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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: September 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)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.): Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
41,807,246 shares of common stock as of September 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................................................3-11
Item 2. Management's Discussion and Analysis...............................11-19
Item 3. Controls and Procedures...............................................19
PART II. Other Information
Item 1. Legal Proceedings.....................................................19
Item 2. Unregistered Sales of Equity Securities............................19-23
Item 3. Defaults Upon Senior Securities.......................................23
Item 4. Submission of Matters to a Vote of Security Holders...................23
Item 5. Other Information.....................................................23
Item 6. Exhibits and Reports on Form 8-K......................................23
Risk Factors...............................................................23-26
Signatures....................................................................26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTS SOFTWARE INC.
BALANCE SHEETS
----------------
September 30, December 31,
2005 2004
ASSETS (Unaudited) (Audited)
-------------- --------------
Current assets:
Cash $ 3,779,879 $ 1,448,724
Accounts receivable, net of allowance for
doubtful accounts of $16,000 253,890 -
Prepaid insurance 57,500 21,375
Prepaid expenses 37,444 65,292
-------------- --------------
Total current assets 4,128,713 1,535,391
-------------- --------------
Computers and software 1,373,445 949,046
Office furniture, fixtures and equipment 69,187 29,386
Leasehold improvements 46,662 16,675
Less accumulated depreciation (867,274) (670,982)
-------------- --------------
Property and equipment, net 622,020 324,125
-------------- --------------
Other assets - security deposits 34,702 9,100
-------------- --------------
Total assets $ 4,785,435 $ 1,868,616
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 498,665 $ 333,916
Deferred revenues 74,985 -
Capital lease payable, current portion - 4,871
-------------- --------------
Total current liabilities 573,650 338,787
-------------- --------------
Long-term liabilities:
Capital lease payable - 648
-------------- --------------
Total liabilities 573,650 339,435
-------------- --------------
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; 41,807,246 and 35,298,817
shares issued and outstanding, respectively 4,181 3,530
Common stock subscribed, not issued 334,436 30,000
Additional paid-in capital 44,864,059 36,316,987
Accumulated deficit (40,990,891) (34,821,336)
-------------- --------------
Total stockholders' equity 4,211,785 1,529,181
-------------- --------------
Total liabilities and stockholders' equity $ 4,785,435 $ 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 Nine Months ended
September 30, September 30,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
Revenues:
Licenses $ 78,400 $ - $ 272,500 $ -
Maintenance 16,833 - 24,500 -
Professional services - - 19,500 -
------------- ------------- ------------- -------------
Total revenues 95,233 - 316,500 -
Expenses:
Sales and marketing 1,085,532 477,659 2,516,067 933,824
Research and development 951,787 560,646 2,534,969 1,594,884
General and administrative 420,568 317,770 1,406,660 1,078,294
------------- ------------- ------------- -------------
Total expenses 2,457,887 1,356,075 6,457,696 3,607,002
------------- ------------- ------------- -------------
Loss from operations (2,362,654) (1,356,075) (6,141,196) (3,607,002)
------------- ------------- ------------- -------------
Other income (expense):
Income earned from expired contract - - - 310,943
Interest income 7,219 5,289 15,780 14,435
Gain on legal settlement 1,000 1,500 3,500 5,000
Write off note receivable from former officer - - - (45,000)
Write off assets related to office move, net - - (45,012) -
Interest expense (927) (7,067) (2,627) (135,698)
------------- ------------- ------------- -------------
Other income (expense), net 7,292 (278) (28,359) 149,680
------------- ------------- ------------- -------------
Net loss $ (2,355,362) $ (1,356,353) $ (6,169,555) $ (3,457,322)
============= ============= ============= =============
Basic and diluted net loss per common share $ (0.06) $ (0.04) $ (0.16) $ (0.11)
============= ============= ============= =============
Shares used in computing basic and diluted net
loss per share 41,492,402 33,891,287 39,417,107 31,819,854
============= ============= ============= =============
The accompanying notes are an integral part of these condensed financial statements.
4
ANTS SOFTWARE INC.
STATEMENTS OF CASH FLOWS
----------------
Nine Months ended September 30,
2005 2004
(Unaudited) (Unaudited)
------------- -------------
Cash flows from operating activities:
Net loss $ (6,169,555) $ (3,457,322)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 206,267 134,587
Amortization of rent for new office facilities 83,340 -
Bad debt expense 16,000 -
Amortization of debt discount and beneficial conversion feature - 134,306
Compensation expense recognized on options granted to non-employees 20,636 36,560
Compensation expense recognized on G Units granted to non-employees 8,786 -
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:
Accounts receivable (269,889) -
Prepaid insurance and expenses (8,277) (29,397)
Other assets - deposits on new office facilities (34,420) -
Accounts payable and other accrued expenses 81,409 63,635
Deferred salaries - (340,505)
Deferred revenue 74,985 (310,943)
------------- -------------
Net cash used in operating activities (5,945,706) (3,724,079)
------------- -------------
Cash flows used in investing activities:
Purchases of office furniture, fixtures and equipment (540,356) (145,249)
Cash flows from financing activities:
Proceeds from private placements, net of commissions 4,730,151 4,443,279
Common stock subscribed 200,000 -
Proceeds from exercise of options 150,589 387,553
Proceeds from exercise of warrants, net of commissions 3,741,996 -
Payments on capital lease obligations (5,519) (3,008)
------------- -------------
Net cash provided by financing activities 8,817,217 4,827,824
------------- -------------
Net increase (decrease) in cash 2,331,155 958,496
------------- -------------
Cash at beginning of period 1,448,724 541,725
------------- -------------
Cash at end of period $ 3,779,879 $ 1,500,221
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,627 $ 1,393
Taxes - -
Non-cash investing and financing activities:
Common stock issued for subscribed shares $ 30,000 $ -
Common stock subscribed to be issued to private placement agent for
commissions $ 125,650 $ -
Conversion of convertible promissory note into common stock, net $ - $ 289,070
Issuance of common stock in settlement of note payable to former officer $ - $ 75,000
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 nine month periods ended September 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 February 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.
6
Revenue from professional fees, consisting primarily of consulting services, is
recognized as services are provided and the revenues are earned.
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 Nine Months ended
September 30, September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
----------------------------- -----------------------------
Net loss $ (2,355,362) $ (1,356,353) $ (6,169,555) $ (3,457,322)
Weighted average shares of common stock
outstanding - basic and dilutive 41,492,402 33,891,287 39,417,107 31,819,854
----------------------------- -----------------------------
Basic and diluted net loss per share $ (0.06) $ (0.04) $ (0.16) $ (0.11)
============================= =============================
As of September 30, 2005 and 2004, outstanding options and warrants for the
purchase of up to 19,767,563 shares of common stock at prices ranging from $0.52
to $8.25 per share, and 13,043,192 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 September 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 Nine Months ended
September 30, September 30,
----------------------------- -----------------------------
Net loss, as reported $ (2,355,362) $ (1,356,353) $ (6,169,555) $ (3,457,322)
Less: Stock-based employee compensation
expense determined under the fair-value
based method (709,128) (173,147) (1,549,046) (787,047)
------------- ------------- ------------- -------------
Net loss, pro forma $ (3,064,490) $ (1,529,500) $ (7,718,601) $ (4,244,369)
============= ============= ============= =============
Basic and diluted net loss per share:
As reported $ (0.06) $ (0.04) $ (0.16) $ (0.11)
============================= =============================
Pro forma $ (0.07) $ (0.05) $ (0.20) $ (0.13)
============================= =============================
Employee options for the purchase of up to an aggregate of 510,000 and
396,186 shares of common stock were granted during the three months ended
September 30, 2005 and 2004, respectively. The weighted average fair value of
employee options granted during the three-month periods ending September 30,
2005 and 2004 was $2.17 and $1.55 per share, respectively.
7
Employee options for the purchase of up to 3,019,000 and 1,107,936 shares of
common stock were granted during the nine-month periods ended September 30, 2005
and 2004, respectively. The weighted average fair value of employee options
granted during those nine-month periods was $2.17 and $1.27 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 nine-month periods ended
September 30, 2005 and 2004, respectively.
Three Months ended Nine Months ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
------------------ ------------------
Interest rate 3.76% 3.85% 4.04% 1.91%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected volatility 97.50% 121.59% 121.09% 107.06%
Expected life in years 5.00 5.00 5.00 5.00
Recent Accounting Pronouncements - In December 2004, the Financial
Accounting Standards Board ("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).
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections". SFAS No. 154 establishes new standards on accounting for changes
in accounting principles. Pursuant to the new rules, all such changes must be
accounted for by retrospective application to the financial statements of prior
periods unless it is impracticable to do so. SFAS No. 154 supersedes Accounting
Principles Bulletin (APB) Opinion 2, "Accounting for Changes" and SFAS No. 3
"Reporting Accounting Changes in Interim Financial Statements", though it
carries forward the guidance of those pronouncements with respect to accounting
for changes in estimates, changes in the reporting entity, and error
corrections. This statement is effective for accounting changes and error
corrections made in years beginning after December 15, 2005, with early adoption
permitted for changes and corrections made in years beginning after May 2005.
The Company does not expect adoption of SFAS No. 154 to have a material impact
on the Company's financial statements. 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 approximately $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.
From July 1, 2005 through September 30, 2005, the Company sold to one
accredited investor, through a private offering, 250,000 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 $400,000. 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 September 2, 2005, the board of directors of the Company agreed
to reduce the warrant exercise price of the 1,901,250 outstanding G Units from
three dollars and fifty cents ($3.50) per share to three dollars and twenty-five
cents ($3.25) per share.
From July 1, 2005 through September 30, 2005, the Company sold to
accredited investors, through a private offering, 778,125 H Units at a price of
one dollar and sixty cents ($1.60) per H Unit, with each H 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 twenty-five cents ($3.25), exercisable until April 14,
2008. The gross proceeds from the offering were $1,245,000. As of September 30,
2005, $200,000 of the total funds raised through the H offering was recorded on
the balance sheet as common stock subscribed. The Company paid cash commissions
of $124,500, and will issue 71,392 H 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.
During the third quarter of 2005, the Company recognized $8,786 in expense
related to issuing 5,492 H Units to a vendor for services. The shares will be
issued during the fourth quarter of 2005.
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.
9
During the nine months ended September 30, 2005, $20,636 in non-employee
stock compensation expense was recognized related to the vesting of options held
by continuing consultants.
During the nine months ended September 30, 2005, a total of 103,704 shares
of common stock of the Company were purchased through the exercise of stock
options, resulting in cash proceeds to the Company of $125,590.
4. WARRANTS AND STOCK OPTIONS
As of September 30, 2005, the Company had outstanding warrants to purchase
up to 12,150,001 shares of common stock and options to purchase up to 7,617,562
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 3,059,000 3,705,556 6,764,556
Exercised 116,590 2,811,283 2,927,873
Retired/forfeited 289,296 - 289,296
Expired 5,000 189,000 194,000
---------------------------------------
Balance, September 30, 2005 7,617,562 12,150,001 19,767,563
=======================================
As of September 30, 2005, 2,371,179 options were available in the option
reserve for future grants.
5. DEFERRED REVENUES
As of September 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 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 received 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 related to the lease 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 nine months ended September 30, 2005, the
Company recognized a total of $50,004 and $83,340 respectively, 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, there will be no material adverse
change in the Company's operations or business, and that sales of the Company's
products and, therefore, revenue, will increase over time. 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.
10
The Company is engaged in the development and marketing of the ANTs Data
Server, a relational database management system ("RDBMS") that is intended to
significantly lower database infrastructure costs and significantly improve
application performance. 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
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 Universal Compatibility - which allows the Company to market the ANTs Data
Server as a low-cost replacement for RDBMS's such as: Oracle, IBM's DB2 and
Informix, Microsoft's SQL Server, Sybase and MySQL;
o High-Performance - which builds on the Company's non-locking technology to
market the ANTs Data Server as a cost-effective alternative for customers
wanting to speed up or scale, high-volume, transaction-intensive
applications;
o QuickStart - which provides customers with entry-level pricing competitive
with RDBMS's from open source vendors
The Company intends to 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.
11
During the three-month period ending September 30, 2005, the Company signed
eight customers and added another customer from October 1, 2005 through the date
of this report bringing the total number of customers to 13. During the
three-month period ending September 30, 2005, the Company signed one ISV and
added four VARs from October 1, 2005 through the date of this report bringing
the total number of ISVs to three and the total number of VARs to nine.
Raising Capital
- ---------------
The Company anticipates that current cash resources will be sufficient to
fund its operations through February 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 44 full-time equivalent employees, comprising 40
full-time employees and 4 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"), 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.
12
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 nine-month periods ending
September 30, 2005 and 2004 are summarized in the table below.
Summary of Statements of Operations
-----------------------------------
($ in 000's)
For Three Months ending For Nine Months ending
September 30, September 30,
------------------------------ ------------------------------
2005 2004 % Change 2005 2004 % Change
--------- --------- -------- --------- --------- --------
Revenues $ 95 $ - N/A $ 317 $ - N/A
Operating expenses 2,457 1,356 81% 6,458 3,607 79%
--------- --------- ------ --------- --------- -------
Loss from operations (2,362) (1,356) 74% (6,141) (3,607) 70%
Other income (expense), net 7 - N/A (29) 150 -119%
--------- --------- ------ --------- --------- -------
Net loss (2,355) (1,356) 74% $ (6,170) $ (3,457) 78%
========= ========= ------ ========= ========= -------
Net loss per share - basic and diluted $ (0.06) $ (0.04) 50% $ (0.16) $ (0.11) 45%
========= ========= ------ ========= ========= -------
Shares used in computing basic and
diluted net loss per share (in 000's) 41,492 33,891 22% 39,417 31,820 24%
========= ========= ------ ========= ========= -------
Revenues
- --------
During the first nine months of 2005, the Company invoiced an aggregate of
$391,485, comprising $371,985 related to the license of the ANTs Data Server and
related one-year maintenance and support agreements, and $19,500 related to
professional services. Of the total invoiced amount related to the ANTs Data
Server, the Company recognized license fee revenue of $272,500 in the statements
of operations during the nine months ended September 30, 2005, and deferred
revenue of $99,485 related to one-year support and maintenance contracts sold
with the license fees on the balance sheet. The Company earned $24,500 of the
total deferred revenue in the nine months ended September 30, 2005, leaving a
total of $74,985 in deferred revenue as of September 30, 2005. The deferred
revenue is being amortized ratably over the twelve-month period from the
contract dates. The professional services fees were earned and recognized as
revenue during the nine-month fiscal period ending September 30, 2005.
13
Operating Expenses
- ------------------
Operating expenses for the three and nine-month fiscal periods ending
September 30, 2005 and 2004 were as follows:
Operating Expenses - Three Months ended September 30,
2005 2004
---- ----
% Change vs.
$ in 000's % of Total Prior Period $ in 000's % of Total
---------- ----------- -------------- ---------- ----------
Sales and marketing $ 1,086 44% 127% $ 478 35%
Research and development 952 39% 70% 561 42%
General and administrative 420 17% 32% 317 23%
----------------------------------------------------------------
Total operating expenses $ (2,458) 100% 81% $ (1,356) 100%
================================================================
Operating Expenses - Nine Months ended September 30,
2005 2004
---- ----
% Change vs.
$ in 000's % of Total Prior Period $ in 000's % of Total
---------- ----------- -------------- ---------- ----------
Sales and marketing $ 2,516 39% 169% $ 934 26%
Research and development 2,535 39% 59% 1,595 44%
General and administrative 1,407 22% 31% 1,078 30%
----------------------------------------------------------------
Total operating expenses $ (6,458) 100% 79% $ (3,607) 100%
================================================================
During the first nine months of 2004, the Company was in the early phase of
its transition from focusing exclusively on basic product research and
development ("R&D") to focusing heavily on sales and marketing, supported by
ongoing R&D. During the three and nine-month periods ending September 30, 2005,
the Company's sales and 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 $608 thousand, or 127%, for the three-month
period ending September 30, 2005 as compared to the same period in 2004. Total
S&M expenses comprised 44% and 35% of total operating expenses for the three
months ended September 30, 2005 and 2004, respectively.
From the third quarter of 2004 to the same period in 2005, total S&M
expenses increased primarily due to the following: 1) a $288.5 thousand, or
206%, increase in employee compensation and benefits expense as the average
number of S&M employees for the quarter increased from 3 in 2004 to 14 in 2005;
2) bonuses of $57.2 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; 3) an increase of $146.7 thousand, or 413%, in total
direct sales and marketing expense (trade shows and other events, lead
generation, public relations and advertising programs); 4) an increase of $52.6
thousand, or 101%, in sales and marketing-related travel; 5) an increase in
allocation of general corporate overhead of $87 thousand, or 158%, based both on
the increase in the number of sales and marketing personnel, and an increase in
total corporate overhead expenses; and 6) a decrease in recruiting expense in
2005 of $51 thousand, or 99%, due to hiring through referrals in 2005 rather
than through placement agencies.
14
For the nine months ending September 30, 2005, total S&M expenses increased
by $1.58 million, or 169%, compared to the same period in 2004. Total S&M
expenses comprised 39% and 26% of total operating expenses for the nine months
ended September 30, 2005 and 2004, respectively.
For the nine-month period ending September 30, 2005 compared to the same
period in 2004, total S&M expenses increased primarily due to the following: 1)
a $658.7 thousand, or 286%, increase in employee compensation and benefits
expense as the average number of S&M employees for the nine-month period
increased from 3 in 2004 to 11 in 2005; 2) bonuses of $170 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; 3) an increase of
$527 thousand, or 236%, in total direct sales and marketing expense (public
relations programs, trade shows and other events, and lead generation, among
others); 4) an increase of $103.7 thousand, or 96%, in sales and marketing
related travel; 5) an increase in allocation of general corporate overhead of
$221 thousand, or 243%, based both on the increase in the number of sales and
marketing personnel, and an increase in total corporate overhead expenses, all
partially offset by 6) a decrease in recruiting expense in 2005 of $29 thousand,
or 57%, due to hiring through referrals in 2005 rather than through placement
agencies.
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 third quarter of
2004, the Company's activities were still focused primarily 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 new features, 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 $391 thousand, or 70%, for the three-month
period ending September 30, 2005 as compared to the same period in 2004. Total
R&D expenses comprised 39% and 42% of total operating expenses for the three
months ended September 30, 2005 and 2004, respectively.
Increased R&D expenses for the three months ending September 30, 2005 as
compared to the same period in 2004 resulted primarily from: 1) a $146 thousand,
or 31%, increase in employee compensation and benefits expense as the average
number of R&D employees for the quarter increased from 13 in 2004 to 18 in 2005,
and modest raises and bonuses were given to the staff in April 2005; 2)
consulting fees increased by $135 thousand, or 1,274%, as the Company increased
its staff of offshore consultants testing the ANTs Data Server; 3) an increase
in depreciation expense of $25.5 thousand, or 64%, as the Company purchased
approximately $540 thousand in new equipment and leasehold improvements related
to R&D during the 12 months ended September 30, 2005; and 4) an increase in
allocation of corporate overhead of $55.5 thousand, or 158%, based both on the
increase in the number of R&D personnel, and an increase in total corporate
overhead expenses.
R&D expense increased by $940 thousand or 59% during the first nine months
of 2005 compared to the same period in 2004. Total R&D expenses comprised 39%
and 44% of total operating expenses for the nine months ended September 30, 2005
and 2004, respectively.
Increased R&D expenses for the nine months ending September 30, 2005 as
compared to the same period in 2004 period resulted primarily from: 1) a $440.6
thousand, or 34%, increase in employee compensation and benefits expense as the
average number of R&D employees for the nine-month period increased from 13 in
2004 to 16 in 2005, and modest raises and bonuses were given to the staff in
April 2005; 2) consulting fees increased by $322 thousand, or 1,159%, as the
Company increased its staff of offshore consultants testing the ANTs Data
Server; 3) an increase in depreciation expense of $59.2 thousand, or 50%, as the
Company purchased approximately $540 thousand in new equipment and leasehold
improvements related to R&D during the 12 months ended September 30, 2005; 4) an
increase in computer supplies of $30.6 thousand, or 272%, attributable to the
increase in computer hardware in 2005; and 5) an increase in allocation of
corporate overhead of $37.8 thousand, or 29%, based both on the increase in the
number of R&D personnel, and an increase in total corporate overhead expenses.
The Company expects that, if sufficiently funded, its research and
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.
15
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 nine-month period
ended September 30, 2005 compared to the same period in 2004, administrative
staff increased from four to six people as the Company added a President, now
Chief Executive Officer, during the fourth fiscal quarter of 2004 and an
in-house recruiter in the third quarter of 2005.
G&A expenses increased by $103 thousand, or 32%, for the three-month period
ending September 30, 2005 as compared to the same period in 2004. Total G&A
expenses comprised 17% and 23% of total operating expenses for the three months
ended September 30, 2005 and 2004, respectively.
Increased G&A expenses for the three months ending September 30, 2005
compared to the same period in 2004 resulted primarily from: 1) an increase in
total compensation and benefits expense of $164 thousand, or 96%, due to: a) the
Chief Executive Officer's $50 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 and b) an increase in medical insurance premiums of $50 thousand or 189%,
due to an increase in the number of personnel covered, as well as an increase in
rates effective June 30, 2005; 2) an increase of $55.7 thousand, or 161%, in
facilities expense related to the Company's move in May 2005 to a larger office;
3) an increase of $36.5 thousand, or 76%, in legal fees related to increased
capital raising in the 2005 quarter, and registering with various state agencies
to do business outside of California; 4) a decrease in recruiting expense in
2005 of $61 thousand, or 99.8%, due to the payment of a placement fee of $58.5
thousand in 2004 for recruiting the then President, now Chief Executive Officer;
5) an increase in general and administrative expenses such as insurance,
supplies, and communications of $26.9 thousand, or 58%, due to increased levels
of activity and personnel in 2005; 6) recognizing bad debt expense of $16
thousand in 2005 as compared to zero in 2004; all offset by 7) an increase of
$142.4 thousand, or 156%, in corporate overhead allocated from G&A to R&D and
S&M based on both the increases in the staff of those other departments, and the
overall increase in corporate overhead expenses in 2005.
Total G&A expenses increased by $329 thousand, or 31%, for the nine-month
period ending September 30, 2005 as compared to the same period in 2004. Total
G&A expenses comprised 22% and 30% of total operating expenses for the nine
months ended September 30, 2005 and 2004, respectively.
Increased G&A expenses for the nine months ending September 30, 2005 as
compared to the same period in 2004 resulted primarily from: 1) an increase in
total compensation and benefits expense of $448 thousand, or 90%, due largely to
the Chief Executive Officer's $150 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 $106 thousand, or 152%;
2) an increase of $116 thousand, or 135%, in facilities expense related to the
new office facilities to which the Company moved in May 2005; 3) an increase of
$82.7 thousand, or 48%, 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 recruiting expense in 2005 of $63.7 thousand, or
83%, due to the payment of a placement fee of $58.5 thousand in 2004 for
recruiting the then President, now Chief Executive Officer; 5) recognizing bad
debt expense of $16 thousand in 2005 as compared to zero in 2004; all offset by
6) an increase of $273 thousand, or 131%, 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.
16
Other Income (Expense), Net
- ---------------------------
The changes in the components of Other Income (Expense), Net for the three
and nine-month periods are shown in the table below:
Three Months ended September 30, Nine Months ended September 30,
2005 2004 2005 2004
---- ---- ---- ----
% Change vs. % Change vs.
$ in 000's Prior Period $ in 000's $ in 000's Prior Period $ in 000's
---------- ------------ ----------- ---------- ------------ ----------
Other income (expense):
Income earned from expired contract - 0% - - -100% 311
Interest income 7 40% 5 16 14% 14
Gain on legal settlement 1 -50% 2 3 -40% 5
Write off note receivable from former officer - 0% - - -100% (45)
Write off assets related to office move, net - 0% - (45) n/a -
Interest expense (1) -86% (7) (3) -98% (135)
------------------------------------- -------------------------------------
Other income (expense), net 7 n/a - (29) -119% 150
------------------------------------- -------------------------------------
The quarter and year-to-date 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. - a one-time
event; 2) in 2004, a note receivable to a former officer in the amount of $45
thousand was written off; 3) in 2004, $134.4 thousand in non-cash interest
expense related to two convertible promissory notes was recognized. 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 book value of leasehold
improvements and security deposits related to the Company's prior facilities in
the amount of $45 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 was payable in monthly installments of $254 over
a three-year period. The outstanding lease obligation was not previously
reported on the balance sheet, as title to the equipment remained with the
lessor until the Company paid the total obligation and a buyout fee. As of
September 30, 2005, the total outstanding obligation was $0, as the lease was
paid in full during the third quarter of 2005.
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 received
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 nine months ended September 30, 2005, the
Company recognized a total of $50,004 and $83,340 respectively, in rental
expense for this lease.
17
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
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.
18
Capital and Liquidity Resources
- -------------------------------
The Company's cash balance as of September 30, 2005 was approximately $3.8
million, which the Company believes will be adequate to fund its activities
through February 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
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
In the third quarter of 2002, the third of four private offerings in 2002
was completed with the sale of 925,000 C Units, at a price of $0.50 per unit
(the "C Units"), with each C 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 seventy-five cents ($0.75),
exercisable until August 30, 2003. In connection with this offering, the Company
paid $19,375 and issued 40,750 C Units in commissions and finder's fees. The
gross proceeds of the offering were $462,500. The Company also issued 33 B Units
in connection with $25 received in the third quarter 2002 to complete an
investment received in the second quarter 2002. The sales of these securities
were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
In the fourth quarter of 2002, the fourth of the four private offerings was
completed with the sale of 500,000 C Units. In connection with this offering,
the Company paid $37,500 in commissions and finder's fees. The gross proceeds of
the offering were $250,000. Also, through a discounted warrant offering,
accredited investors exercised 1,942,370 warrants to purchase common stock, at a
price of fifty cents ($0.50) per share. In connection with this offering, the
Company paid $13,916 in commissions and finder's fees. The gross proceeds from
the offering were $971,185. The sales of these securities were made in reliance
upon Rule 506 and Section 4(2) of the Securities Act of 1933.
In July 2002, the Company paid $7,000 toward the $75,000 current portion of
the note payable, due August 4, 2002 to a former officer. In September 2002, the
former officer subscribed for 136,000 C Units. The C Units were issued in lieu
of the remaining $68,000 cash payment due on the note payable to the former
officer.
19
During the fourth quarter of 2002, the following equity transactions
occurred: a consultant exercised an option to purchase 3,000 shares of common
stock for the aggregate amount of $1,560; and the Company entered into a
settlement agreement effective September 27, 2002, with the law firm Hughes
Hubbard & Reed LLP pursuant to which the Company agreed to issue 125,000 C Units
in exchange for full satisfaction of accrued legal expenses totaling $86,278,
which had been recorded in prior periods.
During the first quarter of 2003, the Company sold to accredited investors
through a private offering, 20,000 C Units, at a price of fifty cents ($0.50)
per C Unit, with each C 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 seventy-five cents ($0.75), exercisable
until August 30, 2003. In connection with this offering the Company issued 2,000
C Units in commissions and finder's fees. The gross proceeds of the offering
were $10,000. The C Unit offering was closed in January 2003. The sales of these
securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.
During the first quarter of 2003, the Company sold to accredited investors,
through a private offering, 402,497 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 $16,250 in cash commissions and finders' fees. The gross proceeds from the
offering were $301,873. The sales of these securities were made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.
From January 1, 2003 through March 31, 2003 two consultants exercised
options to purchase an aggregate of 19,750 shares of common stock for the
aggregate amount of $11,485.
During the second quarter of 2003 the Company sold, to accredited
investors, through the same private offering, 929,733 D Units at a price of
seventy-five cents ($0.75) per D Unit. In connection with this offering, the
Company paid $51,024 in cash commissions and finders' fees. The gross proceeds
from the offering were $697,300. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.
From April 1, 2003 through June 30, 2003, one consultant exercised options
to purchase 4,000 shares of common stock for an aggregate amount of $2,080.
From April 1, 2003 through June 30, 2003, one employee exercised a warrant
to purchase 300,000 shares of common stock for the aggregate amount of $75,000.
During the third quarter of 2003 the Company sold to accredited investors,
through the same private offering, 393,833 D Units. In connection with this
offering, the Company paid $20,768 in cash commissions and finders' fees. The
gross proceeds from the offering were $295,375. The sales of these securities
were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
In August 2003, a former officer subscribed for 172,215 units with each
unit comprised of (i) one share of common stock of the Company and (ii) a
warrant to purchase one share of common stock at a per share price of two
dollars ($2.00), exercisable until March 31, 2006 (the "Unit"). The Units were
issued in lieu of a $75,000 cash payment due on a note payable to the former
officer. This transaction resulted in a loss of approximately $54,000 on
extinguishment of the debt payment. The loss was calculated as the difference
between the price of the then-current private placement offering ($.75 per D
Unit) and the price paid by the former officer ($.435 per Unit) times the
172,215 Units subscribed by the former officer.
From July 1, 2003 through September 30, 2003, one former employee exercised
a warrant to purchase 67,500 shares of common stock for the aggregate amount of
$33,750.
During the fourth quarter of 2003 the Company sold to accredited investors,
through the same private offering, 823,688 D Units. In connection with this
offering, the Company paid $48,750 in cash commissions and finders' fees. The
gross proceeds from the offering were $617,766. The sales of these securities
were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
20
On or about August 4, 2003, the board of directors of the Company extended
the expiration date of 1,561,083 warrants from August 31, 2003 to December 31,
2003. Such warrants had been issued by the Company in private offerings in
reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.
In October 2003, one consultant exercised an option to purchase 5,000
shares of common stock for the aggregate amount of $4,000.
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. The gross proceeds from the offering
were $4,277,376. In connection with this offering, the Company issued 33,666 D
Units to finders and paid $269,100 in cash commissions. The Company issued an
aggregate of 367,240 D Units to the placement agent in connection with the
private offering of D Units that commenced in the first quarter of 2003 and
closed at the end of the first quarter of 2004. 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 issued 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.
On or about July 14, 2004, the holders of two convertible promissory notes
elected to convert such notes. Pursuant to the terms of the notes, the company
issued each note holder 400,000 shares of Common Stock of the Company and a
warrant to purchase 400,000 shares of Common Stock of the Company at a per share
exercise price of $2.00, exercisable until March 31, 2006.
In August 2004, a former officer purchased 60,000 E Units. The E Units were
issued in lieu of a $75,000 cash payment due on August 4, 2004 on a note payable
to the former officer. The sale of these securities was made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.
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 $1,160,000 was received by December 31,
2004 and $963,000 was received in January 2005. 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.
During the fiscal year ended December 31, 2004, 354,019 shares of common
stock of the Company were purchased through the exercise of stock options that
resulted in cash proceeds to the Company of $388,753. A vendor was awarded 3,300
options on August 19, 2004 as partial compensation for selling the sole and
exclusive rights to the domain name, www.ants.com. to the Company. The vendor
exercised the options on the same date they were granted at an exercise price of
$1.88, resulting in non-cash consideration of $6,204 in the third quarter of
2004, which was charged to marketing expense. The total number of shares
purchased through the exercise of stock options for cash and services in 2004
was 357,319.
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.
21
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.
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.
From July 1, 2005 through September 30, 2005, the Company sold to one
accredited investor, through a private offering, 250,000 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 $400,000. 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 September 2, 2005, the board of directors of the Company agreed
to reduce the warrant exercise price of the 1,901,250 outstanding G Units from
three dollars and fifty cents ($3.50) per share to three dollars and twenty-five
cents ($3.25) per share.
From July 1, 2005 through September 30, 2005, the Company sold to
accredited investors, through a private offering, 778,125 H Units at a price of
one dollar and sixty cents ($1.60) per H Unit, with each H 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 twenty-five cents ($3.25), exercisable until April 14,
2008. The gross proceeds from the offering were $1,245,000. As of September 30,
2005, $200,000 of the total funds raised through the H offering was recorded on
the balance sheet as common stock subscribed. The Company paid cash commissions
of $124,500, and will issue 71,392 H 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.
During the third quarter of 2005, the Company recognized $8,786 in expense
related to issuing 5,492 H Units to a vendor for services. The shares will be
issued during the fourth quarter of 2005.
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.
22
During the nine months ended September 30, 2005, $20,636 in non-employee
stock compensation expense was recognized related to the vesting of options held
by continuing consultants.
During the nine months ended September 30, 2005, a total of 103,704 shares
of common stock of the Company were purchased through the exercise of stock
options, resulting in cash proceeds to the Company of $125,590.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the period
covered by this report.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(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.
10.6 Standard Multi-Tenant Lease Agreement with Bayside Plaza, A
Partnership.
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 report on Form 8-K: On August 8, 2005, the Company issued a letter to
shareholders to discuss the Company's then current situation, and its progress
during 2005.
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.
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 February 2006. The Company
anticipates that current cash resources will be sufficient to fund its
operations only through February 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.
23
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
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.
24
The Company competes with 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 carries product and
information liability or errors and omissions insurance, but in the event that
the Company is required to defend more than a few such actions, or in the event
that it is found liable in connection with such an action, its business and
operations may 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.
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.
25
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 Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ANTs software inc.
Date: November 14, 2005 By: /s/ Boyd Pearce
--------------------------------
Boyd Pearce, Chief Executive
Officer and Director
Date: November 14, 2005 By: /s/ Kenneth Ruotolo
--------------------------------
Kenneth Ruotolo, Chief Financial
Officer and Secretary