UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K/A


(Amendment No. 1)





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





For the year ended December 31, 2009





[  ]              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 (section 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]




1




As of June 30, 2009 the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $36 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 107,236,988 shares of common stock outstanding as of March 31, 2010.





Explanatory Note





This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) hereby amends our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which ANTs software inc. (the “Company”) filed with the Securities and Exchange Commission on March 31, 2010.  The sole purpose of this amendment is to (1) include information omitted from our Annual Report on Form 10-K under Part III, Items 10, 11, 12, 13, and 14 and (2) to provide additional information and disclosure related to registration rights and corresponding penalties included in the Fletcher International, Ltd stock purchase agreement signed on March 12, 2010. The additional information and disclosure related to the registration rights is included under Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital Resources and Financial Condition on page 10 and also under Part IV Item 15. Exhibits, Financial Statement Schedules—Note to Financial Statements 17. Subsequent Events on page F-30.


2









TABLE OF CONTENTSPART IIItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
5PART IIIItem 10.  Directors, Executive Officers and Corporate Governance
14Item 11.  Executive Compensation
21Item 12.  Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters
30Item 13.  Certain Relationships and Related Transactions, and Director Independence
34Item 14.  Principal Accountant Fees and Services
34PART IVItem 15. Exhibits, Financial Statement Schedules
36Signatures
37Exhibits.
39








3





This amended Annual Report and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or if they prove incorrect, would likely cause our results to differ materially from those expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.




Forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "hopes," "may," "will," "plans," "intends," "estimates," "could," "should," "would," "continue," "seeks" or "anticipates," or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, problems incurred in establishing sales and sales channels, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include, but are not limited to, statements under the captions "Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as other sections in this amended Annual Report. You should be aware that the occurrence of any of the events discussed under the heading "Item 1A -- Risk Factors" in the 10-K filed on March 31, 2010 and elsewhere in this amended 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 amended Annual Report are intended to be applicable to all related forward-looking statements wherever they may appear in this amended Annual Report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this amended Annual Report.





4




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  This financial review presents the Company’s operating results for each of the two years in the period ended December 31, 2009, and the Company’s financial condition at December 31, 2009. 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, “Risk Factors” in the 10-K filed on March 31, 2010. In addition, the following review should be read in connection with the information presented in the Company’s consolidated financial statements and the related notes to the consolidated financial statements.
  Results of Operations
  The results of operations for the years ended December 31, 2009 and 2008 are summarized in the table below.
 2009


%

Change


2008Revenues

$
5,811,682



-30
%

$
8,282,729Cost of revenues


4,999,837



55
%


3,230,490Gross profit


811,845



-84
%


5,052,239Operating expenses


9,158,141



-33
%


13,507,419Loss from operations


(8,346,296
)


1
%


(8,455,180
)Other (expense) income, net


(14,995,260
)


-305
%


(3,700,584
)Income tax benefit


80,402



-85
%


527,180Net loss


(23,261,154
)


-100
%


(11,628,584
)Deemed dividend related toSeries A Convertible Preferred Stock


(2,048,534
)






-Loss applicable to common shares

$
(25,309,688
)


-118
%

$
(11,628,584
)Basic and diluted net loss per common share

$
(0.27
)


-80
%

$
(0.15
)Shares used in computing basicand diluted net loss per share


95,026,487



22
%


77,847,729
  Revenues
  The Company’s revenues reflect:
  ·
Service revenues representing managed and profession service fees for database and network maintenance and support services and;
  ·
License fees, royalty fees, maintenance, support and sales of the Company’s ANTs Data Server (“ADS”) technology.
  Revenues for 2009 were almost exclusively made up from service activities and totaled $5.8 million, less than 2008 revenues by $2.4 million.  Total revenues for 2008 reflected less service revenues but the year did benefit from a substantial sale of ADS technology and licensing agreements in the amount of $4.3 million.   This shortfall in 2009 was due to the absence of sales of ADS technology in contrast to 2008 with some offset due to increased 2009 service revenues as the 2008 service revenues included only seven months activity related to the Inventa acquisition in May 2008.  For the year ended December 31, 2009 the top three customers accounted for 97% of total revenues, (Company A, 66%, Company B, 25% and Company C, 6%).  This compared to the top three customers in 2008 contributing 92% of revenues.
  Conditional on the Company’s technology developments being successful, the presence of customer demand and the Company having a competitive advantage, future revenues may include sales and licenses of our ANTs Compatibility Server (“ACS”) product and 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. Sales of the Company’s first ACS product, which translates from Sybase to Oracle, 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 second ACS product differently via the use of an OEM agreement, as more fully discussed in Item 1, Business. The Company is currently in the process of developing the second ACS product for a planned announcement and release in mid-2010. The Company intends to develop additional ACS products based on market demand and the availability of resources for development.
  5
 Cost of Revenues
  Cost of revenues was approximately $5.0 million and $3.2 million for 2009 and 2008, respectively. The increased cost of revenue in 2009 was due to the change in mix of revenue in 2009 compared to 2008.  2009 revenues were primarily the result of managed and professional services with related costs being that of personnel supporting these services.  Cost of revenues in 2008 consisted of personnel costs to provide managed and professional services, separation costs for personnel related to the license and sale of ADS technology, software development costs, and third-party licenses related to the sale and license of ADS. The majority of the 2008 revenues related to the ADS technology products and related fees which were proportionately less compared to the remaining service revenues.
  Operating Expenses
  Operating expenses for the years ended December 31, 2009 and 2008 were as follows (in thousands):
 2009


% of

Total


%

Change


2008


% of

TotalSales and marketing

$
1,734



19
%


-20
%

$
2,155



16
%Research and development


2,408



26
%


-64
%


6,652



49
%General and administrative


5,016



55
%


7
%


4,700



35
%Total operating expenses

$
9,158



100
%


-32
%

$
13,507



100
%
  The Company’s primary operating expenses are salaries, benefits and consulting fees related to developing and marketing ACS, marketing and selling managed and professional services and for the year of 2009 and for 2008, the maintenance and support of ADS. The development of ADS was completed in 2005 and sales and support of that product began during that year.  The ADS technology was sold during 2008. The Company began development of ACS in early 2007.
  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 corporate overhead allocations.
  2009 versus 2008
  Total sales and marketing expense for 2009 was $1.7 million compared to $2.2 million in 2008, a decrease of approximately $420,000 or 20%, due primarily to the following:
 
 ·
2009 salaries and benefits for our sales and marketing staff increased by approximately $200,000 or 22% compared to 2008.  The increase in 2009 was due to the acquisition of Inventa in May 2008 and the resulting presence of personnel for the full twelve months of 2009 compared to seven months in 2008.  Sales consulting fees decreased by approximately $203,000 or 66% due to efficiencies achieved in go-to-market strategy in selling through partners rather than selling directly to end-users, resulting in the elimination of end-user marketing and lead-generation programs.
 
 
 ·
Stock based compensation costs decreased in 2009 by approximately $191,000 due to the repricing of certain stock options and warrants to the market value of our Common Stock as of March 26, 2008 and March 31, 2008 and the issuance of a fully-vested and expensed stock option grant to our CEO during the second quarter of 2008. Compensation expense related to our CEO is recorded 50% to sales and marketing and 50% to general and administrative. The stock option grant was a one-time grant not anticipated to reoccur in the future.
 
 ·
Travel and entertainment and corporate event costs decreased in 2009 by approximately $124,000 or 73% due to decreased travel activities for our sales and marketing staff.
  6
  Research and Development
  Research and development expense consists primarily of employee compensation and benefits, contractor fees to research and developmentservice providers, stock-based compensation and equipment and computer supplies.
  2009 versus 2008
  Total research and development expense for 2009 was $2.4 million compared to $6.7 million in 2008, a decrease of approximately $4.3 million or 64%, due primarily to the following:
  ·
Employee compensation and benefits decreased by approximately $1.9 million or 64% in 2009 due to headcount reductions as compared to the prior year. The headcount was reduced due to the completion of the development of the first generation ACS product.
 
 ·
2009 Stock-based compensation decreased by approximately $783,000 or 81% due to headcount reductions over the prior year as explained earlier.
 
 ·
Contractor fees decreased by approximately $1.3 million or 67% in 2009 due to the reduction in the use of contract research and development services on the ACS product and the elimination of such services for the ADS product.
 
 General and Administrative
  General and administrative expenses consists primarily of employee salaries and benefits, professional fees (legal, accounting, and investor relations), facilities expenses, and corporate insurance.
  2009 versus 2008
  Total general and administrative expense for 2009 was $5.0 million compared to $4.7 million in 2008, an increase of approximately $320,000 million or 7%, due primarily to the following:
 
 ·
Stock-based compensation decreased by approximately $900,000 or 64% primarily due the repricing of certain stock options and warrants to the market value of our Common Stock as of March 26, 2008 and March 31, 2008 and the issuance of a fully-vested and expensed stock option grant to our CEO during the second quarter of 2008. Compensation expense related to our CEO is recorded 50% to sales and marketing and 50% to general and administrative. This was a one-time grant and we do not anticipate it will recur in the future.
 
 ·
Facilities, director fees, insurance and other expense decreased by approximately $480,000 or 48% primarily due to a favorable settlement on the Bayview Plaza lease, the former corporate headquarters, totaling approximately $279,000.
 
 ·
Professional fees increased by approximately $1.3 million or 113% primarily due to expenses relating to the restatement of the 2008 financial statements and an increase in investor relations activities.
 
 ·
Allocations of overhead costs from general and administration to other departments decreased by approximately $260,000 or 60%. Allocations of corporate overhead from general and administrative costs to the other functional departments were based on headcount. These allocations decreased as the number of personnel in other functional departments decreased.
  7
  Other Income (Expense), Net
  Other (expense) income primarily consists of interest expense, loss on the conversion of promissory notes, loss on the extinguishment of promissory notes and to a lesser extent, income earned on our cash and cash equivalents. The components of other income (expense) for the years ended December 31, 2009 and 2008, net, are presented in the table below, (in thousands):
 
 2009


% Change


2008Other (expense) income:Interest expense, convertible notes payable

$
(2,715
)


26
%

$
(3,675
)Loss on extinguishment of convertible promissory notes payable


(12,279
)


-24,458
%


(50
)Interest income


2



-98
%


83Other


(3
)


-95
%


(58
)$
(14,995
)


305
%

$
(3,700
)
 
 2009 versus 2008
  For the twelve months ended December 31, 2009, other (expense) income, a net expense for the period, increased by approximately $11.3 million, or 305%, compared to the twelve months ended December 31, 2008.  The following items significantly impacted other (expense) income between the periods:
  ·
Interest expense decreased by approximately $960,000 or 26%, for the year ended December 31, 2009 as compared to the year ended December 31, 2008 due to a decrease in the amount of amortization from the discounts on the convertible promissory notes as a majority of the notes were converted into Series A Preferred Stock during the third quarter of 2009.
  ·
Loss on the extinguishment of convertible promissory notes increased by approximately $12.2 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008 due to the loss on extinguishment of certain Convertible Promissory Notes.
  ·
Interest income for the year ended December 31, 2009 decreased by approximately 98%, due to lower invested cash balances and interest rates.
  Income Tax Benefit
  In November 2008, the Company was approved by the New Jersey Economic Development Authority (the "NJEDA") to participate in the 2008 NJEDA Technology Business Tax Certificate Transfer Program.  This program enables 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.  In November 2008, the Company received $527,180 of net proceeds ($563,959 gross proceeds less $36,779 of expenses incurred) from a third party related to the sale of approximately $7,297,000 of unused net operating loss carryovers for the State of New Jersey.  During December 2009 the Company was approved to sell additional net operating losses and research and development credits.  In January 2010, the Company received $80,402 ($93,718 gross proceeds less $13,316 of expenses incurred) from two third parties related to the sale of approximately $255,000 of unused net operating loss carryovers and approximately $71,000 of research and development tax credits for the State of New Jersey.
  8
  Liquidity, Capital Resources and Financial Condition
  As of and for the year ended December 31,
 
 2009


Change


2008Net cash used in operating activities

$
(3,811,680
)

$
2,720,031


$
(6,531,711
)Net cash used in investing activities


( 44,426
)

$
3,158,225



(3,202,651
)Net cash provided by financing activities


2,972,323


$
(4,333,152
)


7,305,475Net decrease in cash and cash equivalents

$
(883,783
)

$
1,545,104


$
(2,428,887
)
 
 Cash Used in Operating Activities
  In 2009, cash used in operating activities totaled $3.8 million, a decrease of approximately $2.7 million from 2008. This is a result of the headcount reduction in 2009 as compared to 2008 as well as the reduction in interest payments due to the conversion of debt into equity in 2009 and the payment of interest with stock in 2009 as compared to cash interest payments made in 2008 on the convertible promissory notes.
  Cash Used in Investing Activities
  In 2009, cash used in investing activities totaled approximately $44,000, a decrease of approximately $3.1 million compared to the same period in 2008, due to the acquisition of Inventa in 2008, with $3 million paid in conjunction with issuing 20,000,000 shares of common stock to acquire the stock of Inventa Technologies (see Note 3 of the consolidated financial statements).
  Cash Provided by Financing Activities
  During the year ended December 31, 2009, cash provided by financing activities resulted from the following:
  ·
$339,000 in proceeds from the sale of 847,500 shares of our Common Stock at a price of $0.40 per share as part of a private placement.
 
 ·
$2,215,530  in proceeds from the sale of 6,330,080 shares of Common Stock at $0.35 per share and 6,330,080 Common Stock Warrants, exercisable at $0.40 per share for a period of one year as part of a private placement.
 
 ·
$50,000 in proceeds from the sale of 125,000 of our Common Stock at a price of $0.40 per share and 125,000 Common Stock Warrants exercisable at $0.50 per share that expire in one year as part of a private placement.
 
 ·
$115,000 for convertible promissory with an interest rate of 1%. The notes were immediately converted to 287,500 shares of our Common Stock.
 
 ·
$10,400 in proceeds from the exercise of 20,000 Common Stock options.
 
 ·
$50,000 in proceeds from a line of credit from a financial institution.
 
 ·
$500,000 in proceeds from the exercise of 500,000 Preferred Stock Warrants.
 
 ·
$307,606 in principal payments on long-term debt.
  9
 From time to time, we engage in private placement activities with accredited investors. The private placements sometimes consist of Units, which gives the investor shares of restricted common stock at a discount to the then-current market price, and a warrant 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 generally have a life of one to three years.
  The Company had approximately $1.2 million in cash and cash equivalents on hand as of December 31, 2009. During the year ended December 31, 2009, the Company used approximately $318,000 per month for operating activities. As such, the Company secured additional financing to fund operations as follows:
  During the first quarter of 2010, the Company issued 3,465,321 shares of Common Stock at $0.40 per share and 3,465,321 Common Stock Warrants, exercisable at $0.50 per share for a period of one year, for total gross proceeds of $1,386,128 as part of a private placement.
  On March 12, 2010, the Company entered into an agreement (the “Agreement”) with Fletcher International, Ltd., a company organized under the laws of Bermuda (“Fletcher”), under which Fletcher has the right and, subject to certain conditions, the obligation to purchase up to $10,000,000 of the Company’s common stock in multiple closings as described below.  Fletcher also will receive a warrant to purchase up to $10,000,000 of the Company’s common stock.
  At the initial closing under the Agreement, Fletcher has the right to purchase 1,500,000 shares of the Company’s common stock at $1.00 per share. At subsequent closings, Fletcher has the right to purchase (a) up to an aggregate of $500,000 of the Company’s common stock at a price per share equal to the Prevailing Market Price (as defined therein), (b) up to an aggregate of $3,000,000 of the Company’s common stock at a price per share equal to the greater of (i) $1.25 per share, and (ii) the Prevailing Market Price, and (c) up to an aggregate of $5,000,000 of the Company’s common stock at a price per share equal to the greater of (i) $1.50 per share, and (ii) the Prevailing Market Price.  The Company can require such purchases if certain conditions are satisfied.
  Under the Agreement, Prevailing Market Price is defined as the average of the daily volume-weighted average price for shares of the Company’s common stock for the forty business days ending on and including the third business day before the pricing event, but not greater than the average of the daily volume-weighted average price for shares of the Company’s common stock for any five consecutive or nonconsecutive business days in such forty day period.
  In connection with the Agreement, the Company is required to file a Registration Statement with the Securities and Exchange Commission on or before April 15, 2010 covering such shares, including warrant shares, and to have such registration statement declared effective no later than July 1, 2010.  In the event that the registration statement is not declared effective by July 1, 2010, the Company is obligated to pay to Fletcher an amount equal to 1.5% of the share value, as defined in the Agreement, for each 30 day period, or portion thereof, and increasing by 0.25% for each subsequent 30 day period, or portion thereof, based upon the number of days the registration statement is not declared effective after July 1, 2010.
  Assuming the maximum share coverage of 26,609,536 common shares, including 11,074,197 warrant shares and using the closing share price of $0.90 as of March 31, 2010, the Company would be obligated to pay to Fletcher approximately $359,000 for the first 30 days following July 1, 2010 and approximately $419,000 for the next 30 days following July 1, 2010.  Amounts payable to Fletcher continue to increase each subsequent 30 day period, assuming no decreases in the stock price, and could be significant. The agreement does not provide a limit on the amount that the Company would be obligated to pay to Fletcher for not having an effective Registration Statement. Increases (decreases) in our share price will increase (decrease) the amount the Company would be obligated to pay Fletcher.
  However, the Company believes that through negotiations the Company would pay a prorated portion of the penalty relative to the amount invested to date against the total commitment or the penalty could even be waived. For illustrative purposes, if the effectiveness of the Registration Statement is delayed for 30 days or less, the Company would negotiate to pay to Fletcher a penalty amount of up to approximately $22,000, assuming a daily volume-weighted average stock price of $0.84. The assumed penalty is calculated as the product of (1) 1.5%, (2) an assumed daily volume-weighted average stock price of $0.84 and (3) 1,500,000, the total number of shares issued to Fletcher through April 20, 2010.  Nevertheless, the Company expects to have the Registration Statement declared effective by the SEC before July 1, 2010, but certain aspects of having the Registration Statement declared effective are outside of our control.
  The warrant to be issued to Fletcher covers $10,000,000 of the Company’s common stock, is exercisable at a price per share of $0.9030 subject to certain adjustments, is exercisable for nine years subject to certain extensions, and is exercisable on a net exercise basis. If certain conditions are satisfied, the warrant may be replaced with a new warrant covering $10,000,000 of the Company’s common stock with an exercise price per share of $3.00 subject to certain adjustments, a term of two years subject to certain extensions, and the same net exercise provisions. On March 22, 2010, the Company issued 11,074,197 Common Stock Warrants in conjunction with the Agreement.
  On March 22, 2010, the Company issued 1,500,000 shares of the Company’s common stock at $1.00 per share for total gross proceeds of $1,500,000 in conjunction with the Fletcher Agreement.
  The Company has suffered recurring losses from operations and has both a working and net capital deficiency that raises substantial doubt about the Company’s 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/or obtain the necessary financing to meet obligations and repay liabilities arising from normal business operations when they come due. If further financing is not obtained, 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 our ability to secure such financing. A failure to obtain additional financing could prevent the Company from making expenditures that are needed to pay current obligations, allow the hiring of additional development personnel and continue development of our product and technology. The Company is actively in the process of seeking additional capital through private placements of equity and/or debt. At current cash levels, management believes it has sufficient funds to operate through the fourth quarter of 2010. Should additional financing not be obtained, the Company will not be able to execute its business plan and the recoverability of its intangible assets may become impaired. Management’s plans, if successful, will mitigate the factors that raise substantial doubt about the ability to continue as a going concern. Additionally, the Company may be able to mitigate these factors through the generation of revenue from the licensing of the second ACS product, if the development efforts are successful and the market demand continues for such products. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 10
  Critical Accounting Policies
  Goodwill and 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 evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that an impairment may exist. Intangible assets include proprietary technology, amortized on a straight line basis over a 5-year period; customer relationships, amortized on a straight-line basis over a 10-year period; and a trade name, which has an indefinite useful life and is not being amortized.
  Deferred Revenues
  Deferred revenues consisted of annual support and maintenance fees paid in advance by customers. The fees are amortized into revenue ratably over the related contract period, generally twelve 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.
  Income Taxes
  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
  The Company’s judgment, assumptions and estimates used for the current tax provision take into account the potential impact of the interpretation of Accounting Standards Codification Subtopic 740-10 ("ASC 740-10")  issued by the Financial Accounting Standards Board, and its interpretation of current tax laws and possible future audits conducted by the U.S. tax authorities. ASC 740-10 requires that the Company examine the effects of our tax position, based on the use of our judgments, assumptions, and estimates when it is more likely than not, based on technical merits, that our tax position will be sustained if an examination is performed. The Company adopted the provisions of ASC 740-10 on January 1, 2007.
  Long-Lived Assets
  Long-lived assets such as property and equipment are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the indicators of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets' carrying value, the related assets will be written down to fair value.
  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 twelve 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:
  11
  ·
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.
  Research and Development Expenses
  Costs related to the research, design, and development of products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. Generally, products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
  Equity-Based Compensation
  The Company has two equity-based employee and director compensation plans (the ANTs software inc. 2000 Stock Option Plan and the ANTs software inc. 2008 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 equity-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.
  Recent Issued Accounting Pronouncements
  The Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC is an aggregation of previously issued authoritative U.S. GAAP in one comprehensive set of guidance organized by subject area. Subsequent revisions to U.S. GAAP will be incorporated into the ASC through Accounting Standards Updates (“ASU”).  The Company adopted the provisions of the guidance in the third quarter of 2009.  The adoption did not have a material impact on the Company’s consolidated financial statements.
  The Company adopted ASC 820, “Fair Value Measurements and Disclosures”, in two steps; effective January 1, 2008, the Company adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. This framework does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. Adoption of this guidance did not have a significant impact on our accounting for financial instruments.
  Effective April 1, 2009, the FASB amended ASC 820 in relation to determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. Adoption of this amendment did not have a significant effect on our consolidated financial statements.
  In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption will not impact the Company’s financial position or results of operations.
  In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures”. ASU No. 2009-05 amends Topic 820 of the ASC by providing additional guidance clarifying the measurement of liabilities at fair value.  The amendments did not have a significant effect on the Company’s consolidated financial statements.
 
 12
 
 In May 2008, the FASB issued ASC 470, an accounting standard related to convertible debt instruments which may be settled in cash upon conversion (including partial cash settlement). ASC 470 requires the issuing entity of such instruments to separately account for the liability and equity components to represent the issuing entity’s nonconvertible debt borrowing interest rate when interest charges are recognized in subsequent periods. The provisions of ASC 470 must be applied retrospectively for all periods presented even if the instrument has matured, has been extinguished, or has been converted as of the effective date. The application of ASC 470 did not have a material impact on the Company’s consolidated financial statements.
  In June 2008, the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities found within ASC 260, “Earnings Per Share.” This guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted the guidance effective January 1, 2009. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements.
  In September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure – Amendments for Nonpublic Entities” (“ASU 2009-06”).  ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes and eliminates disclosure required by paragraph 740-10-50-15(a) through (b) for nonpublic entities.  The Company adopted ASU 2009-06 during the quarter ended September 30, 2009. The adoption of ASU 2009-06 had no impact on the Company’s financial position or results of operations as of or for the year ended December 31, 2009.
  In September 2009, the FASB ratified ASU No. 2009-13 (“ASU 2009-13”). ASU 2009-13 addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company does not believe that the adoption of ASU 2009-13 will have a material effect on its consolidated financial statements.
  In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements that Include Software Elements” (“ASU 2009-14”). ASU 2009-14 modifies the scope of the software revenue recognition guidance to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s functionality. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-14 retrospectively. In either case, early adoption is permitted. The Company does not believe that the adoption of ASU 2009-14 will have a material effect on its consolidated financial statements.
  13




PART III




ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




MANAGEMENT AND DIRECTORS





The following table sets forth information with respect to our current executive officers, principal employees, consultants and directors:




Name
Age
PositionJoseph Kozak
60
Chairman, President and Chief Executive Officer, Class 1 Director, term expires at the 2010 Annual MeetingFrancis K. Ruotolo
73
Class 3 Director, term expires in 2012John R. Gaulding
64
Lead Director and Class 3 Director, term expires in 2012Robert H. Kite
55
Class 2 Director, term expires in 2011Robert Jett
65
Class 3 Director, term expires in 2012Ari Kaplan
40
Class 2 Director, term expires in 2011Craig Campbell
54
Class 2 Director, term expires in 2011Dave Buckel
48
Chief Financial Officer. Mr. Buckel commenced employment with the Company in January 2010.Rick Cerwonka
58
Chief Operating Officer and President, Inventa Technologies Inc





Joseph Kozak, Age 60


Chairman, President and Chief Executive Officer




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




Dave Buckel, Age 48


Chief Financial Officer





On January 18, 2010, Mr. Buckel joined the ANTs software inc. as Chief Financial Officer.  For more than ten 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. He has 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.





14





Francis K. Ruotolo, Age 73


Director





Francis Ruotolo was an employee through June 30, 2007, was the Chairman of the Board of directors through September 30, 2007, and became a director of the Company effective January 2, 2001.  Mr. Ruotolo has served as Chairman of the Board, Chief Executive Officer and President.  Prior to joining ANTs, he was a member of the Company’s Board of Advisors.  Before joining the Company, Mr. Ruotolo was a director in the consulting practice of Deloitte & Touche.  Prior to working at Deloitte Consulting Mr. Ruotolo was CEO of The Futures Group, a long term strategic planning consultancy whose clients included:  IBM, American Airlines, Monsanto, Ford Motor Co., Pfizer, and numerous departments of the federal government.  Mr. Ruotolo was Senior Vice President of Macy’s California for seven years and held the same position at Lord & Taylor in New York.  Mr. Ruotolo holds a BA degree in English/Journalism from Northeastern University, Boston, MA.  Mr. Ruotolo resigned as President of the Company in March 2003 and resigned as the Company’s Chief Executive Officer effective January 31, 2005.





John R. Gaulding, Age 64


Lead Director





John R. Gaulding joined the Company’s Board of Directors in January 2001.  Mr. Gaulding is a private investor and consultant in the fields of strategy and organization. He is an independent director and is chairman of the Nominating and Governance Committee of Monster Worldwide, Inc. Mr. Gaulding also serves on the board of Yellow Pages Group, Inc., a publicly held company listed on the Toronto Stock Exchange, where he is also chairman of the CGNC. Previously, Mr. Gaulding was Chairman and CEO of National Insurance Group, a publicly held company providing information and insurance to financial institutions.  He was also President and CEO of ADP Claims Services Group and President and CEO of Pacific Bell Yellow Pages, Inc. Most recently, Mr. Gaulding served as a Senior Advisor to Deloitte Consulting specializing in e-Business strategy with responsibility for advising such clients as Hewlett Packard, 3Com, Bergen Brunswig, Longs Drugstores, SCE, and PG&E.





Robert H. Kite, Age 55


Director





Robert Kite joined the Company’s Board of directors in January 2005.  Since 1981, Mr. Kite has been President and COO of Kite Family Co., Inc. and the Managing General Partner of KFT LLLP, a family owned company whose assets and operations include, but are not limited to, commercial and industrial buildings, land holdings, stocks, bonds, commodities, MRI clinics, and hotel and retail development.  Mr. Kite is a director with three publicly traded companies, two privately held companies, and two charitable organizations. Public companies include: National Energy Group (NEGI) an oil and gas company based in Dallas Texas, Petrol Oil & Gas (POIG), an oil and gas exploration and development company based in Overland Park, Kansas, and Jardinier, developer of highly efficient irrigation systems, based in Santa Ana, California. He also serves on the boards of E2020, an Internet education company, and Financialz, an accounting software company. Mr. Kite’s public service work includes board membership with Child Help USA and the FBI Citizen's Academy.  Mr. Kite previously worked in the construction industry in Saudi Arabia with Beck-Arabia, and in Central America in gold mining and manufacturing operations. He is a graduate of Southern Methodist University with a Bachelor of Science, Political Science and Psychology with a Minor in Business.





Robert Jett , Age 65


Director





Robert Jett joined ANTs software inc.’s Board of Directors in May 2007. He serves as general counsel for eDocs-Express, a company that provides consulting and documentation services to financial institutions. A member of the Oregon State Bar and the Multnomah Bar Association, Mr. Jett has extensive law experience, serving as legal counsel for the First National Bank of Oregon, Security Bank of Oregon, Evans Products Company, CFI ProServices, Inc., and other enterprises. Mr. Jett is best known as the architect and product manager of Laser Pro, the predominant loan documentation software system used by thousands of financial institutions across the country.





15





Ari Kaplan, Age 40


Director





Ari Kaplan joined ANTs software inc.’s Board of Directors in April 2007.  Mr. Kaplan was President of the Independent Oracle Users Group (IOUG) from 2005 to 2008. Mr. Kaplan served as Executive Vice President of IOUG from 2003 to 2004, before assuming President in 2005. Mr. Kaplan is also a Senior Consultant for Datalink Corporation, where he leads the database practice.  Beginning in 1999 and continuing through 2005, Mr. Kaplan served as Chief Executive Officer at Expand Beyond, a mobile business software company. Mr. Kaplan worked as a Chief Architect/Senior Consultant from 1994 to 1999, to companies including Chicago Board Options Exchange, Merck & Co., Inc., 3Com/US Robotics, Hallmark, PricewaterhouseCoopers, and the Department of Defense. Mr. Kaplan also worked as a Senior Consultant for Oracle Corporation from 1992 to 1994.  Mr. Kaplan received a Bachelors of Science degree in Engineering and Applied Sciences from the California Institute of Technology in 1992.





Craig Campbell, Age 54


Director





Craig Campbell joined ANTs software inc.’s Board of Directors in May 2007.  Mr. Campbell is the Chief Executive Officer of Campbell Capital Advisors, LLC, a financial services company located in Chicago, Illinois.  He has been a financial executive for over 25 years.  He has extensive experience as a general partner and advisor for investment and hedge funds and has served in leadership positions for numerous charitable foundations.





Rick Cerwonka, Age 58


Chief Operating Officer and President, Inventa Technologies, Inc.





Rick Cerwonka was appointed Chief Operating Officer of the Company effective August 17, 2009. Mr. Cerwonka joined Inventa Technologies 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.








CORPORATE GOVERNANCE





Corporate Governance Guidelines





The Company believes in sound corporate governance practices and has formal Corporate Governance Guidelines. The Company’s Board adopted these Corporate Governance Guidelines in order to ensure that it has the necessary authority and practices in place to review and evaluate the Company’s business operations as needed and make decisions that are independent of the Company’s management.  The Company regularly monitors developments in the area of corporate governance and reviews processes and procedures in light of such developments.  The Company reviews federal laws affecting corporate governance, such as the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and NASDAQ. The Corporate Governance Guidelines set forth practices with respect to the way employees and directors conduct themselves individually and operate the Company’s business.





Code of Business Conduct and Ethics





The Company has developed and periodically modifies its Code of Business Conduct and Ethics to ensure it is in compliance with the Company’s Corporate Governance Guidelines.  The Code of Business Conduct and Ethics sets forth the policies with respect to the way directors, officers, employees, agents and contractors conduct themselves and operate the Company’s business. The Code of Business Conduct and ethics is publicly available at the “Corporate Governance” section of our website at www.ants.com/investor. The Company believes it has in place procedures and practices, which are designed to enhance its shareholders’ interest.





Board Leadership Structure





Our board has carefully considered the benefits and risks in combining the role of Chairman of the Board and Chief Executive Officer and has determined that Mr. Kozak is the most qualified and appropriate individual to lead our board as its chairman.





16


In determining whether to combine the roles of Chairman of the Board and Chief Executive Officer, our board closely considered our current system for ensuring significant independent oversight of management, including the following: (1) only one member of the current board, Mr. Kozak also serves as an employee; (2) the majority of directors serving on our Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee are independent; (3) our board’s flexibility to select, at any time and on a case-by-case basis, the style of leadership best able to meet our current needs based on the individuals available and circumstances present at the time. Our board further noted that the Compensation Committee annually evaluates the Chief Executive Officer’s performance.





In determining that we are best served by having Mr. Kozak serve as Chief Executive Officer and Chairman of the Board, our board considered the benefits of having the Chief Executive Officer serve as a bridge between management and our board, ensuring that both groups act with a common purpose. Our board also considered Mr. Kozak’s knowledge regarding our operations and the industries and markets in which we compete and his ability to promote communication, to synchronize activities between our board and our senior management and to provide consistent leadership to both our board and our company in coordinating the strategic objectives of both groups. Our board further noted that the combined role of Chairman of the Board and Chief Executive Officer facilitates centralized leadership in one person so that there is no ambiguity about accountability.





Board Risk Oversight





Our board oversees an enterprise-wide approach to risk management that is designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us. In setting our business strategy, our board assesses the various risks being mitigated by management and determines what constitutes an appropriate level of risk for us.





While our board has the ultimate oversight responsibility for the risk management process, various committees of our board also have responsibility for risk management. In particular, the Audit Committee focuses on financial risk, including internal controls, and engages outside independent consultants to assist in managing such controls. Risks related to our compensation programs are reviewed by the Compensation Committee and legal and other risks are reviewed by the Corporate Governance and Nominating Committee. Our board is advised by the committees of significant risks and management’s response via periodic updates.





Meetings and Committees of the Board of Directors





Our Board and its committees meet throughout the year and also hold special meetings and may act by written consent from time to time as appropriate.





Our Board currently has seven directors divided into three classes.  Members of each class serve for a three-year term, with one class of directors being elected each year.  During fiscal 2009, our Board held ten (10) meetings.  Directors Kozak, Kaplan, Gaulding, Holt, Jett, Ruotolo and Kite attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of committees on which he served during fiscal 2009.  Director Campbell attended 60% of the meetings of the Board of Directors in fiscal 2009.  Mr. Holt resigned as a director on November 23, 2009.





The 2009 annual meeting was attended by all the directors.





Our Board has an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee (“CGNC”) and effective October 7, 2009, the Board created an Executive Committee.  Each of these committees has a formal written charter. Copies of these charters may be found on the Company’s website at www.ants.com/investor.





The CGNC makes recommendations to the Board concerning committee memberships, and the Board appoints the members and chairpersons of the committees.





17


The following table summarizes the standing committees of the Board of Directors, their membership and the number of meetings held during 2009 prior to the resignation of Tom Holt on November 23, 2009:





Name

Audit

Compensation

CGNC

Executive

(1)John Gaulding

Chair



Member

ChairThomas Holt (2)

Member

ChairRobert H. Kite

Member

Member

Chair

MemberJoseph KozakFrancis Ruotolo







MemberRobert JettAri KaplanCraig CampbellNumber of meetings held in fiscal 2009 prior to Tom Holt’s resignation

5

1

2

0





(1)
On October 7, 2009, the Board of Directors created an Executive Committee.


(2)
Mr. Holt resigned from the Audit Committee on August 17, 2009 and as a Director on November 23, 2009.





On November 23, 2009 changes were made to the membership of directors on committees of the Board of Directors such that the following directors will serve on the following committees:





Name

Audit

Compensation

CGNC

ExecutiveJohn Gaulding

Chair



Member

ChairRobert H. Kite



ChairJoseph Kozak







MemberFrancis Ruotolo





Member

MemberRobert Jett



Member

Chair

MemberAri Kaplan

Member

MemberCraig Campbell

MemberTotal number of meetings held in fiscal 2009

5

2

3

1





On January 27, 2010, Robert Jett replaced Ari Kaplan on the Audit Committee and Ari Kaplan stepped down from the Compensation Committee. The Audit Committee and the Compensation Committee had not met while Ari Kaplan was a member of these Committees. The following table summarizes the three standing committees of the Company’s Board of Directors as of January 27, 2010.





Name

Audit

Compensation

CGNC

ExecutiveJohn Gaulding

Chair



Member

ChairRobert H. Kite



ChairJoseph Kozak







MemberFrancis Ruotolo





Member

MemberRobert Jett

Member

Member

Chair

MemberAri KaplanCraig Campbell

MemberTotal number of meetings held in fiscal 2009

5

2

3

1




18





Audit Committee





Background





The Audit Committee of the Board of Directors of ANTs, which is comprised solely of independent directors, fulfills a fiduciary role for the Board of Directors, as they represent the shareholders, by providing a direct supervisory link to the independent auditors.  The Board of Directors acts upon the recommendations or advice of the Audit Committee, which has no responsibility to make decisions or take actions, separate from the Board of Directors.  In its role, the Audit Committee undertakes the following advisory, consultative and oversight to:





·
Select the independent registered public accounting firm to be employed or nominate the independent auditor for shareholder approval;


·
Consult with the independent auditor on their plan of audit for the Company;


·
Review with the independent auditor, their report of audit and their letter;


·
Consult with the independent auditor, on the adequacy of internal controls;


·
Ensure the integrity of the Company’s financial reporting;


·
Ensure that the Company’s systems of internal control over financial reporting and disclosure controls are designed and functioning properly;


·
Ensure the Company’s compliance with legal and regulatory requirements; and





The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board and to report the results of their activities to the Board.  The reporting process is the responsibility of the Company’s management, which prepares these Company’s financial statements, while the independent auditors are responsible for auditing those financial statements.





The committee membership must meet the requirements of the Audit Committee policy of the NASDAQ Stock Market.  Accordingly, all of the members are directors independent of management and free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member. Officers or employees of the company do not serve on the committee.





The Audit Committee is composed of three non-employee independent directors selected by the Board, based upon their prior experience in Audit Committee matters, their experience in financial matters and their independence and objectivity.  John Gaulding, the Audit Committee chair, is both independent and a “financial expert” under Item 407(d)(5)(ii) of Regulation S-K.  The remaining two members are Messrs. Robert Jett and Craig Campbell.  All members of the Audit Committee are free of any relationship that would interfere with the exercise of independent judgment by them. During August 2009, Thomas Holt accepted payment for consulting services from the Company and stepped down from the Audit Committee.





The Audit Committee operates under a written charter that complies with applicable SEC and NASDAQ requirements; its charter, which was amended and restated on October 13, 2006, is posted at the “Corporate Governance” section of our website at www.ants.com/investor.





Specific Required Items for the Present Report of the ANTs Audit Committee





The Audit Committee provides this report for the Company’s Amendment No. 1 to its annual report for the fiscal year ended December 31, 2009 on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.  The following disclosure, as required, appears over the printed names of each member of the Audit Committee.  The members of the Audit Committee have signed the current disclosure.





Meetings





The Audit Committee held five (5) meetings during the year ended December 31, 2009.





The Committee met with the Company’s independent registered public accounting firm at four of the five meetings, and reviewed their findings, suggestions and plans for continuing audits.  The Committee discussed strengthening controls as the Company grows into operations and out of research and development, the Company’s plans for compliance with certain provisions of the Sarbanes-Oxley Act of 2002 and the accounting issues related to revenue recognition.  The Audit Committee believes that it has an excellent and forthright working relationship with the Company’s Audit Firm, Weiser LLP.  The Audit Committee selected Weiser LLP to serve as the Company’s independent accountants for the 2009 fiscal year.





19





Audit Committee Report





The following is the report of the Audit Committee with respect to our audited financial statements for the fiscal year ended December 31, 2009





We reviewed and discussed with management the Company’s audited financial statements for the year ended December 31, 2009.  In addition, we discussed with Weiser LLP, the matters required by Statements on Accounting Standards No. 114, “Communications with Audit Committees.”  Also we received from Weiser LLP, the written disclosures required by the Public Company Accounting Oversight Board Rule 3526 and have discussed with Weiser LLP its independence from the Company.  Based upon this information and these materials, we recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K, as amended, for filing with the Securities and Exchange Commission.





John R. Gaulding (chair)


Robert Jett


Craig Campbell





Corporate Governance and Nominating Committee (“CGNC”).





The Corporate Governance Committee is currently composed of Mr. Robert Jett (chairperson), Mr. John Gaulding and Mr. Francis Ruotolo, all of whom are independent directors with the exception of Mr. Ruotolo.  The Company deems Mr. Ruotolo to be not independent, on the basis of his previous employment with the Company.  Mr. Ruotolo has been employed by the Company within the past three years and has received payments in excess of the $120,000 threshold in 2009 and 2008.  The Corporate Governance Committee held four meetings during 2009 and each member of the Corporate Governance Committee attended at least 75% of the total meetings of the committee held when he was a member, with the exception of Mr. Gaulding, who attended 50% of the meetings.





The purpose of the CGNC is to ensure that the Board is properly constituted to meet its fiduciary obligations to shareholders and the Company and that the Company has and follows appropriate governance standards.  Among other matters, the CGNC:





·  Reviews and approves nominees for service on the Board;





·  Considers candidates recommended by shareholders; and





·  Adopts, reviews and implements corporate governance policies and procedures.





The CGNC operates under a written charter that complies with applicable SEC and NASDAQ requirements which was adopted October 13, 2006.  The CGNC has a charter that is publicly available at the “Corporate Governance” section of our website at www.ants.com/investor.





Consideration of Director Nominees





In selecting director candidates, the CGNC identifies nominees by first evaluating the current members of the Board willing to continue in service.  If any Board member does not wish to continue in service or if the Board decides not to nominate a member for re-election, the CGNC evaluates candidates who have the desired skills and experience in light of the criteria outlined below.  The CGNC establishes a pool of potential director candidates based on recommendations from the Board, senior management and shareholders.





The CGNC then reviews the credentials of director candidates (including candidates recommended by shareholders), conducts interviews and makes formal nominations for the election of directors.  In making its nominations, the CGNC considers a variety of factors of potential candidates, including the integrity, experience or knowledge with businesses relevant to the Company’s current and future business plans, experience with businesses of similar size, all other relevant experience, background, independence, financial expertise, compatibility with existing Board members, and such other factors as the CGNC deems appropriate in the best interests of the Company and its shareholders.  Proposed nominees are all evaluated equally irrespective of who suggested such nominee as a director candidate.  The Company has not, to date, paid any third party fee to assist in this process.





20





The CGNC and the Board, acting on the CGNC’s recommendation, will consider proposed nominees whose names are submitted to the Company’s Secretary by shareholders.  Proposals made by shareholders for nominees at an annual shareholders meeting must be received by the Secretary of the Company prior to the end of the fiscal year preceding such annual meeting.  The Company does not have a formal policy with regard to the consideration of any director candidate recommended by shareholders.  The Company has not adopted a formal policy because, to date, it has not received any director nominees from shareholders.  The CGNC reviews periodically whether a formal policy concerning director candidates nominated by shareholders should be adopted.





Any shareholder who wishes to contact the Company’s Board or specific members of the Board may do so by sending their correspondence to the Chief Executive Officer of the Company, Mr. Joseph Kozak, at 71 Stevenson Street, Suite 400, San Francisco, California 94105.  Mr. Kozak will submit your correspondence to the Board of Directors or the appropriate committee or director, as applicable.





Compensation Committee





The Compensation Committee has overall responsibility for approving and evaluating our compensation plans, policies and programs applicable to executive officers.  The Committee reviews and approves executive compensation, ensuring that each element of the executives’ compensation meets compensation objectives.  Among other matters, the committee:


·Sets and administers the policies governing the executive compensation policies, including compensation of the chief executive officer;


·  Administers the employee stock option and stock purchase plans; and





·  Reviews executive and leadership development policies, plans and practices.





At varying times during 2009, the following directors served on the Compensation Committee, (the “Committee”) Mr. Tom Holt (chairperson, resigned from the Board in November 2009), Mr. Robert Kite (member for full year and became chairperson in November 2009, succeeding Mr. Holt), Mr. Robert Jett (added to the Committee in November 2009) Mr. Ari Kaplan (added to the Committee in November 2009 and resigned from the Committee in January 2010).  Therefore, the Company’s Compensation Committee is currently composed of Mr. Robert Kite (chairperson) and Mr. Robert Jett, both of whom are independent directors.





The Compensation Committee held two meetings during 2009 and each member of the Compensation Committee attended at least 75% of the total meetings of the committee held when he was a member.





The Compensation Committee operates under a written charter that complies with applicable SEC and NASDAQ requirements, which was amended and restated effective January 10, 2007.  The Compensation Committee’s charter is posted at the “Corporate Governance” section of our website at www.ants.com/investor.





ITEM 11.   EXECUTIVE COMPENSATION





COMPENSATION DISCUSSION AND ANALYSIS








The following compensation discussion and analysis describes the material elements of the compensation and benefits programs for the Company’s officers.








Role of Compensation Committee





The Company’s Compensation Committee is composed entirely of independent directors (the “Committee”). The Committee has a charter, most recently revised in January 2007, which outlines the Committee’s role in the determination of the Company’s compensation structure.  The Committee works with the Company’s Board of Directors, Chief  Financial Officer and other management in determining, developing, establishing, and implementing the Company’s compensation philosophy and plans for the Company’s executive officers (the “Executives”).  The Committee reviews and approves Executive compensation, ensuring that each element of the Executives’ compensation meets compensation objectives.  The Committee also helps to oversee the Company’s stock option plans (ANTs software inc. 2000 Stock Option Plan, 2008 Stock Plan and 2010 Stock Plan).





21





Compensation Philosophy:  Objectives of the Company’s Compensation Programs





The Company’s compensation programs have four main objectives: attract highly-qualified new Executives, retain them and encourage longevity, motivate them to achieve goals that are consistent with the Company’s overall goals, and reward them for outstanding achievement.





What the Compensation Program is Designed to Reward





The Company’s compensation program is designed to reward achievements that are consistent with the Company’s overall goals.





Independent Compensation Consultant





From time to time, the Company may seek the advice of one or more independent compensation consultants.  In such event, it is currently intended that such consultants would report directly to the Committee and would be used primarily to provide additional assurance that (i) the Company’s compensation programs are sufficiently competitive to successfully motivate, attract and retain Executives, and (ii) the compensation offered by the Company is reasonable and consistent with the Company’s objectives.





Relative to 2009 and through April 15, 2010, the services of a compensation consulting service were not contracted.





Elements of Compensation





The elements of compensation for the Executives are: salary, stock options, and bonuses (either in the form of cash, stock or stock options).





Rationale Behind Each Element





The elements of the Company’s compensation structure are intended to achieve the objectives of the compensation programs.  Determination of salary is made to provide Executives with a base level of pay that allows the Company to remain competitive in both recruiting and retaining qualified Executives.  Stock or Stock options are granted to Executives to provide them with an opportunity to build equity ownership in the Company so that they are motivated to act in ways that increase the value of the Company and that are consistent with shareholder goals.  Bonuses are granted for achieving specific goals or in recognition of extraordinary service provided. Bonuses may be paid in cash, stock or stock options.





Determination of Amount of Each Element





Salary.  In determining salaries, the Committee generally considers five factors.  First, the Company has experienced managers responsible for hiring new Executives and adjusting the salary levels of existing Executives.  These managers have extensive industry knowledge of historical and current pay scales, and apply such knowledge to salary determination.  The Company relies heavily on such knowledge.  Second, as the Company interviews candidates for potential employment, it gathers salary information from those candidates, which is used as a data point in setting salaries.  Third, the Company works with search firms, which provide salary data for their candidates and feedback on the general availability of candidates with the experience for each open position.  Fourth, the Company evaluates general labor market conditions such as the hiring activity of other companies actively looking for candidates with the same skill set and experience.  This provides the Company with a sense of how “tight” or “loose” the labor market is, which may affect salary levels.  Finally, the above factors provide the Company with the data needed to establish a general range within which it will typically make an offer to a new Executive or adjust the salary of an existing Executive.  Within that range, the Company will set the salary level for a specific candidate or existing Executive based on the candidate’s or Executive’s experience, prior performance, references and education.





22


During 2009, the Committee periodically reviewed the performance and compensation of the Executives, though the Company did not have a formal review process in place.  No adjustments were made to the Executives’ salaries in 2009 by the Compensation Committee compared to 2008.




Stock and Stock Options.  In determining stock and stock option grants, which are granted to new and existing Executives, the Committee considers three factors.  First, the Company has experienced managers responsible for hiring new Executives and adjusting the compensation levels of existing Executives.  These managers have extensive industry knowledge of historical and current pay scales, and apply such knowledge to determination of compensation.  The Company relies heavily on such knowledge.  Second, the Company makes an assessment of the “risk” profile of the Company versus other employment options available to a candidate or Executive and adjusts stock and stock option grants accordingly.  Third, for more senior Executives, who have a greater ability to affect the direction of the Company, compensation is more heavily weighted towards equity (in the form of stock or stock options), in order to align their goals with that of shareholders.





Stock options are dated as of the date of Board approval of each option grant and are granted at the closing fair market value on the date of grant.  Optionees are informed of their option grants as soon as practicable and stock options are documented within a few days of the grant date.  The Company does not currently have a policy concerning coordination of option grants with the release of material information.





Bonuses.  The Company awards bonuses in the form of stock, stock options or cash.  Bonuses are generally given by the Compensation Committee on the recommendation of the Executive’s manager, typically the Chief Executive Officer (the “CEO”) and are determined in one of two ways.  First, the Executive has a fixed bonus amount for which he or she is eligible.  On a periodic basis, typically quarterly, the Compensation Committee or the CEO reviews his or her performance against goals and determines whether to pay all, none, or a portion of the bonus.  The fixed amount is established in the Compensation Committee’s or the CEO’s discretion. Second, bonuses are occasionally given as a reward for extraordinary effort.  The amount of bonus is determined at the discretion of the Compensation Committee or the CEO.





In 2009, the Chief Executive Officer, Joseph M. Kozak, was eligible to receive a cash bonus of up to $125,000, each six months.  The Company provided the opportunity to Mr. Kozak to earn such a bonus because he had the greatest ability to influence the direction of the Company.  Mr. Kozak received the $250,000 in bonuses for which he was eligible during the 2009 fiscal year, as reflected in the Summary Compensation Table.  The Board of Directors and the Compensation Committee determined that Mr. Kozak achieved the performance objectives set out for him upon his appointment as Chief Executive Officer.  Further, the Compensation Committee believed the bonuses helped to bring Mr. Kozak’s total compensation closer to the industry standard. In the case of Mr. Cerwonka, he has received bonus payments representing commissions earned relative to sales generated by Inventa Technologies Inc.





How Each Element Fits Into the Company’s Overall Compensation Objectives





Compensation is structured to achieve the goals set out above: attract, retain, motivate and reward.  Decisions regarding the weight of each element in relation to other elements are set as a general rule which can be modified as necessary to address individual situations, but with the overall goals in mind.





Employment Agreements




On March 23, 2007, the Company entered into Employment Agreements with its then Chairman, Francis K. Ruotolo, its Chief Executive Officer and President, Joseph Kozak and its former Chief Financial Officer and Secretary, Kenneth Ruotolo (each an “Employee”).




Under each of the Employment Agreements, each of the Employees (i) is paid an annual salary of $200,000, (ii) is employed “at-will,” (iii) is required to devote their full time and attention to the Company, and (iv) may not compete with the Company, nor interfere with the relationship with any person or entity that has a business relationship with the Company, during their employment, and for 12 months thereafter. On April 15, 2007, Mr. Kozak’s Employment Agreement was amended and restated to increase his annual salary from $200,000 to $250,000 and his annual eligible bonus from $200,000 to $250,000.




Each of the employment agreements also provides that, in the event that the employment of the Employee is terminated (i) by the Employee for Good Cause as defined in the agreement or (ii) by the Company without Cause as defined in the agreement, the Employee shall have thirty days to elect either “Release Severance” or “No-Release Severance.”





23





In the event that the Employee elects “Release Severance” then, upon agreeing to a general release of all claims, (i) the Company shall pay Employee a lump sum equal to 12 months of Employee’s base salary, any accrued but unpaid bonuses, and any and all target bonuses for the 12 month period following termination; and (ii) the Employee shall immediately and fully vest in and have the right to exercise any and all unvested stock options granted to Employee, subject to certain resale restrictions.





In the event that Employee elects the Release Severance, then Employee unilaterally agrees to fully release and forever discharge the Company, and its officers, directors, agents, employees, attorneys, parents, affiliates, and subsidiaries, from any and all claims that Employee has ever had, now has or may now have against such parties.





In the event that the Employee elects “No Release Severance” then (i) the Company shall pay Employee a lump sum equal to 6 months of Employee’s base salary, any accrued but unpaid bonuses, and any and all target bonuses for the 6 month period following termination; and (ii) the Employee shall immediately and fully vest in and have the right to exercise 75% of any and all unvested stock options granted to Employee.





Additionally, each of the employment agreements also provides that, in the event that the employment of the Employee is terminated (i) by the Employee for Good Cause as defined in the agreement or (ii) by the Company without Cause as defined in the agreement, then the exercise period of Employee’s Stock Options is extended for a period of five years and certain restrictions are placed on the Employee’s ability to sell shares purchased on exercise of such options.





On June 26, 2007, the Company entered into a Retirement and Board Service Agreement with Mr. Francis K. Ruotolo, the Company’s former Chairman (the “Agreement”).  Under the Agreement (i) Mr. Ruotolo retired as an employee of the Company, (ii) Mr. Ruotolo continued as a member of the Board of Directors, (iii) Mr. Ruotolo’s Employment Agreement with the Company was terminated, (iv) the Company made retirement payments to Mr. Ruotolo consisting of 10 quarterly payments of $50,000 each, for an aggregate of $500,000, (v) Mr. Ruotolo and the Company agreed that all of Mr. Ruotolo’s stock options as of that date continued unaffected by the Agreement, and (vi) Mr. Ruotolo and the Company entered into a mutual general release of all claims, known and unknown.




On May 15, 2008 Rick Cerwonka entered into an employment agreement with the Company providing for an annual base salary of $250,000. Mr. Cerwonka was also granted options to purchase up to 400,000 shares of Common Stock of the Company at $1.18per share. The options vest over a three-year period and have a life of ten years. The contract also provides for the termination and severance provisions described above. Mr. Cerwonka was appointed Chief Operating Officer of the Company effective August 17, 2009.


On June 18, 2009, Kenneth Ruotolo, the Company’s Chief Financial Officer and Secretary terminated his employment with the Company.  Mr. Ruotolo is the son of Company Director Francis K. Ruotolo, who was re-elected as a  Director of the Company at the annual meeting held on March 17, 2010.





On January 18, 2010, David Buckel entered into an employment agreement with the Company and was appointed as the Chief Financial Officer of the Company. The Company and Mr. Buckel have entered into an employment and non-competition agreement providing for an annual base salary of $250,000, of which 10% will be paid in Company Common Stock. Mr. Buckel also was granted options to purchase up to 500,000 shares of Common Stock of the Company at $0.61 per share. The options vest ratably over a three-year period and have a life of ten years. Mr. Buckel is eligible for a semi-annual bonus of $125,000 with the option to be paid in cash or stock as well as 100,000 stock options per year during the initial three years of his contract.





Mr. Buckel did not have any prior related transactions with the Company or any family relationships with any Director or officer of the Company.





Separation Agreements





On June 18, 2009, Kenneth Ruotolo, former Chief Financial Officer and Secretary, terminated his employment with the Company under his 2007 Employment Agreement.  On his resignation, which Mr. Ruotolo believed was for good cause, he elected the “Release Severance” provision of his Employment Agreement. See Recent Actions below for more information regarding Mr. Ruotolo’s separation.





Change In Control Arrangements





The Company’s stock option agreements provide for accelerated vesting of stock options, under certain circumstances involving a change in control of the Company.  If there is a merger or acquisition, or if there is a sale or transfer of the Company’s assets, the optionee will be granted a Merger Consideration Exercise Right, in which the optionee is given the right to purchase or receive the consideration which is received or receivable by the Company’s stockholders.  In the event that the surviving entity does not recognize the optionee’s Merger Consideration Exercise Right, the option shall become fully vested.





24




Defined Contribution Plan





The Company offers the Section 401(k) Savings/Retirement Plan (the "401(k) Plan”), a tax qualified retirement plan to all eligible employees, including the executive officers.  The 401(k) Plan permits eligible employees to defer from 1% to 100% of their annual eligible compensation subject to certain limitations imposed by the Internal Revenue Code.  The employees’ elective deferrals are immediately vested and non-forfeitable in the 401(k) Plan. The Company has not made matching contributions to the 401(k) plan in 2009 or through April 15, 2010.





Perquisites and Other Personal Benefits





During fiscal year 2009, the Company did not offer its executive officers perquisites other than the standard benefit plan offered to all other employees.





Recent Actions





On September 9, 2009, Kenneth Ruotolo, the Company’s former Chief Financial Officer and Secretary 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 18, 2009 termination, in the Superior Court of the State of California, in and for the County of San Francisco.  Mr. Ruotolo is seeking damages, attorneys’ fees and declaratory relief.  We believe that this lawsuit is without merit and intend to continue vigorously defending ourselves. Mr. Ruotolo’s father, Francis K. Ruotolo, is a Director of the Company.





COMPENSATION COMMITTEE REPORT





The Compensation Committee of the Board of Directors has reviewed, and has discussed with management, the Company’s Compensation Discussion and Analysis contained in this annual report.





Based on the review and discussion, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Amendment No. 1 to annual report for the fiscal year ended December 31, 2009 on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2010.





This report is submitted on behalf of the members of the Compensation Committee:





Robert H. Kite, (chair)


Robert Jett





25




TABLES





Summary Compensation Table





Summary Compensation Table for Fiscal 2009, 2008 and 2007





The table below provides information regarding the compensation and benefits earned during fiscal 2009, 2008 and 2007 by each of the executive officers and other highly-compensated employees of the Company as of December 31, 2009:





Name and Principal Position

(a)

Year

(b)


Salary

($)

(c)


Bonus

($)

(d)


Stock/Options Awards

($)

(3)(f)


All Other Compensation

($)

(i)


Total

($)

(j)Joseph Kozak

Chairman, President and

Chief Executive Officer  (1)


2009

2008

2007



230,208

250,000

250,000



250,000

250,000

250,000



129,833

693,929

120,694



-

-

-



610,041

1,193,929

620,694Kenneth Ruotolo

Former Chief Financial

Office and, Secretary


2009

2008

2007



96,013

200,000

200,000



-

35,000

-



30,214

193,277

54,907



-

-

-



126,227

428,277

254,907Rick Cerwonka

President of Inventa

Technologies Inc.(2)


2009

2008

2007



225,000

250,000

-



131,518

50,000

-



100,701

38,549

-



-

-

-



457,219

338,549

-Alton Dinsmore

Vice President, Development


2009

2008

2007



161,146

175,000

156,250



45,000

60,000

60,000



55,408

152,840

74,732



-

-

-



261,554

387,840

290,982Kenneth Markovich

Vice President, Sales


2009

2008

2007



172,256

175,000

179,431



15,000

25,000

60,000



49,128

95,532

113,608



-

-

-



236,384

295,532

353,039





(1)
Joseph Kozak was appointed Chief Executive Officer effective August 16, 2006 and Chairman of the Board of Directors effective October 1, 2007. In October 2006, Mr. Kozak entered into a stock option agreement with the Company to receive the right to exercise a stock option to purchase up to 165,000 shares of common stock, to be vested upon the achievement of a specific milestone.  This option was cancelled and a new option granted, also covering 165,000 shares of common stock, on May 1, 2007. The new option vests monthly over three years.  In May 2008 Mr. Kozak received a fully vested stock option under which he had the right to purchase up to 750,000 shares of common stock at an exercise price of $1.18 per share.  During March 2009, Mr. Kozak was granted 62,500 of common stock, vesting in March 2010, in lieu of a 10% reduction in 2009 salary.  During 2009, 2008 and 2007, Mr. Kozak was eligible for a $125,000 cash bonus each six months.  Upon review of Mr. Kozak’s achievements for fiscal 2009, 2008 and 2007, the Compensation Committee awarded Mr. Kozak the two six-month bonuses for fiscal 2009, 2008 and 2007.





(2)
Rick Cerwonka’s service to the Company began in 2008 as part of the acquisition of Inventa Technologies, Inc. Mr. Cerwonka was appointed Chief Operating Officer of the Company effective August 17, 2009.  During 2009, Mr. Cerwonka’s was granted 62,500 of common stock, vesting in March 2010, in lieu of a 10% reduction in 2009 salary.





(3)
The amounts in this column represent the compensation cost of stock and stock option awards (granted in 2009 and prior years) recognized during 2009, 2008, and 2007 and have been calculated in accordance with US GAAP using the Black-Scholes option pricing model, utilizing certain assumptions as outlined in the footnotes to the Company’s financial statements (“2009 financial statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, June 30, and September 30, 2009, and other periodic filings with the SEC (as modified by guidance provided by the SEC).




26




Grants of Plan-Based Awards in Fiscal 2009








The following table sets forth certain information regarding grants of plan-based awards to each of our named executive officers and other highly-compensated employees during fiscal 2009.  Please refer to “Compensation Disclosure and Analysis” for further discussion.





Name
Grant

Date

(6)
Estimated Future Payouts Under

Non-Equity Incentive Plan Awards
Estimated Future Payouts Under

Equity Incentive Plan Awards
All Other

Stock

Awards:

Number

of Shares

of Stock

or Units

(#)
All Other

Option

Awards:

Number

of

Securities

Und-

erlying

Options

(#)
Exercise

or Base

Price of

Option

Awards

($/Sh)

(7)
Grant Date

Fair Value

of Option

Awards

($) (8)Thresh-

old

($)
Target

($)
Max-imum

($)
Thresh-

old

(#)
Target

(#)
Max-

imum

(#)(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)Joseph

Kozak

Chairman,

President,

and Chief

Executive

Officer(1)
3/2009






62,500

0.55
34,375Kenneth

Ruotolo

Former

Chief

Financial

Officer and

Secretary

(2)Rick

Cerwonka,

President,

Inventa

Technologies

(3)
3/2009






62,500

0.55
34,375Alton

Dinsmore

Vice

President, Development

(4)
3/2009






43,750

0.55
24,063Kenneth

Markovich

Vice

President,

Sales

(5)







(1)
The Company granted Mr. Kozak 62,500 shares of Common Stock in March 2009 in lieu of a 10% reduction in 2009 base compensation. The grant became fully vested in March 2010.




27




(2)
The Company granted Mr. Ruotolo 50,000 shares of Common Stock in March 2009 which were later forfeited.






(3)
The Company granted Mr. Cerwonka 62,500 shares of Common Stock in March 2009 in lieu of a 10% reduction in 2009 base compensation. The grant became fully vested in March 2010.






(4)
The Company granted Mr. Dinsmore 43,750 shares of Common Stock in March 2009 in lieu of a 10% reduction in 2009 base compensation. The grant became fully vested in March 2010.






(5)
The Company granted Mr. Markovich 43,750 shares of Common Stock in March 2009 in lieu of a 10% reduction in 2009 base compensation. The grant was forfeited upon Mr. Markovich’s departure from the company in September 2009.






(6)
The grant dates of all stock grants coincide with the date such stock grants were approved by the Company’s Board of Directors.






(7)
The exercise price of each option award is the same as the closing market price of the Company’s Common Stock on the grant date of the award.






(8)
The amounts represent the total fair value of the option awards on grant date, calculated in accordance with US GAAP using the Black-Scholes pricing model, utilizing certain assumptions as outlined in the footnotes to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, June 30, and September 30, 2009, and other periodic filings with the SEC (as modified by guidance provided by the SEC).




28





Outstanding Equity Awards at Fiscal 2009 Year End





Option Awards
Stock Awards (1)Name
Number of

Securities

Underlying

Unexercised

Options

Exercisable

(#)
Number of Securities

Under-

lying

Unexer-

cised Options

Unexer-

cisable (#)
Equity

Incentive

Plan

Awards:

Number of Securities

Under-

lying

Unexer-

cised Un-

earned

Options (#)
Option

Exercise

Price ($)
Option

Expiration

Date
Number of

Shares or

Units of

Stock that

Have Not Vested  (#)
Market

Value of

Shares or

Units of

Stock that

Have Not

Vested ($)
Equity

Incentive

Plan

Awards:

Number of Unearned

Shares,

Units,or

Other

Rights that

Have Not

Vested ($)
Equity

Incentive Plan

Awards:

Market or

Payout Value

of Unearned

Shares, Units,

or Other

Rights that

Have Not

Vested ($)(a)
(b) (2)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)Joseph Kozak
125,000


0.87
5/4/2015
(1)  62,500
0.55

34,375Chairman, President
125,000


0.87
6/10/2015and Chief Executive
135,000


0.87
10/13/2015Officer
200,000


0.87
6/18/2016142,083
22,917

0.87
4/30/2017750,000


1.18
5/15/2018Kenneth Ruotolo
-
-
-
-
-
-
-
-
-Former ChiefFinancial Officer andSecretary(3)Rick Cerwonka
211,102
188,898

1.18
5/15/2018
(1)  62,500
0.55

34,375President, ChiefOperating Officer,Inventa Technologies(2)Alton Dinsmore
50,000


0.87
7/18/2015
(1)  43,750
0.55

24,063Vice President,
25,000


0.87
6/18/2016Development
75,000


0.87
10/12/201610,000


0.87
11/13/2016125,000


0.87
9/10/201729,167
20,833

0.87
3/26/2018Kenneth Markovich
38,889


0.87
09/30/2010
(1)     -Vice President, Sales
80,000


0.87
09/30/2010100,000


0.87
09/30/201025,000


0.87
09/30/2010




(1)
The Company issued stock awards in 2009 in lieu of a 10% decrease in base compensation. In the case of Mr. Markovich, his grant was forfeited upon his departure from the company in September 2009.




(2)
Rick Cerwonka’s service to the Company began in 2008 as part of the acquisition of Inventa Technologies, Inc. Mr. Cerwonka was appointed Chief Operating Officer of the Company effective August 17, 2009.





(3)
Kenneth Ruotolo terminated his employment with the Company on June 18, 2009.   His stock options outstanding at that time expired three months from the termination date.  Therefore, there were no stock options outstanding pertaining to Mr. Ruotolo at December 31, 2009.





(4)
Unless otherwise noted, all outstanding option awards were fully vested as of December 31, 2009.





29





ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


The following table sets forth, as of December 31, 2009, information regarding ownership of the Company’s common stock by:


·
each person known by the Company, based on filings pursuant to Section 13(d) or (g) under the Exchange Act, to own beneficially more than 5% of the outstanding shares of our common stock as of December 31, 2009;


·
the persons named in the Summary Compensation Table; and


·
all directors and executive officers as a group.





Unless otherwise indicated, the address of each director and officer is: c/o ANTs software inc., 71 Stevenson Street, Suite 400, San Francisco, California 94105.





Name and Address of Beneficial Owner

Number of Shares

of Common Stock (a)


Percent of

ClassConstantin Zdarsky (1)

c/o Time Hanlon, Alley, Maass, Rogers & Lindsay, P.A.

340 Royal Poinciana Way, Ste. 321,

Palm Beach, FL 33480


30,759,677



19.8
%Lyle P. Campbell (2)

c/o Berry-Shino Securities, Inc.

15100 N. 78th Way, Suite #100

Scottsdale, AZ 85260


12,914,200



8.3
%Alton Dinsmore


22,917



*Kenneth Markovich


243,889



*Directors and Executive OfficersJoseph Kozak (3)


1,577,583



1.01
%Francis K. Ruotolo (4)


809,018



*John R. Gaulding (5)


342,232



*Robert H. Kite (6)


728,750



*Craig Campbell (7)


5,499,480



3.54
%Ari Kaplan (8)


159,791



*Robert Jett (9)


102,143



*Rick Cerwonka (10)


273,602



*Former Officer:Kenneth Ruotolo (11)


12,000



*All directors and executive officers as a group (8 persons) (12)


9,492,599



6.10
%





* Less than one percent





a)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and derives from either voting or investment power with respect to securities. Shares of Common Stock issuable upon conversion of the promissory notes or shares of Common Stock issuable upon exercise of warrants and options currently exercisable, or exercisable within 60 days of December 31, 2009, are deemed to be beneficially owned for purposes hereof. There were 101,892,993 shares of common stock outstanding as of December 31, 2009. For purposes of computing the percentages under this table, 155,544,852 shares of common stock were treated as issued and outstanding as of December 31, 2009.





(1)
Includes 9,745,700 shares of Common Stock owned by Mr. Zdarsky, warrants to purchase up to 9,075,728 shares of Common Stock, and the right to acquire 11,938,249 shares of Common Stock pursuant to Convertible Preferred Stock.





30





(2)
Includes 3,914,200 shares of Common Stock owned by Mr. Lyle Campbell and the right to acquire 9,000,000 shares of Common Stock pursuant to Convertible Preferred Stock.





(3)
Includes 38,000 shares of Common Stock purchased on the open market by Mr. Kozak, stock grant of 62,500 shares which vested in March 2010 and vested options to purchase up to 1,477,083 shares of Common Stock. Unvested options of 22,917 are excluded.





(4)
Includes 47,143 shares of Common Stock purchased by Mr. Ruotolo through a private offering, approved by the Company’s Board of Directors and directed to certain accredited investors, 10,000 shares of Common Stock purchased on the open market and vested options to purchase up to 751,875 shares of Common Stock.





(5)
Includes 62,857 shares of Common Stock owned by Mr. Gaulding, warrants to purchase up to 229,375 shares of Common Stock and vested options to purchase up to 50,000 shares of Common Stock.





(6)
Includes 325,000 shares of Common Stock purchased by Mr. Kite through a private offering, approved by the Company’s Board of Directors and directed to certain accredited investors, 125,000 shares of Common Stock purchased through the exercise of warrants, warrants to purchase up to 183,750 shares of Common Stock, and vested options to purchase up to 95,000 shares of Common Stock. Unvested options of 85,000 are excluded.





(7)
Includes 882,814 shares of Common Stock purchased by Mr. Craig Campbell through a private offering, approved by the Company’s Board of Directors and directed to certain accredited investors, the right to acquire 4,500,000 shares of Common Stock pursuant to a convertible Preferred Stock note, and vested options to purchase 116,666 shares of Common Stock.  Unvested options of 70,834 are excluded.





(8)
Includes vested options to purchase 159,791 shares of Common Stock by Mr. Kaplan. Unvested options of 70,834 are excluded.





(9)
Includes 27,143 shares of Common Stock purchased by Mr. Jett on the open market and vested options to purchase 75,000 shares of Common Stock.





(10)
Includes stock grant of 62,500 shares to Mr. Cerwonka which vested in March 2010 and vested options to purchase up to 211,102 shares of Common Stock. Unvested options of 188,898 are excluded.





(11)
Includes 12,000 shares of Common Stock purchased through a private offering, approved by the Company’s Board of Directors.  On June 18, 2009, Kenneth Ruotolo, former Chief Financial Officer and Secretary, terminated his employment with the Company under his 2007 Employment Agreement.





(12)
This calculation does not include the beneficial ownership of the former officer who was named executive officer.








Section 16(a) Beneficial Ownership Reporting Compliance







Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.





To the best of the Company’s knowledge, with the exception of the following untimely filings, all of the Company’s other officers, directors and 10% shareholders timely filed the reports required to be filed under Section 16(a) of the Securities Exchange Act of 1934, as amended, during the fiscal year ended December 31, 2009.





Untimely Section 16(a) Beneficial Ownership Reports:





·
Form 4 filed by director and executive officer Joseph Kozak on February 9, 2009 for a transaction dated January 29, 2009;


·
Form 4 filed by non-affiliate Donald Hutton, on January 25, 2010 for a transaction dated March 1, 2009;


·
Form 4 filed by affiliate Lyle Campbell on July 8, 2009 for a transaction dated July 2, 2009;




31




·
Form 4 filed by 10% shareholder Constantin Zdarsky on July 8, 2009 for a transaction dated July 2, 2009; also on October 20, 2009 for a transaction dated September 14, 2009; and


·
Form 4/A director Robert Kite on January 6, 2010 for a transaction dated May 15, 2008;








DIRECTOR COMPENSATION TABLE





Director Summary Compensation Table for Fiscal 2009





The following table summarizes the total compensation earned or paid by the Company to directors who were not executive officers as of December 31, 2009.








Name (1)

(a)

Fees Earned

or Paid in

Cash ($) (2)

(b)


Option

Awards ($)

(3)

(d)


All Other Compensation

($)

(g)


Total ($)

(h)Craig Campbell


19,000



27,097



-



46,097John  R. Gaulding (4)


43,000



23,398



-



66,398Robert T. Jett


21,000



17,302



-



38,302Ari Kaplan


21,000



27,097



-



48,097Robert H. Kite


36,000



32,516



-



68,516Francis K. Ruotolo


20,500



-



-



20,500Tom Holt (5)


31,000



47,542



-



78,542





(1)
Joseph Kozak, the Company’s Chairman and Chief Executive Officer, is not included in this table as he is an employee of the Company and thus receives no compensation for his service as a director.  Mr. Kozak’s compensation as an executive officer of the Company is shown in the Summary Compensation Table in the Executive Compensation section of this document.





(2)
Includes fees payable for service as a director, committee chair or committee member as described under Compensation of Directors following this table.





(3)
The amounts in this column represent the compensation cost of stock option awards and warrants (granted in 2008 and prior years) recognized during 2009, and have been calculated in accordance with US GAAP using the Black-Scholes option pricing model, utilizing certain assumptions as outlined in the footnotes to the Company’s financial statements (“2009 financial statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  No options were granted in 2009.





(4)
Mr. Gaulding was the Lead Director during 2009.





(5)
Mr. Holt resigned as a Director on November 23, 2009.





32





Additional Information with Respect to Director Equity Awards





Name

Stock Awards

Outstanding at

Fiscal Year End

(#) (1)


Option Awards

Outstanding at

Fiscal Year End

(#) (2)


Stock

Awards

Granted

During

Fiscal 2009

(1) (#)


Option

Awards

Granted

During

Fiscal 2009

(#)


Grant Date

Fair Value of

Options ($)

(3)Craig Campbell


-



187,500



-



-



-John  R. Gaulding


-



279,375



-



-



-Robert T. Jett


-



75,000



-



-



-Ari Kaplan


-



230,625



-



-



-Robert H. Kite


-



363,750



-



-



-Francis K. Ruotolo


-



751,875



-



-



-Thomas Holt (4)


-



311,250



-



-



-


(1)
The Company did not have any stock awards outstanding as of fiscal year end 2009.


(2)
Includes both vested and unvested options and warrants to purchase Common Stock of the Company.


(3)
There were no options granted in 2009.


(4)
Mr. Holt resigned as a Director on November 23, 2009.
 
 Annual Retainers





Effective for fiscal year 2009, the Company paid cash compensation to non-employee directors.  In addition to the fees indicated below, incremental fees are paid for meeting attendance and committee membership or chairmanship, as follows:





Position

Annual AmountNon-employee - Board Chair

$
25,000Non-employee – Lead Director

$
25,000Non-employee Directors

$
15,000Meeting attendance - in person

$
1,000Meeting attendance – telephonic

$
500Audit Committee – Chair

$
7,500Audit Committee – Member

$
3,000Compensation Committee - Chair

$
5,000Compensation Committee - Member

$
1,500Corporate Governance and Nominating Committee - Chair

$
5,000Corporate Governance and Nominating Committee - Member

$
1,500Executive Committee – Chair

$
1,500


Non-employee directors are granted stock options in recognition of their service.  Such directors are granted an option to purchase up to 150,000 shares of common stock, which vest monthly over their three-year board service term.  Non-employee directors who chair a committee are granted an additional 30,000 share option with the same vesting schedule.





Indemnification Agreements





We have entered into Indemnification Agreements with each of our executive officers and directors that provide for indemnification against certain possible actions, lawsuits, judgments, legal and professionals’ fees, and costs which may be brought against them in the course of their service.  Such agreements do not provide indemnification for acts and omissions for which indemnification is not permitted under Delaware law.





33




ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE


Related Transactions





Since January 1, 2009 there were no transactions, and there are no proposed transactions, in which we were or are to be a participant, involving an amount in excess of $120,000, and in which any related person had or will have a direct or indirect material interest, except for the $50,000 quarterly payments made to Francis Ruotolo from June 2007 through September 2009 as more fully described above under Executive Compensation..





The Audit Committee of the Company’s Board of Directors is responsible for reviewing any transaction with related persons and making recommendations to the Board of Directors for consideration.





Director Independence





The entire Board of non-employee directors, with the exception of Francis Ruotolo, are “Independent” directors, as defined by applicable rules and regulations of the SEC and Nasdaq Stock Market.  The Company deems Francis Ruotolo to be not independent, on the basis of his previous employment with the Company.  Mr. Ruotolo has been employed by the Company within the past three years and has received payments in excess of the $120,000 threshold in 2008 and 2009 as more fully described above under Executive Compensation.





Beneficial Investor and Director Relationship





As noted in the Beneficial Shareholder’s table included herein, Lyle P. Campbell is a beneficial shareholder of 8.30% of the Common Stock of the Company.  In May 2007, Mr. Campbell’s son Craig Campbell joined the Company’s Board of Directors.  Mr. Craig Campbell is also a direct shareholder of the Company, beneficially owning 3.54% of the Company’s Common Stock.





ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES




Weiser LLP has served as the Company’s independent registered public accounting firm since January 15, 2009.  Prior to Weiser LLP’s engagement, the Company had engaged the accounting firm Burr, Pilger & Mayer, LLP, whose services were dismissed as of January 13, 2009. During fiscal 2009 and 2008 we retained Burr, Pilger & Mayer to provide services in the following categories, for the fees indicated:




Description

2009


2008Audit fees

$
80,130


$
117,425Audit related fees


-



28,941Tax fees


-



5,000All other fees


-



14,176Total

$
80,130


$
165,542





During fiscal 2009 we retained Weiser LLP to provide services in the following categories, for the fees indicated:





Description

2009


2008Audit fees

$
203,795


$
-Audit related fees


336,067



-Tax fees


23,785



-All other fees


-



-Total

$
563,647


$
-





Audit Fees





These represent aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Company’s annual financial statements and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.





34





Audit Related Fees





Audit-related fees include reviews of interim financial statements, Forms 10-Q and related financial information.





Tax Fees





Comprise of services for tax compliance and tax return preparation.





All Other Fees





All other fees include research, consultation and discussions related to various accounting and tax issues.





The Company’s Audit Committee pre-approved the principal types of services (audit, audit assurance and tax preparation) provided by the principal accountant during the year ended December 31, 2009. 100% of “Audit-Related Fees”, 100% of “Tax Fees” and 100% of “All Other Fees” were approved by the Company’s Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X. The Company’s Audit Committee has considered whether the provision of services rendered by its accountants is compatible with maintaining the accountant’s independence. The Audit Committee reviews in advance, and grants any appropriate pre-approvals of, (i) all auditing services to be provided by the principal accountant and (ii) all non-audit services to be provided by the principal accountant as permitted by Section 10A of the Securities Exchange Act of 1934, and not specifically prohibited under the Sarbanes-Oxley Act of 2002, and in connection therewith approves all fees and other terms of engagement.





35




PART IV
  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  Documents filed as part of this report:
  Consolidated Financial Statements
  Report of Independent Registered Public Accounting Firm
F-1Balance Sheets as of December 31, 2009 and 2008
F-2Statements of Operations for the years ended December 31, 2009 and 2008
F-3Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2009 and 2008
F-4Statements of Cash Flows for the years ended December 31, 2009 and 2008
F-5Notes to Financial Statements
F-7
 36


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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two year period ended December 31, 2009.  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 as of December 31, 2009.  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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the years in the two year period ended December 31, 2009 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/ Weiser LLP
 
 New York, NY
 March 31, 2010
 
 F-1
  ANTS SOFTWARE INC.CONSOLIDATED BALANCE SHEETSDecember 31,ASSETS

2009


2008Current assets:Cash and cash equivalents

$
1,168,024


$
2,051,807Accounts receivable


560,439



383,445Notes receivable from customer


400,000



2,000,000Restricted cash


-



125,000Prepaid expense and other current assets


308,718



164,844Total current assets


2,437,181



4,725,096Property and equipment, net


360,078



399,093Other intangible assets, net


4,671,084



5,504,081Goodwill


22,761,517



22,761,517Other assets


39,997



67,018Total assets

$
30,269,857


$
33,456,805LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable and other accrued expenses

$
1,805,157


$
1,445,043Line of credit


250,000



200,000Current portion of other long-term debt


63,396



-Current portion of convertible promissory notes, net of debt discount of $0 and $15,916,respectively


-



234,084Deferred revenue


451,568



487,121Total current liabilities


2,570,121



2,366,248Long-term liabilities:Convertible promissory notes, net of debt discount of $812,500 and $8,549,964, respectively


1,187,500



2,703,260Other long-term debt


98,709



-Deferred tax liability


344,000



344,000Total liabilities


4,200,330



5,413,508Commitments and contingenciesStockholders' equity:Preferred stock, 50,000,000 shares authorized


-



-Series A convertible preferred stock, $0.0001 par value; 12,000,000 shares designated; 9,428,387 shares and -0- shares issued and outstanding as of December 31, 2009 and 2008, respectively (liquidation preference of $9,428,387 as of December 31, 2009)


943



-Common stock, $0.0001 par value; 200,000,000 shares authorized; 101,892,993 and 90,648,369 shares issued and outstanding as of December 31, 2009 and 2008, respectively


10,189



9,065Additional paid-in capital


139,297,697



115,963,846Accumulated deficit


(113,239,302
)


(87,929,614
)Total stockholders’ equity


26,069,527



28,043,297Total liabilities and stockholders' equity

$
30,269,857


$
33,456,805See accompanying notes to consolidated financial statements
  F-2
  ANTS SOFTWARE INC.CONSOLIDATED STATEMENTS OF OPERATIONS2009


2008Revenues:Products

$
32,250


$
4,970,385Services


5,779,432



3,312,344Total revenues


5,811,682



8,282,729Cost of revenues:Products


-



511,993Services


4,999,837



2,718,497Total cost of revenues


4,999,837



3,230,490Gross profit


811,845



5,052,239Operating expenses:Sales and marketing


1,733,576



2,155,211Research and development


2,408,201



6,652,346General and administrative


5,016,364



4,699,862Total operating expenses


9,158,141



13,507,419Operating loss


(8,346,296
)


(8,455,180
)Other (expense) income:Interest income


2,277



82,816Other


(3,110
)


(58,404
)Loss on extinguishment of convertible promissory notes


(12,279,380
)


(49,940
)Interest expense


(2,715,047
)


(3,675,056
)Total other (expense) income


(14,995,260
)


(3,700,584
)Net loss before income tax benefit


(23,341,556
)


(12,155,764
)Income tax benefit


80,402



527,180Net loss


(23,261,154
)


(11,628,584
)Deemed dividend related to beneficial conversion on Series A convertible preferred stock


(2,048,534
)


-Net loss applicable to common stockholders

$
(25,309,688
)

$
(11,628,584
)Basic and diluted net loss per common share

$
(0.27
)

$
(0.15
)Shares used in computing basic and diluted net loss per share


95,026,487



77,847,729See accompanying notes to consolidated financial statements
 
 F-3
  ANTS SOFTWARE INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY (DEFICIT)Series A ConvertiblePreferred Stock


Common Stock


Additional

Paid-in

CapitalShares


Amount


Shares


Amount


Accumulated

Deficit


TotalBalance at January 1, 2008


-


$
-



57,398,445


$
5,740


$
74,957,098


$
(76,301,030
)

$
(1,338,192
)Proceeds from private placements, net of cash commissions of $367,200


-



-



13,202,424



1,320



7,246,485



-



7,247,805Shares issued in connection with acquisition of Inventa Technologies, Inc.


-



-



20,000,000



2,000



23,998,000



-



24,000,000Beneficial conversion feature


-



-



-



-



1,355,586



-



1,355,586Fair value of conversion feature upon modification of convertible promissory notes


-



-



-



-



5,226,069



-



5,226,069Proceeds from option and warrant exercises


-



-



47,500



5



32,665



-



32,670Stock-based compensation expense- employees


-



-



-



-



3,015,662







3,015,662Stock-based compensation expense- non-employees


-



-



-



-



132,281



-



132,281Net loss


-



-



-



-



-



(11,628,584
)


(11,628,584
)Balance at December 31, 2008


-



-



90,648,369



9,065



115,963,846



(87,929,614
)


28,043,297Proceeds and subscriptions from private placements


-



-



7,427,580



743



2,653,786



-



2,654,529Issuance of 287,500 warrants in connection with two 1% convertible notes


-



-



-



-



78,693



-



78,693Beneficial conversion of two 1% convertible notes


-



-



-



-



20,125



-



20,125Conversion of 1% notes


-



-



287,500



29



114,971



-



115,000Extinguishment of 10% convertible promissory notes, net of commission


-



-



1,770,833



177



758,783



-



758,960Stock issued to placement agent as commission for conversion of 10% convertible promissory notes


-



-



23,850



2



12,354



-



12,356Stock issued for the extension of a 10% convertible promissory note and interest payments


-



-



57,548



6



32,796



-



32,802400,000 shares of common stock and 300,000 warrants granted for consulting arrangements, subject to vesting


-



-



150,000



15



229,744



-



229,759Stock issued for employee compensation under the 2008 Stock Plan, subject to vesting


-



-



1,273,097



127



426,450



-



426,577Stock issued for non-employee compensation under the 2008 Stock Plan, subject to vesting


-



-



234,216



23



113,601



-



113,624Stock-based compensation expense - employees


-



-



-



-



836,627



-



836,627Stock-based compensation expense - non-employees


-



-



-



-



135,161



-



135,161Exercise of common stock options


-



-



20,000



2



10,398



-



10,400Extinguishment of promissory notes and related accrued interest


8,928,387



893



-



-



15,361,878



-



15,362,771Exercise of preferred stock warrants


500,000



50



-



-



499,950



-



500,000Deemed 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
)

$
26,069,527See accompanying notes to consolidated financial statements
 
 F-4
  ANTS SOFTWARE INC.CONSOLIDATED STATEMENTS OF CASH FLOWS2009


2008Cash flows from operating activities:Net loss

$
(23,261,154
)

$
(11,628,584
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,023,745



827,155Amortization of debt issuance costs


2,032,641



83,404Amortization of discount on notes payable


-



2,509,496Amortization of warrant issued to customer


-



57,674Stock-based compensation expense


1,511,989



3,147,942Stock-based interest expense


32,802



-Stock-based consulting expense


229,760



-Loss on extinguishment of convertible promissory notes


12,279,380



49,940Loss (gain) on disposal of fixed assets


-



78,645Changes in operating assets and liabilities:Accounts receivable


(176,994
)


348,395Restricted cash


125,000



67,574Prepaid expenses and other current assets


14,408



83,424Notes receivable from customer


-



(2,500,000
)Payments received on notes receivable from customer


1,600,000



500,000Other assets


27,020



(12,582
)Accounts payable and other accrued expenses


785,276



(53,310
)Deferred revenue


(35,553
)


(90,884
)Net cash used in operating activities


(3,811,680
)


(6,531,711
)Cash flows from investing activities:Purchases of property and equipment


(44,426
)


(161,068
)Proceeds from disposal of property and equipment


-



5,861Acquisition of Inventa, net of cash acquired


-



(3,047,444
)Net cash used in investing activities


(44,426
)


(3,202,651
)Cash flows from financing activities:Proceeds from private placements - equity, net of cash commissions


2,604,529



7,247,805Proceeds from private placements - convertible promissory notes, net of commissions


115,000



-Proceeds from exercise of options and warrants


10,400



32,670Proceeds from exercise of preferred stock warrants


500,000



-Net proceeds from line of credit


50,000



25,000Principal payments on long-term debt


(307,606
)


-Net cash provided by financing activities


2,972,323



7,305,475Net decrease in cash and cash equivalents


(883,783
)


(2,428,887
)Cash and cash equivalents at beginning of year


2,051,807



4,480,694Cash and cash equivalents at end of year

$
1,168,024


$
2,051,807See accompanying notes to consolidated financial statements
  F-5
  ANTS SOFTWARE INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 312009


2008Supplemental disclosure of cash flow information:Cash paid for interest

$
462,024


$
1,003,358Non-cash investing and financing activities:Prepaid insurance premiums financed by a loan

$
69,514


$
-Assets acquired under capital leases


150,197Extinguishment of 1% promissory notes to common stock


115,000



-Extinguishment of 10% promissory notes to common stock, net of commission


771,316



-Common stock issued to placement agent for note conversion into common stock


13,356



-Extinguishment of promissory notes and issuance of Series A convertible preferred stock


3,154,063



-Payment of accrued interest with Series A convertible preferred stock


425,161



-Common stock subscription receivable


50,000



-Deemed dividend related to beneficial conversion feature on Series A convertible preferred stock


2,048,534



-Common stock issued to placement agent allocated to additional paid-in capital


-



51See accompanying notes to consolidated financial statements
  F-6
 
 ANTS SOFTWARE INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1. Description of Business
  Nature of Operations
  ANTs software inc. developed the ANTs Compatibility Server and continues to develop additional Compatibility Server products. The ANTs Compatibility Server ("ACS") brings the promise of a fast, cost-effective method to move applications from one database to another and enables enterprises to achieve cost efficiencies by consolidating their applications onto fewer databases. The Company’s IT managed services and professional services division provides pre- and post-sales services related to the ACS and application migration, application and database architecting, monitoring and management.
  Principles of Consolidation
  The consolidated financial statements include the accounts of ANTs software inc. and its wholly-owned subsidiary, Inventa Technologies, Inc. ("Inventa") from the date of acquisition of Inventa on May 30, 2008, through December 31, 2009 (collectively referred to as the "Company"). All significant intercompany transactions and accounts have been eliminated.
  2. Significant Accounting Policies
  Basis of Presentation and Continuation as a Going Concern
  The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and contemplate continuation of ANTs software inc. (the “Company”) as a going concern.  However, the Company has suffered recurring losses from operations and has a working and net capital deficiency that raises substantial doubt about the Company’s ability to continue as a going concern.  The Company has had minimal revenues since inception, incurred losses from operations since its inception and has a net accumulated deficit during its years of operations totaling $113,239,302, as of December 31, 2009. The Company’s ability to continue as a going concern is dependent upon management’s ability to generate profitable operations in the future and/or obtain the necessary financing to meet obligations and repay liabilities arising from normal business operations when they come due. If further financing is not obtained, 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 our ability to secure such financing. A failure to obtain additional financing could prevent the Company from making expenditures that are needed to pay current obligations, allow the hiring of additional development personnel and continue development of our product and technology. The Company is actively in the process of seeking additional capital through private placements of equity and/or debt. At current cash levels, management believes it has sufficient funds to operate through the fourth quarter of 2010. Should additional financing not be obtained, the Company will not be able to execute its business plan and the recoverability of its intangible assets may become impaired. Management’s plans, if successful, will mitigate the factors that raise substantial doubt about the ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
  There have been no major changes in the Company’s significant accounting policies during the year ended December 31, 2009. The information furnished reflects all adjustments (all of which were of a normal recurring nature), which, in the opinion of management, are necessary to make the consolidated financial statements not misleading and to fairly present the financial position, results of operations, and cash flows on a consistent basis.
  Use of Estimates
  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis , the Company evaluates its estimates and assumptions including, but not limited to, allowance for doubtful accounts receivable, recoverability of long-lived and intangible assets, the fair value of the warrants and debt issued in conjunction with the issuance of the promissory notes, the fair value of the warrants extended and the Series A Convertible Preferred Stock (“Series A”) issued in conjunction with the extinguishment of promissory notes and assumptions incorporated in determining stock-based compensation.  Actual results could differ from these estimates.
  F-7
 
 Fair value of Financial Instruments
  The Company's carrying amount reported in the balance sheet for cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to the immediate or short-term maturity of these financial instruments. The carrying values of the convertible promissory notes approximate their fair values. To determine the fair value of the convertible promissory notes, the Company estimated the fair value by first determining the Company's effective borrowing rate. The effective borrowing rate was estimated by considering the Company's high credit risk and high risk of nonperformance. The Company then evaluated the present value of the future cash flows for convertible promissory notes.
  Cash and Cash Equivalents
  All highly liquid investments having original maturities of three months or less are considered to be cash and cash equivalents. Cash equivalents consist of short-term money market instruments.
  Accounts Receivable
  Receivables are stated at net realizable value.
  Allowance for Doubtful Accounts
  In general, allowances for doubtful accounts may be maintained to reserve for potentially uncollectible trade receivables. Management reviews trade receivables to identify customers with known disputes or collection issues.  The Company may also provide a reserve based on the age of the receivable. In determining any reserve, judgments are made about the credit-worthiness of the customer based on ongoing credit evaluations. Historical level of credit losses and current economic trends that might impact the level of future credit losses are also considered. Receivable balances are written off when the company determines they are uncollectible.
   Charged toBeginning


Operating





EndingBalance


Expenses


Deductions


BalanceAllowance for doubtful accounts:Years Ended December 31,2009

$
-


$
-


$
-


$
-2008

$
-


$
-


$
-


$
-
  
 Restricted Cash
  Restricted cash consisted of a 365-day certificate of deposit in the principal amount of $125,000 as of December 31, 2008 and was held by Silicon Valley Bank with an annual interest rate of 0.75% that matures each year on July 31. The funds were pledged to collateralize the Company's revolving credit card facility. Management closed the revolving credit card facility during 2009. As of December 31, 2008, amounts due on the credit card facility were included in accounts payable and other accrued expenses on the Consolidated Balance Sheets. There were no amounts due on the credit card facility as of December 31, 2009.
  Property and Equipment
  Property and equipment is carried at cost and is depreciated using a straight-line method over estimated useful lives of three to five years. The costs of leasehold improvements are amortized over the term of the lease or estimated economic lives, whichever is shorter. Expenditures for improvement or expansion of property and equipment are capitalized. Repairs and maintenance are charged to expense as incurred. When the assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts with the resulting gain or loss reflected in the Consolidated Statements of Operations.
  F-8
 
 Goodwill and 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. As part of the Company’s analysis, the company considered the estimated future revenues of the existing services division’s contracts on a contract by contract basis using renewal rates of 0 to 100% and assumed a growth rate of 5% for new contacts. For the estimated future revenues from the Company’s Global OEM agreement, the Company used its best estimate of future contracts and discounted the revenues from those contracts by 35%.
  The Company evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that an impairment may exist. All of our intangible assets are subject to amortization. Intangible assets include proprietary technology, amortized on a straight line basis over a 5-year period; customer relationships, amortized on a straight-line basis over a 10-year period; and a trade name, which has an indefinite useful life and is not being amortized.
  Deferred Revenues
  Deferred revenues consisted of annual support and maintenance fees paid in advance by customers. The fees are amortized into revenue ratably over the related contract period, generally twelve 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 written for a period of one year or more. The billing frequencies vary, based on the contract. Revenue is deferred until services are rendered.
  Income Taxes
  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
  Long-Lived Assets
  Long-lived assets such as property and equipment are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the indicators of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets' carrying value, the related assets will be written down to fair value.
  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 twelve months, beginning with customer acceptance of the product. The Company uses the residual method to recognize revenue if 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.
  F-9
 
 Research and Development Expenses
  Costs related to the research, design, and development of products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ends when a product is available for general release to customers. Generally, products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
  Advertising Costs
  The Company expenses advertising costs as incurred. The expense recognized for the years ended December 31, 2009 and 2008 was approximately $8,000 and $18,000, respectively.
  Equity-Based Compensation
  The Company has two equity-based employee and director compensation plans (the ANTs software inc. 2000 Stock Option Plan and the ANTs software inc. 2008 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 equity-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.
 
 Recent Issued Accounting Pronouncements
 
 The Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC is an aggregation of previously issued authoritative U.S. GAAP in one comprehensive set of guidance organized by subject area. Subsequent revisions to U.S. GAAP will be incorporated into the ASC through Accounting Standards Updates (“ASU”).  The Company adopted the provisions of the guidance in the third quarter of 2009.  The adoption did not have a material impact on the Company’s consolidated financial statements.
  The Company adopted ASC 820, “Fair Value Measurements and Disclosures”, in two steps; effective January 1, 2008, the Company adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. This framework does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. Adoption of this guidance did not have a significant impact on our accounting for financial instruments.
 
 Effective April 1, 2009, the FASB amended ASC 820 in relation to determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. Adoption of this amendment did not have a significant effect on our consolidated financial statements.
 
 In January 2010, the FASB issued ASU No 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements” and amended the existing disclosure guidance on fair value measurements, which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption will not impact the Company’s financial position or results of operations.
 
 In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures”. ASU No. 2009-05 amends Topic 820 of the ASC by providing additional guidance clarifying the measurement of liabilities at fair value.  The amendments did not have a significant effect on our consolidated financial statements.
  F-10
  In May 2008, the FASB issued ASC 470, an accounting standard related to convertible debt instruments which may be settled in cash upon conversion (including partial cash settlement). ASC 470 requires the issuing entity of such instruments to separately account for the liability and equity components to represent the issuing entity’s nonconvertible debt borrowing interest rate when interest charges are recognized in subsequent periods. The provisions of ASC 470 must be applied retrospectively for all periods presented even if the instrument has matured, has been extinguished, or has been converted as of the effective date. The application of ASC 470 did not have a material impact on the consolidated financial statements.
  In June 2008, the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities found within ASC 260, “Earnings Per Share.” This guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted the guidance effective January 1, 2009. The implementation of this standard did not have a material impact on the consolidated financial statements.
  In September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure – Amendments for Nonpublic Entities” (“ASU 2009-06”).  ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes and eliminates disclosure required by paragraph 740-10-50-15(a) through (b) for nonpublic entities.  The Company adopted ASU 2009-06 during the quarter ended September 30, 2009. The adoption of ASU 2009-06 had no impact on the Company’s financial position or results of operations as of or for the year ended December 31, 2009.
  In September 2009, the FASB ratified ASU No. 2009-13 (“ASU 2009-13”). ASU 2009-13 addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company does not believe that the adoption of ASU 2009-13 will have a material effect on its consolidated financial statements.
  In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements that Include Software Elements” (“ASU 2009-14”). ASU 2009-14 modifies the scope of the software revenue recognition guidance to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s functionality. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-14 retrospectively. In either case, early adoption is permitted. The Company does not believe that the adoption of ASU 2009-14 will have a material effect on its consolidated financial statements.
  3. Business Combination
  On May 30, 2008 the Company completed the acquisition of Inventa, a Delaware corporation. Inventa was acquired in order to expand the Company's presence in the database compatibility and consolidation technology market by using Inventa's workforce to increase exposure to the market. The acquisition was accounted for as a purchase business combination and, accordingly, a portion of the purchase price was allocated to the tangible assets, liabilities assumed and identifiable intangible assets. The balance of the purchase price was allocated to goodwill. Fair values were estimated using the discounted cash flow method based on information then available, including estimates of future operating results. The primary method used in determining fair value estimates was the income approach, which attempts to estimate the income producing capability of the asset. The Company issued 20,000,000 shares valued at $1.20 per share to the shareholders of Inventa. The value of the Company's stock was valued at the average fair market value of the Company's free trading shares from two days before the date of announcement through two days after the date of the announcement.
  F-11
  The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of the acquisition:
 Purchase price:Cash paid to seller

$
3,000,000Deferred tax liability


344,000Fair value of common stock issued to seller


24,000,000Fair value of convertible notes payable issued to seller


1,355,586Acquisition costs, comprised of legal and accounting fees


57,357Total purchase price

$
28,756,943Net assets acquired:Assets acquired:Cash

$
9,913Accounts receivable


734,886Prepaids and other current assets


59,567Property and equipment


153,277Security deposit


20,015Total


977,658Less liabilities assumed:Line of credit


175,000Trade payables and other accrued expenses


268,045Deferred revenues


529,187972,232Tangible assets in excess of liabilities assumed


5,426Intangible assets:Trade name


860,000

(Indefinite life)Propriety technology


3,200,000

(5 year life)Customer relationships


1,930,000

(10 year life)Identified intangible assets


5,990,000Goodwill


22,761,517Total purchase price

$
28,756,943
  Had the acquisition of Inventa taken place at January 1, 2008, the pro forma consolidated results of operations would have had revenues totaling $10,532,003 (unaudited) for the year ended December 31, 2008; net loss totaling $11,884,574 (unaudited) for the year ending December 31, 2008; and net loss per share - basic and diluted totaling $(0.15) (unaudited) for the year ended December 31, 2008. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
  4.Basic and Diluted Net Loss per Share
  Basic net loss per common share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Net loss applicable to common shareholders for 2009 was adjusted to take into effect a deemed dividend related to a beneficial conversion feature on Series A Convertible Preferred Stock in the amount of $2,048,534.
  The following table presents the calculation of basic and diluted net loss per common share for the years ended December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, the Company had 8,467,198 and 10,402,512 anti-dilutive shares of Common Stock related to stock options, respectively. At December 31, 2009 and 2008, the Company had 2,500,000 and 12,106,115 anti-dilutive shares of Common Stock related to convertible promissory notes. At December 31, 2009 and 2008, warrants for the purchase of 16,125,522 and 4,557,941 shares of Common Stock, respectively, were anti-dilutive. At December 31, 2009 and 2008, the Company had 26,938,249 and -0- anti-dilutive shares of Common Stock related to convertible Preferred Stock, respectively.  These anti-dilutive instruments are not included in the calculation of basic and diluted net loss per common share.
  Loss Applicable to


Common


Loss perCommon Shares


Shares


Common(Numerator)


(Denominator)


ShareYear ended December 31, 2009Basic and diluted net loss per share

$
(25,309,688
)


95,026,487


$
(0.27
)Year ended December 31, 2008Basic and diluted net loss per share

$
(11,628,584
)


77,847,729


$
(0.15
)
  F-12
  5. Prepaid Expenses and Other Current Assets
  As of December 31, 2009 and 2008, prepaid expenses consisted of the following items:
 
 2009


2008Prepaid Insurance and Employee-related

$
47,517


$
38,403Unbilled Revenue


-



13,415Prepaid Marketing


5,000



2,064Subscriptions Receivable


50,000



-Receivable from sale of tax losses


80,402



-Prepaid debt issuance costs


-



4,121Other


125,799



106,841$
308,718


$
164,844
  6. Property and Equipment
  Property and equipment, summarized by major category, at December 31, 2009 and 2008 was as follows:
 
 2009


2008Computers and software

$
737,894


$
609,221Furniture and fixtures


177,785



154,729Leasehold improvements


105,650



202,450Total property and equipment


1,021,329



966,400Less: accumulated depreciation and amortization


(661,251
)


(567,307
)Property and equipment, net

$
360,078


$
399,093
  Depreciation expense for 2009 and 2008 was approximately $191,000 and $341,000, respectively. As of December 31, 2009 and 2008, net property of approximately $304,000 and $226,000, had been used as collateral on the line of credit discussed in Note 12. During the year ended December 31, 2008, the Company determined that $1,535,301 of equipment was obsolete or should be sold. As a result, accumulated depreciation was reduced by $1,450,805.
  Total assets under capital lease as of December 31, 2009 and 2008 was $107,307 and $-0-, respectively. There was no capital lease amortization included in depreciation expense for the years ended December 31, 2009 and 2008, respectively.
  F-13
 
 7. Intangible Assets
  Intangible assets at December 31, 2009 and 2008 consisted of the following:
  2009


2008Gross Carrying

Amount


Accumulated Amortization


Net Carrying

Amount


Gross Carrying

Amount


Accumulated Amortization


Net Carrying

AmountGoodwill

$
22,761,517



-


$
22,761,517


$
22,761,517



-


$
22,761,517Trade name (indefinite useful life)

$
860,000


$
-


$
860,000


$
860,000


$
-


$
860,000Proprietary technology (5-year useful life)


3,200,000



(1,013,333
)


2,186,667



3,200,000



(373,333
)


2,826,667Customer relationships (10 year useful life)


1,930,000



(305,583
)


1,624,417



1,930,000



(112,586
)


1,817,414$
5,990,000


$
(1,318,916
)

$
4,671,084


$
5,990,000


$
(485,919
)

$
5,504,081
  Aggregate amortization expense for the years ended December 31, 2009 and 2008 was $832,997 and $485,919, respectively.
  Estimated amortization expense for the intangible assets for the next five years is as follows:
  2010


2011


2012


2013


2014Proprietary technology (5-year useful life)

$
640,000


$
640,000


$
640,000


$
266,667


$
-Customer relationships (10 year useful life)


193,000



193,000



193,000



193,000



193,000$
833,000


$
833,000


$
833,000


$
459,667


$
193,000
 
 F-14
 
 8. Accounts Payable and Other Accrued Expenses
  At December 31, 2009 and 2008, accounts payable and other accrued expenses consisted of the following:
 
 2009


2008Trade payables

$
1,410,567


$
900,176Accrued bonuses and commissions payable


257,236



180,111Accrued vacation payable


87,354



77,175Accrued interest on convertible promissory notes


50,000



287,581Total

$
1,805,157


$
1,445,043
  9. Deferred Revenues
  Deferred revenue is comprised of license fees and annual maintenance and support fees. License fees are recognized upon customer acceptance of the product. Annual maintenance and support fees are amortized ratably into revenue in the statements of operations over the life of the contract, which is generally a 12-month period beginning with customer acceptance of the product.
  Deferred revenue activity for the years ended December 31, 2009 and 2008 was as follows:
 2009


2008Beginning balance




$
487,121





$
48,818Invoiced current year





1,952,801






3,255,842Deferred revenue recognized from prior year


(487,121
)






(36,606
)Invoiced and recognized current year


(1,501,233
)






(2,780,933
)Total revenue recognized current year






(1,988,354
)






(2,817,539
)Ending balance





$
451,568






$
487,121
  10. Industry Segment, Customer and Geographic Information
  The Company operates in a single industry segment, computer software. All of the Company’s assets and employees are located in the United States. The organization is primarily structured in a functional manner. During the periods presented, the current Chief Executive Officer was identified as the Chief Operating Decision Maker (CODM) as defined by accounting standards. Generation of revenues from ADS and ACS were not segregated from operating expenses between those incurred for maintenance and support of ADS and research and development expenses incurred on ACS. Therefore the CODM reviews consolidated financial information on revenues, gross margins and operating expenses; discrete information between ADS and the ACS product under development, is not currently maintained or reviewed.
  Customer Information
  For the year ended December 31, 2009, $5,664,080, or 97%, of the Company’s revenues were derived from three customers, which represented $3,859,378, $1,436,035 and $368,667, or 66%, 25% and 6% of the Company’s total revenues, respectively. For the year ended December, 31, 2008, $7,585,933, or 92%, of the Company’s revenues were derived from three customers, which represented $3,611,441, $2,376,871 and $1,597,621, or 44%, 28% and 20% of the Company’s total revenues, respectively.
  At December 31, 2009, three customers accounted for 92% (Customer A was 69%, Customer B was 12% and Customer C was 11%) of the trade accounts receivable balance of $560,439.  At December 31, 2008, three customers accounted for 82% (Customer A was 24%, Customer B was 45% and Customer C was 13%) of the trade accounts receivable balance of $383,445.
  F-15
 
 Geographic Information
  Revenues by geographic area were as follows:
  Years ended December 31,2009


2008Domestic

$
5,811,682



100
%

$
8,280,939



100
%International


-



0
%


1,790



0
%Total

$
5,811,682



100
%

$
8,282,729



100
%
 
 11. Income Taxes
  The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”.  The difference between the statutory federal income tax rate on the Company's pre-tax loss and the Company's effective income tax rate is summarized as follows:
 2009


2008Amount


Percent


Amount


PercentU.S. federal income tax benefitat federal statutory rate

$
(8,169,545
)


-35.0
%

$
(4,070,005
)


-35.0
%Sale of net operating loss carryovers


(52,262
)


-0.2
%


(527,180
)


-4.5
%Other permanent items


963,880



4.2
%


474,033



4.0
%Change in valuation allowance


7,177,525



30.7
%


3,588,529



30.9
%Other


-



0
%


7,443



0.1
%Total

$
(80,402
)


-0.3
%

$
(527,180
)


-4.5
%
 Due to our loss position for the years ended December 31, 2009 and 2008, there was no provision for income taxes during these periods.
  In November 2008, the Company was approved by the New Jersey Economic Development Authority (the "NJEDA") to participate in the 2008 NJEDA Technology Business Tax Certificate Transfer Program.  This program enables 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.  In November 2008, the Company received $527,180 of net proceeds ($563,959 gross proceeds less $36,779 of expenses incurred) from a third party related to the sale of approximately $7,297,000 of unused net operating loss carryovers for the State of New Jersey.  During December 2009 the Company was approved to sell additional state tax assets.  In January 2010, the Company received $80,402 ($93,718 gross proceeds less $13,316 of expenses incurred) from two third parties related to the sale of approximately $255,000 of unused net operating loss carryovers and approximately $71,000 of research and development tax credits for the State of New Jersey. As of December 31, 2009, the Company recorded a tax loss receivable in the amount of $80,402 as a component of prepaid expense and other current assets.
  Based upon the Company's history of losses, management believes it is more likely than not that the total deferred tax assets will not be fully realizable.  Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2009 and 2008.
  The tax effects of significant temporary differences representing deferred tax assets as of December 31, 2009 and 2008 are as follows:
 
 F-16
 
 2009


2008Deferred long-term tax assets:Net operating loss carryforward

$
45,903,727


$
44,120,237Research tax credit carryforward


2,830,976



2,515,581Expenses deductible in later years


5,499,360



132,922Non-Cash interest expense


-



1,827,147Gross deferred tax assets


54,234,063



48,595,887Less: valuation allowance


(52,429,344
)


(46,543,887
)Total


1,804,719



2,052,000Deferred long-term tax liabilities:Excess book basis overtax basis of assets acquired


(2,148,719
)


(2,396,000
)Total


(2,148,719
)


(2,396,000
)Net deferred tax liabilities

$
(344,000
)

$
(344,000
)
  As of December 31, 2009, we had net operating loss carryforwards of approximately $118.2 million for federal tax purposes and $79.0 ("NOL's") million for state tax purposes. If not earlier utilized, the federal net operating loss carryforwards will expire in various years from 2010 through 2029 and the state net operating loss carryforwards will expire in various years from 2016 through 2029.
  Following is a summary of the years in which the NOL's will expire:
  Federal NOL's


State NOL's2010-2012


$
3,045,000


$
13,038,0002013-2016



-



32,038,0002017-2020



28,062,000



23,204,0002021-2024



39,755,000



-2025-2029



47,296,000



10,685,000Total


$
118,158,000


$
78,965,000
  Section 382 limits the use of the NOL's based on the purchase price and the existing applicable Federal Rate ("AFR"). For the Inventa acquisition in May of 2008, the AFR was 4.4%. As the purchase price was $28.5 million, the result is an annual limitation of $731,500. For 2008 it is prorated to $426,700. If the Company does not use the loss in a given year, the unused limit can be carried forward until the NOL's expire. The NOL’s listed in the table above are gross NOL’s without regard to Section 382 limitations.  In addition as Inventa is part of a consolidated group, the Company is subject to a Separate Return Limitation Year ("SRLY") that limits the losses from the years prior to the purchase to the profits of Inventa.  Any losses after May 2008 are not subject to either limitation and can be used fully to offset profits of Inventa or ANTs.
  As of December 31, 2009, we had research credit carryforwards of approximately $2.2 million for federal tax purposes and $1.8 million for state tax purposes. If not earlier utilized the federal research credit carryforwards will expire in various years from 2012 through 2029. The state research credit carries forward indefinitely until utilized.
  A summary of the valuation allowance for the Company's deferred tax assets is as follows:
 
 Charged toBeginning


Deferred Tax





EndingBalance


Assets


Deductions


BalanceDeferred Tax Allowance Accounts:Years Ended December 31,2009

$
46,543,887


$
5,885,457


$
-


$
52,429,3442008

$
27,152,471


$
21,443,416


$
-


$
48,595,887
 
 Uncertain Tax Positions
 
 Under accounting standards, the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. On January 1, 2007, the Company reduced its deferred tax asset and valuation allowance by $685,000 upon adopting this standard.
 F-17
 A reconciliation of the beginning and ending amount of the liability for unrealized income tax benefits during the tax years ended December 31, 2009 and 2008 is as follows:
 
 Balance at January 1, 2008

$
684,954Additions for tax positions related to the year ended December 31, 2008


-Balance at December 31, 2008

$
684,954Balance at January 1, 2009

$
684,954Additions for tax positions related to the year ended December 31, 2009


-Balance at December 31, 2009

$
684,954
 
 The $684,954 of unrealized tax benefits, if realized, will affect our effective income tax rate without regard to the valuation allowance. We account for any applicable interest and penalties on uncertain tax positions as a component of income tax expense. No amount is accrued for interest or penalties in the statement of operations or in the statements of financial position as of December 31, 2009 and 2008. The Company does not expect a significant increase or decrease in unrecognized tax benefits within 12 months of the reporting date. The only major tax jurisdictions are the United States, California and New Jersey. The tax years 1995 through 2009 remain open and are subject to examination by the appropriate governmental agencies in the U.S and 1998 through 2009 in California and New Jersey.
 
 12. Debt
 
 Debt consists of the following at December 31, 2009 and 2008:
 
 Type

Issue Date

Due Date

Extinguishment

Date


Stated

Interest Rate


Effective Interest

Rate


2009


2008Convertible Promissory Note

March 2007

August 2009

October 2009


10%


29.55%


$
-


$
250,000Convertible Promissory Notes

May 2008

February 2011

May and July 2009


10%


N/A



2,000,000



3,245,000Convertible Promissory Notes

May 2008

February 2011

May and July 2009


10%


85.66% - 86.34%



-



5,005,000Convertible Promissory Notes with

Attached Warrants

May 2008

February 2011

July 2009


10%


N/A



-



3,003,226Capital lease

December 2009

September 2012

-


6.83%


6.83%



150,197



-Note for Financed Insurance Premiums

April 2009

January 2010

N/A


7.30%


7.30%



11,908



-Line of Credit

May 2008

August 2010

N/A


LIBOR + 2%


2.44%



250,000



200,000Total debt


















2,412,105



11,703,226Less discount on convertible promissory notes


















(812,500
)


(8,565,882
)Less current portion, including line of credit


















(313,396
)


(434,084
)Long-term portion of debt

















$
1,286,209


$
2,703,260
 F-18
 Scheduled future maturities of debt are as follows at December 31,
 2010

$
313,3962011


2,055,0042012


43,7052013


-Thereafter


-Total


2,412,105Less discounts on notes payable

(812,500
)Net value of debt at December 31, 2009
$
1,599,605
 
 “J” Unit Sales
  During the period from December 2006 through March 2007, the Company issued bundled securities consisting of convertible promissory notes (the "Notes") and common stock (collectively referred to as the "J Units"). This private offering was approved by the Board of Directors in December 2006 to raise additional working capital. The J Units were sold at a per unit price of $50,000 and were comprised of (i) 14,285 shares of the Company's common stock (issued at the market value of the Company's common stock on the date of purchase (restated)) and (ii) a Note with an initial face value of $25,000. Each Note had a stated interest rate of 10% per annum (simple interest) due and payable at the end of each quarter. Each Note originally matured 24 months from the issuance date, and was convertible into shares of common stock, at the election of the holder, at a per share price of $2.00. Each Note was prepayable without penalty upon 30 days notice and was convertible at the Company's election in the event the closing price of the common stock equals or exceeds $4.00 per share. If converted at the Company's election, the Company agreed to register the shares of stock upon conversion. Substantially all of the Notes were extinguished in May 2008 as discussed below.
  In December 2006, 40 J Units were sold to accredited investors, raising $2 million, and 571,400 shares of common stock and Notes with an aggregate face value of $1 million were issued. In January 2007, 180 J Units were sold to accredited investors, raising $9 million, and 2,571,300 shares of common stock and Notes with an aggregate face value of $4.5 million were issued. In March 2007, 40 J Units were sold to accredited investors, raising $2 million, and 571,400 shares of common stock and Notes with an aggregate face value of $1 million were issued.
  The Company allocated the proceeds between the common stock and the Notes to determine whether or not a beneficial conversion feature existed as part of the Notes. The Common Stock issued in connection with the December 2006 J Units was valued at $1,265,444 (restated). The notes were then evaluated and deemed to have a beneficial conversion feature with an intrinsic value of $435,444 (restated), which was recorded to Discount on Notes Payable with the offset going to Additional Paid-in Capital. In addition, the Company paid cash and issued stock commissions to a placement agent in connection with the issuance of the December 2006 J Units. Cash commissions of $40,000 were paid to the placement agent; 10,380 shares of common stock were issued to the placement agent; and the Company agreed to issue 9,080 shares of Common Stock to the placement agent upon conversion of the Notes. The Common Stock issued to the placement agent was valued at $23,874 (restated) based on market value of the Company's stock on the date the Company issued the J Units. Based on these commissions, the Company recognized prepaid debt issuance costs of $23,713 (restated) and Additional Paid-in Capital was reduced by $25,150 (restated). The Discount on Convertible Notes Payable issued in December 2006 totaled $700,888. The Notes were extinguished in May 2008 as discussed below.
  The Common Stock issued in connection with the January and March 2007 J Units was valued at $6,849,423 (restated). The notes were then evaluated and deemed to have an embedded conversion feature with an intrinsic value of $2,026,923 (restated), which was recorded to Discount on Notes Payable with the offset going to Additional Paid-in Capital. In addition, the Company paid cash and issued stock commissions to a placement agent in connection with the issuance of the 2007 J Units. Cash commissions of $1,100,000 were paid to the placement agent; 145,440 shares of common stock were issued to the placement agent; and the Company agreed to issue 127,200 shares of Common Stock to the placement agent upon conversion of the Notes. The Common Stock issued to the placement agent was valued at $449,228 (restated) based on the market value of the Company's stock on the date the Company issued the J Units. Based on these commissions, the Company recognized prepaid debt issuance costs of $584,166 (restated) and Additional Paid-in Capital was reduced by $956,061 (restated). The Discount on Convertible Notes Payable issued in January and March 2007 totaled $3,376,346. The Notes were extinguished in May 2008 as discussed below.
 F-19
 Convertible Promissory Notes with Warrants
  During October 2007 the Company sold a convertible promissory note in the amount of $2,000,000 to an accredited investor. Pursuant to the sale, the Company issued a warrant to the investor covering 1,333,333 shares of common stock with a per share exercise price of $3.25. The warrant expired 36 months from issuance. The note had a stated interest rate of 10% per annum (simple interest) due and payable at the end of each calendar quarter, matured in 36 months from the date of issuance and was convertible into shares of common stock, at the election of the holder, at a per share price of $1.50, and is prepayable without penalty if (i) the bid price of the Company's common stock equals or exceeds $4.00 per share for ten consecutive trading days and (ii) the Company provides the investor with 20 trading days' notice of its intent to prepay. The note was deemed extinguished in May 2008. As a result of the extinguishment, the maturity date of the debt and warrants were extended to January 2011 and the per-share conversion price was reduced to $0.80; all other terms remained unchanged.
  During December 2007 the Company sold a convertible promissory note in the amount of $1,003,226. Pursuant to the sale, a warrant was issued to the investor covering 668,817 shares of common stock with a per share exercise price of $3.25. The warrant expired 36 months from issuance. The note had a stated interest rate of 10% per annum (simple interest) due and payable at the end of each calendar quarter, matured 36 months from issuance and was convertible into shares of common stock, at the election of the holder, at a per share price of $1.50, and is prepayable without penalty if (i) the bid price of the Company's common stock equals or exceeds $4.00 per share for ten consecutive trading days and (ii) the Company provides the investor with 20 trading days' notice of its intent to prepay. The note was deemed extinguished in May 2008. As a result of the extinguishment, the maturity date of the debt and warrants were extended to January 2011 and the per-share conversion price was reduced to $0.80; all other terms remained unchanged.
  Upon original issuance, the Company allocated the proceeds of these sales between the warrants and the notes based on their relative fair values. The allocation resulted in a total discount of $479,829 (restated) related to the warrants for the Notes issued in October and December 2007. In addition, the Note issued in October 2007 had a beneficial conversion feature based on the computed fair value of the note. The Company recorded a discount of $191,363 for the beneficial conversion feature. The total discount issued in relation to these notes was $671,192.
  Extinguishment of Debt
  On May 15, 2008 the Company negotiated with certain holders of the Notes to both extend the maturity date and reduce the price at which each note is convertible into shares of common stock (the "Conversion Price") from $1.50 or $2.00 per share to either $0.80 or $1.20 per share. A total of $9.3 million in principal was renegotiated and the due dates were extended from their original maturity dates of December 2008 through December 2010, to a revised maturity date of January 31, 2011. The Notes that were renegotiated represent both those issued under the "J" Unit Sales discussed above as well as those issued under Convertible Debt with Warrants, also discussed above. The other terms of the Notes remained unchanged.
  On the date of modification the discounted present value of the cash flows of the modified convertible promissory notes (the "Modified Notes") was compared with the discounted present value of the Notes to determine whether the change in cash flows exceeded 10% of the carrying value of the Notes. Based on this test, all of the Notes were deemed extinguished. Upon extinguishment, the Company recorded a loss on the extinguishment of $49,940.
  All of the Modified Notes were deemed to have a beneficial conversion feature, as the closing price of the Company's stock on May 15, 2008 was greater than the imputed conversion value. The fair value of the beneficial conversion features totaled $5,226,069 and were recorded to Discount on Notes Payable with an offset to Additional Paid-in Capital. In addition, the warrants issued in connection with the October and December 2007 Notes were modified. Consequently, the Company calculated the relative value of the debt and warrants. The discount associated with this allocation resulted in an additional $291,874 recorded to Discount on Notes Payable with an offset to Additional Paid-in Capital. A total additional discount of $5,517,943 was recorded as a result of the extinguishment of debt. The discount will be amortized over the life of the Modified Notes using the effective or straight line interest method as appropriate.
 
 During the year ended December 31, 2009, the Company repaid $50,000 of a $250,000 Convertible Promissory Note and extended the due date of the remaining $200,000 from March 20, 2009 to the earlier of August 20, 2009 or the receipt of $2,000,000 in financing. The Company also agreed to issue 5,000 shares of the Company’s Common Stock for each month or fraction thereof during which the note is outstanding, with no other terms being modified. This extension was not considered a significant modification of the debt. The holder of the note also agreed to accept shares of the Company’s stock in consideration for interest payments. For the year ended December 31, 2009, the Company recorded $32,802 to stockholders’ equity relating to shares of Common Stock that were issued for the note extension and interest payments. On September 30, 2009, this note holder subscribed to $150,000 of Common Stock and associated Common Stock Warrants as part of a Private Placement as more fully described in Note 14. On October 21, 2009 the Company paid the note holder $50,000 in cash, issued 57,548 Common Shares due for interest, and offset the holder’s stock subscription receivable of $150,000 in order to satisfy the $200,000 Convertible Promissory Note and interest payable.
 F-20
 During the year ended December 31, 2009, the Company reduced the conversion price of a $125,000, 10% Convertible Promissory Notes from $1.20 to $0.60 and reduced the conversion price of three 10% Convertible Promissory Notes totaling $625,000 from $0.80 to $0.40 to induce conversion of the notes into Common Stock. The other terms of the Notes remained unchanged. Immediately after the reduction in the conversion price, the 10% Convertible Promissory Note totaling $125,000 was converted into 208,333 Common Shares at $0.60 per share and the three 10% Convertible Promissory Notes totaling $625,000 were converted into 1,562,500 Common Shares at $0.40 per share. The Company recorded the fair value of the additional 885,417 shares of Common Stock issued due to the reduced conversion price and recorded a loss on the extinguishment of the convertible promissory notes totaling $495,833, which is equal to the fair value of the additional shares of Common Stock transferred resulting from the inducement. This amount was based on the closing price of the stock on the date of conversion of $0.56 per share. In conjunction with the conversion, the Company issued 23,850 shares of Common Stock, with a fair value of $0.56 per share, to the placement agent as a commission per the original agreement.
  During the year ended December 31, 2009, the Company entered into agreements with certain Promissory Note holders to convert their notes into newly designated Series A Convertible Preferred Stock (“Preferred Stock”) as of July 1, 2009. The total aggregate principal amount owed under the notes totaling $8,503,226, plus accrued and unpaid interest through the date of the conversion totaling $425,161, was converted into 8,928,387 shares of Preferred Stock. Each share of Preferred Stock is convertible into approximately 2.86 shares of Common Stock. In addition to the note conversion, three outstanding Common Stock Warrants held by one of the Promissory Note holders for the purchase of an aggregate amount of 3,002,150 shares of Common Stock, at a price of $0.80 per share, had been extended for one year. The Company accounted for this transaction as a loss on extinguishment. The Company recorded a loss on the transaction totaling $11,783,547, which is derived from the sum of the fair value of the Preferred Stock issued ($14,455,484), the additional fair value given in conjunction with the extension of the expiration date of the Common Stock Warrants ($184,513), and the additional fair value given in conjunction with the payment of the accrued interest in Preferred Stock ($297,613) less the carrying value of the Promissory Notes ($3,154,063), which is net of a discount of $5,349,163. See Note 15 related to the portion of this transaction that was with a related party, Constantin Zdarsky. The fair value of the Preferred Stock was determined to be $1.70 per share on July 1, 2009 based on an independent valuation. The fair value of the Preferred Stock was estimated using the Black-Scholes / Noreen-Wolfson Option Pricing Methodology with the following assumptions: dividend yield of 0%, risk-free interest rate of 1.0%, an expected life of three and five years and expected stock price volatility of 1.0 and 1.3 to correspond with expected life assumptions. The ability of the Company to satisfy the liquidation preference has also been considered. The additional fair value related to the one year extension of the warrants was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.09, expected life of two years and risk-free interest rate of 1.6%.
  Line of Credit
  On May 30, 2008, the Company assumed a revolving credit facility (the "Facility") in connection with the acquisition of Inventa, which remains in force through May 15, 2010. The Facility consists of a $250,000 revolving line of credit which bears interest at a daily rate of LIBOR plus 2.00% (0.231% and 0.436% at December 31, 2009 and 2008, respectively). At December 31, 2009 and 2008, there was $250,000 and $200,000 outstanding, respectively, under the line of credit and $0 and $50,000 available, respectively, pursuant to the terms of the Facility. There are no commitment fees due under the facility. The terms of the Facility require consecutive monthly interest-only payments with the principal due on August 1, 2010. The Facility is secured by all of the assets of Inventa.
  Convertible Promissory Notes Related to Acquisition of Inventa Technologies, Inc.
  In May 2008 and as part of the purchase price of Inventa, the Company issued $2.0 million in unsecured promissory notes due January 31, 2011, bearing interest at 10%, with interest payable at the end of each quarter. The convertible promissory notes are immediately convertible to 2.5 million shares of the Company's common stock at the election of the holders at a per share conversion price of $0.80. At the time of issuance, the conversion price was $0.30 per share less than the then-market price of our common stock. The intrinsic value of the embedded beneficial conversion feature totaling $2.0 million was recorded as an increase to paid-in-capital and will be amortized to using the straight-line interest method over the life of the promissory notes.
  1% Convertible Promissory Notes
  During the year ended December 31, 2009, the Company issued two existing shareholders 1% Convertible Promissory Notes convertible at $0.40 per share and 287,500 Common Stock Warrants with an exercise price of $0.47 per share for total gross proceeds of $115,000, when the closing stock price was $0.47 per share. The relative fair value of the warrants issued in conjunction with these notes created debt discount totaling $78,693. The fair value of the warrants was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 0.982, risk-free interest rate of 1.39%, and an expected life of three years. In conjunction with the issuance of these 1% Convertible Promissory Notes, the Company also recorded the intrinsic value of the related beneficial conversion feature of $20,125 to Additional Paid-in Capital. Immediately after issuance, the two 1% Convertible Promissory Notes were converted into 287,500 shares of Common Stock at $0.40 per share.
 F-21
 13. Commitments and Contingencies
  As of December 31, 2009, the Company leased office facilities under a non-cancelable operating lease. Future minimum lease payments required under the non-cancelable leases are as follows:
 
 Year ending December 31,

Operating Leases


Capital Leases2010

$
215,588


$
60,2242011


195,588



60,2242012


195,588



45,1682013


195,5882014


195,588Thereafter


195,588Total minimum lease payments

$
1,193,528



165,616Less amount representing interest






(15,419
)Present value of net minimum lease payments






150,197Less current obligations under capital leases






(51,488
)Long-term obligation under capital lease





$
98,709
 
 As discussed in Note 3, on Inventa was acquired May 30, 2008. As part of the acquisition the Company assumed the Inventa operating lease of a general commercial facility in Mt. Laurel, New Jersey at the monthly rent of $10,007. The lease was initially set to expire on June 30, 2015 and had the option to renew the terms of the lease for an additional five years at the greater of $10,768 or an increase in the consumer price index. The lease was amended effective August 1, 2008 to add 4,590 square feet upon receipt of a Certificate of Occupancy. Effective January 6, 2009, the Company took possession of the additional space at the facilities located in Mt. Laurel, New Jersey. Accordingly, rent increased from $10,007 per month to $16,299 per month or approximately $196,000 per year.  The amendment also restated the end of the lease commitment to be seven years from the date of the Certificate of Occupancy for the additional space, or January 6, 2016.  At expiration of the amended lease, the Company has the option to renew the terms of the lease for an additional five years at the greater of $18,467 per month, or the increase in the consumer price index multiplied by the rent of $16,299 per month.
 
 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.
  Litigation
  On July 10, 2008, Sybase, Inc. (“Sybase”), an enterprise software and services company, filed a complaint for common law unfair business practices, and tortuous interference with contractual relations, among other things, in the Superior Court of the State of California, County of Alameda.  Sybase is seeking an injunction, and damages, among other legal and equitable relief.  We believe that this lawsuit is without merit and intend to continue vigorously defending ourselves.
  On August 22, 2008, a former ANTs employee filed a putative class action complaint for 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.  We believe that this lawsuit is without merit and intend to continue vigorously defending ourselves.
  On October 14, 2008, Bayside Plaza (“Bayside”), a partnership, filed a complaint for breach of contract in Superior Court of the State of California, County of San Mateo.  Bayside was seeking approximately $50,000 in rent, late fees and operating expenses per month from October 2008. The Company settled the complaint by paying $50,000 in May 2009 and agreeing to pay $25,000 in each of August 2009, November 2009 and February 2010. As of the date of the settlement in May 2009, the Company had accrued rent of approximately $404,000. The Company recognized a gain on the settlement of approximately $279,000 as an offset to rent expense, which is included in General and Administrative Expense in the Consolidated Statement of Operations at December 31, 2009.
  On September 9, 2009, Ken 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 the Superior Court of the State of California, County of San Francisco. Mr. Ruotolo is seeking damages, attorneys’ fees and declaratory relief. We believe that this lawsuit is without merit and intend to continue vigorously defending ourselves. Mr. Ruotolo’s father, Francis K. Ruotolo, is a Director of the Company.
 
  F-22
 On January 14, 2010, three lawsuits were filed against the Company by Robert T. Healey.  The first of these lawsuits, against the Company, demands inspection of the Company’s books and records.  The second lawsuit, against the Company, and its 8 directors (including former director Tom Holt), is 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 8 directors (including former director Tom Holt), is 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.  The Company is still evaluating all three of these lawsuits.  A trial on declaratory issues in the third lawsuit is set for early June 2010.
  14. Stockholders' Equity
  2009
 
 Issuance of Series A Preferred Stock:
 
 On July 1, 2009, the Company issued 8,928,387 shares of Preferred Stock with a liquidation preference of $1.00 per share as more fully described in Note 12. The Company has designated 12,000,000 of the 50,000,000 authorized shares of Preferred Stock as Series A Convertible Preferred Stock. The terms of the Preferred Stock allow the holder to convert each share of Preferred Stock into approximately 2.86 shares of Common Stock at any time. The Preferred Stock also contains anti-dilution provisions in the case that the Company issues Common Stock or any Common Stock equivalent at less than $0.35 per share, other than to employees, directors or consultants, among other things. The liquidation preference of the Preferred Stock is $1.00 per share. The holders of shares of Preferred Stock are entitled to receive non-cumulative dividends in preference to any declaration or payment of any dividend at the rate of $0.05 per share per annum when, as and if declared by the Board of Directors. The holders of shares of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then convert. No dividends have been declared as of December 31, 2009. However, due to the fact that the Preferred Stock issued on July 1, 2009 was convertible to Common Stock at an effective price of $0.35 per share when the fair market value of the Common Stock was $0.42 per share, the Company recorded the intrinsic value of this beneficial conversion feature as a Preferred Stock dividend totaling $1,785,677.
 
 On September 18, 2009, the Company entered into an agreement with Constantin Zdarsky, an existing Common and Preferred Stockholder, and Common Stock Warrant holder (see Note 16), in which his 3,002,150 Common Stock Warrants, which were exercisable at $0.80 per share, were cancelled and the Company granted a new warrant to purchase up to 1,050,752 shares of fully-vested Preferred Stock of the Company at a per share exercise price of $1.00 and exercisable through April 30, 2010 (the “Preferred Stock Warrants”). The Company also granted a new fully-vested Common Stock Warrant to purchase up to 7,502,151 shares of Common Stock of the Company at a per share price of $0.40 and exercisable through January 1, 2014.  Pursuant to the agreement, Mr. Zdarsky committed to serially exercise his purchase right under the Preferred Stock Warrants with respect to all 1,050,752 shares of Preferred Stock as follows: 250,000 warrants by September 22, 2009, 250,000 warrants by December 31, 2009, 250,000 warrants by February 28, 2010 and 300,752 warrants by April 30, 2010. The fair value of the Preferred Stock Warrants was estimated to be $732,927 using the Black-Scholes / Noreen-Wolfson Option Pricing Methodology with the following assumptions: dividend yield of 0%, risk-free interest rate of 1%, an expected life of one-half year and expected stock price volatility of 1.0. The fair value of the 3,002,150 cancelled Common Stock Warrants was estimated to be $451,470 using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.09, expected life of two years and risk-free interest rate of 1.6%. The fair value of the new 7,502,151 Common Stock Warrants was estimated to be $2,192,919 using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.09, expected life of 4 years and risk-free interest rate of 2.4%.
 
 On September 22, 2009, 250,000 Preferred Warrants were exercised as stipulated in the agreement. Due to the fact that the 250,000 shares of Preferred Stock issued were convertible into Common Stock at an effective price of $0.35 per share when the fair market value of the Common Stock was $0.39 per share, the Company recorded the intrinsic value of this beneficial conversion feature as a Preferred Stock Dividend totaling $27,143. On December 18, 2009, 250,000 Preferred Warrants were exercised as stipulated in the agreement. Due to the fact that the 250,000 shares of Preferred Stock issued was convertible to Common Stock at an effective price of $0.35 per share when the market value of the Common Stock was $0.68 per share, the Company recorded the intrinsic value of this beneficial conversion feature as a Preferred Stock dividend totaling $235,714.
 
 As of December 31, 2009, the outstanding Preferred Stock was convertible into 26,938,249 shares of Common Stock and the liquidation preference totaled $9,428,387. Preferred Stock dividends related to the intrinsic value of the beneficial conversion feature of the Preferred Stock totaled $2,048,534 for the year ended December 31, 2009.
 F-23
 Funds raised through private offerings to accredited investors:
 
 During the year ended December 31, 2009, the Company received $339,000 from accredited investors from the sale of 847,500 shares of Common Stock, at a price of $0.40 per share.
 During the year ended December 31, 2009, the Company issued 6,330,080 shares of Common Stock at $0.35 per share and 6,330,080 Common Stock Warrants, exercisable at $0.40 per share for a period of one year, for total gross proceeds of $2,215,530 as part of a private placement. Five members of the Board of Directors invested $64,997 as part of this private placement for a total of 185,707 Common Shares and 185,707 Common Stock Warrants.
 
 During the year ended December 31, 2009, the Company issued 250,000 shares of Common Stock at $0.40 per share and 250,000 Common Stock Warrants, exercisable at $0.50 per share for a period of one year, for total gross proceeds of $50,000 and a subscription receivable of $50,000 as part of a private placement.
 
 During the year ended December 31, 2009, the Company issued two existing shareholders 1% Convertible Promissory Notes convertible at $0.40 per share and 287,500 Common Stock Warrants with an exercise price of $0.47 per share for total gross proceeds of $115,000, when the closing stock price was $0.47 per share. The fair value of the warrants issued in conjunction with these notes created debt discount totaling $78,693. The fair value of the warrants was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 0.982, risk-free interest rate of 1.39%, and an expected life of three years. In conjunction with the issuance of these 1% Convertible Promissory Notes, the Company also recorded the fair value of the related beneficial conversion feature of $20,125 to Additional Paid-in Capital. Immediately after issuance, the two 1% Convertible Promissory Notes were converted into 287,500 shares of Common Stock at $0.40 per share.
 
 Funds raised through cash exercises of stock options:
 
 For the year ended December 31, 2009, stock options covering a total of 20,000 shares were exercised, generating $10,400 in cash proceeds.
 
 Other equity transactions:
 
 During the year ended December 31, 2009, the Company issued 1,674,501 shares of Common Stock to employees and consultants for compensation under the 2008 Stock Plan, all of which vest on March 31, 2010. Due to the termination of employment, 167,188 shares of unvested Common Stock were forfeited during the year ended December 31, 2009. The employees and consultants are entitled to one vote per share and any declared dividends per share as of the date of grant, March 31, 2009. No dividends have been declared as of December 31, 2009. The Company issued the Common Stock in compensation for a reduction in cash compensation and in an effort to increase employee ownership in the Company. The fair values of the shares on the dates of grant were $0.36 to $0.70 based upon the closing price of the stock on the dates of grant.
  During the year ended December 31, 2009, the Company was required to issue 200,000 shares of Common Stock to an investor relations consultant per the terms of the agreement with the Company and that was valued at $0.46 per share, of which 50,000 shares vest every three months. The Company issued 100,000 Common shares under this agreement. In connection with this same agreement, the Company issued 300,000 Common Stock Warrants, of which 75,000 warrants vest every three months, with an exercise price of $0.01 per share and expiring on May 1, 2012. The fair value of the warrants was estimated to be $0.40 per warrant using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.0149, risk-free interest rate of 1.64%, and an expected life of three years. During the year ended December 31, 2009, the Company was required to issue 200,000 shares of Common Stock to another investor relations consultant per the terms of the agreement with the Company and that was valued at $0.60 per share, of which 50,000 shares vest every three months. The Company issued 50,000 Common Shares under this agreement.
  F-24
 During the second quarter of 2009, the Company reduced the conversion price of a $125,000, 10% Convertible Promissory Notes from $1.20 to $0.60 and reduced the conversion price of three 10% Convertible Promissory Notes totaling $625,000 from $0.80 to $0.40 to induce conversion of the notes into Common Stock. The other terms of the Notes remained unchanged. Immediately after the reduction in the conversion price, the 10% Convertible Promissory Note totaling $125,000 was converted into 208,333 Common Shares at $0.60 per share and the three 10% Convertible Promissory Notes totaling $625,000 were converted into 1,562,500 Common Shares at $0.40 per share. The Company recorded the fair value of the additional 885,417 shares of Common Stock issued due to the reduced conversion price and recorded a loss on the conversion of the convertible promissory notes totaling $495,833, which is equal to the fair value of the additional shares of Common Stock transferred resulting from the inducement. This amount was based on the closing price of the stock on the date of conversion of $0.56 per share. In conjunction with the conversion, the Company issued 23,850 shares of Common Stock, with a fair value of $0.56 per share, to the placement agent as a commission per the original agreement.
  During the year ended December 31, 2009, the Company recorded $32,802 to stockholders’ equity and issued 57,548 Common Shares as interest on the $200,000 Convertible Promissory Note, as more fully described in Note 12.
  For the year ended December 31, 2009, the Company recognized a total of $836,627 in compensation expense related to the vesting of employee stock options and $135,161 in professional fees related to the vesting of non-employee stock options.
  For the year ended December 31, 2009, the Company recognized a total of $426,577 in compensation expense related to the vesting of Common Stock issued to employees under the 2008 Stock Plan and $113,624 in professional fees, respectively, related to the vesting of Common Stock issued to consultants under the 2008 Stock Plan.
  2008
  Funds raised through private offerings to accredited investors:
  The Company received $7,615,000 from accredited investors for the sale of 12,691,667 shares of common stock, at a price of $0.60 per share and incurred commission costs of $367,200. The Company issued 510,757 shares of common stock and a warrant to purchase up to 50,166 shares at an exercise price of $0.60 in connection with this private placement.
  Other equity transactions:
  As discussed in Note 3, on May 30, 2008 Inventa Technologies, Inc. was acquired for a total purchase price of $28.8 million, which included cash payments of $3,000,000 and issuance of 20 million shares of the Company's common stock valued at $1.20 per share. The Company also issued $2 million in promissory notes to the seller, with a fair value of approximately $1.4 million convertible into 2.5 million shares of common stock. As discussed in Note 13, the notes had a beneficial conversion feature totaling in aggregate $2,000,000 which was allocated to paid-in-capital.
  On March 26 and March 31, 2008, the Board of Directors approved a repricing of certain stock options and warrants for employees, consultants and Board members to the then-current market price of the Company's common stock. Officers and Board members forfeited 1,193,667 vested and unvested shares in connection with the repricing. $786,545 in stock compensation expense was recognized, net of forfeiture credits, as a result of the repricing.
  For the twelve months ended December 31, 2008 a total of $3,015,662 in compensation expense was recognized related to the vesting of employee stock options and the repricing and $132,281 in professional fees was recognized related to the vesting of non-employee stock options and warrants.
  During 2008, a total of 47,500 shares of common stock were issued through the exercise of stock options with original exercise prices ranging from $.52 to $.81, resulting in gross proceeds of $32,670.
 F-25
 Stock Compensation Plans
  The Company has two stock-based employee and director compensation plans (the ANTs software inc. 2000 Stock Option Plan and the ANTs software inc. 2008 Stock Plan) which are intended to attract, retain and provide incentives for talented employees, officers, directors and consultants, and to align stockholder and employee interests. Stock-based compensation is considered to be critical to operations and productivity and generally all of employees and directors of the Company participate, as well as certain consultants. Under the plans, the Company may grant incentive stock options and non-qualified stock options to employees, directors or consultants, at not less than the fair market value on the date of grant for incentive stock options, and 85% of fair market value for non-qualified options. Options are granted at the discretion of the Board of Directors and the Compensation Committee of the Board of Directors.
  Options granted under the plans generally vest within three years after the date of grant, and expire 10 years after grant. Stock option vesting is generally time-based; however, the Company has also issued grants with certain performance-based vesting criteria. Options granted to new hires generally vest between one-sixth and one-third between six months and twelve months from the anniversary date of the grant and then vest monthly thereafter. The remaining unvested options vest ratably over the remaining life of the grant. Following termination of employment or consulting status, there is usually a grace period during which the vested portion of the option is exercisable. This period is typically three months, but may be shorter or longer depending on the terms of a given stock option agreement or upon managements' discretion. Non-employee directors are typically granted stock options in recognition of their service. Such directors are granted an option to purchase up to 150,000 shares, which vest monthly over their three-year board service term. Non-employee directors who chair a committee are granted an additional 30,000-share option with the same vesting schedule. Directors generally serve for terms of three years. Options granted to directors may include a one-year lock-up provision following termination of their director status, during which period the option cannot be exercised.
 
 During the quarter ended December 31, 2009, the Company granted 50,000 stock options to employees and 400,000 stock options to a consultant at exercise prices ranging from $0.57 to $0.70 per share with fair values ranging from $0.38 to $0.42 per share on the date of grant. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.09, risk-free interest rate of 1.2% to 1.4%, and an expected life of three years.
 
 During the quarter ended September 30, 2009, the Company granted 70,000 stock options to employees at exercise prices ranging from $0.35 to $0.41 per share with fair values ranging from $0.23 to $0.26 per share on the date of grant. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.09, risk-free interest rate of 1.56%, and an expected life of three years.
 
 During the quarter ended June 30, 2009, the Company granted 30,000 stock options at $0.37 per share with a fair value of $0.25 per share on the date of grant. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 0.9859, risk-free interest rate of 1.49%, and an expected life of three years.
 
 During the quarter ended March 31, 2009, the Company granted 35,000 stock options at $0.35 per share with a fair value of $0.24 per share on the date of grant. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 1.05, risk-free interest rate of 1.08%, and an expected life of three years.
  As of December 31, 2009, there was approximately $817,000 of total unrecognized compensation cost, adjusted for forfeitures, related to non-vested options granted to Company employees and contractors, which is expected to be recognized over a weighted-average period of approximately 1.68 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
  As of December 31, 2009, there was approximately $282,000 of total unrecognized compensation cost, adjusted for forfeitures, related to non-vested restricted stock awards granted to Company employees and contractors, which is expected to be recognized through March 31, 2010. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
  The fair value of employee and non-employee stock-based awards was estimated using the Black-Scholes valuation model with the following weighted-average assumptions for the years ended December 31, 2009 and 2008.
  Fiscal Years Ended December 31,2009


2008Expected life in years

3.00


3.00Average Volatility

98.59% - 112.99%


66.27% - 92.39%Interest rate

1.08% - 1.56%


1.48 % - 2.67%Dividend Yield

0.00%


0.00%
  F-26
 The computation of expected volatility for the years ended December 31, 2009 and 2008 is based on a combination of historical and market-based implied volatility. The computation of expected life is based on historical exercise patterns which generally represent the full vesting date for employee grants and contractual life of the award for non-employee grants. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
  The following table summarizes stock option plan activity and shares available for grant for the years ended December 31, 2009 and 2008:
  Outstanding OptionsWeightedAverageWeighted


RemainingShares





Average


ContractualAvailable for





Exercise


Term (in


AggregateGrant


Shares


Price


years)


Intrinsic ValueOutstanding, January 1, 2008


652,789



8,689,050


$
2.05



6.87


$
30,495Additional shares authorized


5,000,000



-



-Granted


(4,947,000
)


4,947,000



1.04Exercised through cash consideration






(47,500
)


0.69Expired/forfeited/cancelled


3,186,038



(3,186,038
)


1.87Outstanding, December 31, 2008


3,891,827



10,402,512


$
1.03



7.40


$
-Granted – options


(585,000
)


585,000



0.55Granted – restricted stock awards


(1,507,313
)Exercised through cash consideration


-



(20,000
)


0.52Expired/forfeited/cancelled


2,500,314



(2,500,314
)


0.97Outstanding, December 31, 2009


4,299,828



8,467,198



1.01



7.69


$
60,885Exercisable at December 31, 2009






6,664,511


$
1.03



7.72


$
19,614
  The aggregate intrinsic value of total stock options outstanding and exercisable during the year ended December 31, 2009 in the table above represents the total pretax intrinsic value (i.e., the difference between the closing stock price on December 31, 2009 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. Aggregate intrinsic value changes as the fair market value of Company stock changes. The closing market price of the stock on December 31, 2009 was $0.64. The weighted average grant date fair value of stock options granted during 2009 and 2008 was $0.46 and $0.45, respectively.
 F-27
 The range of exercise prices for stock options outstanding and exercisable at December 31, 2009 are summarized as follows:
  Total Options Outstanding as of December 31 ,2009Weighted


WeightedAverage Exercise


Average RemainingOptions


Price per Share


Contractual LifeRange of exercise prices:$0.36 - $0.99



4,394,650


$
0.79



7.76$1.00 - $1.99



4,015,057


$
1.23



7.69$2.00 - $2.99



43,850


$
2.52



1.36$3.00 - $3.99



13,641


$
3.16



1.55Total stock options outstandingat December 31, 2009



8,467,198


$
1.01



7.69Total Options Exercisable at December 31, 2009Weighted


WeightedAverage Exercise


Average RemainingOptions


Price per Share


Contractual LifeRange of exercise prices:$0.36 - $0.99



3,734,786


$
0.83



8.04$1.00 - $1.99



2,872,234


$
1.26



7.43$2.00 - $2.99



43,850


$
2.52



1.36$3.00 - $3.99



13,641


$
3.16



1.55Total stock options exercisableat December 31, 2009



6,664,511


$
1.03



7.72
  Warrants outstanding as of December 31, 2009 are summarized in the table below:
  WeightedExercises


AveragePrices per


Exercise


Year ofWarrants


Share


Price


ExpirationWarrants issued in privateplacements:6,580,080


$
0.40-0.50






2010287,500


$
0.47






20127,502,151


$
0.40






2014Subtotal


14,369,731






$
0.40Warrants issued to customer andvendors50,000


$
$1.99







2009300,000


$
0.01







201250,166


$
0.60







2013Subtotal


400,166






$
0.33Warrants issued to outside directorsand former employee:900,000


$
.94 - $2.31







2011198,750


$
0.94







2015256,875


$
0.94







2016Subtotal


1,355,625






$
1.70Total warrants outstanding atDecember 31, 2009


16,125,522






$
0.51Warrants exercisable at December 31, 2009


15,975,522






$
0.51
  15. Related Party Transactions
  During the year ended December 31, 2009, the Company paid $24,750 to an investor relations consultant and shareholder who owns approximately 1,000,000 shares of Common Stock and who purchased a $40,000 1% Convertible Note and 100,000 Warrants during the year ended December 31, 2009, as mentioned in Notes 14 and 15. There were no amounts payable to this shareholder as of December 31, 2009.
 
 During the year ended December 31, 2009, the Company paid $17,400 for an executive apartment lease to a shareholder who owns 500,000 shares of the Company’s Common Stock and who also holds a Convertible Promissory note totaling $1,000,000 (undiscounted). The lease was cancelled in June 2009, with the last payment to be made in August 2009. There were no amounts recorded in accounts payable to this shareholder as of December 31, 2009.
 F-28
 Mr. Tom Holt, a former member of the Company’s Board of Directors and former Chairman of the Company’s Compensation Committee, performed consulting services for the Company during the third quarter of the year ended December 31, 2009 totaling $28,000. There were no amounts payable to Mr. Holt as of December 31, 2009.
 
 During the third quarter of the year ended December 31, 2009, the Company entered into an agreement with Constantin Zdarsky, a then holder of 10.2% of the outstanding Common Stock, a Warrant holder and a Promissory Note holder, to convert his notes into Preferred Stock as of July 1, 2009. The total aggregate principal amount owed under his notes totaling $3,503,226, plus accrued and unpaid interest through the date of the conversion totaling $175,161, was converted into 3,678,387 shares of Preferred Stock. In addition to the note conversion, his three outstanding Common Stock Warrants for the purchase of an aggregate amount of 3,002,150 shares of Common Stock, at a price of $0.80 per share, had been extended for one year. As more fully described in Note 15, the also Company entered into an agreement with Mr. Zdarsky in which his 3,002,150 Common Stock Warrants, which were exercisable at $0.80 per share, were cancelled and the Company granted a new warrant to purchase up to 1,050,752 fully-vested shares of Preferred Stock of the Company at a per share exercise price of $1.00 and exercisable through April 30, 2010. The Company also granted a new fully-vested Common Stock Warrant to purchase up to 7,502,151 shares of Common Stock of the Company at a per share price of $0.40 and exercisable through January 1, 2014. As of December 31, 2009, Mr. Zdarsky was a holder of 16.9% of the voting rights of the Company, which included voting rights under his 9,745,700 Common Stock shares and 4,178,387 Preferred Stock shares.
  During the year ended December 31, 2009, five members of the Board of Directors purchased 185,707 shares of Common Stock at $0.35 per share and 187,707 Common Stock Warrants, exercisable at $0.40 per share for a period of one year, for total proceeds of $64,997 as part of a private placement.
 
 16. Employee Benefit Plans
 
 The Company maintains a 401(k) Income Deferral Plan (the "401(k) Plan") immediately open to all employees regardless of age or tenure. The Company may make a discretionary contribution to the 401(k) Plan each year, allocable to all 401(k) Plan participants. However, the Company elected to make no contributions for the years ended December 31, 2009 and 2008. Administrative fees for the 401(k) Plan totaled $3,230 and $4,311 for the years ended December 31, 2009 and 2008, respectively.
  17. Subsequent Events
  The Company evaluated events occurring between the year ended December 31, 2009 and March 31, 2010, the date the consolidated financial statements were issued.
 
 On January 5, 2010, the Company granted 500,000 Common Stock Options to the new Chief Financial Officer with an exercise price of $0.61 and that vest over three years.
 
 On February 3, 2010, the Company amended the Alpharetta lease (Note 14) to rent an additional 1,500 square feet for additional rent of $1,050 per month through November 1, 2010.
 
 During the first quarter of 2010, the Company issued 3,465,321 shares of Common Stock at $0.40 per share and 3,465,321 Common Stock Warrants, exercisable at $0.50 per share for a period of one year, for total gross proceeds of $1,386,128 as part of a private placement.
 
 On March 12, 2010, the Company entered into an agreement (the “Agreement”) with Fletcher International, Ltd., a company organized under the laws of Bermuda (“Fletcher”), under which Fletcher has the right and, subject to certain conditions, the obligation to purchase up to $10,000,000 of the Company’s common stock in multiple closings as described below.  Fletcher also will receive a warrant to purchase up to $10,000,000 of the Company’s common stock.
 
 At the initial closing under the Agreement, Fletcher has the right to purchase 1,500,000 shares of the Company’s common stock at $1.00 per share. At subsequent closings, Fletcher has the right to purchase (a) up to an aggregate of $500,000 of the Company’s common stock at a price per share equal to the Prevailing Market Price (as defined therein), (b) up to an aggregate of $3,000,000 of the Company’s common stock at a price per share equal to the greater of (i) $1.25 per share, and (ii) the Prevailing Market Price, and (c) up to an aggregate of $5,000,000 of the Company’s common stock at a price per share equal to the greater of (i) $1.50 per share, and (ii) the Prevailing Market Price.  The Company can require such purchases if certain conditions are satisfied.
 F-29
 Under the Agreement, Prevailing Market Price is defined as the average of the daily volume-weighted average price for shares of the Company’s common stock for the forty business days ending on and including the third business day before the pricing event, but not greater than the average of the daily volume-weighted average price for shares of the Company’s common stock for any five consecutive or nonconsecutive business days in such forty day period.
  In connection with the Agreement, the Company is required to file a Registration Statement with the Securities and Exchange Commission on or before April 15, 2010 covering such shares, including warrant shares, and to have such registration statement declared effective no later than July 1, 2010.  In the event that the registration statement is not declared effective by July 1, 2010, the Company is obligated to pay to Fletcher an amount equal to 1.5% of the share value, as defined in the Agreement, for each 30 day period, or portion thereof, and increasing by 0.25% for each subsequent 30 day period, or portion thereof, based upon the number of days the registration statement is not declared effective after July 1, 2010.
 
 Assuming the maximum share coverage of 26,609,536 common shares, including 11,074,197 warrant shares and using the closing share price of $0.90 as of March 31, 2010, the Company would be obligated to pay to Fletcher approximately $359,000 for the first 30 days following July 1, 2010 and approximately $419,000 for the next 30 days following July 1, 2010.  Amounts payable to Fletcher continue to increase each subsequent 30 day period, assuming no decreases in the stock price, and could be significant. The agreement does not provide a limit on the amount that the Company would be obligated to pay to Fletcher for not having an effective Registration Statement. Increases (decreases) in the Company's share price will increase (decrease) the amount the Company would be obligated to pay Fletcher.
 The warrant to be issued to Fletcher covers $10,000,000 of the Company’s common stock, is exercisable at a price per share of $0.9030 subject to certain adjustments, is exercisable for nine years subject to certain extensions, and is exercisable on a net exercise basis. If certain conditions are satisfied, the warrant may be replaced with a new warrant covering $10,000,000 of the Company’s common stock with an exercise price per share of $3.00 subject to certain adjustments, a term of two years subject to certain extensions, and the same net exercise provisions. On March 22, 2010, the Company issued 11,074,197 Common Stock Warrants in conjunction with the Agreement.
 
 On March 22, 2010, the Company issued 1,500,000 shares of the Company’s common stock at $1.00 per share for total gross proceeds of $1,500,000 in conjunction with the Fletcher Agreement.
 
 On March 16, the Company granted 150,000 Common Stock Options to each of Robert Jett and Francis Ruotolo and 240,000 Common Stock Options to John Gaulding with an exercise price of $0.86 and that vest over three years to coincide with their upcoming service on the Board of Directors. The Company also granted each of these individuals 50,000 shares of Common Stock for their extended service on the Board of Directors.
 
 On March 17, the Company granted 250,000 Common Stock Options to each of Directors Gaulding, Ruotolo, Jett, Kite, Campbell and Kaplan with an exercise price of $0.91and that vest over three years for their extended service to the Board of Directors.
 
 On March 17, the Shareholders of the Company approved the adoption of the 2010 Stock Plan to allow for the grant of up to 10,000,000 shares of Common Stock and/or Common Stock Options to employees, directors and consultants.
 F-30




SIGNATURES
  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 20th Day of April 2010 by the undersigned, thereunto duly authorized.
  ANTs software inc.By
/s/ Joseph KozakJoseph Kozak,Chairman, Chief Executive Officer and President
 
 37
 
 DIRECTORSBy
/s/ Joseph KozakJoseph Kozak, Chairman, Chief Executive Officerand PresidentDate
April 20, 2010
   By
/s/ Craig L. CampbellCraig Campbell, DirectorDate
April 20, 2010
 
  By
/s/ John R. GauldingJohn R. Gaulding, DirectorDate
April 20, 2010
 
  By
/s/ Robert T. JettRobert Jett, DirectorDate
April 20, 2010
 
  By
/s/ Ari KaplanAri Kaplan, DirectorDate
April 20, 2010
 
  By
/s/ Robert H. KiteRobert H. Kite, DirectorDate
April 20, 2010
 
 By
/s/ Francis K. RuotoloFrancis K. Ruotolo, DirectorDate
April 20, 2010
  38
  (a)
Exhibits
 3.1(1)
Amended and Restated Certificate of Incorporation of the Company.
 3.2(2)
Amended and Restated Bylaws of the Company.
 4.1(3)
The description of Our common stock.
 4.2(4)
The description of Our Series A Preferred Stock.
 23.1
Letter of Consent from Independent Registered Public Accounting Firm, Weiser LLP.
 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 99.1(5)
ANTs software inc. 2010 Stock Plan.
  (1)
Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, filed with the Commission on September 8, 2008.
 (2)
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 Commission on March 17, 2008.
 (3)
Incorporated by Reference to Our Form 10SB12G filed with the Securities and Exchange Commission on September 14, 1999 including any amendment or report filed for the purpose of updating such description. (4)
Incorporated by reference to Exhibit 3(i) to the Company’s current report on Form 8-K filed with the Commission on September 23, 2009. (5)
Incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on January 29, 2010.