UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 2008
[ ] Transition Report Under to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number: 000-16299
ANTS SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3054685
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
700 Airport Blvd., Suite 300, Burlingame, California 94010
(Address of principal executive offices including zip code)
(650) 931-0500
(Registrant's telephone number, including Area Code)
Securities registered under Section 12(b) of the Act: None
Securities Registered under Section 12(g) of the Act:
Common Stock, $0.0001 par value
-------------------
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 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.
[ ] Yes [X] 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. Yes [X] No [ ]
Indicate by check mark if 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 [X] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second quarter. As
of June 30, 2008 the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant was approximately $80 million based on
the average bid and asked price of such common stock as reported on the NASD
Bulletin Board system. Shares of common stock held by each officer and director
and each person who owns more than 10% or more of the outstanding common stock
have been excluded because these persons may be deemed to be affiliates. The
determination of affiliate status for purpose of this calculation is not
necessarily a conclusive determination for other purposes.
The issuer had 90,648,369 shares of common stock outstanding as of March 31,
2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders (the
"Proxy Statement"), to be filed within 120 days of the end of the year ended
December 31, 2008, are incorporated by reference in Part III hereof. Except with
respect to information specifically incorporated by reference in this Form 10-K,
the Proxy Statement is not deemed to be filed as part hereof.
2
TABLE OF CONTENTS
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PART I
Item 1. Business......................................................................................4
Item 1A. Risk Factors.................................................................................10
Item 1B. Unresolved Staff Comments....................................................................15
Item 2. Properties...................................................................................15
Item 3. Legal Proceedings............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities...............................................................16
Item 6. Selected Financial Data......................................................................19
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of
Operations...................................................................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................33
Item 8. Financial Statements and Supplementary Data..................................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........34
Item 9A. Controls and Procedures......................................................................34
Item 9B. Other Information............................................................................37
PART III
Item 10. Directors, Executive Officers and Corporate Governance ......................................38
Item 11. Executive Compensation.......................................................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..............................................................38
Item 13. Certain Relationships and Related Transaction and Director Independence......................38
Item 14. Principal Accountant Fees and Services.......................................................38
PART IV
Item 15. Exhibits, Financial Statements and Schedules..................................................39
Signatures..............................................................................................81
Exhibits................................................................................................83
3
This Annual Report and the information incorporated herein by reference contain
forward-looking statements that involve a number of risks and uncertainties, as
well as assumptions that, if they never materialize or if they prove incorrect,
would likely cause our results to differ materially from those expressed or
implied by such forward-looking statements. Although our forward-looking
statements reflect the good faith judgment of our management, these statements
can only be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from results and outcomes
discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of forward-looking words
such as "believes," "expects," "hopes," "may," "will," "plans," "intends,"
"estimates," "could," "should," "would," "continue," "seeks" or "anticipates,"
or other similar words (including their use in the negative), or by discussions
of future matters such as the development of new products, problems incurred in
establishing sales and sales channels, technology enhancements, possible changes
in legislation and other statements that are not historical. These statements
include, but are not limited to, statements under the captions "Business," "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as other sections in this Annual Report. You
should be aware that the occurrence of any of the events discussed under the
heading "Item 1A -- Risk Factors" and elsewhere in this Annual Report could
substantially harm our business, results of operations and financial condition.
If any of these events occurs, the trading price of our common stock could
decline and you could lose all or a part of the value of your shares of our
common stock.
The cautionary statements made in this Annual Report are intended to be
applicable to all related forward-looking statements wherever they may appear in
this Annual Report. We urge you not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report.
PART I
ITEM 1. BUSINESS
The Company
ANTs software inc. is developing the ANTs Compatibility Server ("ACS") and
develops, markets and supports the ANTs Data Server "ADS". ACS is middleware
that is intended to offer a fast, cost-effective method to move applications
from one database to another and enable enterprises to achieve cost efficiencies
by consolidating their applications onto fewer databases.
Restatement
We have restated our balance sheets as of December 31, 2007 and 2006 and the
related statements of operations, stockholders' (deficit) equity, and cash
flows for the years ended December 31, 2007 and 2006 to correct errors in such
consolidated financial statements.
The restatement of our financial statements is based upon a review of the
accounting treatment of certain transactions entered into with certain investors
in 2006 and 2007 (see Note 14 of the Consolidated Financial Statements for a
description of these transactions). During this review, we discovered of
the Consolidated Financial Statements that we had incorrectly applied a
restriction discount to the market value of our common stock based on a
long history of selling restricted common stock to a group of investors.
The discounted stock price was then used in the allocation between debt
and equity for Units of convertible promissory notes and restricted common
shares, which were sold to investors in late 2006 and early 2007. The discounted
stock price was also used to determine if there was a beneficial conversion
related to the convertible promissory notes. The same methodology was used
in late 2007 when we issued convertible promissory notes along with common
stock warrants. See Note 2 of the Consolidated Financial Statements for the
impact of the restatements to 2007 and 2006.
4
In light of this restatement, the Company concluded that a material weakness
existed at December 31, 2008 in the design and effectiveness of internal
controls related to accounting for the issuance of Warrants and Convertible
Notes Payable. See Item 9A below.
Corporate History
ANTs software inc. (sometimes referred to herein as "ANTs" or "we") is a
Delaware corporation headquartered in Burlingame, California. Our shares are
traded on the OTC Bulletin Board under the stock symbol ANTSE. We are the
successor to Sullivan Computer Corporation, a Delaware corporation incorporated
in January 1979, which, in 1986 changed its name to CHoPP Computer Corporation.
In 1997, we reincorporated from Delaware to Nevada, and in February 1999 changed
our name to ANTs software.com. In July 2000, we merged with Intellectual
Properties and Technologies, Inc., a wholly owned subsidiary with no significant
assets. In December 2000, we reincorporated from Nevada to Delaware and changed
our name from ANTs software.com to ANTs software inc.
Since 2006, we have focused our efforts on development related to the ACS, which
is based on research and development related to the ADS which began in 2000. We
either license this technology to customers or sell the proprietary technology
and related licenses to the customers.
Technology and Intellectual Property
Beginning in 2000, we focused on development of the ADS and core
high-performance database technologies. In May 2008, we sold those
high-performance technologies and the intellectual property related to them,
retaining a license to use those technologies in ACS. The sale of the ADS
technology was recorded as revenue in the financial statements. In 2007, we
began developing ACS. We have developed proprietary technologies related to ACS
which we regard as trade secrets and we are pursuing patent protection on a
number of these technologies. Our Professional Services team has also developed
proprietary technologies used in the monitoring and management of applications
and databases. We regard these technologies as trade secrets.
The ANTs Compatibility ServerTM
Applications written to work with one database product are typically
incompatible with other database products due to proprietary extensions
developed and popularized by the database vendors. This has the effect of
locking customers into one database vendor because it would generally be
cost-prohibitive and too time-consuming to migrate an application from one
database to another. ACS translates these proprietary extensions from one
database product to another and allows customers to migrate applications from
one database product to another more easily and at less cost.
Migrating applications is intended to be a three-step process when using ACS:
1. Move the data - the large database vendors all have full-featured
tools that allow customers to move data from other products to theirs.
2. Install ACS - once the data is migrated, ACS is installed and
connected to the application and the new database.
3. Test and deploy - the application is first tested to ensure that it
functions properly with the new database, and then the customer goes
"live" with the application.
We have developed the underlying technologies related to ACS and we have
conducted successful pilot tests. In April 2008, we announced the launch of the
first version of ACS as a generally available commercial product. The first
version of ACS allows applications currently running on Sybase's database
product to run on Oracle's database product. In the future, we expect to build
versions of ACS that will enable applications to be migrated from and to
numerous other database products. We are in discussions with four database
vendors about building additional versions of ACS.
5
Professional Services
Established in 1993, Inventa Technologies, Inc. ("Inventa"), our IT managed
services and professional services division (together, "Professional Services"),
provides pre- and post-sales services related to the ACS and application
migration, application and database architecting, monitoring and management.
Inventa provides the following services:
ACS Services. This service assists customers in establishing a database
consolidation strategy, action plan for migrating applications among databases,
installation, deployment and post-deployment monitoring and tuning.
Monitoring Infrastructure Management. This service provides management of
monitoring infrastructure including: architecture planning, agent deployment and
support, and agent configuration with threshold management. The core
infrastructure for this service can either be hosted and managed by us or
deployed directly within a customer's environment and individual events / alarms
transitioned back to customer employees.
Monitoring and Event Management. This service provides a fully functional
24x7x365 Network Operations Center ("NOC") responsible for isolating critical
events, opening trouble tickets, and escalating the event's visibility within
the customer's organization. This service can be hosted entirely within our NOC
or portions can be integrated with or hosted directly within the customer's
environment.
Visualization and Trending. Our ESM Integrator(TM) portal captures, centralizes
and integrates performance metrics collected by the monitoring infrastructure
deployed as a component of our other services or layered upon existing data
sources residing within the customer's environment. Sources of data are not
limited to components monitored by our service; we can integrate virtually any
business metrics, or other third party data for enterprise-wide reporting which
is platform independent.
Performance Management. The most popular way organizations attempt to solve
their performance issues is with faster, more powerful hardware. While this
generally produces some positive results, the benefit is very costly in both
hardware and tiered software. Additionally, performance is typically addressed
only when business or system reliability is impacted thereby creating additional
pressure to the already constrained customer staff to fix the issue. Our
Performance Management Service is pro-active and can help maximize the
customer's existing resources in a cost-effective and manageable way.
Capacity Planning. This service provides organizations with the ability to
anticipate the effects of growth and plan for that growth. Customers are able to
map out a strategy to accommodate spikes in transaction volumes and overall
growth while maintaining response time and uptime.
Code Quality Management. Performance quality, reliability, and capacity are
results of how well applications are designed and implemented. Our Code Quality
Management service uses our time-tested code analysis tools to assist customers
in tracking overall code quality and improvements as new application versions
are released.
We provide Professional Services to customers in the banking, insurance, gaming,
automotive and high-technology industries. We have extensive experience in
architecting enterprise application and database deployments, upgrades and
migrations and in installing, configuring, deploying and maintaining database
products from major vendors such as IBM, Oracle, Microsoft and Sybase. We have
developed proprietary software that enables us to remotely monitor, diagnose and
maintain customer applications and databases, saving customers the cost of
having to maintain in-house IT resources needed to deliver these services. We
typically sign annual and multi-year contracts and the majority of our customers
renew.
We deliver our services through a remote delivery model from our New Jersey
office which contains a network operations center and our Center of Excellence
for database migrations. The network operation center provides customers with
remote assessment, diagnostic and tuning capabilities through secure remote
connection 24 hours a day, seven days a week. The Center of Excellence was
established to demonstrate for customers that our database migration services
are capable of assisting in the migration of data either remotely or on-site.
The Center of Excellence is also a state-of-the-art training facility for the
new services personnel we expect to recruit from numerous colleges and
universities in the Mid-Atlantic region.
6
We integrate our professional services capabilities tightly into the pre and
post-sales process, enabling us to:
o Accurately assess the customer's operating environment;
o Propose the most efficient database consolidation and application
migration solution;
o Efficiently deploy ACS and assist the customer in testing before
"going live"; and
o Post-deployment, provide application monitoring, maintenance and
service past deployment
Sales and Marketing
The Market
According to IDC Research, the market for database products was $18.6 billion in
2007. Oracle, Microsoft and IBM control approximately 84% of this market.
According to the numerous CTOs, database architects and application developers
at the target Global 2000 enterprises with whom we have spoken, database
infrastructure costs have become one of the most expensive line items in the IT
budget. These Global 2000 enterprises typically have annual database "spends" in
excess of tens and, in some cases, hundreds of millions of dollars and their
database budgets are growing annually. The migration cost from one database to
another, even to a low-cost open-source database, is extensive due to lack of
compatibility between the products' proprietary extensions. There is significant
interest, confirmed by our discussions with industry analysts and user groups,
for a product that can provide the capability to migrate an application from one
database to another.
According to IDC Research, the markets in which our Professional Services
division operates, IT services and application management, was projected at $122
billion in 2007 with IBM Global Services, HP/EDS and Accenture being among the
largest vendors in those markets. We have a unique combination of experience,
skills and proprietary software that allow us to address a segment of the IT
services market centered on database and application monitoring, maintenance and
services. In addition to this established market we anticipate that our
professional services group will be the first provider of migration and
consulting services resulting from pre- and post-sales of our ACS products.
Customers will look to us as the experts in database consolidation to provide a
full range of services related to ACS installation, deployment and use. To the
extent that this becomes a new "market" for professional services, we are in a
position to capitalize on it.
Strategy
Our go-to-market strategy adapts with changes in the competitive structure of
the database market. The refinement of our strategy is a continuous and
iterative process, reflecting our goal of providing a cost-effective solution
across a wide variety of applications. Our strategy has recently included:
o Developing partnerships with IBM, Oracle, Microsoft, Sybase and others
to bring our products to market;
o Focusing on large enterprise customers who can realize significant
savings by migrating applications among leading database products;
o Selling or licensing our products directly;
o Selling our products and technologies through partners; and
o Developing custom versions of our products for partners and selling or
licensing that technology to them.
ACS can provide a solution for enterprises to address the problems of vendor
lock-in and cost escalation by enabling them to migrate applications among
database products. ACS can provide a potentially significant competitive
advantage for database vendors such as Oracle, IBM, Microsoft, Sybase and others
because they would have the ability to cost-effectively migrate applications
from their competitors' products to their own.
If we are successful in our go-to-market strategy, we intend to generate revenue
through a range of activities which may include: sales of developed technology,
licenses, royalties, custom development and professional services. If one or
more of the large database vendors resells our products, we would expect to
share in that license and maintenance revenue. Each sale of our products or
related technology will require installation, testing, tuning and other
professional services. We intend to generate revenue by providing those
services.
7
We generated significant revenues related to the license and sale of our ADS
technologies during the year-ended December 31, 2008. We expect to generate
revenues from existing and new contracts with our Professional Services
customers, and if successful, we expect to generate additional revenues related
to ACS.
Competition
We have not identified a direct competitor for our ACS database migration
products. Other database vendors encourage migration from competitive products
through use of their proprietary migration tools. These tools often require
substantial investment to rewrite applications. Potential customers with whom we
have spoken are not receptive to migrating applications due to the expense and
risk of such rewrites. While database vendors do not offer a directly
competitive product, we fully expect database vendors to offer incentives for
customers to keep applications deployed on their database products.
Competitors in the Professional Services market are large and well-established,
with vendors such as IBM Global Services, Accenture and HP/EDS offering a wide
range of services. We have maintained long-term relationships with our customers
and have been successful in renewing contracts and in signing multi-year
contracts.
Current Operations
Our operations consist of:
(i) Developing Database Migration Technologies and the ACS - we develop
and market ACS, a faster, cost-effective way to consolidate databases,
allowing customers to efficiently use IT resources and drive down
operating costs.
(ii) Professional Services - we have extensive experience in architecting
enterprise application and database deployments, upgrades and
migrations and in installing, configuring, deploying and maintaining
database products from major vendors such as IBM, Oracle, Microsoft
and Sybase. We provide application migration services, application and
database managed services and consulting services.
Our headquarters are located in Burlingame, California and we have an office in
Mt. Laurel, New Jersey. We have financed operations through private offerings to
accredited investors to whom we have sold common stock and issued convertible
promissory notes and warrants. We expect to continue to raise capital for
operations through such private offerings until we generate positive cash flows
from operations. We believe we have sufficient funds to cover operations into
the third quarter of 2009 at our expected expense rate. This expectation
includes the anticipated receipt of the final payment from a customer as shown
in the Consolidated Balance Sheet. We expect that our focus over the next year
will be on the development and marketing of ACS and on the growth of our
Professional Services offerings.
Employees
As of December 31, 2008, we had 45 full-time employees, all based in the United
States. Of the total number, 30 were engaged in managed and professional
services, 4 in research, development and customer support, 6 in business
development/marketing, and 5 in general, administrative and finance. We have not
experienced work stoppages, are not subject to any collective bargaining
agreement and believe that our relationship with our employees is good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to reports filed or furnished pursuant to Sections
13(a) and 15 (d) of the Securities and Exchange Act of 1934, as amended, are
available free of charge on our Investor Relations Web site at www.ants.com as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC. The information posted on our website is not
incorporated into this Annual Report on Form 10-K.
8
Executive Officers
ANTs executive officers and principal employees as of December 31, 2008:
Name Age Position
Joseph Kozak...............58 Chairman, President and Chief Executive Officer, Class 1 Director,
term expires in 2010
Joseph Kozak - Chairman, President and Chief Executive Officer
Joseph Kozak joined ANTs in June 2005 as President and was named Chief Executive
Officer and appointed to the Board of Directors in August 2006 and was appointed
Chairman of the Board of Directors in October 2007. Mr. Kozak brings 25 years of
front-line leadership experience in sales, marketing and business development.
Mr. Kozak joined ANTs from Oracle Corporation, where he was Vice President of
Industry Sales. While with Oracle he defined and executed global strategies for
retail, distribution, life science, process manufacturing, and consumer packaged
goods industries. He also managed Oracle's acquisition of Retek, Inc. a $630
million purchase in the retail applications space. Prior to Oracle, Mr. Kozak
was CEO of Lombardi Software a manufacturer of business process management
solutions. He was also a partner with Ernst and Young, LLP, in the retail and
consumer packaged goods division; Vice President of Sales for SAP America, where
he was responsible for the retail distribution and consumer goods business units
for the Americas; and Mr. Kozak held numerous management positions with AT&T and
IBM.
9
ITEM 1A. RISK FACTORS
In addition to other information in this Form 10-K, the following risk factors
should be carefully considered in evaluating our business since it operates in a
highly changing and complex business environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights a few
of these risk factors, any one of which may have a significant adverse impact on
our business, operating results and financial condition. As a result of the risk
factors set forth below and elsewhere in this 10-K, and the risks discussed in
our other Securities and Exchange Commission filings, actual results could
differ materially from those projected in any forward-looking statements.
We face significant risks, and the risks described below may not be the only
risks we face. Additional risks that we do not know of or that we currently
consider immaterial may also impair our business operations. If any of the
events or circumstances described in the following risks actually occurs, our
business, financial condition or results of operations could be harmed and the
trading price of our common stock could decline.
Economic Risks
The fragile state of the worldwide economy could impact the company in numerous
ways.
The effects of the recent worldwide economic crisis has caused disruptions and
extreme volatility in global financial markets, increased rates of default and
bankruptcy, has impacted levels of consumer spending, and may impact our
business, operating results, or financial condition. The ongoing worldwide
economic crisis, weakness in the credit markets and significant liquidity
problems for the financial services industry may also impact our financial
condition in a number of ways. For example, current or potential customers may
delay or decrease spending with us or may not pay us or may delay paying us for
previously-purchased products and services. Also, we may have difficulties in
securing additional financing.
Business Risks
We have a history of losses and a large accumulated deficit and we may not be
able to achieve profitability in the future.
For the years ended December 31, 2008 and 2007 we incurred net losses of
$11,628,584 and $17,643,219, respectively. Our accumulated deficit totals
$87,929,614. There can be no assurance that we will be profitable in the future.
If we are not profitable and cannot obtain sufficient capital, we may have to
cease our operations.
We may be unable to successfully execute any of our identified business
opportunities that we determine to pursue.
We currently have a limited corporate infrastructure. In order to pursue
business opportunities, we will need to continue to build our infrastructure and
operational capabilities. Our ability to do any of these successfully could be
affected by any one or more of the following factors:
o Our ability to raise substantial additional capital to fund the
implementation of our business plan;
o Our ability to execute our business strategy;
o The ability of our products and services to achieve market acceptance;
o Our ability to manage the expansion of our operations and any
acquisitions that we may make, which could result in increased costs,
high employee turnover or damage to customer relationships;
o Our ability to attract and retain qualified personnel;
o Our ability to manage our third party relationships effectively; and
o Our ability to accurately predict and respond to rapid technological
changes in our industry and the evolving demands of the markets we
serve.
Our failure to adequately address any one or more of the above factors could
have a significant adverse effect on our ability to implement our business plan
and our ability to pursue other opportunities that arise.
10
We rely on key personnel and, if we are unable to retain or motivate key
personnel or hire qualified personnel, we may not able to grow effectively.
Our success depends in large part upon the abilities and continued service of
our executive officers, including Joseph Kozak, our Chief Executive Officer, and
other key employees. There can be no assurance that we will be able to retain
the services of such officers and employees. Our failure to retain the services
of our key personnel could have a material adverse effect on us. In order to
support our projected growth, we will be required to effectively recruit, hire,
train and retain additional qualified management personnel. Our inability to
attract and retain the necessary personnel could have a material adverse affect
on us.
We depend on a limited number of customers for a significant portion of our
revenue.
During 2008 our three largest customers accounted for approximately 92% of our
revenue. Revenue from one of these customers was $3.6 million, or 44% of total
revenues. Revenues from the second and third customers were $2.4 million, or 28%
of total revenues, and $1.7 million or 19% of total revenues, respectively. A
decrease in revenue from any of our largest customers for any reason, including
a decrease in pricing or activity, or a decision to either utilize another
vendor or to no longer use some or all of the products and services we provide,
could have a material adverse affect on our revenue.
Our ANTs Data Server product competes with products offered by large companies.
We operate in a highly competitive industry. Although we believe that our ANTs
Data Server technology is unique, can be protected, and, if adopted, will confer
benefits to customers, we face very large competitors with greater resources who
may adopt various strategies to block or slow our market penetration, thereby
straining our more limited resources. We are aware of efforts by competitors to
introduce doubt about our financial stability as we compete to make sales and
win customers and business. Large competitors may also seek to hinder our
operations through attempts to recruit key staff with exceptionally attractive
terms of employment, including signing bonuses, or by offer of highly
competitive terms to potential or newly acquired customers.
We rely upon reselling partners and independent software vendors for product
sales.
A significant portion of our sales has been, and we believe will continue to be,
made through reselling partners and independent software vendors (together
"Partners"). As a result, our success may depend on the continued sales efforts
of Partners, and identifying and entering into agreements with additional
Partners. The use of Partners involves certain risks, including risks that they
will not effectively sell or support our products, that they will be unable to
satisfy their financial obligations with us, and that they will cease
operations. Any reduction, delay or loss of orders from Partners may harm our
results. There can be no assurance that we will identify or engage qualified
Partners in a timely manner, and the failure to do so could have a material
adverse affect on our business, financial condition and results of operations.
If we are unable to protect our intellectual property, our competitive position
would be adversely affected.
We rely on patent protection, as well as trademark and copyright law, trade
secret protection and confidentiality agreements with our employees and others
to protect our intellectual property. However, we have not yet filed any patent
applications on any technology or inventions included or incorporated in the ACS
product. Despite our precautions, unauthorized third parties may copy our
products and services or reverse engineer or obtain and use information that we
regard as proprietary. We have filed 13 patent applications with the United
States Patent and Trademark Office and intend to file more. Six patents have
been granted; however, we do not know if the remaining seven applications will
be granted or whether we will be successful in prosecuting any future patents.
In addition, the laws of some foreign countries do not protect proprietary
rights to the same extent as do the laws of the United States. Our means of
protecting our proprietary rights may not be adequate and third parties may
infringe or misappropriate our patents, copyrights, trademarks and similar
proprietary rights. If we fail to protect our intellectual property and
proprietary rights, our business, financial condition and results of operations
would suffer. We believe that we do not infringe upon the proprietary rights of
any third party, and no third party has asserted an infringement claim against
us. It is possible, however, that such a claim might be asserted successfully
against us in the future. We may be forced to suspend our operations to pay
significant amounts to defend our rights, and a substantial amount of the
attention of our management may be diverted from our ongoing business, all of
which would materially adversely affect our business.
11
If we experience rapid growth, we will need to manage such growth well.
We may experience substantial growth in the size of our staff and the scope of
our operations, resulting in increased responsibilities for management. To
manage this possible growth effectively, we will need to continue to improve our
operational, financial and management information systems, will possibly need to
create departments that do not now exist, and hire, train, motivate and manage a
growing number of staff. Due to a competitive employment environment for
qualified technical, marketing and sales personnel, we expect to experience
difficulty in filling our needs for qualified personnel. There can be no
assurance that we will be able to effectively achieve or manage any future
growth, and our failure to do so could delay product development cycles and
market penetration or otherwise have a material adverse effect on our financial
condition and results of operations.
We could face information and product liability risks and may not have adequate
insurance.
Our products may be used to manage data from critical business applications. We
may become the subject of litigation alleging that our products were ineffective
or disruptive in their treatment of data, or in the compilation, processing or
manipulation of critical business information. Thus, we may become the target of
lawsuits from injured or disgruntled businesses or other users. We carry product
and information liability and errors and omissions insurance, but in the event
that we are required to defend more than a few such actions, or in the event our
products are found liable in connection with such an action, our business and
operations may be severely and materially adversely affected.
We have a long corporate existence and were inactive during much of our
corporate history.
Up until approximately 2004, the Company did not have significant operations.
Since that time, we have been in the process of developing our ADS and ACS
products.
We have indemnified our officers and directors.
We have indemnified our Officers and Directors against possible monetary
liability to the maximum extent permitted under Delaware law.
Market acceptance of our products and services is not guaranteed and our
business model is evolving.
We are at an early stage of development and our revenue will depend upon market
acceptance and utilization of our products and services, including ACS which is
now under development. Our products are under constant development and are still
maturing. Customers may be reluctant to purchase products from us because they
may be concerned about our financial viability and our ability to provide a full
range of support services. Given these risks, customers may only be willing to
purchase our products through partners who are not faced with similar
challenges. We may have difficulty finding partners to resell our products.
Also, due to current economic conditions, including the current recession, some
potential customers may have tightened budgets for evaluating new products and
technologies and the evaluation cycles may be much longer than in the past.
There can be no assurance that our product and technology development or support
efforts will result in new products and services, or that they will be
successfully introduced.
Technology Risks
If we deliver products with defects, our credibility will be harmed and the
sales and market acceptance of our products will decrease.
Our product and services are complex and have at times contained errors, defects
and bugs. If we deliver products with errors, defects or bugs, our credibility
and the market acceptance and sales of our products would be harmed. Further, if
our products contain errors, defects or bugs, we may be required to expend
significant capital and resources to alleviate such problems. We may agree to
indemnify our customers in some circumstances against liability arising from
defects in our products. Defects could also lead to product liability as a
result of product liability lawsuits against us or against our customers. We
carry product and information liability and errors and omissions insurance, but
in the event that we are required to defend more than a few such actions, or in
the event that we are found liable in connection with such an action, our
business and operations may be severely and materially adversely affected.
12
Our ANTs Compatibility Server (ACS) product is at an early stage and a business
model is not yet established.
We began developing the ANTs Compatibility Server in 2007 and have not yet begun
selling the product. We anticipate that we will sell ACS through partners,
although we have not yet executed reselling agreements with any partner.
Consequently, we have not yet established pricing for ACS and have only
preliminary estimates as to the possible revenues and expenses associated with
sales, support and delivery. It is possible that we will not generate enough
revenue to offset the expenses and that the ACS line of business will not be
profitable.
We will need to continue our product development efforts.
We believe that the market for our products will be characterized by increasing
technical sophistication. We also believe that our eventual success will depend
on our ability to continue to provide increased and specialized technical
expertise. There is no assurance that we will not fall technologically behind
competitors with greater resources. Although we believe that we enjoy a lead in
our product development, and believe that our patents on the ACS and trade
secrets provide some protection, we will likely need significant additional
capital in order to maintain that lead over competitors who have more resources.
We face rapid technological change.
The market for our products and services is characterized by rapidly changing
technologies, extensive research and the introduction of new products and
services. We believe that our future success will depend in part upon our
ability to continue to develop and enhance ACS and to develop, manufacture and
market new products and services. As a result, we expect to continue to make a
significant investment in engineering and research and development. There can be
no assurance that we will be able to develop and introduce new products and
services or enhance our initial products in a timely manner to satisfy customer
needs, achieve market acceptance or address technological changes in our target
markets. Failure to develop products and services and introduce them
successfully and in a timely manner could adversely affect our competitive
position, financial condition and results of operations.
Financing Risks
A failure to obtain financing could prevent us from executing our business plan
or operate as a going concern.
We anticipate that current cash resources will be sufficient for us to execute
our business plan into the third quarter of 2009. This expectation includes the
anticipated receipt of the final payment from a customer as shown in the
Consolidated Balance Sheet. If further financing is not obtained we will not
be able to continue to operate as a going concern. We believe that securing
additional sources of financing to enable us to continue the development and
commercialization of our proprietary technologies will be difficult and there
is no assurance of our ability to secure such financing. A failure to obtain
additional financing could prevent us from making expenditures that are needed
to pay current obligations, allow us to hire additional personnel and
continue development of our product and technology. If we raise additional
financing by selling equity or convertible debt securities, the relative
equity ownership of our existing investors could be diluted or the new investors
could obtain terms more favorable than previous investors. If we raise
additional funds through debt financing, we could incur significant borrowing
costs and be subject to adverse consequences in the event of a default.
We have incurred indebtedness.
We have incurred debt in the past year and may incur substantial additional debt
in the future. A significant portion of our future cash flow from operating
activities may be dedicated to the payment of interest and the repayment of
principal on our indebtedness. There is no guarantee that we will be able to
meet our debt service obligations. If we are unable to generate sufficient cash
flow or obtain funds for required payments, or if we fail to comply with our
debt obligations, we will be in default. In addition, we may not be able to
refinance our debt on terms acceptable to us, or at all. Our indebtedness could
limit our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions or other purposes in the
future, as needed; to plan for, or react to, changes in technology and in our
business and competition; and to react in the event of an economic downturn.
13
Shareholder Risk
There is a limited market for our common stock.
Our common stock is not listed on any exchange and trades in the
over-the-counter ("OTC") market. As such, the market for our common stock is
limited and is not regulated by the rules and regulations of any exchange.
Further, the price of our common stock and its volume in the OTC market may be
subject to wide fluctuations. Our stock price could decline regardless of our
actual operating performance, and stockholders could lose a substantial part of
their investment as a result of industry or market-based fluctuations. Our stock
trades relatively thinly. If a more active public market for our stock is not
sustained, it may be difficult for stockholders to sell shares of our common
stock. Because we do not anticipate paying cash dividends on our common stock
for the foreseeable future, stockholders will not be able to receive a return on
their shares unless they are able to sell them. The market price of our common
stock will likely fluctuate in response to a number of factors, including but
not limited to, the following:
o sales, sales cycle and market acceptance or rejection of our products;
o our ability to sign Partners who are successful in selling our
products;
o economic conditions within the database industry;
o our failure to develop and commercialize the ACS;
o the timing of announcements by us or our competitors of significant
products, contracts or acquisitions or publicity regarding actual or
potential results or performance thereof; and
o domestic and international economic, business and political
conditions.
Failure to maintain effective internal controls in accordance with Section 404
of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our
stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the SEC require annual management assessments of the
effectiveness of our internal control over financial reporting and a report by
our independent registered public accounting firm on these internal controls. If
we fail to adequately maintain compliance with, or maintain the adequacy of, our
internal control over financial reporting, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of
2002 and the related rules and regulations of the SEC. If we cannot favorably
assess, or our independent registered public accounting firm is unable to
provide an unqualified attestation report on the effectiveness of our internal
controls over financial reporting, investor confidence in the reliability of our
financial reports may be adversely affected, which could have a material adverse
effect on our stock price. As discussed in Section 9A, we have concluded that we
had a material weakness in the internal control environment. This material
weakness was related to the restated 2006 and 2007 financial statements.
Our actual results could differ materially from those anticipated in our
forward-looking statements.
This report contains forward-looking statements within the meaning of the
federal securities laws that relate to future events or future financial
performance. When used in this report, you can identify forward-looking
statements by terminology such as "believes," "anticipates," "plans,"
"predicts," "expects," "estimates," "intends," "will," "continue," "may,"
"potential," "should" and similar expressions. These statements are only
expressions of expectations. Our actual results could, and likely will, differ
materially from those anticipated in such forward-looking statements as a result
of many factors, including those set forth above and elsewhere in this report
and including factors unanticipated by us and not included herein. Although we
believe that the expectations reflected in our forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Neither we nor any other person assumes responsibility for the
accuracy and completeness of these statements. We assume no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results. Accordingly, we caution readers not to place
undue reliance on these statements.
14
Limitation on ability for control through proxy contest.
Our Bylaws provide for a Board of Directors to be elected in three classes. This
classified Board may make it more difficult for a potential acquirer to gain
control of us by using a proxy contest, since the acquirer would only be able to
elect approximately one-third of the directors at each shareholders' meeting
held for that purpose.
Our securities may be de-listed from the OTC Bulletin Board if we do not meet
continued listing requirements.
If we do not meet the continued listing requirements of the OTC Bulletin Board
("OTC") and our securities are de-listed by the OTC, trading of our securities
would likely be halted. In such case, the market would be negatively affected
and we could face difficulty raising capital necessary for our continued
operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in Burlingame, California. We lease approximately
15,000 square feet of office space, of which approximately 20% is currently
utilized. We also maintain a facility in Mt. Laurel, New Jersey, where we lease
approximately 7,300 square feet of office space as of December 31, 2008.
Effective January 6, 2009, leased square foot at our Mt. Laurel facility
increased to approximately 12,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
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 intends to continue vigorously defending
itself.
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 intends to continue vigorously
defending itself.
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 is seeking approximately $50,000 in rent, late fees and
operating expenses per month from October 2008. The Company intends to continue
defending itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to our shareholders for a vote from October 1,
2008 to December 31, 2008.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Price Range of Common Stock
Our common equity is traded on the Over-The-Counter Bulletin Board ("OTCBB")
under the symbol "ANTSE."
The following is the range of high and low closing bid prices of our stock, for
the periods indicated below. This information was obtained from Yahoo! Finance
Historical Quotes, and can be found at the following Internet address:
http://finance.yahoo.com/q/hp?s=ANTSE.OB.
High Low
Quarter Ended June 30, 2009
through April 24, 2009 $0.59 $0.42
Quarter Ended March 31, 2009 0.68 0.32
Quarter Ended December 31, 2008 $.71 $0.30
Quarter Ended September 30, 2008 0.92 0.52
Quarter Ended June 30, 2008 1.26 0.80
Quarter Ended March 31, 2008 1.30 0.71
Quarter Ended December 31, 2007 $1.45 $0.65
Quarter Ended September 30, 2007 2.14 1.50
Quarter Ended June 30, 2007 2.00 1.49
Quarter Ended March 31, 2007 2.56 1.92
The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
As of March 31, 2009 there were 90,648,369 shares of common stock issued and
outstanding and approximately 1,358 registered holders of record of our common
stock.
COMPANY STOCK PRICE PERFORMANCE
The following information shall not be deemed to be "soliciting material" or to
be "filed" with the Securities and Exchange Commission nor shall this
information be incorporated by reference into any future filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that ANTs specifically incorporates it by
reference into a filing.
The graph below compares the cumulative total shareholder return on ANTs common
stock for the last five full years with the cumulative return on the NASDAQ
composite and the Peer group for the same period. The graph assumes that $100
was invested in ANTs common stock and in each of the other indices on December
31, 2003 and that all dividends were reinvested. ANTs has never paid cash
dividends on its stock. The comparisons in the graph below are based on
historical data, with ANTs common stock prices based on the closing price on the
dates indicated and are not intended to forecast the possible future performance
of ANTs common stock.
16
Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008
-------- -------- -------- -------- -------- --------
ANTs Software, Inc. 100.00 234.41 223.66 260.22 76.34 39.78
NASDAQ Composite 100.00 109.16 111.47 123.05 140.12 84.12
NASDAQ Computer and Data Processing Index 100.00 110.23 113.97 127.96 156.36 90.00
Peer Group Only 100.00 68.28 59.45 73.07 159.82 53.86
[SEE SUPPLEMENTAL PDF FOR GRAPHIC OF ABOVE CHART]
(b) Dividend Policy
We have not declared or paid cash dividends or made distributions in the past,
and do not anticipate that we will pay cash dividends or make distributions in
the foreseeable future.
(c) Recent Sales of Unregistered Securities
In 2008, 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:
2008
As discussed in Note 4 of the Consolidated Financial Statements, 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 a result of the acquisition of certain intangible assets, we recorded a
deferred tax liability of approximately $344,000. As discussed in Note 14
of the Consolidated Financial Statements, the notes had a beneficial conversion
feature approximating $1,355,600 which was allocated to additional paid-in
capital.
17
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. In accordance with the provisions of FAS 123(R), $786,545 in
stock compensation expense was recognized, net of forfeiture credits, as a
result of the repricing.
For the year 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 in accordance with the
accounting guidelines set forth in SFAS 123 (R) and EITF 96-18, respectively.
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.
2007
Funds raised through private offerings to accredited investors:
In the first quarter of 2007, the Company entered into agreements with
accredited investors to purchase 220 J Units, raising $11,000,000. Pursuant to
the sale, the Company issued 3,142,700 shares of common stock with share prices
between $1.92 and $2.35 (restated), and issued Notes with an initial face value
of $5,500,000. In accordance with EITF 00-27, the Company allocated the cash
received between debt and equity based on the relative fair value of each piece
of the instrument. As a result, value ascribed to the debt portion was
$4,150,577 and the value ascribed to the equity portion was $6,849,423.
The Company paid $1,100,000 in cash commissions and issued 145,440 shares of
common stock which were valued between $1.92 and $2.35 per share or $449,228.
The total commission value of $1,549,228 (restated) was allocated between
debt issuance costs and additional paid-in capital as a cost of raising the
equity portion of the offering, in the same proportion that was used to
allocate the gross proceeds of the offering between notes payable and
stockholders' equity. This resulted in a recognition of $584,166 (restated)
prepaid debt issue costs and a reduction of additional paid in capital of
$956,061 (restated).
As more fully discussed in Note 14, "Convertible Notes Payable with Warrants",
in the fourth quarter of 2007 the Company issued two convertible promissory
notes payable with a principal value of $3,003,226, along with 2,002,150
warrants exercisable at $0.80 (after modification) per share. The $3,003,226
in cash proceeds were allocated between notes payable and equity in proportion
to their relative fair values on the date of each issuance, which resulted in
a discount on notes payable and an increase of additional paid-in capital of
$479,829 (restated).
Funds raised through cash exercises of stock options and warrants:
For the year ended December 31, 2007, stock options covering a total of 60,000
shares were exercised, generating $60,600 in cash proceeds to the Company. In
the last two quarters of 2007, warrants covering 796,900 shares were exercised
at a modified discounted price of $1.25 per share, resulting in proceeds of
$996,125 to the Company.
Other equity transactions:
For the year ended December 31, 2007, $1,488,405 was recognized in compensation
expense related to vesting of employee stock options, and $99,417 in
professional fees was recognized related to the vesting of non-employee stock
options and warrants in accordance with the accounting guidelines set forth in
SFAS 123 (R) and EITF 96-18, respectively.
Stock Repurchases
There were no shares repurchased by us during 2008.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from our financial statements.
This data should be read in conjunction with the financial statements and notes
and with Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Fiscal Years ended December 31,
-------------------------------------------------------------------------------
2007 2006
2008 (restated) (restated) 2005 2004
--------------- --------------- ------------- -------------- --------------
Operations:
Revenue $ 8,282,729 $ 359,706 $ 287,832 $ 466,620 $ -
Operating expenses 13,449,745 16,305,299 15,532,252 9,154,979 5,060,292
Net loss (11,628,584) (17,643,219) (15,131,978) (8,704,497) (5,060,061)
Basic and diluted net loss per share $ (0.15) $ (0.31) $ (0.30) $ (0.22) $ (0.16)
Financial Position:
Cash and cash equivalents $ 2,051,807 $ 4,480,694 $ 4,698,949 $ 6,381,932 $ 1,448,724
Working capital 2,358,848 3,494,081 4,154,858 5,525,616 1,196,604
Total assets 33,456,805 5,886,727 5,986,238 7,436,357 1,868,616
Stockholders' equity (deficit) $ 28,043,297 $ (1,338,192) $ 4,628,771 $ 6,412,586 $ 1,529,181
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The results of operations for the years ended December 31, 2008, 2007 and 2006
are summarized in the table below.
2007 2006
2008 % Change (Restated) % Change (Restated)
-------------- --------- -------------- --------- --------------
Revenues $ 8,282,729 2203% $ 359,706 25% $ 287,832
Cost of revenues 3,230,490 25383% 12,677 -47% 23,893
-------------- -------------- --------------
Gross profit 5,052,239 1356% 347,029 31% 263,939
Operating expenses 13,507,419 -17% 16,305,299 5% 15,532,252
-------------- -------------- --------------
Loss from operations (8,455,180) -47% (15,958,270) 5% (15,268,313)
Other (expense) income, net (3,700,584) 120% (1,684,949) -1336% 136,335
Income tax benefit 527,180 - -
-------------- -------------- --------------
Net loss (11,628,584) -34% (17,643,219) 17% (15,131,978)
============== ============== ==============
Net loss per share -
basic and diluted $ (0.15) -52% $ (0.31) 3% $ (0.30)
============== ============== ==============
Shares used in computing basic
and
diluted net loss per share 77,847,729 37% 56,618,971 12% 50,474,155
============== ============== ==============
Revenues
Revenues for 2008 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. Future revenues are expected to include sales and licenses
of our ACS product and related technology, 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 we may develop.
19
Revenues for 2007 and 2006 relate to the ADS and consist of license fees,
recognition of maintenance and support services over the term of the agreements,
royalties from third parties that resell ADS, and professional services fees.
Professional services revenues relate to post-sales consulting.
During 2008, we recognized approximately $8.3 million in revenue, an increase of
approximately $7.9 million over 2007. Of the total recognized (in thousands):
o $3,100 for the sale of our ADS technology;
o $3,000 represents seven month's services revenue from our Inventa
subsidiary;
o $1,200 in ADS license fees;
o $107 were ADS license revenues under a revenue sharing agreement;
o $42 were maintenance and support fees;
o $42 was professional services revenue performed by ANTs.
During 2007, we recognized approximately $360,000 in revenue, an increase of
approximately $72,000 from 2006. Of the total recognized:
o $258,000 was license and royalty revenues, an increase of $101,000
versus 2006. The increase was primarily due to a first-time minimum
royalty payment, which was offset by lower license revenue from direct
sales;
o $101,000 was maintenance and support fees, a $5,000 decrease from the
prior year; and
o We did not provide any professional services during 2007, resulting in
a $24,000 decrease in professional services revenue from 2006 as no
such services were requested by our customers in 2007.
Cost of Revenues
Cost of revenues was approximately $3.2 million, $13,000 and $24,000 for 2008,
2007 and 2006, respectively. Cost of revenues in 2008 consists of personnel
costs to provide managed and professional services, separation costs for
personnel related to the license and sale of ADS, software development costs,
and third-party licenses related to the sale and license of ADS. Cost of
revenues in 2007 and 2006 consisted of third-party licenses and services.
Operating Expenses
Operating expenses for the years ending December 31, 2008, 2007 (restated) and
2006 were as follows:
% of 2007 % of 2006 % of
2008 Total % Change (Restated) Total % Change (Restated) Total
------------------ -------- ----------- ----- -------- ----------- ------
Sales and marketing $ 2,097,537 16% -29% $ 2,939,481 18% -43% $ 5,164,937 33%
Research and
development 6,652,346 49% -30% 9,442,521 58% 40% 6,736,381 43%
General and
administrative 4,699,862 35% 20% 3,923,297 24% 8% 3,630,934 24%
------------ ----- -------- ------------ ----- -------- ----------- ------
Total operating
expenses $ 13,449,745 100% -17% $16,305,299 100% 5% $15,532,252 100%
============ ===== ======== =========== ===== ======== =========== ======
Our primary expenses are salaries, benefits and consulting fees relating to
developing and marketing the ANTs Compatibility Server, marketing and selling
managed and professional services, and general and administrative expenses.
The number and distribution of full-time employees as of December 31, 2008, 2007
and 2006 were as follows:
20
% of 2007 % of 2006 % of
2008 Total (Restated) Total (Restated) Total
----------------------------------------------------------
Cost of Revenues 30 67% - 0% - 0%
Sales and marketing 6 13% 3 8% 12 23%
Research and
development 4 9% 29 78% 32 62%
General and
administrative 5 11% 5 14% 8 15%
----------------------------------------------------------
Headcount at end of
period 45 100% 37 100% 52 100%
----------------------------------------------------------
Sales and Marketing Expenses
Sales and marketing expense consists primarily of employee salaries, commissions
and benefits, stock-based compensation, professional fees, travel and
entertainment and corporate overhead allocations.
The components of sales and marketing expenses are presented in the table below.
For the years ended December 31,
------------------------------------------------------------
2007 2006
2008 % Change (Restated) % Change (Restated)
------------------------------------------------------------
Employee compensation and
benefits $ 908,444 -33% $1,348,694 -34% $ 2,049,870
Stock-based compensation 359,286 90% 189,188 -9% 208,085
Professional fees 308,447 -53% 660,534 -24% 868,046
Travel and entertainment 169,546 -42% 290,324 -45% 526,770
Amortization of customer
relationships 138,916 --- - --- -
Corporate allocations from
general and
administrative expenses 56,073 -36% 87,009 -51% 177,417
Events and promotions and other 156,825 -57% 363,732 -73% 1,334,749
------------ ------ ---------- ------- --------------
Total $ 2,097,537 -29% $2,939,481 -43% $ 5,164,937
------------ ------ ---------- ------- --------------
Headcount at end of period 6 100% 3 -75% 12
* For the purposes of our analysis of key expenses, 2006 results have been
reclassified from previously reported amounts in both employee compensation and
benefits and stock-based compensation, as follows:
o We have combined certain employee-related benefits together in
our presentation of employee compensation and benefits.
2008 versus 2007 Results
- ------------------------
Total sales and marketing expense decreased by approximately $842,000
(restated), a 29% decrease in 2008 versus 2007, due primarily to the following:
o Employee compensation and benefits decreased by 33% due to reductions
in our direct sales team as we implemented our partner strategy
relying less on direct sales efforts and due to the transfer of
pre-sales technical staff to research and development. Somewhat
offsetting the savings is the addition of four Inventa staff.
o Stock-based compensation increased 90% primarily due the repricing of
certain stock options and warrants to the market value of our common
stock as of March 26 and March 31, 2008. We do not expect the expenses
incurred due to the repricing and the option grant to recur.
o Professional fees decreased 53% due to our change in go-to-market
strategy. By pursuing partner sales, we reduced end-user marketing and
lead-generation programs.
o Travel and entertainment decreased 42% as we decreased our sales and
marketing team from 2007 levels.
21
o Corporate allocations decreased 36% due to lower headcount in sales
and marketing and cost savings in employee benefits.
o 2008 results reflect seven months' expenses related to Inventa
(acquired May 30, 2008), whereas 2007 results include no expenses
related to Inventa.
2007 versus 2006 Results
- ------------------------
Total sales and marketing expenses decreased by $2.2 million, a 43% decrease in
2007 versus 2006 due primarily to the following:
o Employee compensation and benefits decreased 34% in 2007 versus 2006
due to reductions in our direct sales team as we implemented our ADS
partner strategy and due to the transfer of pre-sales technical staff
to research and development.
o Marketing programs decreased 73% due to our change in go-to-market
strategy. By selling through partners rather than selling directly to
end-users, we eliminated end-user marketing and lead-generation
programs and reduced advertising and trade-show attendance.
o Stock-based compensation decreased 9% primarily due to reduced
headcount from 12 at the end of 2006 to 3 at the end of 2007.
o Travel decreased 45% because our partnering strategy required less
travel and due to the reduction in our sales team.
Research and Development Expenses
Research and development expense consists primarily of employee compensation and
benefits, contractor fees, stock-based compensation and equipment and software.
The components of research and development expense are presented in the table
below.
Years ended December 31,
-------------------------------------------------------
2007 2006
2008 % Change (Restated) % Change (Restated)
-------------------------------------------------------
Employee compensation
and benefits $3,005,928 -44% $ 5,366,836 33% $4,046,325
Contractor fees 1,891,884 -16% 2,245,030 60% 1,401,728
Stock-based compensation 966,673 30% 741,312 46% 507,600
Equipment and computer
supplies 284,304 -28% 396,449 -6% 423,966
Corporate allocations
from general and
administrative expenses 380,400 -22% 489,116 43% 342,407
Other 123,157 -40% 203,778 1320% 14,355
---------- ------ ----------- ----- ----------
Total $6,652,346 -30% $ 9,442,521 40% $6,736,381
---------- ------ ----------- ----- ----------
Headcount at end of period 4 -86% 29 -9% 32
* For the purposes of our analysis of key expenses, 2006 results have been
revised from previously reported amounts in both employee compensation and
benefits and stock-based compensation, as follows:
o We have combined certain employee-related benefits together in our
presentation of employee compensation and benefits.
o Due to reductions in headcount and multiple functional
responsibilities of certain employees, effective January 1, 2007, we
began allocating a portion of certain employees' salaries and bonuses
between departments based on each employee's contribution to that
department.
o Stock-based compensation has been revised to include expenses
recognized on issuances of warrants and options to non-employees.
22
2008 versus 2007 Results
- ------------------------
Total research and development expense decreased by $2.8 million, a 30% decrease
in 2008 versus 2007, due primarily to the following:
o Employee compensation and benefits decreased 44% due to a decrease in
headcount from 29 as of December 31, 2007 to 4 as of December 31,
2008. The decrease is primarily due to the sale of ADS and separation
of the ADS team and migration of most product engineering to contract
organizations and is offset by the addition of three staff from
Inventa.
o Contractor fees decreased 16% as we decreased use of contract research
and development services on the ACS product and eliminated such
services for the ADS product in May 2008.
o Stock-based compensation increased primarily due to i) the impact of
our repricing of certain stock options and warrants to the market
value of our common stock as of March 26, 2008, offset by a reduction
in employees and associated vesting expense on their options versus
the prior year, ii) separation expense related to modification of
grants to former employees on the ADS team, and iii) expense related
to stock option grants issued to Inventa staff. We do not expect the
expenses in (i) and (ii) above to recur.
o 2008 results reflect seven months of expenses related to Inventa
(acquired May 30, 2008), whereas 2007 results include no expenses
related to Inventa.
2007 versus 2006 Results
- ------------------------
Total research and development expenses increased by $2.7 million, a 40%
increase in 2007 versus 2006 due primarily to the following:
o Employee compensation and benefits increased 33% in 2007 versus 2006
due to an increase in average full-time equivalent employees.
Full-time equivalent employees represent the sum of the headcount at
the end of each month, divided by the number of months in the period,
which differs from actual headcount at the end of each year as
presented above. Full-time equivalent employees increased from an
average of 25 in year 2006 to an average of 33 in 2007. This increase
includes the transfer of pre-sales technical staff from our sales and
marketing department to our research and development department.
Although the actual headcount in research and development on December
31, 2007, was less than on December 31, 2006, the decrease was due to
a reduction in force at the end of 2007, and those employees were on
staff for almost the entire year, leading to higher overall expense.
o We increased use of contract research and development teams.
o Stock-based compensation increased 46% in 2007 versus 2006 due to the
increase in headcount.
o Equipment and computer supplies expense decreased 6% primarily due to
decreased purchases of computer equipment. During early 2007, we
completed the purchase of the majority of computers and related
equipment required for our development and test lab, offset by an
increase in depreciation expense on computer equipment that was
purchased in the third quarter of 2006 but impacted all of 2007.
General and Administrative Expenses
General and administrative expenses consists primarily of employee salaries and
benefits, professional fees (legal, accounting, director fees, investor
relations and placement agent fees related to financing), facilities expenses
and insurance.
23
The components of general and administrative expenses are presented in the table
below.
Years ended December 31,
-----------------------------------------------------------
2007 2006
2008 % Change (Restated) % Change (Restated)
-----------------------------------------------------------
Employee compensation
and benefits $ 1,200,350 -28% $1,663,826 26% $1,324,176
Stock-based compensation 1,448,734 120% 657,322 6% 619,060
Facilities, director fees,
insurance and other 1,357,289 24% 1,095,894 11% 985,943
Professional fees 1,129,962 4% 1,082,380 -11% 1,221,579
Corporate allocations to Sales
and marketing and Research
and development (436,473) -24% (576,125) 11% (519,824)
------------- ------ ----------- ------ -----------
Total $ 4,699,862 20% $3,923,297 8% $3,630,934
------------ ------ ----------- ------ -----------
Headcount at end of period 3 40% 5 -38% 8
* For the purposes of our analysis of key expenses, 2006 results have been
revised from previously reported amounts in stock-based compensation to include
expenses recognized on issuances of warrants and options to non-employees.
2008 versus 2007 Results
- ------------------------
Total general and administrative expense increased by approximately $777,000
(restated), a 20% increase in 2008 versus 2007, due primarily to the following:
o Employee compensation and benefits expense decreased 28% due primarily
to the non-recurring nature of a severance payment to our former
chairman during the quarter ended June 30, 2007. In addition, ANTs
headcount decreased from five at December 31, 2007 to three at
December 31, 2008 where it was for most of 2008, resulting in
significant savings.
o Stock-based compensation increased 120% due to the impact of the
repricing of certain stock options and warrants to the market value of
our common stock as of March 26 and March 31, 2008 and the issuance of
two stock option grants during the second quarter, one to our CEO and
one to our CFO. The grants were fully vested when granted and
therefore immediately expensed. We do not expect the expenses due to
the repricing and the option grants to recur.
o Professional fees increased 4% primarily due to increased use of
contract accounting personnel.
o Allocations of overhead costs decreased 24% versus the prior year.
Allocations are based on headcount in the other departments. These
allocations decreased as the number of personnel in other departments
decreased.
o 2008 results reflect seven months' expenses related to Inventa
(acquired May 30, 2008), whereas 2007 results include no expenses
related to Inventa.
2007 versus 2006 Results
- ------------------------
Total general and administrative expenses increased by approximately $292,000
(restated), an 8% increase in 2007 versus 2006 due primarily to the following:
o Employee compensation and benefits expense increased 26% in 2007 from
2006, primarily due to a $500 thousand obligation incurred under a
severance agreement between us and our former chairman. This increase
was offset by lower salaries and benefits of $272 thousand due to a
reduction in full-time employees.
o Professional fees decreased primarily due to reduced Sarbanes Oxley
compliance costs as activities switched from first-time compliance in
2006 to maintenance in 2007.
o Stock-based compensation expense includes expense related to options
issued to employees, including members of our Board of Directors, and
options and warrants issued to non-employees. Stock-based compensation
increased marginally by 6% in 2007 over 2006.
o Director fees increased in 2007 as we began to pay outside directors
cash compensation in consideration for their service on the Board of
Directors. Prior to 2007 we compensated directors by issuing stock
options.
24
Other Income (Expense), Net
The components of other income (expense), net are presented in the table below.
Years ended December 31,
----------------------------------------------------------
2007 2006
2008 % Change (Restated) % Change (Restated)
--------------------- --------------------- ------------
Other (expense) income:
Interest expense, convertible notes
payable $(3,675,056) 78% $(2,008,544) -14755% $ (13,521)
Loss on extinguishment of convertible
promissory notes payble (49,940) - -
Interest income 82,816 -74% 320,928 58% 203,133
Other (58,404) -2290% 2,667 105% (53,277)
------------ ------- ------------ ------- ------------
Total other (expense) income, net $(3,700,584) -120% $(1,684,949) -1336% $ 136,335
============ ======= ============ ======= ============
2008 versus 2007 Results
- ------------------------
Other (expense) income, net primarily consists of interest expense related to
our convertible notes payable and, to a lesser extent, income earned on our cash
and cash equivalents. Total other (expense) income decreased approximately $2.0
million (restated) in 2008 versus 2007 primarily due to the ongoing amortization
of the discount on convertible notes payable. Detail regarding the change in
other (expense) income follows:
o Interest expense totaling approximately $3.7 million is due to
amortizing the discount on our convertible notes payable.
2007 versus 2006 Results
- ------------------------
Other income, net decreased by approximately $1.8 million in 2007 (restated)
compared to 2006 (restated), due primarily to:
o The issuance of $6.5 million in convertible promissory notes in
December 2006 and March 2007 and an additional issuance of $3.0
million in the fourth quarter of 2007, all containing embedded
beneficial conversion features and an associated Discount on
Convertible Promissory Notes Payable. This discount is being amortized
to interest expense using the effective interest method. Interest
expense in 2006 consisted primarily of interest paid on credit cards
used in operations.
o Interest income increased, which somewhat offset the increase in
interest expense.
We recorded approximately $2.0 million (restated) in interest expense
(approximately $1 million (restated) of which was non-cash (non-GAAP measure)
related to the Convertible Notes issued in December 2006 and March 2007 and the
Convertible Notes issued with warrants in October and December 2007 compared to
$14,000 (restated) in 2006. In 2006, interest expense primarily consisted of
interest incurred on company credit cards.
Interest income increased by $118,000 in 2007 compared to 2006. The combination
of higher average balances and investments in higher-yielding investment
products was responsible for the increase. Balances averaged approximately $7.0
million in invested funds during 2007 compared to an average balance of
approximately $6.3 million in 2006. Cash balances were invested in
higher-yielding money market accounts in 2007 compared with 2006.
25
Income Tax Benefit
In November 2008, we were 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 on 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. On November 25, 2008, we 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.
Liquidity, Capital Resources and Financial Condition
As of and for the year ended December 31,
2007 2006
2008 Change (Restated) Change (Restated)
-----------------------------------------------------------------
Net cash used in operating
activities $ (6,531,711) $ 7,450,488 $(13,982,199) $ (643,643) $(13,338,556)
Net cash used in investing
activities (3,202,651) $(3,006,640) (196,011) 423,762 (619,773)
Net cash provided by financing
activities 7,305,475 $(6,654,480) 13,959,955 1,684,609 12,275,346
------------- ------------ ------------- ---------- ------------
Net (decrease) increase in cash
and cash equivalents $ (2,428,887) $(2,210,632) $ (218,255) $1,464,728 $ (1,682,983)
============= ============ ============= ========== ============
Details regarding the cash flows by activity follows.
Cash Used in Operating Activities
- ---------------------------------
In 2008, cash used in operating activities totaled approximately $6.5 million, a
decrease of $7.5 million from 2007. The following items significantly impacted
our cash used in operating activities during 2008:
o Our net loss included approximately $6.8 million in non-cash charges
(non-GAAP measure), which were comprised primarily of $3.1 million in
stock-based compensation, $2.5 million in interest expense related to
the amortization of the Discount on Convertible Notes Payable, and
$800,000 in fixed asset depreciation and intangible asset
amortization.
o An increase in notes receivable from a customer.
o A decrease in research and development expense
In 2007, cash used in operating activities totaled approximately $14.0 million,
approximately $644,000 (restated) higher than cash used in operating activities
in 2006. The following items significantly impacted our cash used in operating
activities during 2007:
o Our net loss included $3.4 million in non-cash charges (non-GAAP
measure), which were comprised primarily of approximately $1.6 million
in stock-based compensation, approximately $1.2 million (restated) in
amortization of Discount on Convertible Notes Payable, and $421,000 in
fixed asset depreciation.
o An increase in salaries and benefits paid, primarily due to average
full-time headcount increases in research and development.
o Severance payments to our former chairman and former employees.
o An increase in contract research and development fees.
o An increase in interest payments related to convertible promissory
notes.
26
In 2006, cash used in operating activities totaled approximately $13.3 million
(restated). The following items significantly impacted our cash used by
operating activities during 2006:
o Our 2006 net loss included $1.9 million in non-cash charges (non-GAAP
measure), which were comprised primarily of $1.3 million in stock
based compensation and $363,000 in depreciation of fixed assets; and
o An increase in total company salaries and benefits paid as we
increased headcount to support bringing the ANTs Data Server to
market.
Cash Used in Investing Activities
- ---------------------------------
In 2008, cash used in investing activities totaled approximately $3.2 million,
an increase of $3.0 million over 2007, primarily due to $3 million that was paid
in conjunction with issuing 20,000,000 shares of common stock to acquire the
stock of Inventa Technologies (see Note 4 of the consolidated financial
statements).
In 2007, cash used in investing activities totaled approximately $196,000, a
decrease of $424,000 from 2006, primarily due to a $340,000 decrease in the
purchase of computer and lab equipment required to design and test our products.
By early 2007, we had purchased substantially all of the equipment needed to
support our design, testing and quality assurance requirements.
Cash Provided by Financing Activities
- -------------------------------------
From time to time, we engage in private placement activities with accredited
investors. The private placements sometimes consist of Units, which give the
investor shares of restricted common stock at a discount to the then-current
market price, and a warrant to purchase 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 two to three years. Following is a discussion
and history of the sales of these instruments.
"J" Unit Sales
- --------------
During the period from December 2006 through March 2007, we 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 our common stock (issued at the market value of our
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 our election in the event the closing price of the common stock
equals or exceeds $4.00 per share if converted at our election, it 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 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, we 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 we 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 our stock on the date we issued the J Units.
Based on these commissions, the Discount on Notes Payable was increased by
$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 (see below).
27
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 a beneficial conversion feature valued at $2,026,923 (restated), which was
recorded to Discount on Notes Payable with the offset going to Additional
Paid-in Capital. In addition, we 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 we 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 market value of our stock on the date we issued the J Units. Based on
these commissions, the Discount on Notes Payable was increased by $584,166
(restated) and Additional Paid-in Capital was reduced by $965,061 (restated).
The Discount on Convertible Notes Payable issued in January and March 2007
totaled $3,376,346. The Notes were extinguished in May 2008 (see below).
Convertible Notes Payable with Warrants
- ---------------------------------------
During October 2007 we sold a convertible promissory note in the amount of
$2,000,000 to an accredited investor. Pursuant to the sale, we 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 our common stock equals or exceeds $4.00 per share for ten consecutive
trading days and (ii) we provide 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 we 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 our common stock equals or
exceeds $4.00 per share for ten consecutive trading days and (ii) we provide 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 of the convertible promissory note, we 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. We recorded a discount of
$191,363 for the beneficial conversion feature. The total discount issued in
relation to these notes was $671,193.
Extinguishment of Debt
- ----------------------
On May 15, 2008 we 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 to $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.
28
On the date of modification all of the Notes were deemed extinguished. Upon
extinguishment, we recorded a loss of $49,940.
All of the Modified Notes were deemed to have a beneficial conversion feature,
as the closing price of our 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, we calculated
the relative value of the debt and warrants. The discount associated with this
allocation resulted in an additional $291,774 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.
Line of Credit
- --------------
On May 30, 2008, we assumed a revolving credit facility (the "Facility") in
connection with the acquisition of Inventa, which remains in force through May
15, 2009. The Facility consists of a $250,000 revolving line of credit which
bears interest at a daily rate of LIBOR plus 2.00% (0.44% at December 31, 2008).
At December 31, 2008, there was $200,000 outstanding under the line of credit
and $50,000 available 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 May 15,
2009. The Facility is secured by all of the assets of Inventa and requires the
net solvency of Inventa.
Convertible Notes Related to Acquisition of Inventa Technologies, Inc.
- ----------------------------------------------------------------------
In May 2008 and as part of the purchase price of Inventa, we 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 our 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 additional paid-in capital and will be amortized to using the straight-line
interest method over the life of the promissory notes.
Contractual Obligations and Contingencies
The following table summarizes our contractual obligations as of December 31,
2008:
Payments Due Payments Payments Due
in Less Payments Due Due in After
Contractual Obligations Total Than 1 Year in 1-2 Years 3-4 Years 4 Years
---------------------------------------------------------------
Convertible Notes $ 11,703,226 $ 450,000 $ 11,253,226 $ - $ -
Non-cancelable operating
leases 1,401,846 326,098 391,181 391,181 293,386
------------ ------------ ------------ --------- ----------
Total contractual
obligations $13,105,072 $ 776,098 $ 11,644,407 $ 391,181 $ 293,386
============ ============ ============ ========= ==========
29
Off-Balance-Sheet Arrangements
On April 27, 2005, we entered into a lease with a partnership, for general
commercial offices located in, Burlingame, California (the "Premises"). The
Premises are used for the purposes of general office use and for software
development. The lease had an initial term of three years and was subject to our
right to extend the term of the lease for a total of six additional years. In
July 2007 we extended this lease for the period May 1, 2008 through April 30,
2009 at the rate of $34,200 per month. Through April 30, 2008 we recognized rent
expense for this lease in accordance with Financial Technical Bulletin 85-3
("FTB 85-3"), "Accounting for Operating Leases with Scheduled Rent Increases."
The base rent, the effects of the scheduled rent increases, and the effects of
the rent abatement were recognized on a straight-line basis over the lease term;
rent expense for the periods May 1, 2008 through April 30, 2009 are recorded at
the payment amount. During the years ended December 31, 2008, 2007 and 2006 we
recognized a net total of $396,673, $200,020 and $200,020 respectively, in
rental expense for this lease. During the year ended December 31, 2008, we
recognized a total of $56,000 of sublease income, which was offset to rental
expense. There are no asset retirement obligations under this operating lease.
On May 30, 2008 we acquired Inventa. As part of the acquisition ANTs assumed the
Inventa operating lease of a general commercial facility in Mt. Laurel, New
Jersey at the monthly rent of approximately $10,000. The lease expires March 31,
2015 and was amended effective August 1, 2008 to add 4,590 square feet upon
receipt of a Certificate of Occupancy, effective January 5, 2009. The total
monthly rent will approximate $16,300. The amendment also restates the end of
the lease commitment to be seven years from the date of the Certificate of
Occupancy or January 5, 2016 for the additional space.
Under our leases we are obligated to restore facilities to their former
condition; these requirements consist of normal maintenance which is considered
to be immaterial. Effective June 1, 2008, we agreed to sub-lease a portion of
our Burlingame facility to a customer on a month-to-month lease through April
2009 for $13,000 for rent and utilities, payable each month in advance. Rental
expense is shown net of sub-lease income.
Critical Accounting Policies
Use of Estimates
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. We evaluate such estimates and assumptions on an ongoing basis
and base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates and probably will differ from these estimates under
different assumptions or conditions. On a regular basis we evaluate our
assumptions, judgments and estimates and make changes accordingly. We also
discuss our critical accounting estimates with the Audit Committee of the Board
of Directors. We believe the assumptions, judgments and estimates involved in
the accounting for the recoverability of long-lived assets, the relative fair
value allocation of debt and equity instruments, revenue recognition,
stock-based compensation, and research and development have the greatest
potential impact on our financial statements. These areas are key components of
our results of operations and are based on complex rules that require us to make
judgments and estimates; as a result, we consider these to be our significant
accounting policies. Historically, our assumptions, judgments and estimates
relative to our significant accounting policies have not differed materially
from actual results.
Revenue Recognition
We recognize license and royalty revenue in accordance with the provisions of
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions. Revenue consists primarily of revenue earned under agreements for
software licenses, maintenance and support (otherwise known as post-contract
customer support or "PCS") and professional services. Maintenance and support
revenue is deferred and recognized over the related contract period, generally
twelve months, beginning with customer acceptance of the product.
We use the residual method to recognize revenue when a license agreement
includes one or more elements to be delivered at a future date. If there is an
undelivered element under the license arrangement, we 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 VSOE of fair value does not exist for all undelivered elements,
we defer all revenue until sufficient evidence exists or all elements have been
delivered. Under the residual method, discounts are allocated only to the
delivered elements in a multiple element arrangement with any undelivered
elements being deferred based on VSOE of fair values of such undelivered
elements. Revenue from software license arrangements, which comprise prepaid
license and maintenance and support fees, is recognized when all of the
following criteria are met:
30
o Persuasive evidence of an arrangement exists;
o Delivery has occurred and there are no future deliverables except PCS;
o The fee is fixed and determinable. If we cannot conclude that a fee is
fixed and determinable, then assuming all other criteria have been
met, revenue is recognized, as payments become due in accordance with
paragraph 29 of SOP 97-2; and
o Collection is probable.
Revenue from professional fees, consisting primarily of consulting services, is
recognized as services are provided.
Revenues resulting from the sale of developed technology are recognized when the
technology is transferred to the customer. Evidence of the transfer occurs when
a sale agreement is executed by both the customer and the Company.
Research and Development Expenses
We account for research and development expenses in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed."
We have not yet established technological feasibility of our ACS product and
believe that the difference between completion of research and development and
technological feasibility is difficult to distinguish; therefore, all costs
relating to its development have been expensed in accordance with SFAS No. 86.
Upon the establishment of such feasibility and once the product is made
available for release to customers, we will capitalize these costs in our
Balance Sheet. Our research and development expenses consist primarily of
salaries and benefits and outside contractor expenses.
Employee Stock-Based Compensation Expense
We have two stock-based employee and director compensation plans (the ANTs
software inc. 2000 Stock Option Plan and the ANTs software inc. 2008 Stock
Plan). Since January 1, 2006, we have been using the provisions of SFAS 123(R),
"Share-Based Payment" to account for stock-based award compensation expense. Our
employee stock-based compensation expense for 2007 and 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not fully vested, as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, "Accounting
for Stock Compensation". Stock-based compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006 is based on the grant
date fair value estimated in accordance with the provisions of SFAS 123(R). We
recognize compensation expense for stock option awards on a straight-line basis
over the requisite service period of the award, generally three years.
Income Taxes
The carrying value of our deferred tax assets is dependent upon our ability to
generate sufficient future taxable income in certain tax jurisdictions. Until
such time as we establish a taxable income in such jurisdictions, the total
amount of our deferred tax assets shall be offset with a valuation allowance
equal to our deferred tax asset balance.
Our judgment, assumptions and estimates used for the current tax provision take
into account the potential impact of the interpretation of FIN No. 48 ("FIN 48")
"Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109,"
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. FIN 48 required that we 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. We adopted the provisions of FIN 48 on
January 1, 2007.
31
Recent Accounting Pronouncements
In February 2008, the FASB issued Financial Staff Position ("FSP") SFAS 157-2,
Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delays the
effective date of SFAS 157, Fair Value Measurements ("SFAS 157"), which was
issued in September 2006, for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). SFAS 157
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FSP 157-2 partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for the items within the scope of this FSP. The
adoption of SFAS 157 for all nonfinancial assets and nonfinancial liabilities is
effective for us beginning January 1, 2009. Adoption of this statement is not
expected to be material.
In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS
141R") and SFAS 160, Accounting and Reporting of Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS 160"). SFAS
141R and SFAS 160 expand the scope of acquisition accounting to all transactions
and circumstances under which control of a business is obtained. SFAS 141R and
SFAS 160 are effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years,
with early adoption prohibited and these standards must be adopted concurrently.
These standards will impact the Company for any acquisitions subsequent to the
adoption date. The most significant effect of adoption of SFAS 141R on results
of operations is that success fees, due diligence, legal, accounting, valuation,
and similar costs incurred in connection with acquisitions (acquisition-related
costs) are required to be expensed as incurred. Current practice is that such
costs are capitalized as part of the costs of the acquisition.
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life
of Intangible Assets ("FSP 142-3"). This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
assets under SFAS 141R when the underlying arrangement includes renewal or
extension of terms that would require substantial costs or result in a material
modification to the asset upon renewal or extension. Companies estimating the
useful life of a recognized intangible asset must now consider their historical
experience in renewing or extending similar arrangements or, in the absence of
historical experience, must consider assumptions that market participants would
use about renewal or extension as adjusted for the entity-specific factors
included in SFAS 142. FSP 142-3 is effective for us beginning January 1, 2009.
Adoption of FSP 142-3 is not expected to be material.
In May 2008, the FASB issued FSP No. APB 14-2, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (including Partial Cash
Settlement) ("FSP 14-1"). FSP 14-1 requires that issuers of certain convertible
debt instruments that may be settled in cash upon conversion to separately
account for the liability and equity components in a manner that will reflect
the entity's nonconvertible debt borrowing rate when interest expense is
recognized in subsequent periods. The accounting for these types of instruments
under FSP 14-1 is intended to appropriately reflect the underlying economics by
capturing the value of the conversion options as borrowing costs, therefore
recognizing their potential dilutive effects on earnings per share. The
effective date of APB 14-1 is for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008 and does not permit
earlier adoption. However, the transition guidance requires retrospective
application to all periods presented and does not grandfather existing
instruments. The Company is currently evaluating the impact FSP 14-1will have on
the financial statements.
In June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF
07-5 provides guidance to determine whether an instrument (or an embedded
feature) is indexed to an entity's own stock when evaluating the instrument as a
derivative under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). An instrument that is both indexed to an entity's
own stock and classified in stockholder's equity in the entity's statement of
financial position is not considered a derivative for the purposes of applying
the guidance in SFAS No. 133. EITF 07-5 provides a two-step process to determine
whether an equity-linked instrument (or embedded feature) is indexed to its own
stock first by evaluating the instrument's contingent exercise provisions, if
any, and second, by evaluating the instrument's settlement provisions. EITF 07-5
is applicable to outstanding instruments as of the beginning of the fiscal year
in which the issue is adopted and is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We will adopt EITF 07-5 on January 1, 2009, and do not
expect the adoption will be material to our consolidated financial condition and
results of operations.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Our revenue is invoiced and received in United States dollars. One of our
partners bundles our product with its own and sells to customers in the U.S. and
abroad. For the year ended December 31, 2008, approximately 4% of our revenue
was generated through these non-U.S. royalties. As a result, our net royalty
receipts may have been impacted by any foreign exchange risk experienced by this
partner; however, we believe that our financial results were not and are not
expected to be materially affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. We do
not enter into foreign currency hedging transactions to mitigate any potential
exposure to foreign currency exchange risks.
Interest Rates
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we earn on our
investment portfolio. Our investment portfolio consists of liquid investments
that have maturities of three months or less. Our risk associated with
fluctuating interest income is limited to investments in interest rate sensitive
financial instruments. Under our current policy, we do not use interest rate
derivative instruments to manage this exposure to interest rate changes. We seek
to ensure the safety and preservation of its invested principal by limiting
default risk, market risk, and reinvestment risk. We mitigate default risk by
investing in short-term investment grade securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Fiscal 2008 Quarters Ended,
----------------------------------------------------------------
Year Ended
March 31 June 30 September 30 December 31,
(Restated) (Restated) (Restated) December 31 2008
---------------------------------------------------------------- ----------------
Revenues $ 32,384 $ 5,422,539 $ 1,441,422 $ 1,386,384 $ 8,282,729
Gross profit (12,035) 4,536,395 263,311 206,894 5,052,239
Net loss (4,736,460) (155,412) (3,828,952) (2,907,760) (11,628,584)
Basic and diluted net loss per
common share (0.08) (0.00) (0.04) (0.03) (0.15)
Shares used in computing basic
and diluted net loss per share 57,792,266 71,986,666 90,648,369 90,648,369 77,847,729
33
Fiscal 2007 Quarters Ended,
----------------------------------------------------------------
Year Ended
March 31 June 30 September 30 December 31 December 31,
(Restated) (Restated) (Restated) (restated) 2007 (Restated)
---------------------------------------------------------------------------------
Revenues $ 69,127 $ 21,467 $ 226,964 $ 42,148 $ 359,706
Gross profit 66,415 14,703 224,563 41,348 347,029
Net loss (3,840,130) (5,016,472) (4,267,235) (4,519,382) (17,643,219)
Basic and diluted net loss per
common share (0.07) (0.09) (0.08) (0.08) (0.31)
Shares used in computing basic
and diluted net loss per share 55,995,934 56,460,534 56,622,605 57,381,544 56,618,971
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 13, 2009, the registrant terminated the engagement of Burr, Pilger,
Mayer LLP ("BPM") as the Company's independent registered public accounting
firm. The decision to change accountants was recommended and approved by the
Audit Committee of the Board of Directors of the registrant.
BPM's audit report on the financial statements of the Company as of and for
the two most recent years ended December 31, 2007 and 2006 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the registrant's two most recent fiscal years and any subsequent interim
period preceding the termination of BPM, there were no disagreements with BPM on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement(s) if not
resolved to the satisfaction of BPM, would have caused BPM to make reference to
the subject matter of the disagreement(s) in connection with its report.
During the Company's two most recent fiscal years and any subsequent interim
period preceding the dismissal of BPM, there have been no reportable events of
the type required to be disclosed by Item 304(a)(1)(v) of Regulation S-K.
The Company has provided BPM with a copy of the disclosures it is making in
response to Item 304(a) of Regulation S-K. The Company has requested that BPM
review the disclosures and furnish the Company with a letter addressed to the
Commission stating whether it agrees with the statements made by the Company in
response to Item 304(a) of Regulation S-K and, if not, stating the respects in
which it does not agree. Such letter is attached hereto as exhibit 16.2.
(b) On January 15, 2009, the Company engaged Weiser, LLP as its new
independent accountant. Prior to the engagement, and for the preceding two most
recent fiscal years and any subsequent interim period prior to the engagement,
the registrant did not consult with Weiser, LLP regarding either: the
application of accounting principles to any specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the registrant's financial statements, and where either a written report was
provided to the registrant or oral advice was provided that the new accountant
concluded was an important factor considered by the registrant in reaching a
decision as to the accounting, auditing or financial reporting issue; or any
matter that was either the subject of a disagreement (as defined in paragraph
(a)(1)(iv) and the related instructions of item 304 of Regulation S-K) or a
reportable event (as described in paragraph (a)(1)(v) of item 304 of Regulation
S-K).
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Based on management's evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2008, our disclosure
controls and procedures are designed at a reasonable assurance level and are
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
(b) Changes in internal control over financial reporting.
We regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, migrating processes, or acquisition
of subsidiaries. No changes to internal controls were made during the 4th
quarter of 2008.
34
(c) Management's report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control over financial reporting are designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements.
To evaluate the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management conducted an
assessment, including testing, using the criteria in Internal
Control--Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management elected to exclude
Inventa from their assessment of internal control over financial reporting
pursuant to the SEC guidance, Management's Report on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports. Inventa represents approximately 38.5% of the Company's total revenues.
Based on our assessment we concluded that at December 31, 2008, there was a
material weakness in our internal control over financial reporting. A material
weakness is a deficiency, or a combination of deficiencies, in internal controls
that can result in a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a
timely basis. Management reported to the Audit committee that a material
weakness was identified related to a lack of adequate resources during the year
to evaluate and correctly report specific technical interpretations of GAAP.
Management has concluded that our internal control over financial reporting was
not effective as of December 31, 2008 to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with GAAP. As
mentioned, we reviewed the results of management's assessment with our audit
committee.
(d) Remediation Steps to Address Material Weakness
Management has recognized the need to raise the level of experience and acumen
within the accounting department, especially pertaining to reporting of
non-routine, highly complex technical transactions. In the fourth quarter of
2008 management hired a third party contract consulting company to provide
financial management expertise, thought leadership and SEC reporting
capabilities to the Company.
The remainder of this page was intentionally left blank.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of ANTs software inc.
We have audited ANTs software inc's internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion. As described in Management's Report on Internal Control
over Financial Reporting, management has excluded Inventa from its assessment of
internal control over financial reporting as of December 31, 2008 because it was
acquired by the Company in a purchase business combination during 2008. We have
also excluded Inventa from our audit of internal control over financial
reporting. Inventa represents approximately 38.5% of total consolidated revenue.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management's
assessment. There was a lack of adequate resources during the year to evaluate
and correctly report specific technical interpretations of GAAP. This material
weakness was considered in determining the nature, timing, and extent of audit
tests applied in our audit of the 2008 consolidated financial statements, and
this report does not affect our report dated December 31, 2008 on those
financial statements.
36
In our opinion, because of the effect of the material weakness described above
on the achievement of the objectives of the control criteria, the Company has
not maintained effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2008 and the related consolidated statements of operations,
stockholders' equity and cash flows of the Company for the year ended December
31, 2008, and our report dated April 29, 2009 expressed an unqualified opinion.
/s/ Weiser LLP
New York, NY
April 29, 2009
ITEM 9B. OTHER INFORMATION
None
37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated in this report by
reference to the Company's Proxy statement to be filed with the SEC in
connection with its 2009 Annual Meeting of Stockholders within 120 days after
the end of our year ended December 31, 2008.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated in this report by
reference to the Company's Proxy statement to be filed with the SEC in
connection with its 2009 Annual Meeting of Stockholders within 120 days after
the end of our year ended December 31, 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated in this report by
reference to the Company's Proxy statement to be filed with the SEC in
connection with its 2009 Annual Meeting of Stockholders within 120 days after
the end of our year ended December 31, 2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated in this report by
reference to the Company's Proxy statement to be filed with the SEC in
connection with its 2009 Annual Meeting of Stockholders within 120 days after
the end of our year ended December 31, 2008.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated in this report by
reference to the Company's Proxy statement to be filed with the SEC in
connection with its 2009 Annual Meeting of Stockholders within 120 days after
the end of our year ended December 31, 2008.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this report:
Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-1
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets as of December 31, 2008 and 2007 F-3
Statements of Operations for the years ended December 31, 2008, 2007 and 2006 F-4
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2008, 2007 and 2006 F-5
Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 F-6
Notes to Financial Statements F-8
39
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 sheet of ANTs software,
inc. and subsidiary as of December 31, 2008, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2008, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred significant
recurring operating losses 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 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated April 29,
2009 expressed an adverse opinion.
/s/ Weiser LLP
New York, NY
April 29, 2009
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ANTs software inc.
We have audited the accompanying balance sheet of ANTs software inc. as of
December 31, 2007 (restated) and the related statements of operations,
stockholders' (deficit) equity and cash flows for each of the two years in the
period ended December 31, 2007 (as restated). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ANTs software inc. as of
December 31, 2007 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 "Basis of Presentation and Continuation as a Going
Concern" to the financial statements as of December 31, 2007 (not presented
herein separately), the Company's recurring losses from operations,
stockholders' deficit, and cash flows used in operating activities raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 1, "Basis of
Presentation and Continuation as a Going Concern" as of December 31, 2007 (not
presented herein separately). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, as of December 31, 2007 (not
presented herein separately), the Company adopted Statement of Financial
Accounting Standard No. 123 (revised 2004), "Share-Based Payment", effective
January 1, 2006 applying the modified perspective method, and Financial
Accounting Standards Board Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes", effective January 1, 2007.
As discussed in Note 2 to the financial statements, the Company has restated
previously issued financial statements as of December 31, 2007 and for each of
the two years in the period ended December 31, 2007 for the correction of a
misstatement in the respective periods.
Burr, Pilger & Mayer LLP
San Francisco, California
March 13, 2008, except for Notes 2, 14 and 16
as to which the date is April 29, 2009
F-2
ANTS SOFTWARE INC.
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------
December 31,
-------------------------------
2007
ASSETS 2008 (restated)
--------------- --------------
Current assets:
Cash and cash equivalents $ 2,051,807 $ 4,480,694
Accounts receivable 383,445 8,204
Notes receivable from customer 2,000,000 -
Restricted cash 125,000 192,574
Current portion of prepaid debt issuance costs 4,121 376,165
Prepaid expenses and other current assets 160,723 173,331
Prepaid expense from warrant issued to customer, net - 57,674
--------------- --------------
Total current assets 4,725,096 5,288,642
Property and equipment, net 399,093 510,490
Other intangible assets (net) 5,504,081 -
Goodwill 22,761,517 -
Long-term portion of prepaid debt issuance costs - 53,175
Other assets 67,018 34,420
--------------- --------------
Total assets $ 33,456,805 $ 5,886,727
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 1,445,043 $ 1,230,308
Line of credit 200,000 -
Current portion of convertible promissory notes, net of debt
discount of $15,916 and $484,565, respectively 234,084 515,435
Deferred revenues 487,121 48,818
--------------- --------------
Total current liabilities 2,366,248 1,794,561
Long-term liabilities:
Convertible promissory notes, net of debt discount of
$8,549,964 and $3,072,868, respectively 2,703,260 5,430,358
Deferred tax liability 344,000 -
--------------- --------------
Total liabilities 5,413,508 7,224,919
--------------- --------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; 50,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $0.0001 par value; 200,000,000 shares authorized;
90,648,369 and 57,398,445 shares issued and outstanding,
respectively 9,065 5,740
Additional paid-in capital 115,963,846 74,957,098
Accumulated deficit (87,929,614) (76,301,030)
--------------- --------------
Total stockholders' equity (deficit) 28,043,297 (1,338,192)
--------------- --------------
Total liabilities and stockholders' equity (deficit) $ 33,456,805 $ 5,886,727
=============== ==============
See accompanying notes to consolidated financial statements
F-3
ANTS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------
2007 2006
2008 (restated) (restated)
-------------- -------------- --------------
Revenues:
Products $ 4,970,385 $ 258,829 $ 157,958
Services 3,312,344 100,877 129,874
-------------- -------------- --------------
Total revenues 8,282,729 359,706 287,832
Cost of Revenues:
Products 511,993 9,476 15,136
Services 2,718,497 3,201 8,757
-------------- -------------- --------------
Gross profit 5,052,239 347,029 263,939
Operating Expenses:
Sales and marketing 2,155,211 2,939,481 5,164,937
Research and development 6,652,346 9,442,521 6,736,381
General and administrative 4,699,862 3,923,297 3,630,934
-------------- -------------- --------------
Total operating expenses 13,507,419 16,305,299 15,532,252
-------------- -------------- --------------
Loss from operations (8,455,180) (15,958,270) (15,268,313)
-------------- -------------- --------------
Other (expense) income:
Interest income 82,816 320,928 203,133
Other (58,404) 2,667 (53,277)
Loss on extinguishment of
convertible
promissory notes payable (49,940) - -
Interest expense (3,675,056) (2,008,544) (13,521)
-------------- -------------- --------------
Total other (expense) income (3,700,584) (1,684,949) 136,335
-------------- -------------- --------------
Net loss before income tax benefit 12,155,764 - -
Income tax benefit 527,180 - -
-------------- -------------- --------------
Net loss $ (11,628,584) $ (17,643,219) $ (15,131,978)
============== ============== ==============
Basic and diluted net loss
per common share $ (0.15) $ (0.31) $ (0.30)
============== ============== ==============
Shares used in computing basic and
diluted
net loss per share 77,847,729 56,618,971 50,474,155
============== ============== ==============
See accompanying notes to consolidated financial statements
F-4
ANTS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
Common Stock Common Additional
-------------------------- Stock Paid-in Accumulated
Shares Amount Subscribed Capital Deficit Total
-----------------------------------------------------------------------------------
Balance at January 1, 2006 44,862,058 $ 4,487 $ 243,608 $ 49,690,324 $ (43,525,833) $ 6,412,586
Proceeds from private placements, net of cash
commissions of $754,400 7,398,129 740 - 10,311,837 - 10,312,577
Prepaid commission 8,833 8,833
Beneficial conversion feature - - - 435,444 - 435,444
Common stock issued for shares subscribed a
December 31, 2005 137,230 14 (243,608) 243,594 - -
Common stock subscribed as commission to
placement agent at December 31, 2006 - - 1 (1) - -
Proceeds from warrant exercises, net of cash
commissions of $39,125 302,500 30 - 529,179 - 529,209
Options exercised through cash consideration 477,902 47 - 713,807 - 713,854
Stock-based compensation expense 10,666 1 - 1,348,246 - 1,348,247
Net loss - - - (15,131,978) (15,131,978)
------------- ----------- ----------- ------------ -------------- -------------
Balance at December 31, 2006 (restated) 53,188,485 5,319 1 63,281,262 (58,657,811) 4,628,771
Proceeds from private placements, net of cash
commissions of $684,942 3,142,700 314 - 6,644,000 - 6,644,314
Beneficial conversion feature - - - 2,218,286 - 2,218,286
Prepaid commission - - - 169,109 - 169,109
Common stock issued for shares subscribed at
December 31, 2006 210,360 22 (1) (21) - -
Proceeds from option and warrant exercises 856,900 85 1,056,640 - 1,056,725
Stock-based compensation expense - - - 1,587,822 - 1,587,822
Net loss - - - - (17,643,219) (17,643,219)
------------- ----------- ----------- ------------ -------------- -------------
Balance at December 31, 2007 (restated) 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 - 7,247,805
Shares issued in connection with acquisition
of Inventa Technologies, Inc. 20,000,000 2,000 - 23,998,000 - 24,000,000
Beneficial conversion feature 1,355,586 1,355,586
Fair value of conversion feature of upon
modification of convertible
promissory notes - - - 5,226,069 5,226,069
Proceeds from option and warrant exercises 47,500 5 - 32,665 - 32,670
Stock-based compensation expense 3,147,943 - 3,147,943
Net loss - - - - (11,628,584) (11,628,584)
------------- ----------- ----------- ------------ -------------- -------------
Balance at December 31, 2008 90,648,369 $ 9,065 $ - $115,963,846 $ (87,929,614) $ 28,043,297
============= =========== =========== ============ ============== =============
See accompanying notes to consolidted financial statements
F-5
ANTS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------
2007 2006
2008 (restated) (restated)
--------------- ---------------- --------------
Cash flows from operating activities:
Net loss $ (11,628,584) $ (17,643,219) $ (15,131,978)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 827,155 421,000 363,062
Amortization of warrant issued to customer 57,674 57,673 57,674
Amortization of discount on notes payable 2,509,496 1,184,922 6,076
Amortization of debt issuance costs 83,404 178,537 -
Stock-based compensation expense 3,147,942 1,587,822 1,348,246
Bad debt expense - - 28,738
Loss on disposal of fixed assets 78,645 (1,041) 57,614
Loss on extinguishment of convertible promissory notes 49,940 - -
Changes in operating assets and liabilities:
Accounts receivable 348,395 47,115 (51,655)
Restricted cash 67,574 - -
Prepaid expenses and other current assets 83,424 (41,851) (44,843)
Notes receivable from customer (2,500,000) - -
Payments received on notes receivable from
customer 500,000 - -
Other assets (12,582) - -
Accounts payable and other accrued expenses (53,310) 234,844 30,294
Deferred revenues (90,884) (8,001) (1,784)
--------------- ---------------- --------------
Net cash used in operating activities (6,531,711) (13,982,199) (13,338,556)
--------------- ---------------- --------------
Cash flows from investing activities:
Transfer operating funds to restricted cash - (1,616) (85,559)
Purchases of property and equipment (161,065) (194,395) (534,214)
Proceeds from disposal of property and equipment 5,861 - -
Acquisition of Inventa, net of cash acquired (3,047,444) - -
--------------- ---------------- --------------
Net cash used in investing activities (3,202,651) (196,011) (619,773)
--------------- ---------------- --------------
Cash flows from financing activities:
Proceeds from private placements - equity, net of
cash commissions 7,247,805 6,644,314 10,312,577
Proceeds from private placements - convertible
promissory notes, net of commissions 6,258,916 719,706
Proceeds from exercise of options and warrants 32,670 1,056,725 1,243,063
Net proceeds from line of credit 25,000 - -
--------------- ---------------- --------------
Net cash provided by financing activities 7,305,475 13,959,955 12,275,346
--------------- ---------------- --------------
Net decrease in cash and cash equivalents (2,428,887) (218,255) (1,682,983)
Cash and cash equivalents at beginning of year 4,480,694 4,698,949 6,381,932
--------------- ---------------- --------------
Cash and cash equivalents at end of year $ 2,051,807 $ 4,480,694 $ 4,698,949
=============== ================ ==============
See accompanying notes to consolidated financial statements
F-6
ANTS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
2007 2006
2008 (restated) (restated)
----------- ----------- -----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 1,003,358 $ 433,014 $ 4,295
=========== =========== ===========
Non-cash investing and financing activities:
Value of beneficial conversion feature
related to issuance
of "J" Units $ - $ 2,218,286 $ 435,444
Common stock paid for private placement
agent commission $ - $ 169,109 $ 8,833
Common stock issued to placement agent
allocated to additional paid in capital $ 51 $ 168,920 $ -
Common stock issued for subscribed shares
at end of prior year $ - $ - $ 198,450
See accompanying notes to consolidated
financial statements (cont'd)
F-7
ANTS SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Nature of Operations
ANTs software inc. is developing the ANTs Compatibility Server. The ANTs
Compatibility Server ("ACS") is middleware that 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 also develops technology
software to sell to their customers.
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 (May 30, 2008) through December 31, 2008 (collectively
referred to as the "Company"). All significant intercompany transactions and
accounts have been eliminated.
2. Restatement
The Company has restated its balance sheet as of December 31, 2007 and 2006
and the related statements of operations, stockholders' equity (deficit), and
cash flows for the years ended December 31, 2007 and 2006 to correct errors in
such financial statements.
The restatement of the Company's financial statements is based upon a review of
the accounting treatment of certain transactions entered into by the Company
with certain investors in 2006 and 2007 (see Note 14 for a description of these
transactions). During this review, the Company discovered that it had
incorrectly applied a restriction discount to the market value of its common
stock based on a long history of selling restricted common stock to a group of
investors. The discounted stock price was then used in the allocation of
proceeds between debt and equity for Units of convertible promissory notes and
restricted common shares, which were sold to investors in late 2006 and early
2007. The discounted stock price was also used to determine if there was a
beneficial conversion related to the convertible promissory notes. The same
methodology was used in late 2007 when the Company issued convertible promissory
notes along with common stock warrants.
The following tables present the effects of the restatement adjustments on the
Company's balance sheet as of December 31, 2007 and its consolidated statements
of operations and cash flows for the years ended December 31, 2007 and 2006.
F-8
CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------
December 31, 2007
----------------------------------------------
ASSETS As Previously
Reported Adjustments As Restated
------------- --------------- --------------
Current assets:
Cash and cash equivalents $ 4,480,694 $ - $ 4,480,694
Accounts receivable 8,204 - 8,204
Restricted cash 192,574 - 192,574
Current portion of prepaid debt issuance cost 434,630 (58,465)(a) 376,165
Prepaid expenses and other current assets 173,331 - 173,331
Prepaid expense from warrant issued to customer, net 57,674 - 57,674
-------------- -------------- --------------
Total current assets 5,347,107 (58,465) 5,288,642
Property and equipment, net 510,490 - 510,490
Long-term portion of prepaid debt issuance cost 47,786 5,389 (b) 53,175
Other assets 34,420 - 34,420
-------------- -------------- --------------
Total assets $ 5,939,803 $ (53,076) $ 5,886,727
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 1,230,306 $ 2 $ 1,230,308
Current portion of convertible promissory notes, net of -
premium of $60,440 and discount of $484,565 (restated),
respectively 1,060,440 (545,005)(c) 515,435
Deferred revenues 48,818 - 48,818
-------------- -------------- --------------
Total current liabilities 2,339,564 (545,003) 1,794,561
Long-term liabilities:
Convertible promissory notes, net of premium of $141,893
(net) and discount $3,072,868 (restated), respectively 8,645,119 (3,214,761)(d) 5,430,358
-------------- -------------- --------------
Total liabilities 10,984,683 (3,759,764) 7,224,919
-------------- -------------- --------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; 50,000,000 shares
authorized, no shares issued and outstanding - - -
Common stock, $0.0001 par value; 200,000,000 shares
authorized; 57,398,445 shares issued and outstanding 5,740 - 5,740
Common stock subscribed, not issued - - -
Additional paid-in capital 69,914,339 5,042,759 (e) 74,957,098
Accumulated deficit (74,964,959) (1,336,071)(f) (76,301,030)
-------------- -------------- --------------
Total stockholders' (deficit) equity (5,044,880) 3,706,688 (1,338,192)
-------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $ 5,939,803 $ (53,076) $ 5,886,727
============== ============== ==============
(a) & (b)-- Adjustment to eliminate prepaid debt issuance costs related to issuance of Convertible Notes Payable
(c) & (d)-- Adjustment to record discount related to issuance of "J" Units
(e)-- Adjustment to record impact of discount related to issuance of "J" Units
(f)-- Adjustment to record net impact to 2007 and 2006 Statements of Operations
49
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2007
-------------------------------------------------
As Previously
Reported Adjustments As Restated
-------------- -------------- --------------
Revenues:
Products $ 258,829 $ - $ 258,829
Services 100,877 - 100,877
-------------- -------------- --------------
Total revenues 359,706 - 359,706
Cost of Revenues:
Products 9,476 - 9,476
Services 3,201 - 3,201
-------------- -------------- --------------
Gross profit 347,029 - 347,029
Operating Expenses:
Sales and marketing 2,939,487 - 2,939,487
Research and development 9,442,521 - 9,442,521
General and administrative 4,310,141 (386,844) (a) 3,923,297
-------------- -------------- --------------
Total 16,692,143 (386,844) 16,305,299
-------------- -------------- --------------
Income (loss) from operations (16,345,114) 386,844 (15,958,270)
-------------- -------------- --------------
Other (expense) income:
Interest income 320,928 - 320,928
Other 2,667 - 2,667
Interest expense (291,704) (1,716,840) (b) (2,008,544)
-------------- -------------- --------------
Total (expense) income 31,891 (1,716,840) (1,684,949)
-------------- -------------- --------------
Net loss $ (16,313,223) $ (1,329,996) $ (17,643,219)
============== ============== ==============
Basic and diluted net loss
per common share $ (0.29) $ (0.02) $ (0.31)
============== ============== ==============
Shares used in computing basic and diluted
net loss per share 56,618,971 56,618,971 56,618,971
============== ============== ==============
(a)-- Adjustment to reverse amortization of Prepaid Debt Issuance Costs
(b)-- Adjustment to record increase of interest expense related to amortization
of Discount on Convertible Notes Payable
50
CONSOLIDATED STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------
For the Year Ended December 31, 2006
--------------------------------------------------
As Previously
Reported Adjustments As Restated
-------------- --------------- --------------
Revenues:
Products $ 157,958 $ - $ 157,958
Services 129,874 - 129,874
-------------- --------------- --------------
Total revenues 287,832 - 287,832
Cost of Revenues:
Products 15,136 - 15,136
Services 8,757 - 8,757
-------------- --------------- --------------
Gross profit 263,939 - 263,939
Operating Expenses:
Sales and marketing 5,164,937 - 5,164,937
Research and development 6,736,381 - 6,736,381
General and administrative 3,630,934 - 3,630,934
-------------- --------------- --------------
Total operating expenses 15,532,252 - 15,532,252
-------------- --------------- --------------
Loss from operations (15,268,313) - (15,268,313)
-------------- --------------- --------------
Other (expense) income:
Interest income 203,133 - 203,133
Other (53,277) - (53,277)
Interest expense (7,446) (6,075) (a) (13,521)
-------------- --------------- --------------
Total (expense) income 142,410 (6,075) 136,335
-------------- --------------- --------------
Net loss $ (15,125,903) $ (6,075) $ (15,131,978)
============== =============== ==============
Basic and diluted net loss
per common share $ (0.30) $ (0.00) $ (0.30)
============== =============== ==============
Shares used in computing basic and diluted
net loss per share 50,474,155 50,474,155 50,474,155
============== =============== ==============
(a)-- Adjustment to record increase of interest expense related to amortization
of Discount on Convertible Notes Payable
51
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2007
------------------------------------------------
As Previously
Reported Adjustments As Restated
--------------- --------------- --------------
Cash flows from operating activities:
Net loss $ (16,313,223) $ (1,329,996)(a)$ (17,643,219)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 421,000 - 421,000
Amortization of warrant issued to customer 57,673 - 57,673
Amortization of premium and discount on notes
payable (353,377) 1,538,299 (b) 1,184,922
Amortization of debt issuance costs 386,844 (208,307)(c) 178,537
Stock-based compensation expense 1,587,822 - 1,587,822
Write-off of fixed assets, security deposits and
other (1,041) - (1,041)
Changes in operating assets and liabilities:
Accounts receivable 47,115 - 47,115
Prepaid expenses and other current assets (41,851) - (41,851)
Accounts payable and other accrued expenses 234,844 - 234,844
Deferred revenues (8,001) - (8,001)
--------------- --------------- --------------
Net cash used in operating activities (13,982,195) (4) (13,982,199)
--------------- --------------- --------------
Cash flows used in investing activities:
Transfer operating funds to restricted cash (1,616) - (1,616)
Purchases of property and other assets (194,395) - (194,395)
--------------- --------------- --------------
Net cash used in investing activities (196,011) - (196,011)
--------------- --------------- --------------
Cash flows from financing activities:
Proceeds from private placements - equity, net of
cash commissions 5,018,574 1,625,740 (d) 6,644,314
Proceeds from private placements - convertible
promissory notes, net of commissions 7,884,652 (1,625,736)(e) 6,258,916
Proceeds from exercise of options and warrants, net
of commissions 1,056,725 - 1,056,725
--------------- --------------- --------------
Net cash provided by financing activities 13,959,951 4 13,959,955
--------------- --------------- --------------
Net decrease in cash and cash equivalents (218,255) - (218,255)
Cash and cash equivalents at beginning of period 4,698,949 - 4,698,949
--------------- --------------- --------------
Cash and cash equivalents at end of period $ 4,480,694 $ - $ 4,480,694
=============== =============== ==============
(a)-- Adjustment to record net impact to the 2007 Statement of Operations
(b)-- Adjustment to record the amortization of Discount on Convertible Notes Payable
(c)-- Adjustment to record the reversal of amortization of Debt Issuance Costs
(d) & (e)-- Adjustment to record difference in allocation between Convertible Notes Payable and Additional Paid in Capital
52
Year Ended December 31, 2007
-------------------------------------------
As Previously
Reported Adjustments As Restated
----------- ------------ -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 433,014 $ - $ 433,014
=========== ============ =============
Non-cash investing and financing activities:
Allocation of stockholders' equity to discount on
convertible note $ - $ 2,218,286 (a) $ 2,218,286
Premium on convertible notes payable $ 936,650 (936,650) (a) -
Common stock paid for private placement agent
commission $ 217,041 $ (47,932) (b) $ 169,109
Common stock issued to placement agent allocated
to additional paid in capital $ 168,920 $ - $ 168,920
(a)-- Adjustment to record the different allocations between Convertible Notes Payable and
Additional Paid in Capital
(b)-- Adjustment to record the different allocations between Convertible Notes Payable and
Additional Paid in Capital based on commissions paid and issued
53
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2006
------------------------------------------------------
As Previously
Reported Adjustments As Restated
--------------- ---------------- --------------
Cash flows from operating activities:
Net loss $ (15,125,903) $ (6,075) (a) $(15,131,978)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 363,062 - 363,062
Amortization of warrant issued to customer 57,674 - 57,674
Amortization of discount on notes payable - 6,076 (b) 6,076
Stock-based compensation expense 1,348,246 - 1,348,246
Bad debt expense 28,738 - 28,738
Write-off of fixed assets, security deposits and 57,614 - 57,614
other
Changes in operating assets and liabilities:
Accounts receivable (51,655) - (51,655)
Prepaid expenses and other current assets (78,457) 33,614 (c) (44,843)
Accounts payable and other accrued expenses 30,294 - 30,294
Deferred revenues (1,784) - (1,784)
---------------- ---------------- --------------
Net cash used in operating activities (13,372,171) 33,615 (13,338,556)
---------------- ---------------- --------------
Cash flows used in investing activities:
Transfer operating funds to restricted cash (85,559) - (85,559)
Purchases of property and other assets (534,214) - (534,214)
---------------- ---------------- --------------
Net cash used in investing activities (619,773) - (619,773)
---------------- ---------------- --------------
Cash flows from financing activities:
Proceeds from private placements - equity, net of 10,065,898 246,679 (d) 10,312,577
cash commissions
Proceeds from private placements - convertible
promissory notes, net of commissions 1,000,000 (280,294) (e) 719,706
Proceeds from exercise of options and warrants, 1,243,063 - 1,243,063
net of commissions
---------------- ---------------- --------------
Net cash provided by financing activities 12,308,961 (33,615) 12,275,346
---------------- ---------------- --------------
Net decrease in cash and cash equivalents (1,682,983) - (1,682,983)
Cash and cash equivalents at beginning of period 6,381,932 - 6,381,932
---------------- ---------------- --------------
Cash and cash equivalents at end of period $ 4,698,949 $ - $ 4,698,949
================ ================ ==============
(a)-- Adjustment to record net impact to the 2006 Statement of Operations
(b)-- Adjustment to record the amortization of Discount on Convertible Notes Payable
(c)-- Adjustment to record the reversal of amortization on Debt Issuance Costs
(d) & (e)-- Adjustment to record difference in allocation between Converible Promissory Notes and Add
54
Years Ended December 31, 2006
------------------------------------------------
As Previously
Reported Adjustments As Restated
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,295 $ - $ 4,295
Non-cash investing and financing activities:
Beneficial conversion feature $ - $ 435,444 (a) $ 435,444
Premium on convertible notes payable $ 120,888 $ (120,888)(a) -
Common stock paid for private placement agent commission $ 6,355 $ 2,508 (b) $ 8,833
Common stock issued for subscribed shares at end of prior $ 198,450 $ - $ 198,450
year
Common stock subscribed for private placement agent $ 1 $ - $ 1
commission
(a)-- Adjustment to record the different allocations between Convertible Notes Payable and Additional Paid
in Capital
(b)-- Adjustment to record the different allocations between Convertible Notes
Payable and Additional Paid in Capital based on commissions paid and issued
3. Significant Accounting Policies
Basis of Presentation and Continuation as a Going Concern
The accompanying financial statements are in accordance with generally accepted
accounting principles of the United States of America, which contemplates
continuation of the Company as a going concern. However, the Company suffered
recurring losses from operations and has a net capital deficiency that raises
substantial doubt about its 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 stockholders' deficit accumulated during its years
of operations totaling $87,929,614. 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 our obligations and
repay our liabilities arising from normal business operations when they come
due. The Company plans to seek additional capital through private placements of
equity or debt. If the Company is successful in its efforts to generate revenue
in 2009, it will be a source of operating funds through the end of 2009.
Management's plans, if successful, will mitigate the factors that raise
substantial doubt about our ability to continue as a going concern.
Use of Estimates
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets 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. Actual results could differ from those
estimates. The significant estimates made by management include 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, and assumptions incorporated in determining
stock-based compensation.
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.
55
Accounts Receivable
Receivables are stated at net realizable value. All but $2,000 of the accounts
receivable outstanding as of December 31, 2008 were collected in February 2009.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are maintained to reserve for potentially
uncollectible trade receivables. Management reviews trade receivables to
identify customers with known disputes or collection issues. For customers not
specifically identified, the Company also provides a reserve based on the age of
the receivable. In determining the 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. Balances are written off
when the company determines they are uncollectible.
As of December 31, 2008 trade receivables totaled $383,445, the majority which
was collected in January 2009 with the remaining amount expected to be collected
in early 2009; therefore no reserve was required as of December 31, 2008.
Historical allowances for doubtful accounts follows:
Charged to
Beginning Operating Ending
Balance Expenses Deductions Balance
---------- ----------- ------------- ----------
Allowance for doubtful accounts:
Years Ended December 31,
2008 $ - $ - $ - $ -
2007 $ - $ - $ - $ -
2006 $ 16,000 $ 28,738 $ (44,738) $
Restricted Cash
Restricted cash consists of a 365-day certificate of deposit in the principal
amount of $125,000, held by Silicon Valley Bank with an annual interest rate of
0.85% that matures on July 31, 2009. The funds are pledged to collateralize the
Company's revolving credit card facility. Management intends to maintain the
certificate of deposit as long as the revolving credit card facility is in
place. Amounts due on the credit card facility are included in accounts payable
and other accrued expenses on the Consolidated Balance Sheet.
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.
Goodwill and Intangible Assets
Under the provisions of SFAS No. 142 Goodwill and Other Intangible Assets ("SFAS
142"), 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.
56
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 trade name, which has an indefinite useful life and is not
being amortized.
Deferred Revenues
As of December 31, 2008, 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 financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, 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 the same portion or all of the deferred tax assets will not be
realized. The Company adopted the provisions of Financial Accounting Standards
Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in
Income Taxes, on January 1, 2007. As a result of this adoption, the Company
reduced its deferred tax assets by $685,000.
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
The Company recognizes license and royalty revenue in accordance with the
provisions of Statement of Position ("SOP") 97-2, Software Revenue Recognition,
and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions. Revenue consists primarily of revenue earned
under agreements for software licenses, maintenance and support (otherwise known
as post-contract customer support or "PCS") and professional services.
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 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:
57
o Persuasive evidence of an arrangement exists;
o Delivery has occurred and there are no future deliverables except PCS;
o The fee is fixed and 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 in accordance
with paragraph 29 of SOP 97-2.
o Collection is probable.
Revenue from professional fees, consisting primarily of consulting services, is
recognized as services are provided and the revenues are earned.
Research and Development Expenses
The Company accounts for research and development ("R&D") costs in accordance
with Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. 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.
Advertising Costs
The Company expenses advertising costs as incurred. The expense recognized for
the years ended December 31, 2008, 2007 and 2006 was $18,049, $33,425 and
$242,882, respectively.
Stock-Based Compensation
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). Since January 1, 2006, the Company has been using the provisions of SFAS
123(R), Share-Based Payment ("SFAS 123(R)"), to account for stock-based awards
compensation expense. The Company elected to use the modified prospective
transition method as permitted by SFAS 123(R). Under this transition method,
stock-based compensation expense for the year ended December 31, 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not fully vested, as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, Accounting for
Stock Compensation ("SFAS 123"). Stock-based compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006 is based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). The Company recognizes compensation expense for stock option awards on a
straight-line basis over the requisite service period of the award, generally
three years; however, the Company has also issued stock options with
performance-based vesting criteria.
All stock-based awards to nonemployees are accounted for at their fair value in
accordance with Emerging Issues Task Force ("EITF") 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. 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
In February 2008, the FASB issued Financial Staff Position ("FSP") SFAS 157-2,
Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delays the
effective date of SFAS 157, Fair Value Measurements ("SFAS 157"), which was
issued in September 2006, for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). SFAS 157
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FSP 157-2 partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for the items within the scope of this FSP. The
adoption of SFAS 157 for all nonfinancial assets and nonfinancial liabilities is
effective for the Company beginning January 1, 2009. Adoption of this statement
is not expected to be material.
58
In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS
141R") and SFAS 160, Accounting and Reporting of Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS 160"). SFAS
141R and SFAS 160 expand the scope of acquisition accounting to all transactions
and circumstances under which control of a business is obtained. SFAS 141R and
SFAS 160 are effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years,
with early adoption prohibited and these standards must be adopted concurrently.
These standards will impact the Company for any acquisitions subsequent to the
adoption date. The most significant effect of adoption of SFAS 141R on results
of operations is that success fees, due diligence, legal, accounting, valuation,
and similar costs incurred in connection with acquisitions (acquisition-related
costs) are required to be expensed as incurred. Current practice is that such
costs are capitalized as part of the costs of the acquisition.
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life
of Intangible Assets ("FSP 142-3"). This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
assets under SFAS 141R when the underlying arrangement includes renewal or
extension of terms that would require substantial costs or result in a material
modification to the asset upon renewal or extension. Companies estimating the
useful life of a recognized intangible asset must now consider their historical
experience in renewing or extending similar arrangements or, in the absence of
historical experience, must consider assumptions that market participants would
use about renewal or extension as adjusted for the entity-specific factors
included in SFAS 142. FSP 142-3 is effective for us beginning January 1, 2009.
Adoption of FSP 142-3 is not expected to be material.
In May 2008, the FASB issued FSP No. APB 14-2, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (including Partial Cash
Settlement) ("FSP 14-1"). FSP 14-1 requires that issuers of certain convertible
debt instruments that may be settled in cash upon conversion to separately
account for the liability and equity components in a manner that will reflect
the entity's nonconvertible debt borrowing rate when interest expense is
recognized in subsequent periods. The accounting for these types of instruments
under FSP 14-1 is intended to appropriately reflect the underlying economics by
capturing the value of the conversion options as borrowing costs, therefore
recognizing their potential dilutive effects on earnings per share. The
effective date of APB 14-1 is for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008 and does not permit
earlier adoption. However, the transition guidance requires retrospective
application to all periods presented and does not grandfather existing
instruments. The Company is currently evaluating the impact FSP 14-1will have on
the financial statements.
In June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF
07-5 provides guidance to determine whether an instrument (or an embedded
feature) is indexed to an entity's own stock when evaluating the instrument as a
derivative under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). An instrument that is both indexed to an entity's
own stock and classified in stockholder's equity in the entity's statement of
financial position is not considered a derivative for the purposes of applying
the guidance in SFAS No. 133. EITF 07-5 provides a two-step process to determine
whether an equity-linked instrument (or embedded feature) is indexed to its own
stock first by evaluating the instrument's contingent exercise provisions, if
any, and second, by evaluating the instrument's settlement provisions. EITF 07-5
is applicable to outstanding instruments as of the beginning of the fiscal year
in which the issue is adopted and is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We will adopt EITF 07-5 on January 1, 2009, and do not
expect the adoption will be material to our consolidated financial condition and
results of operations.
4. 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 fewer 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 currently 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.
59
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 $ 3,000,000
Deferred tax liability 344,000
Fair value of common stock issued to seller 24,000,000
Fair value of convertible notes payable issued to seller 1,355,586
Acquisition costs, comprised of legal and accounting fees 57,357
---------------------------
Total purchase price $ 28,756,943
===========================
Net assets acquired:
Assets acquired:
- ----------------
Cash $ 9,913
Accounts receivable 734,886
Prepaids and other current assets 59,567
Property and equipment 153,277
Security deposit 20,015
---------------------------
Total 977,658
Less liabilities assumed:
- -------------------------
Line of credit 175,000
Trade payables and other accrued expenses 268,045
Deferred revenues 529,187
---------------------------
Total 972,232
---------------------------
Tangible assets in excess of liabilities assumed 5,426
Intangible assets:
- ------------------
Trade name 860,000 (Indefinite life)
Proprietary technology 3,200,000 (5 year life)
Customer relationships 1,930,000 (10 year life)
---------------------------
Identified intangible assets 5,990,000
Goodwill 22,761,517
---------------------------
Total purchase price $ 28,756,943
===========================
Had the acquisition of Inventa taken place at January 1, 2007, the pro forma
consolidated results of operations would have had revenues totaling $10,532,003
(unaudited) and $5,751,907 (unaudited) for the years ending December 31, 2008
and 2007, respectively; net loss totaling $11,884,574 (unaudited) and
$17,628,800 (restated and unaudited) for the years ending December 31, 2008 and
2007, respectively; and net loss per share - basic and diluted totaling $(0.15)
(unaudited) and $(0.31) (restated and unaudited) for the years ended December
31, 2008 and 2007, respectively. 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.
60
5. Basic and Diluted Net Loss per Share
Basic net loss per share is calculated in accordance with SFAS No. 128, Earnings
per Share, using the weighted-average number of common shares outstanding during
the period. Diluted net loss per share is computed using the weighted-average
number of common and dilutive common equivalent shares outstanding during the
period.
The following table presents the calculation of basic and diluted net loss per
share for the years ended December 31, 2008, 2007 and 2006:
Loss Shares Loss per
(Numerator) (Denominator) Share
--------------------- -------------------- --------------------
Year ended December 31, 2008
Basic and diluted net loss per share $ (11,628,584) 77,847,729 $ (0.15)
Year ended December 31, 2007 (restated)
Basic and diluted net loss per share $ (17,643,219) 56,618,971 $ (0.31)
Year ended December 31, 2006 (restated)
Basic and diluted net loss per share $ (15,131,978) 50,474,155 $ (0.30)
*T
At December 31, 2008, 2007 and 2006, stock options and warrants for the purchase
of 14,960,453, 16,813,430 and 16,354,480 shares of common stock at prices
ranging from $0.52 to $6.38 per share respectively, were antidilutive and
therefore not included in the computation of diluted earnings per share. At
December 31, 2008, 2007 and 2006, the Company had 10,402,512, 8,689,050,
and 8,091,569 antidilutive shares related to stock options, respectively. At
December 31, 2008, 2007, and 2006, the Company had 12,106,115, 5,252,150, and
500,000 antidilutive shares related to convertible promissory notes,
respectively.
6. Prepaid Expenses and Other Current Assets
As of December 31, 2008 and 2007, prepaid expenses consisted of the following
items:
2008 2007
---- ----
Prepaid-Insurance and Employee-Related $ 38,403 $ 112,440
Unbilled Revenues 13,415 -
Prepaid marketing 2,064 37,267
Other 106,841 23,624
--------------------- ---------------------
Total $ 160,723 $ 173,331
===================== =====================
7. Prepaid Expense from Warrant
Prepaid expense from warrant consists of an original charge of $173,021 related
to the issuance of a warrant to a customer in 2005 to purchase 100,000 shares of
the our Common Stock, in exchange for a guarantee by that customer to provide
maintenance and support services for ADS to our customers should we be unable to
provide such services. The fair value of the warrant was calculated using the
Black-Scholes valuation model. The warrant had an exercise price of $3.50 per
share and expired in July 2008.
Effective May 2008, the Company sold the underlying ADS technology to the
customer and the remaining prepaid asset was expensed. The prepaid expense was
being amortized into the Consolidated Statements of Operations on a
straight-line basis, over 36 months, commencing January 2006. Amortization
expense, including the amount written off in May 2008 totaled $57,674 for the
year ended December 31, 2008. Amortization expense for the year ended December
31, 2007 and 2006 totaled $57,673 and $57,674, respectively.
61
8. Property and Equipment
Property and equipment, summarized by major category, at December 31,
2008 2007
---- ----
Computers and software $ 609,221 $ 2,005,337
Furniture and fixtures 154,729 85,215
Leasehold improvements 202,450 96,804
------------- --------------
Total property and equipment 966,400 2,187,356
Less: accumulated depreciation and amortization (567,307) (1,676,866)
------------- --------------
Property and equipment, net $ 399,093 $ 510,490
============= ==============
Depreciation expense for 2008, 2007 and 2006 was $341,236, $421,000 and
$363,062, respectively. During 2008 we performed a physical inventory of
property and equipment and wrote off $62,377 in fixed assets, net of accumulated
depreciation. In 2007 we performed a physical inventory of our property and
equipment and no adjustment to the financial statements was required. During
2006 we performed a physical inventory of property and equipment and wrote off
$57,614 in fixed assets, net of accumulated depreciation.
As of December 31, 2008 and 2007, the Company had $84,110 and $1,010,235,
respectively, in fully depreciated assets in use, consisting primarily of
computer equipment and software. As of December 31, 2008, net property of
approximately $226,000 has been used as collateral on the line of credit
discussed in Note 14. 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.
9. Intangible Assets
Intangible assets at December 31, 2007 were $-0-. Intangible assets at December
31, 2008 consisted of the following:
2008
-------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------------------ -------------- ---------------
Goodwill $ 22,761,517 $ - $ 22,761,517
================== ============== ===============
Trade Name (indefinite useful life) $ 860,000 $ - $ 860,000
Proprietary Technology (5-year useful life) 3,200,000 (373,333) 2,826,667
Customer Relationships (10-year useful life) 1,930,000 (112,586) 1,817,414
------------------ -------------- ---------------
Total $ 5,990,000 $ (485,919) $ 5,504,081
================== ============== ===============
Aggregate amortization expense for the years ended December 31, 2008, 2007, and
2006 was approximately $485,919, $-0-, and $-0-, respectively.
Estimated amortization expense for the intangible assets for the next five years
is as follows:
Years Ending December 31
-----------------------------------------------------
2009 2010 2011 2012 2013
-----------------------------------------------------
Proprietary Technology $ 640,000 $640,000 $ 640,000 $ 640,000 $ 266,667
Customer Relationships 193,000 193,000 193,000 193,000 193,000
---------- -------- ---------- ---------- -----------
Total $ 833,000 $833,000 $ 833,000 $ 833,000 $ 459,667
========== ======== ========== ========== ===========
62
10. Accounts Payable and Other Accrued Expenses
At December 31, 2008 and 2007, accounts payable and other accrued expenses
consisted of the following:
2008 2007
---- ----
Trade payables $ 900,176 $ 788,460
Accrued bonuses and commissions payable 180,111 143,750
Accrued vacation payable 77,175 89,318
Accrued interest on convertible promissory notes 287,581 208,780
--------------- ----------------
Total $ 1,445,043 $ 1,230,308
=============== ================
11. 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 on 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 ending December 31, 2008 and 2007 was as
follows:
2008 2007
--------------------------------- --------------------------------
Beginning balance $ 48,818 $ 56,819
Invoiced current year 3,255,842 382,770
Deferred revenue recognized from prior year $ (36,606) $ (26,820)
Invoiced and recognized current year (2,780,933) (332,886)
---------------- ----------------
Total revenue recognized current year (2,817,539) (359,706)
Amounts transferred to Four J's -
Write-offs - (31,065)
---------------- ----------------
Ending balance $ 487,121 $ 48,818
================ ================
Write-offs consist of bad debt expense charged on deferred revenues outstanding
as of the beginning of each period as well as amounts charged to deferred
revenue during each period but that became unrealizable.
12. Industry Segment, Customer and Geographic Information
We operate in a single industry segment, computer software. Substantially all of
our assets and employees are located at the corporate headquarters in
Burlingame, California. Our organization is primarily structured in a functional
manner. During the periods presented, our current Chief Executive Officer was
identified as our Chief Operating Decision Maker (CODM) as defined by SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"). Generation of revenues from ADS were not segregated from operating
expenses between those incurred for maintenance and support of ADS and research
and development expenses incurred on ACS. Therefore our 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, 2008, $7,585,933, or 92%, of our revenues were
derived from three customers, which represented $3,611,441, $2,376,871 and
$1,597,621, or 44%, 28% and 20% of our total revenues, respectively. For the
year ended December, 31, 2007, $336,493, or 94%, of our revenues were derived
from three customers, which represented $213,212, $63,281 and $60,000, or 59%,
18% and 17% of our total revenues, respectively. For the year ended December 31,
2006, $118,800, or 41%, of our revenues were from two customers, which
represented $69,000 and $49,800 or 24% and 17% of our total revenues,
respectively.
63
Geographic Information
Revenues by geographic area were as follows:
Years ended December 31,
-----------------------------------------------------------
2008 2007 2006
------------------- ------------------ ------------------
Domestic $ 8,280,939 100% $ 146,494 41% $ 240,009 83%
International 1,790 0% 213,212 59% 47,823 17%
------------------- ------------------ ------------------
Total $ 8,282,729 100% $ 359,706 100% $ 287,832 100
13. 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:
2007 2006
2008 (Restated) (Restated)
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------------ ------- ------------ ------- ------------ -------
U.S. federal income tax benefit
at federal statutory rate $(4,070,005) -35.0% $(6,175,127) -35.0% $(5,296,192) -35.0%
Sale of net operating loss carryovers (527,180) -4.5% - 0.0% - 0.0%
Other permanent items 474,033 4.0% 594,212 3.4% 510,360 3.4%
Change in valuation allowance 3,588,529 30.9% 5,534,455 31.3% 4,794,198 31.7%
Other 7,443 0.1% 46,460 0.3% (8,366) -0.1%
------------ ------- ------------ ------- ------------ -------
Total $ (527,180) -4.5% $ - 0.0% $ - 0.0%
============ ======= ============ ======= ============ =======
The Company accounts for income taxes in accordance with SFAS 109, "Accounting
for Income Taxes." Due to our loss position for the periods ended December 31,
2008, 2007 and 2006, 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 on 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. On November 25, 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.
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
total deferred tax assets at December 31, 2008 and 2007.
The tax effects of significant temporary differences representing deferred tax
assets as of December 31, 2008, 2007 and 2006 are as follows:
64
As of December 31,
2008 2007 2006
----------------- ------------------- ------------------
Deferred long-term tax assets:
Net operating loss carryforward $ 44,120,237 $ 24,941,951 $ 18,767,303
Research tax credit carryforward 2,515,581 2,114,422 1,922,882
Expenses deductible in later years 132,922 96,098 79,833
Non-Cash interest expense 1,827,147 - -
----------------- ------------------- ------------------
Gross deferred tax assets 48,595,887 27,152,471 20,770,018
Less: valuation allowance (46,543,887) (27,152,471) (20,770,018)
----------------- ------------------- ------------------
Total 2,052,000 - -
----------------- ------------------- ------------------
Deferred long-term tax liabilities:
Basis difference purchase
accounting adjustment (2,396,000) - -
----------------- ------------------- ------------------
Total (2,396,000) - -
----------------- ------------------- ------------------
Net deferred tax liabilities $ (344,000) $ - $ -
================= =================== ==================
As of December 31, 2008, we had net operating loss carryforwards of
approximately $117.0 million for federal tax purposes and $74.5 ("NOL's")
million for state tax purposes. If not earlier utilized, the federal net
operating loss carryforwards will expire in various years from 2009 through 2028
and the state net operating loss carryforwards will expire in various years from
2013 through 2028.
Following is a summary of the years in which the NOL's will expire:
Federal NOL's State NOL's
-------------- --------------
2009-2012 $ - $ 20,424,000
2013-2016 - 31,097,000
2017-2020 30,572,000 13,618,000
2021-2024 38,485,000 -
2025-2028 47,932,000 9,350,000
-------------- --------------
Total $ 116,989,000 $ 74,489,000
============== ==============
Section 382 limits the use of the NOL's based on the purchase price and the
existing applicable Federal Rate("AFR"). For 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. 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, 2008, we had research credit carryforwards of approximately
$2.0 million for federal tax purposes and $1.6 million for state tax purposes.
If not earlier utilized the federal research credit carryforwards will expire in
various years from 2013 through 2028. 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 to
Beginning Deferred Tax Ending
Balance Assets Deductions Balance
------------- ------------ ----------- -------------
Deferred Tax Allowance Accounts:
Years Ended December 31,
2008 $ 27,152,471 $ 21,443,416 $ - $ 48,595,887
2007 $ 20,770,018 $ 6,382,453 $ - $ 27,152,471
2006 $ 14,861,104 $ 5,908,914 $ - $ 20,770,018
Uncertain Tax Positions
Effective January 1, 2007, we adopted FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" (FIN 48). This interpretation clarifies the
criteria for recognizing income tax benefits under FASB Statement No. 109,
"Accounting for Income Taxes", and requires additional disclosures about
uncertain tax positions. Under FIN 48 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, although the implementation of FIN 48 did not
impact the amount of the Company's liability or impact beginning retained
earnings, the Company reduced its deferred tax asset and valuation allowance by
$685,000.
A reconciliation of the beginning and ending amount of the liability for
unrecognized income tax benefits during the tax year ended December 31, 2008 and
2007 is as follows:
65
Balance at January 1, 2007 $ 684,954
Additions for tax positions related to the year ended December 31, 2007 -
-----------
Balance at December 31, 2007 $ 684,954
===========
Balance at January 1, 2008 $ 684,954
Additions for tax positions related to the year ended December 31, 2008 -
-----------
Balance at December 31, 2008 $ 684,954
===========
The $684,954 of unrecognized tax benefits, if recognized, will affect our
effective income tax rate. We account for any applicable interest and penalties
on uncertain tax positions as a component of income tax expense. Our only major
tax jurisdictions are the United States, California and New Jersey. The tax
years 1994 through 2008 remain open and are subject to examination by the
appropriate governmental agencies in the U.S and 2001 through 2008 in California
and New Jersey.
14. Debt
Long-term debt consists of the following at December 31, 2008 and 2007:
Balance as of
December 31,
-----------------------
Extinguishment Stated Effective 2007
Type Issue Date Due Date Date Interest Rate Interest Rate 2008 (Restated)
---- ---------- -------- ---- ------------- ------------- ---- ----------
Convertible Promissory
Notes December 2006 December 2008 May 2008 10% 75.12% - 91.18% $ - $1,000,000
Convertible Promissory
Notes January - March 2007 January - March 2009 May 2008 10% 6.65% - 84.63% - 5,250,000
Convertible Promissory
Note March 2007 March 2009 N/A 10% 29.55% 250,000 250,000
Convertible Promissory
Notes with
Attached Warrants October - December 2007 October - December 2010 May 2008 10% 2.18% - 23.87% - 3,003,226
Convertible Promissory
Notes May 2008 February 2011 N/A 10% N/A 3,245,000 -
Convertible Promissory
Notes May 2008 February 2011 N/A 10% 5.66% - 86.34% 5,005,000
Convertible Promissory
Notes with
Attached Warrants May 2008 February 2011 N/A 10% N/A 3,003,226 -
Line of Credit May 2008 May 2009 N/A LIBOR + 2% 2.44% 200,000 -
-------- ----------
Total debt 11,703,226 9,503,226
Less discount (8,565,882) (3,557,433)
Less current portion (434,084) (515,435)
--------- ---------
Long-term portion of convertible notes payable 2,703,260 5,430,358
========== =========
Scheduled future maturities of long-term debt are as follows at December 31,
- ----------------------------------------------------------------------------
2008:
- -----
Years Ending December 31
2009 $ 450,000
2010 -
2011 11,253,226
2012 -
2013 -
Thereafter -
----------------------------------
Total $ 11,703,226
Less discount on notes payable (8,565,882)
----------------------------------
Net value of notes at
December 31, 2008 $ 3,137,344
===================================
66
"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 applied the guidance in Accounting Principles Board ("APB") No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
Emerging Issues Task Force ("EITF") 00-27, Application of EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Feature or Contingent with
Adjustable Conversion Ratios, to Certain Convertible Instruments, and EITF 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios ("EITF 98-5"), to allocate the
proceeds between the common stock and the Notes and 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 in accordance with EITF 98-5 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 (see 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 in accordance with EITF 98-5 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 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 (see
below).
Convertible Notes Payable 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.
67
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.
In accordance with APB 14 and EITF 00-27, 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
accounted for the beneficial conversion feature in accordance with EITF 98-5 and
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 and in accordance with EITF 96-19, Debtors
Accounting for Modification or Exchange of Debt Instruments, 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.
In accordance with EITF 06-6, Debtor's Accounting for a Modification (or
Exchange) of Convertible Debt Instruments, 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.
68
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, 2009. The Facility consists of a $250,000 revolving line
of credit which bears interest at a daily rate of LIBOR plus 2.00% (0.436% at
December 31, 2008). At December 31, 2008, there was $200,000 outstanding under
the line of credit and $50,000 available 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 May
15, 2009. The Facility is secured by all of the assets of Inventa.
Convertible 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. In
accordance with EITF 98-5, 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.
15. Commitments and Contingencies
As of December 31, 2008, 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
- ----------------------- ------------------
2009 $ 326,098
2010 195,591
2011 195,591
2012 195,591
2013 195,591
-------------------
Total minimum lease payments $ 1,108,462
===================
The Company leases approximately 15,000 square feet of general commercial
offices located in Burlingame, California (the "Premises"). The Premises are
used for the purposes of general office use and for software development. The
base rent under this lease is $16,060 per month for the first year, $17,520 per
month for the second year and $20,440 per month for the third year. The Company
received abated rent for the period from May 1, 2005 to July 30, 2005 and the
initial term of the lease was accounted for in accordance with Financial
Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent
Increases ("FTB 85-3"), which required the effects of the scheduled rent
increases and effects of rent abatement to be recognized on a straight-line
basis over the initial term of the lease. This results in monthly rental expense
of $16,668 through April 30, 2008, the original lease term. During the years
ended December 31, 2008, 2007 and 2006 the Company recognized a total of
$396,673, $200,020 and $200,020 respectively, in rental expense for this lease.
In July 2007 this lease was extended for the period May 1, 2008 through April
30, 2009 at the rate of $34,200 per month. During the year ended December 31,
2008, we recognized a total of $56,000 of sublease income, which was offset to
rental expense. There are no asset retirement obligations under this operating
lease.
Effective June 1, 2008, the Company entered into a sub-lease for a portion of
the Burlingame facility to a customer on a month-to-month basis through April
2009 for $13,000 for rent and utilities, payable each month in advance.
Sub-lease income for the year ended December 31, 2008 was approximately $91,000.
As discussed in Note 4, 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 expires June 30, 2015 and has 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.
69
The lease was amended effective August 1, 2008 to add 4,590 square feet upon
receipt of a Certificate of Occupancy, currently scheduled for February 1, 2009.
The total monthly rent will be $16,299. The amendment also restates the end of
the lease commitment to be seven years from the date of the Certificate of
Occupancy for the additional space. 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 or an increase in the consumer price index.
Litigation
On July 10, 2008, Sybase, Inc. ("Sybase") an enterprise software and services
company, filed a complaint for common law unfair business practices, and
tortious interference with contractual relations, among other things, in the
Superior Court of the State of California, County of Alameda. Sybase is seeking
an injunction, and damages, among other legal and equitable relief. ANTs
believes that this lawsuit is without merit and intends to continue vigorously
defending itself.
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. ANTs
believes that this lawsuit is without merit and intends to continue vigorously
defending itself.
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 is seeking approximately $50,000 in rent, late fees and
operating expenses per month from October 2008. The Company intends to continue
defending itself.
70
16. Stockholders' Equity
Stockholders' equity transactions by cash and non-cash transactions for
the years ending December 31, 2008, 2007 and 2006 is presented below.
2007 2006
2008 (restated) (restated)
--------------- --------------- --------------
Total stockholders' equity, beginning of year $ (1,338,192) $ 4,628,771 $ 6,412,586
--------------- --------------- --------------
Cash transactions:
- ------------------
Proceeds from private placements:
Sales of "H" units at $1.60 per unit - - 204,000
Cash commissions on sales of "H" units - - (20,000)
Sales of restricted shares of common stock at $1.50 per share - - 9,597,503
Cash commissions on sales of restricted stock - - (709,250)
Sales of "J" units at $25,000 per unit (equity portion of units) - 6,849,427 1,265,474
Cash commissions on sales of "J" units - (684,942) (25,150)
Sales of debt with attached warrants 479,829 -
Sales of common stock at $0.60 per share 7,615,056 - -
Cash commissions on sales of common stock (367,251) - -
--------------- --------------- --------------
Total 7,247,805 6,644,314 10,312,577
--------------- --------------- --------------
Proceeds from stock and warrant exercises:
Warrants with exercise price of $2.00 per share modified
$1.50 per share in 2006 - - 109,998
Warrants with exercise price of $2.00 exercised at $2.00 per share - - 458,336
Cash commissions on exercise of warrants - - (39,125)
Warrants with exercise price of $2.00-$3.50 per share modified
$1.25 per share - 996,125 -
Cash proceeds from exercise of stock options 32,670 60,600 713,854
--------------- --------------- --------------
Total 32,670 1,056,725 1,243,063
--------------- --------------- --------------
Total cash transactions 7,280,475 7,701,039 11,555,640
--------------- --------------- --------------
Non-cash transactions:
- ----------------------
Acquisition of Inventa Technologies, Inc.:
Issuance of 20,000,000 shares valued at $1.20 per share 24,000,000 - -
Fair value of $2 million in convertable promissory notes 1,355,586 - -
---------------
Total 25,355,586 - -
Fair value of conversion feature of reissued convertible
promissory notes 5,226,069 - -
Related to private placements:
Beneficial conversion feature - 2,218,286 435,444
Common stock issued for commission - 169,109 8,833
Common stock issued for shares subscribed at December 31, 2006 - - -
--------------- --------------- --------------
Total - 2,387,395 444,276
--------------- --------------- --------------
Related to stock vesting and warrant-based compensation:
Employee compensation expense 3,015,662 1,488,405 1,253,159
Non-employee compensation expense 132,281 99,417 95,088
--------------- --------------- --------------
Total 3,147,943 1,587,822 1,348,247
--------------- --------------- --------------
Total non-cash transactions 33,729,598 3,975,217 1,792,523
--------------- --------------- --------------
Net loss for year (11,628,584) (17,643,219) (15,131,978)
--------------- --------------- --------------
Total stockholders' equity, end of year $ 28,043,297 $ (1,338,192) $ 4,628,771
=============== =============== =============
Details of these transactions by quarter for the years ending December 31, 2008,
2007 and 2006 are presented below.
71
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 4, 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 14,
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. In accordance with the provisions of FAS 123(R), $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 in accordance
with the accounting guidelines set forth in SFAS 123 (R) and EITF 96-18,
respectively.
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.
2007
Funds raised through private offerings to accredited investors:
In the first quarter of 2007, the Company entered into agreements with
accredited investors to purchase 220 J Units, raising $11,000,000. Pursuant to
the sale, the Company issued 3,142,700 shares of common stock with share prices
between $1.92 and $2.35 (restated), and issued Notes with an initial face value
of $5,500,000. In accordance with EITF 00-27, the Company allocated the cash
received between debt and equity based on the relative fair value of each piece
of the instrument. As a result, value ascribed to the debt portion was
$4,150,577 and the value ascribed to the equity portion was $6,849,423.
The Company paid $1,100,000 in cash commissions and issued 145,440 shares of
common stock which were valued at $1.92 to $2.35 per share or $449,228. The
total commission value of $1,549,228 (restated) was allocated between debt
issuance costs and additional paid-in capital as a cost of raising the equity
portion of the offering, in the same proportion that was used to allocate the
gross proceeds of the offering between notes payable and stockholders' equity.
This resulted in an allocation to additional paid-in capital of $965,061
(restated) and $584,166 (restated) to debt issuance costs.
As more fully discussed in Note 14, "Convertible Notes Payable with
Warrants", in the fourth quarter of 2007 the Company issued two convertible
promissory notes payable with a principal value of $3,003,226, along with
2,002,150 warrants exercisable at $0.80 (after modification) per share. The
$3,003,226 in cash proceeds were allocated between notes payable and equity in
proportion to their relative fair values on the date of each issuance, which
resulted in a discount on notes payable and increase of additional paid-in
capital of $479,829 (restated).
72
Funds raised through cash exercises of stock options and warrants:
For the year ended December 31, 2007, stock options covering a total of 60,000
shares were exercised, generating $60,600 in cash proceeds to the Company. In
the last two quarters of 2007, warrants covering 796,900 shares were exercised
at a discounted price of $1.25 per share, resulting in proceeds of $996,125 to
the Company.
Other equity transactions:
For the year ended December 31, 2007, $1,488,405 was recognized in compensation
expense related to vesting of employee stock options, and $99,417 in
professional fees was recognized related to the vesting of non-employee stock
options and warrants in accordance with the accounting guidelines set forth in
SFAS 123 (R) and EITF 96-18, respectively.
2006
Funds raised through private offerings to accredited investors:
In the fourth quarter of 2007, the Company entered into agreements with
accredited investors to purchase 40 J Units, raising $2,000,000. Pursuant to the
sale, the Company issued 571,400 shares of common stock with share prices
between $2.30 and $2.38 (restated), and issued Notes with an initial face value
of $1,000,000. In accordance with EITF 00-27, the Company allocated the cash
received between debt and equity based on the relative fair value of each piece
of the instrument. As a result, value ascribed to the debt portion was $734,556
and the value ascribed to the equity portion was $1,265,444.
During the quarter ended June 30, 2006, the Company sold to accredited
investors, through a private offering, 6,398,335 restricted shares of common
stock at a price of one dollar and fifty cents ($1.50) per share. The Company
received $9,597,503 in gross proceeds from the offering and paid $709,250 in
cash commissions on these sales to the placement agent. Commissions paid in
common stock to the placement agent totaled $496,475.
During the quarter ended March 31, 2006, the Company sold to accredited
investors, through a private offering, 127,500 H Units at a price of one dollar
and sixty cents ($1.60) per H Unit, with each H Unit consisting of (i) one (1)
share of common stock, and (ii) a warrant to purchase up to one (1) share of
common stock at a per share exercise price of three dollars and twenty-five
cents ($3.25), exercisable until April 14, 2008. The Company received $204,000
in gross proceeds from the offering. No commissions were incurred for these
sales.
During the quarter ended March 31, 2006, cash commissions totaling $20,000 were
paid in connection with the H Unit offering that occurred during the fourth
quarter of 2005.
Funds raised through cash exercises of warrants:
During the quarter ended September 30, 2006, investors exercised warrants to
purchase 229,168 shares of the Company's common stock (or "shares") at $2.00 per
share for a total of $458,336.
During the three months ended March 31, 2006, an investor exercised a warrant to
purchase 73,332 shares at $2.00 per share for a discounted price of $1.50 per
share, resulting in gross proceeds to the Company of $109,998. The Company paid
$39,125 in cash commissions in connection with the warrant exercises that
occurred during the fourth quarter of 2005.
Funds raised through cash exercises of stock options:
For the year ended December 31, 2006, stock options covering a total of 477,902
shares were exercised, generating $713,854 in cash proceeds.
73
Other equity transactions:
For the year ended December 31, 2006, the Company recognized $1,253,159 in
compensation expense related to vesting of employee stock options, and $79,087
in professional fees related to the vesting of non-employee stock options in
accordance with the accounting guidelines set forth in SFAS 123 (R).
During 2006, the Company recognized $16,000 in non-cash professional fee expense
(non-GAAP measure) related to issuing 10,666 restricted shares of our common
stock at a price of $1.50 per share to a vendor.
17. Stock-Based Compensation
Stock Option 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 Plan, 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 Plan 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 reamining 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.
Stock-Based Compensation Expense
The following table sets forth the total stock-based compensation expense for
employees, non-employee directors and consultants for the years ended December
31, 2008, 2007 and 2006, respectively.
74
2008 2007 2006
------------ ----------- ------------
Cost of Revenues $ 113,864 $ - $ -
Sales and marketing 359,286 189,188 221,586
Research and development 1,226,057 741,312 507,600
General and administrative 1,448,736 657,322 619,060
---------------------------------------
Stock-based compensation before income taxes 3,147,943 1,587,822 1,348,246
Income tax benefit - - -
---------------------------------------
Total stock-based compensation expense after income taxes $ 3,147,943 $ 1,587,822 $ 1,348,246
=======================================
Stock-based compensation expense charged to:
Employee compensation expense (includes
outside directors) $ 3,015,660 $ 1,488,405 $ 1,253,159
Professional fees - S&M consultants 4,664 55,650 13,500
Professional fees - R&D consultants 75,735 11,837 65,587
Professional fees - G&A consultants 51,884 31,930 16,000
---------------------------------------
Stock-based compensation before income taxes 3,147,943 1,587,822 1,348,246
Income tax benefit - - -
---------------------------------------
Total stock-based compensation expense after income taxes $ 3,147,943 $ 1,587,822 $ 1,348,246
=====================================
As of December 31, 2008, there was approximately $1,626,744 of total
unrecognized compensation cost, adjusted for forfeitures, related to non-vested
stock-based payments granted to Company employees and contractors, which is
expected to be recognized over a weighted-average period of approximately 2.5
years. Total unrecognized compensation cost will be adjusted for future changes
in estimated forfeitures.
Net cash proceeds from the exercise of stock options were $32,670, $60,600, and
$713,854 for the years ended December 31, 2008, 2007, and 2006, respectively. No
income tax benefit was realized from stock option exercises during the year, due
to our net loss from operations for the period. In accordance with SFAS 123(R),
if there had been excess tax benefits from the exercise of stock options, these
would have been shown as financing cash flows rather than operating cash flows.
Valuation Assumptions
- ---------------------
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, 2008, 2007 and 2006.
Fiscal Years Ended December 31,
----------------------------------------------------------------
2008 2007 2006
------------------- ---------------------- ---------------------
Expected life in years 3.00 3.00 3.00 - 6.00
Average Volatility 66.27% - 92.39% 66% - 67% 79% - 96%
Interest rate 1.48 % - 2.67% 3.50 % - 4.76% 4.55 % - 5.00%
Dividend Yield 0.00% 0.00% 0.00%
75
The computation of expected volatility for the years ended December 31, 2008,
2007 and 2006 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.
18. Stock Options and Warrants
Stock option and warrant activity for the year ending December 31, 2008 is as
follows:
Stock Option Shares Total Options
Available Warrants and Warrants
for Grant Outstanding Outstanding Outstanding
------------- ------------- ------------- -------------
Balance, January 1, 2008 652,789 8,689,050 8,124,380 16,813,430
Authorized 5,000,000 - - -
Granted (4,947,000) 4,947,000 50,166 4,997,166
Exercised (47,500) - (47,500)
Retired/forfeited 3,186,038 (3,186,038) (3,616,605) (6,802,643)
--------------------------- ---------------------------
Balance, December 31, 2008 3,891,827 10,402,512 4,557,941 14,960,453
=========================== ===========================
Exercisable, at January 1, 2008 6,694,666 4,557,941 11,252,607
------------- ---------------------------
Stock Option Activity
The following table summarizes stock option plan activity and shares available
for grant for the years ended December 31, 2008, 2007 and 2006:
Outstanding Options
-----------------------------------------------------
Weighted
Average
Weighted Remaining
Shares Average Contractual
Available for Number of Exercise Term (in Aggregat
Grant Shares Price years) Intrinsic Value
------------- -------------- --------------------------------------
Outstanding, January 1, 2006 1,818,940 8,060,801 2.17 7.96 $ 2,688,761
Granted (3,350,000) 3,350,000 2.25
Exercised through cash consideration - (477,902) 1.49
Expired/forfeited/cancelled 2,841,330 (2,841,330) 2.45
------------ ------------ ---------
Outstanding, December 31, 2006 1,310,270 8,091,569 2.14 7.01 $ 1,007,974
Granted (1,804,167) 1,804,167 1.77
Exercised through cash consideration - (60,000) 1.01
Expired/forfeited/cancelled 1,146,686 (1,146,686) 2.32
------------ ------------ ---------
Outstanding, December 31, 2007 652,789 8,689,050 $ 2.05 6.87 $ 30,495
Additional shares reserved 5,000,000 - -
Granted (4,947,000) 4,947,000 1.04
Exercised through cash consideration (47,500) 0.69
Expired/forfeited/cancelled 3,186,038 (3,186,038) 1.87
------------ ------------ ---------
Outstanding, December 31, 2008 3,891,827 10,402,512 $ 1.03 7.40 $ -
Exercisable at December 31, 2008 6,694,666 $ 1.03 6.33 $ -
76
The aggregate intrinsic value of total stock options outstanding and exercisable
during the year ended December 31, 2008 in the table above represents the total
pretax intrinsic value (i.e., the difference between the closing stock price on
December 31, 2008 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, 2008. Aggregate intrinsic value changes as the fair
market value of Company stock changes. The closing market price of the stock on
December 31, 2008 was $0.37. The weighted average grant date fair value of stock
options granted during 2008, 2007 and 2006 was $0.45, $0.76 and $1.26,
respectively.
A summary of the nonvested shares subject to options granted under the 2000
Stock Option Plan and the 2008 Stock Plan as of December 31, 2008 and 2007 is as
follows:
Weighted Average
Grant Date Fair
Option Shares Value Per Share
------------------- --------------------
Nonvested at January 1, 2007 2,208,490 $ 0.61
Granted during the period 1,804,167 $ 0.76
Vested during the period (1,160,083) $ 1.00
Terminated during the period (898,265) $ 1.01
------------------
Nonvested at December 31, 2007 1,954,309 $ 0.64
Granted during the period 4,947,000 $ 0.45
Vested during the period (2,184,621) $ 0.52
Terminated during the period (1,008,842) $ 0.48
------------------
Nonvested at December 31, 2008 3,707,846 $ 0.42
==================
As of December 31, 2008, there was $1,626,744 of total unrecognized
compensation cost related to nonvested shares based compensation agreements
granted under the 2000 Stock Option Plan and the 2008 Stock Plan. That cost is
expected to be recognized over a weighted average period of approximately 2.5
years.
The range of exercise prices for stock options outstanding and exercisable at
December 31, 2008 are summarized as follows:
77
Total Options Outstanding as of December 31 ,2008
--------------------------------------------------------------------------
Weighted Weighted
Average Exercise Average Remaining
Options Price per Share Contractual Life
--------------------- --------------------------- ------------------------
Range of exercise prices:
$0.52 - $0.99 5,914,239 $ 0.84 6.52
$1.00 - $1.99 4,314,871 $ 1.24 8.72
$2.00 - $2.99 156,761 $ 2.43 5.21
$3.00 - $3.99 16,641 $ 3.13 2.44
--------------------- --------------------------- ------------------------
Total stock options outstanding
at December 31, 2008 10,402,512 $ 1.03 7.40
===================== =========================== ========================
Total Options Exercisable at December 31, 2008
--------------------------------------------------------------------------
Weighted Weighted
Average Exercise Average Remaining
Options Price per Share Contractual Life
--------------------- --------------------------- ------------------------
Range of exercise prices:
$0.52 - $0.99 4,672,228 $ 0.87 5.77
$1.00 - $1.99 1,849,036 $ 1.31 7.85
$2.00 - $2.99 156,761 $ 2.43 5.21
$3.00 - $3.99 16,641 $ 3.13 2.44
--------------------- --------------------------- ------------------------
Total stock options exercisable
at December 31, 2008 6,694,666 $ 1.03 6.33
===================== =========================== ========================
Stock-based Awards to Board of Directors
- ----------------------------------------
On August 16, 2006, Mr. Boyd Pearce, former CEO, resigned, and we entered into a
separation agreement pursuant to which (i) a stock option granted to Mr. Pearce
in April 2005, covering 750,000 shares of our common stock, was cancelled and
replaced by a five-year warrant covering the same number of shares at the same
exercise price; (ii) stock options granted in October 2004 covering a total of
750,000 shares of common stock were modified to have a five-year exercise
period, and; (iii) restrictions were placed on Mr. Pearce's ability to sell
stock purchased under both the newly granted warrant and the modified options.
The Company recorded no expense in the Consolidated Statements of Operations
related to the cancellation of the April 2005 option grant and the subsequent
warrant grant since the exercise price of the warrant was greater than the
market price of our common stock on the date of the warrant grant, and the fair
value of the warrant, calculated using the Black-Scholes valuation model, was
less than the fair value of the original option grant. The Company recorded
compensation expense of $198,750 during the period ending September 30, 2006
related to the modification of the October 2004 option grants. No future expense
is anticipated as both the warrant and options were fully vested at the date of
modification.
On August 22, 2006, the Company entered into Cancellation and Regrant Agreements
with directors Thomas Holt, Homer Dunn, John Gaulding, and Robert Henry Kite.
Under these Agreements certain non-qualified options to purchase shares of
common stock were replaced with Warrants to purchase shares of common stock. The
exercise prices and terms of the warrants mirrored the exercise prices and terms
of the non-qualified stock options. The exercise prices ranged from $2.60 per
share to $6.38 per share for Thomas Holt; from $2.60 per share to $2.85 per
share for John Gaulding; from $2.60 per share to $2.85 per share for Homer Dunn;
and from $2.35 per share to $2.85 per share for Robert Henry Kite. The cancelled
stock options and granted warrants covered an aggregate of 192,500 shares for
Thomas Holt; 322,500 shares for John Gaulding; 262,500 shares for Homer Dunn;
and 245,000 shares for Robert Henry Kite. No financial benefit was conferred on
the directors from the exchange of their stock options for warrants as the
exercise prices and terms of the warrants mirrored the exercise prices and terms
of the options. These option cancellations and warrant grants helped the Company
through a period of heavy recruiting. The Company intends to reduce the number
of shares in one or more future intended stock option or equity incentive plans
by the aggregate number of shares covered by these warrants. The Company
recorded no expense in the Consolidated Statements of Operations for these
transactions since the warrants all had exercise prices greater than the market
price of the stock on the date of grant, and the fair value of the warrant
awards calculated using the Black-Scholes valuation model was less than the fair
value of the original option awards.
78
On September 8, 2006, Mr. Girish Mundada, former vice president of engineering,
resigned and entered into a separation agreement with the Company pursuant to
which: (i) stock options covering an aggregate of 410,000 shares of Company
common stock were modified to extend the standard post-termination exercise
period from three months following termination through June 8, 2008; (ii)
restrictions were placed on Mr. Mundada's ability to sell stock purchased under
the stock options, and; (iii) stock options covering an aggregate of 210,000
shares of Company common stock were cancelled. Compensation expense of $66,000
was recorded during the period ending September 30, 2006 related to the
modification of Mr. Mundada's options. No future expense is anticipated as the
options were fully vested at the date of modification.
Warrants Outstanding
- --------------------
Warrants outstanding as of December 31, 2008 are summarized in the table below:
Weighted
Exercises Average
Prices per Exercise Year of
Warrants Share Price Expiration
---------------- -------------- ------------ --------------
Warrants issued in private
placements:
3,002,150 $ 0.80 2009
---------------- -----------
Subtotal 3,002,150 $ 0.80
----------------
Warrants issued to customer and
vendors
150,000 $1.45 - $1.99 2009
50,166 $ 0.60 2013
---------------- -----------
Subtotal 200,166 $ 1.42
----------------
Warrants issued to outside directors
and former employee:
50,000 $ 0.94 2010
850,000 $.94 - $2.31 2011
198,750 $ 0.94 2015
256,875 $ 0.94 2016
---------------- -----------
Subtotal 1,355,625 $ 1.70
----------------
Total warrants outstanding at
December 31, 2008 4,557,941 $ 1.09
================ ===========
Of the total warrants outstanding at December 31, 2008, all warrants were fully
vested and exercisable.
19. Concentration of Credit Risk
The Company maintains cash balances at two financial institutions in excess of
federally insured limits. At December 31, 2008, our uninsured cash balances
totaled $1,869,678. At December 31, 2008, two customers accounted for 73% of
trade accounts receivable balance of $383,445. All but $2,000 of the entire
outstanding balance had been collected as of the date of this report.
20. Employee Benefit Plans
79
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, 2008, 2007 and 2006. Administrative fees for
the 401(k) Plan totaled $4,311, $4,378 and $3,600 for the years ended December
31, 2008, 2007 and 2006, respectively.
21. Subsequent Events
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 $195,000 per year.
During the first quarter of 2009, the due date of a convertible promissory note
was extended from April 2009 to the earlier of August 2009 or the receipt of
$2,000,000 in financing.
80
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 30th Day of April 2009 by the undersigned, thereunto duly
authorized.
ANTs software inc.
By /s/ Joseph Kozak
--------------------------
Joseph Kozak,
Chairman, Chief Executive Officer
and President
81
DIRECTORS
By /s/ Joseph Kozak
----------------------------------
Joseph Kozak, Chairman, Chief
Executive Officer and President
Date April 30, 2009
--------------------------
By /s/ Craig L. Campbell
---------------------------------
Craig Campbell, Director
Date April 30, 2009
--------------------------
By /s/ John R. Gaulding
---------------------------------
John R. Gaulding, Director
Date April 30, 2009
--------------------------
By /s/ Thomas Holt
---------------------------------
Thomas Holt, Director
Date April 30, 2009
--------------------------
By /s/ Robert T. Jett
---------------------------------
Robert Jett, Director
Date April 30, 2009
--------------------------
By /s/ Ari Kaplan
Ari Kaplan, Director
Date April 30, 2009
--------------------------
By /s/ Robert H. Kite
---------------------------------
Robert H. Kite, Director
Date April 30, 2009
--------------------------
By /s/ Francis K. Ruotolo
---------------------------------
Francis K. Ruotolo, Director
Date April 30, 2009
--------------------------
82
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Company, as listed in Exhibit 3.1 to the Company's 10-QSB filed
on August 14, 2003, is hereby incorporated by reference.
3.2 Amended and Restated Bylaws of the Company.
3.3 2000 Stock Option Plan of the Company, amended April 5, 2005,
as listed in Exhibit 10.1 to the Company's 8-K filed on April
12, 2005, is hereby incorporated by reference.
10.1 Form of Indemnification Agreement signed with officers and
directors of the Company, as listed in Exhibit 10.5 to the
Company's 10-KSB filed on March 22, 2001, is hereby
incorporated by reference.
10.2 Standard Multi-Tenant Office Lease, as listed in Exhibit 10.6
to the Company's 10-QSB filed on November 14, 2005, is hereby
incorporated by reference.
14 Code of Ethics, as listed in Exhibit 14 to the Company's 10-KSB
filed on March 30, 2004, is hereby incorporated by reference.
23.1 Letter of Consent from Independent Registered Accountants,
Weiser, LLP.
23.2 Letter of Consent from Independent Registered Accountants,
BPM 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
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the period from October 1,
2008 through December 31, 2008:
1) On November 10, 2008 we issued a press release that contained
information regarding our results of operations for the quarter
ending September 30, 2008.
2) On November 28, 2008 we disclosed entry into a material definitive
agreement with Sybase, Inc.
83