10-K 1 a6662925.htm ANTS SOFTWARE INC. 10-K a6662925.htm
 
 
 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 year ended December 31, 2010
 
[  ]              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)
 
             
71 Stevenson St., Suite 400, San Francisco, California, 94105
 (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
___________________

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
 
Indicate by check mark if the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 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 [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 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. [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ]  Accelerated filer [ ]  Non-accelerated filer [ ] Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
 
 
 

 
 
As of June 30, 2010 the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $107.53 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.
 
ANTs software inc. had 132,670,888 shares of common stock outstanding as of March 29, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders (the "Proxy Statement"), to be filed within 120 days of the end of the year ended December 31, 2010, 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.
 
 
 
2

 
 

 
Table of Contents
 
     
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34
 
 
 
 
 
 
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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," "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. (“ANTs,” the “Company,” “we” or “us”) has developed a software solution, ACS, to help customers reduce IT costs by consolidating hardware and software infrastructure and eliminating cost inefficiencies. ACS is an innovative middleware solution that accelerates database consolidation between database vendors, enabling application portability. ACS allows customers to move software applications from one database product to another without time consuming and costly database migrations and application rewrites.  ACS translates the languages used by database products so that software applications written for one database product will work with another.  ACS allows customers to replace the database product without replacing the software application.  Our most recently released ACS product translates Sybase’s database product to run on IBM’s DB2 database product. Our first ACS product translated Sybase’s database product to run on Oracle’s database product.  We plan to build other ACS products that will translate additional database languages based on demand and available financing.

Corporate History

ANTs is a Delaware corporation.  Our shares are traded on the OTC Bulletin Board (“OTCBB”) under the stock symbol “ANTS.”  We are 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, we reincorporated from Delaware to Nevada, and in February 1999 changed our name to ANTs software.com.  In July 2000, we merged with Intellectual Properties and Technologies, Inc., a wholly owned subsidiary with no significant assets.  In December 2000, we reincorporated from Nevada to Delaware and changed our name from ANTs software.com to ANTs software inc.

In May 2008, ANTs acquired Inventa Technologies Inc. (“Inventa”) of Mt. Laurel, New Jersey.  Inventa is a wholly-owned subsidiary that provides pre- and post-sales services related to the ACS and other professional services including application migration, as well as a complete portfolio of services ranging from architecting and managing IT infrastructure to full application performance tuning and administrative services (collectively, “Professional Services”).

Our headquarters are located in San Francisco, California and we have offices in Mt. Laurel, New Jersey and Alpharetta, Georgia.  We have historically financed operations through private offerings to accredited investors and asset managers to whom we have sold common stock and issued convertible promissory notes and warrants and other rights to purchase capital stock.  More recently, we have financed operations through private offerings to institutional investors to whom we have sold common stock and issued warrants and other rights to purchase capital stock. We expect to continue to raise capital for operations through such private offerings until we generate positive cash flows from operations.  We believe we have sufficient funds to cover operations into the second quarter of 2011 at our expected expense rate.  We expect that our focus over the next year will be on the continued development, marketing and sales of ACS, the growth of our Professional Services offerings for ACS implementations, and securing the capital necessary to support our operations.
 
Technology and Intellectual Property

Beginning in 2000, we focused on development of the ANTs Data Server (“ADS”) and core high-performance database technologies.  In May 2008, we sold ADS and the high-performance technologies and intellectual property related to it, while retaining a license to use those technologies in ACS.  In 2007, we began developing ACS and launched the first commercial version in April 2008.  We have developed proprietary technologies related to ACS which we regard as trade secrets and we are pursuing patent protection on a number of these technologies. Inventa has also developed proprietary technologies used in the monitoring and management of applications and databases.  We regard these technologies as trade secrets.
 
 
 
4

 
 
The ANTs Compatibility Server™

Applications written to work with one database product are typically incompatible with other database products due to proprietary extensions developed and popularized by the database vendors.  This has the effect of locking customers into one database vendor because it would generally be cost-prohibitive and too time-consuming to migrate an application from one database to another.  ACS translates these proprietary extensions from one database product to another and allows customers to migrate applications from one database product to another more easily and at less cost.

Migrating applications is intended to be a three-step process when using ACS:
 
 
1.
Move the data - the large database vendors all have full-featured tools that allow customers to move data from other products to their product.
 
 
 
 
2.
Install ACS - once the data is migrated, ACS is installed and connected to the application and the new database.
 
 
 
 
3.
Test and deploy - the application is first tested to ensure that it functions properly with the new database, and then the customer goes “live” with the application.
 
We developed the underlying technologies related to ACS with the first version of ACS allowing applications currently running on Sybase's database product to run on Oracle's database product.  During 2008, ANTs completed pilots for an early group of customers and in December 2008 announced its first commercial deployment with the Wyndham Hotel Group call center application. We announced in May 2010 that we co-developed and launched with IBM our second ACS to migrate Sybase database environments to IBM’s DB2 database product quickly and cost-effectively and also became one of IBM’s preferred service providers.  We are continuing to develop additional functionality for the Sybase to DB2 ACS and plan to build other versions of ACS that will enable applications to be migrated from and to other database products based on demand and available financing.

The Company’s ACS development is primarily led and performed by a team in the Alpharetta, Georgia office.

Professional Services

Professional Services include pre- and post-sales services related to ACS and application migration, application and database architecting, monitoring and management.  We deliver our services through a remote delivery model from our Mount Laurel, New Jersey office which contains a network operations center. The network operations center provides customers with remote assessment, diagnostic and tuning capabilities through secure remote connection 24 hours a day, seven days a week. We integrate our Professional Services capabilities tightly into the pre and post-sales process, enabling us to:
 
 
·
Accurately assess the customer’s operating environment;
 
 
 
 
·
Propose the most efficient database consolidation and application migration solution;
 
 
 
 
·
Efficiently deploy ACS and assist the customer in testing before “going live”; and
 
 
 
 
·
Provide post-deployment application monitoring, maintenance and service.

Sales and Marketing
 
The Market

We believe the market for database products exceeds $20 billion with Oracle, Microsoft and IBM controlling a substantial portion of this market.  According to Chief Technology Officers, database architects and application developers at the target Global 2000 enterprises with whom we have 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 database to another, even to a low-cost open-source database, is extensive due to lack of compatibility between the products' proprietary extensions.  We further believe there is significant interest, confirmed by our discussions with industry analysts and user groups, for a product that can provide the capability to migrate an application from one database to another.

We believe the markets in which our Professional Services group operates, IT services and application management exceeds $100 billion with IBM Global Services, HP/EDS and Accenture being among the largest vendors in those markets.  We have a unique combination of experience, skills and proprietary software that allow us to address a segment of the IT services market centered on database and application monitoring, maintenance and services.  In addition to this established market, we anticipate that our Professional Services group will be the first provider of migration and consulting services resulting from pre- and post-sales of our ACS products.  We expect our ACS customers will look to us as the experts in database consolidation to provide a full range of services related to ACS installation, deployment and use.  To the extent that this becomes a new “market” for Professional Services, we are in a position to capitalize on it.
 
 
 
5

 
 
Our Strategy

Our go-to-market strategy adapts with changes in the competitive structure of the database market.  The refinement of our strategy is a continuous and iterative process, reflecting our goal of providing a cost-effective solution across a wide variety of applications.  Our strategy has recently included:
 
 
·
Developing partnerships with IBM and others to bring our products to market;
 
 
 
 
·
Focusing on large enterprise customers who can realize significant savings by migrating applications among leading database products;
 
 
 
 
·
Selling or licensing our products directly;
 
 
 
 
·
Selling our products and technologies through partners; and
 
 
 
 
·
Developing custom versions of our products for our partners and selling or licensing that technology to them.
 
ACS provides a solution for enterprises to address the problems of vendor lock-in and cost escalation by enabling them to migrate applications among database products.  ACS can provide a potentially significant competitive advantage for database vendors such as Oracle, IBM, Microsoft, Sybase and others because they would have the ability to cost-effectively migrate applications from their competitors’ products to their own.

If we are successful in our go-to-market strategy, we intend to generate revenue through a range of activities which may include: sales of developed technology, licenses, royalties, custom development and Professional Services.   Each sale of our related technology will require installation, testing, tuning and other Professional Services.  We intend to generate revenue by providing those services.

IBM OEM Agreement

In August 2009, the Company entered into an OEM agreement with IBM regarding the supply of database migration technology (“IBM OEM Agreement”).  IBM announced the IBM OEM Agreement in May 2010 with the general availability release of the initial ACS.  We anticipate substantial business and future revenue to be generated from this agreement.  Through December 31, 2010, we have recognized $0.20 million of revenue through this agreement. According to this agreement, ANTs is responsible for technology development specifically tailored to IBM's needs.  IBM has responsibility for marketing, sales and support of the technology on a worldwide basis, with ANTs being the preferred service provider for migration projects.

Competition

We have not identified a direct competitor for our ACS database migration products.  Other database vendors encourage migration from competitive products through use of their proprietary migration tools.  These tools often require substantial investment to rewrite applications.  Potential customers with whom we have spoken are not receptive to these competing migrating applications due to the expense and risk of such rewrites.  While database vendors do not offer a directly competitive product, we fully expect database vendors to offer incentives for customers to keep applications deployed on their database products.

Competitors in the Professional Services market are large and well established, with vendors such as IBM Global Services, Accenture and HP/EDS offering a wide range of services.  We have historically maintained long-term relationships with our customers and have been successful in renewing contracts and in signing multi-year contracts. However, a contract with the largest Professional Services customer, accounting for $4.41 million and $3.81 million, net of trade discounts, for the years ended December 31, 2010 and 2009, respectively, expired on December 31, 2010 and was not renewed by the customer as discussed below under the caption “Recent Developments – Loss of Significant Customer, Employee Termination Costs and Impairment of Other Intangible Assets.”

Recent Developments

Negative Cash Flow

The Company had $0.33 million in cash on hand as of December 31, 2010. During the year ended December 31, 2010, the Company used an average $0.58 million per month for operating activities. As such, the Company has found it necessary to secure additional financing to fund operations. The Company has suffered recurring losses from operations and has generated negative cash flow from operations that raises substantial doubt about the Company’s ability to continue as a going concern. The Company also had significant near-term liquidity needs as of December 31, 2010, including $0.25 million currently due on a line of credit and $2.00 million in notes payable due January 31, 2011. Subsequent to December 31, 2010, the Company received proceeds from a $3.00 million subscription receivable (less $0.39 million in fees, including $0.24 million in dispute) for the sale of 5.18 million shares of common stock pursuant to the BRG Agreement, $0.06 million in proceeds from the exercise of warrants covering 0.13 million shares of common stock issued in conjunction with prior private placement offerings, and gross proceeds of $0.75 million from Note and Warrant Purchase Agreements. The outstanding balance on the line of credit was subsequently repaid and the notes payable were subsequently deferred until January 31, 2013 through an Exchange Agreement. At current cash levels, management believes it has sufficient funds to operate into the second quarter of 2011. We are actively seeking, and will have to continue seeking, additional sources of financing to enable us to continue the development and commercialization of our proprietary technologies. The BRG Agreement, Note and Warrant Purchase Agreements, line of credit, and Exchange Agreement are all discussed further below and in the notes to the accompanying consolidated financial statements.
 
 
6

 
 
Release of ACS

As noted above, IBM announced the IBM OEM Agreement in May 2010 with the general availability release of the initial ACS.  We anticipate substantial business and future revenue to be generated from this agreement with $0.20 million of revenue recognized through December 31, 2010. According to this agreement, ANTs is responsible for technology development specifically tailored to IBM's needs.  IBM has responsibility for marketing, sales and support of the technology on a worldwide basis, with ANTs being the preferred service provider for migration projects.

Loss of Significant Customer, Employee Termination Costs and Impairment of Other Intangible Assets

The Company’s contract with its largest Professional Services customer as determined by historical revenue expired on December 31, 2010 and the customer chose not to renew the contract. The customer represented $4.41 million, or 71%, and $3.81 million, or 66%, respectively, of total revenue net of trade discounts, for the years ended December 31, 2010 and 2009, respectively. As a result of the customer not renewing its contract, the Company terminated the employment of 20 employees and 14 contractors, all primarily supporting Professional Services. Employees were notified of their termination in December 2010 with their last day effective January 4, 2011. Total salary, commissions, contract labor costs and estimated payroll taxes and benefits associated with these 34 individuals was approximately $3.60 million and $3.16 million for the years ended December 31, 2010 and 2009, respectively. Adding stock-based compensation associated with these 34 individuals brings the costs to approximately $4.59 million and $3.60 million for the years ended December 31, 2010 and 2009, respectively. Total related cash severance costs recorded as of December 31, 2010 are less than $0.03 million and total non-cash severance charges related to acceleration of non-vested restricted stock units that were scheduled to vest on April 1, 2011 is estimated to be less than $0.02 million.

The Company assesses other intangible assets for impairment in conjunction with its assessment of goodwill or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. In connection with the preparation of our accompanying consolidated financial statements, we performed an analysis of the potential impairment, and re-assessed the remaining asset lives, of other identifiable intangible assets acquired in the acquisition of Inventa. As a result of the Professional Services customer not renewing its contract, this analysis and re-assessment resulted in: (1) an impairment charge of $1.55 million in acquired proprietary technology, (2) an impairment charge of $1.33 million in customer relationships and (3) an impairment charge of $0.86 million in trade names. We also reduced the remaining useful life of customer relationships from approximately 7.5 years to 3.0 years.  All of the impairments resulted from  the customer not renewing their contract and the Company’s continuing focus on ACS. Following the impairments, the carrying value of other intangible assets at December 31, 2010 was $0.10 million. These non-cash impairment charges had no impact on the Company’s cash balance as of December 31, 2010.

We discuss these impairments in note 5 to the accompanying consolidated financial statements and the sections captioned “Results of Operations—Revenue” and “Results of Operations — General and Administrative” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Issuance of Shares of Common Stock and Warrants to Fletcher International, Ltd.

We entered into an agreement with Fletcher International, Ltd. (“Fletcher”) on March 12, 2010, as amended on July 15, 2010 (the “Fletcher Agreement”). Pursuant to this agreement, we sold an aggregate of 3.71 million shares of common stock to Fletcher in March, May and July 2010 for an aggregate purchase price of $4.00 million.  Additionally, in March 2010, we issued to Fletcher a warrant (the “Fletcher Initial Warrant”) to purchase an additional $10.00 million of shares of common stock pursuant to the Fletcher Agreement at an initial exercise price of $0.903, which was subsequently adjusted as described below.  The Fletcher Initial Warrant is exercisable on or before May 18, 2019. The term of the Fletcher Initial Warrant will be further extended if the Company is required to restate its consolidated financial statements, subject to certain adjustments. The exercise price of the Initial Warrant is subject to adjustment upon a change of control event. Additionally, the Company could be required to pay Fletcher cash for an amount equal to the fair value of the warrant immediately prior to a change in control event. Fletcher may exercise the warrant for cash or on a net share settled or “cashless” basis. The Fletcher Agreement also requires that we make certain quarterly payments.  Specifically, for so long as any portion of the Fletcher Initial Warrant remains outstanding, we are required to pay to Fletcher on each March 31, June 30, September 30 and December 31, a quarterly payment equal to:  the product of (A) the quotient of (x) the remaining unexercised amount of the Fletcher Initial Warrant as of the third business day preceding such quarterly payment date (initially $10.00 million), divided by (y) the warrant exercise price as of the third business day preceding the quarterly payment date, multiplied by (B) $0.01 per share (each a “Fletcher Quarterly Payment”).  The Fletcher Quarterly Payment was initially $0.11 million per quarter from March 31, 2010 to December 31, 2010. We have the right to pay the Fletcher Quarterly Payment in cash or shares of common stock based on a formula set forth in the Fletcher Agreement.

Pursuant to the Fletcher Agreement, Fletcher is entitled to certain down-round protections in the event we issue and sell shares of common stock at a price below that paid or deemed paid by Fletcher.  The price per share of common stock sold to BRG, described below, was less than the price paid by Fletcher. As a result, the Fletcher Agreement required that we issue to Fletcher an additional 4.15 million shares of common stock.  We issued these shares to Fletcher on December 31, 2010.  Further, the Fletcher Initial Warrant has been adjusted to reduce the exercise price of the Fletcher Initial Warrant to $0.5261 per share (from $0.903).  The Fletcher Initial Warrant now represents the right to purchase up to 19.01 million shares of our common stock at an exercise price of $0.5261 per share.  The increase in the number of shares issuable to Fletcher under the Fletcher Initial Warrant also causes an increase in future Fletcher Quarterly Payments.  However neither the additional shares nor the adjustments to the warrants have specific registration rights.  The adjusted Fletcher Quarterly Payment is $0.19 million beginning March 31, 2011. Based on information provided to the Company by Fletcher and BRG, Fletcher is deemed to beneficially own the shares beneficially owned by BRG but BRG does not beneficially own Fletcher’s shares.  From publicly-filed documents, it is the Company’s understanding that BRG is a wholly-owned subsdiary of Fletcher.
 
 
 
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If certain conditions are satisfied, a subsequent warrant covering $10.00 million of our common stock will be issued to Fletcher with an exercise price per share of $1.92, as adjusted and subject to certain additional adjustments, a term of two years subject to certain extensions, and the same net share settlement provisions as the Fletcher Initial Warrant (the “Fletcher Subsequent Warrant”). Specifically, after March 12, 2014, if the daily market price of our common stock exceeds $3.50 per share for a period of two consecutive quarters, we will issue the Fletcher Subsequent Warrant with a two-year life covering $10.00 million of our common stock and subject to any adjustments in price or term that were made to the Fletcher Initial Warrant. Upon the Company giving Fletcher notice of the issuance of the Fletcher Subsequent Warrant, Fletcher will have ten days to exercise any remaining portion of the Fletcher Initial Warrant. Any portion of the Fletcher Initial Warrant still unexercised after ten days will be cancelled. As a result of the terms of the Fletcher Initial Warrant and the Fletcher Agreement, we anticipate that Fletcher would exercise the Fletcher Initial Warrant prior to the delivery of the Fletcher Subsequent Warrant.  In that event, the Company will remain obligated to issue the Fletcher Subsequent Warrant. Upon issuance of the Fletcher Subsequent Warrant, we will be required to file an additional registration statement with respect to the shares of common stock issuable upon exercise of the Fletcher Subsequent Warrant. The down-round protections contained in the Fletcher Agreement also pertain to the Fletcher Subsequent Warrant. The issuance of shares to BRG caused the exercise price of the Fletcher Subsequent Warrant to be reduced from an initial price of $3.00 per share to $1.92 per share and could be further reduced in the future as described above.

In addition, Fletcher has the right, but not the obligation, exercisable at any time prior to July 15, 2016, to purchase (i) an aggregate of up to $1.00 million of additional shares of our common stock (the “Remaining Second Tranche”) at a price per share of $1.25 per share (up to 0.80 million shares) and (ii) an aggregate of up to $5.00 million of additional shares of our common stock (the “Third Tranche”) at a price per share of $1.50 per share (up to 3.33 million shares).

Following is a summary of the shares issued to Fletcher through December 31, 2010. The aggregate purchase price for shares purchased by Fletcher does not reflect an 8% fee paid to a placement agent.

Date
   
Reason
   
Shares
   
Aggregate
(Deemed)
Purchase
Price
   
Price Per
Share
                         
March 22, 2010
   
Purchase
      1,500,000     $ 1,500,000     $ 1.0000
April 1, 2010
   
Quarterly Share Payment
      128,818       110,742       0.8597
May 11, 2010
   
Purchase
      605,767       500,000       0.8254
July 1, 2010
   
Quarterly Share Payment
      100,673       110,742       1.1000
July 16, 2010
   
Purchase
      1,600,000       2,000,000       1.2500
October 1, 2010
   
Quarterly Share Payment
      153,179       110,742       0.7230
December 31, 2010
   
Quarterly Share Payment
      343,663       110,742       0.3222
December 31, 2010
   
Anti-Dilution Provisions
      4,146,169       --       --

Issuance of Shares of Common Stock and Warrants to BRG Investments, LLC.

On December 31, 2010, the Company entered into an agreement (the “BRG Agreement”) with BRG Investments, LLC (“BRG”).  Pursuant to the BRG Agreement, on January 4, 2011, BRG paid the subscription price for its purchase of 5.18 million shares of our common stock (the “Initial Closing Shares”) for an aggregate purchase price of $3.00 million (or $0.5787 per share). The aggregate purchase price for shares purchased by BRG does not reflect a 5% fee paid to a placement agent ($0.15 million). In addition, the placement agent for the shares of common stock sold to Fletcher, StreetCapital Inc. (“StreetCapital”), is also asserting, and we are disputing, that it is due an 8% fee ($0.24 million) and a warrant to purchase 0.41 million shares of our common stock, representing 8% of the shares of common stock sold to BRG.  The 5.18 million shares were issued to BRG as of execution of the agreement on December 31, 2010. The BRG Agreement is similar to the Fletcher Agreement. Based on information provided to the Company by Fletcher and BRG, Fletcher is deemed to beneficially own the shares beneficially owned by BRG but BRG does not beneficially own Fletcher’s shares.  From publicly-filed documents, it is the Company’s understanding that BRG is a wholly-owned subsdiary of Fletcher.

 
The BRG Agreement requires that the Company file registration statements with the SEC to register for resale under the Securities Act of 1933, as amended, the shares of common stock issued or to be issued to BRG pursuant to the BRG Agreement. The BRG Agreement includes substantial penalties if the shares are not registered within a certain number of days from issuing such shares or associated warrants.  The initial registration statement covering the Initial Closing Shares, the BRG Initial Warrant and BRG Quarterly Payment Shares, described below, is required to be filed and declared effective on or before March 31, 2011.  The Company will not have the initial registration statement declared effective by the SEC before the required date because of an unresolved interpretive issue in the Fletcher and BRG Agreements. Assuming the registration statement covering the shares issued or issuable to BRG is declared effective between May 30 and June 29, 2011, and using the closing share price of $0.39 as of March 29, 2011, as the “Daily Market Price” under the BRG Agreement, the Company would be obligated to pay to BRG $0.13 million  for the first 30 days following March 31, 2011 and, using the same share price of $0.39, an increase over the prior 30 day period of $0.02 million, for each 30 days thereafter.  Based on these assumptions, the penalty would be estimated to be $0.45 million, representing $0.13 million, $0.15 million and $0.17 million for the first, second and third 30-day period, respectively, that the registration statement is not declared effective. Because payments are based in part on the daily price of our common stock, changes in the price of our common stock would change the total amounts payable to BRG and could be significant. The agreement does not provide a limit on the amount that the Company would be obligated to pay to BRG for not having an effective registration statement. We will attempt to negotiate a waiver or reduction of the penalty based on the cause of the late filing of the registration statement. The Company is also obligated to use its best efforts to keep the registration statements continuously effective for a period of time.
 
 
 
8

 
 
BRG also has the right under the BRG Agreement, but not the obligation, to purchase additional shares of our common stock at a purchase price equal to the greater of (i) the Average Market Price, as defined in the agreement, of our common stock calculated as of the date of BRG’s notice of its intent to purchase the shares, and (ii) $0.5787, for up to an aggregate purchase price of $3.00 million (“BRG Subsequent Investments”).  Upon the issuance and sale of shares of common stock in the BRG Subsequent Investments, the Company will be required to file additional registration statements (or amend a then-existing registration statement) with respect to such shares and to cause such shares to be registered under the Securities Act for resale by the selling security holder.

In conjunction with this transaction, we issued to BRG a warrant to purchase additional shares of our common stock (the “BRG Initial Warrant”).  The BRG Initial Warrant provides BRG the right to purchase up to $3.00 million (the “Warrant Amount”) of our common stock at an initial exercise price of $0.5261 per share.  The exercise price of the BRG Initial Warrant is subject to adjustment in certain circumstances.  The actual number of shares issuable upon exercise of the BRG Initial Warrant is determined by dividing the Warrant Amount by the exercise price then in effect.  As a result, the BRG Initial Warrant is initially exercisable for 5.70 million shares of common stock (the “BRG Initial Warrant Shares”).  In the event of a Subsequent Investment, the Warrant Amount will be increased by the aggregate amount of each Subsequent Investment thereby increasing the number of shares BRG may purchase under the BRG Initial Warrant.  The BRG Initial Warrant is exercisable at any time on or before January 4, 2020, subject to certain extensions, including (i) an extension of two business days for every day a registration statement (or any subsequent registration statement which is required to be filed by the Company pursuant to the terms of the BRG Agreement) is not available with respect to all common stock issued or issuable under the BRG Agreement, the BRG Initial Warrant or the BRG Subsequent Warrant (as defined below) at any time on or after the date that such shares are required to be registered pursuant to the terms of the BRG Agreement (except during certain permitted blackout periods) or such shares of common stock are not listed or quoted and qualified for trading on a public market (each, a “Public Market Unavailability Day”), and (ii) an extension for that number of days equal to the number of days in the period commencing on March 31, 2011 and ending on the date a registration statement is declared effective for the covered shares.  BRG may exercise the warrant for cash or on a net share settled or “cashless” basis.

The BRG Agreement further provides that if, for two consecutive calendar quarters commencing on or after January 4, 2014 (the “Commencement Date of Measurement’), the Daily Market Price of our common stock for each business day in such calendar quarter exceeds $3.00 per share (the “BRG Subsequent Warrant Condition”), we are required to give BRG notice of the satisfaction of the BRG Subsequent Warrant Condition.  The Commencement Date of Measurement is subject to certain extensions of one day for every Public Market Unavailability Day.  On the tenth business day following BRG’s receipt of notice of the satisfaction of the BRG Subsequent Warrant Condition, we will be required to issue and deliver to BRG a new warrant (the “BRG Subsequent Warrant”) in form substantially the same as the BRG Initial Warrant except that the BRG Subsequent Warrant will provide BRG the right to purchase up to $3.00 million (plus the amount of any Subsequent Investments) of shares of our common stock with an exercise price per share equal to the product of (i) the exercise price of the BRG Initial Warrant (initially $0.5261) as of the date of issuance of the BRG Subsequent Warrant multiplied by (ii) the quotient equal to $3.00 divided by $0.5261, subject to certain adjustments.  For example, if the exercise price of the BRG Initial Warrant remains $0.5261, the exercise price of the BRG Subsequent Warrant would be $3.00.  The BRG Subsequent Warrant will have a term of two years from the date of issuance subject to certain extensions, including an extension by the number of days by which the term of the BRG Initial Warrant was extended.  Upon issuance of the BRG Subsequent Warrant, we will be required to file an additional registration statement with respect to the shares of common stock issuable upon exercise of the BRG Subsequent Warrant. Upon the issuance of the BRG Subsequent Warrant, the BRG Initial Warrant will expire and be of no further force and effect to the extent not previously exercised.  As a result of the terms of the BRG Initial Warrant and the BRG Agreement, we anticipate that BRG will exercise the BRG Initial Warrant prior to the delivery of the BRG Subsequent Warrant.  In that event, the Company will remain obligated to issue to BRG the BRG Subsequent Warrant.

The BRG Initial Warrant has, and the BRG Subsequent Warrant will have, anti-dilution protections that require adjustments to the exercise price of the warrant in the event the Company engages or participates in any sale or issuance of any shares of, or securities convertible into, exercisable or exchangeable, for any shares of any class of the Company’s capital stock, subject to certain excluded issuances set forth in the BRG Agreement (the “Future Equity Issuances”).  If we sell or issue shares or securities with an exercise or conversion price that is less than the warrant exercise price, which is initially $0.5261 for the BRG Initial Warrant, and which will initially be $3.00 for the BRG Subsequent Warrant (if the exercise price of the BRG Initial Warrant remains $0.5261 at the time of issuance of the BRG Subsequent Warrant), the exercise price for the BRG Initial Warrant and the BRG Subsequent Warrant, respectively, shall automatically be reduced to equal the lesser of (a) the warrant exercise price then in effect and (b) the lowest price per share of the common stock paid or payable by any person in the Future Equity Issuance (including, in the case of options, warrants, convertible preferred securities, convertible notes or other securities convertible, exchangeable or exercisable into or for common stock, the lowest price per share at which such conversion, exchange or exercise may occur on any future date). Furthermore, if we are required to restate our consolidated financial statements, the warrant exercise price shall be reduced to the market value of the Company’s common stock during a window of time following the restatement, as defined in the BRG Agreement and the number of shares subject to be issued under the warrants shall be increased accordingly.  Based on the terms of the warrants, a reduction in the warrant exercise price will result in the warrants being exercisable for additional shares of common stock at the lower exercise price determined by dividing the aggregate exercise price (initially $3.00 million for each warrant) by the adjusted exercise price.
 
In addition to the foregoing, for so long as any portion of the BRG Initial Warrant remains outstanding, and commencing on March 31, 2011, The Company is required to pay to BRG on each March 31, June 30, September 30 and December 31, a quarterly payment equal to:  the product of (A) the quotient of (x) the remaining unexercised amount of the BRG Initial Warrant as of the third business day preceding such quarterly payment date (initially $3.00 million), divided by (y) the warrant exercise price as of the third business day preceding the quarterly payment date (initially $0.5261 and subject to adjustments), multiplied by (B) $0.01 per share (each a “BRG Quarterly Payment”).  The current BRG Quarterly Payment is $0.06 million beginning March 31, 2011.  The Company, in its discretion, may pay the BRG Quarterly Payments in cash or in shares of common stock (such shares to be issued as BRG Quarterly Payments are referred to herein as the “BRG Quarterly Payment Shares”) determined by dividing the BRG Quarterly Payment by the Average Market Price (as defined in the BRG Agreement) on the third business day prior to the applicable BRG Quarterly Payment date.
 
 
 
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Maximum Number; Limitation on Sales under Stock Purchase Agreement and Warrants.
 
Pursuant to the BRG and Fletcher Agreements, we cannot issue to BRG or Fletcher, and neither BRG nor Fletcher can purchase, additional shares of our common stock to the extent such issuance would result in either BRG and Fletcher beneficially owning an aggregate number of shares of common stock greater than the Maximum Number (as defined below), unless BRG and Fletcher deliver a notice to the Company electing to increase the Maximum Number at least 65 days prior to the date of increase in the Maximum Number.  The “Maximum Number” is the number of shares of our common stock equal to 9.9% of the aggregate number of outstanding shares of common stock calculated on a monthly basis based on the total number of outstanding shares of common stock outstanding on the last day of the applicable month.  Pursuant to the BRG and Fletcher Agreements, we are required to deliver to Fletcher and BRG on or before the tenth day of each calendar month a notice (the “Outstanding Share Notice”) stating, among other things, the aggregate number of shares of our common stock outstanding as of the last day of the preceding calendar month.  If the Outstanding Share Notice reflects a decrease in the number of our outstanding shares of common stock from the number reflected in the Outstanding Share Notice for the prior month, the Maximum Number will be deemed to decrease immediately such that the Maximum Number equals 9.9% of the aggregate number of outstanding shares of common stock reported on the most recent Outstanding Share Notice.  If the Outstanding Share Notice reflects an increase in the number of our outstanding shares of common stock from the number reflected in the Outstanding Share Notice for the prior month, then on the 65th day after delivery of the Outstanding Share Notice, the Maximum Number will be increased to a number equal to 9.9% of the aggregate number of outstanding shares of our common stock reported on the new Outstanding Share Notice. The Maximum Number as of December 31, 2010 is 11.66 million shares of common stock based on the Outstanding Share Notice delivered to Fletcher on October 7, 2010.  The Maximum Number will increase to 12.94 million shares of common stock effective May 9, 2011, based on the Outstanding Share Notice delivered to Fletcher on March 10, 2011.  BRG and Fletcher have the right to increase the Maximum Number above the 9.9% limitation by delivering a notice to the Company electing to increase the Maximum Number at least 65 days prior to the date of increase in the Maximum Number.  Any shares of common stock that would have been issued to Fletcher or BRG pursuant to the Fletcher and BRG Agreements or upon exercise of either the Fletcher and/or BRG Initial Warrants or the Fletcher and/or BRG Subsequent Warrants but for the limitations on the Maximum Number shall be deferred and shall be delivered to Fletcher or BRG, as appropriate, promptly and in any event no later than three business days after the date such limitations cease to restrict the issuance of such shares (whether due to an increase in the Maximum Number so as to permit such issuance, the disposition by Fletcher and/or BRG of shares of common stock or any other reason) unless Fletcher and/or BRG has withdrawn the applicable notice to purchase or warrant exercise notice.  Based on information provided to the Company by Fletcher and BRG, Fletcher is deemed to beneficially own the shares beneficially owned by BRG but BRG does not beneficially own Fletcher’s shares.  As a result, Fletcher may currently beneficially own more than the Maximum Number.

Line of Credit

On January 15, 2011, the Company fully repaid the outstanding balance on its revolving line of credit of $0.25 million as well as the applicable interest due from the proceeds received from the payment of the BRG subscription price noted above.

Exchange of Convertible Promissory Notes

On February 7, 2011, the Company entered into an exchange agreement (the “Exchange Agreement”) with Gemini Master Fund, Ltd., and Manchester Securities Corp. (each a “Holder”) pursuant to which, in exchange for the surrender and cancellation of outstanding convertible promissory notes in aggregate initial principal face amount of $2.00 million, the Company issued to each Holder a convertible Exchange Note in the aggregate original principal amount of $1.20 million, non-interest bearing unless there is an event of default thereunder, with a maturity of January 31, 2013, and a warrant to purchase 3.33 million shares of common stock, with a net, or so-called “cashless,” exercise provision, at an exercise price provided in the Exchange Agreement.  The Holders had acquired the outstanding convertible promissory notes from Robert T. Healey and William J. Healey.  The notes continue to be guarantied by the Company’s subsidiary, Inventa Technologies, Inc.  There had not been an Event of Default under the terms of the outstanding convertible promissory notes prior to or at the time of the exchange.

If the Conversion Price, as defined below, is less than the Fixed Price, as defined below, then the Company may, at its election, in lieu of issuing such number of underlying shares:
 
 
(A)
issue such number of underlying shares as is determined by dividing the principal amount being converted by the Fixed Price, and
 
 
(B)
pay in cash to the Holder an amount equal to the product of (1) the difference between (x) the number of underlying shares which would have been issued if the Company did not make such election and (y) the number of underlying shares which was actually issued pursuant to clause (A) above, multiplied by (2) the Market Price, defined below, as of the conversion date.

The Conversion Price is the lesser of (a) the Fixed Price and (b) 80% of the average of the three lowest daily closing bid prices during the 22 consecutive trading days immediately preceding the conversion date on which the Holder elects to convert all or part of the Note.  The Fixed Price is equal to $0.59 per share, subject to adjustment as set forth in the Exchange Agreement. The Market Price is the closing sale price per share of common stock on the principal market on the trading day next preceding date on which such price is being determined.
 
 
 
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Through March 29, 2011, the Holders have converted $0.75 million of the aggregate $2.40 million adjusted face amount of the Notes. The Company has issued 1.27 million shares and paid or will pay $0.49 million in cash to make up the difference between the actual and minimum conversion price of $0.59 per share.

Note and Warrant Purchase Agreements
 
On March 3, 2011, the Company entered into Note Purchase Agreements and Warrant Purchase Agreements with certain investors (each a “Purchaser”). Pursuant to the Note Purchase Agreements, the Purchasers purchased and the Company sold senior secured promissory notes in the aggregate initial principal face amount of $8.40 million, bearing a 5% coupon in addition to an original issuance discount and with an initial maturity of March 3, 2016.  Pursuant to the Warrant Purchase Agreements, the Purchasers purchased and the Company sold to the Purchasers five year Series B Warrants initially covering an aggregate of 28.47 million shares of the Company’s common stock, subject to possible adjustment, and initially exercisable at $0.59 per share, subject to possible adjustment and possibly including a “Make Whole Amount” payment as defined therein.  Pursuant to the Note Purchase Agreements, the Company received gross proceeds of $0.50 million for the notes and an aggregate of $6.25 million was placed into escrow accounts. Pursuant to the Warrant Purchase Agreements, the Company received gross proceeds of $0.25 million.

The Series B Warrants may be exercised, at the election of the holder, by payment of cash, through the surrender of a principal amount due on the note equal to the aggregate exercise price of the warrants, or under certain circumstances, through a “cashless exercise” for a net number of shares according to a formula set forth in the Warrant Purchase Agreements.

The Company will only be entitled to the amounts held in escrow when it is disbursed to the Company from the escrow account in connection with exercise of Series B Warrants at the Purchaser’s election through the surrender of a principal amount due on the note as described below and in the notes and the escrow agreements. In connection with an exercise through the surrender of a principal amount due on the note, cash will be released to the Company from escrow to the extent that the aggregate exercise price is in excess of any Make Whole Amount due to the Purchaser(s) and if certain conditions are satisfied. Those conditions include (a) that the aggregate unpaid principal amount of the Notes is equal to or less than $7.65 million prior to such note principal reduction and (b) the adjusted exercise price as defined therein is at least $0.15 per common share.  Alternatively, cash will be released to the Purchaser(s) if the aggregate exercise price is less than any Make Whole Amount due to the Purchaser(s). Instead of releasing cash from escrow, the Company may elect to pay any Make Whole Amount out of cash on hand or through an increase, or accretion, in principal of the Notes and a corresponding increase to the number of shares subject to the Series B Warrant(s) (an In-Kind Make Whole). The In-Kind Make Whole is also subject to certain conditions and limitations.

For example, if a Purchase exercises a Series B Warrant by note principal reduction, the note principal will be reduced by the amount of the aggregate exercise price and the Company will receive cash from escrow equal to the aggregate expercise price.  If any Make Whole Amount is due in connection therewith, then the Make Whole Amount will be deducted from the proceeds delivered to the Company and will be delivered to the Purchaser, with the Company receiving the balance thereof, if any. Alternatively, the Company may pay the Make Whole Amount to the Purchaser for the shortfall between the actual exercise price and $0.59 per share out of available cash on hand or, under certain circumstances, through an In-Kind Make Whole adjustment to the Note(s) and Series B Warrant(s).

After March 3, 2013, or earlier upon certain events, one or more Purchasers can give notice to the Company (a “Put Notice”) to cause the Company to redeem, in cash, all or any part of the remaining Principal Amount and all accrued but unpaid interest thereon (the “Put Amount”).

The Company, the Purchasers and an agent also entered into a security agreement pursuant to which the Company granted blanket security interests in all of its assets, and a registration rights agreement pursuant to which the Company granted securities registration rights to the Purchasers.  The Note Purchase Agreements were guarantied by the Company’s subsidiary, Inventa Technologies, Inc.

Pursuant to the Note Purchase Agreements, each Purchaser has a 12-month additional investment right to purchase additional 5% Senior Secured Notes on the same terms as those set forth in the Note Purchase Agreements.  In addition, pursuant to the Warrant Purchase Agreements each Purchaser has a 12-month additional investment right to purchase additional Series B Warrants on the same terms as those set forth in the Warrant Purchase Agreements.  Pursuant to the Note Purchase Agreements and Warrant Purchase Agreements, the Company agreed to certain negative covenants that, among other things and subject to certain specified exceptions, prohibit the Company from incurring additional indebtedness, paying dividends on its capital stock or pledging assets.

Employees
 
As of December 31, 2010, we had 68 full-time employees, all based in the United States. We have not experienced work stoppages, are not subject to any collective bargaining agreement and believe that our relationship with our employees is good.  However, as noted above, we terminated the employment of 20 employees as of January 4, 2011 as a result of a customer not renewing its Professional Services contract.
 
Available Information
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K 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 Securities and Exchange Commission “SEC.” The information posted on our website is not incorporated into this Annual Report on Form 10-K.
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K 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, may also be read and copied by any person at the SEC’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.  The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.  Our reports and other documents filed electronically under the Act may also be found at the SEC’s website at http://www.sec.gov.
 
Executive Officers
 
ANTs executive officers and principal employees as of December 31, 2010:
  
Name 
Age 
Position 
     
Joseph Kozak 
61
Chairman, Chief Executive Officer and Class 1 Director (term expires in 2013)
     
David A. Buckel
49
Chief Financial Officer
     
Rick Cerwonka
59
Chief Operating Officer
 
Joseph Kozak – Chairman, Chief Executive Officer and Class 1 Director
 
Joseph Kozak joined ANTs in June 2005 as President and was named Chief Executive Officer and appointed to the Board of Directors in August 2006 and was appointed Chairman of the Board of Directors in October 2007. 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.
 
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Dave Buckel – Chief Financial Officer

On January 18, 2010, Mr. Buckel joined ANTs as Chief Financial Officer. For more than 15 years, Mr. Buckel has served as Chief Financial Officer for a number of public and private companies in the IT and technology industries. He has worked under a wide range of circumstances from startup ventures, consolidations and turnaround situations to leading fast growing profit driven corporations. Mr. Buckel brings to ANTs extensive experience in SEC reporting, Sarbanes-Oxley compliance, investor relations, corporate development and the capital markets. He has held high level positions including public and private company board of director roles and has chaired and been a key member of both the audit and compensation committees for a number of public companies. Prior to joining ANTs, Buckel served as CFO for Ryla Inc., a fast growing call center solutions provider that was acquired. He also served as CFO for Internap Network Services, an industry leader in route control technology and a provider of high-performance solutions for business critical applications and Interland Inc., a publicly-traded applications hosting and Web services consulting company. Mr. Buckel received his MBA from Syracuse University and a bachelor’s degree in accounting from Canisius College. He is a Certified Management Accountant, CMA, by the Institute of Management Accountants.

Rick Cerwonka – Chief Operating Officer

Rick Cerwonka was appointed Chief Operating Officer of the Company effective August 17, 2009. Mr. Cerwonka joined Inventa in January 2000 as Vice President of Managed Services and was named President and Chief Executive Officer in December 2002. Before joining the Company, Mr. Cerwonka founded XTEND-Tech, Inc., which offered full-service applications management and support to Fortune 500 clients in finance, telecommunications, manufacturing, government and banking. Prior to XTEND-Tech, Inc., Mr. Cerwonka was Vice President of the Enterprise Solutions Division for the Southern States Area for Sybase, Inc.
 
 
In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating our business since it operates in a highly changing and complex business environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of these risk factors, any one of which may have a significant adverse impact on our business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this 10-K, and the risks discussed in our other SEC filings, actual results could differ materially from those projected in any forward-looking statements.
 
We face significant risks, and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently consider immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be harmed and the trading price of our common stock could decline.
 
Economic Risks
 
The fragile state of the worldwide economy could affect the Company in numerous ways. The effects of the  ongoing worldwide economic crisis has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, has impacted levels of consumer spending, and may impact our business, operating results, or financial condition. The ongoing worldwide economic crisis, weakness in the credit markets and significant liquidity problems for the financial services industry may also affect our financial condition in a number of ways.   We might face increased problems in collecting our trade receivables, notes, and other obligations receivable. Since we rely on those receivables to finance our ongoing business operations, failure to collect our receivables might cause our business and operations to be severely and materially adversely affected.  Also, we may have difficulties in securing additional financing.
 
Business Risks
 
We have a history of losses and a large accumulated deficit and we may not be able to achieve profitability in the future.

For the years ended December 31, 2010 and 2009 we incurred net losses applicable to common stockholders of $43.73 million and $25.31 million, respectively.  Our accumulated deficit totals $156.97 million and $113.24 million at December 31, 2010 and 2009, respectively.  There can be no assurance that we will be profitable in the future.  If we are not profitable and cannot obtain sufficient capital from non-operating sources, we may have to cease our operations.

We may not be able to continue as a going concern.

The opinion of our independent registered accounting firm included an explanatory paragraph in their report in connection with our accompanying consolidated financial statements as of and for the years ended December 31, 2010 and 2009 stating that there was substantial doubt about our ability to continue as a  going  concern.  See “Report of Independent Registered Public Accounting Firm” and the notes to the accompanying consolidated financial statements as of and for the years ended December 31, 2010 and 2009.  During such years we experienced significant operating losses ($16.93 million for the year ended December 31, 2010 and $8.35 million for the year ended December 31, 2009), liquidity constraints and negative cash flows from operations.  We anticipate that current cash resources will be sufficient for us to execute our business plan into the second quarter of  2011.  If we are not profitable to generate positive cash flow and cannot obtain sufficient capital from non-operating sources to fund operations and pay liabilities in a timely manner, we may have to cease our operations. Securing additional sources of financing to enable us to continue the development and commercialization of our proprietary technologies will be difficult and there is no assurance of our ability to secure such financing.  A failure to obtain additional financing and generate positive cash flow from operations could prevent us from making expenditures that are needed to pay current obligations, allow us to hire additional personnel and continue development of our product and technology. This leaves substantial doubt as to our ability to continue as a going concern.
 
 
 
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If we default on or fail to timely pay amounts due for notes, trade payables or other liabilities, our creditors may initiate bankruptcy proceedings against us.

We owe various amounts to debt holders and trade creditors for notes, trade payables and other liabilities. We may, due to constraints caused by negative operating cash flow and a failure to raise additional operating capital through financing, be unable to meet required payment terms or requirements. In that event, our creditors may initiate bankruptcy proceedings against us.

We may be unable to successfully execute any of our identified business opportunities that we determine to pursue.

We currently have a limited corporate infrastructure.  In order to pursue business opportunities, we will need to continue to build our infrastructure and operational capabilities.  Our ability to do any of these successfully could be affected by any one or more of the following factors:
 
 
·
Our ability to raise substantial additional capital to fund the implementation of our business plan;
     
 
·
Our ability to execute our business strategy;
     
 
·
The ability of our current or potential future products and services to achieve market acceptance;
     
 
·
Our ability to manage the expansion of our operations and any acquisitions that we may make, which could result in increased costs, high employee turnover or damage to customer relationships;
     
 
·
Our ability to attract and retain qualified personnel;
     
 
·
Our ability to manage our third party relationships effectively; and
     
 
·
Our ability to accurately predict and respond to rapid technological changes in our industry and the evolving demands of the markets we serve.

Our failure to adequately address any one or more of the above factors could have a significant adverse effect on our ability to implement our business plan and our ability to pursue other opportunities that arise.

We have granted to BRG and Fletcher certain “down-round” protections that may make it more difficult for us to raise capital in the future.
 
Pursuant to the Fletcher and BRG Agreements, we have granted to Fletcher and BRG certain protections that require that we issue additional shares of common stock to Fletcher and BRG and/or reduce the exercise price of the warrants and increase the number of shares issuable under the warrants issued to Fletcher and BRG in the event we issue or sell, or are deemed to have issued and sold, shares of our common stock at prices below the purchase price paid, or exercise price payable, by Fletcher or BRG.  The increase in the number of shares issuable upon exercise of the Fletcher and BRG Initial Warrants also will increase the amount of the quarterly payments owed by the Company to each of Fletcher and BRG.  By way of example, the Fletcher Agreement required that we issue to Fletcher an additional 4.15 million shares of common stock as a result of the issuance to BRG of stock and warrants under the BRG Agreement at a price below that previously paid by Fletcher.  Further, the Fletcher Initial Warrant to purchase common stock granted by the Company to Fletcher under the Fletcher Agreement has been adjusted to reduce the exercise price of the warrant to $0.5261 per share (from $0.903).  As a result, the Fletcher Initial Warrant now represents the right to purchase up to 19.01 million shares of our common stock at a cash exercise price of $0.5261 per share.  The increase in the number of shares issuable to Fletcher under the Fletcher Initial Warrant also causes an increase in certain quarterly payments payable by the Company under the Fletcher Agreement.  Based on information provided to the Company by Fletcher and BRG, Fletcher is deemed to beneficially own the shares beneficially owned by BRG but BRG does not beneficially own Fletcher’s shares.  From publicly-filed documents, it is the Company’s understanding that BRG is a wholly-owned subsdiary of Fletcher. Such provisions may make it more difficult to raise capital through the sale of shares of our common stock or securities convertible into shares of our common stock.
 
We Have Entered into Transactions that could Result in the Issuance of a Substantial Number of Shares of Our Common Stock Resulting in Significant Dilution to Existing Investors although management currently does not believe this to be the case.

Background.  As described in more detail under “Item 1. Business—Issuance of Shares of Common Stock and Warrants to Fletcher International Ltd” and “—Issuance of Shares of Common Stock and Warrants to BRG Investments, LLC,” as well as in note 13 to the accompanying consolidated financial statements, we entered into the Fletcher Agreement on March 12, 2010, as amended on July 15, 2010 and the BRG Agreement on December 31, 2010 (the BRG Agreement together with the Fletcher Agreement, are referred to as the “Prior Stock Purchase Agreements”), pursuant to which we issued and sold to each of Fletcher and BRG shares of our common stock, warrants to purchase common stock and other rights to acquire shares of common stock in the future.
 
Pursuant to the Prior Stock Purchase Agreements, if at any time within one year following any closing date of the issuance and sale of our common stock under the applicable Prior Stock Purchase Agreement or the closing of any exercise of any warrant granted under the Stock Purchase Agreements (each, a "Diluted Investment Closing"), there is (i) a public disclosure of Company's intention or agreement to engage in a Future Equity Issuance (as defined below), or (ii) a consummation of a Future Equity Issuance, in either case at a Later Issuance Price (as defined below) per share below the purchase price or exercise price per share paid or deemed paid for the shares of common stock acquired at the applicable Diluted Investment Closing, we are required to issue and deliver a number of shares of common stock to Fletcher and/or BRG (as applicable) calculated in accordance with the formula set forth in the Prior Stock Purchase Agreements.  As a result of the provisions, the Company would be required to issue enough shares to Fletcher and/or BRG to effectively lower their purchase price for the shares acquired in the Diluted Investment Closing to the Later Issuance Price.

At the same time, the exercise price of the warrants issued to Fletcher and BRG under the Prior Stock Purchase Agreements is automatically reduced to equal the lesser of (A) the exercise price as then in effect and (B) the Later Issuance Price, and the number of shares issuable (as defined below) upon exercise in full of the warrants is correspondingly increased.

The Prior Stock Purchase Agreements define the term “Future Equity Issuance” as any sale or issuance to any person or entity of any shares of, or securities convertible into, exercisable or exchangeable for, or whose value is derived in whole or in part from, any shares of any class of Company's capital stock, other than certain specifically excluded issuances.  The Prior Stock Purchase Agreements define the term “Later Issuance Price” as the lowest price per share of common stock paid or payable by any person or entity in the Future Equity Issuance, including, in the case of options, warrants, convertible preferred stock, convertible notes or other securities convertible, exchangeable or exercisable into or for common stock, the lowest price per share at which such conversion, exchange or exercise may occur on any future date.

Pursuant to the Prior Stock Purchase Agreements, we cannot issue to Fletcher or BRG, and Fletcher and BRG cannot purchase, additional shares of or common stock to the extent such issuance would result in Fletcher or BRG, as applicable, beneficially owning an aggregate number of shares of common stock greater than the Maximum Number, unless Fletcher or BRG delivers 65 days’ prior notice to the Company electing to increase the Maximum Number.  The Maximum Number is the number of shares of our common stock equal to 9.9% of the aggregate number of outstanding shares of common stock calculated on a monthly basis based on the total number of outstanding shares of common stock on the last day of the applicable month.  Pursuant to the Prior Stock Purchase Agreements, we are required to deliver the Outstanding Share Notice to each of Fletcher and BRG on or before the tenth day of each calendar month a notice stating, among other things, the aggregate number of shares of our common stock outstanding as of the last day of the preceding calendar month.  Fletcher and BRG have the right to waive the Maximum Share provisions upon 65 days notice to the Company.  In that event, we would be required to issue to Fletcher and BRG any shares that we did not previously issue due to the Maximum Number limitation.

Based on information provided to the Company by Fletcher and BRG, Fletcher is deemed to beneficially own the shares beneficially owned by BRG but BRG does not beneficially own Fletcher’s shares.  From publicly-filed documents, it is the Company's understanding that BRG is a wholly-owned subsidiary of Fletcher. As a result, Fletcher may currently beneficially own more than the Maximum Number.
 
 
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In summary, these provisions require that if we issue shares of stock, or securities, notes or warrants convertible into shares of common stock, in a Future Equity Issuance at a price (or deemed price) per share less than the price previously paid, or deemed paid, by Fletcher or BRG, we are required to issue to Fletcher and/or BRG a number of additional shares of common stock that would lower their effective purchase price to the Later Issuance Price in the Future Equity Issuance.  Likewise, the Prior Stock Purchase Agreements require an adjustment to the exercise price of the warrants issued to Fletcher and BRG to the Later Issuance Price in the event of a Future Equity Issuance along with an inverse adjustment to the number of shares subject to purchase under the warrants.

Recent Transactions.  On February 7, 2011, we entered into an Exchange Agreement with Gemini Master Fund, Ltd., and Manchester Securities Corp. (each a “Holder”) pursuant to which, in exchange for the surrender and cancellation of outstanding convertible promissory notes in aggregate initial principal face amount of $2.00 million, the Company issued to the Holders convertible Exchange Notes in the aggregate original principal amount of $2.40 million and warrants to purchase an aggregate of 6.67 million  shares of common stock.  See the more detailed description in “Item 1. Business—Exchange of Convertible Promissory Notes” and in note 21 to the accompanying consolidated financial statements.

The Exchange Notes are convertible, at the option of the respective Holders, into shares of the Company’s common stock at a Conversion Price equal to the lesser of (a) $0.59 per share (subject to adjustment) and (b) 80% of the average of the three lowest daily closing bid prices as reported on the OTCBB (or other market on which the stock is then traded) during the 22 consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of its Exchange Note.  This amount is referred to as the “Formula Price.”  Upon conversion of the Exchange Notes, the outstanding principal amount elected to be converted is converted into such number of shares of common stock as is determined by dividing the outstanding Principal Amount being converted by the then applicable Conversion Price, provided that if the Conversion Price is less than $0.59 per share, then the Company may, at its election, in lieu of issuing such number of shares of common stock:
 
(A)  issue such number of shares of common stock as is determined by dividing the outstanding Principal Amount being converted by $0.59 per share, and
 
(B)  pay in cash to the Holder, within three trading days following the conversion date, an amount equal to the product of (1) the difference between (x) the number of shares of common stock which would have been issued if the Company did not make the election to pay cash and (y) the number of shares of common stock that was actually issued in the conversion multiplied by (2) the market price as of the day before the conversion date.
 
Although the Company has the option to issue shares at the Conversion Price of $0.59 per share and pay cash for the balance, the Company could actually issue shares of common stock at the then applicable Conversion Price rather than pay any portion in cash, for example, if the Company did not have sufficient cash to fund the cash portion of the conversion if and when the Holders convert the Exchange Notes.  As a result, the Company would have to issue more shares at a lower conversion price in the event that Later Issuance Price of the common stock as described above is below $0.7375 at the time of conversion since 80% of any lower price will be below $0.59.  There is no maximum number of shares issuable upon conversion of the Exchange Notes.

Since there is no floor price in the computation, there is no maximum number of shares that can be issued under the terms of the Exchange Notes other than the statutory requirement under Delaware law that shares cannot be issued for less than the par value of the Company’s common stock, or $0.0001 per share.  As a result, it is possible that the Conversion Price under the Exchange Notes, and the exercise price under the related warrants, could be as low as $0.0001 per share.

However, if the Company does not have sufficient cash to fund the cash portion of the conversion if and when the Holders convert the Exchange Notes, the Company could nevertheless elect to issue only those shares based on the Conversion Price of $0.59 per share and be in breach of the Exchange Notes for failure to make the cash payment outlined above in paragraph (B).

On March 3, 2011, the Company entered into Note Purchase Agreements and Warrant Purchase Agreements with certain Purchasers. Pursuant to the Note Purchase Agreements, the Purchasers purchased and the Company sold senior secured promissory notes in the aggregate initial principal face amount of $8.40 million, bearing a 5% coupon in addition to an original issuance discount and with an initial maturity of March 3, 2016.  Pursuant to the Warrant Purchase Agreements, the Purchasers purchased and the Company sold to the Purchasers five year Series B Warrants initially covering an aggregate of 28.47 million shares of the Company’s common stock, subject to possible adjustment, and initially exercisable at $0.59 per share, subject to possible adjustment and possibly including the  Make Whole Amount payment as defined therein.  Pursuant to the Note Purchase Agreement, the Company received gross proceeds of $0.50 million for the notes and an aggregate of $6.25 million was placed into escrow accounts. Pursuant to the Warrant Purchase Agreements, the Company received gross proceeds of $0.25 million. See the more detailed description in “Item 1. Business—Note and Warrant Purchase Agreements” and in note 21 to the accompanying consolidated financial statements.

Impact Under Prior Stock Purchase Agreements.  The Exchange Agreement and Note and Warrant Purchase Agreements were Future Equity Issuances for purposes of the Prior Stock Purchase Agreements.  Any issuance of shares of common stock by the Company pursuant to the Exchange Agreement or Note and Warrant Purchase Agreements for a price lower than the price paid, or deemed paid, pursuant to the Prior Stock Purchase Agreements would cause the Company to issue additional shares of stock to Fletcher and/or BRG or modify the terms of their respective warrants. However, it is the Company’s position that entering into the Exchange Agreement and Note and Warrant Purchase Agreements do not, in and of themselves, require the Company to issue additional shares to Fletcher and/or BRG or modify the terms of their respective warrants. Entering into the Exchange Agreement and Note and Warrant Purchase Agreements does not cause any dilution to Fletcher or BRG, only the possibility of dilution. Therefore, the Company does not anticipate the need to issue additional shares to Fletcher and/or BRG or modify the terms of their respective warrants until such time as the Company issues shares pursuant to the Exchange Notes or Note and Warrant Purchase Agreements for a price lower than the price paid, or deemed paid, pursuant to the Prior Stock Purchase Agreements. If the Company were to issue shares pursuant to the Exchange Notes or Note and Warrant Purchase Agreements at a lower price, it is possible that the Company would not have sufficient authorized and available shares to issue to all of the entitled parties which could possibly include the Holders noted above). Fletcher and/or BRG may disagree with the Company’s position and assert that they are due shares upon entering into these subsequent transactions, because of (1) the possibility of issuing shares at a lower Later Issuance Price pursuant to the Exchange Agreement, and/or (2) paying cash for any shortfall between the fixed and effective conversion prices under either the Exchange Agreement or Note and Warrant Purchase Areements may be construed to be an issuance at a lower Later Issuance Price. The absolute lowest price that shares could potentially be issued under the Exchange Agreement specifically is the par value of the Company’s common stock, or $0.0001 per share. Calculating the number of shares issuable to Fletcher and BRG based on par value would result in the Company potentially issuing billions of shares of common stock, for which the Company does not have sufficient authorized and unissued shares available and would result in the Company being in breach of the Prior Stock Purchase Agreements. The Company has been in ongoing negotiations with Fletcher and BRG to clarify and eliminate any ambiguities with respect to whether entering into the Exchange and Note and Warrant Purchase Agreements could require us to issue any additional shares to Fletcher and/or BRG. The Company cannot guarantee that it will be successful in defending its position that no shares are currently issuable to Fletcher or BRG and that their respective warrants should be modified, or negotiating an outcome with Fletcher and BRG that is favorable to the Company.
 
The “down-round” protections granted to Fletcher and BRG are accounted for as derivative liabilities at fair value in our consolidated financial statements that may cause our results of operations to fluctuate.
 
Pursuant to the Fletcher and BRG Agreements, we have granted to Fletcher and BRG certain protections that require that we issue additional shares of common stock to Fletcher and BRG and/or reduce the exercise price of the warrants and increase the number of shares issuable under the warrants in the event we issue or sell, or are deemed to have issued and sold, shares of our common stock at prices per share below the purchase price per share paid, or exercise price payable, by Fletcher or BRG, as the case may be. Such anti-dilution protections are also known as “down-round” protections. We account for warrants with down-round protection as derivative liabilities. Subsequent to December 31, 2010, the Company has entered into other agreements with embedded derivatives. These derivative liabilities are measured at fair value at inception and at the end of each fiscal quarter with the changes in fair value at the end of each quarter reflected in income or loss for the applicable quarter. Recording the initial fair value and subsequent changes in fair value of derivative liabilities may contribute to significant fluctuations in our results of operations.
 
 
 
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In the event we do not satisfy our obligation to register for resale the shares issued to BRG, we will be liable for significant damages.

The BRG Agreement requires that the Company file registration statements with the SEC to register for resale the shares of common stock issued or to be issued to BRG pursuant to the BRG Agreement, the BRG Initial Warrant and the BRG Subsequent Warrant contingently issuable under the BRG Agreement.  In the event the initial registration statement for the shares already issued and issuable pursuant to the BRG Agreement and BRG Initial Warrant is not declared effective on or before March 31, 2011, the BRG Agreement requires that the Company pay substantial penalties to BRG.  We will not have the registration statement declared effective by the SEC before March 31, 2011 because of an unresolved interpretive issue in the Fletcher and BRG Agreements. Assuming the registration statement covering the shares issued or issuable to BRG is declared effective between May 30 and June 29, 2011, and using the closing share price of $0.39 as of March 29, 2011, as the “Daily Market Price” under the BRG Agreement, the Company would be obligated to pay to BRG $0.13 million  for the first 30 days following March 31, 2011 and, using the same share price of $0.39, an increase over the prior 30 day period of $0.02 million, for each 30 days thereafter.  Based on these assumptions, the penalty would be estimated to be $0.45 million, representing $0.13 million, $0.15 million and $0.17 million for the first, second and third 30-day period, respectively, that the registration statement is not declared effective. Because payments are based in part on the daily price of our common stock, changes in the price of our common stock would change the total amounts payable to BRG and could be significant. The BRG Agreement does not provide a limit on the amount that the Company would be obligated to pay to BRG for not having an effective registration statement. We will attempt to negotiate a waiver or reduction of the penalty based on the cause of the late filing of the registration statement.
 
We rely on key personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.

Our success depends in large part upon the abilities and continued service of our executive officers, including Joseph Kozak, our Chief Executive Officer, Rick Cerwonka, our Chief Operating Officer, and David Buckel, our Chief Financial Officer, and other key employees.  There can be no assurance that we will be able to retain the services of such officers and employees. Our failure to retain the services of our key personnel could have a material adverse effect on us.  In order to support our projected growth, we will be required to effectively recruit, hire, train and retain additional qualified management personnel.  Our inability to attract and retain the necessary personnel could have a material adverse effect on us.

We depend on a limited number of customers and losing one customer may adversely affect a significant portion of our revenue and we did recently experience the non-renewal of a significant customer contract.

During 2010, our two largest customers accounted for approximately 91% of our net revenues.  Revenues from the largest customer were $4.41 million, or 71% of revenues while revenues from the second largest customer were $1.24 million, or 20% of revenues, both net of trade discounts.  The contract with the largest customer expired on December 31, 2010 and was not renewed by the customer. As a result of the customer not renewing their contract, the Company terminated the employment of 20 employees and 14 contractors, eliminating $3.60 million of annualized salaries, commissions, contract labor costs and estimated payroll taxes and benefits. Stock-based compensation for these 34 individuals was an additional $4.59 million for the year ended December 31, 2010. Total related cash severance costs recorded as of December 31, 2010 are less than $0.03 million and total non-cash severance charges related to acceleration of non-vested restricted stock units that were scheduled to vest on April 1, 2011 is estimated to be less than $0.02 million. A decrease in revenue from any of our 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 we provide, could have a material adverse effect on our business, financial condition and results of operations. The Company also incurred non-cash impairment charges of $3.74 million related to acquired proprietary technology, customer relationships and trade name intangible assets and reduced the remaining useful life of customer relationships from approximately 7.5 years to 3.0 years.  If the Company is not able to acquire new customers and retain existing customers to bring in needed funds, it could have a material and adverse effect on the Company.

We rely upon reselling partners and independent software vendors for sales of ACS and they may not effectively sell or service our products.

All of our sales of ACS to date have been, and we believe a significant portion will continue to be, made through reselling partners and independent software vendors (together “Partners”).  For the year ended December 31, 2010, we recognized $0.20 million of revenue from IBM under the IBM OEM Agreement. Our success may depend on the continued sales efforts of Partners, and identifying and entering into agreements with additional Partners.  The use of Partners involves certain risks, including risks that they will not effectively sell or support our products, that they will be unable to satisfy their financial obligations with us, and that they will cease operations.  Any failure of the IBM OEM Agreement or other similar agreements to generate significant revenue for any reason, including reduction, delay or loss of orders from Partners may harm our results, including significant operational, restructuring and/or impairment charges. There can be no assurance that we will identify or engage qualified Partners in a timely manner, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.
 
Although no such competing products now exist, competitors may develop and release competing products in the future which may decrease our ability to sell our ACS product.

Currently, there are very few companies that are marketing and selling database migration software.  However, other companies will likely develop database migration programs which are similar to the product developed by us and attempt to sell their products to the same customers we are now approaching.  If customers determine that the competing products are less expensive, easier to use, or offer increased functionality, among other things, customers may chose to purchase the competitors' migration program rather than ours.  If potential customers chose to purchase a database migration program other than ACS, the Company may not be able to generate enough cash from sales to fund further development or pay necessary expenses.  The development of a competing database migration program could have a materially adverse effect on the Company.

Our results of operations have fluctuated in the past and may continue to fluctuate, which could have a negative impact on the price of our common stock.
 
We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuation in our operating results may cause the market price of our common stock to decline. We expect to experience continued fluctuations in our operating results in the near future due to a variety of factors, including:
     
 
changes in the fair value of our derivative liabilities as noted above;
     
 
the level of revenue generated through the IBM OEM Agreement, other potential sales agents or internally;
     
 
the loss of any additional significant customers;
 
 
 
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fluctuations in the demand and sales cycle for our services;
     
 
competition and the introduction of new services by competitors;
     
 
integration of people, operations, products and technologies of acquired businesses;
     
 
general economic conditions; and
     
 
any impairments or restructurings charges that we may incur in the future.

In addition, fluctuations in our results of operations may arise from strategic decisions we have made or may make with respect to the timing and magnitude of new software development efforts. These and other factors discussed in this Annual Report could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expense, depreciation and amortization and interest expense. Our results of operations, therefore, are particularly sensitive to fluctuations in revenue. Because our results of operations have fluctuated in the past and we expect them to continue to fluctuate in the future, we can offer no assurance that the results of any particular period are an indication of future performance in our business operations. Fluctuations in our results of operations could have a negative impact on our ability to raise additional capital and execute our business plan. Our operating results in one or more future quarters may fail to meet the expectations of investors, which could cause an immediate and significant decline in the trading price of our stock.
 
If we are unable to protect our intellectual property, our competitive position would be adversely affected.

We rely on patent protection, as well as trademark and copyright law, trade secret protection and confidentiality agreements with our employees and others to protect our intellectual property.  Despite our precautions, unauthorized third parties may copy our products and services or reverse engineer or obtain and use information that we regard as proprietary.  We have filed one patent application with the United States Patent and Trademark Office for our ACS product and intend to file more.  No patents have been granted for our ACS product.  One trademark has been granted.  In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.  Our means of protecting our proprietary rights may not be adequate and third parties may infringe or misappropriate our patents, copyrights, trademarks and similar proprietary rights.  If we fail to protect our intellectual property and proprietary rights, our business, financial condition and results of operations would suffer.  We believe that we do not infringe upon the proprietary rights of any third party, and no third party has asserted an infringement claim against us.  It is possible, however, that such a claim might be asserted successfully against us in the future.  We may be forced to suspend our operations to pay significant amounts to defend our rights, and a substantial amount of the attention of our management may be diverted from our ongoing business, all of which would materially adversely affect our business.
 
If the Company has a judgment entered against it in any of the pending lawsuits in which it is a defendant, the Company may be required to pay a substantial sum.

Currently, the Company is a defendant in several lawsuits (discussed in more detail in Item 3).  While the Company is vigorously defending against these suits and believes that each is unmeritorious, the courts may find us liable for damages under these claims and be required to pay substantial sums to the plaintiffs in addition to its own attorneys’ fees.  If this is the case, we may not have enough cash on hand to make the payment or the ability to seek funding to pay the judgment amount.  The payment of such judgment and fees may have a materially adverse effect on us and we may have to cease operations.
 
If we experience rapid growth, we will need to manage such growth well.

We may experience substantial growth in the size of our staff and the scope of our operations, resulting in increased responsibilities for management.  To manage this possible growth effectively, we will need to continue to improve our operational, financial and management information systems, will possibly need to create 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, we expect to experience difficulty in filling our needs for qualified personnel.  There can be no assurance that we will be able to effectively achieve or manage any future growth, and our failure to do so could delay product development cycles and market penetration or otherwise have a material adverse effect on our financial condition and results of operations.

We could face information and product liability risks and may not have adequate insurance.

Our products may be used to manage data from critical business applications.  We may become the subject of litigation alleging that our products were ineffective or disruptive in their treatment of data, or in the compilation, processing or manipulation of critical business information.  Thus, we may become the target of lawsuits from injured or disgruntled businesses or other users.  We carry product and information liability and errors and omissions insurance, but in the event that we are required to defend more than a few such actions, or in the event our products are found liable in connection with such an action, our business and operations may be severely and materially adversely affected.

We have indemnified our officers and directors and may be responsible for paying indemnified monetary liabilities.

We have agreed to indemnify our officers and directors against possible monetary liability to the maximum extent permitted under Delaware law. In the event our officers and directors incur damages or expense costs in connection with their service with us, we will be required to pay such damages and costs which could have a material adverse effect on our ability to operate as a going concern.

Market acceptance of our products and services is not guaranteed and our business model is evolving.

We are at an early stage of development and our revenue depends upon market acceptance and utilization of our products and services, including the recent release of the ACS for Sybase to DB2.  Our products are under constant development and are still maturing.  There can be no assurance that our product and technology development or support efforts will result in new products and services, or that they will be successfully introduced.
 
 
 
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Market concerns regarding our financial viability and the economy may adversely affect customer buying decisions.

Customers may be reluctant to purchase products from us because they may be concerned about our financial viability and our ability to provide a full range of support services.  Given these risks, customers may only be willing to purchase our products, if at all, through partners who are not faced with similar challenges. We may have difficulty finding partners to resell our products.  Also, due to current economic conditions, including the current recession, some potential customers may have tightened budgets for evaluating new products and technologies and the evaluation cycles may be much longer than in the past.
 
Technology Risks
 
If we deliver products with defects, our credibility will be harmed and the sales and market acceptance of our products will decrease.

Our products and services are complex and have at times contained errors, defects and bugs.  If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems.  We may agree to indemnify our 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 us or against our customers.  We carry product and information liability and errors and omissions insurance, but in the event that we are required to defend more than a few such actions, or in the event that we are found liable in connection with such an action, our business and operations may be severely and materially adversely affected.

Our ACS product is at an early stage and our business model is not well established.

We began developing ACS in 2007 and have only recently begun selling the product through the IBM OEM Agreement. Through the IBM OEM Agreement, we receive royalties based on the license revenue recorded by IBM. We are also designated as a preferred supplier for ACS implementation services.  We have not yet established definitive pricing for ACS implementation services and have only preliminary estimates as to the possible revenues and expenses associated with sales, support and delivery.  It is possible that we will not generate enough revenue to offset the expenses and that the ACS line of business will not be profitable.

We will need to continue our product development efforts as our future operations depend on our ability to expand our current products and development new products, which cannot be assured.

We believe that the market for our products will be characterized by increasing technical sophistication.  We also believe that our eventual success will depend on our ability to continue to provide increased and specialized technical expertise.  There is no assurance that we will not fall technologically behind competitors with greater resources.  Although we believe that we enjoy a lead in our product development, and believe that our patent application for ACS and trade secrets provide some protection, we will need significant additional capital in order to maintain that lead over competitors who have more resources.

We face rapid technological change that may limit our ability to effectively develop and market new products for future operations.

The market for our products and services is characterized by rapidly changing technologies, extensive research and the introduction of new products and services.  We believe that our future success will depend in part upon our ability to continue to develop and enhance ACS and to develop, manufacture and market new products and services. As a result, we expect to continue to make a significant investment in engineering and research and development. There can be no assurance that we will be able to develop and introduce new products and services or enhance our initial products in a timely manner to satisfy customer needs, achieve market acceptance or address technological changes in our target markets.  Failure to develop products and services and introduce them successfully and in a timely manner could adversely affect our competitive position, financial condition and results of operations.

Financing Risks
 
 A failure to obtain financing and generate positive cash flow from operations could prevent us from executing our business plan or operate as a going concern.

We anticipate that current cash resources will be sufficient for us to execute our business plan into the second quarter of 2011.  If further financing is not obtained, including the potential subsequent investments by Fletcher and/or BRG under the Fletcher and BRG Agreements, and we are unable to generate positive cash flow from operations, we will not be able to continue to operate as a going concern.  We believe that securing additional sources of financing to enable us to continue the development and commercialization of our proprietary technologies will be difficult and there is no assurance of our ability to secure such financing.  A failure to obtain additional financing and generate positive cash flows from operations could prevent us from making expenditures that are needed to pay current obligations, allow us to hire additional personnel and continue development of our product and technology.  If we raise additional financing by selling equity or convertible debt securities, the relative equity ownership of our existing investors would be diluted or the new investors could obtain terms more favorable than previous investors could.  Further, any such financings may trigger the down round protections included in the Fletcher and BRG Agreements thereby resulting in further dilution to our other stockholders.  If we raise additional funds through debt financing, we could incur significant borrowing costs and be subject to adverse consequences in the event of a default.
 
 
 
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We have incurred indebtedness which will result in significant future payments.

We have incurred debt, including significant debt subsequent to December 31, 2010, and may incur substantial additional debt in the future.  Further, we have quarterly payment obligations under both the Fletcher and BRG Agreements.  A significant portion of our future cash flow from operating activities may be dedicated to the payment of interest, quarterly payments and the repayment of principal on our indebtedness.  There is no guarantee that we will be able to meet our debt service and quarterly payment obligations.  If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with our debt obligations, we will be in default.  Our indebtedness and quarterly payment obligations could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of another economic downturn.

The terms of the Fletcher and BRG Agreements may make it difficult to obtain financing from other parties.

The terms of the Fletcher and BRG Agreements, including the down-round protections, may make it more difficult to obtain additional financing from other parties due to the dilutive effects of such down-round protections, the ongoing quarterly payment obligations and other rights of Fletcher and BRG under the respective agreements.

Shareholder Risk
 
There is a limited market for our common stock that may cause shareholders to experience difficulty in selling their shares at times of their choosing.

Our common stock is not listed on any exchange and trades on the OTCBB.  As such, the market for our common stock is limited and is not regulated by the rules and regulations of any exchange.  Further, the price of our common stock and its volume in the OTCBB may be subject to wide fluctuations.  Our stock price could decline regardless of our actual operating performance, and stockholders could lose all or a substantial part of their investment as a result of industry or market-based fluctuations.  Our stock trades relatively thinly.  If a more active public market for our stock is not sustained, it may be difficult for stockholders to sell shares of our common stock.  Because we do not anticipate paying cash dividends on our common stock for the near future, stockholders will not be able to receive a return on their shares unless they are able to sell them.  The market price of our 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 our products;
     
 
·
our ability to sign Partners who are successful in selling our products;
     
 
·
economic conditions within the database industry;
     
 
·
our failure to further develop and commercialize ACS;
     
 
·
the timing of announcements by us or our 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.
 
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our 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 our internal control over financial reporting.  If we fail to adequately maintain compliance with, or maintain the adequacy of, our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have 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 we cannot favorably assess our internal controls over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.
 
Our 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,” “would”, “could”, “should” and similar expressions.  These statements are only expressions of expectations.  Our 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 us and not included herein.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  The statements made in this prospectus are based on information which the Company believes to be complete and accurate as of the date of this prospectus.  We assume 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, we caution readers not to place undue reliance on these statements.

We have granted to Fletcher and BRG certain “down-round” protections that may result in a change in control of the Company.

The “down-round” protections may result in possible future issuances of stock for items such as subsequent investments, quarterly payments and anti-dilution features. The amount of stock that could be issued under these arrangements, although not known to the Company at this time, could result in issuances of stock in amounts that might effect a change in control of the Company.
 
 
 
18

 
 
The “down-round” protections we have granted to Fletcher, BRG, the Holders of the Exchange Notes and the Purchasers of the Series B Warrants may result in increased dilution to current and future shareholders.

The “down-round” protections that we have granted to Fletcher, BRG, the Holders of the Exchange Notes and the Purchasers of the Series B Warrants require a future issuance of shares to each based on the price of future issuances or sale to other shareholders or investors.  These “down-round” protections may also require the increase in the number of shares covered by warrants held by Fletcher, BRG, the Holders of the Exchange Notes and the Purchasers of the Series B Warrants or decrease the exercise price of the warrants, or both.  These additional issuances to Fletcher, BRG, the Holders of the Exchange Notes and the Purchasers of the Series B Warrants may dilute current shareholders’ stock holdings in us and discourage future investors from purchasing shares in us.
 
Our classified Board limits the ability of potential acquirers to acquire control through proxy contest.

Our Bylaws provide for a Board of Directors to be elected in three classes.  This classified Board may make it more difficult for a potential acquirer to gain control of us 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.

Our securities may be de-listed from the OTCBB if we do not meet continued listing requirements.
 
If we do not meet the continued listing requirements of the OTCBB and our securities are de-listed by the OTC, trading of our securities would likely be halted. In such case, the market would be negatively affected and we could face difficulty raising capital necessary for our continued operations.
 
 
None.
 
 
Our headquarters are located in San Francisco, California under a short-term lease that allows the Company a monthly termination option. The Company maintains a facility in Mt. Laurel, New Jersey, where we lease approximately 12,000 square feet of office space as of December 31, 2010. On September 9, 2009, the Company entered into a one-year lease for office space in Alpharetta, Georgia, beginning on November 1, 2009 for 1,500 square feet of office space for rent of $1,000 per month. On February 3, 2010, the Company amended the Alpharetta lease to rent an additional 1,500 square feet for additional rent of $1,050 per month through November 1, 2010. The Company further amended the Alpharetta lease to extend it through April 2011. The Company anticipates entering into a long-term lease in the near future for its office space in Alpharetta, Georgia.
 
ITEM 3. LEGAL PROCEEDINGS
 
On July 10, 2008, Sybase, Inc. (“Sybase”), an enterprise software and services company, filed a complaint against the Company for common law unfair business practices, and tortious interference with contractual relations, among other things, in the Superior Court of the State of California, County of Alameda.  Sybase was seeking an injunction and damages among other legal and equitable relief.  Sybase has been changing its damages and remedies claims and is now seeking rescission of its license of certain ANTs software source code and damages in connection therewith. A trial date, initially set for August 2010, was continued to April 2011, and is now being continued again, likely to October 2011. The Company believes that this lawsuit is without merit and intends to continue vigorously defending itself while seeking a settlement beneficial to the Company.

On August 22, 2008, a former ANTs employee filed a class action complaint against the Company on behalf of all current and former software engineers for failure to pay overtime wages and failure to provide meal breaks, among other things, in Superior Court of the State of California, County of San Mateo.  The former employee is seeking an injunction, damages, attorneys’ fees and penalties.  No trial date has yet been set. On March 9, 2011, the Court certified the class and a subclass consisting solely of former engineering employees who signed release agreements, with another former employee as the sub-class representative. The Company believes that this lawsuit is without merit and intends to continue vigorously defending itself.

On September 9, 2009, Kenneth Ruotolo, a former employee and officer of the Company, filed a complaint for breach of contract, breach of the covenant of good faith and fair dealing and declaratory relief in connection with his June 2009 termination, in the Superior Court of the State of California, County of San Francisco. Mr. Ruotolo sought damages, attorneys’ fees and declaratory relief. On September 20, 2010 a settlement was reached between the Company and Mr. Ruotolo and the matter was dismissed. Pursuant to the settlement, the Company paid Mr. Ruotolo $0.23 million in December 2010. In addition, Mr. Ruotolo shall have until September 14, 2014 to exercise options to purchase 0.54 million shares of common stock, at exercise prices ranging from $0.52 to $1.18 per share. As of the date of the settlement, the Company had accrued compensation of $0.18 million.  In conjunction with the settlement, the Company recorded an additional accrual of $0.05 million for the one-time lump sum payment and recorded stock-based compensation of $0.34 million representing the estimated fair value to reinstate Mr. Ruotolo’s options to purchase common stock. Mr. Ruotolo’s father, Francis K. Ruotolo, is a Director of the Company.
 
On January 14, 2010, three lawsuits were filed against the Company by Robert T. Healey.  The first of these lawsuits, against the Company, demanded inspection of the Company’s books and records.  The second lawsuit, against the Company and its eight directors (including former director Tom Holt), was alleged to be brought by Mr. Healey “both individually and derivatively,” therein alleging various wrongdoing by the Company and its directors.  The third lawsuit, against the Company and its eight directors (including former director Mr. Holt), was brought by Mr. Healey for a declaration directing the Company to nominate Mr. Healey and Rick Cerwonka (the Company’s Chief Operating Officer and the President of the Company’s subsidiary, Inventa Technologies, Inc.) for election to the Company’s Board of Directors.  On May 4, 2010, the Company and the members of the Board of Directors (including former director Mr. Holt) entered into a settlement agreement and mutual general release with Mr. Healey regarding the three lawsuits filed by Mr. Healey. Dismissal with prejudice was granted by the court on June 17, 2010. Mr. Healey and his family are stockholders and held, in the aggregate, $2.00 million of convertible promissory notes as of December 31, 2010. These convertible promissory notes were subsequently transferred to new holders pursuant to the Exchange Agreement on February 7, 2011 with repayment of the notes deferred until January 31, 2013.
 
 
 
19

 
 
On August 18, 2010, the Company received a demand letter from Mr. Holt, one of the Company’s former directors, to reinstate his previously cancelled options and warrants to purchase shares of the Company's common stock, extend the exercise period for each by 90 days and pay him the difference in alleged lost profits for a prior request to exercise one of his warrants. On September 17, 2010, Mr. Holt subsequently filed a complaint for breach of contract, breach of the covenant of good faith and declaratory relief in connection with the Company’s refusal to accept exercise of Mr. Holt’s common stock warrants, in the Superior Court of the State of California, in and for the County of San Francisco. Mr. Holt’s options and warrants were received for his service on the Board of Directors. Mr. Holt had options and warrants to purchase a total of 0.31 million shares of common stock for $0.94 per share. On November 23, 2010 a settlement was reached between the Company and Mr. Holt and this matter was dismissed in December 2010. Pursuant to the settlement, the Company reinstated warrants to purchase 0.19 million shares of common stock for $0.94 per share, exercisable until September 1, 2011. The total value of the warrants was less than $0.02 million, calculated using a Black-Scholes valuation model.

On March 1, 2011 StreetCapital, Inc. (“StreetCapital”) filed a complaint against the Company in the Superior Court of Fulton County, Georgia claiming that the Company owes fees to StreetCapital in connection with the investment in the Company made by BRG Investments, LLC (“BRG”) on or about December 31, 2010.  StreetCapital claims, among other things, that (i) the investment by BRG was the result of StreetCapital’s efforts under an engagement letter entered into between the Company and StreetCapital in September 2009, (ii) StreetCapital is entitled to be paid $0.24 million as a fee in respect of the BRG transaction, (iii) StreetCapital is owed a warrant for the right to acquire 0.41 million shares of ANTs common stock at an exercise price of $0.5261 per share, (iv) StreetCapital is entitled to have certain warrants previously issued to it re-priced to a lower exercise price and (v) StreetCapital is entitled to a cash fee equal to 8% of the amount invested by Gemini Master Investment Fund, Ltd. pursuant to that certain Exchange Agreement dated February 7, 2011 among the Company, Gemini Master Investment Fund, Ltd., and Manchester Securities Corp. as well as a warrant for the purchase of additional common stock of the Company.  StreetCapital is also seeking exemplary damages. The Company believes the plaintiff’s claims are without merit and intends to defend itself vigorously.  


PART II
 
 
Our 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 intra-day trading prices of our stock, for the periods indicated below.
   
High
   
Low
 
             
Quarter Ended December 31, 2010
 
$
0.90
   
$
0.26
 
Quarter Ended September 30, 2010
   
1.18
     
0.60
 
Quarter Ended June 30, 2010
   
3.25
     
0.79
 
Quarter Ended March 31, 2010
   
1.00
     
0.55
 
                 
Quarter Ended December 31, 2009
 
$
0.97
   
$
0.45
 
Quarter Ended September 30, 2009
   
0.57
     
0.26
 
Quarter Ended June 30, 2009
   
0.69
     
0.34
 
Quarter Ended March 31, 2009
   
0.74
     
0.31
 
 
The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
 
As of December 31, 2010 there were 130,501,337 and 9,979,139 shares of common and Series A preferred stock, respectively, issued and outstanding. As of December 31, 2010 there were approximately 1,077 and 4 registered holders of record of our common and preferred stock, respectively.
 
Equity Compensation Plan Information
 

Plan category
 
Number of
securities
to be issued upon
exercise of
outstanding
 options,
warrants and rights
   
Weighted-average
exercise price of
outstanding
options,
warrants and rights
   
Number of
securities remaining
available for future
issuance
under equity
compensation
plans (excluding
securities
reflected in column
(a))
  
 
(a)
   
(b)
   
(c)
Equity compensation plans approved by security holders
   
15,107,562
   
$
1.02
     
9,185,848
Equity compensation plans not approved by security holders
   
-
     
-
     
-
Total
   
15,107,562
   
$
1.02
     
9,185,848
 
 
 
20

 
 
Company Stock Price Performance
 
The following information shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission nor shall this information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that ANTs specifically incorporates it by reference into a filing.
 
The graph below compares the cumulative total shareholder return on ANTs common stock for the last five full years with the cumulative return on the NASDAQ composite and the Peer group for the same period. The graph assumes that $100 was invested in ANTs common stock and in each of the other indices on December 31, 2005 and that all dividends were reinvested. ANTs has never paid cash dividends on its stock. The comparisons in the graph below are based on historical data, with ANTs common stock prices based on the closing price on the dates indicated and are not intended to forecast the possible future performance of ANTs common stock.
 
Graph
 

     
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
                                       
ANTs Software, Inc.
Return %
          16.35       -70.66       -47.89       72.97       0.00  
 
Cum $
    100.00       116.35       34.13       17.79       30.77       30.77  
                                                   
                                                   
NASDAQ Computer and Data Processing Index
Return %
            12.27       22.19       -42.43       63.45       13.55  
 
Cum $
    100.00       112.27       137.18       78.97       129.08       146.57  
                                                   
                                                   
NASDAQ Composite-Total Returns
Return %
            10.39       10.65       -39.98       45.36       18.16  
 
Cum $
    100.00       110.39       122.15       73.32       106.58       125.93  
                                                   
                                                   
Peer Group Only
Return %
            22.90       118.73       -66.30       13.83       -7.39  
 
Cum $
    100.00       122.90       268.82       90.59       103.12       95.50  
                                                   
                                                   
Peer Group + ANTS
Return %
            20.85       52.18       -65.10       23.40       -5.75  
 
Cum $
    100.00       120.85       183.90       64.17       79.19       74.64  
 
Dividend Policy
 
We have not declared or paid cash dividends or made distributions in the past, and do not anticipate that we will pay cash dividends or make distributions in the foreseeable future.
 
 
 
21

 
 
Recent Sales of Unregistered Securities
 
Set forth below is information regarding securities issued by us within the past three years which were not registered under the Securities Act.  Also included is the consideration, if any, received by us for such securities and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.  No underwriters were involved in any such sales.

Private Placements; Equity Stock; Warrants

All purchasers in the private placements qualify as accredited investors as such term is defined in Rule 501 under the Securities Act.  The common stock issued by the Company to the investors has not been registered under the Securities Act.  The offer and sale of these shares was made in connection with a private placement and is exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Issuance of Warrants to StreetCapital, Inc.  On March 22, 2010, May 12, 2010 and July 16, 2010, the Company entered into a private placement transaction with StreetCapital, Inc. (“StreetCapital”) in which it issued warrants to purchase 0.12 million, 0.05 million and 0.13 million shares of restricted common stock, respectively.  These warrants were issued as consideration for services rendered by StreetCapital as placement agent in connection with the sale of shares to Fletcher.  As discussed elsewhere in this Annual Report, StreetCapital believes that it is owed a warrant covering an additional 0.41 million shares of ANTs common stock at an exercise price of $0.5261 per share related to the BRG transaction.

Issuance of Shares to C4 Capital Consulting.  On December 20, 2010, the Company entered into private placement transactions with C4 Capital Consulting in which it issued 0.66 million shares of common stock, respectively.  These shares were issued as consideration for consulting services rendered by C4 Capital Consulting and in connection with various financing.

Other Private Placements.  From March 9, 2010 through December 31, 2010, the Company issued a total of 5.12 million shares of common stock through the exercise of warrants to purchase shares of common stock with exercise prices ranging from $0.40 to $0.50 per share, resulting in gross proceeds of $2.07 million.
 
Stock Repurchases
 
There were no shares repurchased by us during 2010.

 
Not applicable.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This financial review presents the operating results of the Company for each of the two years in the period ended December 31, 2010, and the financial condition of the Company at December 31, 2010. Except for the historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause the Company’s actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under Item 1A of Part I of this report, “Risk Factors.” In addition, the following review should be read in connection with the information presented in the accompanying consolidated financial statements and the related notes.
 
Results of Operations
 
The results of operations for the years ended December 31, 2010 and 2009 are summarized in the table below.
   
Year Ended December 31,
 
   
2010
   
Change
   
2009
 
                   
Revenues
 
$
6,184,113
    6
%
 
 
$
5,811,682
 
Cost of revenues
   
6,968,591
    39
 
 
   
4,999,837
 
     Gross (loss) profit
   
(784,478
  (197
)
 
   
811,845
 
Operating expenses
   
16,150,197
    76
 
     
9,158,141
 
     Operating loss
   
(16,934,675
)
  103
 
     
(8,346,296
)
                         
Non-operating expense, net
   
25,837,564
    72
 
     
14,995,260
 
Income tax benefit
   
(344,000
  328
 
     
(80,402
)
     Net loss
   
(42,428,239
)
  82
 
     
(23,261,154
)
                         
Deemed dividend related to
                       
    Series A Convertible Preferred Stock
   
1,303,705
    (36
)
 
   
2,048,534
 
                         
Loss applicable to common shares
 
$
(43,731,944
)
  73
%
 
 
$
(25,309,688
)
                         
Basic and diluted net loss per common share
 
$
(0.40
)
  48
%
 
 
$
(0.27
)
                         
Shares used in computing basic
                       
     and diluted net loss per share
   
110,343,542
    16
%
 
   
95,026,487
 
 
 
 
22

 
 
Revenues
 
The Company’s revenues for the years ended December 31, 2010 and 2009 include service revenues representing managed and professional service fees for database and network maintenance, support services. Revenues for the year ended December 31, 2010 also include the sale of an initial license and maintenance of the new ACS. Conditional on the Company’s technology developments being successful, the presence of customer demand and the Company having a competitive advantage, future revenues will include additional sales and licenses of its ACS and may also include managed services revenue related to existing and new contracts and professional services revenue from pre- and post-sales consulting related to ACS and other database consolidation technologies. The Company announced on May 20, 2010 that it co-developed and launched with IBM a new product based on the ACS to migrate Sybase to DB2 quickly and cost-effectively and also became one of IBM’s preferred service providers.  Sales of the Company’s original ACS have been limited due to the structure of the sales arrangement and go-to-market strategy. As such, the Company has structured the go-to-market strategy for the Sybase to DB2 ACS differently via the use of the IBM OEM Agreement. Pursuant to this OEM agreement, ANTs is responsible for technology development specifically tailored to IBM’s needs. IBM will assume responsibility for marketing, sales and support of the technology on a worldwide basis, while ANTs will be the preferred service provider for migration projects. Revenue from IBM royalties is recognized in the period that it is reported and paid to the Company, consistent with the IBM OEM Agreement. The Company continues to develop ACS with additional feature components, enhancements and modifications for other databases based on market demand and the availability of resources for development.

As previously discussed in Recent Developments above, the Company’s revenues for the years ended December 31, 2010 and 2009 also include $4.41 million and $3.81 million, respectively and net of trade discounts, from its largest Professional Services customer as determined by historical revenue. This customer is represented as Customer A in the table below. The contract with the customer expired on December 31, 2010 and the customer chose not to renew the contract. As a result of the customer not renewing its contract, the Company terminated the employment of 20 employees and 14 contractors. Total salary, commissions, contract labor costs and estimated payroll taxes and benefits associated with these 34 individuals was approximately $3.60 million and $3.16 million for the years ended December 31, 2010 and 2009, respectively. Adding stock compensation associated with these 34 individuals brings the costs to approximately $4.59 million and $3.60 million for the years ended December 31, 2010 and 2009, respectively. Total related cash severance costs to be recorded as of December 31, 2010 are less than $0.03 million and total non-cash severance charges related to acceleration of non-vested restricted stock units that were scheduled to vest on April 1, 2011 is estimated to be less than $0.02 million. We expect that our focus over the next year will be on the continued development, marketing and sales of ACS and growth of our professional services offerings – particularly for ACS implementations.

Revenues for the year ended December 31, 2010 were $6.18 million; an increase of $0.37 million compared to $5.81 million for the year ended December 31, 2009.  Significant customer concentrations are summarized as follows:
 
   
Years Ended December 31,
   
2010
   
2009
Customer A
 
$
4,412,271
     
71
%
 
$
3,805,429
     
65
%
Customer B
   
1,239,330
     
20
     
1,436,035
     
25
 
Other customers
   
532,512
     
9
     
570,218
     
10
 
 
 
$
6,184,113
     
100
%
 
$
5,811,682
     
100
%
                             

The increase in revenues for the year ended December 31, 2010 compared to 2009 includes $0.20 million from the sale of an initial license of the new ACS during the three months ended September 30, 2010, as well as the sale of additional professional service projects, especially for Customer A. As noted above, the contract with Customer A expired on December 31, 2010 and was not renewed by the customer. The Company is also dependent on IBM for sales and marketing of the ACS. For the year ended December 31, 2010, the Company has recognized $0.20 million in royalty revenues received from IBM for sales of the ACS. The Company expects to generate additional revenue from ACS licenses and implementation services during the next several quarterly periods.
 
 
 
23

 
 
Cost of Revenues

Cost of revenues consists primarily of employee salaries and benefits, stock-based compensation, professional fees for non-employee consultants and contractors, and impairment and amortization of acquired technologies.

Total cost of revenues was $6.97 million and $5.00 million for years ended December 31, 2010 and 2009, respectively, resulting in a gross loss of $0.78 million for the year ended December 31, 2010 and gross profit of $0.81 million for the year ended December 31, 2009. Cost of revenues for the year ended December 31, 2010 includes $1.55 million for impairment of acquired technologies and $0.04 million estimated for severance costs. As previously discussed in Recent Developments above, the Company’s contract with its largest professional services customer as determined by historical revenue expired as of December 31, 2010 and was not renewed by the customer. As a result, the Company evaluated the remaining value of acquired technologies, concluded that the carrying value of acquired technology was not recoverable and recorded the charge to fully impair the technology as of December 31, 2010. The Company also terminated the employment of 17 employees and 14 contractors associated with cost of revenues as a result of the customer not renewing its contract. The total severance costs for the terminated employees include cash and stock-based compensation for accelerated vesting of restricted stock units.

The remaining increase in cost of revenues for the year ended December 31, 2010 compared to 2009 was largely due to increases in stock-based compensation of $0.47 million and additional contract personnel of $0.44 million to support expanded services to Customer A throughout the year-ended December 31, 2010, noted above. The increase in stock-based compensation was primarily a result of $0.44 million for a matching award of fully-vested stock as of March 31, 2010.  The increase in stock-based compensation more than offset a 10% reduction in cash compensation to both employees and non-employee consultants and contractors in customer support roles. As noted above, the Company accelerated vesting restricted stock units of employees terminated as a result of the customer not renewing its contract. However, restricted stock units for terminated non-employee consultants and contractors was not accelerated and previously recognized stock-based compensation expense of $0.03 million was reversed. The Company also began amortization of capitalized software related to the ACS product on July 1, 2010, recording amortization expense of $0.06 million for the year ended December 31, 2010.

Operating Expenses
 
Operating expenses are summarized in the table below.
 
 
Years Ended December 31,
 
 
2010
 
Change
 
2009
 
Research and development
$
3,322,672
 
38
%
 
$
2,408,201
 
Sales and marketing
 
3,009,569
 
74
     
1,733,576
 
General and administrative
 
9,817,956
 
96
     
5,016,364
 
 
$
16,150,197
 
76
%
 
$
9,158,141
 
 
The Company’s primary operating expenses are salaries, benefits and consulting fees related to developing and marketing ACS, and marketing and selling managed and professional services. The Company began development of ACS in early 2007.  Development of additional ACS feature components, enhancements and modifications for other databases is ongoing.

Research and Development

Research and development expense consists primarily of employee compensation and benefits, professional fees to research and development service providers, stock-based compensation for both employees and non-employee personnel, and equipment and computer supplies.

Total research and development expense for the year ended December 31, 2010 was $3.32 million compared to $2.41 million for the year ended December 31, 2009, an increase of $0.91 million or 38%.  The expense for the year ended December 31, 2010 excludes $2.01 million capitalized as software development. The gross increase in research and development expense (before $2.01 million in capitalized software) for the year ended December 31, 2010 compared to 2009 is primarily for employee compensation and benefits due to additional headcount as of December 31, 2010 compared to December 31, 2009. Headcount for research and development personnel has been increasing since the latter half of 2009 to (1) complete the initial ACS as announced on May 20, 2010 and (2) subsequently develop additional feature components, enhancements and modifications for other databases as well as to provide related support and maintenance to beta customers. The Company has also utilized Professional Support employees to assist with certain research and development activities. While ACS development continues, amortization of certain components of capitalized software began July 1, 2010 with $0.06 million of amortization expense recorded in cost of revenues during the year ended December 31, 2010.

At December 31, 2010, the Company had 36 full-time research and development employees and consultants compared to 20 as of December 31, 2009. Research and development expense for the year ended December 31, 2010 also included $0.41 million in stock based compensation associated with the company-wide 10% reduction in cash compensation for a matching award of fully-vested stock as of March 31, 2010.
 
 
 
24

 
 
Sales and Marketing

Sales and marketing expense consists primarily of employee salaries and benefits, stock-based compensation, professional fees for marketing and sales services, and impairment and amortization of acquired customer relationships.

Total sales and marketing expense was $3.01 million and $1.73 million for the years ended December 31, 2010 and 2009, respectively, an increase of $1.28 million, or 74%.  Sales and marketing expense for the year ended December 31, 2010 includes $1.33 million for impairment of acquired customer relationships and $0.01 million estimated for severance costs. As previously discussed in Recent Developments above, the Company’s contract with its largest professional services customer as determined by historical revenue expired as of December 31, 2010 and was not renewed by the customer. As a result, the Company evaluated the remaining value of acquired customer relationships and concluded that an impairment was necessary to reduce the carrying value to fair value of $0.10 million as of December 31, 2010 and reduced the remaining useful life of customer relationships from approximately 7.5 years to 3.0 years.  The Company also terminated the employment of three sales and marketing employees as a result of the customer not renewing its contract. The total severance costs for the terminated employees include cash and stock-based compensation for accelerated vesting of restricted stock units.

Excluding impairment and severance charges noted above, sales and marketing expense decreased $0.06 million from the year ended December 31, 2009 to the year ended December 31, 2010. Salaries, commissions and bonuses were lower by approximately $0.18 million for the year ended December 31, 2010 compared to 2009. The decrease in these compensation components reflects a period of time with a smaller number of sales and marketing personnel during 2010 as compared to 2009. The Company hired a dedicated sales engineer for the ACS in June 2010. However, the prior vice president of sales left the Company in September 2009 and a Professional Services salesperson left in July 2009.  Neither of these individuals was replaced. 

The decrease in salaries, commissions and bonuses was partially offset by an increase in stock-based compensation of $0.17 million for the year ended December 31, 2010 compared to 2009. The increase in stock-based compensation is primarily due to the matching award of fully-vested stock as of March 31, 2010 associated with the company-wide 10% reduction in cash compensation. The Company continues to engage in an active marketing program and to develop additional sales strategies for the ACS. At this time, we are primarily relying upon IBM to sell the ACS, but may consider the addition of an in-house sales force in the future.

General and Administrative

General and administrative expenses consist primarily of employee salaries and benefits, professional fees (including legal, accounting and investor relations among others), facilities expenses and general insurance.

Total general and administrative expense for year ended December 31, 2010 was $9.81 million compared to $5.02 million for the year ended December 31, 2009, an increase of $4.87 million or 96%. The increase was primarily a result of the following:

·
Employee compensation and benefits, including director fees and stock-based compensation, increased $2.05 million for the year ended December 31, 2010 from the year ended December 31, 2009. The changes include increases of $1.73 million in stock-based compensation and an increase of $0.14 million in cash compensation. The increases in employee compensation are largely due to the company-wide 10% reduction in cash compensation for a matching award of fully-vested stock as of March 31, 2010, personnel changes and an officer’s pay increase.
 
·
Stock-based compensation for non-employee consultants and service providers increased $0.98 million for the year ended December 31, 2010 from the year ended December 31, 2009.  Stock-based compensation includes $0.34 million for the estimated fair value to reinstate Mr. Ruotolo's options to purchase shares of common stock pursuant to the September 20, 2010 settlement agreement. Stock-based compensation subject to vesting that is granted to non-employee consultants is adjusted each period to reflect changes in fair value.  The changes in the associated stock-based compensation are primarily due to changes in our stock price.
 
·
An impairment charge of $0.86 million for the Inventa trade name. As previously discussed in Recent Developments above, the Company’s contract with its largest professional services customer as determined by historical revenue expired as of December 31, 2010 and was not renewed by the customer. As a result, the Company evaluated the remaining value of the trade name, concluded that the carrying value was not recoverable and recorded the charge to fully impair the trade name as of December 31, 2010.
 
·
Professional fees for legal, accounting and investor relations services, excluding stock-based compensation, increased $0.59 million for the year ended December 31, 2010 from the year ended December 31, 2009. The year-over-year increase is primarily due to costs incurred for services associated with the Fletcher and BRG Agreements, the annual shareholder meeting on March 17, 2010, an increase in investor relations activities, consultation and design costs for employee compensation plans associated with the salary reduction program, litigation-related legal fees and the use of additional external resources for accounting and compliance activities.
 
·
Facilities and general insurance expense increased $0.13 million for year ended December 31, 2010 from the year ended December 31, 2009. The Company relocated into smaller and overall less expense facilities in January 2009. However the year-over-year increase from 2009 to 2010 reflects a favorable settlement on the lease of the former corporate headquarters of approximately $0.28 million recorded in late 2009.
 
 
25

 
 
Non-Operating Expense, Net

Non-operating expense, net primarily consists of equity financing costs and interest expense, summarized in the table below.
 
   
For the Years Ended
December 31,
 
   
2010
   
2009
 
Net loss on derivative liabilities
 
$
23,986,628
   
$
--
 
Loss on extinguishment of convertible promissory notes
   
--
     
12,279,380
 
Interest expense
   
964,858
     
2,715,047
 
Other expense, net
   
886,078
     
833
 
   
$
25,837,564
   
$
14,995,260
 
 
The components of the net loss on derivative liabilities for the year ended December 31, 2010 are summarized as follows:

Expense in connection with issuance of derivative liabilities:
       
Fletcher Agreement
 
$
16,249,080
 
BRG Agreement
   
4,988,928
 
    Net change in fair value of derivative liabilities associated with the Fletcher Agreement (an unrealized loss)
   
2,748,620
 
   
$
23,986,628
 

The net change in fair value of derivative liabilities associated with the Fletcher Agreement noted above excludes the effects of the July 15, 2010 amendment to the Fletcher Agreement. The effects of the amendment are recorded in additional paid-in capital within stockholders’ equity. There was no change in the fair value of derivative liabilities associated with the BRG Agreement since it was initially recorded as of December 31, 2010.

Other expense, net includes $0.44 million for the year ended December 31, 2010 for Quarterly Payments to Fletcher based on the number of shares outstanding and unexercised under the Initial Warrant. The Quarterly Payment amount is equal to $0.01 per share into which the Initial Warrant is exercisable for so long as any portion of the Initial Warrant remains outstanding. The value of the Fletcher Quarterly Payments was $0.11 million per quarter throughout 2010. The Company may elect to pay the Quarterly Payment in shares of the Company’s common stock or cash.  As a result of issuing shares pursuant to the BRG Agreement, the anti-dilution provisions of the Fletcher Agreement were triggered causing an increase in the number of shares that Fletcher may purchase under its warrant and a corresponding decrease in the purchase price per share. The new aggregate Fletcher and BRG Quarterly Payment is $0.25 million beginning March 31, 2011.

Other expense, net for the year ended December 31, 2010 also includes $0.44 million for a registration penalty as described in note 13 to the accompanying consolidated financial statements.   The Company was required to file a registration statement with the SEC by July 1, 2010 for all the shares issued and issuable to Fletcher. We recorded a penalty of $0.44 million since we were unable to have a registration statement declared effective by that date. The Fletcher Agreement was subsequently amended on July 15, 2010 to, among other things, waive the monetary penalty for not having the associated registration statement declared effective by July 1, 2010. As a result of the amendment, the liability for the penalty was extinguished as part of the consideration exchanged for entering into the amendment. The Company agreed, however, to file and cause to become effective registration statements in the future to register all of the shares of common stock for resale on or before specified dates. This includes the registration statement declared effective on August 31, 2010, prior to the required date of October 8, 2010 as set forth in the amendment.  

Interest expense for the year ended December 31, 2010 decreased $1.75 million, or 64%, compared to the year ended December 31, 2009.  The decrease is due to less amortization from discounts on convertible promissory notes, as a majority of the notes were converted into Series A Convertible preferred stock during the third quarter of 2009.

The loss on extinguishment of convertible promissory notes for the year ended December 31, 2009 was the result of induced conversion of certain convertible promissory notes during the year ended December 31, 2009.

Income Tax Benefit
 
The Company recorded an income tax benefit of $0.34 million for elimination of a deferred tax liability associated with the Inventa trade name that was impaired during the year ended December 31, 2010.  The Company has not recorded any additional income tax benefit for the year ended December 31, 2010 due to the substantial net operating losses generated by the Company and full valuation allowances on the associated deferred tax assets.

In January 2009, the Company received final net proceeds of $0.08 million ($0.09 million gross proceeds less $0.01 million of expenses incurred) from two third parties related to the sale of $0.26 million of unused net operating loss carryovers and $0.07 million of research and development tax credits for the State of New Jersey from participation in the 2008 New Jersey Economic Development Authority (the "NJEDA") Technology Business Tax Certificate Transfer Program. This program enabled approved, unprofitable technology companies based in the State of New Jersey to sell their unused net operating loss carryovers and unused research and development tax credits to unaffiliated, profitable corporate taxpayers in the State of New Jersey for at least 75% of the value of the tax benefits.  The program was suspended in 2010. 
 
 
 
26

 
 
Liquidity, Capital Resources and Financial Condition
 
The Company had $0.33 million in cash on hand as of December 31, 2010. During the year ended December 31, 2010, the Company used an average of $0.58 million per month for operating activities. As such, the Company secured additional financing to fund operations as summarized under “Cash Provided by Financing Activities” below. The Company has suffered recurring losses from operations and has generated negative cash flow from operations that raises substantial doubt about the Company’s ability to continue as a going concern. The Company also had significant near-term liquidity needs as of December 31, 2010, including $0.25 million currently due on a line of credit and $2.00 million in notes payable due January 31, 2011. Subsequent to December 31, 2010, the Company received the proceeds from the $3.00 million subscription receivable (net of $0.39 million in fees, including $0.24 million in dispute) for the sale of 5.18 million shares of common stock pursuant to the BRG Agreement, $0.06 in proceeds from exercise and issuance of 0.13 million shares of common stock covered by warrants issued in conjunction with prior private placement offerings, and gross proceeds of $0.75 million from the Note and Warrant Purchase Agreements.  The outstanding balance on the line of credit was subsequently repaid and the notes payable were subsequently deferred until January 31, 2013 through the Exchange Agreement. The accompanying consolidated financial statements include additional information about the BRG Agreement in note 13 and the Exchange Agreement and Note Purchase Agreements in note 21. All of these agreements are also discussed in “Recent Developments—Issuance of Shares of Common Stock and Warrants to BRG Investments, LLC.,” “—Exchange of Convertible Promissory Notes” and “—Note and Warrant Purchase Agreements.”

Because of these factors, the opinion of our independent registered public accounting firm included an explanatory paragraph in their report in connection with our accompanying consolidated financial statements as of and for the years ended December 31, 2010 and 2009, stating that there was substantial doubt about our ability to continue as a  going  concern. The Company’s ability to continue as a going concern is dependent upon management’s ability to generate profitable operations in the future and obtain the necessary financing to meet obligations and repay liabilities arising from business operations when they come due. The Company anticipates generating profitable operations from marketing and sales of ACS and the growth of our Professional Services offerings for ACS implementations. If the Company does not generate profitable operations or obtain the necessary financing, the Company may not have enough operating funds to continue to operate as a going concern. Securing additional sources of financing to enable the Company to continue the development and commercialization of proprietary technologies will be difficult and there is no assurance of the Company’s ability to secure such financing. A failure to generate profitable operations or obtain additional financing could prevent the Company from making expenditures that are needed to pay current obligations, allow the hiring of additional development personnel and continue development of its products and technologies. The Company continues actively seeking additional capital through private placements of equity and debt. 

At current cash levels and with proceeds received by the Company of $3.00 million in January 2011 from the subscription receivable from BRG (less $0.39 million in fees, including $0.24 million in dispute) and $0.75 million in March 2011 from the Note and Warrant Purchase Agreements, management believes it has sufficient funds to operate into the second quarter of 2011. Should additional financing not be obtained, the Company will not be able to execute its business plan. The Company may be able to mitigate these factors through the generation of revenue from the sale and licensing of the most recent ACS if the ongoing development efforts are successful and the market demand continues for such products and through additional equity and debt financing. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Cash flows are summarized in the table below.
 
 
Years Ended December 31,
 
 
2010
   
Change
 
2009
 
               
Net cash used in operating activities
$
(6,953,826
)
$
(3,142,146
)
 
$
(3,811,680
)
Net cash used in investing activities
 
(1,798,472
)
 
(1,754,046
)
   
(44,426
)
Net cash provided by financing activities
 
7,914,585
   
4,942,262
     
2,972,323
 
Net decrease in cash
$
(837,713
$
46,070
   
$
(883,783
)

Cash Used in Operating Activities
 
For the year ended December 31, 2010, cash used in operating activities was $6.95 million, an increase of $3.14 million from year ended December 31, 2009. The increase is primarily a result of the increase in headcount as of December 31, 2010 compared to December 31, 2009.
 
Cash Used in Investing Activities
 
For the year ended December 31, 2010, cash used in investing activities was $1.80 million, an increase of $1.75 million from the year ended December 31, 2009, comprised mostly of capitalized costs for software development related to the Company’s ACS. Purchases of property and equipment were less than $0.05 million for both periods.
 
Cash Provided by Financing Activities
 
During the year ended December 31, 2010, cash provided by financing activities resulted from the following:
 
·
An aggregate of $1.39 million in net cash proceeds from the sale of 3.47 million shares of the Company’s common stock at a price of $0.40 per share and warrants to purchase 3.47 million shares of common stock exercisable at $0.50 per share that expire in one year as part of a private placement.
 
 
 
27

 
 
·
An aggregate of $3.68 million in net cash proceeds from the sale of 3.71 million shares of common stock (including proceeds allocated to derivative liabilities) at an average price of $0.99 per share to Fletcher. The Fletcher Agreement is discussed further in note 13 to the accompanying consolidated financial statements and in "Recent DevelopmentsIssuance of Shares of Common Stock and Warrants to Fletcher International, Ltd." under Item 1 "Business."

·
An aggregate of $2.31 million in proceeds from the exercise of options and warrants to purchase 5.45 million shares of common stock.

·
An aggregate $0.55 million in proceeds from the exercise of warrants to purchase 0.55 million shares of preferred stock.

·
Proceeds of $0.05 million from a subscription receivable as of December 31, 2009.

·
Less an aggregate of $0.06 million in principal payments on long-term debt.

From time to time, the Company engages in private placement activities with accredited investors. The private placements sometimes consist of units, which gives the investor shares of restricted common stock (some at a discount to the then-current market price), and warrants to purchase a number of restricted shares of common stock at a fixed price set at a premium to the then-current market price. The warrants (other than the Fletcher and BRG Initial Warrants and Fletcher and BRG Subsequent Warrants) generally have a life of one to three years. As discussed in note 13 to the accompanying consolidated financial statements, the Fletcher and BRG Agreements included initial warrants having terms of approximately nine years.

For so long as any portion of the Fletcher and BRG Initial Warrants remain outstanding, the Company is obligated to pay Fletcher and BRG Quarterly Payments based on the number of shares outstanding and unexercised under the Fletcher Initial Warrant. The aggregate payments to Fletcher and BRG will be $0.25 million per quarter beginning March 31, 2011. The Company has the option to pay the Quarterly Payment in shares of the Company’s common stock or cash.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2010 and 2009, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases, we do not engage in off-balance sheet financial arrangements.

Capital Resources

As of December 31, 2010 and 2009, the Company did not have any material commitments for capital expenditures and does not expect that there will be material commitments for capital expenditures in future periods under its current business plan.

Critical Accounting Policies and Estimates
 
This discussion and analysis of the Company’s financial condition and results of operations is based upon the accompanying consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those summarized below. The Company bases its estimates on historical experience and on various other assumptions that management believes 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 materially from these estimates.
 
In addition to the significant accounting policies summarized in note 2 to the accompanying consolidated financial statements, management believes the following policies are the most sensitive to judgments and estimates in the preparation of the consolidated financial statements.
 
Derivative Financial Instruments

From time to time, the Company issues warrants and options to vendors as consideration to perform services. The Company may also issue warrants as part of a debt or equity placement offering. The Company does not enter into any derivative contracts for hedging or speculative purposes.

The Company accounts for warrants with exercise price reset features, or down-round provisions, as liabilities. Similarly, down-round provisions for issuances of common stock are also accounted for as liabilities. These derivative liabilities are measured at fair value with the changes in fair value at the end of each period reflected in current period income or loss. The fair value of derivative liabilities is estimated using a binomial model or Monte Carlo simulation to model the financial characteristics, depending on the complexity of the derivative being measured. A Monte Carlo simulation provides a more accurate valuation than standard option valuation methodologies such as the Black-Scholes or binomial option models when derivatives include changing exercise prices or different alternatives depending on average future price targets. In computing the fair value of the derivatives at the end of each period, the Company uses significant judgments, which, if incorrect, could have a significant negative impact to the Company's consolidated financial statements.  The input values for determining the fair value of the derivatives include observable market indices such as interest rates, and equity indices as well as unobservable model-specific input values such as certain volatility parameters. For further discussion, see notes 13 and 15 to the accompanying consolidated financial statements.
 
 
 
28

 
 
Goodwill and Other Intangible Assets
 
Goodwill is tested for impairment on an annual basis as of December 31, or whenever impairment indicators arise. The Company utilizes one reporting unit in evaluating goodwill for impairment and assesses the estimated fair value of the reporting unit based on discounted future cash flows. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, further analysis will take place to determine whether or not the Company should recognize an impairment charge.
 
The Company assesses other intangible assets for impairment in conjunction with its assessment of goodwill or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. In connection with the preparation of the accompanying consolidated financial statements, we performed an analysis of the potential impairment, and re-assessed the remaining asset lives, of other identifiable intangible assets acquired in the acquisition of Inventa. As a result of the Professional Services customer not renewing its contract, this analysis and re-assessment resulted in: (1) an impairment charge of $1.55 million in acquired technology, (2) an impairment charge of $1.33 million in customer relationships and (3) an impairment charge of $0.86 million in trade names. We also reduced the remaining useful life of customer relationships from approximately 7.5 years to 3.0 years.  Following the impairments, the carrying value of other intangible assets at December 31, 2010 was $0.10 million.

Revenue Recognition
 
Revenues consist of product revenues representing sales of customized platforms using our intellectual property, licenses and royalties and services revenues representing managed and professional services fees for maintenance and support services. Maintenance and support revenue is deferred and recognized over the related contract period, generally 12-24 months, beginning with customer acceptance of the product.

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 will defer revenue based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element, as determined by the price charged when the element is sold separately.  If the 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 and support fees, is recognized when all of the following criteria are met:
 
·
Persuasive evidence of an arrangement exists;
 
·
Delivery or performance has occurred;
 
·
The arrangement fee is fixed or determinable.  If the Company cannot conclude that a fee is fixed and determinable, then assuming all other criteria have been met, revenue is recognized as payments become due; and
 
·
Collection is reasonably assured.
 
Deferred revenues consisted of annual support and maintenance fees paid in advance by customers, as well as quarterly and annual service fees that are also paid in advance by customers. The fees are amortized into revenue ratably over the related contract period, generally ranging from 3-24 months, beginning with customer acceptance of the product. Deferred revenue also includes license fees for any customer who has been invoiced, but has not yet signed the customer acceptance of delivery and acknowledgment form as required under our revenue recognition policy. For Inventa, revenue contracts are generally for a period of one year or more. The billing frequencies vary, based on the contract. Revenue is deferred until services are rendered.

Stock-Based Compensation
 
The Company has three stock-based employee and director compensation plans (the ANTs software inc. 2000 Stock Option Plan, the ANTs software inc. 2008 Stock Plan and the ANTs software inc. 2010 Stock Plan). The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award, generally three years; however, the Company has also issued stock options with performance-based vesting criteria. All stock-based awards to nonemployees are accounted for at their fair value. The Company has recorded the fair value of each stock option issued to non-employees as determined at the date of grant using the Black-Scholes option pricing model.
 
Capitalized Software Development Costs

Costs that are related to the conceptual formulation and design of licensed programs are expensed as incurred to research and development expense; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. The Company did not establish technological feasibility for the ACS until May 2010, at which time we began capitalizing software development costs. Since then, the Company has been primarily capitalizing the costs of developing significant, value added enhancements and features. Capitalization ceases and amortization of related capitalized amounts begin when the significant enhancements and features are included in the software being sold. The Company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. Costs to provide customer support and maintenance are charged to software cost as incurred.
 
 
 
29

 
 
Recent Accounting Pronouncements
 
Recent accounting pronouncements are summarized in note 2 to the accompanying consolidated financial statements. Currently, we do not expect any recent accounting pronouncements that we have not yet adopted to have a material impact on our consolidated financial statements.

 
Not applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our accompanying consolidated financial statements and the report of our independent registered public accounting firm appear in Part IV of this Annual Report on Form 10-K. Our report on internal controls over financial reporting appears in Item 9A of this Annual Report on Form 10-K.

 
Not Applicable.
 
 
(a) Evaluation of disclosure controls and procedures
 
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  However, during this evaluation the Company identified concerns of a possible control deficiency identified as limited resources and limited number of employees offering support, namely an understaffed financial and accounting function, and the need for additional personnel to prepare and analyze financial information in a timely manner and to allow review and on-going monitoring and enhancement of our controls.
 
(b) Changes in internal control over financial reporting.
 
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, migrating processes or acquisition of subsidiaries.  Management uses the services of a third party contract consulting company to independently monitor, test and review our system of internal control to ensure compliance.
 
(c) Management's report on internal control over financial reporting.
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting are 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
 
To evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an assessment, including testing, using the criteria in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
Based on our assessment, we concluded that at December 31, 2010, the Company’s internal control over financial reporting is effective.
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
 
 
30

 
 
 
None

PART III
 
 
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 2011 Annual Meeting of Stockholders within 120 days after the end of our year ended December 31, 2010.
 
 
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 2011 Annual Meeting of Stockholders within 120 days after the end of our year ended December 31, 2010.
 
 
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 2011 Annual Meeting of Stockholders within 120 days after the end of our year ended December 31, 2010.
 
 
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 2011 Annual Meeting of Stockholders within 120 days after the end of our year ended December 31, 2010.
 
 
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 2011 Annual Meeting of Stockholders within 120 days after the end of our year ended December 31, 2010.

PART IV
 
 
Item 15(a)(1). Financial Statements. The following financial statements are filed herewith:
 
Report of Independent Registered Public Accounting Firm
F-1
   
Consolidated Balance Sheets as of December 31, 2010 and 2009
F-2
   
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
F-3
   
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2010 and 2009
F-4
   
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
F-5
   
Notes to Consolidated Financial Statements
F-7
 
 
 
31

 
 
Item 15(a)(3). Exhibits. The following exhibits are filed as part of this report:
 
Exhibit Number
 
Description
 
 
 
3.1
 
Amended and Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, filed with the SEC on November 29, 2010.)
3.2
 
Certificate of Designation of Rights, Preferences, Privileges and Restrictions of Series A Preferred Stock of ANTs software inc. (Incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2009.)
3.3
 
Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 17, 2008.)
4.1
 
Instrument Defining Rights of Security Holders. (The description of Company’s common stock contained in Company’s Form 10S-B filed with the SEC on September 14, 1999 including any amendment or report filed for the purpose of updating such description.)
5.1
 
Opinion of Morris, Manning & Martin, LLP.
10.1
 
Agreement by and between Company and BRG Investments, LLC dated December 31, 2010. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2011.)
10.2
 
Warrant to Purchase Shares of Company’s Common Stock issued to BRG Investments, LLC by Company. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2011.)
10.3
 
Form of Indemnification Agreement signed with officers and directors of the Company. (Incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000, filed with the SEC on March 22, 2001.)
10.4
 
Amended and restated employment agreement entered into to be effective as of the 28th day of June, 2010, with Joseph Kozak, Chairman, President and Chief Executive Officer. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed with the SEC on August 19, 2010.)
10.5
 
Employment agreement made and entered into to be effective as of January 18, 2010, with David Buckel, Chief Financial Officer. (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed with the SEC on August 19, 2010.)
10.6
 
Employment agreement made and entered into to be effective as of May 14, 2008, with Richard M. Cerwonka, Chief Operating Officer and President, Inventa Technologies Inc. (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed with the SEC on August 19, 2010.)
10.7
 
Retirement and Board Service Agreement dated as of June 26, 2007, with Francis K. Ruotolo.  (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed with the SEC on August 9, 2007.)
10.10
 
Exchange Agreement dated February 7, 2011 by and among ANTs software inc., Gemini Master Fund, Ltd., and Manchester Securities Corp. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2011.)
10.11
 
Guaranty dated February 7, 2011 by Inventa Technologies, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2011.)
10.12
 
Convertible Note due January 31, 2013 in initial principal face amount of $1.2 million, made by the Company in favor of Gemini Master Fund, Ltd. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2011.)
10.13
 
Convertible Note due January 31, 2013 in initial principal face amount of $1.2 million, made by the Company in favor of Manchester Securities Corp. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2011.)
10.14
 
Warrant to purchase 3,333,333 shares of Company’s common stock dated February 7, 2011, issued to Gemini Master Fund, Ltd. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2011.)
10.15
 
Note Purchase Agreement dated March 3, 2011 by and among ANTs software inc., the Purchasers listed therein, and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.16
 
Senior secured promissory note in favor of JGB Capital LP in initial principal face amount of $1,050,000. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.17
 
Senior secured promissory note in favor of JGB Capital Offshore LP in initial principal face amount of $1,050,000. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.18
 
Senior secured promissory note in favor of SAM LLC in initial principal face amount of $2,100,000. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.19
 
Senior secured promissory note in favor of Manchester Securities Corp. in initial principal face amount of $4,200,000. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
 
 
 
32

 
 
 
10.20
 
Warrant Purchase Agreement dated March 3, 2011 by and among ANTs software inc., and the Purchasers listed on Exhibit A thereto. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.21
 
Series B Warrant issued to JGB Capital LP exercisable for 3,559,322 shares of registrant common stock. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.22
 
Series B Warrant issued to JGB Capital Offshore LP exercisable for 3,559,322 shares of registrant common stock. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.23
 
Series B Warrant issued to SAM LLC exercisable for 7,115,645 shares of registrant common stock. (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.24
 
Series B Warrant issued to Manchester Securities Corp. exercisable for 14,237,289 shares of registrant common stock. (Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.25
 
Registration Rights Agreement dated March 3, 2011 by and among ANTs software inc., JGB Management, Inc. and Manchester Securities Corp. (Incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.26
 
Security Agreement dated March 3, 2011 by and among ANTs software inc., Wells Fargo Bank, National Association, JGB Management, Inc. and Manchester Securities Corp. (Incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.27
 
Escrow Agreement dated March 3, 2011 by and among ANTs software inc., Wells Fargo Bank, National Association, and JGB Management, Inc. (Incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.28
 
Escrow Agreement dated March 3, 2011 by and among ANTs software inc., Wells Fargo Bank, National Association, and Manchester Securities Corp. (Incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
10.29
 
Guaranty dated March 3, 2011 granted by Inventa Technologies, Inc. (Incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2011.)
14.1
 
Code of Ethics (Incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003, filed with the SEC on March 30, 2004.)
23.1
 
Consent of WeiserMazars LLP (formerly known as Weiser LLP), Independent Registered Public Accounting Firm.
31.1
 
Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
33

 

 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf as of the 31st Day of March 2011 by the undersigned, thereunto duly authorized.

 
  ANTs software inc.
     
 
By
/s/ Joseph Kozak                    
Joseph Kozak,
Chairman, Chief Executive Officer
and President
 
 
DIRECTORS

 
By
/s/ Joseph Kozak                       
Joseph Kozak, Chairman, Chief
Executive Officer and President
     
 
Date   March 31, 2011
 
 
By
/s/ Craig L. Campbell               
Craig Campbell, Director
     
 
Date   March 31, 2011

 
By
/s/ John R. Gaulding                
John R. Gaulding, Director
     
 
Date   March 31, 2011

 
By
/s/ Robert T. Jett                  
Robert Jett, Director
     
 
Date   March 31, 2011
 
 
By
/s/ Ari Kaplan                        
Ari Kaplan, Director
     
 
Date   March 31, 2011
 
 
By
/s/ Robert H. Kite                   
Robert H. Kite, Director
     
 
Date   March 31, 2011
 
 
By
/s/ Francis K. Ruotolo             
Francis K. Ruotolo, Director
     
 
Date   March 31, 2011
 
 
 
34

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying consolidated balance sheets of ANTs software inc. and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two year period ended December 31, 2010.  The Company’s management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ANTs software inc. and subsidiary as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the years in the two year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant recurring operating losses, decreasing liquidity, and negative cash flows from operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ WeiserMazars LLP

New York, NY
March 31, 2011

 
 
 
F-1

 
 
ANTS SOFTWARE INC.
 
CONSOLIDATED BALANCE SHEETS
 
             
   
December 31,
 
ASSETS
 
2010
   
2009
 
Current assets:
           
Cash
 
$
330,311
   
$
1,168,024
 
Accounts receivable, net
   
536,773
     
560,439
 
Note receivable from customer
   
--
     
400,000
 
Subscription receivable
   
3,062,500
     
50,000
 
Prepaid expenses and other current assets
   
122,733
     
258,718
 
Total current assets
   
4,052,317
     
2,437,181
 
                 
Property and equipment, net of accumulated depreciation and amortization
   
280,189
     
360,078
 
Capitalized software development costs, net of accumulated amortization
   
1,951,398
     
--
 
Goodwill
   
22,761,517
     
22,761,517
 
Other intangible assets, net of accumulated amortization
   
 100,000
     
4,671,084
 
Other assets
   
55,039
     
39,997
 
Total assets
 
$
29,200,460
   
$
30,269,857
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and other accrued expenses
 
$
 1,887,013
   
$
1,805,157
 
Line of credit
   
250,000
     
250,000
 
Current portion of capital lease
   
55,004
     
51,488
 
Current portion of other debt
   
--
     
11,908
 
Deferred revenue, current portion
   
164,811
     
451,568
 
Total current liabilities
   
 2,356,828
     
2,570,121
 
                 
Convertible promissory notes, net of debt discount of $62,500 and $812,500, respectively
   
1,937,500
     
1,187,500
 
Capital lease, less current portion
   
43,705
     
98,709
 
Deferred revenue, less current portion
   
18,084
     
--
 
Deferred tax liability
   
--
     
344,000
 
Derivative liabilities
   
 24,768,796
     
--
 
Total liabilities
   
 29,124,913
     
4,200,330
 
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
    Preferred stock, 50,000,000 shares authorized
   
--
     
--
 
Series A convertible preferred stock, $0.0001 par value; 12,000,000 shares designated; 9,979,139 shares and 9,428,387 shares issued and outstanding as of December 31, 2010 and 2009, respectively (liquidation preference of $9,979,139 and $9,428,387, respectively)
   
998
     
943
 
Common stock, $0.0001 par value; 300,000,000 shares authorized; 130,501,337 shares and 101,892,993 shares issued and outstanding as of December 31, 2010 and 2009, respectively
   
13,050
     
10,189
 
Additional paid-in capital
   
157,032,745
     
139,297,697
 
Accumulated deficit
   
(156,971,246
)
   
(113,239,302
)
        Total stockholders’ equity
   
 75,547
     
26,069,527
 
Total liabilities and stockholders' equity
 
$
 29,200,460
   
$
30,269,857
 
                 
 
See accompanying notes to consolidated financial statements.
 
 
F-2

 
 

ANTS SOFTWARE INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Years Ended
 
   
December 31,
 
   
2010
   
2009
 
Revenues
 
$
6,184,113
   
$
5,811,682
 
                 
Cost of revenues
   
 6,968,591
     
4,999,837
 
                 
Gross (loss) profit
   
(784,478
   
811,845
 
                 
Operating expenses:
               
Research and development
   
3,322,672
     
2,408,201
 
Sales and marketing
   
3,009,569
     
1,733,576
 
General and administrative
   
9,817,956
     
5,016,364
 
Total operating expenses
   
16,150,197
     
9,158,141
 
                 
     Operating loss
   
(16,934,675
)
   
(8,346,296
)
                 
Non-operating expense, net:
               
Net loss on derivative liabilities
   
23,986,628
     
--
 
Loss on extinguishment of convertible promissory notes
   
--
     
12,279,380
 
Interest expense
   
964,858
     
2,715,047
 
Other expense, net
   
886,078
     
833
 
Total non-operating expense, net
   
25,837,564
     
14,995,260
 
                 
Net loss before income tax benefit
   
(42,772,239
)
   
(23,341,556
)
Income tax benefit
   
(344,000
)
   
(80,402
     Net loss
   
(42,428,239
)
   
(23,261,154
)
                 
Deemed dividend related to beneficial conversion on Series A convertible preferred stock
   
1,303,705
     
2,048,534
 
                 
Net loss applicable to common stockholders
 
$
(43,731,944
)
 
$
(25,309,688
)
                 
Basic and diluted net loss per common share
 
$
(0.40
)
 
$
(0.27
)
                 
Shares used in computing basic and diluted net loss per share
   
110,343,542
     
95,026,487
 
                 
                 
 
See accompanying notes to consolidated financial statements.
 
 
F-3

 
 
 
ANTS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
   
Series A Convertible
                               
   
Preferred Stock
   
Common Stock
   
Additional
Paid-in
Capital
             
   
Shares
   
Amount
   
Shares
   
Amount
   
Accumulated
Deficit
   
Total
 
Balance at January 1, 2009
   
--
   
 $
--
     
90,648,369
   
 $
9,065
   
 $
115,963,846
   
$
(87,929,614
)
 
 $
28,043,297
 
Net proceeds and
     subscriptions from private placements
   
--
     
--
     
7,427,580
     
743
     
2,653,786
     
--
     
2,654,529
 
Issuance of warrants to
     purchase 287,500 shares of
     common stock with the
     issuance of two 1%
     convertible notes
   
--
     
--
     
--
     
--
     
78,693
     
--
     
78,693
 
Beneficial conversion of two
     1% convertible notes
   
--
     
--
     
--
     
--
     
20,125
     
--
     
20,125
 
Conversion of 1% notes
   
--
     
--
     
287,500
     
29
     
114,971
     
--
     
115,000
 
Extinguishment of 10%
     convertible promissory
     notes, net of commission
   
--
     
--
     
1,770,833
     
177
     
758,783
     
--
     
758,960
 
Stock issued to placement
     agent for conversion of
     10% convertible
     promissory notes
   
--
     
--
     
23,850
     
2
     
12,354
     
--
     
12,356
 
Stock issued for the extension
     of a 10% convertible
     promissory note and
     interest payments
   
--
     
--
     
57,548
     
6
     
32,796
     
--
     
32,802
 
Extinguishment of promissory
     notes and related accrued
     interest
   
8,928,387
     
893
     
--
     
--
     
15,361,878
     
--
     
15,362,771
 
Issuance of 400,000 shares of
     common stock
     and warrants to purchase
     300,000 shares of common
     stock granted for
     consulting arrangements,
     subject to vesting
   
--
     
--
     
150,000
     
15
     
229,744
     
--
     
229,759
 
Stock issued for employee
     compensation under stock
     plans, subject to vesting
     and net of forfeitures
   
--
     
--
     
1,273,097
     
127
     
426,450
     
--
     
426,577
 
Stock issued for non-
     employee compensation
     under stock plans, subject
     to vesting
   
--
     
--
     
234,216
     
23
     
113,601
     
--
     
113,624
 
Stock-based compensation
     expense – employees
   
--
     
--
     
--
     
--
     
836,627
     
--
     
836,627
 
Stock-based compensation
     expense – non-employees
   
--
     
--
     
--
     
--
     
135,161
     
--
     
135,161
 
Exercise of common stock
     options
   
--
     
--
     
20,000
     
2
     
10,398
     
--
     
10,400
 
Exercise of preferred stock
     warrants
   
500,000
     
50
     
--
     
--
     
499,950
     
--
     
500,000
 
Deemed dividend related to
     beneficial conversion
     feature on Series A
     convertible preferred stock
   
--
     
--
     
--
     
--
     
2,048,534
     
(2,048,534
)
   
--
 
Net loss
   
--
     
--
     
--
     
--
     
--
     
(23,261,154
)
   
(23,261,154
)
Balance at December 31, 2009
   
9,428,387
   
 
943
     
101,892,993
   
 
10,189
   
 
139,297,697
   
 
(113,239,302
)
 
 
26,069,527
 
                                                         
Net proceeds from private
     placement
   
--
     
--
     
3,465,321
     
346
     
1,385,783
     
--
     
1,386,129
 
Net proceeds from sale and
     issuance of common stock
     to Fletcher (note 13)
   
--
     
--
     
3,705,767
     
371
     
459,939
     
--
     
460,310
 
 Exchange of derivatives in
     connection with
     Amendment to Fletcher
     Agreement on July 15,
     2010 (note 13)
    --       --       --       --       5,490,607       --       5,490,607  
Quarterly share payment to
     Fletcher per private
     placement agreement(note
     13)
   
--
     
--
     
726,333
     
73
     
442,895
     
--
     
442,968
 
Issuance of common stock to
     BRG for subscription
     receivable (note 13)
   
--
     
--
     
5,184,033
     
518
     
--
     
--
     
518
 
Stock issued to Fletcher
     pursuant to anti-dilution
     provisions (note 13)
   
--
     
--
     
4,146,169
     
415
     
--
     
--
     
415
 
Vesting and issuance of
     common stock and
     warrants to purchase
     common stock granted for
     consulting arrangements
   
--
     
--
     
913,854
     
91
     
669,642
     
--
     
669,733
 
Stock issued for employee
     and director compensation
     under the stock plans
   
--
     
--
     
4,919,184
       
492
     
2,804,234
     
--
       
2,804,726
 
Stock issued for non-
     employee compensation
     under the stock plan,
     subject to vesting
   
--
     
--
     
101,818
     
10
     
175,467
     
--
     
175,477
 
Stock-based compensation
     expense – employees
     --      
--
     
--
     
--
     
1,291,463
     
--
     
1,291,463
 
Stock-based compensation
     expense – non-employees
   
--
     
--
     
--
     
--
     
787,561
     
--
     
787,561
 
Exercise of employee stock
     options
   
--
     
--
     
299,000
     
30
     
294,820
     
--
     
294,850