10-K 1 a5354648.htm ANTS SOFTWARE INC. 10K ANTS SOFTWARE INC. 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

o Transition Report Under to Section 13 or 15 (d) of the Securities Exchange Act of 1934

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, California 94010
(Address of principal executive offices including zip code)

(650) 931-0500
(Registrant’s telephone number, including Area Code)

Securities registered under Section 12(b) of the Act: None

Securities Registered under Section 12(g) of the Act: Common Stock, $0.0001 par value
___________________

Check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Check whether the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act. Yes o No x

Check whether the registrant (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 such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Check if disclosure of delinquent filers in pursuant to Item 405 of Regulation S-K (section 2229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Check whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of June 30, 2006 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $115 million based on the average bid and asked price of such common stock as reported on the NASD Bulletin Board system. Shares of common stock held by each officer and director and each person who owns more than 10% or more of the outstanding common stock have been excluded because these persons may be deemed to be affiliates. The determination of affiliate status for purpose of this calculation is not necessarily a conclusive determination for other purposes.

The issuer had shares of common stock outstanding as of March 1, 2007 of 55,819,785.

 
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended December 31, 2006, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

TABLE OF CONTENTS

PART I
 
  3
  9
13
13
13
13
     
PART II 
 
     
13
     
14
15
   
15
23
23
 
   
24
24
24
 
 
 
PART III 
 
     
25
25
25
   
25
26
26
     
 PART IV
 
     
27
 
54
 
56
     
 
2

 
This Annual Report and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or if they prove incorrect, would likely cause our results to differ materially from those expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.
 
Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plans,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, problems incurred in establishing sales and sales channels, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include, but are not limited to, statements under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other sections in this Annual Report. You should be aware that the occurrence of any of the events discussed under the heading “Item 1A — Risk Factors” and elsewhere in this Annual Report could substantially harm our business, results of operations and financial condition. If any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock.
 
The cautionary statements made in this Annual Report are intended to be applicable to all related forward-looking statements wherever they may appear in this Annual Report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. 


PART I


The Company

ANTs software inc. develops, markets and supports the ANTs Data Server, a relational database management system that can dramatically reduce costs and can improve performance in a wide range of applications. Two proprietary technologies - the ANTs Concurrency Engine and compatibility with the proprietary extensions from other database vendors - together provide unique performance and consolidation/cost-saving advantages that make the ANTs Data Server an attractive alternative to other relational database management systems (“RDBMS’s”). End-users of RDBMS’s, independent software vendors who bundle an RDBMS with their products and other RDBMS vendors can use the ANTs Data Server or its technologies to lower costs and gain competitive advantage.

Corporate History 

ANTs software inc. (sometimes referred to herein as “ANTs” or the “Company”) is a Delaware corporation headquartered in Burlingame, California. The Company’s shares trade on the OTC Bulletin Board under the stock symbol ANTS. The Company is the successor to Sullivan Computer Corporation, a Delaware corporation incorporated in January 1979, which, in 1986 changed its name to CHoPP Computer Corporation. In 1997, the Company reincorporated from Delaware to Nevada, and in February 1999 changed its name from CHoPP Computer Corporation to ANTs software.com. In July 2000, Intellectual Properties and Technologies, Inc., a wholly owned subsidiary with no significant assets, merged into the Company. In December 2000, the Company reincorporated from Nevada to Delaware and changed its name from ANTs software.com to ANTs software inc.

Research and development related to the ANTs Data Server (“ADS”) began in 2000, with the first beta version of the product released in late 2004 and the first commercial version released in 2005.

Technology and Intellectual Property
3

Overview
 
The ANTs Data Server is based on technologies that provide an advantage over other relational database management systems: Compatibility and the ANTs Concurrency Engine.
 
Compatibility

Applications written to work with one RDBMS are typically incompatible with other RDBMSs due to proprietary extensions developed and popularized by other RDBMS vendors. This has the effect of locking in customers to one RDBMS vendor because it will generally be cost-prohibitive and time-consuming to migrate an application, which currently works with one RDBMS to work with another RDBMS. ANTs has developed technology that allows the ANTs Data Server to natively process these proprietary extensions. This technology, which is tightly integrated into the ANTs Data Server, allows customers to migrate applications to the ANTs Data Server more easily and at less cost.

The ANTs Concurrency Engine

Applications which require access to rapidly changing, shared data often suffer from poor performance and scalability because of database locking. The ANTs Concurrency Engine (ACE), which comprises a highly efficient data-processing engine coupled with lock-free data structures, eliminates virtually all data locking. ACE is architected into the core of the ANTs Data Server and enables performance improvements over other RDBMS’s. The Company has applied for eleven patents on the concepts, which underlie ACE, six of which have been granted by the United States Patent and Trademark Office.

ACE consists of two key components:
 
 
·
A highly efficient data processing engine
 
·
Lock-free data structures, enabling concurrency

The Data Processing Engine

For many years, shared data manipulation due to locking in the database has been the bottleneck in application performance and scalability. ANTs studied this problem and developed a revolutionary way of organizing the work associated with manipulating data. The data processing engine at the heart of the ANTs Data Server reorganizes tasks so as to avoid locking. The result is an entirely new approach to the process by which data is managed.

Lock-Free Data Structures

Contention for shared data produces two significant performance bottlenecks in data-intensive applications:

 
·
The necessity of locking records, and in some cases entire indexes, to ensure data integrity. This results in significant delays due to lock waiting.
 
·
Cache synchronization conflicts that occur when shared data is distributed in multiple caches or multiple clients

The Company’s innovative lock-free data structure technology, which virtually eliminates index-locking, allows index operations, which, to the Company’s knowledge, are not possible with existing RDBMS’s. Locks not only cause waiting, they also can cause severe cache synchronization conflicts, which ACE also eliminates. Operations that would significantly decrease performance in an index-dependent application, such as adding or modifying items, should, when using the ANTs Data Server, execute concurrently at maximum speed.

Using the ANTs Data Server, developers can design applications knowing that they will handle operations under loads that are now generally impossible, even when the data are rapidly changing. The Company has several patented and patent-pending designs for the implementation and deployment of lock-free data structures.

Patents

The Company has developed several proprietary technologies, all of which it believes must be present to achieve results comparable to the ANTs Data Server. The Company filed eleven patent applications to obtain protection for its intellectual property. The Company has been granted six patents. The remaining five applications are pending and the Company awaits the Patent and Trademark Office’s action on those. The Company also claims copyright, trade secret and trademark protection in aspects of its business and technology and new intellectual property is under development on an ongoing basis. The Company was granted three patents in the 1980’s and 1990’s related to hardware designs developed during a time when the Company was producing a supercomputer: U.S. Patents No. 4,484,262 (granted on November 20, 1984) and No. 4,707,781 (granted on November 17, 1987) on its Shared Memory Computer Method and Apparatus, and U.S. Patent No. 5,438,680 (granted on August 1, 1995) on its Method and Apparatus for Enhancing Concurrency in a Parallel Digital Computer. In April 2001, U.S. Patent No. 4,484,262 expired. In January 2003, the Company chose not to pay the maintenance fee for U.S. Patent No. 5,438,680 and in November 2004, U.S. Patent No. No. 4,707,781 expired. These three patents were related to hardware and had no usefulness for any business activity the Company now conducts.
4

Product-The ANTs Data Server
 
The ANTs Data Server is an RDBMS that can dramatically reduce costs and can improve performance in a wide range of applications. Two proprietary technologies-the ANTs Concurrency Engine and compatibility with the proprietary extensions from other database vendors-together provide unique performance and consolidation/cost-saving advantages that make ADS an attractive alternative to other RDBMS’s. End-users of RDBMS’s, independent software vendors who bundle an RDBMS with their products and other RDBMS vendors can use ADS or its technologies to lower costs and gain competitive advantage. 

In addition to its unique compatibility and performance technologies, ADS incorporates features that make it suitable for a wide range of applications, including:

 
·
It can be deployed on off-the-shelf hardware
 
·
It can be deployed on the Linux, Windows, and Solaris operating systems
 
·
It supports the SQL-92 language and popular features from SQL-99
 
·
Its micro-threaded execution engine maximizes performance of multi-core CPUs and multi-processor servers
 
·
Transactions are durably recorded to disk logs for backup, failover and recovery
 
·
Automatic failover and recovery are built in

ADS contains many additional features and provides a platform on which the ANTs R&D team can build significant new features as the market demands.

Sales and Marketing

The Market

The market for RDBMS products was $15 billion in 2005 growing to $21 billion in 2010 (according to IDC Research). Oracle, Microsoft and IBM control approximately 85% of this market. According to the numerous CTOs, database architects and application developers at the target Global 2000 enterprises with whom ANTs has spoken, database infrastructure costs have become one of the most expensive line items in the IT budget. These Global 2000 enterprises typically have annual database “spends” in excess of tens and, in some cases, hundreds of millions of dollars; and their database budgets are growing annually. The migration cost from one RDBMS to another, even to a low-cost open-source RDBMS, is extensive due to lack of compatibility between the products’ proprietary extensions.

Strategy

ANTs’ go-to-market strategy adapts with changes in the competitive structure of the RDBMS market. The refinement of ANTs’ strategy is a continuous and iterative process, reflecting the company’s goal of providing a cost-effective solution across a wide variety of applications. ANTs’ strategy has recently included:

 
·
Focusing on large enterprise customers who can realize significant savings by migrating applications away from expensive RDBMS’s and to the ANTs Data Server.
 
·
Focusing on industry segments where high-performance applications demand a high-performance database.
 
·
Selling the ANTs Data Server through three sales channels;
 
o
Direct sales to end-users.
 
o
Through independent software vendors who will incorporate the ANTs Data Server with their own product which they will sell to their customers.
 
o
Through selling partners such as value added resellers and system integrators - companies which generally have deep expertise in certain vertical or geographical markets and who integrate the best products to develop complete solutions for their customers. 

5

ANTs’ compatibility technology provides a solution to the problem of RDBMS lock-in and cost escalation for major enterprises by enabling them to migrate applications from high-cost, proprietary vendors to the compatible, cost-effective ANTs Data Server. Just as corporations have lowered total cost of ownership by migrating from custom applications to packaged applications, from proprietary to “open-standards” hardware, and from Unix to Linux, corporations can now consolidate their high-cost RDBMS’s to the ANTs Data Server.

ANTs high-performance technology makes the ANTs Data Server suitable as an alternative for new and existing applications where database performance is critical. Such applications include:

 
·
High volume on-line transaction processing, in capital markets applications for example
 
·
Telecom - messaging applications
 
·
Real-time analytics for security and defense department applications

ANTs has established relationships with a number of partners with whom it is bringing the ANTs Data Server to market. These partners include selling partners, with whom ANTs is engaged as a means of gaining market distribution and access to customers, and independent software vendor (“ISV”) partners, who bundle the ANTs Data Server with their software products and sell a “turn-key” solution to customers. Following are select results of ANTs’ partnering strategy:

IBM - through a multinational solutions engagement agreement, announced January 2007, the ANTs Data Server (ADS) may be sold through IBM contracts to customers worldwide. First success: ADS selected for deployment on IBM blade servers in Raytheon, Inc.’s ship board computing platform for the U.S. Navy.

Four Js Development Tools, Ltd.- selling a turnkey solution comprised of its application development tool, Genero, bundled with ADS (which is rebranded as Genero db). First success: Genero db selected by a Fortune 100 retailer in mid-2006 for in-store applications.

Singlepoint, Inc. (formerly Wireless Services Corporation) - bundling ADS with Singlepoint’s text messaging platform to provide high performance for wireless carriers. First success: ADS replaces Microsoft SQL Server at Sprint, processing over 12 million messages per day.

The Company intends to generate revenue through licensing, maintenance, and integration/customization fees. The Company intends to license ADS to independent software vendors and others whom it expects will customize it for use with their applications and use it for database compatibility purposes. The Company also intends to license ADS to end-users and to sell ADS through re-sellers and system integrators. ANTs began selling the first commercial version of ADS in 2005, and has generated approximately $754,000 in revenues through December 31, 2006.

Competition

The Company operates in the RDBMS segment of the software market and competes against other compatible, high-performance and general-purpose RDBMS’s.

ANTs has identified one competitor in the “compatibility” segment. Enterprise DB, an open-source RDBMS, claims compatibility with applications written for Oracle. The three major RDBMS vendors, Oracle, IBM and Microsoft also encourage migration from competitive products through use of their migration tools. These tools often require substantial investment related to rewriting applications, retraining developers and purchasing additional database licenses. Customers with whom ANTs has spoken are not receptive to migrating applications under such conditions with these tools.

Competition in the high-performance segment comes from in-memory databases such as TimesTen (acquired by Oracle, June 2005) and Solid Information Technology, Inc., from specialty vendors such as Kx Systems, Inc. and FAME Information Systems, Inc., and also from the traditional RDBMS vendors: Oracle, IBM, and Microsoft. The traditional vendors often encourage customers to solve their high-performance problem by upgrading hardware and by contracting with high-cost consulting services to develop work-arounds to the bottlenecks found in their products.

General-purpose competitors include: Oracle, IBM, and Microsoft, MySQL AB, InterSystems Corporation and Sybase, Inc. Business conditions in the RDBMS market are highly competitive for a number of reasons, including: the market is dominated by very large companies with extensive financial, marketing, and engineering resources; the market is well-established and some customers have built up extensive infrastructure around competitive RDBMS products and expect high levels of both features and service from an RDBMS vendor. The Company’s success will likely require that it win business from established competitors, and as a new entrant in the RDBMS market, the Company’s product may have less functionality than customers expect; making sales of ADS more challenging.

6

Current Operations

The Company’s operations currently comprise marketing the ANTs Data Server, a relational database management system that can dramatically reduce costs and can improve performance in a wide range of applications, supporting customers and research and development. The Company is located in Burlingame, California with sales staff in a number of other states. The Company has a long-standing relationship with a contract development organization in India and has individual contractors who provide development and consulting services from Europe, Australia and India as well as other parts of the United States.

The Company has financed operations through sales of its common stock and issuance of convertible promissory notes in private offerings to accredited investors. The Company expects to continue to raise capital for operations through such private offerings until such time as sales revenue offsets expenses. The Company believes it has sufficient funds to cover operations at the expected expense rate through fiscal year 2007. The Company anticipates its focus will be on continued marketing of ADS, supporting customers, and research and development.

Employees

As of March 1, 2007, the Company had 49 full-time employees, all based in the United States. Of the total number, 27 were engaged in research and development, 10 in sales and marketing, 4 in support services and 8 in general, administrative and finance. ANTs has not experienced work stoppages, is not subject to any collective bargaining agreement and believes that its relationship with its employees is good.

Available Information

Our Annual Report on Form 10K, Quarterly Reports on Form 10Q, Current Reports on Form 8K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15 (d) of the Securities and Exchange Act of 1934, as amended, are available free of charge on our Investor Relations Web site at www.ants.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information posted on our website is not incorporated into this Annual Report on Form 10-K.

Executive Officers

ANTs executive officers and principal employees as of December 31, 2006:
     
Name
Age
Position
     
Francis K. Ruotolo
69
Chairman, Class 3 Director, term expires in 2009
     
Joseph Kozak
55
President, Chief Executive Officer, Class 1 Director, term expires in 2007
     
Clifford Hersh
59
Managing Director and Chief Scientist
     
Kenneth Ruotolo
46
Chief Financial Officer, Executive Vice President, Finance and Administration, and Secretary
     
Jeffrey R. Spirn, Ph.D.
58
Vice President, Research and Development
     
David Segleau
46
Vice President, Support Services
     
Rao Yendluri
55
Vice President, Engineering
7

Francis K. Ruotolo - Chairman, Board of Directors

Francis Ruotolo is Chairman of the Board of the Company. Mr. Ruotolo became Chairman of the Board, Chief Executive Officer and President in January 2001. Prior to that time, he was a member of the Company’s Board of Advisors. Before joining the Company, Mr. Ruotolo was a director in the consulting practice of Deloitte & Touche. Prior to working at Deloitte Consulting Mr. Ruotolo was CEO of The Futures Group, a long term strategic planning consultancy whose clients included: IBM, American Airlines, Monsanto, Ford Motor Co., Pfizer, and numerous departments of the federal government. Mr. Ruotolo was Senior Vice President of Macy’s California for seven years and held the same position at Lord & Taylor in New York. Mr. Ruotolo holds a BA degree in English/Journalism from Northeastern University, Boston, MA. Mr. Ruotolo resigned as President of the Company in March 2003 and resigned as the Company’s Chief Executive Officer effective January 31, 2005. Mr. Ruotolo is the father of the Corporate Secretary and Chief Financial Officer, Kenneth Ruotolo.

Joseph Kozak - Director, President and Chief Executive Officer
 
Joseph Kozak joined ANTs software inc. in June 2005 as President and was named Chief Executive Officer and appointed to the Board of Directors in August 2006. Mr. Kozak brings 25 years of front-line leadership experience in sales, marketing and business development. Mr. Kozak joined ANTs from Oracle Corporation, where he was Vice President of Industry Sales. While with Oracle he defined and executed global strategies for retail, distribution, life science, process manufacturing, and consumer packaged goods industries. He also managed Oracle's acquisition of Retek, Inc. a $630 million purchase in the retail applications space. Prior to Oracle, Mr. Kozak was CEO of Lombardi Software a manufacturer of business process management solutions. He was also a partner with Ernst and Young, LLP, in the retail and consumer packaged goods division; Vice President of Sales for SAP America, where he was responsible for the retail distribution and consumer goods business units for the Americas; and Mr. Kozak held numerous management positions with AT&T and IBM.
 
Clifford Hersh - Managing Director and Chief Scientist

Clifford Hersh joined the Company in March 1997. Previously, he was a founder and Chief Executive Officer of Move Resources, Inc. He was also Vice President of Engineering for Array Technologies, Inc. and Director of Advanced Development at Genigraphics Corporation. Mr. Hersh received a bachelor degree in mathematics from the University of California at Berkeley, and a Master of Science degree in engineering from the Federal Institute of Technology, Zurich, Switzerland.

Kenneth Ruotolo - Executive Vice President Finance and Operations, Chief Financial Officer and Secretary

Kenneth Ruotolo joined the Company in June 2001. Before joining the Company, Mr. Ruotolo was a founder and served as Vice President of Finance and Operations for eStar, Inc. an internet-based content developer and syndicator. Prior to eStar, Mr. Ruotolo was a partner for twelve years with era2, an interactive design and internet consulting agency. Mr. Ruotolo holds a B.A. degree in Economics from the University of California at Davis and an M.B.A. from Northeastern University.

Jeffrey R. Spirn, Ph.D. - Vice President Research and Development

Jeffrey Spirn joined the Company in March 2000, became Director of Engineering in February 2001 and was promoted to Vice President of Research and Development in September 2001. Before joining ANTs, Dr. Spirn was a software architect at Oracle, where he worked on application server, naming, and multithreading issues. Prior to that, Dr. Spirn worked for Sun Microsystems and in the HP and DEC research labs. Before his industrial career, Dr. Spirn was a Computer Science Professor at Brown and Penn State Universities, and held visiting positions at Bell Laboratories and the University of Hawaii. During this period, he published one book and many technical articles on network and operating system design and performance modeling. Dr. Spirn holds a Ph.D. in Electrical Engineering/Computer Science from Princeton University, and a B.S. in Electrical Engineering from M.I.T.

David Segleau - Vice President Support Services

David Segleau joined the Company in July 2006. Prior to joining ANTs, Mr. Segleau was Senior Director of embedded databases at Oracle Corporation, responsible for a global engineering team focused on embedded database technologies. Prior to Oracle, he was Vice President of Engineering for Sleepycat Software, where he managed engineering, technical support, quality assurance, and technical publications teams. Mr. Segleau also held directorships of quality assurance, customer services, engineering services, technology consulting, datablade development, and technical support for Visto, Asta, Versata, Inc., Informix, and Illustra. He began his career in information systems and services for the energy industry where he led key projects in application development and optimization.

8

Rao Yendluri - Vice President Engineering

Rao Yendluri joined the Company in September 2006. Prior to joining ANTs, he founded and was President of iNuCom, a software development firm specializing in data warehousing components. Prior to founding iNuCom, Mr. Yendluri was Director of Engineering for IBM. Mr. Yendluri was previously Vice President of Engineering for Solid Information Technology, where he managed a distributed R&D organization and was responsible for the Solid EmbeddedEngine database, Hot Standby option, and Solid Synchronet products. Prior to that, Mr. Yendluri was Director of Development at Prism Solutions, Inc., where he oversaw development of data warehouse extraction, transformation and loading tools and at Centura Software Corporation (now GUPTA Technologies, LLC), he was Director of Connectivity and Replication Development for the company’s database product. Mr. Yendluri also managed the SQL connectivity group at Tandem Computers, and was instrumental in forming the SQL Access Group, which developed the X/Open CLI API, an industry standard for database access.


In addition to other information in this 10-K, the following risk factors should be carefully considered in evaluating the Company’s business since it operates in a highly changing and complex business environment that involves numerous risks, some of which are beyond its control. The following discussion highlights a few of these risk factors, any one of which may have a significant adverse impact on the Company’s business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this 10-K, 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.

The Company faces significant risks, and the risks described below may not be the only risks we face. Additional risks that the Company does not know of or that it currently considers immaterial may also impair its business operations. If any of the events or circumstances described in the following risks actually occurs, the Company’s business, financial condition or results of operations could be harmed and the trading price of its common stock could decline.

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 products and services. The Company’s product is under constant development and is still maturing. Some customers may be reluctant to purchase products from a company with an unproven product, uncertain finances, or less-experienced support department. Also, due to economic conditions some potential customers may have tightened budgets for evaluating new products and technologies and the evaluation cycles may be much longer than in the recent past. There can be no assurance that the Company’s product and technology development or support efforts will result in new products and services, or that they will be successfully introduced.

If the Company delivers products with defects, its credibility will be harmed and the sales and market acceptance of its products will decrease. The Company’s product and services are complex and have at times contained errors, defects and bugs. If the Company delivers products with errors, defects or bugs, its credibility and the market acceptance and sales of its products would be harmed. Further, if its products contain errors, defects or bugs, the Company may be required to expend significant capital and resources to alleviate such problems. The Company may agree to indemnify its customers in some circumstances against liability arising from defects in our products. Defects could also lead to product liability as a result of product liability lawsuits against the Company or against its customers. The Company carries product and information liability and 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.

A failure to obtain financing could prevent the Company from executing its business plan. The Company anticipates that current cash resources will be sufficient for it to execute its business plan through fiscal year 2007. The Company believes that securing additional sources of financing to enable it to continue the development and commercialization of its proprietary technologies will be difficult and there is no assurance of its ability to secure such financing. A failure to obtain additional financing could prevent the Company from making expenditures that are needed to pay current obligations, allow it to hire additional personnel and continue development of its product and technology. If the Company raises additional financing by selling equity or convertible debt 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 be subject to adverse consequences in the event of a default.

9

The Company’s four largest customers represented 73% of its revenue in 2006, and the loss of any of these customers could cause a significant drop in its revenue. The Company depends on a limited number of customers for a significant portion of its revenue. The Company's four largest customers represent approximately 73% of its revenue during the year ended December 31, 2006. A decrease in revenue from any of its largest customers for any reason, including a decrease in pricing or activity, or a decision to either utilize another vendor or to no longer use some or all of the products and services it provides, could have a material adverse effect on its revenue.

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 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. The Company is aware of efforts by competitors to introduce doubt about the Company’s financial stability as it competes to make sales and win customers and business. Large competitors 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 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 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.

The Company relies upon Independent Software Vendors for product sales. A significant portion of the Company’s sales have been made through independent software vendors (“ISVs”). As a result, its success may depend on the continued sales efforts of these ISVs, and identifying and entering into agreements with additional ISVs. The use of these ISVs involves certain risks, including risks that they will not effectively sell or support the Company’s products, that they will be unable to satisfy their financial obligations with the Company, and that they will cease operations. Any reduction, delay or loss of orders from ISVs may harm the Company’s results. There can be no assurance that the Company will identify or engage qualified ISVs in a timely manner, and the failure to do so could have a material adverse affect on the Company’s business, financial condition and results of operations.

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 eleven patent applications with the United States Patent and Trademark Office and intends to file more. Six patents have been granted; 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 believes that these technologies are the basis for 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.

10

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, Joseph Kozak and 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 have to 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 retaining such qualified personnel. Specifically, the Company may experience increased costs in order to retain skilled employees. If the Company is unable to retain experienced employees as needed, it would be unable to execute its business plan.

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 products 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 experiences rapid 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, will possibly need to create entire departments that do not now exist, and 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 and 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. Assuming the Company can attract sufficient financing, and revenues increase, there is no assurance that the Company’s plans will be realized or that it will achieve break-even status or profitability in the future.

Changes to financial accounting standards may affect the Company’s results of operations and cause it to change business practices. The Company prepares financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the SEC and various other bodies formed to interpret and create appropriate accounting principles. A change in those principles can have a significant effect on the Company’s reported results and may affect its reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect the Company’s reported financial results or the way it conducts business. For example, accounting principles affecting many aspects of the Company’s business, including rules relating to equity-related compensation, have recently been revised or are under review. The Financial Accounting Standards Board and other agencies have finalized changes to U.S. generally accepted accounting principles that required the Company, starting January 1, 2006, to record a charge to earnings for employee stock option grants and other equity incentives. The Company will have significant ongoing accounting charges resulting from option grant and other equity incentive expensing that could reduce net income or increase losses. In addition, since the Company historically used equity-related compensation as a component of its total employee compensation program, the accounting change could make the use of equity-related compensation less attractive and therefore make it more difficult to attract and retain employees.

11

There is a 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 rules and regulations of any exchange. Further, the price of the Company’s common stock and its volume in the OTC market may be subject to wide fluctuations. The Company’s stock price could decline regardless of its actual operating performance, and stockholders could lose a substantial part of their investment as a result of industry or market-based fluctuations. The Company’s stock trades relatively thinly. If a more active public market for its stock is not sustained, it may be difficult for stockholders to sell shares of its common stock. Because the Company does not anticipate paying cash dividends on its common stock for the foreseeable future, stockholders will not be able to receive a return on their shares unless they are able to sell them. The market price of the Company’s common stock will likely fluctuate in response to a number of factors, including but not limited to, the following:

· sales, sales cycle and market acceptance or rejection of the Company’s product;
· economic conditions within the database industry;
· the Company’s failure to meet performance estimates or the performance estimates of securities analysts;
· the timing of announcements by the Company or its competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof; and
· domestic and international economic, business and political conditions.

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 on the over-the-counter market. This was a result of the registration of the Company’s common stock pursuant to a 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.

Failure to develop or maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on the Company’s stock price. Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of its internal control over financial reporting and a report by its independent registered public accounting firm attesting to and reporting on these assessments. If the Company fails to adequately maintain compliance with, or maintain, the adequacy of its internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, the Company may not be able to ensure that it can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If the Company cannot favorably assess, or its independent registered public accounting firm is unable to provide an unqualified attestation report on the Company’s assessment of the effectiveness of its internal control over financial reporting, investor confidence in the reliability of its financial reports may be adversely affected, which could have a material adverse effect on its stock price.

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 approximately one-third of the directors at each shareholders meeting held for that purpose.

The Company’s actual results could differ materially from those anticipated in our forward-looking statements. This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or future financial performance. When used in this report, you can identify forward-looking statements by terminology such as “believes,” “anticipates,” “plans,” “predicts,” “expects,” “estimates,” “intends,” “will,” “continue,” “may,” “potential,” “should” and similar expressions. These statements are only expressions of expectation. The Company’s actual results could, and likely will, differ materially from those anticipated in such forward-looking statements as a result of many factors, including those set forth above and elsewhere in this report and including factors unanticipated by the Company and not included herein. Although the Company believes that the expectations reflected in the Company’s forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. The Company assumes no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. Accordingly, the Company cautions readers not to place undue reliance on these statements.

12


None.


The Company’s headquarters are located at 700 Airport Blvd., Suite 300, Burlingame, California. The Company leases approximately 15,000 square feet.


The Company is not a party to any material pending legal proceeding and, to best of its knowledge, no such action by or against the Company has been threatened. 


There were no matters submitted to the Company’s shareholders for a vote from October 1, 2006 to December 31, 2006.

PART II


(a)  Price Range of Common Stock

The Company’s common equity is traded on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “ANTS”.

The following is the range of high and low closing bid prices of the Company’s stock, for the periods indicated below. This information was obtained from Yahoo! Finance Historical Quotes, and can be found at the following Internet address: http://finance.yahoo.com/q/hp?s=ANTS.OB.

 
 
High
 
Low
 
           
Quarter Ended December 31, 2006
 
$
2.85
 
$
1.99
 
Quarter Ended September 30, 2006
   
2.29
   
2.00
 
Quarter Ended June 30, 2006
   
3.03
   
2.11
 
Quarter Ended March 31, 2006
   
2.65
   
2.00
 
               
Quarter Ended December 31, 2005
 
$
2.90
 
$
1.80
 
Quarter Ended September 30, 2005
   
3.10
   
1.94
 
Quarter Ended June 30, 2005
   
3.40
   
2.10
 
Quarter Ended March 31, 2005
   
4.05
   
2.10
 
               
Quarter Ended December 31, 2004
 
$
2.02
 
$
1.04
 
Quarter Ended September 30, 2004
   
2.17
   
1.60
 
Quarter Ended June 30, 2004
   
2.25
   
1.80
 
Quarter Ended March 31, 2004
   
2.95
   
0.80
 

The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.

As of March 1, 2007 there were 55,819,785 shares of common stock issued and outstanding and 1,434 registered holders of record of the Company’s common stock.    

13

(b) Dividend Policy

The Company has not declared or paid cash dividends or made distributions in the past, and it does not anticipate that it will pay cash dividends or make distributions in the foreseeable future.

 
(c)
Recent Sales of Unregistered Securities

In December 2006 the Company’s Board of Directors approved the terms of a private offering to raise working capital. The private offering consists of units (the “J Units”) sold at a per unit price of $50,000 with each J Unit comprised of (i) 14,285 shares of common stock of the Company (issued at a per share price of $1.75) and (ii) a convertible promissory note (the “Note”) with an initial face value of $25,000. In December 2006, the Company entered into agreements with accredited investors to purchase 40 J Units, raising $2,000,000. Pursuant to the sale, the Company issued 571,400 shares of common stock of the Company and issued Notes with an initial face value of $1,000,000. The Notes bear interest at the rate of 10% per annum (simple interest) due and payable at the end of each fiscal quarter. The Notes mature 24 months from the issuance date, and are convertible into shares of the Company’s common stock, at the election of the holder, at a per share price of $2.00. The Notes are prepayable without penalty upon 30 days notice. The Notes are convertible at the election of the Company upon a certain event, and if converted at the election of the Company, the Company has agreed to register the shares of stock issuable upon conversion. The Company paid $40,000 in cash commissions and will issue 10,380 shares of common stock of the Company to a placement agent for services related to the J Unit sales. The net proceeds will be used to fund operations. The sales of these securities were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.

In January 2007, the Company sold an additional 180 J Units to accredited investors for an aggregate investment of $9,000,000. The terms and conditions of the additional 180 J units are identical to those sold in December 2006 as noted above. Pursuant to the sales, the Company will issue investors (i) 2,571,300 shares of common stock of the Company, and (ii) Notes with an initial face value of $4,500,000. The Company paid $900,000 in cash commissions and will issue 163,620 shares of common stock of the Company to a placement agent for services related to the J Unit sales. The net proceeds will be used to fund operations. The sales of these securities were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.

In March 2007, the Company sold an additional 14 J Units to accredited investors for an aggregate investment of $700,000. The terms and conditions of the additional 14 J units are identical to those sold in December 2006 as noted above. Pursuant to the sales, the Company will issue investors (i) 199,990 shares of common stock of the Company, and (ii) Notes with an initial face value of $350,000. The Company will pay $70,000 in cash commissions and will issue 12,726 shares of common stock of the Company to a placement agent for services related to the J Unit sales. The net proceeds will be used to fund operations. The sales of these securities were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.


The following selected financial data are derived from our financial statements. This data should be read in conjunction with the financial statements and notes and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.


   
Fiscal Years
 
   
2006
 
2005
 
2004
 
2003
 
2002
 
Operations:
                     
Revenue
 
$
287,832
 
$
466,620
 
$
-
 
$
-
 
$
-
 
Operating expenses
   
15,532,252
   
9,154,979
   
5,060,292
   
3,616,351
   
4,322,755
 
Net income (loss)*
   
(15,125,903
)
 
(8,704,497
)
 
(5,060,061
)
 
(3,587,340
)
 
(4,304,891
)
Basic & diluted net loss per share*
 
$
(0.30
)
$
(0.22
)
$
(0.16
)
$
(0.15
)
$
(0.22
)
                                 
Financial Position:
                               
Cash and cash equivalents
 
$
4,698,949
 
$
6,381,932
 
$
1,448,724
 
$
541,725
 
$
946,957
 
Working capital
   
3,882,199
   
5,525,616
   
1,196,604
   
(220,883
)
 
851,355
 
Total assets
   
5,996,171
   
7,436,357
   
1,868,616
   
921,355
   
1,388,812
 
Stockholder' equity
 
$
3,823,010
 
$
6,412,586
 
$
1,529,181
 
$
(135,315
)
$
1,163,813
 

* Fiscal 2006 net loss includes $1,332,246 in non-cash compensation expense related to the vesting of stock-based awards as required by Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”. Included in the $1,332,246 is $79,087 for payments made to vendors. The total non-compensation expense increased the fiscal year 2006 net loss by $0.03 per share.

14

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and notes hereto.

This Annual Report and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or if they prove incorrect, would likely cause our results to differ materially from those expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.
 
Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plans,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, problems incurred in establishing sales and sales channels, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include, but are not limited to, statements under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other sections in this Annual Report. You should be aware that the occurrence of any of the events discussed under the heading “Item 1A — Risk Factors” and elsewhere in this Annual Report could substantially harm our business, results of operations and financial condition. If any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock.
 
The cautionary statements made in this Annual Report are intended to be applicable to all related forward-looking statements wherever they may appear in this Annual Report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report.

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.

Revenue Recognition - The Company recognizes 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.

The company uses 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, the Company defers 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, the Company defers 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:

15


 
·
Persuasive evidence of an arrangement exists.
 
·
Delivery has occurred and there are no future deliverables except post-contract customer support (“PCS”).
 
·
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.
 
·
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 - On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based Payment” (the “Statement or “SFAS 123(R)”), which require the Company to recognize expense related to the fair value of its stock-based compensation awards. The Company elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore has not restated its financial results for prior periods. Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not fully vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock Compensation” (“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award, which is three years.
 
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 is applying the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).
 
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.

The Company’s judgment, assumptions and estimates used for the current tax provision take into account the potential impact of FIN 48, its interpretation of current tax laws and possible future audits conducted by the U.S. tax authorities. FIN 48 required the Company to examine the effects of its tax position, based on the use of its judgments, assumptions, and estimates when it is more likely than not, based on technical merits, that the Company’s tax position will be sustained if an examination is performed.

Results of Operations

The results of operations for the fiscal years ended December 31, 2006, 2005 and 2004 are summarized in the table below.
 
16


   
Summary of Statements of Operations    
 
   
for Years ending December 31,    
 
                           
   
2006
 
% Change 2006 to 2005
   
2005
 
% Change 2005 to 2004
   
2004
 
                           
Revenues
 
$
287,832
   
-38
%
 
$
466,620
   
N/A
   
$
-
 
Cost of goods sold
   
23,893
   
N/A
     
-
   
N/A
     
-
 
Gross profit
   
263,939
   
-43
%
   
466,620
   
N/A
     
0
 
Operating expenses
   
15,532,252
   
70
%
   
9,154,979
   
81
%
   
5,060,292
 
Loss from operations
   
(15,268,313
)
 
76
%
   
(8,688,359
)
 
72
%
   
(5,060,292
)
                                     
Other income (expense), net
   
142,410
   
982
%
   
(16,138
)
 
-7086
%
   
231
 
Net loss
 
$
(15,125,903
)
 
74
%
 
$
(8,704,497
)
 
72
%
 
$
(5,060,061
)
                                     
Net loss per share -
                                   
basic and diluted
 
$
(0.30
)
 
36
%
 
$
(0.22
)
 
38
%
 
$
(0.16
)
                                     
Shares used in computing basic and
                                   
diluted net loss per share
   
50,474,155
   
25
%
   
40,418,575
   
24
%
   
32,501,014
 
 
Revenues

The Company began marketing and selling the ANTs Data Server as a high-performance RDBMS during 2005. The first contracts occurred during the first quarter of 2005 and the sales team began building a pipeline of prospective customers. In late 2005, the Company modified its strategy to include development and marketing of the ANTs Data Server as a low-cost, compatible RDBMS in addition to marketing ADS as a high-performance RDBMS. This led to a shift in focus and in sales and marketing towards “compatibility” sales, with somewhat reduced emphasis on high-performance sales, resulting in a decrease in fiscal 2006 revenues.
 
During 2006, the Company recognized $287,832 in revenue, in accordance with its revenue recognition policy, of which:

$157,958 was license fees
$105,792 were maintenance and support fees from the current and prior periods and
$24,082 was professional services fees

The Company deferred $56,819 of the maintenance and support fees invoiced in fiscal 2006. These deferred fees are reflected on the balance sheets as deferred revenue.

Operating Expenses

Operating expenses for the fiscal years ending December 31, 2006, 2005 and 2004 were as follows:

   
Operating Expenses - Fiscal Years ended December 31,        
 
   
2006
 
% Change vs. Prior Period
   
2005
 
% Change vs. Prior Period
   
2004
 
                           
Sales and marketing
 
$
5,164,937
   
43
%
 
$
3,618,324
   
131
%
 
$
1,564,424
 
Research and development
   
6,736,381
   
88
%
   
3,589,565
   
70
%
   
2,109,452
 
General and administrative
   
3,630,934
   
86
%
   
1,947,090
   
40
%
   
1,386,416
 
Total operating expenses
 
$
15,532,252
   
70
%
 
$
9,154,979
   
81
%
 
$
5,060,292
 

17

During fiscal 2004, the Company was in the early phase of its transition from basic product research and development (“R&D”) to sales and marketing (“S&M”), supported by ongoing R&D. In 2004, the Company’s S&M staff averaged 5; during fiscal 2005 the S&M staff averaged 12, an increase of 140%. Costs for all direct marketing and sales activities (travel and entertainment, lead generation programs, events & promotions, the use of outside consultants, advertising, public relations, printing, etc.) increased from $827 thousand in 2004 to $1.5 million in 2005, an increase of $673 thousand, or 81%.

From 2004 to 2005, S&M expense increased from 31% to 40% of total operating expenses, while over the same time period, R&D expense declined from 42% to 39% of total operating expenses. General and administrative (“G&A”) expenses also declined, from 27% to 21% of total operating expenses.

All areas of the Company expanded in 2005 as the Company added personnel and relocated its offices to accommodate growth. Total average full-time staff increased from 23 in 2004 to 35 in 2005, an increase of 52%.

During fiscal 2005 the Company completed a transition from heavy focus on research and development of the ANTs Data Server (“ADS”) to an expanding focus on sales, marketing and customer support. In addition, late in 2005 the Company changed strategic direction. While continuing to focus on the high-performance database market, the Company began pursuing a much larger legacy database replacement market by taking advantage of the compatibility technology in ADS to offer customers a lower-cost, compatible alternative to expensive legacy database products. These changes led to a sharp increase in sales and marketing costs compared to 2004. These strategic changes required increases in research and development to support the effort to enhance the compatibility features of ADS. G&A costs increased as infrastructure and staff were added.

The Company continued to grow in 2006. Total average full-time staff increased to 47 in 2006 from 35 in 2005, an increase of 34%. The bulk of the increase was in the R&D department, which grew 53%, from an average full-time staff of 17 in 2005 to 26 in 2006.

During fiscal 2006, pursuant to its change in strategy, the Company accelerated development efforts related to compatibility features and implemented an aggressive recruiting campaign to attract engineering resources. As a result, R&D expenses increased significantly compared to 2005. Additionally, the Company implemented an ambitious marketing and sales effort to build the infrastructure and develop programs aimed at Global 2000 companies as prospects for a low cost, compatible RDBMS. G&A expense increased substantially over 2005 as the Company staffed up to handle more employees, and most significantly, as the Company was required to meet the extensive process and reporting requirements related to its first-time compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Sales and Marketing Expenses

Sales and marketing 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.

Changes to key sales and marketing expenses from 2004 to 2006:
                         
                           
   
2006
 
% Change vs. Prior Period
   
2005
 
% Change vs. Prior Period
   
2004
 
Marketing programs
 
$
1,782,274
   
56
%
 
$
1,144,688
   
85
%
 
$
617,426
 
Employee compensation and benefits
   
2,049,872
   
23
     
1,664,421
   
177
     
601,202
 
Employee stock-based compensation
   
208,085
   
N/A
     
-
   
---
     
-
 
Sales-related travel
   
526,770
   
53
     
343,229
   
116
     
158,647
 
 
18

Total S&M expenses increased by $1.5 million in 2006 compared to 2005, due primarily to the following: 1) expenses related to direct marketing activities such as trade shows, advertising, lead generation and other marketing events increased significantly; 2) employee-related expenses increased as the prior year’s staffing increases were realized over the course of a full year; 3) recognition of employee stock-based compensation expense as required by SFAS 123R which was implemented at the beginning of fiscal 2006; and 4) sales-related travel expense climbed as the Company continued to expand sales activity in international and domestic markets.

Total S&M expenses increased by $2.0 million in 2005 compared to 2004, due primarily to the following: 1) increased S&M staffing levels led to an increase in salaries and benefits; 2) professional fees related to the execution of direct marketing and lead generation programs, web-site design and maintenance and printing and other ancillary costs grew and 3) sales-related travel expense rose as the Company increased sales activity in international and domestic markets.

Research and Development Expenses

Research and development expenses consist primarily of employee salaries and benefits, fees to consultants, depreciation on equipment and software, and allocation of corporate overhead. In 2005 R&D focused primarily on supporting sales activities by adding new features, and testing and refining ADS as a high-performance product. Significant increases in R&D expenses during fiscal 2006 were driven by changes in the Company’s overall strategic direction to include compatibility features in ADS. The strategy change required adding significant new engineering resources, in the form of employees and additional offshore consultants to support R&D operations.

Changes to key research and development expenses from 2004 to 2006:
                         
                           
   
2006
 
% Change vs. Prior Period
   
2005
 
% Change vs. Prior Period
   
2004
 
Employee compensation and benefits
 
$
3,804,380
   
56
%
 
$
2,436,288
   
44
%
 
$
1,688,651
 
On- and off-shore contractors
   
1,401,728
   
168
     
523,607
   
547
     
80,937
 
Employee stock-based compensation
   
442,015
   
N/A
     
-
   
---
     
-
 
Depreciation on equipment & computer supplies
   
423,966
   
44
     
293,956
   
68
     
175,390
 
 
Total R&D expenses increased by $3.1 million in 2006 compared to 2005, due primarily to the following: 1) employee-related expenses rose as R&D staffing increased from an average of 17 in 2005 to 26 in 2006; 2) greater use of on and off-shore consultants, and; 3) recognition of employee stock-based compensation expense as required by the implementation of SFAS 123R which was implemented at the beginning of fiscal 2006.

Total R&D expenses increased by $1.5 million in 2005 compared to 2004, due primarily to the following: 1) employee-related expenses rose as a result of increased staffing levels and wage increases for R&D personnel; 2) increased use of on and off-shore consultants, and; 3) increased purchases of computer equipment (depreciation) and upgrades to facilities systems in the Company’s development lab.

General and Administrative Expenses

General and administrative expenses comprise primarily employee salaries and benefits, professional fees (legal, accounting, investor relations, and recruiting), facilities expenses and insurance.
 

Changes to key general and administrative expenses from 2004 to 2006:
                         
                           
   
2006
 
% Change vs. Prior Period
   
2005
 
% Change vs. Prior Period
   
2004
 
Employee compensation and benefits
 
$
1,324,176
   
31
%
 
$
1,012,725
   
99
%
 
$
509,371
 
Employee stock-based compensation
   
603,059
   
N/A
     
-
   
---
     
-
 
Professional fees
   
1,221,579
   
91
     
640,089
   
29
     
495,802
 
Facilities
   
460,084
   
55
     
296,526
   
154
     
116,710
 
 
Total G&A expenses increased by $1.7 million in 2006 compared to 2005, due primarily to the following: 1) employee-related expense increases were driven in large part by increases in medical insurance premiums as well as an increase in headcount; 2) recognition of employee stock-based compensation expense as required by the implementation of SFAS 123R which was implemented at the beginning of fiscal 2006; 3) professional fees grew mainly due to compliance with section 404 of the Sarbanes-Oxley Act of 2002, and; 4) an increase in facilities expense as the Company realized a full year’s worth of expense in its new facility.

Total G&A expenses increased by $500 thousand in 2005 compared to 2004, due primarily to the following: 1) an increase in employee-related expenses resulting from higher medical insurance premiums, and an increase in compensation related to the hiring of a new CEO and a new Controller; 2) increased professional fees related to increased capital raising activity in 2005, and; 3) facilities expense grew as the Company relocated to larger facilities during the year.

    19

In 2006, the Company was required to implement the processes and procedures necessary to effect compliance with Section 404 of the Sarbanes-Oxley Act of 2002. In addition to consulting expenses, the Company incurred increased audit fees, as the external auditors issued an opinion on the effectiveness of the Company’s internal controls over the financial reporting process during 2006. The Company estimates the total cost of compliance with Section 404 in 2006 will be between $400 thousand to $500 thousand.

The majority of the Company’s operating expenses and costs over the next twelve months are expected to be for, and related to, marketing and selling the ANTs Data Server, continuing technical development, and supporting customers.

Other Income (Expense), Net

The components of Other Income (Expense), Net for the fiscal years ending December 31, 2006, 2005 and 2004 are:

   
Fiscal Years ended December 31,
 
       
% Change vs.
       
% Change vs.
       
   
2006
 
Prior Period
   
2005
 
Prior Period
   
2004
 
Other income (expense):
                                   
Income earned from expired contract
 
$
-
   
N/A
   
$
-
   
-100
%
 
$
310,943
 
Interest income
   
203,133
   
740
%
   
24,170
   
40
%
   
17,214
 
Gain on legal settlement and other
   
4,337
   
-28
%
   
6,000
   
9
%
   
5,500
 
Write off note receivable from
                                   
former officer
   
-
   
N/A
     
-
   
-100
%
   
(45,000
)
Write off assets related to office move, net
   
-
   
-100
%
   
(41,294
)
 
N/A
     
-
 
Write off of fixed assets related to impairment
   
(57,614
)
 
N/A
     
-
   
N/A
     
-
 
Interest expense
   
(7,446
)
 
49
%
   
(5,014
)
 
-98
%
   
(288,426
)
Other income (expense), net
 
$
142,410
   
982
%
 
$
(16,138
)
 
N/A
   
$
231
 
                                     
 
Two factors drove the increase in interest income during fiscal 2006: 1) an average balance of approximately $6.3 million in invested funds during 2006 compared to an average balance of approximately $3.2 million in fiscal 2005 and 2) cash balances were invested in higher-yielding money market accounts in 2006 compared to minimum-yield bank investment products during 2005. Average cash funds available for investment have increased over time as the Company has raised increasingly larger amounts of equity capital.

The changes from 2004 to 2005 resulted primarily from 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, $288 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 net amount of $41 thousand.

Off Balance Sheet Arrangements

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.

20

The Company is recognizing rent expense for this lease in accordance with FASB 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, resulting in monthly rental expense of $16,668. During the fiscal years ended December 31, 2006, 2005 and 2004, the Company recognized a total of $200,020, $133,347 (incurred from May 1, 2005 through December 31, 2005), and $0 respectively, in rental expense for this lease.

Recent Accounting Pronouncements
 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155 (“SFAS No. 155”), “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140”. SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006 (January 1, 2007 for the Company). The adoption of SFAS No. 155 is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.
  
In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, the financial statement effects of a tax position should initially be recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with a taxing authority. FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect, if any, of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings in the period adopted. The adoption of FIN 48 is not expected to have a material impact on the Company’s financial condition or results of operations.

In September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 addresses the diversity in practice of quantifying financial statement misstatements resulting in the potential build up of improper amounts on the balance sheet. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for companies with fiscal years ending after November 15, 2006. SAB 108 allows a one-time transitional cumulative effect adjustment to beginning retained earnings, in the first year of adoption, for errors that were not previously deemed material, but are material under the guidance in SAB 108. The adoption of SAB 108 is not expected to have a material impact on the Company’s financial condition or results of operations.
 
In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies in conjunction with other accounting pronouncements that require or permit fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007 and all fiscal periods within those fiscal years. The adoption of FAS 157 is not expected to have a material impact on the Company’s financial condition or results of operations.

21


From inception, the Company has reported negative cash flow from operations. During the periods from fiscal 2000 through fiscal 2004, the Company was focused primarily on research and development with its first sales occurring in the first quarter of 2005. Total revenues for 2005 and 2006 were approximately $754 thousand. These revenues were less than the Company’s need for funds during these years.

Throughout this seven year period, the Company has funded operations and investments in operating assets with cash raised through financing activities in the form of private offerings to accredited investors. The funds raised have been primarily in the form of sales of the Company’s common stock and, to a lesser degree, through the issuance of convertible promissory notes.

The Company has offered several private offerings each year. The offerings typically consist of Units, which give the investor shares of restricted common stock at a discount to the then-current market price, and a warrant to purchase the same number of restricted shares of common stock at a fixed price set at a premium to the then-current market price. The warrants generally have a life of three years.

In the latter part of 2006 and early 2007, the Company sold units comprised of common stock and a convertible promissory note (“Notes”), convertible into common stock. As of December 31, 2006, the Company had Notes with a face value of $1 million outstanding. The Notes bear interest at the rate of 10% per annum (simple interest) due and payable at the end of each fiscal quarter. The Notes mature 24 months from the issuance date, and are convertible into shares of the Company’s common stock, at the election of the holder, at a per share price of $2.00. The Notes are prepayable without penalty upon 30 days notice. The Notes are convertible at the election of the Company upon a certain event, and if converted at the election of the Company, the Company has agreed to register the shares of stock issuable upon conversion. If the Notes are not converted, the Company will have an obligation to pay the noteholders the face value of $1 million in December 2008.

Sales of the Company’s securities in private offerings have been the Company’s primary source of operating capital. The Company has also raised funds as investors exercise warrants related to prior offerings, and as stock options are exercised. The Company’s investing activities have been focused almost entirely on the acquisition of computer equipment, and expansion of electrical and air-conditioning capacity in its development and testing laboratory. The funds used for investing have been significantly less than the funds provided by financing activities; the remainder of the capital raised has been used to support operations and increase cash balances on hand.

For the fiscal years ended December 31, 2006, 2005 and 2004, operations used approximately $13.4 million, $7.6 million and $4.9 million in cash, respectively. Investing activities utilized another $620 thousand, $725 thousand and $182 thousand, respectively. Thus, total cash outflows for the fiscal years ended December 31, 2006, 2005 and 2004 were approximately $14 million, $8.3 million and $5.1 million, respectively. During these fiscal years, the Company relied on cash flows from financing activities to fund operations and investments in capital equipment. Financing activities provided approximately $12.3 million, $13.3 million and $6 million in the fiscal years ended December 31, 2006, 2005 and 2004, respectively. Cash on hand at December 31, 2006 was $4.7 million, a decrease of $1.7 million from $6.4 million on December 31, 2005.

During January 2007, the Company raised an additional $8 million, net of a commission paid to the placement agent of $900 thousand, in equity securities and convertible promissory notes (“Notes”). The Notes have a face value of $4.5 million. The Notes mature 24 months from the issuance date, and are convertible into shares of the Company’s common stock, at the election of the holder, at a per share price of $2.00. The Notes are prepayable without penalty upon 30 days notice. The Notes are convertible at the election of the Company upon a certain event and, in the event of conversion at the election of the Company; the Company has agreed to register the shares of such stock issuable upon conversion. If the Notes are not converted, the Company will have an obligation to pay the note holders the face value of $4.5 million in January 2009.

In March 2007, the Company raised an additional $630 thousand, net of a commission to be paid to the placement agent of $70 thousand, in equity securities and convertible promissory notes (“Notes”). The Notes have a face value of $350 thousand. The Notes mature 24 months from the issuance date, and are convertible into shares of the Company’s common stock, at the election of the holder, at a per share price of $2.00. The Notes are prepayable without penalty upon 30 days notice. The Notes are convertible at the election of the Company upon a certain event and, in the event of conversion at the election of the Company; the Company has agreed to register the shares of such stock issuable upon conversion. If the notes are not converted, the Company will have an obligation to pay the note holders the face value of $700 thousand in March 2009.

On March 7, 2007, the Company had approximately $11.3 million in cash on hand to fund operations and equipment purchases. The Company anticipates that, at its current levels of revenues and expenditures, the $11.3 million cash balance will fund operations through fiscal 2007. The Company will consider a number of avenues to raise additional operating capital: 1) in the past the Company has been successful in raising funds through sales of its stock and the issuance of convertible notes to accredited investors through private offerings and anticipates that it will continue to raise funds through this method; 2) as the Company develops close relationships with large partners, it will pursue strategic investments from those partners, and; 3) the Company expects to continue generating revenue in 2007, and if successful, this will be a source of operating funds. The Company is pursuing all three avenues, however, it believes that due to an uncertain investment climate, securing additional investment will be difficult.

22

 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

Foreign Currency Exchange Risk
 
The majority of the Company’s revenue is realized in United States dollars. While some portion of the Company’s revenue is generated from international customers, payments are made in United States dollars, mitigating foreign exchange exposure. As a result, the Company’s financial results would not be materially affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The Company does not enter into foreign currency hedging transactions to mitigate its exposure to foreign currency exchange risks.

Interest Rates 

The Company’s exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income it can earn on its investment portfolio. The Company’s investment portfolio consists of liquid investments that have maturities of three months or less. The Company’s risk associated with fluctuating interest income is limited to investments in interest rate sensitive financial instruments. Under the Company’s current policy, the Company does not use interest rate derivative instruments to manage this exposure to interest rate changes. The Company seeks to ensure the safety and preservation of its invested principal by limiting default risk, market risk, and reinvestment risk. The Company mitigates default risk by investing in short-term investment grade securities.


   
2006
 
   
Quarter Ended
 
Year Ended
 
   
March 31
 
June 30
 
September 30
 
December 31
 
December 31
 
                       
Revenues
 
$
68,389
 
$
83,258
 
$
48,212
 
$
87,973
 
$
287,832
 
Gross profit
   
68,389
   
68,162
   
46,212
   
81,176
   
263,939
 
Net loss *
   
(2,750,979
)
 
(3,895,181
)
 
(4,392,656
)
 
(4,087,087
)
 
(15,125,903
)
Basic and diluted net loss per common share*
   
(0.06
)
 
(0.08
)
 
(0.08
)
 
(0.08
)
 
(0.30
)
Shares used in computing basic and diluted
                               
net loss per share
   
45,180,279
   
51,775,813
   
52,053,558
   
52,786,035
   
50,474,155
 
 
   
2005
 
   
Quarter Ended
 
Year Ended
 
   
March 31
 
June 30
 
September 30
 
December 31
 
December 31
 
                       
Revenues
 
$
86,767
 
$
134,500
 
$
95,233
 
$
150,120
 
$
466,620
 
Gross profit
   
86,767
   
134,500
   
95,233
   
150,120
   
466,620
 
Net loss
   
(1,798,171
)
 
(2,016,022
)
 
(2,355,362
)
 
(2,534,942
)
 
(8,704,497
)
Basic and diluted net loss per common share
   
(0.05
)
 
(0.05
)
 
(0.06
)
 
(0.06
)
 
(0.22
)
Shares used in computing basic and diluted
                               
net loss per share
   
37,176,396
   
39,535,096
   
41,492,402
   
44,862,058
   
40,418,575
 
 
* Fiscal 2006 net loss includes $1,332,246 in non-cash compensation expense related to the vesting of stock-based awards as required by Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”. Included in the $1,332,246 is $79,087 for payments made to vendors. The total non-compensation expense increased the fiscal year 2006 net loss by $0.03 per share.

23


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

(a)
      Disclosure 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 annual report.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system no matter how well conceived and operated can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of control systems must be considered relative to their cost. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues of fraud, if any within ANTs have been detected.

(b)      
Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Management has concluded that as of December 31, 2006 the Company’s internal control over financial reporting is effective based on these criteria. The Company’s independent registered public accounting firm, Burr, Pilger & Mayer LLP, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. That audit report is included in this report Form 10-K.

(c)      
Changes in Internal Control over Financial Reporting

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 the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
(d)
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
of ANTs software inc.:
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting included in Item 9A, that ANTs software inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit including obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
24

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as of December 31, 2006 and 2005 and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2006 of the Company and our report dated March 12, 2007 expressed an unqualified opinion.
 
/s/ Burr, Pilger & Mayer LLP 
 
San Francisco, California
March 12, 2007


None

PART III

  ITEM 10.         DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this item is incorporated in this report by reference to the Company’s Proxy statement to be filed with the SEC in connection with its 2007 Annual Meeting of Stockholders within 120 days after the end of our fiscal year ended December 31, 2006.
 
  ITEM 11.         EXECUTIVE COMPENSATION
 
The information required by this item is incorporated in this report by reference to the Company’s Proxy statement to be filed with the SEC in connection with its 2007 Annual Meeting of Stockholders within 120 days after the end of our fiscal year ended December 31, 2006.
 
   ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this item is incorporated in this report by reference to the Company’s Proxy statement to be filed with the SEC in connection with its 2007 Annual Meeting of Stockholders within 120 days after the end of our fiscal year ended December 31, 2006.
 
25

 
  ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is incorporated in this report by reference to the Company’s Proxy statement to be filed with the SEC in connection with its 2007 Annual Meeting of Stockholders within 120 days after the end of our fiscal year ended December 31, 2006.
 
  ITEM 14.         PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this item is incorporated in this report by reference to the Company’s Proxy statement to be filed with the SEC in connection with its 2007 Annual Meeting of Stockholders within 120 days after the end of our fiscal year ended December 31, 2006.
 
26

 
 Part IV

 ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this report:
     
       
       
   
Page
 
       
Report of Independent Registered Public Accounting Firm
   
28
 
         
Balance Sheets as of December 31, 2006 and 2005
   
29
 
         
Statements of Operations for the years ended December 31, 2006, 2005 and 2004
   
30
 
         
Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004
   
31
 
         
Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
   
32
 
         
Notes to Financial Statements
   
33
 
         
Signatures and Exhibits
   
54
 


27


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of ANTs software inc.

We have audited the accompanying balance sheets of ANTs software inc. as of December 31, 2006, and 2005 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the three year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on those financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ANTs software inc. as of December 31, 2006, and 2005, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for share-based payment to conform to statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as of January 1, 2006 applying the modified prospective method.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.


/s/ Burr, Pilger & Mayer, LLP
San Francisco, California

March 12, 2007
 
28


ANTS SOFTWARE INC.
 
BALANCE SHEETS
 
           
   
December 31,
 
December 31,
 
ASSETS
 
2006
 
2005
 
Current assets:
           
Cash and cash equivalents
 
$
4,698,949
 
$
6,381,932
 
Accounts receivable, net of allowance for doubtful accounts of
             
$0 and $16,000 in 2006 and 2005, respectively
   
68,145
   
45,228
 
Prepaid insurance and other expenses
   
152,299
   
73,560
 
Total current assets
   
4,919,393
   
6,500,720
 
Restricted cash
   
190,958
   
105,399
 
Prepaid expense from warrant issued to customer, net
   
115,347
   
173,021
 
Property and equipment, net
   
736,053
   
622,515
 
Other assets
   
34,420
   
34,702
 
Total assets
 
$
5,996,171
 
$
7,436,357
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Current liabilities:
             
Accounts payable and other accrued expenses
 
$
626,011
 
$
548,178
 
Accrued bonuses and commissions payable
   
179,127
   
218,750
 
Accrued vacation payable
   
175,237
   
149,573
 
Deferred revenues
   
56,819
   
58,603
 
Total current liabilities
   
1,037,194
   
975,104
 
               
Commitments and contingencies (Note 9)
   
-
   
-
 
               
Long-term liabilities:
             
Accrued rent
   
15,087
   
48,667
 
Convertible promissory notes, includes debt premium of $120,880
   
1,120,880
   
-
 
Total liabilities
   
2,173,161
   
1,023,771
 
               
               
Stockholders’ equity:
             
Preferred stock, $0.0001 par value; 50,000,000 shares authorized,
             
no shares issued and outstanding
   
-
   
-
 
Common stock, $0.0001 par value; 200,000,000 shares authorized;
             
53,188,485 and 44,862,058 shares issued and outstanding, respectively
   
5,319
   
4,487
 
Common stock subscribed, not issued
   
1
   
243,608
 
Additional paid-in capital
   
62,469,426
   
49,690,324
 
Accumulated deficit
   
(58,651,736
)
 
(43,525,833
)
Total stockholders’ equity
   
3,823,010
   
6,412,586
 
Total liabilities and stockholders' equity
 
$
5,996,171
 
$
7,436,357
 
               
See Accompanying Notes to Financial Statements
 
29

 

ANTS SOFTWARE INC.
STATEMENTS OF OPERATIONS
   
Years Ended
 
   
December 31,
 
December 31,
 
December 31,
 
   
2006
 
2005
 
2004
 
Revenues:
                   
Licenses and royalties
 
$
157,958
 
$
397,500
 
$
-
 
Maintenance
   
105,792
   
49,620
   
-
 
Professional services
   
24,082
   
19,500
   
-
 
Total revenues
   
287,832
   
466,620
   
-
 
                     
Cost of revenue:
                   
Licenses
   
23,893
   
-
   
-
 
Gross profit
   
263,939
   
466,620
   
-
 
                     
Operating expenses:
                   
Sales and marketing
   
5,164,937
   
3,618,324
   
1,564,424
 
Research and development
   
6,736,381
   
3,589,565
   
2,109,452
 
General and administrative
   
3,630,934
   
1,947,090
   
1,386,416
 
Total operating expenses
   
15,532,252
   
9,154,979
   
5,060,292
 
Loss from operations
   
(15,268,313
)
 
(8,688,359
)
 
(5,060,292
)
                     
Other income (expense):
                   
Interest income
   
203,133
   
24,170
   
17,214
 
Gain on legal settlement and other
   
4,337
   
6,000
   
5,500
 
Income earned from expired contract
   
-
   
-
   
310,943
 
Write-off of note receivable from former officer
   
-
   
-
   
(45,000
)
Write-off of fixed assets
   
(57,614
)
 
-
   
-
 
Disposal of assets related to office move
   
-
   
(41,294
)
 
-
 
Interest expense
   
(7,446
)
 
(5,014
)
 
(288,426
)
Other income, net
   
142,410
   
(16,138
)
 
231
 
Net loss
 
$
(15,125,903
)
$
(8,704,497
)
$
(5,060,061
)
                     
Basic and diluted net loss per common share
 
$
(0.30
)
$
(0.22
)
$
(0.16
)
Shares used in computing basic and diluted
                   
net loss per share
   
50,474,155
   
40,418,575
   
32,501,014
 
                     
See Accompanying Notes to Financial Statements
 
30




ANTS SOFTWARE INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
                               
               
Note
             
               
Receivable
             
           
Common
 
from Officer
 
Additional
         
   
Common Stock
 
Stock
 
for Stock
 
Paid in
 
Accumulated
     
   
Shares
 
Amount
 
Subscribed
 
Purchases
 
Capital
 
Deficit
 
Total
 
Balances at December 31, 2003
   
26,381,004
 
$
2,638
 
$
-
 
$
(45,000
)
$
29,668,322
 
$
(29,761,275
)
$
(135,315
)
Proceeds from private placements, net of commissions of $334,100
   
7,263,159
   
726
   
-
   
-
   
5,602,552
   
-
   
5,603,278
 
Common stock subscribed, not issued
   
-
   
-
   
30,000
   
-
   
-
   
-
   
30,000
 
Common stock issued to finders and placement agent as commissions
   
437,269
   
44
   
-
   
-
   
(44
)
 
-
   
-
 
Common stock issued to replace escheated shares
   
66
   
-
   
-
   
-
   
-
   
-
   
-
 
Options exercised through cash consideration
   
354,019
   
35
   
-
   
-
   
388,717
   
-
   
388,752
 
Common stock issued in settlement of note payable to former officer
   
60,000
   
6
   
-
   
-
   
74,994
   
-
   
75,000
 
Officer note forgiveness
   
-
   
-
   
-
   
45,000
   
-
   
-
   
45,000
 
Discount on convertible promissory note
   
-
   
-
   
-
   
-
   
(46,373
)
 
-
   
(46,373
)
Beneficial interest on convertible promissory note
   
-
   
-
   
-
   
-
   
280,000
   
-
   
280,000
 
Conversion of promissory convertible notes to common stock
   
800,000
   
80
   
-
   
-
   
289,070
   
-
   
289,150
 
Stock options issued as payments for services to vendor
   
3,300
   
1
   
-
   
-
   
59,749
   
-
   
59,750
 
Net loss and comprehensive net loss
   
-
   
-
   
-
   
-
   
-
   
(5,060,061
)
 
(5,060,061
)
Balance at December 31, 2004
   
35,298,817
   
3,530
   
30,000
   
-
   
36,316,987
   
(34,821,336
)
 
1,529,181
 
                                             
Common stock issued for shares subscribed at December 31, 2004
   
30,000
   
3
   
(30,000
)
 
-
   
29,997
   
-
   
-
 
Proceeds from private placements, net of cash commissions, $353,850
   
5,461,125
   
546
   
-
   
-
   
7,823,604
   
-
   
7,824,150
 
Common stock subscribed as payment to vendors for services
   
-
   
-
   
45,158
   
-
   
-
   
-
   
45,158
 
Common stock issued to finders and placement agent as commission
   
67,556
   
7
   
-
   
-
   
(7
)
 
-
   
-
 
Common stock subscribed as commission to placement agent
   
-
   
-
   
198,450
   
-
   
(198,450
)
 
-
   
-
 
Proceeds from warrant exercises, net of cash commissions of $193,800
   
3,878,970
   
388
   
-
   
-
   
5,343,139
   
-
   
5,343,527
 
Options exercised through cash consideration
   
103,704
   
11
   
-
   
-
   
125,581
   
-
   
125,592
 
Stock options issued as payment to vendor for services provided
   
12,886
   
1
   
-
   
-
   
51,921
   
-
   
51,922
 
Warrants issued as prepayment to vendor for services to be provided in the future
   
-
   
-
   
-
   
-
   
173,021
   
-
   
173,021
 
Employee compensation expense from exercise of stock option award
   
9,000
   
1
   
-
   
-
   
20,789
   
-
   
20,790
 
Compensation expense recognized on accelerated vesting of employee options
   
-
   
-
   
-
   
-
   
3,742
   
-
   
3,742
 
Net loss and comprehensive net loss
   
-
   
-
   
-
   
-
   
-
   
(8,704,497
)
 
(8,704,497
)
Balance at December 31, 2005
   
44,862,058
   
4,487
   
243,608
   
-
   
49,690,324
   
(43,525,833
)
 
6,412,586
 
                                             
Proceeds from private placements, net of cash commissions of $769,250
   
7,398,129
   
740
   
-
   
-
   
10,031,513
   
-
   
10,032,253
 
Allocation of proceeds raised from private placements                                            
to premium on convertible promissory note
   
-
   
-
   
-
   
-
   
(120,880
)
 
-
   
(120,880
)
Allocation of certain commissions paid to placement agent to debt issuance costs
   
-
   
-
   
-
   
-
   
33,645
   
-
   
33,645
 
Common stock issued for shares subscribed at December 31, 2005
   
137,230
   
14
   
(243,608
)
 
-
   
243,594
   
-
   
-
 
Common stock subscribed as commission to placement agent at December 31, 2006
   
-
   
-
   
1
   
-
   
(1
)
 
-
   
-
 
Proceeds from warrant exercises, net of cash commissions of $39,125
   
302,500
   
30
   
-
   
-
   
529,179
   
-
   
529,209
 
Options exercised through cash consideration
   
477,902
   
47
   
-
   
-
   
713,807
   
-
   
713,854
 
Common stock issued as payment to vendor for services
   
10,666
   
1
   
-
   
-
   
15,999
   
-
   
16,000
 
Stock options and warrants issued as payments for services to vendors
   
-
   
-
   
-
   
-
   
79,087
   
-
   
79,087
 
Employee compensation expense from vesting of stock options
   
-
   
-
   
-
   
-
   
1,253,159
   
-
   
1,253,159
 
Net loss and comprehensive net loss
   
-
   
-
   
-
   
-
   
-
   
(15,125,903
)
 
(15,125,903
)
Balance at December 31, 2006
   
53,188,485
 
$
5,319
 
$
1
 
$
-
 
$
62,469,426
 
$
(58,651,736
)
$
3,823,010
 
                                             
See Accompanying Notes to Financial Statements
 
31


ANTS SOFTWARE INC.
STATEMENTS OF CASH FLOWS
               
   
Years Ended
 
   
December 31,
 
December 31,
 
December 31,
 
   
2006
 
2005
 
2004
 
Cash flows from operating activities:
             
Net loss
 
$
(15,125,903
)
$
(8,704,497
)
$
(5,060,061
)
Adjustments to reconcile net loss to net cash used in operating activities:
                   
Depreciation
   
363,062
   
285,423
   
181,656
 
Amortization of accrued rent, net of cash payments
   
(4,380
)
 
53,047
   
-
 
Amortization of warrant issued to customer
   
57,674
   
-
   
-
 
Amortization of debt discount and beneficial conversion feature
   
-
   
-
   
285,973
 
Bad debt expense, net of write-offs of uncollectible accounts
   
28,738
   
16,000
   
-
 
Stock options , warrants and restricted stock issued to vendors for services
   
95,087
   
97,080
   
59,750
 
Compensation expense recognized on vesting of employee stock options
   
1,253,159
   
20,790
   
-
 
Compensation expense recognized on accelerated vesting of employee stock options
   
-
   
3,742
   
-
 
Write-off of note receivable to officer for stock purchases
   
-
   
-
   
45,000
 
Write-off of leasehold improvements and security deposits, net
   
-
   
36,194
   
-
 
Write-off of unrecoverable security deposits related to prior office facilities
   
-
   
8,818
   
-
 
Write-off of fixed assets
   
57,614
   
-
   
-
 
                     
Changes in operating assets and liabilities:
   
-
   
-
   
-
 
Accounts receivable
   
(51,655
)
 
(61,228
)
 
-
 
Prepaid insurance and other expenses
   
(78,739
)
 
13,107
   
(39,638
)
Other assets
   
282
   
(34,420
)
 
-
 
Accounts payable and other accrued expenses
   
48,633
   
416,273
   
44,336
 
Accrued bonuses and commissions payable
   
(39,623
)
 
65,571
   
153,179
 
Accrued vacation
   
25,664