10QSB 1 a5017866.txt ANTS SOFTWARE INC ================================================================================ 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 ---------------- 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] ================================================================================ 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.
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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.
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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