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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number: 000-16299
________________
ANTS SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3054685
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
801 Mahler Rd, Suite G, Burlingame, CA 94010
(Address of principal executive offices) (Zip Code)
(650) 692-0240
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common stock, as of the latest practicable date:
32,792,397 shares of common stock as of June 30, 2004
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. Financial Information
Item 1. Financial Statements .............................................3-10
Item 2. Management's Plan of Operation .................................10-13
Item 3. Controls and Procedures ........................................13-14
PART II. Other Information
Item 1. Legal Proceedings ..................................................14
Item 2. Changes in Securities ...............................................14
Item 3. Defaults Upon Senior Securities......................................15
Item 4. Submission of Matters to a Vote of Security Holders..................15
Item 5. Other Information....................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15-16
Risk Factors..............................................................16-19
Signatures...................................................................19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTS SOFTWARE INC.
CONDENSED BALANCE SHEETS
June 30, Dec. 31,
2004 2003
ASSETS (Unaudited) (Audited)
------------ ------------
Current assets:
Cash $ 2,669,235 $ 541,725
Prepaid insurance 64,125 46,229
Prepaid expenses 16,745 800
------------ ------------
Total current assets 2,750,105 588,754
------------ ------------
Computers and software 901,099 774,441
Office furniture and fixtures 29,386 29,386
Leasehold improvements 16,675 9,000
Less accumulated depreciation (578,095) (489,326)
------------ ------------
Property and equipment, net 369,065 323,501
------------ ------------
Other assets - security deposits 9,100 9,100
------------ ------------
Total assets $ 3,128,270 $ 921,355
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 96,563 $ 83,189
Deferred salaries - 340,505
Deferred revenues - 310,943
Capital lease payable, current portion 2,100 2,310
Note payable - former officer, current portion 75,000 75,000
------------ ------------
Total current liabilities 173,663 811,947
------------ ------------
Long-term liabilities:
Capital lease payable 5,882 7,919
Convertible promissory note, net of unamortized
beneficial interest and debt discount of $189,585
and $83,196 in 2004 and 2003, respectively 130,415 236,804
------------ ------------
Total liabilities 309,960 1,056,670
------------ ------------
Commitment and contingencies
Stockholders' equity/(deficit):
Preferred stock, $0.0001 par value; 50,000,000
shares authorized, no shares issued and outstanding
in 2004 and 2003, respectively - -
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 32,792,397 and 26,381,004 shares issued
and outstanding, respectively 3,279 2,638
Notes receivable from officer for stock purchases - (45,000)
Additional paid-in capital 34,677,275 29,668,322
Accumulated deficit (31,862,244) (29,761,275)
------------ ------------
Total stockholders' equity/(deficit) 2,818,310 (135,315)
------------ ------------
Total liabilities and stockholders' equity $ 3,128,270 $ 921,355
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
ANTS SOFTWARE INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months ended June 30, Six Months ended June 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ---------------- ---------------- ----------------
Cost of goods sold $ - $ - $ - $ -
General and administrative expenses 409,511 310,498 755,918 611,879
Sales and marketing 312,287 193,879 457,557 322,519
Research and development expenses 577,501 437,765 1,037,452 803,204
---------------- ---------------- ---------------- ----------------
Loss from operations (1,299,299) (942,142) (2,250,927) (1,737,602)
---------------- ---------------- ---------------- ----------------
Other income (expense):
Income earned from expired
contract - - 310,943 -
Interest income 7,063 794 9,146 2,478
Gain on legal settlement 1,500 1,000 3,500 17,000
Write-off of officer's note
receivable for stock purchases - - (45,000) -
Interest expense (41,087) - (128,631) -
---------------- ---------------- ---------------- ----------------
Other income, net (32,524) 1,794 149,958 19,478
---------------- ---------------- ---------------- ----------------
Net loss $ (1,331,823) $ (940,348) $ (2,100,969) $ (1,718,124)
================ ================ ================ ================
Basic and diluted net loss per
common share $ (0.04) $ (0.04) $ (0.07) $ (0.07)
================ ================ ================ ================
Shares used in computing basic and
diluted net loss per share 32,311,854 24,192,811 30,274,355 23,787,125
================ ================ ================ ================
The accompanying notes are an integral part of these condensed financial
statements.
4
ANTS SOFTWARE INC.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2004 2003
(Unaudited) (Unaudited)
------------ ------------
Cash flows from operating activities:
Net loss $(2,100,969) $(1,718,124)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 88,769 77,294
Amortization of debt discount and beneficial
interest 127,238 -
Compensation expense recognized on options
granted to non-employees 29,498 69,054
Write-off of note receivable to officer for stock
purchases 45,000 -
Changes in operating assets and liabilities:
Prepaid insurance and expenses (33,841) (76,310)
Accounts payable 13,374 97,808
Deferred salaries (340,505) 66,376
Deferred revenue (310,943) -
------------ ------------
Net cash used in operating activities (2,482,379) (1,483,902)
------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment, net (134,333) (48,236)
------------ ------------
Cash flows from financing activities:
Proceeds from private placements net of commissions 4,443,279 941,905
Proceeds from exercise of options 303,190 13,565
Proceeds from exercise of warrants - 75,000
Payments on capital lease obligations (2,247) -
------------ ------------
Net cash provided by financing activities 4,744,222 1,030,470
------------ ------------
Net increase (decrease) in cash 2,127,510 (501,668)
------------ ------------
Cash at beginning of period 541,725 946,957
------------ ------------
Cash at end of period $ 2,669,235 $ 445,289
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,146 $ -
Taxes - -
The accompanying notes are an integral part of these condensed financial
statements.
5
ANTS SOFTWARE INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements are presented in
accordance with the requirements for Form 10-QSB and Item 310(b) of Regulation
S-B. Accordingly, they do not include all the disclosures normally required by
generally accepted accounting principles. Reference should be made to the ANTs
software inc. (the "Company") Form 10-KSB for the twelve months ended December
31, 2003, for additional disclosures including a summary of the Company's
accounting policies, which have not significantly changed.
The information furnished reflects all adjustments (all of which were of a
normal recurring nature), which, in the opinion of management, are necessary to
fairly present the financial position, results of operations, and cash flows on
a consistent basis. Operating results for the three and six month periods ended
June 30, 2004 and 2003 are not necessarily indicative of the results that may be
expected in the future.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern.
Management has evaluated the Company's current financial position and its
available resources and plans to raise additional funds through the issuance of
equity securities during 2004 and possibly thereafter. Should the Company be
unsuccessful in raising additional funds, it is unlikely that the Company will
continue operations beyond December 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basic And Diluted Net Loss Per Share - Basic net loss per share is
calculated using the weighted-average number of common shares outstanding during
the period. Diluted net loss per share is computed using the weighted-average
number of common and dilutive common equivalent shares outstanding during the
period.
The following table presents the calculation of basic and diluted net loss
per share:
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------------------
Net loss $ (1,331,823) $ (940,348) $ (2,100,969) $ (1,718,124)
Weighted average shares of common stock
outstanding - basic and dilutive 32,311,854 24,192,811 30,274,355 23,787,125
-----------------------------------------------------------------------
Basic and diluted net loss per share $ (0.04) $ (0.04) $ (0.07) $ (0.07)
As of June 30, 2004 and 2003, outstanding options and warrants for the
purchase of up to 13,474,330 shares of common stock at prices ranging from $0.52
to $11.63 per share, and 8,529,279 shares of common stock at prices ranging from
$0.25 to $11.63 per share, respectively, were anti-dilutive, and therefore, not
included in the computation of diluted loss per share.
Stock-Based Compensation - In December 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure."
This Statement amends SFAS No. 123, "Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company follows APB 25 in accounting for
its employee stock options. The disclosure provisions of SFAS 148 have been
incorporated into these financial statements and accompanying footnotes.
6
At June 30, 2004, the Company had a stock-based employee compensation plan.
The Company accounts for this plan under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees, and related Interpretations.
The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months ended June 30, Six Months ended June 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
---------------------------------- ----------------------------------
Net loss, as reported $ (1,331,823) $ (940,348) $ (2,100,969) $ (1,718,124)
Less: Stock-based employee compensation
expense determined under the fair-value
based method (218,523) (329,535) (680,183) (654,391)
---------------- ---------------- ---------------- ----------------
Net loss, pro forma $ (1,550,346) $ (1,269,883) $ (2,781,152) $ (2,372,515)
================ ================ ================ ================
Basic and diluted net loss per share:
As reported $ (0.04) $ (0.04) $ (0.07) $ (0.07)
================ ================ ================ ================
Pro forma
$ (0.05) $ (0.05) $ (0.09) $ (0.10)
================ ================ ================ ================
Employee options for the purchase of up to 335,000 and 610,000 shares of
common stock were granted during the three-month periods ended June 30, 2004 and
2003, respectively. The weighted average fair value of employee options granted
during the three-month periods ended June 30, 2004 and June 30, 2003 was $1.64
and $0.95 per share, respectively. Employee options for the purchase of up to
740,000 and 970,000 shares of common stock were granted during the six-month
periods ended June 30, 2004 and 2003, respectively. The weighted average fair
value of employee options granted during the six-month periods ended June 30,
2004 and 2003 was $1.12 and $0.96 per share, respectively.
The pro forma amounts for net loss per share in the table above were
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions for the periods ended June 30, 2004 and 2003,
respectively.
Three Months ended June 30, Six Months ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
--------------------------- ---------------------------
Interest rate 3.22% 2.53% 3.19% 2.69%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected volatility 126.00% 134.01% 124.46% 135.98%
Expected life in years 5.00 5.00 5.00 5.00
Recent Accounting Pronouncements - The Financial Accounting Standards Board
(FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, in January 2003 and amended the Interpretation in December 2003. This
Interpretation requires the consolidation of Variable Interest Entities in which
a company holds a qualifying variable interest. The provisions of this
Interpretation do not have a significant effect on the Company's [to be
consistent] financial position or operating results. In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes
standards for how a company classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after September 15, 2003. The provisions of this Standard do not have
a significant effect on the Company's financial position or operating results.
7
Certain reclassifications have been made to conform the prior year
financial statements to the presentation of the current period.
3. EQUITY TRANSACTIONS
From January 1, 2004 through March 31, 2004, the Company sold to accredited
investors, through a private offering, 5,703,159 D Units at a price of
seventy-five cents ($0.75) per D Unit, with each D Unit consisting of (i) one
(1) share of common stock of the Company, and (ii) a warrant to purchase up to
one (1) share of common stock of the Company at a per share price of two dollars
($2.00), exercisable until March 31, 2006. In connection with this offering, the
Company paid $269,100 in cash commissions, issued 33,666 D Units to finders, and
will issue 239,697 D Units to the placement agent. The gross proceeds from the
offering were $4,277,379. The sales of these securities were made in reliance
upon Rule 506 and Section 4(2) of the Securities Act of 1933.
On or about February 17, 2004, the Company sold to an accredited investor
66 shares of common stock at a price of $.75 per share. The accredited investor
paid for the shares by assigning all rights in certain shares of common stock of
the Company, which shares had been escheated.
On or about May 31, 2004, the Company sold to one accredited investor,
through a private offering, 400,000 E units at a price of one dollar and
twenty-five cents ($1.25) per E unit for gross proceeds of $500,000, with each E
Unit consisting of (i) one (1) share of common stock of the Company, and (ii) a
warrant to purchase up to one (1) share of common stock of the Company at a per
share price of two dollars and fifty cents ($2.50), exercisable until May 31,
2007. In connection with this offering, the Company paid $65,000 in cash
commissions and will issue 36,363 E Units to the placement agent. The sale of
these securities was made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.
During the six months ended June 30, 2004, 274,502 shares of common stock
of the Company were purchased through the exercise of stock options. Total
proceeds to the Company were $303,190.
On or about April 23, 2004, the Company and Gary Ebersole, its former
President and Chief Operating Officer, agreed to amend Mr. Ebersole's Stock
Option Agreements to extend the period during which Mr. Ebersole could exercise
the vested portion of his stock options from April 30, 2004 to June 30, 2004.
The Company recognized non-employee compensation expense of $29,498 in the
statement of operations (included in general and administrative expenses)
related to this transaction. As of June 30, 2004, Mr. Ebersole had exercised all
his vested stock options.
4. WARRANTS AND STOCK OPTIONS
As of June 30, 2004, the Company had outstanding warrants to purchase up to
9,621,125 shares of common stock and options to purchase up to 3,853,205 shares
of common stock. These securities give the holder the right to purchase shares
of the Company's common stock in accordance with the terms of the instrument.
Stock
Warrants Options Total
-------- ------- -----
Outstanding at December 31, 2003 3,484,300 3,841,162 7,325,462
Granted 6,136,825 740,000 6,876,825
Retired/forfeited - (453,455) (453,455)
Expired - - -
Exercised through cash consideration - (274,502) (274,502)
------------ ------------ ------------
Outstanding at June 30, 2004 9,621,125 3,853,205 13,474,330
------------ ------------ ------------
5. LEGAL SETTLEMENT
The Company was a defendant in a case entitled Hubert P. Lauffs et al. v.
Mosaic Multisoft Corporation, in which the plaintiff asserted a cause of action
against the Company for breach of fiduciary duty. The plaintiff purported to
base his cause of action on allegations that the Company and others caused the
shareholders of Mosaic Multisoft Corporation ("Mosaic") to elect outside
directors to its board of directors who subsequently voted to remove Mosaic's
president from office, thus interfering with Mosaic's ability to raise capital
and causing Mosaic to be unable to repay its debt to the plaintiff. In March
2000, the Company won this case on summary judgment. In April 2000, the
plaintiff filed an appeal of the summary judgment ruling. On November 21, 2001,
the Fourth District Court of Appeal ruled in the Company's favor by affirming
the Superior Court's March 2000 summary judgment. In September 1999, the Company
had filed an action for malicious prosecution against Lauffs and his attorney
seeking recovery of the Company's legal fees incurred in connection with the
proceedings. The Company entered into Settlement Agreements in December 2002,
pursuant to which the plaintiffs agreed to pay the Company an aggregate of
$400,000. Per an agreement the Company entered into with the Company's attorneys
on or about September 27, 2002, almost all of the money recovered will be paid
to the Company's attorneys. From January 1, 2004 through June 30, 2004, the
Company received $3,500 as its portion of the settlement, which was recognized
as a gain from legal settlement.
8
6. DEFERRED REVENUES
On or about August 22, 2003 the Company signed a Letter of Intent ("LOI")
with Net Soft Systems, Inc. of Vancouver, British Columbia, Canada ("Net Soft").
The LOI included the following terms:
o Net Soft agreed to pay the Company $400,000 (non-refundable)
o The Company agreed to negotiate only with Net Soft for the exclusive
rights to sell and distribute the ANTs Data Server (the "Rights") in
Poland, Russia, the Czech Republic, and the European Common Market
o The negotiation process would determine what additional payments would
be required of Net Soft to obtain the Rights
o If, by November 30, 2003, terms of a deal regarding the Rights had not
been agreed to, the Company could negotiate the Rights with any other
entity
o The LOI itself contained no grant of Rights
On November 30, 2003 the Company and Net Soft agreed to extend the LOI
through January 31, 2004 and on January 31, 2004 the Company and Net Soft agreed
to extend the LOI through March 31, 2004. On March 31, 2004, the LOI terminated
and on that date, no future agreements between Net Soft and the Company were
contemplated in connection with such LOI. As of March 31, 2004, the Company had
received $310,943 of the $400,000 due pursuant to the LOI. The remaining $89,057
was considered uncollectible. In accordance with Generally Accepted Accounting
Principles the Company did not consider the earnings process complete until
collection was reasonably assured and all applicable revenue recognition
conditions were met according to the Security and Exchange Commission's Staff
Accounting Bulletin: No 104 -"Revenue Recognition." Therefore, the payments
pursuant to the LOI were recorded in the financial statements prior to January
1, 2004 as deferred revenue. With the termination of the LOI and no future
agreements contemplated in connection with such LOI at the time of termination,
the Company was under no obligation to return the monies to Net Soft. Since Net
Soft did not receive either a license to use the Company's product or services
related to the Company's product, the Company has recognized the $310,943 as
other income in the statements of operations and has eliminated the deferred
revenue liability.
7. CONVERTIBLE PROMISSORY NOTES
On or about August 15, 2003, the Company sold to two accredited investors,
through a private offering, one convertible promissory note each, without
interest, in principal face amount of $160,000 per note, each maturing on August
15, 2005, and each convertible at the option of the holder into shares of Common
Stock of the Company, at a conversion price of $0.75 per share. The Company had
agreed to grant the holder of each note, upon conversion of the note, a warrant
to purchase 213,333 shares of Common Stock of the Company at a per share price
of $2.00, exercisable until March 31, 2006. The stated conversion price of the
notes was $0.75 per share, however, the Company had agreed to set the conversion
price at $0.40 per share in the event an anticipated $5 million financing did
not close shortly after the note financing, and, since the intent of the
agreement was for the conversion price to include one share of common stock and
a warrant to purchase another share of common stock, the Company further agreed
to increase the number of shares of Common Stock underlying each warrant to be
granted upon conversion of the notes from 213,333 to 400,000. The $5 million
financing did not close, accordingly, the Company entered into Amendment
Agreements with each convertible promissory note holder, setting the conversion
price at $0.40 per share and increasing the number of shares of Common Stock
underlying the warrant to be granted upon conversion of each note from 213,333
to 400,000. Since, for accounting purposes, the active conversion price was
$0.40 per share, the intrinsic value of the conversion option of $280,000 was
recorded both in additional paid-in capital and as a beneficial interest debt
discount to the convertible debt. For the six month period ended June 30, 2004,
beneficial interest discount amounting to $122,500, and imputed interest of
$4,738 attributable to the interest-rate-related debt discount, were both
amortized to interest expense. The proceeds of the private offering were used
for general working capital purposes. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933. On or
about July 14, 2004, the noteholders elected to convert their convertible
promissory notes. The Company will therefore issue 400,000 shares of Common
Stock and a warrant to purchase up to 400,000 shares of Common Stock to each
noteholder.
9
8. NOTE RECEIVABLE FROM OFFICER
The Company entered into an agreement with a former officer, effective
January 11, 2001, in which the Company agreed to forgive, on August 4, 2001 and
on each year anniversary thereafter, $45,000 of the principal amount and all
accrued interest on a loan made to the former officer in August 1999 in the
original amount of $225,000. In August 2003 the Company forgave $45,000 of the
loan balance pursuant to the terms of the agreement. In light of the fact that
the remaining loan balance of $45,000 has been deemed to be uncollectible as of
March 31, 2004, the Company has elected to charge the entire $45,000 to general
and administrative expense as of March 31, 2004.
ITEM 2. MANAGEMENT'S PLAN OF OPERATION
Certain statements contained in this Form 10-QSB constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements herein are based on current expectations that involve
a number of risks and uncertainties. Such forward-looking statements are based
on assumptions that the Company will have adequate financial resources to fund
the development and operation of its business, and there will be no material
adverse change in the Company's operations or business. The foregoing
assumptions are based on judgments with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions and future business decisions. All are difficult or impossible to
predict accurately and many of which are beyond the Company's control.
Accordingly, although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in the forward-looking statements will be realized. There are a number of risks
presented by the Company's business and operations, which could cause the
Company's financial performance to vary markedly from prior results, or results
contemplated by the forward-looking statements. Such risks include failure of
the ANTs technology to work properly, failure to develop commercially viable
products or services from the ANTs technology, delays or failure in fundraising
efforts, delays in or lack of market acceptance, failures to recruit adequate
personnel, and problems with protection of intellectual property, among others.
Management decisions, including budgeting, are subjective in many respects and
periodic revisions must be made to reflect actual conditions and business
developments, the impact of which may cause the Company to alter its capital
investment and other expenditures, which may also adversely affect the Company's
results of operations. In light of significant uncertainties inherent in
forward-looking information included in this Quarterly Report on Form 10-QSB,
the inclusion of such information should not be regarded as a representation by
the Company that the Company's objectives or plans will be achieved. The Company
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements.
The Company is engaged in the development and marketing of the ANTs Data
Server a software product that is intended to significantly improve the speed at
which computers can manipulate data. The Company anticipates that, if
sufficiently funded, over the next twelve months its focus will be marketing its
first product, supporting customers, and continued research and development.
Technology Development
- ----------------------
Over the next twelve months, assuming the Company is sufficiently funded,
the Company intends to continue to improve and add functionality to the ANTs
Data Server. The Company has built out the basic functionality to the point
where it believes that virtually all additional functionality will be driven by
partner or customer demand. The Company intends to actively engage prospective
partners and customers in technical discussions to determine what features are
and will be most in demand for the markets the Company is targeting. The Company
intends to mobilize its engineering resources around developing those features.
10
Marketing
- ---------
In October 2003, the Company began marketing the first commercial version
of its first product. The Company's go-to-market strategies include:
o Focus on the high-performance, high-volume, transaction intensive
industry segments where cost constraints and performance demands might
dictate a willingness to adopt new technology. Company and product
messaging will focus on the "high-performance, no compromise" value
proposition.
o Sell to Independent Software Vendors ("ISV's") and directly to
end-users in targeted markets.
o Execute a "compatible with," not a "replacement of," strategy for the
leading RDBMS's such as: Oracle, IBM's DB2, and Microsoft's SQL
Server, since the RDBMS market is mature and customers have
substantial investment in infrastructure, development, and support, in
the leading RDBMS vendors' products.
Raising Capital
- ---------------
During February and March 2004, the Company raised approximately $4 million
(net of placement agent fees and commissions) in financing through a private
offering of Company securities. In May 2004, an additional $435,000 (gross
proceeds of $500,000 less placement agent fees and commissions of $65,000) in
financing was raised through a private offering of Company securities to one
accredited investor. To carry out its plan of operations, the Company
anticipates that, over the next twelve months, it will require an additional $2
million. The Company intends to pursue a number of avenues to raise these
additional operating funds: 1) in the past the Company has been successful in
raising funds through private placements of its stock and anticipates that it
will continue to raise funds through private placements, 2) as the Company
develops close relationships with large partners, it will pursue strategic
investments from those partners, and 3) the Company expects to begin generating
revenue in 2004 and, if successful, this should be a source of some operating
funds. The Company is pursuing all three avenues, but believes that securing
additional capital will be difficult.
Personnel
- ---------
The Company currently has 22 full-time employees and 3 full-time
consultants. The Company views the recruitment of additional qualified
marketing, sales, and technical personnel as essential to the further
development and commercialization of its proprietary technologies. If the
Company is sufficiently funded and it is successful in its recruitment efforts,
the Company expects that its personnel and other operating costs will increase
moderately over current levels. During 2003, to conserve cash, all employees
agreed to reduce their salary to 85% of their then-current salary ("New Salary")
and the employees further agreed to defer part of their New Salary. In addition,
as of January 16, 2004, Francis K. Ruotolo agreed to reduce his salary to 50% of
his starting salary (such new salary shall be referred to herein as "Salary")
and defer part of his Salary. In connection with these deferrals the Company
agreed to accrue the difference between the New Salary or the Salary, as
applicable, and the employees' actual pay, until the Company received sufficient
funding. During February and March 2004, the Company raised approximately $4
million (net of placement agent fees and commissions). On March 1, 2004, the
salary accruals and deferrals were discontinued. As of June 30, 2004, all
accrued salaries had been fully repaid. The total amount paid in salary
deferrals during the six months ended June 30, 2004 was $478,655.
The majority of the Company's operating expenses and costs over the next
twelve months are expected to be for, and related to, marketing and selling the
ANTs Data Server, continuing technical development, and supporting customers.
Patents
- -------
On July 6, 2004, the United States Patent and Trademark Office ("PTO")
issued patent 6,760,726 for the ANTs System and Method of Managing Concurrent
Operations on Linked Lists and on July 13, 2004, the PTO issued patent 6,763,447
for the ANTs Lock-Free List for use with Computer System Utilizing FIFO Queue
for Tracking Order of Various Sublists. The Company is awaiting the PTO's
response regarding an additional five patent applications, which were filed at
approximately the same time as the two issued patents. Subsequent to June 30,
2004, the Company filed an additional patent application.
11
Sales and Marketing Expenses
- ----------------------------
Sales and marketing expenses consist primarily of employee salaries,
benefits, consultant fees, travel, marketing programs (trade shows, public
relations, lead generation programs) and marketing and sales literature and
presentations. Marketing and sales expenses increased from $193,879 for the
quarter ended June 30, 2003 to $312,287 for the quarter ended June 30, 2004, an
increase of $118,408 or 61%. This increase results from the Company shifting its
focus from research and development to sales and marketing. For the six-month
periods ended June 30, 2004 and 2003, marketing and sales expenses were $457,557
and $322,519, respectively, an increase of $135,038 or 42%. The changes from
2003 to 2004 resulted from increased expenditures on events and promotions,
sales-related travel and marketing communications in 2004.
Marketing and sales expenses for the six months ended June 30, 2004 and
2003 break out as follows: salaries, benefits and consultant costs (60% and 85%
of the total, respectively), travel (12% and 3%, respectively), marketing
programs (17% and 6%, respectively) and other expenses (11% and 6%,
respectively). The Company expects that its marketing and sales expenses will
continue to increase moderately to substantially as additional staff is
recruited and as marketing and sales programs are implemented.
Research and Development Expenses
- ---------------------------------
Research and development expenses consist primarily of employee salaries,
benefits, consultant fees, equipment and software purchases and depreciation.
Research and development expenses increased from $437,765 for the quarter ended
June 30, 2003 to $577,501 for the quarter ended June 30, 2004, an increase of
$139,736 or 32%. For the six months ended June 30, 2004 and 2003, these expenses
were $1,037,452 and $803,204, respectively, an increase in 2004 of $234,248, or
29%. The changes from 2003 to 2004 resulted largely from an increase in: 1)
salaries and benefits related to the hiring of additional engineering personnel
and consulting fees, which together represented 80% of the increase; 2)
allocated overhead expenses which represented 10% of the increase; 3) other
operating expenses such as computer supplies which represented 4% of the
increase and 4) depreciation expense for new equipment purchased during the
six-month period ended June 30, 2004 which represented 6% of the increase.
Research and development expenses for the six months ended June 30, 2004
and 2003 break out as follows: salaries, benefits and consulting fees (82% and
82% of the total, respectively), equipment, software and depreciation (9% and
8%, respectively), and other expenses (9% and 10%, respectively). The Company
expects that its research and development expenses will increase moderately as
additional staff is recruited to customize its product for potential customers.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses consist primarily of salaries,
benefits, consulting fees, legal, investor relations and audit fees, facilities,
and insurance. General and administrative expenses increased from $310,498 for
the quarter ended June 30, 2003 to $409,511 for the quarter ended June 30, 2004,
an increase of $99,013, or 32%. For the six months ended June 30, 2004 and 2003,
these expenses were $755,918 and $611,879, respectively, an increase in 2004 of
$144,039, or 24%. The changes from 2003 to 2004 resulted primarily from an
increase in the first quarter of 2004 in legal and investor relations fees of
$108,142 related to the Company's financing activities and its annual meeting,
proxy and voting process and from an increase in salaries, benefits and
consulting fees of $53,751, of which $29,498 is non-employee stock-based
compensation expense related to the extension of the period during which Mr.
Gary Ebersole, the Company's former President and Chief Operating Officer, could
exercise his stock options.
Components of general and administrative expense for the six months ended
June 30, 2004 and 2003 break out as follows: salaries, benefits and consulting
fees (44% and 46% of the total, respectively), legal and investor relation fees
(28% and 17%, respectively), audit fees (6% and 7%, respectively), insurance (9%
and 14%, respectively), and other expenses such as facilities, supplies and
travel (13% and 16%, respectively). The Company expects that its general and
administrative expenses will increase moderately as the Company expands.
12
Off-Balance Sheet Arrangements
- ------------------------------
During 2003, the Company entered into an operating lease for certain
computer equipment used in the Company's development lab. The total original
lease obligation was $9,155 and is payable in monthly installments of $254 over
a three-year period. The outstanding lease obligation is not reported on the
balance sheet, as title to the equipment remains with the lessor until the
Company pays the total obligation and a buyout fee. As of June 30, 2004, the
outstanding obligation was $6,604. Should the Company default in its lease
obligation, the lessor could choose to repossess the computer equipment. Should
the lessor do so, it would not have a material effect on the Company's ability
to maintain normal business operations.
Critical Accounting Policies
- ----------------------------
Use of Estimates - The preparation of the financial statements in
accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
reported amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. The Company evaluates such estimates and
assumptions on an ongoing basis and bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates and probably will
differ from these estimates under different assumptions or conditions.
The Company believes the following represents its critical accounting
policies:
o Stock-based compensation
o Income taxes
Stock-based Compensation - The Company uses the fair value recognition
provisions of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, to value stock options granted to employees and independent
consultants. The values are derived from a model, which requires historical
assumptions and management judgment. Stock-based compensation for employees is
disclosed in the pro-forma net loss statement in note 1 of the Company's annual
financial statements. Stock-based compensation for independent consultants is
expensed in the statement of operations.
Income Taxes - The carrying value of the Company's deferred tax assets are
dependent upon the Company's ability to generate sufficient future taxable
income in certain tax jurisdictions. Until such time as the Company establishes
a taxable income in such jurisdictions, the total amount of the deferred tax
assets shall be offset with a valuation allowance.
Capital and Liquidity Resources
- -------------------------------
The Company intends to increase expenditures moderately to substantially
over the next twelve months as it actively markets and sells the ANTs Data
Server and hires additional sales, marketing, and technical personnel. The
Company's cash balance as of June 30, 2004 was approximately $2.7 million, which
it believes will be adequate to fund its activities through 2004 at its expected
rate of spending. There can be no assurance that the Company's continued product
development and infrastructure development will not require a much higher rate
of spending. The Company is involved in discussions from time to time with
prospective investors in order to raise capital to support its continued
operations, although there can be no assurance that it will be able to obtain
investment proceeds on acceptable terms, or at all.
ITEM 3. CONTROLS AND PROCEDURES
The effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) was evaluated under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as of the end of the period
covered by this quarterly report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in providing reasonable
assurance that the information required to be disclosed in this quarterly report
is recorded, processed, summarized and reported within the time period required
for the filing of this quarterly report.
13
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended) identified in connection with the evaluation
of the Company's internal control performed during its last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceeding and, to
best of its knowledge, no such action by or against the Company, has been
threatened.
ITEM 2. CHANGES IN SECURITIES
From January 1, 2004 through March 31, 2004, the Company sold to accredited
investors, through a private offering, 5,703,159 D Units at a price of
seventy-five cents ($0.75) per D Unit, with each D Unit consisting of (i) one
(1) share of common stock of the Company, and (ii) a warrant to purchase up to
one (1) share of common stock of the Company at a per share price of two dollars
($2.00), exercisable until March 31, 2006. In connection with this offering, the
Company paid $269,100 in cash commissions, issued 33,666 D Units to finders, and
will issue 239,697 D Units to the placement agent. The gross proceeds from the
offering were $4,277,379. The proceeds of the private offering are being used
for sales, marketing and general working capital purposes. The sales of these
securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.
On or about February 17, 2004, the Company sold to an accredited investor
66 shares of common stock at a price of $.75 per share. The accredited investor
paid for the shares by assigning all rights in certain shares of common stock of
the Company, which had been escheated.
On May 31, 2004, the Company sold to one accredited investor, through a
private offering, 400,000 E units at a price of one dollar and twenty-five cents
($1.25) per E unit, with each E Unit consisting of (i) one (1) share of common
stock of the Company, and (ii) a warrant to purchase up to one (1) share of
common stock of the Company at a per share price of two dollars and fifty cents
($2.50), exercisable until May 31, 2007. In connection with this offering, the
Company paid $65,000 in cash commissions and will issue 36,363 E Units to the
placement agent. The gross proceeds from the offering were $500,000. The
proceeds are being used for sales, marketing and general working capital
purposes. The sale of these securities was made in reliance upon Rule 506 and
Section 4(2) of the Securities Act of 1933.
On or about August 15, 2003, the Company sold to two accredited investors,
through a private offering, one convertible promissory note each, without
interest, in principal face amount of $160,000 per note, each maturing on August
15, 2005, and each convertible at the option of the holder into shares of Common
Stock of the Company at a conversion price of $0.75 per share. The Company had
agreed to grant the holder of each note, upon conversion of the note, a warrant
to purchase 213,333 share of Common Stock of the Company at a per share price of
$2.00, exercisable until March 31, 2006. The stated conversion price of the
notes was $0.75 per share, however, the Company had agreed to set the conversion
price at $0.40 per share in the event an anticipated $5 million financing did
not close shortly after the note financing, and, since the intent of the
agreement was for the conversion price to include one share of common stock and
a warrant to purchase another share of common stock, the Company further agreed
to increase the number of shares of Common Stock underlying each warrant to be
granted upon conversion of the notes from 213,333 to 400,000. The $5 million
financing did not close, accordingly, the Company entered into Amendment
Agreements with each convertible promissory noteholder, setting the conversion
price at $0.40 per share and increasing the number of shares of Common Stock
underlying each warrant to be granted upon conversion of each note from 213,333
to 400,000. The proceeds of the private offering were used for general working
capital purposes. The sales of these securities were made in reliance upon Rule
506 and Section 4(2) of the Securities Act of 1933. On or about July 14, 2004,
the note holders elected to convert their convertible promissory notes. The
Company will therefore issue 400,000 shares of Common Stock and a warrant to
purchase up to 400,000 shares of Common Stock to each noteholder.
14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No changes during the period covered by this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2004 Annual Meeting of shareholders on May 6, 2004.
One Class 1 director, Thomas Holt, was nominated and re-elected to serve on the
board until the annual meeting following the close of the 2006 fiscal year.
Papken Der Torossian chose not to serve as Class 1 director following the
expiration of his term and therefore was not up for re-election at the 2004
Annual Meeting. Class 2 director Homer G. Dunn will serve on the board until the
annual meeting following the close of the 2004 fiscal year. Class 3 directors
Francis K. Ruotolo and John R. Gaulding will continue to serve on the board
until the annual meeting following the close of the 2005 fiscal year.
Shareholders ratified the selection of Burr, Pilger & Mayer, LLP as the
Company's independent accountant for the calendar year ending December 31, 2004.
The Company's shareholders voted upon the matters as follows:
- ------------------------ ---------------- --------------- ----------------------
DESCRIPTION OF MATTER VOTES FOR VOTES AGAINST WITHHELD/ABSTENTIONS
- ------------------------ ---------------- --------------- ----------------------
Election of Class 1
Director:
- ------------------------ ---------------- --------------- ----------------------
Thomas Holt 20,110,153 - 48,616
- ------------------------ ---------------- --------------- ----------------------
- ------------------------ ---------------- --------------- ----------------------
Ratification of Auditor 20,001,668 53,496 103,605
- ------------------------ ---------------- --------------- ----------------------
ITEM 5. OTHER INFORMATION
On or about April 23, 2004, the Company and Gary Ebersole, its former
President and Chief Operating Officer, agreed to amend Mr. Ebersole's Stock
Option Agreements to extend the period during which Mr. Ebersole could exercise
the vested portion of his stock options from April 30, 2004 to June 30, 2004. As
of June 30, 2004, Mr. Ebersole had exercised all his vested stock options.
The Company and Francis K. Ruotolo, its Chief Executive Officer, entered
into a Deferred Salary Agreement and an Amendment Agreement to such Deferred
Salary Agreement, on or about March 31, 2004 and June 30, 2004 respectively,
pursuant to which Mr. Ruotolo acknowledged and agreed that as of January 16,
2004 his salary was set at Two Hundred Thousand dollars ($200,000) per annum,
subject to the Company's withholding obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Company, as listed in Exhibit 3.1 to the Company's 10-QSB
filed on August 14, 2003, is hereby incorporated by
reference.
3.2 Amended and Restated Bylaws of the Company, as listed in
Exhibit 3.2 to the Company's 10-KSB filed on March 22,
2001, are hereby incorporated by reference.
10.1 2000 Stock Option Plan of the Company, as amended, attached
as Exhibit 4 to the Company's Form S-8 filed on May 23,
2003, is hereby incorporated by reference.
10.2 Agreement and Plan of Merger dated December 8, 2000 between
ANTs software inc. and ANTs software.com, as listed in
Exhibit 10.2 to the Company's 10-KSB filed on March 22,
2001, is hereby incorporated by reference.
10.3 Settlement Agreement and Full Release of All Claims dated
January 11, 2001, between the Company and Frederick D.
Pettit, as listed in Exhibit 10.3 to the Company's 10-KSB
filed on March 22, 2001, is hereby incorporated by
reference.
15
10.4 Separation Agreement dated January 8, 2001, between the
Company and Francis K. Ruotolo, as listed in Exhibit 10.4
to the Company's 10-KSB filed on March 22, 2001, is hereby
incorporated by reference.
10.5 Form of Indemnification Agreement signed with officers and
directors of the Company, as listed in Exhibit 10.5 to the
Company's 10-KSB filed on March 22, 2001, is hereby
incorporated by reference.
10.6 Registration Agreement between the Company and Karen
Buechler and Eric Scott Buechler dated September 15, 2000,
as listed in Exhibit 10.6 to the Company's 10-KSB filed on
March 22, 2001, is hereby incorporated by reference.
10.7 Registration Agreement between the Company and Arcade
Investment Limited dated September 7, 2000, as listed in
Exhibit 10.7 to the Company's 10-KSB filed on March 22,
2001, is hereby incorporated by reference.
10.8 Amended Agreement between the Company and Arcade Investment
dated October 6, 2000, as listed in Exhibit 10.8 to the
Company's 10-KSB filed on March 22, 2001, is hereby
incorporated by reference.
10.9 Form of Registration Agreement between the Company and each
of Discount Bank and Trust Company, Lemanik Sicav
Convertible Bond, and Pershing Keen Nominees, as listed in
Exhibit 10.9 to the Company's 10-KSB filed on March 22,
2001, is hereby incorporated by reference.
10.10 Employment Agreement dated March 24, 2003, between the
Company and Gary Ebersole, as listed in Exhibit 10.10 to
the Company's 10-QSB filed on May 8, 2003, is hereby
incorporated by reference.
10.11 Separation and Settlement Agreement and Full Release of All
Claims dated January 14, 2004, between the Company and Gary
Ebersole, as listed in Exhibit 10.11 to the Company's
10-KSB filed on March 30, 2004, is hereby incorporated by
reference.
10.12 Deferred Salary Agreement dated March 31, 2004 between
the Company and Francis K. Ruotolo.
10.13 Amendment Agreement dated June 30, 2004 between the Company
and Francis K. Ruotolo.
14. Code of Ethics, as listed in Exhibit 14 to the Company's
10-KSB filed on March 30, 2004, is hereby incorporated by
reference.
31.1 Certification of the Chief Executive Officer required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the period covered by this report, the Company filed the following
reports on Form 8-K: (i) on April 14, 2004, the Company clarified the date on
which its annual shareholder meeting was being held, and (ii) on May 6, 2004,
the Company announced that: (a) the ANTs Data Server ("ADS") had been ported to
11 platforms, (b) the Company was porting ADS to the 64-bit Linux platform, (c)
internal testing demonstrated that ADS running on the Linux platform had the
same high performance as ADS running on the Windows and Solaris platforms, (d)
the Company would be exhibiting for a second year at the Securities Industry
Association Technology Management Conference, and that (e) the independent
analyst David Rogers, of Standard Investment Chartered, Inc. (Member NASD SIPC),
had initiated coverage of the Company.
RISK FACTORS
In addition to other information in this 10-QSB, the following risk factors
should be carefully considered in evaluating the Company's business since it
operates in a highly changing and complex business environment that involves
numerous risks, some of which are beyond its control. The following discussion
highlights a few of these risk factors, any one of which may have a significant
adverse impact on the Company's business, operating results and financial
condition. As a result of the risk factors set forth below and elsewhere in this
10-QSB, and the risks discussed in the Company's other Securities and Exchange
Commission filings, actual results could differ materially from those projected
in any forward-looking statements.
16
A failure to obtain additional financing could prevent the Company from
executing its business plan. A failure to raise additional funding could prevent
the Company from continuing its business after 2004. The Company anticipates
that current cash resources will be sufficient to fund its operations only
through 2004 at its expected rate of spending. The Company believes that, due to
an uncertain investment climate, securing additional sources of financing to
enable it to complete the development and commercialization of its proprietary
technologies is uncertain and there is no assurance of its ability to secure
such financing. A failure to obtain additional funding could prevent the Company
from making expenditures that are needed to pay current obligations, allow it to
hire additional personnel, continue development of the technology or attract
customers who are concerned about its ability to continue operations. If the
Company raises additional funds by selling equity securities, the relative
equity ownership of its existing investors could be diluted or the new investors
could obtain terms more favorable than previous investors. If the Company raises
additional funds through debt financing, it could incur significant borrowing
costs.
If the Company is unable to protect its intellectual property, its
competitive position would be adversely affected. The Company relies on patent
protection, as well as trademark and copyright law, trade secret protection and
confidentiality agreements with its employees and others to protect its
intellectual property. Despite the Company's precautions, unauthorized third
parties may copy its products and services or reverse engineer or obtain and use
information that it regards as proprietary. The Company has filed patent
applications and intends to file more. Two patent applications have been granted
and issued; however, the Company does not know if the remaining applications
will be granted or whether it will be successful in prosecuting any future
patents. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent, as do the laws of the United States. The
Company's means of protecting its proprietary rights may not be adequate and
third parties may infringe or misappropriate its patents, copyrights, trademarks
and similar proprietary rights. If the Company fails to protect its intellectual
property and proprietary rights, its business, financial condition and results
of operations would suffer. The Company believes that it does not infringe upon
the proprietary rights of any third party, and no third party has asserted a
patent infringement claim against it. It is possible, however, that such a claim
might be asserted successfully against the Company in the future. The Company
may be forced to suspend its operations to pay significant amounts to defend its
rights, and a substantial amount of the attention of its management may be
diverted from its ongoing business, which can materially affect its ability to
attain and maintain profitability.
The Company focuses on the research and development of its proprietary
technologies and the marketing of its first product. The Company's present focus
is on the research and development of its proprietary technologies and the
marketing of its first product. The Company believes that these technologies are
the basis for highly marketable commercial products. However, there can be no
assurance of this and it is possible that the Company's proprietary technologies
and products will have no commercial benefit or potential. In addition, from the
Company's inception to the present, it has not recognized any operating
revenues.
The Company faces possible competition from large companies. The Company
operates in a highly competitive industry. Although the Company believes that
its technology is unique, can be protected, and, if adopted, will confer
benefits that will be otherwise unavailable for some significant time, it faces
very large competitors with greater resources who may adopt various strategies
to block or slow its market penetration, thereby straining its more limited
resources. They may also seek to hinder the Company's operations through
attempts to recruit key staff with exceptionally attractive terms of employment,
including signing bonuses, or by offer of highly competitive terms to potential
or newly acquired customers.
The Company depends on its key personnel and may have difficulty attracting
and retaining the skilled staff it needs to execute its growth plans. The
Company's success will be dependent largely upon the personal efforts of its
Chairman and Chief Executive Officer, Francis K. Ruotolo, as well as other
senior managers. The loss of key staff could have a material adverse effect on
the Company's business and prospects. To execute its plans, the Company will
need to hire additional staff and retain current employees. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense. The Company may not be
successful in attracting or retaining such qualified personnel. Specifically,
the Company may experience increased costs in order to attract and retain
skilled employees. If the Company is unable to hire, train and manage new
skilled and experienced employees as needed, it would be unable to support its
planned growth and future operations.
17
The Company faces rapid technological change. The market for the Company's
products and services is characterized by rapidly changing technologies,
extensive research and the introduction of new products and services. The
Company believes that its future success will depend in part upon its ability to
continue to enhance its existing products and to develop, manufacture and market
new products and services. As a result, the Company expects to continue to make
a significant investment in engineering, research and development. There can be
no assurance that the Company will be able to develop and introduce new products
and services or enhance its initial intended products and services in a timely
manner to satisfy customer needs, achieve market acceptance or address
technological changes in its target markets. Failure to develop products and
services and introduce them successfully and in a timely manner could adversely
affect the Company's competitive position, financial condition and results of
operations.
In the event that the Company experiences growth, the Company will need to
manage such growth well. The Company may experience substantial growth in the
size of its staff and the scope of its operations, resulting in increased
responsibilities for management. To manage this possible growth effectively, the
Company will need to continue to improve its operational, financial and
management information systems and to hire, train, motivate and manage a growing
number of staff. Due to a competitive employment environment for qualified
technical, marketing and sales personnel, the Company expects to experience
difficulty in filling its needs for qualified personnel. There can be no
assurance that the Company will be able to effectively achieve or manage any
future growth, and its failure to do so could delay product development cycles
and market penetration or otherwise have a material adverse effect on its
financial condition and results of operations.
The Company could face information and product liability risks and may not
have adequate insurance. The Company's product may be used to manage data from
critical business applications. The Company may become the subject of litigation
alleging that its product was ineffective or disruptive in its treatment of
data, or in the compilation, processing or manipulation of critical business
information. Thus, the Company may become the target of lawsuits from injured or
disgruntled businesses or other users. The Company does not presently carry
product or information liability or errors and omissions insurance, and although
it intends to acquire such insurance prior to commencing substantial sales, such
insurance may not be available in an acceptable or affordable form. In the event
that the Company is required to defend more than a few such actions, or in the
event that it was found liable in connection with such an action, its business
and operations would be severely and materially adversely affected.
The Company is dependent on new demand for its products and services. The
success of the Company's business depends upon demand for and use of its
technology, products and services in general and the demand for additional
computing power, cost effectiveness and speed in particular. The Company's
product is new and the Company may encounter substantial market resistance. In
the event sufficient demand does not develop, the Company's business and results
of operations would be materially adversely affected. The Company believes that
there appears to be increased demand for computing power, cost effectiveness and
speed, but if general economic conditions decline or hardware and memory
advances make such power, cost effectiveness and speed more readily available,
then adoption, use and sales of the Company's products and services may be
materially adversely affected.
The Company will need to continue its product development efforts. The
Company believes that its market will be characterized by increasing technical
sophistication. The Company also believes that its eventual success will depend
on its ability to continue to provide increased and specialized technical
expertise. There is no assurance that the Company will not fall technologically
behind competitors with greater resources. Although the Company believes that it
enjoys a significant lead in its product development and introduction, and is
hopeful that its patents provide some protection, it will likely need
significant additional capital in order to continue to enjoy such a
technological lead over competitors with more resources.
Market acceptance of the Company's products and services is not guaranteed.
The Company is at an early stage of development and its earnings will depend
upon market acceptance and utilization of its intended products and services.
Due to economic conditions potential customers have significantly tightened
budgets for evaluating new products and technologies and the evaluation cycles
are much longer than in the recent past. There can be no assurance that the
Company's product and technology development efforts will result in new products
and services, or that they will be successfully introduced.
18
Future profitability is not guaranteed. The Company has not recognized any
operating revenues to date. There is no assurance that the Company's plans will
be realized, that it will be able to generate revenues or that it will achieve
profitability in the future.
Limited market for the Company's common stock. The Company's common stock
is not listed on any exchange and trades in the over-the-counter (the "OTC")
market. As such, the market for the Company's common stock is limited and is not
regulated by the authorities of any exchange. Further, the price of the
Company's common stock and its volume in the OTC market may be subject to wide
fluctuations.
The Company has a long corporate existence and was inactive during much of
its corporate history. The Company was formed as the Sullivan Computer
Corporation, incorporated in Delaware in January 1979. The Company was privately
owned until late 1986, at which time its common stock began trading in the
over-the-counter market. This was a result of the registration of the Company's
common stock pursuant to the merger with CHoPP Computer Corporation, a British
Columbia corporation. During the period from mid-1987 through late 1999, the
Company had few or no employees. The Company's operating activities were limited
and were largely administered personally by its former Chairman. Due to the
passage of time and the poor condition of financial and other records, there can
be no assurance that all matters have been addressed at this date.
The Company has indemnified its officers and directors. The Company has
indemnified its Officers and Directors against possible monetary liability to
the maximum extent permitted under Delaware law.
Limitation on ability for control through proxy contest. The Company's
Bylaws provide for a Board of Directors to be elected in three classes. This
classified Board may make it more difficult for a potential acquirer to gain
control of the Company by using a proxy contest, since the acquirer would only
be able to elect one or two directors out of four directors at each shareholders
meeting held for that purpose.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ANTs software inc.
Date: August 12, 2004 By: /s/ Francis K. Ruotolo
-------------------------------------
Francis K. Ruotolo, Chairman and
Chief Executive Officer
Date: August 12, 2004 By: /s/ Kenneth Ruotolo
-------------------------------------
Kenneth Ruotolo
Chief Financial Officer and Secretary
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