UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-K

  X . ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

      . TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number 000-32865

 

WORDLOGIC CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada		88-0422023
(State of incorporation)		(I.R.S. Employer Identification No.)

 

1130 West Pender St., Suite 230

Vancouver, BC Canada V6E 4A4

(Address of principal executive offices)

 

(604) 257-3660

(Registrant’s telephone number)

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 Section 15(d) of the Act.

Yes      . No  X .

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      . No  X .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	. (Do not check if a smaller reporting company)	Smaller reporting company	X .

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes      . No  X .

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012 was $7,759,779 based upon the price ($0.105) at which the common stock was last sold as of the last business day of the most recently completed second fiscal quarter, multiplied by the approximate number of shares of common stock held by persons other than executive officers, directors and five percent stockholders of the registrant without conceding that any such person is an “affiliate” of the registrant for purposes of the federal securities laws. Our common stock is traded in the over-the-counter market and quoted on the Over-The-Counter Bulletin Board under the symbol “WLGC.OB”

As of April 2, 2013, there were 83,276,717 shares of the registrant’s $0.001 par value common stock issued and 83,045,177 shares outstanding.

Documents incorporated by reference: None

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TABLE OF CONTENTS

		Page
	PART I
Item 1	Business	4
Item 1A	Risk Factors	10
Item 1B	Unresolved Staff Comments	10
Item 2	Properties	10
Item 3	Legal Proceedings	10
Item 4	Mine Safety Disclosures	11
	PART II
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6	Selected Financial Data	13
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	16
Item 8	Financial Statements and Supplementary Data	F-1
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	17
Item 9A	Controls and Procedures	17
Item 9B	Other Information	18
	PART III
Item 10	Directors and Executive Officers and Corporate Governance	19
Item 11	Executive Compensation	22
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	25
Item 13	Certain Relationships and Related Transactions, and Director Independence	26
Item 14	Principal Accounting Fees and Services	27
	PART IV
Item 15	Exhibits	29

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections. We may use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “foresee,” “estimate” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted. These risks and uncertainties include the following:

·

The availability and adequacy of our cash flow to meet our requirements;

·

Economic, competitive, demographic, business and other conditions in our local and regional markets;

·

Changes or developments in laws, regulations or taxes in our industry;

·

Actions taken or omitted to be taken by third parties including our competitors, as well as legislative, regulatory, judicial and other governmental authorities;

·

Competition in our industry;

·

The loss of or failure to obtain any license or permit necessary or desirable in the operation of our business;

·

Changes in our business strategy, capital improvements or development plans;

·

The availability of additional capital to support capital improvements and development; and

·

Other risks identified in this report and in our other filings with the Securities and Exchange Commission or the SEC.

 

This report should be read completely and with the understanding that actual future results may be materially different from what we expect. The forward looking statements included in this report are made as of the date of this report and should be evaluated with consideration of any changes occurring after the date of this Report. We will not update forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Term

 

Except as otherwise indicated by the context hereof, references in this report to “Company,” “WLGC,” “we,” “us” and “our” are references to WordLogic Corporation.  All references to “USD” or United States Dollars refer to the legal currency of the United States of America.

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PART I

ITEM 1.  BUSINESS

Business Overview

We were incorporated in the State of Nevada on March 30, 1999 under the original name of The AmericanWest.com, Inc.  Pursuant to an agreement and plan of merger dated as of March 11, 2003, we merged with and acquired the assets of WordLogic Corporation, a Delaware corporation.  In anticipation of the closing of the merger, we changed our name to WordLogic Corporation.  WordLogic Corporation, the public Nevada company, was the surviving corporation after the merger.

We are a software company that develops, markets, licenses and sells advanced predictive text solutions designed to accelerate the entry and retrieval of text and information for personal computing devices ranging from small handheld Mobile Devices with touch screen and QWERTY keyboards to desktop computers and tablet PCs.  As efficient text input becomes more important due to the rapid expansion of data such as SMS, email, social networking, and search, the Company seeks to provide a natural input method that could reduce finger movements by over 50%, supply accurate multiple word predictions in just a gesture or two, and help users to control their input and enhance their communication.  The Company's Intelligent Input Platform™ and iKnowU™ keyboard application represent a new method for text input that is not solely focused on typing or speaking with speed and accuracy. Rather, as people input, search, text, email, and compose, the Company seeks to help individuals communicate and control their message, enhancing both accuracy and semantics in order to help users create meaning.

Business Development  

On January 9, 2007, we developed a new text entry/text messaging input solution for cell phones utilizing our patent pending prediction engine.  This new solution for cell phones is more efficient, user friendly and provides a more compelling text entry interface for users than our existing solutions.  In addition, the functionality and configuration of the technology can be expanded and/or modified to suit a user's or manufacturers' specific needs.

On March 15, 2007, we entered into a worldwide non-exclusive license with Cre8txt Limited of Bolton, United Kingdom.  Cre8txt has developed a keyboard which utilizes the skills of people who already use SMS (Short Message Service) texting on mobile phones.  Texting has become popular in Europe, North America and Asia.  Text message specific abbreviations have been developed which allow certain, experienced users to actually type text faster using a numerical keyboard layout rather than using a traditional computer QWERTY keyboard.  The Cre8txt keyboard is similar to a mobile phone keypad, and will utilize the WordLogic(TM) predictive text technology.  The WordLogic Prediction Engine is a powerful software tool which will predict text selected from a database of frequently used words, and will also be capable of translating SMS Text language into full text.  On July 5, 2007, we delivered the first 1,000 units of our software to Cre8txt Limited of Bolton, UK.

In March 2011, a new finger touchscreen prototype of the Company's WordLogic™ Predictive Keyboard was nominated for a CTIA Wireless 2011 Emerging Technology Award. The CTIA E-Tech Award category covers new or yet-to-be introduced products that enhance productivity and organization.

In February 2012, the Company entered into an agreement with RPX Corporation (“RPX”), for RPX to license the Company’s advanced predictive input software patents.  Under the terms of the agreement, the Company received a $5 million non-dilutive cash payment, while retaining full ownership of its patent portfolio.  RPX Corporation is a provider of patent risk solutions, offering defensive buying, acquisition syndication, patent intelligence and advisory services.  By acquiring patents, RPX helps to mitigate and manage patent risk for its growing client network.

In October 2012, the iKnowU™ keyboard application for Android powered devices was released. It leverages the Company’s state-of-the-art patented technology, delivering the most advanced keyboard automation solution available.

In January 2013, the Company released its new predictive text solution, WordLogic for Business, allowing organizations to improve productivity through accurate, faster and more consistent text entry across the workforce.

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Technology Overview

iKnowU™ 's award-winning keyboard is the most feature-rich and intuitive application for Android powered devices. We are the only keyboard provider that has the ability to predict entire phrases and sentences through their WordChunking™ technology, as well as offering the Company’s Gesturing™  capabilities.  This unique feature gives users the ability to enter words and phrases with sub-second input, resulting in rapid entry speeds with full accuracy.  Since October 2012, over 60,000 Android users have downloaded the application and are enjoying the most feature-rich, intelligent keyboard on the market. The application uniquely features:

The Company’s technology is unique in that it encompasses both the desk top PC and mobile device platforms. This patented technology can improve the way that mobile device users interact with their devices and open the door to new revenue streams as well as provide a competitive advantage against rival companies.

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The Company also released the incredible power of its patented predictive text technology, WordLogic for Business, to the workplace in one cost-effective solution. With over ten years experience, the Company understands the need for enterprises to offer their workers the ability to rapidly and seamlessly enter industry or company-specific words and sentences into a multitude of devices from PC’s to mobile phones and tablets. WordLogic for Business is optimized to run on Android tablets and smartphones as well as desktop PCs. It can also be used with custom touchscreen devices, such as touchscreen PDAs used by couriers and delivery companies. WordLogic for Business automatically syncs across all devices currently in use and delivers a consistent, high-quality experience for the end-user, irrespective of the device or platform they are using. Companies seeking to adopt predictive text can build WordLogic for Business into their existing IT infrastructure using WordLogic's simple SDK.

Intellectual Property

 

We own the copyright of all of the content of our website, www.WordLogic.com.

 

On October 21, 2003 we received trademark approval for the mark “WordLogic” under Reg. No. 2,774,468 pending in the United States. A similar trademark application has been approved and registered in Canada under TMA576,700.

Our intellectual property portfolio includes six issued U.S. and European patents and five pending U.S. patent applications, one of which has received a Notice of Allowability from the U.S. Patent and Trademark Office (“USPTO”).

In conjunction with its wholly owned subsidiary, 602531 British Columbia Ltd., the Company holds U.S. patents 7,293,231, 7,681,124, 7,716,579, and 7,921,361, which relate to data entry for personal computing devices. U.S. patent 7,293,231, which the Company believes to be one of its pioneering patents, relates to various methods, systems, devices, and computer-readable media for use in connection with computer-assisted data entry.

Equivalent foreign patents include EP 1171813 (WO 0057265), published under the Patent Cooperation Treaty and accepted by the European Patent Office. EP 1171813 is also accepted in Germany, France, the UK, Italy, Finland, Spain, the Netherlands, and Portugal. Additionally, a patent for a data entry method and system for personal computer and corresponding computer-readable medium is published by the World Intellectual Property Organization as WO 0233527 and by the European Patent Office as EP 1356368.

In addition, the Company has five U.S. patent applications filed in connection with its U.S. patent 7,293,231 related to various aspects of computer-assisted data entry. These entail three divisional patent applications (#11/133,779, #11/134,759, and #11/134,810) and two continuation applications (#11/871,900 and #11/871,904). These applications are also in the name of the Company's subsidiary 602531 British Columbia.

For the Company's pending applications, the USPTO has recently issued a Notice of Allowability for application #11/871,900 related to keyboard prediction and search utilizing gesturing software technology.

On February 12, 2013 we received trademark notice of allowance for the mark “IknowU” under serial number 85678117 in the United States.

We will principally rely upon trademark, copyright, patent, trade secret and contract law to protect our proprietary rights.  We generally intend to enter into confidentiality agreements, “work-made-for-hire” contracts and intellectual property licenses with our employees, consultants and corporate partners, respectively, as part of our efforts to control access to and distribution of our products, content and other proprietary information.

Summary of the Company’s Patents and Patent Applications

ISSUED PATENTS
Issued Patent Number	Location	Issue Date	Description
1356368	Europe	Jan. 2008	Data Entry Method and System for Personal Computer, and Corresponding Computer Readable Medium
1171813	Europe	Mar. 2004	Data Entry for Personal Computing Devices
7,293,231	U.S.	Nov. 2007	Data Entry for Personal Computing Devices
7,681,124	U.S.	Mar. 2010	Data Entry for Personal Computing Devices
7,716,579	U.S.	May 2010	Data Entry for Personal Computing Devices
7,921,361	U.S.	April 2011	Data Entry for Personal Computing Devices

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PATENT APPLICATIONS
Application Number	Location	Type	Recent USPTO Action
#11/133,779	U.S.	Divisional Patent Application
#11/134,759	U.S.	Divisional Patent Application
#11/134,810	U.S.	Divisional Patent Application
#11/871,900	U.S.	Continuation Application	Notice of Allowability
#11,871,904	U.S.	Continuation Application

A copy of our patents can be obtained from the USPTO web site located at www.uspto.gov or from our website located at www.WordLogic.com, which provides a direct link to the patents.

Product Availability

The Company released iKnowU™ to support Android-based devices, as Android became a market leader with a more than 75% share by the end of 2012 (Source: Business Insider 2012). The iKnowU™ is available to download from the Google Play store for $1.99, with a free time-limited trial version also available.

The Company also brings the incredible power of its patented predictive text technology, released its new predictive text solution, WordLogic for Business, allowing organizations to improve productivity through accurate, faster and more consistent text entry across the workforce. Organizations seeking to adopt predictive text can build WordLogic for Business into their existing IT infrastructure using WordLogic's simple Software Development Kits. WordLogic for Business is available worldwide to businesses of all sizes as either a fully-hosted service from WordLogic or installed and internally hosted on the customer's systems and is available in multiple languages.

Target Customers

The Company’s target customers will likely include Tier 1 wireless operators in the U.S. as well as smartphone original equipment manufacturers (OEMs). In the telecommunications industry, a Tier 1 wireless carrier entails a company that is the sole operator of its network, indicating that this provider offers a direct connection to the networks it uses to deliver voice and data as well as to the Internet. AT&T Inc. (T-NYSE), Verizon Communications Inc. (VZ-NYSE), Sprint Nextel Corp. (S-NYSE), and T-Mobile USA, Inc. are examples of Tier 1 operators. Conversely, Tier 2 companies may procure a portion of their networks from the Tier 1 carriers, and Tier 3 operators are wholly reliant on the networks of the Tier 1 and Tier 2 firms. In addition to targeting the Tier 1 carriers, the Company intends to market its technology to smartphone OEMs. Examples of smartphone OEMs include Samsung Electronics Co., Ltd., HTC Corp. (2498-TPE), Motorola Mobility Holdings Inc. (MMI-NYSE), Nokia and LG Electronics Inc. Customers this size may have the potential to apply the Company’s technology in up to 200 million units annually. The Company will also be targeting its enterprise solution WordLogic for Business to individual corporations, as well as enterprise software manufacturers such as Oracle, Microsoft and SAP.

Marketing Strategy

The Company designed and implemented a new logo and website design in 2012. In October of 2012, the Company soft-launched its first Android product iKnowU™ on Google Play and created a specifically branded site iknowu.net. The Company started marketing campaigns and promotion of the iKnowU™ product via banner advertising campaigns on numerous mobile and internet portals.

The Company has engaged a marketing and public relations firms to disseminate the iKnowU™ - Wordlogic message to publishers worldwide.

Future retail-based marketing plans include customer email campaigns featuring corporate news and updated product information, external email marketing campaigns to attract new customers, and affiliate marketing.

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Growth Strategy

In addition to further developing its current product offering, much of the Company’s strategy for growth going forward is based on its U.S. and European patents.  As well as leveraging its intellectual property, the Company seeks to increase emphasis on its predictive text platform, which the Company believes can offer predictive input with a broad range of Internet-enabled control and communication applications.  Other projects in development include expanding and enhancing the Company’s retail product offerings.  Ultimately, the Company believes that it may become an acquisition target for larger companies within the technology sector due to the breadth of its patent portfolio and the novel characteristics of its technology.

The Industry

Smartphones and mobile devices have become a necessity for many professional and non-professional individuals. Touchscreens, email, 3G, 4G, and power-packed mobile applications have resulted in considerable growth of new devices. To this extent, the Company estimates that nearly 75% of phones shipped in the U.S. contain either a QWERTY or touchscreen keyboard. Over 700 million smartphones were sold in 2012 and could see a 50% increase each year for the next few years to over a billion smartphone sales in 2013.

Likewise, the PC market represents billions of dollars of equipment that uses text input and millions of consumers who could benefit from refined input and search options. Although not double digit growth in 2013, 384 million desktop PCs, portable computers, and mini-notebooks are expected to ship to consumers, The Company may be of value to PC manufacturers that are seeking innovative advancements to the PC experience in order to remain competitive. Likewise, versions of the Company's technology can be incorporated into the growing number of tablet computers entering the marketplace (estimated at over 165 million for 2013).

Further, the information technology (IT) industry is experiencing several related trends: (1) rapid growth of mobile devices; (2) tablets gaining in popularity over netbooks; (3) smartphones becoming more advanced; (4) enterprise workers seeking to use their phones for both business and personal tasks; and (5) increasing developer activity online. Accordingly, there will likely be even greater emphasis on mobile apps going forward, particularly for tablets, and targeted toward enterprise. In many cases, large enterprises are expected to launch apps specific for their workforces, as these companies seek to reduce costs and leverage time and cost efficiencies (Source: The New Wave of App Development from TechNewsWorld ™, February 1, 2011).

Outsell, Inc., a research and advisory firm for the publishing and information industries, estimates that the global information industry is valued at $506 billion with strong gains coming from web search. The Company believes that there is considerable unmet need within this market for improved enterprise search tools and, consequently, an opportunity for our technology operating as either a front-end application or as a standalone product.

Competition

The Company believes that speed, ease of use, phrase prediction and a relatively small footprint are advantages of its technology that could further establish the Company as a provider of text input and manipulation software, particularly for mobile phones. However, as the demand for text-savvy phones accelerates, competition among text input solution providers is also increasing. Introducing technology and user interface enhancements is crucial to maintaining a competitive advantage.

Altogether, the predictive technology landscape is considered to be relatively competitive. Yet, within the refined search area, the Company believes that there are fewer competitors because although many developers would like to build better predictive text technologies, many do not possess the existing technology and code to do so.

We compete with companies such as SwiftKey and Nuance that offer keyboard solutions that are not as robust as the company offerings but have significant market share among handset manufacturers and carriers. In 2012, SwiftKey spent more days as Google Play’s No.1 paid download than any other app, validating the global market for better text input for mobile devices. As we increase marketing and the awareness of the iKnowU™ product we are poised to significantly capture our competitor’s clients and new customers.

Government Regulation

Because we sell products through the Internet, we may be subject to rules and regulations around the world, which will affect our business.  The laws and regulations that govern Internet commerce change rapidly.  Also, because we carry on business in Canada, we are subject to laws regarding employment, taxes and other regulatory issues for our Canadian operations.  The following laws and regulations applicable to Internet commerce and are relevant to our business:

 

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Privacy Law.  The state of privacy law is unsettled, and rapidly changing.  Current and proposed federal, state and foreign privacy regulations and other laws restricting the collection, use and disclosure of personal information could limit our ability to use the information in our databases to generate revenues.  In late 1998, COPPA was enacted, mandating that measures be taken to safeguard minors under the age of 13.  The FTC promulgated regulations implementing COPPA on October 21, 1999, which became effective on April 21, 2000.  The principal COPPA requirement is that individually identifiable information about minors under the age of 13 not be collected, used or displayed without first obtaining informed parental consent that is verifiable in light of present technology.

 

The FTC final regulations create a “sliding scale” of permissible methods for obtaining such consent.  Consent for internal use of the individually identifiable information of children under the age of 13 can be obtained through e-mail plus an additional safeguard, such as confirming consent with a delayed e-mail, telephone call, or letter.  Obtaining verifiable consent from a child’s parent to share that child’s information with a third party or enable the child to publicly distribute the information by, for example, allowing unrestricted access to a chat room or message board is significantly more burdensome.  While the temporary “sliding scale implementation was due to expire on April 21, 2002, on October 31, 2001, the FTC extended the implementation period through April 21, 2005.  On April 21, 2005, the “sliding scale” mechanism was extended indefinitely.

 

The FTC has required that parental consent for such higher risk activities be verified by more secure methods than e-mail, such as a credit card in connection with a transaction, print-and-sign forms, toll-free numbers staffed by trained operators, or digital signatures.  Complying with the new requirements is costly and may dissuade some of our customers from using our products.  While we will attempt to be fully compliant with the FTC requirements, our efforts may not be entirely successful.  In addition, at times, we rely upon outside vendors to maintain data-collection software, and there can be no assurance that they will at all times comply with our instructions to comply with COPPA.  If our methods of complying with COPPA are inadequate, we may face litigation with the FTC or individuals, which would adversely affect our business.

 

Moreover, we have posted a privacy policy pertaining to all users and visitors to our web site.  By doing so, we will subject ourselves to the jurisdiction of the FTC.  Should any of our business practices be found to differ from our privacy policy, we could be subject to sanctions and penalties from the FTC.  It is also possible that users or visitors could try to recover damages in a civil action as well.

 

The European Union recently enacted its own privacy regulations that may result in limits on the collection and use of certain user information.  The laws governing the Internet, however, remain largely unsettled, even in areas where there has been some legislative action.  It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business on the Internet.  Furthermore, the Federal Trade Commission has recently investigated the disclosure of personal identifying information obtained from individuals by Internet companies.  Evolving areas of law that are relevant to our business include privacy law, regulation on what websites contain, and sales and use tax.  Because of this rapidly evolving and uncertain regulatory environment, we cannot predict how these laws and regulations might affect our business.  In addition, these uncertainties make it difficult to ensure compliance with the laws and regulations governing the Internet.  These laws and regulations could harm us by subjecting us to liability or forcing us to change how we do business.

Conformance to E-Commerce Statutory Requirements for Formation of Contracts. We intend to conduct e-commerce on our web site, and through affiliated web sites.  The applicable law on online formation of contracts has been unsettled and is evolving.  On June 30, 2000, the federal government enacted the “E-Sign” statute, which in limited cases permits online formation of contracts.  Similarly, on January 1, 2000, California adopted a standard version of the Uniform Electronic Transactions Act (“UETA”), which also permits electronic signatures and record-keeping for certain types of contracts.  We attempt to comply with these laws, but there is no guarantee that we will be successful.  Judicial interpretation of the applicability of these laws could result in customer contracts being set aside or modified.  In that case, our e-commerce revenue could be materially adversely affected.

Sales Tax.  The tax treatment of goods sold over the Internet is currently unsettled.  A number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods through the Internet.  Such proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect our opportunity to derive financial benefit from electronic commerce.  While the Internet Tax Freedom Act (ITFA) has placed a moratorium on new state and local taxes on Internet commerce, the tax moratorium expired on November 1, 2003, and has not been re-enacted.  On November 1, 2007, the "Internet Tax Freedom Act Amendment Acts of 2007" was signed into law.  It extends the prohibitions against multiple and discriminatory taxes on electronic commerce until November 1, 2014. 

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WHERE YOU CAN GET ADDITIONAL INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC.  You may read and copy our reports or other filings made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.W., Washington, DC 20549.  You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  You can also access these reports and other filings electronically on the SEC’s web site, www.sec.gov.

ITEM 1A.   RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

On June 23, 2010, we entered into a lease agreement for office space located at 1130 West Pender St., Suite 230, Vancouver, BC Canada V6E 4A4. Since that time, we have not sought to move or change our office site.  Our telephone number remains (604) 257-3600. Under the lease, we currently pay a total of $6,954 CAD per month on a month-to-month basis for 2113ft of corporate office space. The space we lease is utilized for general main office purposes.

On June 15, 2012, we also entered into a lease agreement for new office space located at 175 Varick Street, Office number 345, New York, NY 10014 U.S.A. Under the lease, we currently pay a total of $1,400 USD per month on a month-to-month basis for 80ft of corporate office space. The space we lease is utilized for general office purposes.

On July 10, 2012, we also entered into a lease agreement for new office space located at 3820 Cessna Drive, Suite 190, Richmond, BC Canada V7B 0A2. Under the lease, we currently pay a total of $2,172 CAD per month on a month-to-month basis for 934ft of corporate office space. The space we lease is utilized for general office purposes. Additional space may be required as we expand our operations. We do not foresee any significant difficulties in obtaining any required additional space. We do not own any real estate.

ITEM 3.   LEGAL PROCEEDINGS

In January, 2011, Mr. Knaven, a former officer and director of the Company, commenced a complaint to British Columbia’s Employment Standards Branch against the Company (the “ESB Complaint”) alleging that he was owed unpaid wages.  In October, 2011, Mr. Knaven initiated two further legal proceedings against the Company in B.C. Supreme Court (the “Supreme Court Actions”), in which he advanced further complaints in respect of claims for shares and interest, a claim for wrongful dismissal, and further claims for general and unspecified damages.

Regarding the ESB Complaint, on October 24, 2012 the Company applied successfully for a ruling placing that complaint in abeyance, to be dealt with by the B.C. Supreme Court rather than the ESB.  In accordance with that ruling, Mr. Knaven on November 9, 2011 delivered a proposed amendment to one of the Supreme Court Actions.  The quantified portion of Mr. Knaven’s claims totals approximately $261,752. He also seeks general and unspecified damages which are unquantified.

The Company vigorously contests the claims, and has filed Responses and Counterclaims regarding all of the above referenced disputes.  The Counterclaims name Mr. Knaven and others as defendants by counterclaim. Mr. Knaven has been served and has filed Responses disputing and denying the Counterclaims.  

The other defendants by counterclaim have not yet been served.  They include Mr. Mike Flom who appears to have been involved in assisting Mr. Knaven in formulating and advancing Knaven’s various claims against the Company.  In addition, although Mr. Flom has neither threatened nor served any legal proceedings of his own, Mr. Flom had, during 2012, asserted that the Company owed him a “termination” payment and related sums totaling in excess of $500,000, and the issuance of shares.  The Company has put Mr. Flom on notice that it does not accept those assertions.

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In October, 2012, Biller Communications (“Biller”), a former consulting firm of the Company, commenced a complaint to Supreme Court of the State of New York against the Company alleging that the Company owes Biller $30,456, pursuant to a contract. The Company vigorously contests that the Company owes Biller any money. The Company filed a Verified Answer raising numerous defenses and Discovery Demands upon the attorneys for Biller.

Subsequent to December 31, 2012, the Company received notice from the former Chief Operating Officer (“COO”), threatening a “whistle blower” claim pursuant to the Sarbanes-Oxley and Dodd-Frank legislation, to be commenced in the State of New York, alleging he was forced to resign because he was investigating expenses incurred by the Chief Executive Officer.  The Company denies the allegations, and further maintains the matter is to be resolved by arbitration. Accordingly it has commenced arbitration in British Columbia, Canada to resolve the issues. The Company also appointed an independent director to conduct an investigation into the allegations raised by the former COO to report to the Board of Directors on the outcome of his investigation, together with recommendations. The report was delivered to the Board of Directors on March 13, 2013.    

On April 2, 2013, a complaint was filed with the United States District Court for the Southern District of New York by Paul Silverstein against the Company in regards to certain claims asserted under the Dodd-Frank Wall Street Reform and Consumer Protection Act by Mr. Silverstein related to allegations of fraud and the termination of Mr. Silverstein as President and CEO of the Corporation. The Corporation has not yet responded to the claims and the complaint is in the initial stages.

The outcome of above litigations and possible litigation cannot be reliably predicted at this time, nor can the Company provide a timeline for resolution.

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable.

11

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PART II

ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

Our Common Stock is currently quoted on the OTC Bulletin Board (OTCBB).  Our Common Stock has been quoted on the OTC Bulletin Board trading under the symbol “WLGC.OB” since April 14, 2003.  Because we are quoted on the OTCBB, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if they were listed on a national securities exchange.

 

The following table sets forth the high and low bid prices for our Common Stock per quarter as reported by the OTCBB for the period from January 1, 2011 through December 31, 2012, based on our fiscal year end December 31. These prices represent quotations between dealers without adjustment for retail mark-up, markdown or commission and may not represent actual transactions.  

		First Quarter				Second Quarter				Third Quarter			Fourth Quarter
2012 – High		$0.20				$0.13				$0.1199			$0.11
2012 – Low		$0.091				$0.101				$0.09			$0.0687
2011 – High		$0.36				$0.28				$0.21			$0.15
2011 – Low		$0.12				$0.15				$0.10			$0.08

Record Holders

As of April 2, 2013, an aggregate of 83,276,717 shares of our Common Stock were issued and outstanding and were owned by approximately 110 holders of record, based on information provided by our transfer agent.

 

Recent Sales of Unregistered Securities

None. 

Re-Purchase and Retirement of Equity Securities

See Note 12 – Treasury Stock of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding share repurchases and retirement of treasury stock. The following is our monthly stock repurchases for the fiscal year 2012:

Period		Total number of Shares Purchased			Average Price Paid per Share
August 1, 2012 – August 31, 2012		99,000		$	0.0961
September 1, 2012 – September 31, 2012		333,000		$	0.1007
October 1, 2012 – October 31, 2012		370,140		$	0.1036
November 1, 2012 – November 30, 2012		229,400		$	0.0874
December 10, 2012, retirement of treasury stock		(800,000)		$	-

The repurchases were made using cash resources and occurred in the open market and pursuant to a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934.

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Dividends

We have not paid any cash dividends on our Common Stock since inception and presently anticipate that all earnings, if any, will be retained for development of our business and that no dividends on our Common Stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of our Board of Directors and will depend upon, among other things, future earnings, operating and financial condition, capital requirements, general business conditions and other pertinent facts.  Therefore, there can be no assurance that any dividends on our Common Stock will be paid in the future.

Securities Authorized for Issuance Under Equity Compensation Plans

 

On May 14, 2010, the Company registered on Form S-8 the 2010 Share Incentive Plan, under which the Company is authorized to issue up to ten million (10,000,000) shares of the Company’s Common Stock to the Company’s employees, executives and consultants.

On July 30, 2012, the Company registered on Form S-8 the 2012 Equity Incentive Plan, under which the Company is authorized to issue up to ten million (10,000,000) shares of the Company’s Common Stock to the Company’s employees, executives and consultants.

ITEM 6.   SELECTED FINANCIAL DATA

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections.  We may use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “foresee,” “estimate” and variations of these words and similar expressions to identify forward-looking statements.  These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted.  You should read this report completely and with the understanding that actual future results may be materially different from what we expect.  The forward-looking statements included in this report are made as of the date of this report and should be evaluated with consideration of any changes occurring after the date of this Report.  We will not update forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS

Working Capital

	December 31, 2012	December 31, 2011
Current Assets	$1,758,735	$52,979
Current Liabilities	$487,972	$686,878
Working Capital (deficit)	$ 1,270,763	(633,899)

Cash Flows

	December 31, 2012	December 31, 2011
Cash Flows from (used in) Operating Activities	$1,835,245	$(917,798)
Cash Flows from (used in) Investing Activities	$(936,123)	$nil
Cash Flows from (used in) Financing Activities	$(137,408)	$848,238
Effect of exchange rate changes on cash	$(31,200)	8,395
Net Increase (decrease) in Cash During Period	$730,514	$(61,165)

13

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Operating Revenues

Operating revenues for the twelve months ended December 31, 2012 were $5,000,991 and is comprised of product sales of $991 and license granting of $5,000,000.

Operating revenues for the twelve months ended December 31, 2011 were $4,076 and is comprised of product sales totaling $4,076.

Operating Expenses and Net Loss

Operating expenses for the twelve months period ended December 31, 2012 were $3,640,436 and is comprised of $119,864 in rent, $3,121,636 in selling, general and administrative and $398,936 in research and development. Operating expenses for the same period ended December 31, 2011 were $1,987,410 and is comprised of $71,164 in rent, $1,556,967 in selling, general and administrative and $359,279 in research and development.

Net income for the twelve months period ended December 31, 2012 was $1,380,832 and is comprised of $1,360,555 income from operations, $6,992 in interest income, $2,113 in interest expense, $2,947 in gain on interest forgiveness, and $12,451 in gain on settled payable.  Net loss for the same period ended December 31, 2011 was $2,132,373 and is comprised of $1,983,334 loss from operations, $11,250 bad debts, $7,689 in interest expense and $130,100 loss on settlement of debt.

Liquidity and Capital Resources

As at December 31, 2012, the Company’s cash and current asset balance was $1,758,735 compared to $52,979 as at December 31, 2011. The increase in current assets of $1,705,756 is attributed to an increase of $566,818 in cash and cash equivalents, an increase of $163,696 in restricted cash, an increase of $915,077 in investments, an increase of $17,884 in GST/HST refund receivable, an increase of $5 in employee advances, an increase of $515 in interest receivable, and an increase in prepaid expenses of $47,761.

 

As at December 31, 2012, the Company had current and total liabilities of $487,972 compared with current and total liabilities of $686,878 as at December 31, 2011. The decrease in total liabilities of $198,906 is attributed to a $30,532 decrease in accounts payable and accrued liabilities, a decrease of $38,074 in bank loans payable, a decrease of $121,894 in indebtedness to related parties, a decrease of $6,000 in notes payable, and a decrease of $2,406 in accrued interest.

As at December 31, 2012, the Company had a working capital of $1,270,763 compared with a working capital deficit of $633,899 as at December 31, 2011.  The increase in working capital was primarily attributed to an increase in investments and a reduction in accounts payable and accrued liabilities.

Cashflow from Operating Activities

During the year ended December 31, 2012, the Company generated $1,835,245 of cash for operating activities compared to the use of $917,798 of cash for operating activities during the same period ended December 31, 2011. The change in net cash generated in operating activities is primarily attributed to an increase in revenue from patents licensing. 

Cashflow from Investing Activities

During the year ended December 31, 2012, the Company used $936,123 of cash for investing activities compared to $nil of cash for investing activities during the same period ended December 31, 2011. The change in net cash used in investing activities is primarily attributed to purchase of equipment and investments in term deposits. 

Cashflow from Financing Activities

During the year ended December 31, 2012, the Company used $137,408 of cash from financing activities compared to cash received $848,238 for the same period ended December 31, 2011.  The change in cash flows from financing activities is primarily attributed to an increase in repayment of related party advances, repayment of line of credit, and other promissory notes, net of decrease in sale of common shares.

14

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Going Concern

We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities. For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

Future Financings

We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the 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 periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Recently Issued Accounting Pronouncements

In October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.

In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.

In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income” in Accounting Standards Update No. 2011-05. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The adoption of ASU 2011-12 is not expected to have a material impact on our financial position or results of operations.

15

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In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on December 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on our financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will become effective for the Company on December 1, 2012. We are currently evaluating ASU 2011-04 and have not yet determined the impact that adoption will have on our financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. This amendment explains which modifications constitute troubled debt restructurings (“TDR”). Under the new guidance, the definition of a troubled debt restructuring remains essentially unchanged, and for a loan modification to be considered a TDR, certain basic criteria must still be met. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructuring occurring on or after the beginning of the fiscal year of adoption. ASU 2011-02 has become effective for the Company on September 1, 2012. The Company does not believe that the guidance will have a material impact on its financial statements.

The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

WORDLOGIC CORPORATION

(A Development Stage Company)

For the Years Ended December 31, 2012 and 2011

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Cash Flows	F-5
Consolidated Statements of Stockholders’ Deficit	F-6
Notes to the Consolidated Financial Statements	F-12

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

WordLogic Corporation

(A Development Stage Company)

We have audited the accompanying consolidated balance sheets of WordLogic Corporation (A Development Stage Company) as of December 31, 2012 and 2011 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for each of the twelve month periods 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 audits in accordance with 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of WordLogic Corporation (A Development Stage Company) as of December 31, 2012 and 2011, and the results of its operations and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses prior to the current period, has used significant cash in support of its operating activities and, based upon current operating levels, requires additional capital or significant reconfiguration of its operations to sustain its operations for the foreseeable future, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ M&K CPAS, PLLC

www.mkacpas.com

Houston, Texas

April 10, 2013

F-2

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WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Balance Sheets

(Expressed in US Dollars)

		December 31, 2012		December 31, 2011
Assets
Current Assets
Cash and cash equivalents	$	581,605	$	14,787
Restricted cash (Note 3)		174,561		10,865
Investments (Note 4)		915,077		–
GST/HST refund receivable (Note 6)		32,724		14,840
Employee advances		221		216
Interest receivable (Note 4)		515		–
Prepaid expenses (Note 5)		54,032		12,271
Total Current Assets		1,758,735		52,979
Property and equipment, net of accumulated depreciation (Note 7)		19,365		1,896
Total Assets	$	1,778,100	$	54,875
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities
Accounts payable and accrued liabilities	$	430,481	$	461,013
Bank loans payable (Note 8)		–		38,074
Indebtedness to related parties (Note 9)		25,543		147,437
Accrued interest		31,948		34,354
Notes payable (Note 10)		–		6,000
Total Current Liabilities		487,972		686,878
Total Liabilities		487,972		686,878
Stockholders’ Equity (Deficit)
Common stock, $.001 par value; 250,000,000 shares authorized 83,276,717 shares issued and 83,045,177 shares outstanding as of December 31, 2012, and 82,500,606 shares issued and outstanding as of December 31, 2011 (Note 11)		83,277		82,501
Additional paid-in capital		23,524,244		22,946,272
Stock receivable		–		(10,000)
Stock payable		4,000		–
Accumulated deficit		(2,264,854)		(2,264,854)
Deficit accumulated during development stage		(19,379,130)		(20,759,962)
Accumulated other comprehensive loss		(657,160)		(625,960)
Treasury stock, 231,540 shares and nil as of December 31, 2012 and December 31, 2011, respectively (Note 12)		(20,249)		–
Total Stockholders’ Equity (Deficit)		1,290,128		(632,003)
Total Liabilities and Stockholders’ Equity (Deficit)	$	1,778,100	$	54,875

The accompanying notes are an integral part of the consolidated financial statements.

F-3

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WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Statements of Operations

(Expressed in US Dollars)

		Accumulated from May 27, 2003 (Date of Inception) to	For the Years Ended
		December 31, 2012		December 31, 2012		December 31, 2011
Revenue
Product sales	$	26,748	$	991	$	4,076
Patents licensing (Note 14)		5,000,000		5,000,000		–
Royalty revenue		32,962		–		–
Total Revenues		5,059,710		5,000,991		4,076
Operating expenses
Rent		948,227		119,864		71,164
Selling, general and administrative (Note 9 and 13)		20,488,975		3,121,636		1,556,967
Research and development		3,324,673		398,936		359,279
Total Operating Expenses		24,761,875		3,640,436		1,987,410
Income (Loss) from Operations		(19,702,165)		1,360,555		(1,983,334)
Other income (expenses)
Bad debts		(11,250)		–		(11,250)
Interest income		8,752		6,992		–
Interest expense:
Related parties		(84,152)		–		–
Amortization of discount on convertible note		(145,243)		–		–
Other notes, advances and amounts		(445,371)		(2,113)		(7,689)
Gain on derivative liability		142,861		–		–
Gain on interest forgiveness		2,947		2,947		–
Gain (loss) on settled payables (Note 15)		(745,509)		12,451		(130,100)
Income (Loss) Before Extraordinary Item		(20,979,130)		1,380,832		(2,132,373)
Net extraordinary gain on litigation settlement, less applicable income taxes of $nil		1,600,000		–		–
Net Income (Loss)		(19,379,130)		1,380,832		(2,132,373)
Other Comprehensive Income
Net Gain (Loss) of Foreign Currency Translation		(657,160)		(31,200)		8,395
Net Comprehensive Income (Loss)	$	(20,036,290)	$	1,349,632	$	(2,123,978)
Basic net income (loss) per share			$	0.02	$	(0.03)
Diluted net income (loss) per share			$	0.02	$	(0.03)
Weighted average common shares used in calculating basic net income (loss) per share				83,726,680		72,623,959
Weighted average common shares used in calculating diluted net income (loss) per share				83,726,680		72,623,959

The accompanying notes are an integral part of the consolidated financial statements.

F-4

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WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Expressed in US Dollars)

		Accumulated from May 27, 2003 (Date of Inception) to		For the Year Ended
		December 31, 2012 (Unaudited)		December 31, 2012		December 31, 2011
Cash flows from operating activities:
Net income (loss)	$	(19,379,130)	$	1,380,832	$	(2,132,373)
Adjustments to reconcile net income (loss) to net cash provided  (used) in operating activities:
Bad debts		11,250		–		11,250
Depreciation and amortization		65,358		3,577		667
Common stock issued for services and payables		1,050,425		64,333		938,635
Stock-based compensation		12,587,229		479,607		83,644
Amortization of debt discount		145,243		–		–
Loss (gain) on settled liabilities		807,202		(15,398)		130,100
Gain on derivative liability		(142,861)		–		–
Changes in current assets and liabilities:
Receivables		17,524		(18,399)		5,635
Employee advances		(15,589)		(5)		5
Prepaid expenses		(54,032)		(41,761)		276
Accounts payable and accrued liabilities		655,799		(18,082)		58,359
Accrued interest payable		65,658		541		(13,996)
Net cash provided (used) in operating activities		(4,185,924)		1,835,245		(917,798)
Cash flows from investing activities:
Investment in term deposits		(915,077)		(915,077)		–
Purchases of equipment		(47,988)		(21,046)		–
Net cash used in investing activities		(963,065)		(936,123)		–
Cash flows from financing activities:
Proceeds from related party advances		1,328,499		10,373		(69,248)
Repayment of related party advances		(1,015,730)		(132,267)		–
Proceeds from promissory notes issued to related parties		411,509		–		–
Repayment of related party promissory notes		(493,941)		–		–
Proceeds from convertible promissory note		933,926		–		–
Repayment of convertible promissory notes		(947,462)		–		–
Proceeds from other promissory note		993,120		–		17,000
Repayment of other promissory notes		(449,220)		(6,000)		–
Payments on capital lease obligation		(12,071)		–		–
Proceeds from line of credit		60,659		–		17,058
Repayment of line of credit		(60,659)		(38,074)		(14,144)
Purchase of treasury stock		(101,440)		(101,440)		–
Proceeds from stock options and warrants exercised		532,915		–		–
Proceeds from sale of common shares		5,380,680		130,000		897,572
Net cash provided (used) by financing activities		6,560,785		(137,408)		848,238
Effect of exchange rate changes on cash		(657,160)		(31,200)		8,395
Net change in cash		754,636		730,514		(61,165)
Cash, beginning of period		1,530		25,652		86,817
Cash, end of period	$	756,166	$	756,166	$	25,652
Non-Cash Information:
Cashless exercise of warrants	$	275	$	–	$	187
Stock issued to settle notes payable plus accrued interest	$	1,445,853	$	–	$	160,400
Line of credit converted to bank loan	$	44,359	$	–	$	–
Retirement of treasury stock	$	81,191	$	81,191	$	–
Reclass from common stock to stock payable	$	4,000	$	4,000	$	–
Supplemental disclosure of cash flow information:
Cash paid for income taxes		-		-		-
Cash paid for interest	$	215,044	$	2,113	$	5,298

The accompanying notes are an integral part of the consolidated financial statements.

F-5

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WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Statement of Stockholders’ Equity (Deficit)

(Expressed in US Dollars)

The accompanying notes are an integral part of the consolidated financial statements.

F-6

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The accompanying notes are an integral part of the consolidated financial statements.

F-7

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The accompanying notes are an integral part of the consolidated financial statements.

F-8

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The accompanying notes are an integral part of the consolidated financial statements.

F-9

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