order of priority as the Secured Party, in its sole discretion, shall determine; and (c) finally, to pay to the Debtor, or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from such proceeds. SECTION 10. EXPENSES; SECURED PARTY'S LIEN. If any Debtor Event of Default shall have occurred, the Debtor will forthwith upon demand pay to the Secured Party: (a) the amount which the Secured Party may have been required to pay to free any of the Collateral from any lien thereon; and (b) the amount of any and all reasonable out-of-pocket expenses, including, without limitation, the reasonable fees and disbursements of its counsel, and of any agents not regularly in its employ, which the Secured Party may incur in connection with the collection, sale or other disposition of any of the Collateral. SECTION 11. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL. Upon the payment, performance or other satisfaction in full of all the Obligations, the Security Interests shall terminate and all rights to the Collateral shall revert to the Debtor. Upon any such termination of the Security Interests or release of Collateral, the Secured Party will, at the Debtor's expense, to the extent permitted by law, execute and deliver to the Debtor such documents as the Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. SECTION 12. NOTICES. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (a) personally served, (b) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (c) delivered by reputable air courier service with charges prepaid, or (d) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice given in accordance herewith. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (i) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (ii) on the second business day following the date of mailing by express courier service or on the fifth business day after deposited in the mail, in each case, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be for (i) the Debtor as provided in the Bridge Loan Agreement for notices to the Company, (ii) for each Secured Party as provided in the Bridge Loan Agreement for notices to the Buyer and (iii) for the Agent as provided in the Bridge Loan Agreement for notices to the Escrow Agent. Any party hereto may from time to time change its address or facsimile number for notices under this Section in the manner contemplated by the Bridge Loan Agreement. SECTION 13. AGENT. (a) Anything in the other provisions of this Security Interest Agreement to the contrary notwithstanding, the Secured Party may designate another entity to act as agent (the "Agent") for the Secured Party with respect to any one or more of the rights of Secured Party hereunder, including, but not necessarily limited to, the right to hold the security interest and/or be named as secured party (as agent for the Secured Party) in any filed financing statement and to take action in the name and stead of the Secured Party hereunder. Such designation may be made with or without power of substitution, Such designation shall remain in effect until canceled by the Secured Party, as provided herein; provided, however, that such cancellation shall not affect the validity of any action theretofore taken by such agent pursuant to this Security Interest Agreement. The Debtor acknowledges and agrees to honor such designation and acknowledges that the Agent is acting as the agent of the Secured Party and not as a principal. (b) Each Secured Party hereby confirms that the Secured Party has designated Krieger & Prager, LLP (acting by Samuel M. Krieger and Ronald Nussbaum, or either one of them), as its initial Agent, with full right of substitution. (c) If there is more than one Secured Party, the Agent shall act as agent for all Secured Parties. Any revocation of the authority of the Agent or the designation of an alternate Agent shall be done only by Secured Parties who represent a Majority in Interest of the Holders (as defined below) at that time; provided that at all times all Secured Parties shall be represented by one and the same Agent. The term "Majority in Interest of the Holders" means, as of the relevant date, one or more Secured Parties whose respective outstanding principal amounts of the Notes held by each of them, as of such date, aggregate more than fifty percent (50%) of the aggregate outstanding principal amounts of the outstanding Notes held by all Secured Parties on that date. (d) Reference is made to the provisions of Sections 2 through 15, inclusive, of the Joint Escrow Instructions. All such provisions are incorporated herein by reference, as if set forth herein in full, except that, for such purposes, the references therein to (i) the "Escrow Agent" shall be deemed to be references to the "Agent" under this Security Interest Agreement, (ii) the "Company" shall be deemed to be references to the Debtor under this Security Interest Agreement, and (iii) the "Buyer" shall be deemed to be references to the relevant Secured Party under this Security Interest Agreement. SECTION 14. MISCELLANEOUS. (a) No failure on the part of the Secured Party to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy under this Security Interest Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by the Secured Party of any right, power or remedy under this Security Interest Agreement preclude the exercise, in whole or in part, of any other right, power or remedy. The remedies in this Security Interest Agreement are cumulative and are not exclusive of any other remedies provided by law. Neither this Security Interest Agreement nor any provision hereof may be changed, waived, discharged or terminated orally but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (b) The execution and delivery by Debtor of this Security Interest Agreement and all documents delivered in connection herewith have been duly and validly authorized by all necessary corporate action of Debtor and this Agreement and all documents delivered in connection herewith have been duly and validly executed and delivered by Debtor. The execution and delivery by Debtor of this Security Interest Agreement and all documents delivered in connection herewith will not result in a breach or default of or under the Certificate of Incorporation, By-laws or any agreement, contract or indenture of Debtor. This Security Interest Agreement and all documents delivered in connection therewith are legal, valid and binding obligations of Debtor enforceable against Debtor in accordance with their terms. (c) In the event that any action is taken by Debtor or Secured Party in connection with the this Security Interest Agreement, or any related document or matter, the losing party in such legal action, in addition to such other damages as he or it may be required to pay, shall pay reasonable attorneys' fees to the prevailing party. SECTION 15. SEPARABILITY. If any provision hereof shall prove invalid or unenforceable in any jurisdiction whose laws shall be deemed applicable, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Secured Party. SECTION 16. GOVERNING LAW. (a) This Security Interest Agreement shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the City of Wilmington or (except with respect to issues relating to the copyright in and to the software, as contemplated by Section 7 hereof, which shall exclusively be in the aforesaid federal courts) or of the state courts of the State of Delaware sitting in the City of Wilmington in connection with any dispute arising under this Security Interest Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON COVENIENS, to the bringing of any such proceeding in such jurisdictions or to any claim that such venue of the suit, action or proceeding is improper. To the extent determined by such court, the Debtor shall reimburse the Secured Party for any reasonable legal fees and disbursements incurred by the Secured Party in enforcement of or protection of any of its rights under this Security Interest Agreement. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law. (b) The Debtor and the Secured Party acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Security Interest Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Security Interest Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. SECTION 16. JURY TRIAL WAIVER. The Debtor and the Secured Party hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Note or this Security Interest Agreement. SECTION 17. ASSIGNMENT. Only in connection with the transfer of all of the rights under the Transaction Agreements in accordance with their terms, a Secured Party may assign or transfer the whole of its security interest granted hereunder. Any transferee of the Collateral shall be vested with all of the rights and powers of the assigning Secured Party hereunder with respect to the Collateral. SECTION 18.WAIVER. The Debtor waives any right that it may have to require Secured Party to proceed against any other person, or proceed against or exhaust any other security, or pursue any other remedy Secured Party may have. IN WITNESS WHEREOF, the Parties have executed this Security Interest Agreement as of the day, month and year first above written. SECURED PARTY: SECURED PARTIES (named in Schedule 1): By: Krieger & Prager LLP, as their agent By:/S/ _____________ DEBTOR: AMBIENT CORPORATION By: John J. Joyce President AGENT: KRIEGER & PRAGER, LLP By:/s/ Sam Krieger SCHEDULE 1 The Secured Parties are: - ----------------------------------- -------------------------------------------- Name Address - ----------------------------------- -------------------------------------------- Double U Master Fund LP Harbour House, Waterfront Drive Road Town, Tortola, BVI - ----------------------------------- -------------------------------------------- EX-23.1 6 tex23_1-9094.txt EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM We consent to the incorporation by reference in the registration statement of Ambient Corporation on Form S-8 (No. 333-112569) of our report dated February 3, 2006 with respect to our audits of the consolidated financial statements of Ambient Corporation and its Subsidiaries as at and for the years ended December 31, 2005 and 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph related to the Company's ability to continue as a going concern) which report is included in this Annual Report on Form 10-KSB. /s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C. Saddle Brook NJ February 24, 2006 EX-31 7 tex31-9094.txt EX-31 EXHIBIT 31 RULE 13a-14(a) / 15d-14(a) CERTIFICATION I, John J. Joyce, Chief Executive Officer of Ambient Corporation, (the "Company") certify that: 1. I have reviewed this Annual Report on Form 10-KSB for the year ended December 31, 2005. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the period presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Company is made known to me by others within the Company, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the Company's internal control over financial reporting that occurred during the Company's 2005 fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of Company's board of directors (or persons fulfilling the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. February 24, 2006 /S/ JOHN J. JOYCE JOHN J. JOYCE PERSIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER EX-32 8 tex32-9094.txt EX-32 EXHIBIT 32 SECTION 1350 CERTIFICATION In connection with the Annual Report of Ambient Corporation (the "Company") on Form 10-KSB for the Year ended December 31, 2005 (the "Report") filed with the Securities and Exchange Commission, I, John J. Joyce, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. FEBRUARY 24, 2006 /S/ JOHN J. JOYCE --------------------------- JOHN J. JOYCE PERSIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO AMBIENT CORPORATION AND WILL BE RETAINED BY AMBIENT CORPORATION AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----