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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2005
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________
Commission file number: 000-16299
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ANTS SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3054685
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
700 Airport Blvd. Suite 300, Burlingame, CA 94010
(Address of principal executive offices) (Zip Code)
(650) 931-0500
(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:
40,904,121 shares of common stock as of June 30, 2005
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 Discussion and Analysis ............................10-17
Item 3. Controls and Procedures ............................................17
PART II. Other Information
Item 1. Legal Proceedings ................................................17-18
Item 2. Unregistered Sales of Equity Securities ..............................18
Item 3. Defaults Upon Senior Securities.......................................18
Item 4. Submission of Matters to a Vote of Security Holders................18-19
Item 5. Other Information.....................................................19
Item 6. Exhibits...........................................................19-20
Risk Factors...............................................................20-22
Signatures.................................................................22-23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTS SOFTWARE INC.
CONDENSED BALANCE SHEETS
-------------
June 30, December 31,
2005 2004
ASSETS (Unaudited) (Audited)
------------ -----------
Current assets:
Cash $ 4,744,608 $ 1,448,724
Accounts receivable 181,500 -
Prepaid insurance 86,250 21,375
Prepaid expenses 46,900 65,292
------------ -----------
Total current assets 5,059,258 1,535,391
------------ -----------
Computers and software 1,161,718 949,046
Office furniture, fixtures and equipment 59,537 29,386
Leasehold improvements 39,792 16,675
Less accumulated depreciation (789,975) (670,982)
------------ -----------
Property and equipment, net 471,072 324,125
------------ -----------
Other assets - security deposits 34,702 9,100
------------ -----------
Total assets $ 5,565,032 $ 1,868,616
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 471,368 $ 333,916
Deferred revenues 58,333 -
Capital lease payable, current portion 3,757 4,871
------------ -----------
Total current liabilities 533,458 338,787
------------ -----------
Long-term liabilities:
Capital lease payable - 648
------------ -----------
Total liabilities 533,458 339,435
------------ -----------
Commitment and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 50,000,000 shares authorized,
no shares issued and outstanding, respectively - -
Common stock, $0.0001 par value; 100,000,000 shares authorized;
40,904,121 and 35,298,817 shares issued and outstanding, respectively 4,091 3,530
Common stock subscribed, not issued - 30,000
Additional paid-in capital 43,663,012 36,316,987
Accumulated deficit (38,635,529) (34,821,336)
------------ -----------
Total stockholders' equity 5,031,574 1,529,181
------------ -----------
Total liabilities and stockholders' equity $ 5,565,032 $ 1,868,616
============ ===========
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,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Revenues:
Licenses $ 108,000 $ - $ 194,100 $ -
Maintenance 7,000 - 7,667 -
Professional services 19,500 - 19,500 -
------------- ------------ -------------- ------------
Total revenues 134,500 - 221,267 -
Expenses:
Sales and marketing 855,176 312,287 1,430,535 457,557
Research and development 796,093 577,501 1,583,182 1,037,452
General and administrative 460,489 409,511 986,092 755,918
------------- ------------ -------------- ------------
Total expenses 2,111,758 1,299,299 3,999,809 2,250,927
------------- ------------ -------------- ------------
Loss from operations (1,977,258) (1,299,299) (3,778,542) (2,250,927)
------------- ------------ -------------- ------------
Other income (expense):
Income earned from expired contract - - - 310,943
Interest income 6,033 7,063 8,561 9,146
Gain on legal settlement 1,000 1,500 2,500 3,500
Write off note receivable from
former officer - - - (45,000)
Disposal of assets related to office move, net (45,012) - (45,012) -
Interest expense (785) (41,087) (1,700) (128,631)
------------- ------------ -------------- ------------
Other income, net (38,764) (32,524) (35,651) 149,958
------------- ------------ -------------- ------------
Net loss $ (2,016,022) $ (1,331,823) $ (3,814,193) $ (2,100,969)
============= ============ ============== ============
Basic and diluted net loss per common share $ (0.05) $ (0.04) $ (0.10) $ (0.07)
============= ============ ============== ============
Shares used in computing basic and diluted
net loss per share 39,535,096 32,311,854 38,362,261 30,274,355
============= ============ ============== ============
The accompanying notes are an integral part of these condensed financial statements.
4
ANTS SOFTWARE INC.
STATEMENTS OF CASH FLOWS
------------
Six Months ended June 30,
2005 2004
(Unaudited) (Unaudited)
--------------------- ------------------
Cash flows from operating activities:
Net loss $ (3,814,193) $ (2,100,969)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 128,968 88,769
Amortization of rent for new office facilities 33,336 -
Amortization of debt discount and beneficial conversion feature - 127,238
Compensation expense recognized on options granted to non-employees 14,349 29,498
Write-off of note receivable to officer for stock purchases - 45,000
Disposal of leasehold improvements at old office facilities, net 36,194 -
Write-off of unrecoverable security deposits related to old office facilities 8,818 -
Changes in operating assets and liabilities:
Prepaid insurance and expenses (46,483) (33,841)
Accounts receivable (181,500) -
Other assets - deposits on new office facilities (34,420)
Accounts payable and other accrued expenses 104,117 13,374
Deferred salaries - (340,505)
Deferred revenues 58,333 (310,943)
------------- -----------
Net cash used in operating activities (3,692,481) (2,482,379)
------------- -----------
Cash flows used in investing activities:
Purchases of office furniture, fixtures and equipment (312,109) (134,333)
Cash flows from financing activities:
Proceeds from private placements, net of commissions 3,409,650 4,443,279
Proceeds from exercise of options 150,590 303,190
Proceeds from exercise of warrants, net of commissions 3,741,996 -
Payments on capital lease obligations (1,762) (2,247)
------------- -----------
Net cash provided by financing activities 7,300,474 4,744,222
------------- -----------
Net increase (decrease) in cash 3,295,884 2,127,510
------------- -----------
Cash at beginning of period 1,448,724 541,725
------------- -----------
Cash at end of period $ 4,744,608 $ 2,669,235
============= ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,700 $ 1,146
Taxes - -
Non-cash investing and financing activities:
Common stock issued for subscribed shares $ 30,000 $ -
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, 2004, 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 make the financial statements not misleading and 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, 2005
and 2004 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 2005 and possibly thereafter. Should the Company be
unsuccessful in raising additional funds, it is unlikely that the Company will
continue operations beyond January 31, 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - We recognize revenue in accordance with the
provisions of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions". Revenue consists primarily
of revenue earned under agreements for software licenses, maintenance and
support (otherwise known as post-contract customer support or "PCS"), and
professional services.
We use the residual method to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date. If
there is an undelivered element under the license arrangement, we defer revenue
based on vendor-specific objective evidence, or VSOE, of the fair value of the
undelivered element, as determined by the price charged when the element is sold
separately. If VSOE of fair value does not exist for all undelivered elements,
we defer all revenue until sufficient evidence exists or all elements have been
delivered. Under the residual method, discounts are allocated only to the
delivered elements in a multiple element arrangement with any undelivered
elements being deferred based on VSOE of fair values of such undelivered
elements.
Revenue from software license arrangements, which comprise prepaid
license and maintenance and support fees, is recognized when all of the
following criteria are met:
o Persuasive evidence of an arrangement exists.
o Delivery has occurred and there are no future deliverables
except post-contract customer support ("PCS").
o The fee is fixed and determinable. If we cannot conclude that
a fee is fixed and determinable, then assuming all other
criteria have been met, revenue is recognized as payments
become due in accordance with paragraph 29 of SOP 97-2.
o Collection is probable.
Revenue from professional fees, consisting primarily of consulting services, is
recognized as services are provided and the revenues are earned.
6
Basic And Diluted Net Loss Per Share - Basic net loss per share is
calculated in accordance with FASB 128 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,
---------------------------------- ----------------------------------
2005 2004 2005 2004
---------------------------------- ----------------------------------
Net loss $ (2,016,022) $ (1,331,823) $(3,814,193) $ (2,100,969)
Weighted average shares of common stock
outstanding - basic and dilutive 39,535,096 32,311,854 38,362,261 30,274,355
---------- ---------- ---------- ----------
Basic and diluted net loss per share $ (0.05) $ (0.04) $ (0.10) $ (0.07)
========== ========== ========== ==========
As of June 30, 2005 and 2004, outstanding options and warrants for the
purchase of up to 18,302,202 shares of common stock at prices ranging from $0.52
to $10.50 per share, and 13,474,330 shares of common stock at prices ranging
from $0.52 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.
At June 30, 2005 and 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 Opinion 25, "Accounting
for Stock Issued to Employees", and related Interpretations.
The following table illustrates the effect on net loss had the
Company 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,
----------------------------------- ------------------------------------
2005 2004 2005 2004
----------------------------------- ------------------------------------
Net loss, as reported $ (2,016,022) $ (1,331,823) $ (3,814,193) $ (2,100,969)
Less: Stock-based employee compensation
expense determined under the fair-
value based method (568,097) (218,523) (839,918) (680,183)
------------- ------------ ------------ ------------
Net loss, pro forma $ (2,584,119) $ (1,550,346) $ (4,654,111) $ (2,781,152)
============= ============ ============ ============
Basic and diluted net loss per share:
As reported $ (0.05) $ (0.04) $ (0.10) $ (0.07)
============= ============ ============ ============
Pro forma $ (0.07) $ (0.05) $ (0.12) $ (0.09)
============= ============ ============ ============
7
Employee options for the purchase of up to an aggregate of 2,249,000
and 335,000 shares of common stock were granted during the three months ended
June 30, 2005 and 2004, respectively. The weighted average fair value of
employee options granted during the three-month periods ending June 30, 2005 and
2004 was $2.15 and $1.64 per share, respectively.
Employee options for the purchase of up to 2,374,000 and 740,000 shares of
common stock were granted during the six-month periods ended June 30, 2005 and
2004, respectively. The weighted average fair value of employee options granted
during those six-month periods was $2.13 and $1.12 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 three and six month periods ended June 30,
2005 and 2004, respectively.
Three Months ended June 30, Six Months ended June 30,
------------------------------- -----------------------------
2005 2004 2005 2004
------------------------------- -----------------------------
Interest rate 4.14% 3.22% 4.10% 3.19%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected volatility 127.53% 126.00% 126.45% 124.46%
Expected life in years 5.00 5.00 5.00 5.00
Recent Accounting Pronouncements - In December 2004, the FASB issued
Statement of Financial Accounting Standards No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"). SFAS 123(R) replaces SFAS 123 and supersedes APB 25.
SFAS 123(R) is effective as of the beginning of the first annual reporting
period that begins after December 15, 2005. SFAS 123(R) requires that the costs
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS 123(R) applies to all awards granted after the
required effective date and shall not apply to awards granted in periods before
the required effective date, except if prior awards vest, are modified,
repurchased or cancelled after the effective date. SFAS 123(R) also amends
Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows",
to require that excess tax benefits be reported as a financing cash inflow
rather than as a reduction of taxes paid.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107"), which offers guidance on SFAS 123(R). SAB 107 was issued to assist
preparers by simplifying some of the implementation challenges of SFAS 123(R)
while enhancing the information that investors receive. SAB 107 creates a
framework that is premised on two overarching themes: (a) considerable judgment
will be required by preparers to successfully implement SFAS 123(R),
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 valuation models,
expected volatility and expected term. The Company will apply the principles of
SAB 107 in conjunction with its adoption of SFAS 123(R).
Certain reclassifications have been made to conform the prior year
financial statements to the presentation of the current period.
3. EQUITY TRANSACTIONS
From November 12, 2004 through January 12, 2005, the Company sold to
accredited investors, through a private offering, 2,123,000 F Units at a price
of one dollar ($1.00) per F Unit, with each F 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 exercise price of two
dollars ($2.00), exercisable until November 12, 2007. The gross proceeds from
the offering were $2,123,000, of which $933,000 was received in January 2005.
The Company issued 963,000 shares in January 2005, including 30,000 shares that
had been recorded as common stock subscribed as of December 31, 2004. The
Company paid cash commissions totaling $90,350 and issued 63,181 F Units to the
placement agent in January 2005 in connection with this private offering. The
sales of these securities were made in reliance upon Rule 506 and Section 4(2)
of the Securities Act of 1933.
8
From February 1, 2005 through March 31, 2005, the Company offered all
shareholders who owned warrants with an exercise price of $2.00 the right to
exercise their warrants at a discounted price of $1.40 per share. A total of
2,140,283 warrants was exercised, resulting in gross proceeds to the Company of
$2,996,396. The Company paid cash commissions of $109,800 in connection with
these warrant exercises in March and April of 2005. The sales of these
securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.
On February 25, 2005, a prior consultant exercised an option for 12,886
shares, generating cash proceeds to the Company of $24,999. The option was
previously granted in lieu of cash compensation. Non-employee stock compensation
expense of $3,526 related to the exercise was recognized during the six months
ended June 30, 2005.
From April 14, 2005 through May 31, 2005, the Company offered certain
shareholders who owned warrants with an exercise price of $2.00 the right to
exercise their warrants at a discounted price of $1.40 per share. A total of
671,000 warrants was exercised, resulting in gross proceeds to the Company of
$939,400. The Company paid cash commissions of $84,000 in connection with these
warrant exercises in May 2005. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.
From April 14, 2005 through June 30, 2005, the Company sold to
accredited investors, through a private offering, 1,651,250 G Units at a price
of one dollar and sixty cents ($1.60) per G Unit, with each G 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 exercise price
of three dollars and fifty cents ($3.50), exercisable until April 14, 2008. The
gross proceeds from the offering were $2,642,000. The Company paid cash
commissions of $75,000, and will issue 29,829 G Units to the placement agent in
connection with this private offering. The sales of these securities were made
in reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.
In January 2005 a sales consultant's contract terminated, and as part
of the termination agreement, the Company agreed to extend the period for
exercising certain stock options from the standard 90 days allowed under the
2002 Stock Option Plan to one year. On May 1, 2005, the Company recognized
non-employee stock compensation expense of $30,130 related to the extension.
During the six months ended June 30, 2005, $5,692 in non-employee stock
compensation expense was recognized related to the vesting of options held by
continuing consultants.
During the six months ended June 30, 2005, a total of 103,704 shares of
common stock of the Company was purchased through the exercise of stock options,
resulting in cash proceeds to the Company of $125,591.
4. WARRANTS AND STOCK OPTIONS
As of June 30, 2005, the Company had outstanding warrants to purchase
up to 11,271,876 shares of common stock and options to purchase up to 7,030,326
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
Options Warrants Total
------- -------- -----
Balance, December 31, 2004 4,969,448 11,444,728 16,414,176
Granted 2,374,000 2,777,431 5,151,431
Exercised 116,590 2,811,283 2,927,873
Retired/forfeited 196,532 - 196,532
Expired - 139,000 139,000
------------------------------------------------------------
Balance, June 30, 2005 7,030,326 11,271,876 18,302,202
============================================================
As of June 30, 2005, 2,858,415 options remained available for future
grants in the option reserve.
5. DEFERRED REVENUES
9
As of June 30, 2005, deferred revenues consisted of both payments from
customers in advance for one-year software maintenance under perpetual licenses,
and for the license and maintenance fees for three-year arrangements for which
the license and maintenance support fees were not individually identified and
priced. The revenues are being amortized ratably to revenue over the applicable
periods.
6. COMMITMENTS AND CONTINGENCIES
On April 27, 2005, the Company entered into a lease with Bayside Plaza,
a partnership, for approximately 15,600 square feet of general commercial
offices located at 700 Airport Boulevard, Suite 300, Burlingame, California (the
"Premises"). The Company moved its principal offices to these Premises on May 2,
2005. The Premises are used for the purposes of general office use including,
without limitation, hosting server operations and for software development. The
lease has an initial term of three years, subject to the Company's right to
extend the term of the lease for a total of six additional years. The base rent
under this lease is $16,060 per month for the first year, $17,520 per month for
the second year and $20,440 per month for the third year. The Company will
receive abated rent for the period from May 1, 2005 to July 30, 2005. In the
event that the Lease is not extended, the total obligations of the Company
hereunder amount to $600,060.
The Company is recognizing rent expense for this lease in accordance
with Financial Technical Bulletin 85-3 ("FTB 85-3"), "Accounting for Operating
Leases with Scheduled Rent Increases". The base rent, the effects of the
scheduled rent increases, and the effects of the rent abatement are being
recognized on a straight-line basis over the lease term. This results in monthly
rental expense of $16,668. During the quarter and six months ended June 30,
2005, the Company recognized a total of $33,336 in rental expense for this
lease.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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, over
the next twelve months its focus will be on marketing, supporting customers, and
continued research and development.
Technology Development
- ----------------------
Over the next twelve months, 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
10
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.
Marketing
- ---------
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.
o Execute a "compatible with," strategy for RDBMS's such as:
Oracle, IBM's DB2, and Microsoft's SQL Server.
o Sell the ANTs Data Server through three sales channels;
o Direct sales to end-users
o Through Independent Software Vendors ("ISV's") who
will incorporate the ANTs Data Server with their own
product which they will sell to their customers
o Through Value Added Resellers ("VARs") - companies
which generally have deep expertise in certain
vertical markets and who integrate the best products
to develop complete solutions for their customers.
During the six-month period ending June 30, 2005, the majority of invoiced sales
have come through sales to ISV's and the remainder through direct sales to
end-user customers.
Raising Capital
- ---------------
The Company anticipates that current cash resources will be sufficient
to fund its operations through January 31, 2006 at its expected rate of
spending. To carry out its plan of operations, the Company anticipates that,
over the next twelve months, it will require an additional $5 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 warrants 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 has begun generating revenue
and expects to continue generating revenue during the next twelve months and, if
successful, this should be a source of some operating funds. The Company intends
to pursue all three avenues.
Personnel and Appointment of Officers
- -------------------------------------
The Company currently has 42 full-time equivalent employees, comprising
35 full-time employees and 7 contractors. 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 is successful in its recruitment
efforts, the Company expects that its personnel and other operating costs will
increase moderately to substantially over current levels.
As previously reported by the Company on Form 8-K filed on June 15,
2005, the Company appointed Mr. Joseph Kozak as President of the Company
effective June 10, 2005. Also on June 10, 2005, Mr. Boyd Pearce resigned as
President of the Company and remains Chief Executive Officer.
On April 26, 2005, the Company entered into agreements terminating the
Salary Agreements discussed below (the "Termination Agreements") with each of
the following persons: Francis K. Ruotolo, the Company's Chairman, Boyd Pearce,
the Company's Chief Executive Officer, Kenneth Ruotolo, the Company's Chief
Financial Officer and Secretary, Clifford Hersh, the Company's Chief Scientist,
Girish Mundada, the Company's Vice President of Engineering and Jeffrey R.
Spirn, Ph.D., the Company's Vice President of Research and Development (each an
"Officer").
In October 2004, pursuant to salary agreements by and between the
Company and each Officer dated as of October 29, 2004 (the "Salary Agreements"),
11
each Officer's salary (the "Original Salary") was reduced to 50 percent of the
Original Salary, and the Company agreed to pay each Officer a bonus, equal to
the aggregate amount that such Officer's salary had been reduced, should the
Company raise a certain amount of financing between October 16, 2004 and
February 1, 2005.
Effective January 1, 2005, each Officer's salary was increased to 75
percent of the Original Salary pursuant to amendment agreements by and between
the Company and each Officer dated as of January 13, 2005. The Company did not
raise the required financing by February 1, 2005 and no bonus was paid to the
Officers at that time.
On February 1, 2005, the Company and the Officers agreed, pursuant to
amendment agreements by and between the Company and each Officer dated as of
February 1, 2005, that if the Company raised a certain amount of financing
between February 1, 2005 and June 30, 2005, the Officers would be paid a bonus,
equal to the aggregate amount that such Officer's salary had been reduced since
October 16, 2004. In March 2005, the Company raised the required financing and
in April 2005, the Company paid the contingent bonuses in performance of its
obligations under the Salary Agreements, as amended. Also in April 2005, the
Company and Officers agreed to terminate the Salary Agreements and the related
amendment agreements, and to restore each Officer's salary to the Original
Salary, effective April 1, 2005.
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 six additional patent applications.
Results of Operations
- ---------------------
The results of operations for the three and six month periods ending
June 30, 2005 and 2004 are summarized in the table below.
Summary of Statements of Operations
------------------------------------------------------
($ in 000's)
For Three Months ending June 30, For Six Months ending June 30,
------------------------------- -------------------------------
2005 2004 % Change 2005 2004 % Change
---- ---- -------- ---- ----- --------
Revenues $ 135 $ - N/A $ 222 $ - N/A
Operating expenses 2,112 1,299 63% 4,000 2,251 78%
------ ------ -- ------ ------ --
Loss from operations (1,977) (1,299) 52% (3,778) (2,251) 68%
Other income (expense), net (39) (33) 18% (36) 150 -124%
---------- ------- -- ---------- --------- --
Net loss $ (2,016) $(1,332) 51% $ (3,814) $ (2,101) 82%
========== ======= == ========== ========= ==
Net loss per share -
basic and diluted $ (0.05) $ (0.04) 25% $ (0.10) $ (0.07) 43%
========== ======= == ========== ========= ==
Shares used in computing basic
and diluted net loss per share
(in 000's) 39,535 32,312 22% 38,362 30,274 27%
========== ======= == ========== ========= ==
Revenues
- --------
During the first six months of 2005, the Company invoiced an aggregate
of $279,600, comprising $260,100 related to the license of the ANTs Data Server
and related one-year maintenance and support agreements, and $19,500 related to
12
professional services. Of the total invoiced amount related to the ANTs Data
Server, the Company recognized license fee revenue of $194,100 in the statements
of operations during the six months ended June 30, 2005, and deferred revenue of
$66,000 related to one-year support and maintenance contracts sold with the
license fees on the balance sheet. The Company earned $7,667 of the total
deferred revenue in the six months ended June 30, 2005, leaving a total of
$58,333 in deferred revenue as of June 30, 2005. The deferred revenues are being
amortized ratably over the twelve-month period from the contract dates. The
professional services fees were earned and recognized as revenue during the
fiscal period ending June 30, 2005.
Operating Expenses
- ------------------
Operating expenses for the three and six month fiscal periods ending
June 30, 2005 and 2004 were as follows:
Operating Expenses - Three Months ended June 30,
2005 2004
---- ----
% Change vs.
$ in 000's % of Total Prior Period $ in 000's % of Total
---------- ---------- ------------ ---------- ----------
Sales and marketing $ 855 40% 174% $ 312 24%
Research and development 796 38% 38% 577 44%
General and administrative 461 22% 12% 410 32%
-----------------------------------------------------------------
Total operating expenses $ (2,112) 100% 63% $ (1,299) 100%
=================================================================
Operating Expenses - Six Months ended June 30,
2005 2004
---- ----
% Change vs.
$ in 000's % of Total Prior Period $ in 000's % of Total
---------- ---------- ------------ ---------- ----------
Sales and marketing $ 1,431 36% 212% $ 458 20%
Research and development 1,583 40% 53% 1,037 46%
General and administrative 986 24% 30% 756 34%
-----------------------------------------------------------------
Total operating expenses $ (4,000) 100% 78% $ (2,251) 100%
=================================================================
During the first six months of 2004, the Company was just beginning its
transition from focusing primarily on basic research and development ("R&D"), to
focusing heavily on sales and marketing, supported by ongoing R&D. During the
three-month and six-month periods ending June 30, 2005, the Company's marketing
activities expanded dramatically, both as compared to the same periods in 2004,
and as compared to the growth in R&D and general and administrative ("G&A")
activities over the same periods.
Sales and Marketing Expenses
- ----------------------------
Sales and marketing ("S&M") expenses consist primarily of employee
salaries and benefits, consultants' fees, travel, marketing programs (trade
shows, public relations, lead generation programs), marketing and sales
literature and presentations, and allocation of corporate overhead.
Total S&M expenses increased by $543 thousand, or 174%, for the
three-month period ending June 30, 2005 as compared to the same period in 2004.
Total S&M expenses comprised 40% and 24% of total operating expenses for the
three months ended June 30, 2005 and 2004, respectively.
From the second quarter of 2004 to the same period in 2005, total S&M
expenses increased primarily due to the following: 1) a $341 thousand, or 200%,
increase in total compensation and benefits expense related to: a) an increase
from an average of four sales and sales support staff (including full-time
consultants) in 2004 to an average of eleven staff (including full-time
consultants) in 2005, b) bonuses of $58.7 thousand paid to sales staff pursuant
13
to their 2005 sales plans (the ratio of sales bonuses to total sales in 2005 is
not necessarily indicative of the level of bonuses that will be paid in the
future) as compared to zero paid in 2004 and c) recruiting fees of $12 thousand
in 2005 as compared to zero in 2004; 2) an increase of $95.6 thousand, or 131%,
in total direct sales and marketing expense (public relations programs, trade
shows and other events, and lead generation, among others); 3) an increase of
$27 thousand, or 61%, in sales and marketing related travel; and 4) an increase
in allocation of general corporate overhead of $78 thousand, or 346%, based both
on the increase in the number of sales and marketing personnel, and an increase
in total corporate overhead expenses.
For the six months ending June 30, 2005, total S&M expenses increased
by $973 thousand, or 212%, as compared to the same period in 2004. Total S&M
expenses comprised 36% and 20% of total operating expenses for the six months
ended June 30, 2005 and 2004, respectively.
For the six-month period ending June 30, 2005 as compared to the same
period in 2004, total S&M expenses increased primarily due to the following: 1)
a $646 thousand, or 237%, increase in total compensation and benefits expense
related to: a) an increase from an average of three sales and sales support
staff (including full-time consultants) in 2004 to an average of nine staff
(including full-time consultants) in 2005, b) bonuses of $114 thousand paid to
sales staff pursuant to their 2005 sales plans (the ratio of sales bonuses to
total sales in 2005 is not necessarily indicative of the level of bonuses that
will be paid in the future) as compared to zero paid in 2004 and c) recruiting
fees of $21 thousand in 2005 as compared to zero in 2004; 2) an increase of
$127.7 thousand, or 129%, in total direct sales and marketing expense (public
relations programs, trade shows and other events, and lead generation, among
others); 3) an increase of $51 thousand, or 90%, in sales and marketing related
travel; and 4) an increase in allocation of general corporate overhead of $134
thousand, or 377%, based both on the increase in the number of sales and
marketing personnel, and an increase in total corporate overhead expenses.
The Company expects that, if sufficiently funded, its marketing and
sales expenses will continue to increase substantially as more marketing and
sales personnel are hired and more programs are implemented.
Research and Development Expenses
- ---------------------------------
Research and development ("R&D") expenses consist primarily of employee
salaries and benefits, fees to consultants, depreciation on equipment and
software, and allocation of corporate overhead. During the second quarter of
2004, the Company's activities were still primarily focused on the basic R&D
process related to developing, and rendering the product viable for potential
users. Since 2004, R&D has become more and more focused on supporting S&M
activities, primarily through adding functionalities, testing and refining the
product based on feedback from customers and potential customers, and doing
customer conversions to the ANTs Data Server.
Total R&D expenses increased by $219 thousand, or 38%, for the
three-month period ending June 30, 2005 as compared to the same period in 2004.
Total R&D expenses comprised 38% and 44% of total operating expenses for the
three months ended June 30, 2005 and 2004, respectively.
Increased R&D expenses for the three months ending June 30, 2005 as
compared to the same period in 2004 resulted primarily from: 1) an increase in
total compensation and benefits expense of $194 thousand, or 41%, as the average
number of R&D staff increased from 14 in 2004 to 17 in 2005, and modest raises
and bonuses were given to the staff in April 2005 in recognition of their
dedicated efforts over the years; and 2) an increase in depreciation expense of
$15 thousand, or 38%, as the Company purchased approximately $275 thousand in
new equipment and leasehold improvements related to R&D during the 12 months
ended June 30, 2005.
From the first six months of 2004 to the same period in 2005, total R&D
expense increased by $546 thousand or 53%. Total R&D expenses comprised 40% and
46% of total operating expenses for the six months ended June 30, 2005 and 2004,
respectively.
Increased R&D expenses for the six months ending June 30, 2005 period
as compared to the same period in 2004 period resulted primarily from: 1) an
increase in total compensation and benefits expense of $489 thousand, or 58%, as
the average number of R&D staff increased from 13 in 2004 to 15 in 2005, and
modest raises and bonuses were given to the staff in April 2005, in recognition
of their dedicated efforts over the years; and 2) an increase in depreciation
expense of $33.7 thousand, or 42%, as the Company purchased approximately $275
thousand in new equipment and leasehold improvements related to R&D during the
12 months ended June 30, 2005.
The Company expects that, if sufficiently funded, its research and
14
development expenses will increase moderately over the next twelve months as
additional staff is recruited, and additional hardware is purchased, to support
sales and marketing needs.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses ("G&A") comprise primarily employee
salaries and benefits, professional fees (legal, accounting, investor relations,
and recruiting), facilities expenses and insurance. During the six-month period
ended June 30, 2005 compared to the same period in 2004, administrative staff
increased from four to five people as the Company added a President, now Chief
Executive Officer, during the fourth fiscal quarter of 2004.
Total G&A expenses increased by $51 thousand, or 12%, for the
three-month period ending June 30, 2005 as compared to the same period in 2004.
Total G&A expenses comprised 22% and 32% of total operating expenses for the
three months ended June 30, 2005 and 2004, respectively.
Increased G&A expenses for the three months ending June 30, 2005 as
compared to the same period in 2004 resulted primarily from: 1) an increase in
total compensation and benefits expense of $60.7 thousand, or 26%, due to the
Chief Executive Officer's $25 thousand of compensation in the 2005 period, as
compared to zero in the 2004 period, and the restoration of executive officers'
salaries from 75% of their original salaries in 2004 to 100%, effective April 1,
2005; 2) an increase of $39.7 thousand, or 104%, in facilities expense related
to the new office facilities to which the Company moved in May 2005; 3) an
increase of $37 thousand, or 65%, in legal fees related to increased capital
raising in the 2005 quarter, and registering with various state agencies to do
business outside of California, all offset by 4) an increase of $64.2 thousand,
or 82%, in corporate overhead allocated from G&A to R&D and S&M based on both
the increases in the staff of these areas, and the overall increase in corporate
overhead expenses in 2005.
Total G&A expenses increased by $230 thousand, or 30%, for the
six-month period ending June 30, 2005 as compared to the same period in 2004.
Total G&A expenses comprised 25% and 34% of total operating expenses for the six
months ended June 30, 2005 and 2004, respectively.
Increased G&A expenses for the six months ending June 30, 2005 as
compared to the same period in 2004 resulted primarily from: 1) an increase in
total compensation and benefits expense of $251 thousand, or 65%, due largely to
the Chief Executive Officer's $50 thousand of compensation in the 2005 period,
as compared to zero in the 2004 period, the restoration of executive officers'
salaries from 75% of their original salaries in 2004 to 100%, effective April 1,
2005, and an increase in medical insurance premiums of $56 thousand, or 129%; 2)
an increase of $60.6 thousand, or 119%, in facilities expense related to the new
office facilities to which the Company moved in May 2005; 3) an increase of
$46.2 thousand, or 37%, in legal fees related to increased capital raising in
2005, and registering with various state agencies to do business outside of
California; 4) a decrease in D&O and property and liability insurance of $17.7
thousand, or 25%, from 2004 to 2005, all offset by 4) an increase of $124.6
thousand, or 101%, in corporate overhead allocated from G&A to R&D and S&M based
on both the increases in the staff of these areas, and the overall increase in
corporate overhead expenses in 2005.
The Company expects that, if sufficiently funded, its general and
administrative expenses will increase moderately as the Company expands.
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.
Other Income (Expense), Net
- ---------------------------
Other income (expense), net, increased by ($2.5 thousand) or (7.8%) and
($181.9 thousand), or (121%) in the three and six-month periods ending June 30,
2005 and 2004, respectively.
The changes were largely attributable to the following: 1) in 2004, the
Company recognized $311 thousand in other income related to the expiration of a
contract with Net Soft Systems, Inc.; 2) in 2004, a note receivable to a former
officer in the amount of $45 thousand was written off; 3) $127.2 thousand in
non-cash interest expense related to two convertible promissory notes was
recognized in 2004. Since these notes were converted to stock in July 2004,
there was no corresponding expense in 2005; and 4) in 2005, the Company wrote
off the net
15
book value of leasehold improvements and security deposits related to the
Company's prior facilities in the amount of $42 thousand.
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, 2005, the
total outstanding obligation was $4,452. Should the Company default in its lease
obligation, the lessor could choose to repossess the computer equipment;
however, should the lessor do so, it would not have a material adverse effect on
the Company's ability to maintain normal business operations.
On April 27, 2005, the Company entered into a lease with Bayside
Plaza, a partnership, for approximately 15,600 square feet of general commercial
offices located at 700 Airport Boulevard, Suite 300, Burlingame, California (the
"Premises"). The Company moved its principal offices to these Premises on May 2,
2005.The Premises are used for the purposes of general office use including,
without limitation, hosting server operations and for software development. The
lease has an initial term of three years, subject to the Company's right to
extend the term of the lease for a total of six additional years. The base rent
under this lease is $16,060 per month for the first year, $17,520 per month for
the second year and $20,440 per month for the third year. The Company will
receive abated rent for the period from May 1, 2005 to July 30, 2005. In the
event that the Lease is not extended, the total obligations of the Company there
under amount to $600,060.
The Company is recognizing rent expense for this lease in accordance
with Financial Technical Bulletin 85-3 ("FTB 85-3"), "Accounting for Operating
Leases with Scheduled Rent Increases". The base rent, the effects of the
scheduled rent increases, and the effects of the rent abatement are being
recognized on a straight-line basis over the lease term. This results in monthly
rental expense of $16,668. During the quarter and six months ended June 30,
2005, the Company recognized a total of $33,336 in rental expense for this
lease.
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 Revenue recognition
o Stock-based compensation
o Income taxes
Revenue Recognition - We recognize revenue in accordance with the
provisions of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions". Revenue consists primarily
of revenue earned under agreements for software licenses, maintenance and
support (otherwise known as post-contract customer support or "PCS") and
professional services.
We use the residual method to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date. If
there is an undelivered element under the license arrangement, we defer revenue
based on vendor-specific objective evidence, or VSOE, of the fair value of the
undelivered element, as determined by the price charged when the element is sold
separately. If VSOE of fair value does not exist for all undelivered elements,
we defer all revenue until sufficient evidence exists or all elements have been
delivered. Under the residual method, discounts are allocated only to the
delivered elements in a multiple element arrangement with any undelivered
16
elements being deferred based on VSOE of fair values of such undelivered
elements. Revenue from software license arrangements, which comprise prepaid
license and maintenance support fees, is recognized when all of the following
criteria are met:
o Persuasive evidence of an arrangement exists.
o Delivery has occurred and there are no future deliverables
except post-contract customer support ("PCS").
o The fee is fixed and determinable. If we cannot conclude that
a fee is fixed and determinable, then assuming all other
criteria have been met, revenue is recognized as payments
become due in accordance with paragraph 29 of SOP 97-2.
o Collection is probable.
Revenue from professional fees, consisting primarily of consulting
services, is recognized as services are provided and the revenues are earned.
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's cash balance as of June 30, 2005 was approximately $4.8
million, which the Company believes will be adequate to fund its activities
through January 31, 2006 at its expected 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 and although it has
consistently raised capital, there can be no assurance that it will be able to
obtain capital on acceptable terms, or at all. Over the next twelve months, if
sufficiently funded, the Company intends to increase expenditures moderately to
substantially as it actively markets and sells the ANTs Data Server and hires
additional sales, marketing, and technical personnel. There can be no assurance
that the Company's continued product development, infrastructure development and
sales and marketing activities will not require a much higher rate of spending
than currently projected by management.
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.
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
17
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceeding
and, to the best of its knowledge, no such action against the Company has been
threatened, nor does the Company anticipate any such action.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
From November 12, 2004 through January 12, 2005, the Company sold to
accredited investors, through a private offering, 2,123,000 F Units at a price
of one dollar ($1.00) per F Unit, with each F 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 exercise price of two
dollars ($2.00), exercisable until November 12, 2007. The gross proceeds from
the offering were $2,123,000, of which $933,000 was received in January 2005.
The Company issued 963,000 shares in January 2005, including 30,000 shares that
had been recorded as common stock subscribed as of December 31, 2004. The
Company paid cash commissions totaling $90,350 and issued 63,181 F Units to the
placement agent in January 2005 in connection with this private offering. The
sales of these securities were made in reliance upon Rule 506 and Section 4(2)
of the Securities Act of 1933.
From February 1, 2005 through March 31, 2005, the Company offered all
shareholders who owned warrants with an exercise price of $2.00 the right to
exercise their warrants at a discounted price of $1.40 per share. A total of
2,140,283 warrants was exercised, resulting in gross proceeds to the Company of
$2,996,396. The Company paid cash commissions of $109,800 in connection with
these warrant exercises in March and April of 2005. The sales of these
securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.
On February 25, 2005, a prior consultant exercised an option for 12,886
shares, generating cash proceeds to the Company of $24,999. The option was
previously granted in lieu of cash compensation. Non-employee stock compensation
expense of $3,526 related to the exercise was recognized during the six months
ended June 30, 2005.
From April 14, 2005 through May 31, 2005, the Company offered certain
shareholders who owned warrants with an exercise price of $2.00 the right to
exercise their warrants at a discounted price of $1.40 per share. A total of
671,000 warrants was exercised, resulting in gross proceeds to the Company of
$939,400. The Company paid cash commissions of $84,000 in connection with these
warrant exercises in May 2005. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.
From April 14, 2005 through June 30, 2005, the Company sold to
accredited investors, through a private offering, 1,651,250 G Units at a price
of one dollar and sixty cents ($1.60) per G Unit, with each G 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 exercise price
of three dollars and fifty cents ($3.50), exercisable until April 14, 2008. The
gross proceeds from the offering were $2,642,000. The Company paid cash
commissions of $75,000, and will issue 29,829 G Units to the placement agent in
connection with this private offering. The sales of these securities were made
in reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.
In January 2005 a sales consultant's contract terminated, and as part
of the termination agreement, the Company agreed to extend the period for
exercising certain stock options from the standard 90 days allowed under the
2002 Stock Option Plan to one year. On May 1, 2005, the Company recognized
non-employee stock compensation expense of $30,130 related to the extension.
During the six months ended June 30, 2005, $5,692 in non-employee stock
compensation expense was recognized related to the vesting of options held by
continuing consultants.
During the six months ended June 30, 2005, a total of 103,704 shares of
common stock of the Company was purchased through the exercise of stock options,
resulting in cash proceeds to the Company of $125,591.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
18
The annual meeting of the shareholders of the Company was held on April
5, 2005. Of the 36,559,997 shares entitled to vote at the meeting, 23,223,414
shares were voted. The results were as follows:
Proposal number 1 - Election of Two Class 2 Directors:
FOR WITHHELD
--- --------
Homer G. Dunn 23,176,013 47,401
Robert Henry Kite 23,174,813 48,601
Proposal number 2 - Amendment to the Company's 2000 Stock Option Plan
(the "Plan") to increase the shares reserved under the Plan from 5,450,000 to
10,450,000:
FOR AGAINST ABSTENTION
--- ------- ----------
11,388,423 608,246 106,867
Proposal number 3 - Ratification of the selection of Burr, Pilger &
Mayer, LLP, as independent accountants for the Company for the calendar year
ending December 31, 2005:
FOR AGAINST ABSTENTION
--- ------- ----------
23,208,185 12,570 2,659
The following directors continued in office after the annual
shareholder meeting: Francis K. Ruotolo, Boyd Pearce, John R. Gaulding,
Thomas Holt, and Richard LaBarbera.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Company, filed as 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, filed as Exhibit
3.2 to the Company's 10-KSB filed on March 22, 2001, are
hereby incorporated by reference.
10.1 Letter Agreement between the Company and Boyd Pearce, filed as
Exhibit 10.1 to the Company's Form 8-K filed on October 20,
2004, is hereby incorporated by reference.
10.2 Salary Agreement between the Company and Francis K. Ruotolo,
filed as Exhibit 10.1 to the Company's Form 8-K filed on
November 1, 2004, is hereby incorporated by reference.
10.3 Salary Agreement between the Company and Boyd Pearce, filed as
Exhibit 10.2 to the Company's Form 8-K filed on November 1,
2004, is hereby incorporated by reference.
10.4 Salary Agreement between the Company and Kenneth Ruotolo,
filed as Exhibit 10.3 to the Company's Form 8-K filed on
November 1, 2004, is hereby incorporated by reference.
10.5 Salary Agreement between the Company and Clifford Hersh, filed
as Exhibit 10.4 to the Company's Form 8-K filed on November 1,
2004, is hereby incorporated by reference.
10.6 Salary Agreement between the Company and Jeffrey R. Spirn,
PhD, filed as Exhibit 10.5 to the Company's Form 8-K filed on
November 1, 2004, is hereby incorporated by reference.
10.7 Salary Agreement between the Company and Girish Mundada, filed
as Exhibit 10.1 to the Company's Form 8-K filed on November 2,
2004, is hereby incorporated by reference.
19
10.8 ANTs software inc. 2000 Stock Option Plan, as amended, filed
as Exhibit 10.1 to the Company's form 8-K filed on April 12,
2005, is hereby incorporated by reference.
10.9 Termination Agreement between the Company and Boyd Pearce,
filed as Exhibit 10.1 to the Company's form 8-K filed on April
29, 2005, is hereby incorporated by reference.
10.10 Termination Agreement between the Company and Kenneth Ruotolo,
filed as Exhibit 10.2 to the Company's form 8-K filed on April
29, 2005, is hereby incorporated by reference.
10.11 Termination Agreement between the Company and Clifford Hersh,
filed as Exhibit 10.3 to the Company's form 8-K filed on April
29, 2005, is hereby incorporated by reference.
10.12 Termination Agreement between the Company and Jeffrey R.
Spirn, Ph.D., filed as Exhibit 10.4 to the Company's form 8-K
filed on April 29, 2005, is hereby incorporated by reference.
10.13 Termination Agreement between the Company and Girish Mundada,
filed as Exhibit 10.5 to the Company's form 8-K filed on April
29, 2005, is hereby incorporated by reference.
10.14 Termination Agreement between the Company and Francis K.
Ruotolo, filed as Exhibit 10.6 to the Company's form 8-K filed
on April 29, 2005, is hereby incorporated by reference.
10.15 Indemnification Agreement between the Company and Joseph M.
Kozak, filed as Exhibit 10.1 to the Company's form 8-K filed
on June 15, 2005, is hereby incorporated by reference.
10.16 Resignation of Boyd Pearce as President of the Company, filed
as Exhibit 10.2 to the Company's form 8-K filed on June 15,
2005, is hereby incorporated by reference.
10.17 Letter Agreement dated June 10, 2005 between the Company and
Joseph M. Kozak, filed as Exhibit 10.3 to the Company's form
8-K filed on June 15, 2005, is hereby incorporated by
reference.
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 fiscal quarter covered by this report, the Company filed the
following reports on Form 8-K: (i) On April 5, 2005, the Company's Board of
Directors and stockholders approved an amendment to the Company's
2000 Stock Option Plan (the "Plan") to increase the shares reserved under the
Plan from 5,450,000 to 10,450,000, (ii) on April 29, 2005, the Company (a)
entered into a three year lease with Bayside Plaza to lease approximately 15,600
square feet of general commercial offices, and (b) entered into agreements with
the Company's officers to terminate prior salary agreements and to restore each
Officer's salary to his/her Original Salary, (iii) On May 10, 2005 the Company
issued a press release announcing that, since December 2004, it had raised $7.1
million through private offerings for general working capital purposes and (iv)
on June 15, 2005 the Company disclosed (a) the appointment of Joseph M. Kozak as
the President of the Company and that Mr. Kozak and the Company had entered into
an Indemnification Agreement, and (b) the resignation of Boyd Pearce as
President and Mr. Pearce's continued employment as Chief Executive Officer 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 quarterly report on form 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.
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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 January 31, 2006. The Company
anticipates that current cash resources will be sufficient to fund its
operations only through January 31, 2006 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 and may be
unable to service such debt in accordance with its terms.
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.
Market acceptance of the Company's products and services is not
guaranteed. The Company is at an early stage of development and its revenue 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.
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 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.
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 with the United States Patent and Trademark Office and intends to
file more. Two patents 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 an 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, all of
which would materially adversely affect its business.
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
21
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
substantial 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
Chief Executive Officer, Boyd Pearce, its President Joseph Kozak, and its
Chairman, 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.
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.
If the Company continues at or exceeds its current rate of 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.
Future profitability is not guaranteed. The Company has not recognized
any substantial 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.
22
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 two or three directors out of seven directors at each
shareholders meeting held for that purpose.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANTs software inc.
Date: August 8, 2005 By: /s/ Boyd Pearce
------------------------------------
Boyd Pearce, Chief Executive Officer and
Director
Date: August 8, 2005 By: /s/ Kenneth Ruotolo
------------------------------------
Kenneth Ruotolo
Chief Financial Officer and Secretary
23