================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number: 000-16299
----------------
ANTS SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3054685
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
801 Mahler Rd, Suite G, Burlingame, CA 94010
(Address of principal executive offices) (Zip Code)
(650) 692-0240
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of Common stock, as of the latest practicable date:
24,918,768 shares of common stock as of June 30, 2003
Transitional Small Business Disclosure Format: Yes |_| No |X|
================================================================================
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. Financial Information
Item 1. Financial Statements ...............................................3-8
Item 2. Management's Discussion and Analysis or Plan of Operation ........8-11
Item 3. Controls and Procedures ............................................11
PART II. Other Information
Item 1. Legal Proceedings ...................................................11
Item 2. Changes in Securities ................................................11
Item 3. Defaults Upon Senior Securities.......................................11
Item 4. Submission of Matters to a Vote of Security Holders...................12
Item 5. Other Information.....................................................12
Item 6. Exhibits and Reports on Form 8-K...................................12-13
Risk Factors...............................................................13-15
Signatures....................................................................16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTs software inc.
CONDENSED BALANCE SHEETS
June 30, Dec 31,
2003 2002
(Unaudited) (Audited)
------------ ------------
ASSETS
Current assets:
Cash $ 445,289 $ 946,957
Prepaid insurance 125,906 53,597
Prepaid expenses 800 800
------------ ------------
Total current assets 571,995 1,001,354
------------ ------------
Computers and software 718,920 670,682
Office furniture and fixtures 29,386 29,386
Leasehold Improvements 9,000 9,000
Less accumulated depreciation (404,005) (326,710)
------------ ------------
Property and equipment, net 353,301 382,358
------------ ------------
Other assets - security deposits 9,100 5,100
------------ ------------
Total assets $ 934,396 $ 1,388,812
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 127,290 $ 36,263
Deferred salaries payable 66,376 --
Accrued legal fees 45,517 38,736
Note payable - former officer, current portion 75,000 75,000
------------ ------------
Total current liabilities 314,183 149,999
------------ ------------
Long-term note payable - former officer, net of current portion 75,000 75,000
------------ ------------
Total liabilities $ 389,183 $ 224,999
------------ ------------
Commitment and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value: 50,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.0001 par value; 100,000,000 shares authorized;
24,918,768 and 23,240,788 shares issued and outstanding, respectively 2,492 2,324
Note receivable from officer for stock purchases (90,000) (90,000)
Additional paid-in capital 28,524,780 27,425,424
Accumulated deficit (27,892,059) (26,173,935)
------------ ------------
Total stockholders' equity 545,213 1,163,813
------------ ------------
Total liabilities and stockholders' equity $ 934,396 $ 1,388,812
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
ANTs software inc.
CONDENSED STATEMENTS OF OPERATIONS
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
Cost of goods sold $ -- $ -- $ -- $ --
Selling, general and administrative expenses 504,377 856,595 934,399 1,449,906
Research and development expenses 437,765 402,005 803,204 1,380,908
------------ ------------ ------------ ------------
Loss from operations (942,142) (1,258,600) (1,737,603) (2,830,814)
------------ ------------ ------------ ------------
Other income:
Interest income 794 2,052 2,479 3,779
Gain on legal settlement 1,000 -- 17,000 --
------------ ------------ ------------ ------------
Other income 1,794 2,052 19,479 3,779
------------ ------------ ------------ ------------
Net loss $ (940,348) $ (1,256,548) $ (1,718,124) $ (2,827,035)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.04) $ (0.07) $ (0.07) $ (0.16)
============ ============ ============ ============
Shares used in computing basic and diluted net
loss per share 24,192,811 18,932,573 23,787,125 18,075,920
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
4
ANTs software inc.
CONDENSED STATEMENTS OF CASH FLOWS
Six months ended June 30,
-------------------------
2003 2002
(Unaudited) (Unaudited)
------------ ------------
Cash flows from operating activities:
Net loss $ (1,718,124) $ (2,827,035)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/Amortization 77,295 64,185
Compensation expense recognized on options granted to non-employees 69,054 493,611
Compensation expense recognized on option and warrant extensions -- 525,635
Changes in operating assets and liabilities:
Prepaid insurance (72,309) 15,641
Security deposits (4,000) --
Accounts payable 91,027 13,292
Deferred salaries payable 66,376 --
Accrued legal fees 6,781 (23,659)
------------ ------------
Net cash used in operating activities (1,483,900) (1,738,330)
------------ ------------
Cash flows from investing activities-purchase of property and equipment (48,238) (40,519)
------------ ------------
Cash flows from financing activities:
Proceeds from private placements, net of commissions 941,905 1,294,340
Proceeds from exercise of options 13,565 1,200
Proceeds from exercise of warrants 75,000 25,000
Proceeds from issuance of convertible promissory notes -- 200,000
Common stock subscribed not issued -- 92,009
------------ ------------
Net cash provided by financing activities 1,030,470 1,612,549
------------ ------------
Net decrease in cash (501,668) (166,300)
------------ ------------
Cash at beginning of period 946,957 734,319
------------ ------------
Cash at end of period $ 445,289 $ 568,019
============ ============
NON-CASH FINANCING ACTIVITY:
Conversion of promissory note to common stock $ -- $ 200,000
Conversion of other current liability to common stock -- 125,000
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, 2002, for additional disclosures including a summary of the Company's
accounting policies, which have not significantly changed.
The information furnished reflects all adjustments (all of which were of a
normal recurring nature), which, in the opinion of management, are necessary to
fairly present the financial position, results of operations, and cash flows on
a consistent basis. Operating results for the three and six months ended June
30, 2003 and 2002, 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 2003 and possibly thereafter. Should the Company be
unsuccessful in raising additional funds, it is unlikely that the Company will
continue operations beyond mid-September 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basic Net Loss Per Share - Basic net loss per share is calculated using
the weighted-average number of common shares outstanding during the period.
Diluted net loss per share is computed using the weighted-average number of
common and dilutive common equivalent shares outstanding during the period.
The following table presents the calculation of basic and diluted net loss
per share:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss $ (940,348) $ (1,256,548) $ 1,718,124 $ 2,827,035
Weighted average shares of common stock outstanding
- - basic and dilutive 24,192,811 18,932,573 23,787,125 18,075,920
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.04) $ (0.07) $ (0.07) $ (0.16)
As of June 30, 2003 and 2002, outstanding options and warrants for the
purchase of up to 8,529,279 shares of common stock at prices ranging from $0.25
to $11.63, and 8,261,308 shares of common stock at prices ranging from $0.25 to
$11.63, 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 provision of SFAS 148 is effective
for years ending after December 15, 2002 and have been incorporated into these
financial statements and accompanying footnotes.
6
At June 30, 2003, the Company had a stock-based employee compensation
plan. The Company accounts for this plan under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees, and related Interpretations.
The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $ (940,348) $ (1,256,548) $ (1,718,124) $ (2,827,035)
Less: Stock-based employee compensation expense
determined under the fair-value based method (329,535) (821,782) (654,391) (1,587,681)
------------ ------------ ------------ ------------
Net loss, pro forma $ (1,269,883) $ (2,078,330) $ (2,372,515) $ (4,414,716)
============ ============ ============ ============
Basic and diluted loss per share:
As reported $ (0.05) $ (0.07) $ (0.07) $ (0.16)
============ ============ ============ ============
Pro forma $ (0.10) $ (0.11) $ (0.10) $ (0.24)
============ ============ ============ ============
The weighted average fair value of options granted during the periods
ended June 30, 2003 and 2002 were $1.06 and $1.78, respectively. The pro forma
amounts were estimated using the Black-Scholes option-pricing model with the
following assumptions for the periods ended June 30, 2003 and 2002,
respectively.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
--------------- -------------- --------------- --------------
Interest rate 3.32%-3.84% 2.05%-5.24% 3.32%-3.98% 2.05%-5.24%
Dividend yield 0% 0% 0% 0%
Expected volatility 136.99%-140.26% 73.71%-146.32% 136.99%-143.05% 73.71%-148.12%
Expected life in years 1-10 Years 1-10 Years 1-10 Years 1-10 Years
3. EQUITY TRANSACTIONS
From January 1, 2003 through March 31, 2003 the Company sold to accredited
investors through a private offering, 20,000 C Units, at a price of fifty cents
($.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
Company also 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, and 15,151 D Units to be issued to the placement agent. The gross
proceeds from the offering were $301,875.
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.
From April 1, 2003 through June 30, 2003 the Company sold, to accredited
investors through a private offering 929,733 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
7
offering, the Company paid $51,024 in cash commissions and finders' fees and
47,573 D Units to be issued to the placement agent. The gross proceeds from the
offering were $697,304.
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.
4. WARRANTS AND STOCK OPTIONS
As of June 30, 2003, the Company had outstanding warrants to purchase up
to 4,321,807 shares of common stock and options to purchase up to 4,207,472
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.
Warrants Stock Options Total
-------- ------------- -----
Outstanding at January 1, 2003 3,267,577 3,384,066 6,651,643
Granted 1,354,230 1,025,000 2,379,230
Retired -- (177,844) (177,844)
Expired -- -- --
Exercised through cash consideration (300,000) (23,750) (323,750)
Exercised through non-cash consideration -- -- --
--------- --------- ---------
Outstanding at June 30, 2003 4,321,807 4,207,472 8,529,279
5. LEGAL SETTLEMENT
The Company was a defendant in a case entitled Hubert P. Lauffs et al. v.
Mosaic Multisoft Corporation, in which the plaintiff asserted a cause of action
against the Company for breach of fiduciary duty. The plaintiff purported to
base his cause of action on allegations that the Company and others caused the
shareholders of Mosaic Multisoft Corporation ("Mosaic") to elect outside
directors to its board of directors who subsequently voted to remove Mosaic's
president from office, thus interfering with Mosaic's ability to raise capital
and causing Mosaic to be unable to repay its debt to the plaintiff. In March
2000, we won this case on summary judgment. In April 2000, the plaintiff filed
an appeal of the summary judgment ruling. On November 21, 2001, the Fourth
District Court of Appeal ruled in our favor by affirming the Superior Court's
March 2000 summary judgment. In September 1999, we had filed an action for
malicious prosecution against Lauffs and his attorney seeking recovery of the
Company's legal fees incurred in connection with the proceedings. We entered
into Settlement Agreements in December 2002, pursuant to which the plaintiffs
agreed to pay us an aggregate of $400,000. Per an agreement we entered into with
our attorneys on or about September 27, 2002, almost all of the money recovered
will be paid to our attorneys. From January 1, 2003 through June 30, 2003, we
received $17,000 as our portion of the settlement, which was recognized as a
gain from legal settlement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements contained in this Form 10-QSB constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements herein are based on current
expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will have
adequate financial resources to fund the development and operation of its
business, and there will be no material adverse change in the Company's
operations or business. The foregoing assumptions are based on judgments with
respect to, among other things, information available to the Company, future
economic, competitive and market conditions and future business decisions. All
are difficult or impossible to predict accurately and many of which are beyond
the Company's control. Accordingly, although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any such
assumption could prove to be inaccurate and therefore there can be no assurance
that the results contemplated in the forward-looking statements will be
realized. There are a number of risks presented by the Company's business and
operations, which could cause the Company's financial performance to vary
markedly from prior results, or results contemplated by the forward-looking
8
statements. Such risks include failure of the Company's technology to work
properly, failure to develop commercially viable products or services from the
Company's 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.
Overview
The Company is engaged in the development and marketing of proprietary
software that it believes can significantly improve performance in applications
that require high-speed access to shared, rapidly changing data. ANTs' first
product, the ANTs Data Server is a standards-compliant relational database
management system based on a high-performance SQL query execution engine that
incorporates innovative lock-free operations.
Plan of Operation
The Company anticipates that, if sufficiently funded, over the next twelve
months its focus will be threefold: continued development of the ANTs Data
Server ("ADS"), marketing ADS, and supporting customers. The development effort
will be focused on enhancing the core technology underlying ADS and developing
features that will broaden ADS's market appeal.
In March 2003, the Company signed a license agreement with Wireless
Services Corporation ("WSC"). Under the terms of the license agreement, WSC can
incorporate ADS into its Integrated Data eXchange platform. WSC expects to
deploy the Integrated Data eXchange platform with ADS in the second half of
2003. Under the terms of the license agreement, the Company will receive revenue
once such a deployment occurs.
The majority of the Company's operating expenses and costs over the next
twelve months are expected to be for and in connection with sales and marketing
and existing and additional personnel and equipment.
Technology Development
Over the next twelve months the Company intends to improve and add
functionality to ADS, assuming it is sufficiently funded. The Company is
actively engaging prospective customers in technical discussions and testing to
determine what features are most in demand for the markets the Company is
targeting. ADS can be deployed on hardware running either Sun's Solaris
operating system or Microsoft's Windows 2000 operating system. The Company
intends to port ADS to the Linux operating system in the second half of 2003.
Marketing
ANTs' product, the ANTs Data Server, is a standards-compliant SQL
relational database server. ADS, which incorporates our proprietary lock-free
data structure technology solves a fundamental problem that has compromised
application performance for years - database locking of rapidly changing, shared
data. In internal benchmark testing of key database operations, ADS performed up
to 80 times the number of operations as one of the industry's leading database
servers (for a full description of the benchmark please visit our web site:
www.antssoftware.com). Target markets include: Telecommunications, Financial
Services and Logistics/Transportation. Our go-to-market strategy includes
establishing OEM relationships with leading vendors in each market and sales
directly to end-users. Prospective customers have indicated that they are
concerned about our lack of long-term financial resources and will carefully
evaluate our financial condition prior to deciding whether to evaluate or
purchase ADS.
Selling, General and Administrative
Selling, general and administrative expenses decreased from $856,595
during the three months ended June 30, 2002 to $504,377 for the three months
ended June 30, 2003. General and administrative expenses decreased from
$1,449,906 during the six months ended June 30, 2002 to $934,399 for the six
months ended June 30, 2003.
9
Components of selling, general and administrative expenses for the three months
ended June 30, 2003 include: salaries and benefits (40%), professional services
(38%) and other expenses (22%). Components of selling, general and
administrative expenses for the six months ended June 30, 2003 include: salaries
and benefits (38%), professional services (41%) and other expenses (21%). Of the
$1,449,906 expensed during the six months ending June 30, 2002, approximately
$420,000 was a non-cash marketing expense related to the recognition of
compensation expense for non-qualified stock option grants that were previously
not recognized. The year-over-year decrease during the six months ending June
30, 2003 resulted from a $391,000 decrease in marketing expense (the six months
ending June 30, 2002 included an approximately $420,000 non-cash compensation
expense for non-qualified stock option grants that were previously not
recognized), a $76,000 decrease in legal fees, and a $137,000 decrease in
overhead and all other expenses offset by a $56,000 increase in salaries and
benefits and a $34,000 increase in travel expense.
We expect that if we are sufficiently funded, selling, general and
administrative expenses will increase moderately over the next twelve months as
sales and marketing programs are implemented and additional staff is recruited
to sell and support our products.
Research and Development
Research and development expenses increased from $402,005 during the three
months ended June 30, 2002 to $437,765 for the three months ended June 30, 2003.
Research and development expenses decreased from $1,380,908 during the six
months ended June 30, 2002 to $803,204 for the six months ended June 30, 2003.
Salaries and benefits accounted for 71% and other expenses accounted for 29% of
the total for the three months ended June 30, 2003. Salaries and benefits
accounted for 73% and other expenses accounted for 27% of the total for the six
months ended June 30, 2003. Of the $1,380,908 expensed during the six months
ended June 30, 2002, $525,000 was a non-cash expense related to the extension of
certain options and warrants granted to a former officer and our current Chief
Scientist. These expenses are related to the research, testing and product
development of our proprietary software. We expect that if we are sufficiently
funded, our research and development expenses will increase moderately as
additional staff is recruited to customize our products and develop new ones.
Personnel
The Company currently has 15 full-time employees, two part-time employees,
and two full-time consultants. On June 1, 2003 the Company's management team
began taking salary deferrals. Currently those deferrals equal 50-75% of base
salary. On July 16, 2003 all remaining employees began taking salary deferrals
equaling 50% of base salary. The deferred amounts are expensed on the Company's
income statement and accrued as a liability on its balance sheet. It is the
Company's intention to eliminate some or all deferrals and pay back the deferred
amounts should it receive sufficient funding. The Company views the recruitment
of additional qualified marketing, sales, and technical personnel as essential
to the further development and commercialization of our proprietary
technologies. If the Company is sufficiently funded and it is successful in its
recruitment efforts, the Company expects that its personnel and other operating
costs will increase over current levels.
Appointment of Director
On June 26, 2003, Mr. Gary Ebersole, the President and Chief Operating
Officer of the Company was appointed as a Class 2 director.
Capital and Liquidity Resources
We anticipate that if we are sufficiently funded, we will increase
expenditures moderately to substantially over the next twelve months as we begin
to sell product and as we continue to develop our technology. We expect to begin
realizing revenues in late 2003. Our cash balance as of June 30, 2003 was
approximately $445,000, which we believe will be adequate to fund our activities
through mid-September 2003 at our current rate of spending. There can be no
assurance that our continued product development and infrastructure development
will not require a much higher rate of spending. There can also be no assurance
that we will be able to obtain additional capital on acceptable terms.
To carry out our plan of operation, we anticipate that over the next
twelve months we will require approximately $5 million. We will pursue a number
of avenues to raise these operating funds: 1) in the past we have been
successful in raising funds through private placements of our stock, we will
continue to pursue this avenue; 2)
10
we intend to pursue other methods of financing; and 3) we expect to begin
generating revenue by the end of this year, which will be a source of operating
funds if we are successful. We believe that due to a poor investment climate,
securing additional sources of financing which would enable us to complete the
development and commercialization of our proprietary technologies will be
difficult, and there is no assurance of our ability to secure such financing.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Sections 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934, as amended) within 90 days
prior to the filing of 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 accurate and complete and has been recorded, processed,
summarized and reported within the time period required for the filing of this
quarterly report. Subsequent to the date of this evaluation, there have not been
any significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect our internal controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information is hereby incorporated by reference from the Form 10-KSB
filed on March 21, 2003. There have been no other material developments in the
period covered by this report.
ITEM 2. CHANGES IN SECURITIES
From January 1, 2003 through March 31, 2003 the Company sold, to
accredited investors through a private offering 20,000 C Units, at a price of
fifty cents ($.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. We also 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 and 15,151 D Units to be issued to placement agent. The gross
proceeds from the offering were $301,875.
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.
From April 1, 2003 through June 30, 2003 the Company sold, to accredited
investors through a private offering 929,733 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 $51,024 in cash commissions and finders' fees and 47,573 D Units to be
issued to placement agent. The gross proceeds from the offering were $697,304.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No changes during the period covered by this report.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2003 Annual Meeting of shareholders on May 6, 2003.
Two Class 3 directors Francis K. Ruotolo and John R. Gaulding were nominated and
re-elected to serve on the board until the annual meeting following the close of
the 2005 fiscal year. Class 1 directors Thomas Holt and Papken S. Der Torossian
will continue to serve on the board until the annual meeting following the close
of the 2003 fiscal year. Class 2 director Homer G. Dunn will serve on the board
until the annual meeting following the close of the 2004 fiscal year.
Shareholders approved an amendment to the Company's Amended and Restated
Certificate of Incorporation to authorize 50,000,000 shares of undesignated
Preferred Stock, with a par value of $0.0001 per share. Shareholders also
approved an amendment to the Company's 2000 Stock Option Plan to increase the
shares reserved under the plan by an additional 1,500,000 shares of Common
Stock, and ratified the selection of Burr, Pilger & Mayer, LLP as the Company's
independent accountant for the calendar year ending December 31, 2003.
The matters were approved by our shareholders as follows:
DESCRIPTION OF MATTER VOTES FOR VOTES AGAINST WITHHELD/ABSTENTIONS
- ----------------------------------------------------------------------------------------------------
Election of Directors:
- ----------------------------------------------------------------------------------------------------
Francis K. Ruotolo 19,974,177 95,155
- ----------------------------------------------------------------------------------------------------
John R. Gaulding 19,989,426 79,906
- ----------------------------------------------------------------------------------------------------
Approval of amendment to
Certificate of Incorporation 13,337,811 432,457 154,475
- ----------------------------------------------------------------------------------------------------
Approval of amendment to 2000
Stock Option Plan 13,302,637 454,260 167,846
- ----------------------------------------------------------------------------------------------------
Ratification of Auditor 19,961,560 90,729 17,043
- ----------------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
No changes during the period covered by this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company, as listed in Exhibit 3.2
to the Company's 10-KSB filed on March 22, 2001, are hereby
incorporated by reference.
10.1 2000 Stock Option Plan of the Company, as amended, attached as
Exhibit 4 to the Company's S-8 filed on May 23, 2003 , is hereby
incorporated by reference.
10.2 Agreement and Plan of Merger dated December 8, 2000 between ANTs
software inc. and ANTs software.com, as listed in Exhibit 10.2 to
the Company's 10-KSB filed on March 22, 2001, is hereby incorporated
by reference.
10.3 Settlement Agreement and Full Release of All Claims dated January
11, 2001, between the Company and Frederick D. Pettit, as listed in
Exhibit 10.3 to the Company's 10-KSB filed on March 22, 2001, is
hereby incorporated by reference.
10.4 Separation Agreement dated January 8, 2001, between the Company and
Francis K. Ruotolo, as listed in Exhibit 10.4 to the Company's
10-KSB filed on March 22, 2001, is hereby incorporated by reference.
10.5 Form of Indemnification Agreement signed with officers and directors
of the Company, as listed in Exhibit 10.5 to the Company's 10-KSB
filed on March 22, 2001, is hereby incorporated by reference.
10.6 Registration Agreement between the Company and Karen Buechler and
Eric Scott Buechler dated September 15, 2000, as listed in Exhibit
10.6 to the Company's 10-KSB filed on March 22, 2001, is hereby
incorporated by reference.
12
10.7 Registration Agreement between the Company and Arcade Investment
Limited dated September 7, 2000, as listed in Exhibit 10.7 to the
Company's 10-KSB filed on March 22, 2001, is hereby incorporated by
reference.
10.8 Amended Agreement between the Company and Arcade Investment dated
October 6, 2000, as listed in Exhibit 10.8 to the Company's 10-KSB
filed on March 22, 2001, is hereby incorporated by reference.
10.9 Form of Registration Agreement between the Company and each of
Discount Bank and Trust Company, Lemanik Sicav Convertible Bond, and
Pershing Keen Nominees, as listed in Exhibit 10.9 to the Company's
10-KSB filed on March 22, 2001, is hereby incorporated by reference.
10.10 Employment Agreement dated March 24, 2003, between the Company and
Gary Ebersole.
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the period covered by this report, we filed the following reports
on Form 8-K: on May 6, 2003 we provided an update on our financial status, on
June 3, 2003 Francis K. Ruotolo, our Chairman and Chief Executive Officer
provided a marketing and financial update in a letter addressed to our
shareholders, and on June 25, 2003, Mr. Ruotolo provided a marketing and
financial update in a letter addressed to our shareholders.
RISK FACTORS
In addition to other information in this 10-QSB, the following risk
factors should be carefully considered in evaluating our business since we
operate in a highly changing and complex business environment that involves
numerous risks, some of which are beyond our control. The following discussion
highlights a few of these risk factors, any one of which may have a significant
adverse impact on our business, operating results and financial condition. As a
result of the risk factors set forth below and elsewhere in this 10-QSB, and the
risks discussed in our 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 us from executing
our business plan. A failure to raise additional funding could prevent us from
continuing our business after mid-September 2003. We anticipate that current
cash resources will be sufficient to fund our operations into mid-September 2003
at our current rate of spending . We believe that, due to a poor investment
climate, securing additional sources of financing to enable us to complete the
development and commercialization of our proprietary technologies will be
difficult and there is no assurance of our ability to secure such financing. A
failure to obtain additional funding could prevent us from making expenditures
that are needed to pay current obligations, allow us to hire additional
personnel and continue development of the technology. If we raise additional
funds by selling equity securities, the relative equity ownership of our
existing investors could be diluted or the new investors could obtain terms more
favorable than previous investors. If we raise additional funds through debt
financing, we could incur significant borrowing costs.
If we are unable to protect our intellectual property, our competitive
position would be adversely affected. We rely on patent protection, as well as
trademark and copyright law, trade secret protection and confidentiality
agreements with our employees and others to protect our intellectual property.
Despite our precautions, unauthorized third parties may copy our products and
services or reverse engineer or obtain and use information that we regard as
proprietary. We have also filed patent applications and intend to file more. We
do not know if any of our intended future patents will be issued or whether we
will be successful in prosecuting any additional 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. Our means of protecting our proprietary
rights may not be adequate and third parties may infringe or misappropriate our
patents, copyrights, trademarks and similar proprietary rights. If we fail to
protect our intellectual property and proprietary rights, our business,
financial condition and results of operations would suffer. We believe that we
do not infringe upon the proprietary rights of any third party, and no third
party has asserted a patent infringement claim against us. It is possible,
however, that such a claim might be asserted successfully against us in the
future. We may be forced to suspend our operations to pay significant
13
amounts to defend our rights, and a substantial amount of the attention of our
management may be diverted from our ongoing business, which can materially
affect our ability to attain and maintain profitability.
We focus on the research and development of our proprietary technologies
and the marketing of our first product. Our present focus is on the research and
development of our proprietary technologies and the marketing of our first
product. We believe that these technologies are the basis for highly marketable
commercial products. However, there can be no assurance of this and it is
possible that our proprietary technologies and products will have no commercial
benefit or potential. In addition, from our inception to the present, we have
not recognized any operating revenues.
We face possible competition from large companies. The industry that we
are in is highly competitive. Although we believe that our technology is unique,
can be protected, and, if adopted, will confer benefits that will be otherwise
unavailable for some significant time, we face very large competitors with
greater resources who may adopt various strategies to block or slow our market
penetration, thereby straining our more limited resources. They may also seek to
hinder our 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.
We depend on our key personnel and may have difficulty attracting and
retaining the skilled staff we need to execute our growth plans. Our success
will be dependent largely upon the personal efforts of our Chairman and Chief
Executive Officer, Francis K. Ruotolo, as well as other senior managers. The
loss of key staff could have a material adverse effect on our business and
prospects. To execute our plans, we will need to hire additional staff and
retain current employees. If we are sufficiently funded, we plan to increase our
technical, sales, marketing, and administrative personnel. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense. We may not be successful
in attracting or retaining such qualified personnel. Specifically, we may
experience increased costs in order to attract and retain skilled employees. If
we are unable to hire, train and manage new skilled and experienced employees as
needed, we would be unable to support our planned growth and future operations.
We face rapid technological change. The market for our products and
services is characterized by rapidly changing technologies, extensive research
and the introduction of new products and services. We believe that our future
success will depend in part upon our ability to continue to enhance our existing
products and to develop, manufacture and market new products and services. As a
result, we expect to continue to make a significant investment in engineering,
research and development. There can be no assurance that we will be able to
develop and introduce new products and services or enhance our initial intended
products and services in a timely manner to satisfy customer needs, achieve
market acceptance or address technological changes in our target markets.
Failure to develop products and services and introduce them successfully and in
a timely manner could adversely affect our competitive position, financial
condition and results of operations.
We may need to manage growth well. In the event we are sufficiently
funded, we may experience substantial growth in the size of our staff and the
scope of our operations, resulting in increased responsibilities for management.
To manage this possible growth effectively, we will need to continue to improve
our operational, financial and management information systems and to hire,
train, motivate and manage a growing number of staff. We expect to experience
difficulty in filling our needs for qualified engineers and other personnel.
There can be no assurance that we will be able to effectively achieve or manage
any future growth, and our failure to do so could delay product development
cycles and market penetration or otherwise have a material adverse effect on our
financial condition and results of operations.
We could face information and product liability risks and may not have
adequate insurance. Because we intend to provide database products for critical
business and Internet applications, we may become the subject of litigation
alleging that our products were ineffective or disruptive in their treatment of
data, or in the compilation, processing or manipulation of critical business
information. Thus, we may become the targets of lawsuits from injured or
disgruntled businesses or other users. We do not presently carry product or
information liability or errors and omissions insurance, however we intend to
acquire such insurance prior to commencing substantial sales. In the event that
we are required to defend more than a few such actions, or in the event that we
were found liable in connection with such an action, our business and operations
would be severely and materially adversely affected.
We are dependent on new demand for our products and services. The success
of our business depends upon demand for and use of our technology, products and
services in general and the demand for additional
14
computing power, cost effectiveness and speed in particular. The technology
underlying our product is new and although we have thoroughly tested it
internally we may encounter substantial market resistance. In the event
sufficient demand does not develop, our business and results of operations would
be materially adversely affected. We believe 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 our products and services may be materially adversely affected.
We will need to continue our product development efforts. We believe that
our market will be characterized by increasing technical sophistication. We also
believe that our eventual success will depend on our ability to continue to
provide increased and specialized technical expertise. There is no assurance
that we will not fall technologically behind competitors with greater resources.
Although we believe that we enjoy a significant lead in our product development
and introduction, and are hopeful that our patents provide some protection, we
will likely need significant additional capital in order to continue to enjoy
such a technological lead over competitors with more resources.
Market acceptance of our products and services is not guaranteed. We are
at an early stage of development and our earnings will depend upon market
acceptance and utilization of our 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 our product and
technology development efforts will result in new products and services, or that
they will be successfully introduced. Additionally, prospective customers have
indicated that they are concerned about our lack of long-term financial
resources and will carefully evaluate our financial condition prior to deciding
whether to evaluate or purchase our product.
Future profitability is not guaranteed. We have not recognized any
operating revenues to date. Assuming we are able to secure sufficient financing,
we expect to begin recognizing revenues from the sale of products and services
in calendar 2003. There is no assurance that our plans will be realized, that we
will be able to generate revenues in 2003 or that we will achieve profitability
in the future.
Limited market for our common stock. Our common stock is not listed on any
exchange and trades in the over-the-counter (the "OTC") market. As such, the
market for our common stock is limited and is not regulated by the authorities
of any exchange. Further, the price of our common stock and its volume in the
OTC market may be subject to wide fluctuations.
We have a long corporate existence and were inactive during much of our
corporate history. We were formed as the Sullivan Computer Corporation,
incorporated in Delaware in January 1979. We were privately owned until late
1986, at which time our common stock began trading in the over-the-counter
market. This was a result of the registration of our common stock pursuant to
the merger with CHoPP Computer Corporation, a British Columbia corporation.
During the period from mid-1987 through late 1999, we had few or no employees.
Our operating activities were limited and were largely administered personally
by our former Chairman, Donald R. Hutton. 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.
We have indemnified our officers and directors. We have indemnified our
Officers and Directors against possible monetary liability to the maximum extent
permitted under Delaware law.
Limitation on ability for control through proxy contest. Our Bylaws
provide for a Board of Directors to be elected in three classes. This classified
Board may make it more difficult for a potential acquirer to gain control of the
Company by using a proxy contest, since the acquirer would only be able to elect
one or two directors out of five directors at each shareholders meeting held for
that purpose.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ANTs software inc.
Date: August 14, 2003 By: /s/ Francis K. Ruotolo
--------------- -----------------------------------
Francis K. Ruotolo, Chairman and
Chief Executive Officer
Date: August 14, 2003 By: /s/ Kenneth Ruotolo
--------------- -----------------------------------
Kenneth Ruotolo
Chief Financial Officer and Secretary
16