UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
x ANNUAL REPORT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year
ended December 31, 2008
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES 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 or
Other Jurisdiction of Incorporation of Organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
650 West Georgia Street, Suite
2400
Vancouver, British Columbia, Canada V6B
4N7
|
(604) 257-3660
|
|
|
(Address of
principal executive offices) (ZIP Code)
|
(Registrant’s
telephone number, including area
code)
|
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per
share
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o No x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o 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 shorter period that the registrant as required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No o
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. o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer o Smaller reporting company
þ
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) No þ
Aggregate market
value of the voting and non-voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 2008: $22,550,995 (Non-affiliate
holdings of 19,609,561 common shares, closing price of $1.15).
Number of common
shares outstanding at March 27, 2009: 34,703,496
TABLE
OF CONTENTS
| PART I | ||
| 3 | ||
| 9 | ||
| 9 | ||
| 9 | ||
| 9 | ||
| 9 | ||
| PART II | ||
| 10 | ||
| 12 | ||
| 12 | ||
| 15 | ||
| 15 | ||
| 16 | ||
| 16 | ||
| 17 | ||
|
PART
III
|
||
| 18 | ||
| 20 | ||
| 23 | ||
| 24 | ||
| 25 | ||
|
PART
IV
|
||
| 26 | ||
2
PART
I
Forward-looking
Statements
This annual report
contains forward-looking statements. These statements relate to future events or
our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “could”, "may", "will",
"should", "expect", "plan", "anticipate", "believe", "estimate", "predict",
"potential" or the negative of these terms or other comparable terminology.
These statements are only predictions and involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements.
Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable laws, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements so as to conform these statements to actual results.
As
used in this annual report, the terms "we", "us", "our", “the Company”, and
"Wordlogic" mean Wordlogic Corporation and all of our subsidiaries, unless
otherwise indicated. All dollar amounts in this annual report refer
to US dollars unless otherwise indicated.
Overview
We are a software
company with a technology that delivers advanced predictive text solutions
designed to accelerate the entry of text and information into personal computing
devices. Our target computing devices include handheld personal digital
assistants (PDAs), smart phones, global positioning system (GPS), laptops,
Tablet PCs, and conventional desktop computers. The Wordlogic Predictive
KeyboardTM
software provides a fast entry system that adapts to a user’s vocabulary
and tendencies to predict the next most common letters, words, or phrases. This
software incorporates a customizable dictionary, thesaurus, spellchecker,
calculator, multi-lingual symbol capability and fast access to internet sites
from within common software applications. In addition, this software
incorporates internet search engines by which a user can highlight a word, press
the search key and get the Merriam Webster Dictionary definition of the
word.
Our principal
offices are located at 650 West Georgia Street, Suite 2400, Vancouver, British
Columbia, Canada. Our fiscal year end is December 31. We have one wholly-owned
subsidiary, 602531 British Columbia Ltd., which holds our intellectual
properties including our patents and trademarks. Our common stock is quoted on
the OTC Bulletin Board under the symbol “WLGC.OB.” We maintain a website at
www.wordlogic.com.
3
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.
On
November 6, 2007 we were granted, through our subsidiary 602531 British Columbia
Ltd., U.S. Patent No. 7,293,231, titled “Data Entry for Personal Computing
Devices”, from the U.S. Patent and Trademark Office. On January 9,
2008 we were granted our second European patent. European Patent No.
1356368 was granted to us by the European Patent Office for the invention: “Data
Entry Method and System For Personal Computer, And Corresponding Computer
Readable Medium.” As of March 31, 2009 our patent pending application
number 11/133,770 is in a position of allowance with the US Patent
Office. We are now waiting until this patent is granted and expecting
new developments with 3 additional patents currently in review at various patent
offices.
In
2008 we advanced a claim against Mercedes-Benz USA involving damages for
patent infringement for use of their car navigation system in certain 2007, 2008
and 2009 Mercedes-Benz models under US Patent No. 7293231 titled "DATA ENTRY FOR
PERSONAL COMPUTING DEVICES." We are seeking 8.6% royalties of the sales of the
infringing product that sell for approximately $3,000.00 to $5,000.00 per car.
We will so be seeing treble damages and injunctive relief to prevent further
infringement.
On
September 30, 2008 we retained Mr. James P. Yano as our Chief Operations
Officer. Mr. Yano has agreed to develop our business model and expand
our distribution channels, commercialization opportunities and a marketing
strategy for our predictive text input technology. Mr. Yano has over
10 years experience in sales and marketing. In that time he has
served in various executive and managerial positions with companies specializing
in software and scientific equipment. From 2001 to 2005, Mr. Yano
served as a Marketing Manager with Agilent Technologies Inc., a $6 billion
scientific instruments/analysis equipment maker. During this time,
Mr. Yano organized product development, strategized new product concepts,
executed the introduction of new products onto the market and exceeded sales
forecasts. From 2005 to the present, Mr. Yano has been working as
Vice President of Marketing and International Channels with Aspetrics, Inc, a
process instrument manufacturer. Mr. Yano once again identified new
products and market opportunities and commercialized the company’s concepts
through the development of relationships with manufacturers and distribution
agents.
In
September 2008 we also retained the services of Richard Eakle and William
Pipkin. Mr. Eakle has a history as one of the top 10 US analysts from
his time as a Morgan Stanley analyst. Mr. Eakle will work towards increasing
awareness of our products throughout the investment community. Mr.
Pipkin has a large amount of experience with various technology endeavors and
will aid us in the planned deployment of an Intuitive Search Report which
highlights our predictive input technology.
The following is a detailed description
of our technologies and products:
4
5
6
Intellectual
Property
We
own the copyright of all of the contents of our website,
www.wordlogic.com.
We
have filed six individual patent applications for “Method, system and media for
entering data in a personal computing device” in the United States, Canada and
Europe.
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.
On
March 4, 2004 European Patent No. 1171813 entitled "Data Entry for Personal
Computing Devices" was granted to us by the European Patent Office. European
Patent No. 1171813 has also been individually accepted in Germany, France, The
United Kingdom, Italy, Finland, Spain, the Netherlands, and
Portugal.
On
August 9, 2007 the U.S. Patent and Trademark Office issued a Notice of Allowance
indicating that our patent applications for “Method, system, apparatus and
computer readable media for directing input associated with a keyboard-type
device” have been allowed in the United States and internationally under the
Patent Cooperation Treaty.
On
November 6, 2007 we received approval for pioneer Patent No. 7293231 titled
"Data Entry for Personal Computing Devices" from the U.S. Patent and Trademark
Office. U.S. Patent No. 7,293,231 relates to various methods, systems, devices
and computer-readable media for use in connection with computer-assisted data
entry. We have also six additional patent applications pending in the U.S.
Patent and Trademark Office in connection with U.S. Patent No. 7,293,231 – three
divisional patent applications (US11/133,779, US11/134,759 and US11/134,810) and
three continuation applications (US11/871,887, US11/871,900 and US11/871,904).
These six additional patent applications have further claims directed to various
aspects of computer-assisted data entry. These additional patent applications
are in the name of our subsidiary 602531 British Columbia Ltd., and are based on
and claim the benefit of U.S. Patent No. 7,293,231.
On
January 9, 2008 we were granted our second European patent. European
Patent No. 1356368 was granted to us by the European Patent Office for the
invention: “Data Entry Method and System for Personal Computer, And
Corresponding Computer Readable Medium.”
As
of March 31, 2009 our patent pending application number 11/133,770 is in a
position of allowance with the US Patent Office. We are now waiting
until this patent is granted and expecting new developments with 3 additional
patents currently in review at various patent offices.
A
copy of our patents can be obtained from the USPTO web site, located at
www.uspto.gov or visit our web site at www.wordlogic.com to obtain a direct link
to the patents.
Research and
Development
Expenditures
relating to the development of new products and processes, including significant
improvements to existing products, are expensed as incurred. We have spent
$312,165 and $419,705 on research and development for the fiscal years ended
December 31, 2008 and 2007, respectively.
Since our
inception, we have devoted significant resources to develop our software
solutions and technologies. We believe that our future success will depend, in
large part, on our ability to develop new product offerings and enhance and
extend the features of our existing products. Our product development branch is
responsible for core technology, quality assurance, documentation and expanding
the ability of our products to operate with leading hardware platforms and key
computing devices. We currently have research and development operations in
Vancouver, British Columbia. We have devoted and expect to continue to devote
substantial resources to our research and development activities.
Employees
As
of December 31, 2008, we had three employees and they were all employed on a
full time basis.
Additionally, we
engage various consultants in the areas of management, legal, accounting and
software development.
7
Legislation and Government
Regulation
Because we sell
products through the Internet, we may be subject to rules and regulations around
the world which affect business transacted on the Internet. The laws and
regulations that govern our 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 intellectual properties are
relevant to our business:
Intellectual
Property. Copyrighted material that we develop, as well as our
trade mark and patents are important to our business prospects. 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. To date, we have received
two European patents. On November 6, 2007 we received approval for pioneer
Patent No. 7293231 titled "Data Entry for Personal Computing Devices" from the
U.S. Patent and Trademark Office. We also have six additional patent
applications pending in the U.S. Patent and Trademark Office in connection with
U.S. Patent No. 7,293,231 However, these actions may be inadequate. We
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.
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 sites, 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.
Environmental Law. To the
extent which environmental compliance may be necessary, we do not anticipate any
significant compliance expense.
8
Not
Applicable.
None.
Our principal
executive offices are located at 650 West Georgia Street, Suite
2400
Vancouver, British
Columbia, Canada V6B 4N7. We rent office space from MCC Meridian Capital Corp, a
company controlled by our President. Office rent incurred by us
totaled $143,109 and $97,853 during the fiscal years ended December 31, 2008 and
2007, respectively. Research, marketing, testing, management and
administrative support are currently carried out at this office. On
March 1, 2008 we renewed our lease for a term of 2 years. Our lease
payments were approximately $12,066 plus taxes for the first six months of the
term and approximately $13,846 plus taxes for the remainder of the 2 year
term.
As
of December 31, 2008, our future minimum lease payments under non-cancellable
operating leases are as follows:
|
Twelve months
ended December 31, 2009
|
$ | 155,231 | ||
|
Twelve months
ended December 31, 2010
|
25,872 | |||
|
Total
|
$ | 181,103 |
On
July 8, 2008, our wholly-owned subsidiary, 602531 British Columbia Ltd.
("BC"), filed a lawsuit against Mercedes-Benz USA, LLC ("MBUSA"), alleging
that MBUSA has infringed and is infringing U.S. Patent No. 7,293,231 ("the '231
Patent"), which is owned by BC. The lawsuit was filed in the United States
District Court for the District of Oregon. BC's Complaint seeks
damages, attorney fees and injunctive relief. MBUSA filed an
answer denying BC's allegations and counterclaims for
a declaration that the '231 Patent is invalid and not infringed by
MBUSA. MBUSA also seeks an award of attorney fees pursuant to 35 U.S.C. §
285.
In
October 2008, MBUSA moved for an order transferring the case to the
United States District Court for the District of New Jersey. The
motion was granted, and the case is now pending in the United States
District Court for the District of New Jersey. The parties are in the
early stages of discovery, having exchanged written discovery requests and
responses. No trial date has been set.
As
of March 31, 2009, other than as noted above, we are not party to any material
pending legal proceedings to which we or any of our subsidiaries are a party or
of which any of our properties is the subject. Also, our management is not aware
of any legal proceedings contemplated by any governmental authority against
us.
None.
9
PART
II
Market
Information
Our common stock is
not traded on any exchange. Our common stock is quoted on the OTC Bulletin
Board, under the trading symbol “WLGC.OB”. The market for our stock
is highly volatile. We cannot assure you that there will be a market in the
future for our common stock. The OTC Bulletin Board securities are not listed
and traded on the floor of an organized national or regional stock exchange.
Instead, OTC Bulletin Board securities transactions are conducted through a
telephone and computer network connecting dealers in stocks. OTC Bulletin Board
stocks are traditionally smaller companies that do not meet the financial and
other listing requirements of a regional or national stock
exchange.
The following table
shows the high and low prices of our common shares on the OTC Bulletin Board for
each quarter within the two most recent fiscal years. The following quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions:
|
Period
|
High
|
Low
|
||||||
|
Fourth
Quarter, 2008
|
$ | 0.70 | $ | 0.25 | ||||
|
Third
Quarter, 2008
|
$ | 1.78 | $ | 0.55 | ||||
|
Second
Quarter, 2008
|
$ | 1.15 | $ | 0.62 | ||||
|
First
Quarter, 2008
|
$ | 1.85 | $ | 0.69 | ||||
|
Fourth
Quarter, 2007
|
$ | 4.38 | $ | 1.29 | ||||
|
Third
Quarter, 2007
|
$ | 2.24 | $ | 0.21 | ||||
|
Second
Quarter, 2007
|
$ | 0.58 | $ | 0.23 | ||||
|
First
Quarter, 2007
|
$ | 0.70 | $ | 0.36 | ||||
Holders
There were
approximately 81 holders of record of our common stock as of March 27, 2009. In
addition, we believe that a significant number of beneficial owners of our
common stock hold their shares in street name.
10
Dividends
For the two most
recent fiscal years we have not paid any cash dividends on our common shares and
do not expect to declare or pay any cash dividends on our common shares in the
foreseeable future. Payment of any dividends will depend upon our future
earnings, if any, our financial condition, and other factors as deemed relevant
by our Board of Directors.
Equity Compensation
Plans
As
of December 31, 2008, these were the securities authorized for issuance under
our equity compensation plans:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
0
|
0
|
0
|
|
Equity
compensation plans not approved by security holders
|
5,250,850
|
$0.80
|
4,432,000
|
|
Total
|
5,250,850
|
$0.80
|
4,432,000
|
We
have adopted a total of 4 separate equity compensation plans for employees,
officers and directors under which we are authorized to issue options to
purchase shares of our common stock. The exercise price, the number
of shares and the expiry of the option are determined by the issuance committee
whose functions are currently performed by our Board of Directors.
|
·
|
The 2001
equity compensation plan: The first plan is dated February 15, 2001, and
pursuant to it we are authorized to grant options to acquire up to a total
of 4,000,000 shares of our common
stock.
|
|
·
|
The 2005
equity compensation plan: The second plan is dated February 15, 2005, and
pursuant to it we are authorized to grant options to acquire up to a total
of 3,000,000 shares of our common
stock.
|
|
·
|
The 2008
Stock Compensation Plan: This plan is dated August 19, 2008 and pursuant
to it we are authorized to grant up to 500,000 shares of our common
stock.
|
|
·
|
The 2008
Equity Incentive Plan: This plan is dated October 15, 2008 and pursuant to
it we are authorized to grant up to 2,000,000 shares of our common
stock.
|
We
currently have 2,767,000 stock options remaining for issuance under the 2001
plan, and 1,665,000 stock options remaining for issuance under the 2005 plan,
for a total remaining of 4,432,000 as at December 31,
2008. Additionally, we have 2,000,000 shares available for issuance
under our 2008 Equity Incentive Plan and no shares under the 2008 Stock
Compensation Plan.
Recent Sales of Unregistered
Securities
From January 1,
2008 to December 31, 2008, we made the following sales of previously unreported
and unregistered securities:
In
October 2008, we conducted a private placement offering whereby we sold 112,500
units at a price of $0.20 per unit for total proceeds of $22,500. Each unit
consisted of one share of our common stock and one warrant to purchase another
share of common stock at $0.50 per share. The warrants may be exercised over a
period of two years. The offering was made in reliance on exemptions from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended. The relative fair value of the warrants granted in this placement,
estimated at the grant date using the Black-Scholes options pricing model, was
$10,872.
In
December 2008, we conducted a private placement offering whereby we sold 200,000
units at a price of $0.25 per unit for total proceeds of $50,000. Each unit
consisted of one share of our common stock and one warrant to purchase another
share of our common stock at $0.50 per share. The warrants may be exercised over
a period of two years. The offering was made in reliance on exemptions from
registration contained in Section 4(2) the Securities Act of 1933, as amended.
The relative fair value of the warrants granted in this placement, estimate at
the grant date using the Black-Scholes options pricing model, was
$21,632.
Our reliance upon
the exemption under Section 4(2) of the Securities Act of 1933 was based on the
fact that the issuance of these shares did not involve a “public offering.” Each
offering was not a "public offering" as defined in Section 4(2) due to the
insubstantial number of persons involved in the deal, size of the offering,
manner of the offering and number of securities offered. We did not undertake an
offering in which we sold a high number of shares to a high number of investors.
In addition, the investors had the necessary investment intent as required by
Section 4(2) since they agreed to and received a share certificate bearing a
legend stating that such shares are restricted pursuant to Rule 144 of the
Securities Act. This restriction ensures that these shares would not be
immediately redistributed into the market and therefore not be part of a "public
offering." The investors negotiated the terms of the transactions directly with
our executive officers. No general solicitation was used, no commission or other
remuneration was paid in connection with these transactions, and no underwriter
participated. Based on an analysis of the above factors, these transactions were
effected in reliance on the exemption from registration provided in Section 4(2)
of the Securities Act for transactions not involving any public
offering.
Additionally, the
investors were given adequate access to sufficient information about us to make
an informed investment decision. None of the securities were sold
through an underwriter and accordingly, there were no underwriting discounts or
commissions involved.
We did not complete
any repurchases of our equity securities during the quarter ended December 31,
2008.
11
Not
applicable.
The following
discussion should be read in conjunction with our consolidated financial
statements, including the notes thereto, appearing elsewhere in this Form 10-K.
The discussions of results, causes and trends should not be construed to imply
any conclusion that these results or trends will necessarily continue into the
future.
Liquidity and Capital
Resources
As
of December 31, 2008, we had total cash of $4,277 and a working capital deficit
of $706,757. At December 31, 2008 our deficit accumulated during the development
stage was $9,463,199. Our net loss of $9,463,199 from May 27, 2003 (inception)
to December 31, 2008 was mostly funded by our equity financing and related party
loans. During the fiscal year ended December 31, 2008, we raised $1,035,010
through the sale of our equity securities and the exercise of options compared
to $1,318,689 during the same period in 2007. We were provided a net
cash amount of $898,093 from financing activities for the year ended December
31, 2008 compared to $1,161,471 during the same period in 2007. During the
fiscal year ended December 31, 2008 our cash position decreased by $18,974,
compared to an increase of $8,261 during the same period in 2007.
We used net cash of
$1,008,376 in operating activities for the fiscal year ended December 31, 2008
compared to net cash of $1,042,302 in operating activities for the same period
in 2007. From our inception on May 27, 2003 to December 31, 2008 we
have used net cash of $3,731,077 in operating activities. We did not
use any cash in investing activities during the year ended December 31, 2008
compared to net cash of $6,918 for the same period in 2007. During
the fiscal year ended December 31, 2008 our monthly cash requirement to fund our
operations was approximately $84,000, compared to approximately $87,000 for the
same period in 2007.
The effect of
exchange rates on cash was an increase in cash of $91,309 for the fiscal year
ended December 31, 2008 compared to a decrease in cash of $103,990 for the
fiscal year ended December 31, 2007. This was due to the increase in
value of the US dollar versus the Canadian dollar in 2008.
We
expect to require a total of approximately $1,925,000 set out as follows to
fully carry out our business plan over the next twelve months beginning April
2009. Our planned expenditures for the next twelve months
include:
|
Description
|
Estimated Expenses
($)
|
|
Research and
development costs for our Predictive KeyboardTM
software
|
350,000
|
|
Management
fees
|
500,000
|
|
Consulting
fees (including legal and auditing fees)
|
400,000
|
|
Rent
expenses
|
160,000
|
|
Salaries and
other costs associated with third-party contractors
|
150,000
|
|
Marketing
expenses
|
50,000
|
|
Travel
expenses
|
20,000
|
|
Investor
relations costs
|
60,000
|
|
Accrued
interest expense
|
95,000
|
|
Other
administrative expenses
|
140,000
|
|
Total
|
1,925,000
|
We do not
anticipate enough positive internal operating cash flow until we can generate
substantial revenues, which may take the next few years to fully realize. There
is no assurance we will achieve profitable operations. We have historically
financed our operations primarily by cash flows generated from the sale of our
equity securities and through cash infusions from our officers and affiliates in
exchange for debt and/or common stock. No officer or affiliate has made any
commitment or is obligated to continue to provide cash through loans or
purchases of equity.
We
estimate that we will require additional financing of approximately $1,925,000
to carry out our planned business operations and expansion over the next 12
months.
During the year
ended December 31, 2005, we received proceeds of $370,000 from two unsecured
promissory notes. The notes bear interest at 8% per annum. The first note
matured on March 1, 2007 and includes $240,000 of principal and all related
accrued interest. The second note matured on May 11, 2007 and includes $130,000
of principal and all related accrued interest. On June 1, 2007 both notes were
renewed for an additional 24 months beyond their initial maturity. During the
year ended December 31, 2006, we received proceeds of $100,000 on a third
unsecured promissory note, also bearing interest at 8% per annum, maturing on
October 12, 2008. On December 16, 2008 the promissory notes totalling $470,000,
plus accrued interest of $119,632 were paid through the issuance of 3,930,879
shares of common stock.
During the year
ended December 31, 2006, we received proceeds of $436,500 on an unsecured
promissory note and repaid $17,709. During the year ended December 31, 2007 an
additional $6,720 was advanced and $60,000 was repaid. During the
year ended December 31, 2008 we repaid $348,000 leaving a balance of $17,511
owing as at December 31, 2008. The note bears interest at 8% per annum and
matures on June 15, 2009. Accrued interest payable on the note
totalled $53,021 at December 31, 2008.
Interest expense on
the notes during the years ended December 31, 2008 and 2007 totaled $33,792 and
$70,229, respectively.
During the year
ended December 31, 2008, we also received proceeds of $122,300 ($CAD150,000)
from Peter Knaven, our director, Senior Vice President and Chief Technology
Officer on an unsecured promissory note. The note bears interest at
8% per annum, matures May 31, 2009 and includes approximately $122,300 ($CAD
150,000) of principal and all related accrued interest.
We
intend to meet the balance of our cash requirements for the next 12 months
through external sources: a combination of debt financing and equity financing
through private ,placements. Currently we are active in contacting
broker/dealers in Canada and elsewhere regarding possible financing
arrangements. However, we currently do not have any arrangements in place for
the completion of any further private placement financings and there is no
assurance that we will be successful in completing any further private placement
financings. If we are unsuccessful in raising enough money through future
capital raising efforts, we may consider other financing possibilities such as
bank loans. If we are unsuccessful in raising enough money, we may not fully
carry out our business plan.
12
Results of
Operations
Revenues
Our total revenues
decreased $1,151 from $4,537 for the fiscal year ended December 31, 2007 to
$3,386 for the fiscal year ended December 31, 2008. The decrease in total
revenues was mainly due to our decreased royalty revenue. As we are a
development stage company, our revenue streams are not established and thus our
product sales and royalty revenues are unstable. From May 27, 2003 (inception)
to December 31, 2008 we generated total revenues of $50,443.
Total revenues
during the fiscal year ended December 31, 2008 consisted of $2,020 from product
sales and $1,366 from royalty revenue. Total revenues during the fiscal year
ended December 31, 2007 consisted of $1,161 from product sales and $3,376 from
royalty revenue.
Expenses
Our total operating
expenses increased $2,447,848 to $3,890,471 for the fiscal year ended December
31, 2008 from $1,442,623 for the same period in 2007. The significant increase
in total operating expenses was mainly due to increased payments to our
management and more consultants hired in the fiscal year ended December 31,
2008. From May 27, 2003 (inception) to December 31, 2008 our total
operating expenses were $9,712,834, including $507,835 in rent, $7,524,018 in
selling, general and administrative expenses, and $1,680,981 in research and
development.
Our selling,
general and administrative expenses consist of stock-based compensation,
interest expenses, bank charges, travel, meals and entertainment, foreign
exchange, office maintenance, communication expenses (cellular, internet, fax,
and telephone), courier, postage costs, office supplies, salaries, management
fees, and legal and auditing consulting fees.
Selling, general
and administrative expenses increased $2,510,132 to $3,435,197 for the fiscal
year ended December 31, 2008 from $925,065 for the same period in 2007. The
significant increase in selling, general and administrative expenses during the
fiscal year ended December 31, 2008 was mainly due to an increase of our
non-cash, stock-based compensation granted to newly hired
consultants.
Research and
development expenses were $312,165 for the year ended December 31, 2008 compared
to $419,705 for the same period in 2007. Our rent expenses increased
$45,256 to $143,109 for the year ended December 31, 2008 from $97,853 for the
same period in 2007. This increase was due to the higher cost for our
office space in our new rental agreement.
Net
Loss
We
incurred a net loss of $4,923,057 for the year ended December 31, 2008, compared
to net loss of $1,634,324 for the same period in 2007. The increase of
$3,288,733 in net loss was largely the result of increased non-cash, stock-based
compensation to newly hired consultants during the fiscal year ended December
31, 2008. We incurred a loss of $3,887,085 from operations for the
year ended December 31, 2008, compared to a loss from operations of $1,438,086
for the same period in 2007. Since May 27, 2003 (inception) to
December 31, 2008, we have incurred losses from operations of $9,662,391 and a
net loss of $9,463,199.
Our net loss per
share was $0.17 for the fiscal year ended December 31, 2008 compared to $0.07
for the same period in 2007.
13
Going
Concern
Our operating
history makes predictions of future operating results difficult to ascertain.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development. Such risks include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address these
risks we must, among other things, develop a customer base, implement and
successfully execute our business and marketing strategy, continue to develop
and upgrade technology and products on a timely and cost-effective basis,
respond to competitive developments and emerging industry standards, and
attract, retain and motivate qualified personnel. There can be no assurance that
we will be successful in addressing such risks, and the failure to do so can
have a material adverse effect on our business prospects, financial condition
and results of operations.
We
are seeking equity financing to provide for the capital required to market our
software and fully carry out our business plan. We cannot guarantee we will be
successful in our business operations. A critical component of our operating
plan impacting our continued existence is our ability to obtain additional
capital through additional equity and/or debt financing. Obtaining additional
financing will be subject to a number of factors including market conditions,
investor acceptance of our business plan and investor sentiment. These factors
may make the timing, amount, terms and conditions of additional financing
unattractive or unavailable to us. If financing is not available on satisfactory
terms, we may be unable to continue, develop or expand our operations. If we are
unable to raise additional financing, we will have to significantly reduce our
spending, delay or cancel planned activities or substantially change our current
corporate structure. In such an event, we intend to implement expense reduction
plans in a timely manner. However, these actions would have material adverse
effects on our business, revenues, operating results, and prospects, resulting
in a possible failure of our business. If we raise funds through equity or
convertible securities, our existing stockholders may experience dilution and
our stock price may decline.
We
have generated limited revenues and incurred significant operating losses from
operations. Since we anticipate we will expand operational activities, we may
continue to experience net negative cash flows from operations and will be
required to obtain additional financing to fund operations through equity
securities’ offerings and bank borrowings to the extent necessary to provide
working capital. Our continuation as a going concern is dependent upon our
ability to generate sufficient cash flow from stockholders or other outside
sources to sustain operations and meet our obligations on a timely basis and
ultimately to attain profitability. We have limited capital with which to pursue
our business plan. There can be no assurance that our future operations will be
significant and profitable, or that we will have sufficient resources to meet
our objectives.
These factors raise
concerns about our ability to continue as a going concern. Our auditors have
issued a going concern opinion. This means that our auditors believe there is
substantial doubt that we can continue as an on-going business for the next
twelve months. Our financial statements do not include any adjustments that
might result from the uncertainty about our ability to continue operating. If we
are unable to obtain additional financing from outside sources and eventually
produce enough revenues, we may be forced to sell our assets, or curtail or
cease our operations.
Off-Balance
Sheet Arrangements
As
of December 31, 2008, we had no off balance sheet transactions that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Critical
Accounting Policies
Software Development
Costs
Software
development costs are recorded in accordance with Statement on Financial
Accounting Standards (“SFAS”) Statement No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed”. Costs
incurred to establish the technological feasibility of computer software to be
sold, leased, or otherwise marketed are expensed as incurred as research and
development costs. Once technological feasibility is established, the
cost of producing product masters for the software is
capitalized. Capitalization of the software development costs ceases
and amortization of the capitalized costs commences when the product is
available for general release to customers. Capitalized costs are
amortized based on the greater of (a) the ratio of current gross revenues to the
total current and anticipated future gross revenues, or (b) the straight-line
method over the remaining estimated economic life of the product.
Research and
Development
Expenditures
relating to the development of new products and processes, including significant
improvements to existing products, are charged to operations as
incurred.
14
Foreign Currency
Translation
Our functional
currency is the Canadian dollar and these financial statements have been
translated into U.S. dollars in accordance with SFAS 52, Foreign Currency
Translation. The Canadian dollar based accounts of our foreign
operations have been translated into United States dollars using the current
rate method. Assets and liabilities of those operations are
translated into U.S. dollars using exchange rates as of the balance sheet date;
income and expenses are translated using the weighted average exchange rates for
the reporting period. Translation adjustments are recorded as accumulated other
comprehensive income (loss), a separate component of shareholders’
equity.
Stock-based
Compensation
On
January 1, 2006, we adopted SFAS 123 (revised 2004), Share-Based Payment
(“SFAS 123(R)”), which requires the measurement and recognition of compensation
expense for all share-based awards made to employees and directors, including
employee stock options and shares issued through its employee stock purchase
plan, based on estimated fair values. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin 107 (“SAB 107”)
relating to SFAS 123(R). We have applied the provisions of SAB 107 in
its adoption of SFAS 123(R). We adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of the accounting
standard as of the beginning in 2006. Our financial statements as of
and for the year ended December 31, 2008 reflect the impact of SFAS 123(R).
In accordance with the modified prospective transition method, our financial
statements for prior periods do not include the impact of
SFAS 123(R).
Our determination
of estimated fair value of share-based awards utilizes the Black-Scholes
option-pricing model. The Black-Scholes model is affected by our stock price as
well as assumptions regarding certain highly complex and subjective variables.
These variables include, but are not limited to, our expected stock price
volatility over the term of the awards and actual and projected employee stock
option exercise behaviors.
Inflation
The amounts
presented in the financial statements do not provide for the effect of inflation
on our operations or financial position. The net operating losses shown would be
greater than reported if the effects of inflation were reflected either by
charging operations with amounts that represent replacement costs or by using
other inflation adjustments.
Not
Applicable.
|
Report of
Independent Registered Public Accounting Firm by M&K CPAS,
PLLC
|
F-1 |
|
Consolidated
Balance Sheets
|
F-2 |
|
Consolidated
Statements of Operations
|
F-3 |
|
Consolidated
Statements of Cash Flows
|
F-4 |
|
Consolidated
Statements of Stockholders’ Deficit
|
F-5 |
|
Notes to the
Consolidated Financial Statements
|
F-6 |
15
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors
WordLogic
Corporation:
We
have audited the accompanying balance sheet of WordLogic Corporation as of
December 31, 2008 and 2007 and the related statements of operations, changes in
stockholders' deficit, and cash flows for the periods then ended. The
financial statements for the period from May 27, 2003 (inception) through
December 31, 2006 include total revenues of $50,443 and a net comprehensive loss
of $9,837,530. Our opinion on the statements of operation,
stockholders’ deficit and cash flows for the period May 27, 2003 (inception)
through December 31, 2006, insofar as it relates to amounts for prior periods
through December 31, 2006, is based on the reports of other
auditors. 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 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 WordLogic Corporation as of
December 31, 2008 and 2007, and the results of its operations, changes in
stockholders' deficit and cash flows then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1to the financial statements, the
Company suffered a net loss from operations and has a net capital deficiency,
which raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ M&K CPAS,
PLLC
Houston,
Texas
www.mkacpas.com
March 28,
2009
F-1
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Consolidated
Balance Sheets
(Expressed in US
Dollars)
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 120 | $ | 4,988 | ||||
|
Restricted
cash
|
4,157 | 18,263 | ||||||
|
Accounts
receivable
|
122 | 170 | ||||||
|
Goods and
services tax receivable
|
6,206 | 38,477 | ||||||
|
Employee
advances
|
179 | 2,606 | ||||||
|
Prepaid
expenses
|
– | 23,708 | ||||||
|
Total Current
Assets
|
10,784 | 88,212 | ||||||
|
Property and
equipment, net of accumulated depreciation
|
9,778 | 18,171 | ||||||
|
Total
Assets
|
$ | 20,562 | $ | 106,383 | ||||
|
Liabilities
and Stockholders’ Deficit
|
||||||||
|
Current
Liabilities
|
||||||||
|
Bank
overdraft
|
$ | 4,468 | $ | 32,328 | ||||
|
Accounts
payable
|
339,345 | 127,466 | ||||||
|
Line of
credit
|
40,196 | 14,123 | ||||||
|
Indebtedness
to related parties
|
67,157 | 4,447 | ||||||
|
Accrued
expenses
|
– | 2,660 | ||||||
|
Accrued
interest
|
126,564 | 254,758 | ||||||
|
Note payable
to related party
|
122,300 | – | ||||||
|
Current
portion of long-term debt
|
17,511 | 100,000 | ||||||
|
Total Current
Liabilities
|
717,541 | 535,782 | ||||||
|
Long Term
Debt
|
||||||||
|
Notes
payable
|
– | 735,511 | ||||||
|
Total
Liabilities
|
717,541 | 1,271,293 | ||||||
|
Stockholders’
Deficit
|
||||||||
|
Common stock,
$.001 par value; 100,000,000 shares authorized, 34,222,996 and
28,102,617 shares issued and outstanding as of December 31, 2008 and 2007,
respectively
|
34,223 | 28,103 | ||||||
|
Additional
paid-in capital
|
11,371,182 | 6,077,623 | ||||||
|
Accumulated
deficit
|
(2,264,854 | ) | (2,264,854 | ) | ||||
|
Deficit
accumulated during development stage
|
(9,463,199 | ) | (4,540,142 | ) | ||||
|
Accumulated
other comprehensive loss
|
(374,331 | ) | (465,640 | ) | ||||
|
Total
Stockholders’ Deficit
|
(696,979 | ) | (1,164,910 | ) | ||||
|
Total
Liabilities and Stockholders’ Deficit
|
$ | 20,562 | $ | 106,383 | ||||
(The accompanying
notes are an integral part of the consolidated financial
statements.)
F-2
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, 2008
|
December
31, 2008
|
December
31, 2007
|
||||||||||
|
Revenues
|
||||||||||||
|
Product
sales
|
$ | 17,481 | $ | 2,020 | $ | 1,161 | ||||||
|
Royalty
revenue
|
32,962 | 1,366 | 3,376 | |||||||||
|
Total
Revenues
|
50,443 | 3,386 | 4,537 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Rent, related
party
|
507,835 | 143,109 | 97,853 | |||||||||
|
Selling,
general and administrative
|
7,524,018 | 3,435,197 | 925,065 | |||||||||
|
Research and
development
|
1,680,981 | 312,165 | 419,705 | |||||||||
|
Total
Operating Expenses
|
9,712,834 | 3,890,471 | 1,442,623 | |||||||||
|
Loss from
Operations
|
(9,662,391 | ) | (3,887,085 | ) | (1,438,086 | ) | ||||||
|
Other income
(expenses)
|
||||||||||||
|
Interest
income
|
1,760 | – | – | |||||||||
|
Interest
expense:
|
||||||||||||
|
Related
parties
|
(65,065 | ) | (10,259 | ) | (12,210 | ) | ||||||
|
Amortization
of discount on convertible note
|
(145,243 | ) | – | – | ||||||||
|
Other notes,
advances and amounts
|
(417,041 | ) | (42,993 | ) | (184,028 | ) | ||||||
|
Gain on
derivative liability
|
142,861 | – | – | |||||||||
|
Loss on
settled liabilities
|
(918,080 | ) | (982,720 | ) | – | |||||||
|
Loss Before
Extraordinary Item
|
(11,063,199 | ) | (4,923,057 | ) | (1,634,324 | ) | ||||||
|
Net
extraordinary gain on litigation settlement, less applicable income taxes
of $0
|
1,600,000 | – | – | |||||||||
|
Net
Loss
|
$ | (9,463,199 | ) | $ | (4,923,057 | ) | $ | (1,634,324 | ) | |||
|
Other
Comprehensive Income
|
||||||||||||
|
Net
Gain/(Loss) on Foreign Currency Translation
|
(374,331 | ) | 91,309 | (103,990 | ) | |||||||
|
Net
Comprehensive Income
|
$ | (9,837,530 | ) | $ | (4,831,748 | ) | $ | (1,738,314 | ) | |||
|
Basic and
diluted loss per share
|
$ | (0.17 | ) | $ | (0.07 | ) | ||||||
|
Weighted
average common shares outstanding (basic and diluted)
|
29,031,872 | 25,133,000 | ||||||||||
(The accompanying
notes are an integral part of the consolidated financial
statements.)
F-3
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 Years Ended
|
|||||||||||
|
December
31, 2008
|
December
31, 2008
|
December
31, 2007
|
||||||||||
|
Cash flows
from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (9,463,199 | ) | $ | (4,923,057 | ) | $ | (1,634,324 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
52,285 | 6,424 | 8,426 | |||||||||
|
Common stock
issued for services and payables
|
47,457 | – | – | |||||||||
|
Stock-based
compensation
|
4,479,024 | 2,692,317 | 439,393 | |||||||||
|
Amortization
of debt discount
|
145,243 | – | – | |||||||||
|
Loss on
settled liabilities
|
982,720 | 982,720 | – | |||||||||
|
Gain on
derivative liability
|
(142,861 | ) | – | – | ||||||||
|
Changes in
current assets and liabilities:
|
||||||||||||
|
Receivables
|
44,435 | 32,319 | (32,214 | ) | ||||||||
|
Employee
advances
|
(15,547 | ) | 2,427 | 6,922 | ||||||||
|
Prepaid
expenses
|
– | 23,708 | (23,708 | ) | ||||||||
|
Bank
overdraft
|
4,468 | (27,860 | ) | (30,740 | ) | |||||||
|
Accounts
payable and accrued liabilities
|
(23,197 | ) | 211,188 | 37,816 | ||||||||
|
Accrued
interest payable
|
158,095 | (8,562 | ) | 186,127 | ||||||||
|
Net cash used
in operating activities
|
(3,731,077 | ) | (1,008,376 | ) | (1,042,302 | ) | ||||||
|
Cash flows
from investing activities:
|
||||||||||||
|
Purchases of
equipment
|
(26,942 | ) | – | (6,918 | ) | |||||||
|
Net cash used
in investing activities
|
(26,942 | ) | – | (6,918 | ) | |||||||
|
Cash flows
from financing activities:
|
||||||||||||
|
Proceeds from
related party advances
|
767,830 | 62,710 | 77,673 | |||||||||
|
Repayment of
related party advances
|
(814,215 | ) | – | (152,829 | ) | |||||||
|
Proceeds from
promissory notes issued to related parties
|
383,809 | 122,300 | – | |||||||||
|
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
|
913,220 | – | 6,720 | |||||||||
|
Repayment of
other promissory notes
|
(425,709 | ) | (348,000 | ) | (60,000 | ) | ||||||
|
Payments on
capital lease obligation
|
(12,071 | ) | – | – | ||||||||
|
Proceeds from
line of credit
|
68,978 | 26,073 | – | |||||||||
|
Repayment of
line of credit
|
(28,782 | ) | - | (28,782 | ) | |||||||
|
Proceeds from
stock options and warrants exercised
|
411,325 | 332,510 | 25,000 | |||||||||
|
Proceeds from
sale of common shares
|
3,378,189 | 702,500 | 1,293,689 | |||||||||
|
Net cash
provided by financing activities
|
4,135,097 | 898,093 | 1,161,471 | |||||||||
|
Effect of
exchange rate changes on cash
|
(374,331 | ) | 91,309 | (103,990 | ) | |||||||
|
Net change in
cash
|
2,747 | (18,974 | ) | 8,261 | ||||||||
|
Cash,
beginning of period
|
1,530 | 23,251 | 14,990 | |||||||||
|
Cash, end of
period
|
$ | 4,277 | $ | 4,277 | $ | 23,251 | ||||||
|
Non-Cash
Information:
|
||||||||||||
|
Cashless
exercise of warrants
|
$ | 88 | $ | – | $ | 88 | ||||||
|
Stock
issued to settle notes payable plus accrued interest
|
$ | 589,632 | $ | 589,632 | $ | – | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid for
income taxes
|
$ | – | $ | – | $ | – | ||||||
|
Cash paid for
interest
|
$ | 198,672 | $ | 4,609 | $ | 17,557 | ||||||
(The accompanying
notes are an integral part of the consolidated financial
statements.)
F-4
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Consolidated
Statement of Stockholders’ Deficit
(Expressed in US
Dollars)
|
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Deficit
Accumulated
During Development
|
Accumulated
Other
Comprehensive
|
||||||||||||||||||||||||
|
Shares
|
Par
Value
|
Capital
|
Deficit
|
Stage
|
Loss
|
Total
|
||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
|
Balance, May
27, 2003 (inception), prior to reverse merger
|
19,016,657 | 19,017 | 1,504,366 | (2,264,854 | ) | – | 3,806 | (737,665 | ) | |||||||||||||||||||
|
Reverse
merger with The American West.com, Inc. (Note 1)
|
2,907,007 | 2,907 | (2,907 | ) | – | – | – | – | ||||||||||||||||||||
|
Cancelled
shares.
|
(60,000 | ) | (60 | ) | 60 | – | – | – | – | |||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (408,027 | ) | – | (408,027 | ) | |||||||||||||||||||
|
Currency
translation adjustment
|
– | – | – | – | – | (270,371 | ) | (270,371 | ) | |||||||||||||||||||
|
Balance,
December 31, 2003
|
21,863,664 | 21,864 | 1,501,519 | (2,264,854 | ) | (408,027 | ) | (266,565 | ) | (1,416,063 | ) | |||||||||||||||||
|
Common stock
issued in exchange for services and payables
|
88,000 | 88 | 47,369 | – | – | – | 47,457 | |||||||||||||||||||||
|
Common stock
options granted
|
– | – | 10,344 | – | – | – | 10,344 | |||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
– | – | – | – | 938,596 | – | 938,596 | |||||||||||||||||||||
|
Currency
translation adjustment
|
– | – | – | – | – | (97,095 | ) | (97,095 | ) | |||||||||||||||||||
|
Balance,
December 31, 2004
|
21,951,664 | 21,952 | 1,559,232 | (2,264,854 | ) | 530,569 | (363,660 | ) | (516,761 | ) | ||||||||||||||||||
|
Sale of
common stock ($0.65/share)
|
830,770 | 830 | 539,170 | – | – | – | 540,000 | |||||||||||||||||||||
|
Common stock
options granted
|
– | – | 204,458 | – | – | – | 204,458 | |||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (1,221,564 | ) | – | (1,221,564 | ) | |||||||||||||||||||
|
Currency
translation adjustment
|
– | – | – | – | – | (2,930 | ) | (2,930 | ) | |||||||||||||||||||
|
Balance,
December 31, 2005
|
22,782,434 | 22,782 | 2,302,860 | (2,264,854 | ) | (690,995 | ) | (366,590 | ) | (996,797 | ) | |||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.60/share)
|
570,000 | 570 | 341,430 | – | – | – | 342,000 | |||||||||||||||||||||
|
Common stock
options exercised ($0.30/share)
|
100,000 | 100 | 29,900 | – | – | – | 30,000 | |||||||||||||||||||||
|
Common stock
options exercised ($0.60/share)
|
29,150 | 30 | 17,460 | – | – | – | 17,490 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.50/share)
|
1,000,000 | 1,000 | 499,000 | – | – | – | 500,000 | |||||||||||||||||||||
|
Common stock
options and warrants vested
|
– | – | 1,132,512 | – | – | – | 1,132,512 | |||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (2,214,823 | ) | – | (2,214,823 | ) | |||||||||||||||||||
|
Currency
translation adjustment
|
– | – | – | – | – | 4,940 | 4,940 | |||||||||||||||||||||
|
Balance,
December 31, 2006
|
24,481,584 | 24,482 | 4,323,162 | (2,264,854 | ) | (2,905,818 | ) | (361,650 | ) | (1,184,678 | ) | |||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.65/share)
|
200,000 | 200 | 129,800 | – | – | – | 130,000 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.50/share)
|
821,000 | 821 | 409,679 | – | – | – | 410,500 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.40/share)
|
75,000 | 75 | 29,925 | – | – | – | 30,000 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.30/share)
|
2,377,297 | 2,377 | 710,812 | – | – | – | 713,189 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.25/share)
|
40,000 | 40 | 9,960 | – | – | – | 10,000 | |||||||||||||||||||||
|
Exercise of
warrants ($1.25/share)
|
20,000 | 20 | 24,980 | – | – | – | 25,000 | |||||||||||||||||||||
|
Common stock
options exercised (cashless)
|
87,736 | 88 | (88 | ) | – | – | – | – | ||||||||||||||||||||
|
Common stock
options and warrants vested
|
– | – | 439,393 | – | – | – | 439,393 | |||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (1,634,324 | ) | – | (1,634,324 | ) | |||||||||||||||||||
|
Currency
translation adjustment
|
– | – | – | – | – | (103,990 | ) | (103,990 | ) | |||||||||||||||||||
|
Balance,
December 31, 2007
|
28,102,617 | 28,103 | 6,077,623 | (2,264,854 | ) | (4,540,142 | ) | (465,640 | ) | (1,164,910 | ) | |||||||||||||||||
|
Sale of
common stock ($1.00/share)
|
100,000 | 100 | 99,900 | – | – | – | 100,000 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one-half warrant
($0.60/share)
|
800,000 | 800 | 479,200 | – | – | – | 480,000 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one-half warrant
($1.00/share)
|
50,000 | 50 | 49,950 | – | – | – | 50,000 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.20/share)
|
112,500 | 112 | 22,388 | – | – | – | 22,500 | |||||||||||||||||||||
|
Sale of units
consisting of one share of common stock and one warrant
($0.25/share)
|
200,000 | 200 | 49,800 | – | – | – | 50,000 | |||||||||||||||||||||
|
Exercise of
warrants ($0.50/share)
|
125,000 | 125 | 62,375 | – | – | – | 62,500 | |||||||||||||||||||||
|
Exercise of
warrants ($0.75/share)
|
100,000 | 100 | 74,900 | – | – | – | 75,000 | |||||||||||||||||||||
|
Common stock
options exercised ($0.30/share)
|
10,000 | 10 | 2,990 | – | – | – | 3,000 | |||||||||||||||||||||
|
Common stock
options exercised ($1.00/share)
|
192,000 | 192 | 191,808 | – | – | – | 192,000 | |||||||||||||||||||||
|
Common stock
issued for services($0.68/share)
|
200,000 | 200 | 135,800 | – | – | – | 136,000 | |||||||||||||||||||||
|
Common stock
issued for services ($0.65/share)
|
300,000 | 300 | 194,700 | – | – | – | 195,000 | |||||||||||||||||||||
|
Common stock
issued in settlement of debt
|
3,930,879 | 3,931 | 1,568,421 | – | – | – | 1,572,352 | |||||||||||||||||||||
|
Common stock
options and warrants vested
|
– | – | 2,361,327 | – | – | – | 2,361,327 | |||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (4,923,057 | ) | – | (4,923,057 | ) | |||||||||||||||||||
|
Currency
translation adjustment
|
– | – | – | – | – | 91,309 | 91,309 | |||||||||||||||||||||
|
Comprehensive
loss
|
– | – | – | – | – | – | (4,831,748 | ) | ||||||||||||||||||||
|
Balance,
December 31, 2008
|
34,222,996 | 34,223 | 11,371,182 | (2,264,854 | ) | (9,463,199 | ) | (374,331 | ) | (696,979 | ) | |||||||||||||||||
(The accompanying
notes are an integral part of the consolidated financial
statements.)
F-5
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
1. NATURE
OF OPERATIONS AND CONTINUANCE OF BUSINESS
Nature
of Operations
WordLogic
Corporation (the “Company” or “WLC”), formerly TheAmericanWest.com, Inc., was
incorporated under the laws of the State of Nevada on March 30, 1999. The
Company’s primary business is the development and commercialization of data
entry software for handheld computing devices. Its headquarters is located in
Vancouver, BC, Canada.
Reverse
Merger
On March 11, 2003,
WLC entered into an Agreement and Plan of Merger (the “Agreement”) with
WordLogic Corporation-private company (“WCPC”), a British Columbia, Canada
corporation. On May 27, 2003, WLC issued 19,016,658 shares of its common stock
in exchange for all 19,016,658 outstanding common shares of WCPC, and the two
companies merged. This merger has been treated as a recapitalization of WCPC,
with WLC the legal surviving entity. Since WLC had, prior to the
recapitalization, minimal assets and no operations, the recapitalization has
been accounted for as the sale of 2,907,006 shares of WCPC’s common stock for
the net assets of WLC. Following the closing, WLC remained the surviving
corporation with 21,923,664 common shares outstanding, of which the former
shareholders of WCPC owned approximately 86.74%.
In connection with
the closing of the Agreement, WLC changed its name to “WordLogic Corporation”
(formerly TheAmericanWest.com, Inc.) and changed its OTCBB symbol under which
its common stock trades on the Over-The-Counter Bulletin Board to “WLGC”. WLC’s
directors resigned their positions and the executive officers of WCPC were
appointed to fill the vacancies created by the resignations, which resulted in a
change in control.
Going
Concern
The accompanying
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. As shown in the accompanying financial statements,
the Company has incurred recurring losses, 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. At December 31, 2008 the Company
has a working capital deficiency of $706,757 and has incurred losses of
$9,463,199 since inception. These factors, among others, raise significant doubt
regarding the Company’s ability to continue as a going concern.
The financial
statements do not include any adjustments relating to the recoverability of
assets and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company’s continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis and ultimately to attain
profitability. The Company’s management intends to satisfy cash requirements
with working capital acquired in exchange for debt and/or common stock. There is
no assurance the cash infusions will continue in the future or that the Company
will achieve profitable operations.
The Company’s
future success will be dependent upon its ability to create and provide
effective and competitive software products that meet customers changing
requirements; including the effective use of leading technologies to continue to
enhance its current products and to influence and respond to emerging industry
standards and other technological changes on a timely and cost-effective
basis.
Development
Stage
Following its
reverse merger on May 27, 2003, the Company entered the development stage and
became a development stage enterprise in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 7, Accounting and Reporting by
Development Stage Enterprises.
F-6
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
a)
|
Basis
of Presentation
|
These financial
statements and related notes are presented in accordance with accounting
principles generally accepted in the United States, and are expressed in U.S.
dollars. The Company’s fiscal year-end is December 31.
|
b)
|
Basis
of Consolidation
|
The consolidated
financial statements include the accounts of WordLogic Corporation and its
wholly-owned subsidiary 602531 British Columbia Ltd. (the “Subsidiary”), an
entity incorporated under the laws of the Province of British Columbia, Canada.
The Subsidiary does not have any operations. All significant intercompany
balances and transactions have been eliminated in consolidation.
|
c)
|
Use
of Estimates
|
The preparation of
financial statements in accordance with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses in the reporting
period. We regularly evaluate our estimates and assumptions related to the
useful life and recoverability of long-lived assets, stock-based compensation
and deferred income tax asset valuation allowances. We base our estimates and
assumptions on current facts, historical experience and various other factors
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities and the accrual of costs and expenses that are not readily apparent
from other sources. The actual results experienced by us may differ materially
and adversely from our estimates. To the extent there are material differences
between our estimates and the actual results, our future results of operations
will be affected.
|
d)
|
Cash
and Cash Equivalents
|
The Company
considers all highly liquid instruments with original maturities of three months
or less when acquired, to be cash equivalents. We had no cash
equivalents at December 31, 2008 or 2007.
|
e)
|
Allowance
for Doubtful Accounts
|
The Company
considers its receivables to be fully collectible; accordingly, no allowance for
doubtful accounts is required. The Company recognizes an allowance for doubtful
accounts on specific accounts identified at risk based on the age of the
outstanding receivable and the inability or unwillingness of its customers to
make the required payments, however there was no need to recognize such an
allowance during the years ended December 31, 2008 and 2007.
|
f)
|
Property
and Equipment
|
Property and
equipment are stated at cost and are amortized over their estimated useful lives
as follows:
|
Asset
|
Method
|
Rate
|
|
Computer
equipment
|
Straight-line
|
33.3%
|
|
Computer
software
|
Straight-line
|
100.0%
|
|
Furniture and
fixtures
|
Declining
balance
|
20.0%
|
|
Other
equipment
|
Declining
balance
|
20.0%
|
Amortization is
recorded at one-half of the normal rate in the year of acquisition. We have
compared the depreciation taken using the declining balance method to the
straight-line method and have determined the difference to be immaterial for the
years ended December 31, 2008 and 2007.
Upon retirement or
disposition of equipment, the cost and accumulated amortization are removed from
the accounts and any resulting gain or loss is reflected in operations. Repairs
and maintenance are charged to expense as incurred and expenditures for
additions and improvements are capitalized.
F-7
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
g)
|
Impairment
of Long-Lived Assets
|
The Company
evaluates the carrying value of its long-lived assets under the provisions of
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Statement No. 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted future cash flows estimated to be generated by those assets are
less than the assets’ carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
|
h)
|
Software
Development Costs
|
Software
development costs are recorded in accordance with Statement on Financial
Accounting Standards (“SFAS”) Statement No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed”. Costs incurred to
establish the technological feasibility of computer software to be sold, leased,
or otherwise marketed are expensed as incurred as research and development
costs. Once technological feasibility is established, the cost of producing
product masters for the software is capitalized. Capitalization of the software
development costs ceases and amortization of the capitalized costs commences
when the product is available for general release to customers. Capitalized
costs are amortized based on the greater of (a) the ratio of current gross
revenues to the total current and anticipated future gross revenues, or (b) the
straight-line method over the remaining estimated economic life of the
product.
|
i)
|
Research
and Development
|
Expenditures
relating to the development of new products and processes, including significant
improvements to existing products, are charged to operations as
incurred.
|
j)
|
Income
Taxes
|
The Company
accounts for income taxes under the provisions of SFAS No. 109, Accounting for
Income Taxes. SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Pursuant to SFAS No. 109 the Company
is required to compute tax asset benefits for net operating losses carried
forward. The potential benefit of net operating losses has not been recognized
in these financial statements because the Company cannot be assured it is more
likely than not it will utilize the net operating losses carried forward in
future years.
|
k)
|
Revenue
Recognition
|
The Company
recognizes revenue related to sales and licensing of data entry software in
accordance with Statement of Position No. 97-2, “Software Revenue Recognition”
(“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue
Recognition with Respect to Certain Arrangements”. Pursuant to SOP 97-2 and
Staff Accounting Bulletin No. 104 “Revenue Recognition”, revenue will only be
recognized when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed, and collectibility is reasonably
assured.
The Company earns
revenue from the sale of its software products and from royalties earned on
software licensing agreements. Revenue from the sale of software products is
recognized at the point of delivery, which occurs when customers either download
the software or are shipped software products. Royalty revenue is recognized in
accordance with the terms of licensing agreements and when collectibility is
reasonably assured, which is usually on receipt of royalty
payments.
F-8
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
l)
|
Financial
Instruments
|
The fair values of
cash, accounts receivable, accounts payable, line of credit, bank overdraft, and
related party balances approximate their carrying values due to the immediate or
short-term maturity of these financial instruments. The long-term notes payable
bear interest at rates that in management’s opinion approximate the current
interest rates available to the Company for notes with the same maturity dates
and therefore their fair value is estimated to approximate their carrying
value.
The Company’s
operations are in Canada, which results in exposure to market risks from changes
in foreign currency rates. The financial risk to the Company’s operations
results from fluctuations in foreign exchange rates and the degree of volatility
of these rates. Currently, the Company does not use derivative instruments to
reduce its exposure to foreign currency risk.
|
m)
|
Foreign
Currency Translation
|
The Company’s
functional currency is the Canadian dollar and these financial statements have
been translated into U.S. dollars in accordance with SFAS 52, Foreign Currency
Translation. The Canadian dollar based accounts of the Company’s foreign
operations have been translated into United States dollars using the current
rate method. Assets and liabilities of those operations are translated into U.S.
dollars using exchange rates as of the balance sheet date; income and expenses
are translated using the weighted average exchange rates for the reporting
period. Translation adjustments are recorded as accumulated other comprehensive
income (loss), a separate component of shareholders’ equity.
|
n)
|
Stock-based
Compensation
|
On January 1,
2006, the Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all share-based awards made to employees and directors, including employee
stock options and shares issued through its employee stock purchase plan, based
on estimated fair values. In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin 107 (“SAB 107”) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of the
beginning in 2006. The Company’s financial statements as of and for the year
ended December 31, 2007 reflect the impact of SFAS 123(R). In accordance
with the modified prospective transition method, the Company’s financial
statements for prior periods do not include the impact of
SFAS 123(R).
The Company’s
determination of estimated fair value of share-based awards utilizes the
Black-Scholes option-pricing model. The Black-Scholes model is affected by the
Company’s stock price as well as assumptions regarding certain highly complex
and subjective variables. These variables include, but are not limited to, the
Company’s expected stock price volatility over the term of the awards and actual
and projected employee stock option exercise behaviours.
F-9
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
o)
|
Loss
per Common Share
|
The Company reports
net loss per share in accordance with SFAS No. 128, Earnings per share.
SFAS No. 128 requires dual presentation of basic and diluted loss per
share. Basic net loss per share excludes the impact of common stock equivalents.
Diluted net loss per share utilizes the average market price per share when
applying the treasury stock method in determining common stock equivalents. As
of December 31, 2008, there were 9,599,985 vested common stock options and
warrants outstanding, which were excluded from the calculation of net loss per
share-diluted because they were anti-dilutive.
|
p)
|
Comprehensive
Income (Loss)
|
The Company reports
its comprehensive income (loss) in accordance with SFAS 130, Reporting
Comprehensive Income. For the years ended December 31, 2008 and 2007, the
Company’s only component of comprehensive loss was foreign currency translation
adjustments.
|
q)
|
Advertising
Costs
|
Advertising costs
are charged to operations as incurred. No advertising costs were
charged during the years ended December 31, 2008 and 2007.
|
r)
|
Recent
Accounting Pronouncements
|
In May 2008, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 becomes
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board (“PCAOB”) amendment to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles” and is not
expected to have a significant impact on our consolidated financial
statements.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. SFAS No.
141 (revised 2007) establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141 (revised 2007) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The adoption of this statement
is not expected to have a material effect on the Company's future reported
financial position or results of operations.
In December 2007,
the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51”. SFAS No. 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The adoption of this statement is not
expected to have a material effect on the Company's future reported financial
position or results of operations.
In February 2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB Statement No. 115”. This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions of SFAS No. 159 apply
only to entities that elect the fair value option. However, the amendment to
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, applies to all entities with available-for-sale and trading
securities. SFAS No. 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provision of SFAS No. 157, “Fair
Value Measurements”. The adoption of this statement is not expected to have a
material effect on the Company's future reported financial position or results
of operations.
F-10
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
s)
|
Reclassifications
|
Certain
reclassifications have been made to the prior period’s financial statements to
conform to the current period’s presentation.
3. RESTRICTED
CASH
As
of December 31, 2008 and 2007 we had restricted cash balances of $4,157 and
$18,263, respectively. This cash was held in trust by our attorneys
for the payment of future legal invoices.
4. PROPERTY
AND EQUIPMENT
|
Cost
$
|
Accumulated
Amortization
as
of December
31, 2008
$
|
Net
Carrying Amount
as
of December
31, 2008
$
|
Net
Carrying Amount
as
of December
31, 2007
$
|
|||||||||||||
|
Office
equipment
|
3,146 | 2,720 | 426 | 660 | ||||||||||||
|
Computer
equipment
|
115,264 | 107,610 | 7,654 | 13,126 | ||||||||||||
|
Computer
software
|
5,781 | 5,781 | - | 1,760 | ||||||||||||
|
Furniture and
fixtures
|
12,435 | 10,737 | 1,698 | 2,625 | ||||||||||||
| 136,626 | 126,848 | 9,778 | 18,171 | |||||||||||||
Depreciation
expense totalled $6,424 and $8,426 for the years ended December 31, 2008 and
2007, respectively.
5. LINE
OF CREDIT
The Company has a
CDN$50,000 (US$40,767) at December 31, 2008 line of credit of which CDN$700
(US$571) was unused at December 31, 2008. The interest rate on the credit line
is 2% over the Royal Bank prime rate. Interest payments are due monthly. An
officer has personally guaranteed the line of credit. At December 31,
2008 our total interest rate was 5.5% based on a Royal Bank primate rate of
3.5%.
6. RELATED
PARTY TRANSACTIONS AND BALANCES
The Company
incurred the following related party transactions:
|
a)
|
As of
December 31, 2007, the Company had prepaid office rent and fees of $22,757
to a private company controlled by a director, which was applied to
general and administrative expenses during the year ended December 31,
2008.
|
|
b)
|
The Company
has entered into an agreement with a private company controlled by a
director to rent office premises requiring monthly lease payments of $CAD
13,846, expiring February 28, 2010. Office rent incurred by the Company
totalled $143,109 ($CAD 153,177) and $97,853 ($CAD 104,376) for the years
ended December 31, 2008 and 2007,
respectively.
|
As
of December 31, 2008, the Company’s future minimum lease payments under
non-cancellable operating leases are as follows:
|
Twelve months
ended December 31, 2009
|
$ | 155,231 | ||
|
Twelve months
ended December 31, 2010
|
25,872 | |||
|
Total
|
$ | 181,103 |
|
c)
|
The Company
has entered into an agreement with a private company controlled by a
director to provide management services requiring monthly payments of $CAD
16,667, expiring June 1, 2009. Management fees incurred by the Company
totalled $186,854 ($CAD 200,000) and $187,496 ($CAD 200,000) for the years
ended December 31, 2008 and 2007, respectively. As at December
31, 2008 the amount owing to this private company totalled
$59,252.
|
F-11
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
6.
RELATED PARTY TRANSACTIONS AND
BALANCES (continued)
|
d)
|
During the
year ended December 31, 2008, the Company received proceeds of $122,300
($CAD150,000) from a director on an unsecured promissory
note. The note bears interest at 8% per annum, matures May 31,
2009 and includes $CAD 150,000 of principal and all related accrued
interest. Accrued interest payable on the note totalled $8,953
($CAD 10,981) at December 31, 2008. Interest expense on the
note during the year ended December 31, 2008 totalled $10,259 ($CAD
10,981).
|
|
e)
|
During the
year ended December 31, 2008, the Company paid $63 to a director for
operating expenses incurred in the year ended December 31,
2007.
|
|
f)
|
During the
year ended December 31, 2008, the Company paid $4,384 to a private company
controlled by an officer for accounting services incurred in the year
ended December 31, 2007. During the year ended December 31,
2008, the Company incurred accounting fees of $30,951 with this private
company, of which $7,905 is outstanding as at December 31,
2008.
|
|
g)
|
During the
year ended December 31, 2007, the Company advanced $951 to a corporation
having former management in common with the Company. During the
year ended December 31, 2008 the Company advanced a further $241,
increasing the balance to $1,192, all of which was repaid leaving no
balance outstanding at December 31,
2008.
|
|
h)
|
During the
year ended December 31, 2008, the Company paid $13,080 to a director for
director’s fees.
|
|
i)
|
During the
year ended December 31, 2008, the Company incurred $93,427 with a director
and officer for wages and salaries.
|
7. NOTES
PAYABLE
Promissory
Notes
During the year
ended December 31, 2005, the Company received proceeds of $370,000 on two
unsecured promissory notes. The notes bear interest at 8% per annum. The first
note matured on March 1, 2007 and includes $240,000 of principal and all related
accrued interest. The second note matured on May 11, 2007 and includes $130,000
of principal and all related accrued interest. On June 1, 2007 both notes were
renewed for an additional 24 months beyond their initial maturity. During the
year ended December 31, 2006, the Company received proceeds of $100,000 on a
third unsecured promissory note, also bearing interest at 8% per annum, maturing
October 12, 2008. On December 16, 2008 the promissory notes totalling $470,000,
plus accrued interest of $119,632 were paid through the issuance of 3,930,879
shares of common stock.
During the year
ended December 31, 2006, the Company received proceeds of $436,500 on an
unsecured promissory note and repaid $17,709. During the year ended December 31,
2007 an additional $6,720 was advanced and $60,000 was repaid. During
the year ended December 31, 2008 the Company repaid $348,000 leaving a balance
of $17,511 owing as at December 31, 2008. The note bears interest at 8% per
annum and matures on June 15, 2009. Accrued interest payable on the note
totalled $53,021 at December 31, 2008.
Interest expense on
the notes during the years ended December 31, 2008 and 2007 totalled $33,792 and
$70,229, respectively.
Maturities
Aggregate
maturities required on long-term debt at December 31, 2008, are as
follows:
|
Year
|
Amount
|
|
2009
|
$
17,511
|
8. COMMON
STOCK
For the year ended
December 31, 2008:
|
a)
|
In January
2008, the Company issued 100,000 shares of its common stock at a price of
$1.00 per share for total proceeds of
$100,000.
|
F-12
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
8. COMMON STOCK
(continued)
|
b)
|
Also in
January 2008, the Company issued 42,000 shares of its common stock at
$1.00 per share related to the exercise of stock options to a director,
for total proceeds of $42,000.
|
|
c)
|
In February
2008, the Company issued 25,000 shares of its common stock at $0.75 per
share related to the exercise of warrants, for total proceeds of
$18,750.
|
|
d)
|
In March
2008, the Company issued 75,000 shares of its common stock at $0.75 per
share related to the exercise of warrants, for total proceeds of
$56,250.
|
|
e)
|
Also in March
2008, the Company conducted a private placement offering whereby it sold
50,000 units at a price of $1.00 per unit for total proceeds of
$50,000. Each unit consisted of one share of the Company’s
common stock and one half warrant to purchase an additional share of
common stock, exercisable at $2.00 per share. The relative fair value of
the warrants granted in this placement, estimated at the grant date using
the Black-Scholes options pricing model, was
$12,768.
|
|
f)
|
Also in March
2008, the Company issued 10,000 shares of its common stock at $0.30 per
share related to the exercise of stock options to an employee, for total
proceeds of $3,000.
|
|
g)
|
In April
2008, the Company conducted a private placement offering whereby it sold
800,000 units at a price of $0.60 per unit for total proceeds of
$480,000. Each unit consisted of one share of the Company’s
common stock and one warrant to purchase an additional share of common
stock, exercisable at $1.00 per share. The relative fair value of the
warrants granted in this placement, estimated at the grant date using the
Black-Scholes options pricing model, was
$197,577.
|
|
h)
|
In July 2008,
the Company issued 150,000 shares of its common stock at $1.00 per share
related to the exercise of stock options to a director, for total proceeds
of $150,000.
|
|
j)
|
In August
2008, the Company issued 125,000 shares of its common stock at $0.50 per
share related to the exercise of warrants, for total proceeds of
$62,500.
|
|
k)
|
Also in
August 2008, the Company issued 300,000 shares of its common stock
registered on a Form S-8 at $0.65 per share for services rendered by a
consultant for total consideration of
$195,000.
|
|
l)
|
In September
2008, the Company issued 200,000 shares of its common stock registered on
a Form S-8 at $0.68 per share for services rendered by a consultant for
total consideration of $136,000.
|
|
m)
|
In October
2008, the Company conducted a private placement offering whereby it sold
112,500 units at a price of $0.20 per unit for total proceeds of $22,500.
Each unit consisted of one share of the Company’s common stock and one
warrant to purchase another share of common stock at $0.50 per share. The
warrants may be exercised over a period of two years. The offering was
made in reliance on exemptions from registration contained in Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The relative
fair value of the warrants granted in this placement, estimate at the
grant date using the Black-Scholes options pricing model, was
$10,872.
|
|
n)
|
In December
2008, the Company conducted a private placement offering whereby it sold
200,000 units at a price of $0.25 per unit for total proceeds of $50,000.
Each unit consisted of one share of the Company’s common stock and one
warrant to purchase another share of common stock at $0.50 per share. The
warrants may be exercised over a period of two years. The offering was
made in reliance on exemptions from registration contained in Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The relative
fair value of the warrants granted in this placement, estimate at the
grant date using the Black-Scholes options pricing model, was
$21,632.
|
|
o)
|
In December
2008, the Company settled outstanding promissory notes and accrued
interest totalling $589,632 through the issuance of 3,930,879 shares of
the Company’s common stock at a price recorded at the market price on the
date of grant. Accordingly, we recorded a loss on settlement
for the difference in fair value of the shares issued and the debt
extinguished.
|
F-13
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
8.
COMMON STOCK
(continued)
For the year ended
December 31, 2007:
|
a)
|
In March
2007, the Company conducted a private placement offering whereby it sold
125,000 units at a price of $0.50 per unit for total proceeds of $62,500.
Each unit consisted of one share of the Company’s common stock and one
warrant to purchase another share of common stock at $0.75 per share. The
warrants may be exercised over a period of one year. The offering was made
in reliance on exemptions from registration contained in Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The relative
fair value of the warrants granted in this placement, estimate at the
grant date using the Black-Scholes options pricing model, was
$12,374.
|
|
b)
|
In May 2007,
the Company conducted a private placement offering whereby it sold 25,000
units at a price of $0.40 per unit for total proceeds of $10,000. Each
unit consisted of one share of the Company’s common stock and one warrant
to purchase another share of common stock at $0.75 per share. The warrants
may be exercised over a period of one year. The offering was made in
reliance on exemptions from registration contained in Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The relative
fair value of the warrants granted in this placement, estimate at the
grant date using the Black-Scholes options pricing model, was
$1,944.
|
|
c)
|
In July 2007,
the Company conducted private placement offerings whereby it sold 50,000
units at a price of $0.40 per unit for total proceeds of $20,000 and
40,000 units at a price of $0.25 per unit for total proceeds of $10,000.
Each unit consisted of one share of the Company’s common stock and one
warrant to purchase another share of common stock at $0.75 per share. The
warrants may be exercised over a period of one year. The offering was made
in reliance on exemptions from registration contained in Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The
relative fair value of the warrants granted in this placement, estimate at
the grant date using the Black-Scholes options pricing model, was
$8,331.
|
|
d)
|
In August
2007, the Company conducted private placement offerings whereby it sold
1,125,000 units at a price of $0.30 per unit for total proceeds of
$337,500 and 376,000 units at a price of $0.50 per unit for total proceeds
of $188,000. Each unit consisted of one share of the Company’s common
stock and one warrant to purchase another share of common stock with
1,200,000 warrants exercisable at $1.00 per share, 176,000 at $0.75 per
share and 125,000 at $0.50 per share. The warrants may be exercised over a
two-year period. The offering was made in reliance on exemptions from
registration contained in Rule 506 of Regulation D under the Securities
Act of 1933, as amended. The relative fair value of the
warrants granted in this placement, estimate at the grant date using the
Black-Scholes options pricing model, was
$226,318.
|
|
e)
|
In September
2007, the Company conducted private placement offerings whereby it sold
1,252,297 units at a price of $0.30 per unit for total proceeds of
$375,689, 320,000 units at a price of $0.50 per unit for total proceeds of
$160,000 and 200,000 units at a price of $0.65 per unit for total proceeds
of $130,000. Each unit consisted of one share of the Company’s common
stock and one warrant to purchase another share of common stock with
1,672,297 warrants exercisable at $1.00 per share and 100,000 warrants
exercisable at $0.75 per share. The warrants may be exercised over a
two-year period. The offering was made in reliance on exemptions from
registration contained in Rule 506 of Regulation D under the Securities
Act of 1933, as amended. The relative fair value of the warrants granted
in this placement, estimate at the grant date using the Black-Scholes
options pricing model, was
$310,670.
|
|
f)
|
In September
2007, the Company issued 80,674 shares related to the exercise of 125,000
options at $0.50 each, on a cashless basis to a
consultant.
|
|
g)
|
In November
2007, the Company issued 7,062 shares related to the exercise of 125,000
options at $0.50 each, on a cashless basis to a
consultant.
|
|
h)
|
In November
2007, the Company issued 20,000 shares related to the exercise of 20,000
warrants at $1.25 per share for total proceeds of
$25,000.
|
F-14
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
8.
COMMON STOCK
(continued)
The following table
summaries the continuity of the Company’s share purchase warrants:
|
Number
of Warrants
|
Weighted
average
exercise
price
$
|
Weighted
average remaining contractual life (in
years)
|
||||||||||
|
Balance,
December 31, 2006
|
2,400,770 | 1.25 | 0.17 | |||||||||
|
Issued
|
3,513,297 | 0.95 | 1.09 | |||||||||
|
Exercised
|
(20,000 | ) | 1.25 | – | ||||||||
|
Expired/Cancelled
|
(830,770 | ) | 1.25 | – | ||||||||
|
Balance,
December 31, 2007
|
5,063,297 | 1.04 | 0.99 | |||||||||
|
Issued
|
1,137,500 | 0.88 | 1.96 | |||||||||
|
Exercised
|
(225,000 | ) | 0.61 | – | ||||||||
|
Expired/Cancelled
|
(140,000 | ) | 0.75 | – | ||||||||
|
Outstanding,
December 31, 2008
|
5,835,797 | 1.00 | 1.25 | |||||||||
9. STOCK-BASED
COMPENSATION
The Company adopted
two stock option plans. The first plan is dated February 15, 2001, under which
the Company is authorized to grant options to acquire up to a total of 4,000,000
shares of common stock. The second plan is dated February 15, 2005, under which
the Company is authorized to grant options to acquire up to a total of
3,000,000
shares of common
stock. Pursuant to the stock option plans, options granted are
subject to vesting terms which range from immediate vesting to various stages
over a period of one year including monthly vesting, at the sole discretion of
the Board of Directors. Stock options remaining for future grants: 2,767,000 and
1,665,000, respectively under each plan, for a total remaining of 4,432,000 as
at December 31, 2008.
During the year
ended December 31, 2008, the Company adopted the 2008 Stock Compensation Plan
and the 2008 Equity Incentive Plan, under which the Company is authorized to
issue up to 500,000 and 2,000,000 shares, respectively, of the Company’s common
stock, to be registered on Form S-8, to the Company’s employees, executives and
consultants. As at December 31, 2008, shares remaining to be issued
under each plan were nil and 2,000,000, respectively.
On January 3, 2008,
the Company granted options to purchase a total of 1,000,000 shares of the
Company’s common stock to a director. The options carry an exercise price of
$1.00 per share and vested immediately. The options expire January 3, 2013. The
fair value for options granted was estimated at the date of grant using the
Black-Scholes option-pricing model and the weighted average fair value of stock
options granted was $1.47. During the year ended December 31, 2008, the Company
recorded stock-based compensation of $1,465,239 as a general and administrative
expense in connection with these options.
On March 20, 2008,
the Company granted options to purchase a total of 100,000 shares of the
Company’s common stock to a consultant. The options carry an exercise
price of $0.50 per share and vested immediately. The options expire
March 20, 2013. The fair value for options granted was estimated at the date of
grant using the Black-Scholes option-pricing model and the weighted average fair
value of stock options granted was $0.66. During the year ended
December 31, 2008, the Company recorded stock-based compensation of $65,733 as a
general and administrative expense in connection with these
options.
On August 18, 2008,
the Company granted options to purchase a total of 250,000 shares of the
Company’s common stock to a director. The options carry an exercise
price of $0.80 per share and vested immediately. The options expire
on August 18, 2013. The fair value for options granted was estimated
at the date of grant using the Black-Scholes option-pricing model and the
weighted average fair value of stock options granted was
$0.68. During the year ended December 31, 2008, the Company recorded
stock-based compensation of $171,224 as a general and administrative expense in
connection with these options.
Also on August 18,
2008, the Company granted options to purchase a total of 215,000 shares of the
Company’s common stock to a consultant. The options carry an exercise
price of $0.80 per share and vested immediately. The options expire
August 18, 2010. . The fair value for options granted was
estimated at the date of grant using the
F-15
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
9. STOCK-BASED COMPENSATION
(continued)
Black-Scholes
option-pricing model and the weighted average fair value of stock options
granted was $0.56. During the year ended December 31, 2008, the
Company recorded stock-based compensation of $120,953 as a general and
administrative expense in connection with these options.
On September 8,
2008, the Company granted options to purchase a total of 100,000 shares of the
Company’s common stock to a consultant. The options carry an exercise
price of $0.90 per share and vested immediately. The options expire
September 8, 2010. The fair value for options granted was estimated
at the date of grant using the Black-Scholes option-pricing model and the
weighted average fair value of stock options granted was
$0.64. During the year ended December 31, 2008, the Company recorded
stock-based compensation of $63,739 as a general and administrative expense in
connection with these options.
On October 1, 2008,
the Company granted options to purchase a total of 1,500,000 shares of the
Company’s common stock to a consultant. The options carry an exercise
price of $0.80 per share and vest monthly commencing October 31,
2008. The options expire September 30, 2012. The fair
value for options granted was estimated at the date of grant using the
Black-Scholes option-pricing model and the weighted average fair value of stock
options granted was $0.20. During the year ended December 31, 2008,
the Company recorded stock-based compensation of $23,899 as a general and
administrative expense in connection with these options.
On February 21,
2007, the Company granted options to purchase a total of 150,000 shares of the
Company’s common stock to a consultant. The options carry an exercise price of
$0.50 per share and vested monthly commencing February 21, 2007 through April
21, 2007. The options expire February 21, 2011. The fair value for options
granted was estimated at the date of grant using the Black-Scholes
option-pricing model and the weighted average fair value of stock options
granted was $0.43. During the year ended December 31, 2007, the Company recorded
stock-based compensation of $54,042 as general and administrative
expense.
On April 20, 2007,
the Company granted options to purchase a total of 150,000 shares of the
Company’s common stock to a consultant. The options carry an exercise price of
$0.50 per share and vested monthly commencing April 20, 2007 through June 20,
2007. The options expire April 20, 2010. The fair value for options granted was
estimated at the date of grant using the Black-Scholes option-pricing model and
the weighted average fair value of stock options granted was $0.35. During the
year ended December 31, 2007, the Company recorded stock-based compensation of
$39,516 as general and administrative expense.
On November 21,
2007, the Company granted options to purchase an aggregate of 50,000 shares of
the Company’s common stock to an employee. The options carry an exercise price
of $1.85 per share and vested immediately upon being granted. The options expire
November 21, 2010. The fair value for options granted was estimated at the date
of grant using the Black-Scholes option-pricing model and the weighted average
fair value of stock options granted was $1.42. During the year ended December
31, 2007, the Company recorded $70,941 stock-based compensation as general and
administrative expense.
On December 1,
2007, the Company granted options to purchase a total of 250,000 shares of the
Company’s common stock to a consultant. The options carry an exercise price of
$0.60 per share and vest monthly commencing December 1, 2007 through February 1,
2009. The options expire November 30, 2010. The fair value for options granted
was estimated at the date of grant using the Black-Scholes option-pricing model
and the weighted average fair value of stock options granted was $1.84. During
the years ended December 31, 2007 and 2008, the Company recorded $52,956 and
$376,382, respectively, in stock-based compensation as general and
administrative expense.
The fair value for
stock options granted was estimated at the date of grant using the Black-Scholes
option-pricing model and the weighted average fair value of stock options
granted during the years ended December 31, 2008 and 2007 were $0.69 and $0.83
per share, respectively. The weighted average assumptions used are as
follows:
|
Years
Ended
|
||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Expected
dividend yield
|
0 | % | 0 | % | ||||
|
Risk-free
interest rate
|
2.43 | % | 3.93 | % | ||||
|
Expected
volatility
|
129.74 | % | 116.75 | % | ||||
|
Expected
option life (in years)
|
3.75 | 3.25 | ||||||
F-16
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
9.
STOCK-BASED COMPENSATION
(continued)
The total intrinsic
value of stock options exercised during the years ended December 31, 2008 and
2007 were $123,000 and $476,250 respectively.
The following table
summarizes the continuity of the Company’s stock options:
|
Number of Options
|
Weighted
Average Exercise Price
|
Weighted-Average
Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
|
|
Outstanding,
December 31, 2007
|
4,835,850
|
$
1.04
|
||
|
Granted
|
3,165,000
|
$
0.86
|
||
|
Exercised
|
(202,000)
|
$
0.52
|
||
|
Expired/Cancelled
|
(2,548,000)
|
$
1.42
|
||
|
|
||||
|
Outstanding,
December 31, 2008
|
5,250,850
|
$
0.80
|
3.25
|
$nil
|
|
|
|
|||
|
Exercisable,
December 31, 2008
|
3,764,188
|
$0.73
|
3.25
|
$nil
|
A summary of the
status of the Company’s nonvested shares as of December 31, 2008, and changes
during the years ended December 31, 2008, is presented below:
|
Nonvested
shares
|
Number
of Shares
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
||
|
Nonvested at
January 1, 2008
|
503,333
|
$0.85
|
|
Granted
|
3,165,000
|
$0.69
|
|
Vested
|
(2,181,671)
|
$1.09
|
|
Nonvested at
December 31, 2008
|
1,486,662
|
$
0.23
|
As at December 31,
2008, there was $342,963 total unrecognized compensation cost related to
nonvested share-based compensation arrangements. That cost is expected to be
recognized over a weighted average period of 3.51 years.
F-17
WORDLOGIC
CORPORATION
(A
Development Stage Company)
Notes to the
Consolidated Financial Statements
(Expressed in US
Dollars)
10. INCOME
TAXES
Deferred income
taxes reflect the tax consequences on future years of differences between the
tax bases:
|
2008
|
2007
|
|||||||
|
Deferred tax
assets
|
$ | 1,211,145 | $ | 768,818 | ||||
|
Valuation
allowance
|
(1,211,145 | ) | (768,818 | ) | ||||
|
Net future
income taxes
|
– | – | ||||||
In assessing the
realizability of future tax assets, management considers whether it is more
likely than not that some portion or all of the future tax assets will not be
realized. The ultimate realization of future tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of future tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Management has
provided for a valuation allowance on all of its losses as there is no assurance
that future tax benefits will be realized.
Our tax loss
carry-forwards will begin to expire in 2027.
11. COMMITMENTS
As
of December 31, 2008, the Company’s future minimum lease payments under
non-cancellable operating leases are as follows:
|
Twelve months
ended December 31, 2009
|
$ | 155,231 | ||
|
Twelve months
ended December 31, 2010
|
25,872 | |||
|
Total
|
$ | 181,103 |
12. SUBSEQUENT
EVENTS
On January 1, 2009,
the Company issued 200,000 shares of its common stock registered on a Form S-8
at $0.30 per share for services rendered by a consultant for total consideration
of $60,000.
On January 19,
2009, the Company issued 30,500 shares of its common stock registered on a Form
S-8 at $0.38 per share for services rendered by a consultant for total
consideration of $11,517.
On January 22,
2009, the Company entered into an agreement with a consultant, whereby the
consultant is to be paid $20,000, upon completion of services
rendered.
On January 27,
2009, the Company issued 250,000 shares of its common stock registered on a Form
S-8 at $0.68 per share for services rendered by a consultant for total
consideration of $170,000.
On February 4,
2009, the Company entered into an agreement with a consultant, whereby the
consultant is to be issued 48,780 shares at a deemed value of $0.41 for total
consideration of $20,000.
On March 6, 2009,
the Company granted options to purchase an aggregate of 200,000 shares of the
Company’s common stock to certain employees. The options carry an exercise price
of $0.27 per share and vested immediately upon being granted. The options expire
March 6, 2014.
On March 6, 2009,
the Company granted options to purchase an aggregate of 100,000 shares of the
Company’s common stock to an officer. The options carry an exercise price of
$0.27 per share and vested immediately upon being granted. The options expire
March 6, 2014.
F-18
On
March 14, 2008 we changed our independent registered accounting firm from
Cordovano and Honeck LLP to Manning Elliott LLP due to the inability of
Cordovano and Honeck LLP to meet the Section 203 requirements of the
Sarbanes-Oxley Act regarding periodic partner rotation. Our change in
independent registered accounting firms was not the result of any disagreements
with Cordovano and Honeck LLP on accounting and financial
disclosure.
On
February 17, 2009 we changed our independent registered accounting firm from
Manning Elliott LLP to M & K CPAs, PLLC. Our change in
independent registered accounting firms was not the result of any disagreements
with Manning Elliott LLP on accounting and financial
disclosure. Our audited financial statements for the fiscal
years ended December 31, 2008 and December 31, 2007 have been included in this
annual report in reliance upon M & K CPAs, PLLC, as experts in accounting
and auditing.
Evaluation of Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures, as defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's 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.
We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2008. Based on the evaluation of
these disclosure controls and procedures, and in light of the material
weaknesses found in our internal controls over financial reporting, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective.
Management’s Report on
Internal Control over Financial Reporting
Our management is
responsible for establishing and maintaining effective internal control over
financial reporting. Under the supervision of our Chief Executive
Officer and Chief Financial Officer, the Company conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2008 using the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
16
A
material weakness is a 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. In its
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2008, the Company determined that there were control
deficiencies that constituted material weaknesses, as described
below.
|
1.
|
The Company’s
auditors requested some out-of-period adjustments which has led management
to conclude that the controls over the period-end financial reporting
process were not operating effectively. Specifically, controls were not
effective to ensure that routine and non-routine accounting estimates and
other adjustments were appropriately recorded, reviewed, analyzed, and
monitored on a timely basis. A material weakness in the period-end
financial reporting process could result in the Company not being able to
meet its regulatory filing deadlines and, if not remediated, has the
potential to cause a material misstatement or to force the Company to miss
a filing deadline in order to implement corrective action.
The following
out-of-period adjustments were made at the request of the Company’s
registered public accounting firm, M&K CPAS, PLLC:
· to record the
difference between the market value, as of the grant date, of shares
issued to settle a debt and the value of the debt, which resulted in the
Company recording a loss in the 2008 fiscal year;
· to correct a
revalution of options put through in the 2008 fiscal year, which resulted
in the incorrect inputs under the Black Scholes option pricing model being
used in fiscal 2007;
· to record an
adjustment for foreign currency; and
· to accrue for
legal fees that the Company had yet to be billed for.
|
|
2.
|
Certain
entity level controls establishing a “tone at the top” were considered
material weaknesses. The Company has an audit committee; however the
members of the audit committee are all executive officers and are not
independent.
|
|
3.
|
There are no
preventative and detective IT systems in place to prevent and/or detect
fraud other than password protection. The Company has software
based controls in place which prevent double entries and provides other
detective control mechanisms such as account
reconciliations.
|
|
4.
|
There is no
segregation of duties between cash management and cash account
reconciliations which may result in the misappropriation of
funds.
|
Management
is currently evaluating remediation plans for the above control
deficiencies.
In
light of the existence of these control deficiencies, the Company concluded that
there is a reasonable possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a timely basis
by the company’s internal controls.
As a result, management has concluded that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2008 based on criteria established in Internal
Control—Integrated Framework issued by COSO.
M&K
CPAS, PLLC, an independent registered public accounting firm, was not required
to and has not issued an attestation report concerning the effectiveness of our
internal control over financial reporting as of December 31, 2008 pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.
Changes
in Internal Control over Financial Reporting
There have not been
any changes in our internal control over financial reporting during the quarter
ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
None.
17
PART
III
The following table
sets forth the name, age, and position of our executive officers and directors
as of December 31, 2008.
|
Name
and Age
|
Position(s)
Held in Wordlogic Corporation
|
Tenure
|
Other Public Company
Directorships Held
by Director
|
|
Frank R.
Evanshen, 60
|
Director,
President, and Chief Executive Officer
|
From May 27,
2003 to present
|
None
|
|
Darrin
McCormack, 43
|
Chief
Financial Officer
|
From August
13, 2007 to present
|
None
|
|
Peter Knaven,
46
|
Director
|
From August
13, 2007 to present
|
None
|
|
Senior Vice
President
|
From July 1,
2004 to present
|
||
|
Chief
Technology Officer
|
From November
7, 2007 to present
|
||
|
T. Allen
Rose, 52
|
Director,
Secretary and Treasurer
|
May 27, 2003
to present
|
None
|
|
David
Stirling, 63
|
Executive
Vice President
|
November 16,
2004 to present
|
None
|
|
James P.
Yano, 42
|
Chief
Operations Officer
|
September 30,
2008 to present
|
None
|
The directors shall
be elected at an annual meeting of the stockholders and except as otherwise
provided within our Bylaws, as pertaining to vacancies, shall hold office until
a successor is elected and qualified. There are no arrangements or understanding
between any of our directors or officers or any other person pursuant to which
any officer or director was or is to be selected as an officer or
director.
Frank R. Evanshen was the
President, Chief Executive Officer and a director of Wordlogic Corporation since
October 2001. Upon the closing of our merger with Wordlogic
Corporation on May 27, 2003 Mr. Evanshen was appointed as our President, Chief
Executive Officer and a director. Mr. Evanshen has been a venture
capitalist and merchant banker for over 25 years and has extensive experience in
raising capital for private and public ventures. He received his Bachelor of
Arts from Loyola College in Montreal in 1970.
Darrin McCormack has been our
Chief Financial Officer since August 13, 2007. Mr. McCormack is a Certified
General Accountant and Certified Fraud Examiner and is the managing partner in
the firm D. McCormack & Company Inc, CGA’s from July 1995 to present. D.
McCormack & Company is a registered participant with the Canadian Public
Accountability Board. Mr. McCormack has been a CGA in public practice since
1988. He received his diploma in Financial Accounting from Malaspina
College in Nanaimo, BC in 1986.
Peter Knaven has served as our
Senior Vice President since July 1, 2004, as our Chief Technology Officer since
November 7, 2007, and a director since August 13, 2007. From 2002 to 2004, Mr.
Knaven worked as a software consultant with Percomm Incorporated, a company in
the business of designing and manufacturing pagers. Mr. Knaven first joined
Wordlogic Corporation in 2000 as a software engineer, and had been one of the
chief architects of the WordLogic predictive engine until 2001. He possesses
extensive knowledge of the technology, software development cycle, and has wide
experience in project design and management. Mr. Knaven received his Bachelor of
Science in Computer Science from HIO Higher Technical Education in Enschede,
Netherlands in 1985.
T. Allen Rose has served as
the director, Secretary and Treasurer of Wordlogic Corporation since October
2001. Upon the closing of our merger with Wordlogic Corporation on
May 27, 2003 Mr. Rose was appointed as our Chief Financial Officer, Secretary,
Treasurer and a director. Mr. Rose resigned as our Chief Financial
Officer on August 13, 2007. Mr. Rose is a Chartered Accountant and has been in
senior financial management for numerous private and public companies since
1983. He received his Bachelor of Commerce in Finance & Accounting from
McMaster University in Hamilton, Ontario in 1979.
James P. Yano has served as
our Chief Operations Officer since September 30, 2008. Mr. Yano has
over 10 years experience in sales and marketing. In that time he has
served in various executive and managerial positions with companies specializing
in software and scientific equipment. From 2001 to 2005, Mr. Yano
served as a Marketing Manager with Agilent Technologies Inc., a $6 Billion
scientific instruments/analysis equipment maker. During this time,
Mr. Yano organized product development, strategized new product concepts,
executed the introduction of new products onto the market and exceeded sales
forecasts. From 2005 to the present, Mr. Yano has been working as
Vice President of Marketing and International Channels with Aspetrics, Inc, a
process instrument manufacturer. Mr. Yano once again identified new
products and market opportunities and commercialized the company’s concepts
through the development of relationships with manufacturers and distribution
agents.
Dr. David Stirling has served
as our Executive Vice President of Business Development since November 16, 2004.
Since before 2003, Dr. Stirling has been the Principal of Kyuquot Elementary
Secondary School and the Director of the Houpsitas Adult Learning Center in
Kyuquot, British Columbia. Throughout his career, Dr. Stirling has been
developing individual education programs for students with learning
difficulties. Dr. Stirling holds a Masters degree in Education from George
Washington University and a PhD in Kinesiology from the University of
Saskatchewan.
18
Significant
Employees
Other than the
senior officers described above, we do not expect any other individuals to make
a significant contribution to our business.
Family
Relationships
There are no family
relationships among our officers, directors or persons nominated for such
positions.
No Legal
Proceedings
None of our
directors, executive officers, promoters or control persons have been involved
in any of the following events during the past five years:
|
·
|
any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that
time;
|
|
·
|
any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
|
·
|
being subject
to any order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
|
·
|
being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
|
Section 16(a) Beneficial
Ownership Compliance Reporting
Section 16(a) of
the Securities Exchange Act of 1934 requires a company’s directors and officers,
and persons who own more than ten-percent (10%) of the company’s common stock,
to file with the Securities and Exchange Commission reports of ownership on Form
3 and reports of change in ownership on Forms 4 and 5. Such officers, directors
and ten-percent stockholders are also required to furnish the company with
copies of all Section 16(a) reports they file. Based solely on our review of the
copies of such forms received by us and on representations from certain
reporting persons, we believe that all Section 16(a) reports applicable to our
officers, directors and ten-percent stockholders with respect to the fiscal year
ended December 31, 2008 were filed with the exception of reports to be filed by
David Stirling. However, some were filed late.
Code of
Ethics
We have adopted a
code of ethics that applies to our senior officers such as the principal
executive officer, principal financial officer, principal accounting officer and
persons performing similar functions. This code of ethics is included, by
reference, as an exhibit to our annual report on Form 10-KSB filed with the SEC
on April 14, 2005.
If
any amendments are made to the code of ethics or our management grants any
waiver, including any implicit waiver, from a provision of the code to any
senior officers, we will disclose the nature of such amendment or waiver on our
website or in a current report on Form 8-K.
Audit
Committee
We
established a separately-designated standing audit committee on February 19,
2008. The committee consists of Darrin McCormack, our Chief Financial
Officer, Peter Knaven, our Director, Senior Vice President and Chief Technology
Officer, as well as T. Allen Rose, our Director, Secretary and
Treasurer.
Darrin McCormack is
the financial expert serving on our audit committee, but as he also serves as
our Chief Financial Officer, he is not an independent member of our
committee.
The OTC BB on which
we list does not have any independence requirements for the Audit
Committee.
19
Director
Nominees
We
do not have a nominating committee. The Board of Directors, sitting as a Board,
selects individuals to stand for election as members of the Board. Since the
Board of Directors does not include a majority of independent directors, the
decision of the Board as to director nominees is made by persons who have an
interest in the outcome of the determination. The Board will consider candidates
for directors proposed by security holders, although no formal procedures for
submitting candidates have been adopted. Unless otherwise determined, not less
than 90 days prior to the next annual Board of Directors' meeting at which the
slate of Board nominees is adopted, the Board will accept written submissions of
proposed nominees that include the name, address and telephone number of the
proposed nominee; a brief statement of the nominee’s qualifications to serve as
a director; and a statement as to why the shareholder submitting the proposed
nominee believes that the nomination would be in the best interests of
shareholders. If the proposed nominee is not the same person as the shareholder
submitting the name of the nominee, a letter from the nominee agreeing to the
submission of his or her name for consideration should be provided at the time
of submission. The letter should be accompanied by a résumé supporting the
nominee's qualifications to serve on the Board of Directors, as well as a list
of references.
The Board
identifies director nominees through a combination of referrals from different
people, including management, existing Board members and security holders. Once
a candidate has been identified, the Board reviews the individual's experience
and background and may discuss the proposed nominee with the source of the
recommendation. If the Board believes it to be appropriate, Board members may
meet with the proposed nominee before making a final determination whether to
include the proposed nominee as a member of management's slate of director
nominees submitted to shareholders for election to the Board.
Among the factors
that the Board considers when evaluating proposed nominees are their knowledge
of, and experience in business matters, finance, capital markets and mergers and
acquisitions. The Board may request additional information from the candidate
prior to reaching a determination. The Board is under no obligation to formally
respond to all recommendations, although as a matter of practice, it will
endeavor to do so.
The following table
sets forth, as of December 31, 2008, compensation awarded to our Principal
Executive Officer (PEO and Principal Financial Officer (PFO), and to other
persons serving as executive officers whose salary and bonus for such year
exceeded $100,000 (collectively, the “Named Executive Officers”) for the last
three completed fiscal years.
|
SUMMARY
COMPENSATION TABLE
|
|||||||||
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
|
Frank
Evanshen
President,
CEO and Director
|
2006
|
nil
|
nil
|
nil
|
$383,600
|
nil
|
nil
|
$176,412
(1)
|
$560,012
|
|
2007
|
nil
|
nil
|
nil
|
$63,933
|
nil
|
nil
|
$187,496
(1)
|
$251,429
|
|
|
2008
|
nil
|
nil
|
nil
|
$1,465,239
|
nil
|
nil
|
$186,854 (1)
|
$1,652,093
|
|
|
T. Allen
Rose,
Former CFO,
Secretary, Treasurer (4)
|
2006
|
nil
|
nil
|
nil
|
$191,800
|
nil
|
nil
|
$73,211
|
$265,011
|
|
2007
|
nil
|
nil
|
nil
|
$31,967
|
nil
|
nil
|
$18,170
|
$50,137
|
|
|
2008
|
nil
|
nil
|
nil
|
$171,224
|
nil
|
nil
|
$13,080
|
$184,304
|
|
|
Darrin
McCormack
CFO
|
2006
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
|
2007
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
$16,500
(2)
|
$16,500
|
|
|
2008
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
$30,951
(2)
|
$30,951
|
|
|
Peter
Knaven
Senior Vice
President, Chief Technology Officer, and Director (3)
|
2006
|
$88,206
|
nil
|
nil
|
$75,060
|
nil
|
nil
|
nil
|
$163,266
|
|
2007
|
$93,748
|
nil
|
nil
|
$75,060
|
nil
|
nil
|
nil
|
$168,808
|
|
|
2008
|
$93,427
|
nil
|
nil
|
$75,060
|
nil
|
nil
|
nil
|
$168,487
|
|
|
David
Stirling,
Executive
Vice President
|
2006
|
$53,806
|
nil
|
nil
|
$42,172
|
nil
|
nil
|
nil
|
$95,978
|
|
2007
|
$32,109
|
nil
|
nil
|
$14,792
|
nil
|
nil
|
nil
|
$46,901
|
|
|
2008
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
nil
|
|
|
James P.
Yano, Chief Operations Officer (5)
|
2008
|
nil
|
nil
|
nil
|
$23,899
|
nil
|
nil
|
$61,857
|
$85,756
|
20
|
(1)
|
Represents
management consulting fees paid to MCC Meridian Capital Corp. (“MCC”).
MCC, a company controlled by Franklin R. Evanshen, has a management
agreement with us for the services provided personally by Mr. Evanshen in
his role as our President and Chief Executive Officer. The agreement
currently requires monthly payments of approximately $16,667 for services
rendered.
|
|
(2)
|
Represents
amounts incurred with D. McCormack & Company Inc., a company
controlled by Darrin McCormack, for accounting and financial management
services provided personally by Mr. McCormack in his role as Chief
Financial Officer. Under the agreement, fees are charged at
approximately $95 ($110 CAD) per
hour.
|
|
(3)
|
Peter Knaven
has an employment agreement with us for his employment as a Software
Programmer and Developer. This agreement provides that Mr. Knaven is paid
approximately $8,333 per month for his services. On July 1, 2004 we
entered into an agreement to grant to Mr. Knaven 1,000,000 options to
purchase shares of our common stock at a price of $0.60 per share. 100,000
options were vested immediately, while 900,000 vest monthly at a rate of
15,000 per month, beginning on July 1, 2004 and ending on July 1,
2009. Mr. Knaven was appointed as one of our directors on
August 13, 2007.
|
|
(4)
|
T. Allen Rose
served as our Chief Financial Officer until August 13, 2007 and is one of
our directors.
|
|
(5)
|
James P. Yano
has served as our Chief Operations Officer since September 30,
2008. According to Mr. Yano’s consulting agreement, Mr. Yano
will serve as the Company’s Chief Operations Officer from October 1, 2008
until September 30, 2011. The Consulting Agreement can be
renewed with consent from both parties. Mr. Yano will be
compensated with a monthly salary of $18,000 and options to purchase
1,500,000 shares of the Company’s common stock (the “Options”) with the
following conditions:
|
|
a.
|
The Options
will vest at a rate of 40,000 per month, with any remainder vesting on
September 30, 2011.
|
|
b.
|
The Options
are exercisable at $0.80 per share and contain cashless exercise
provisions.
|
|
c.
|
Vested
Options will expire 24 months after vesting. All Options,
whether vested or unvested, will expire upon the delivery of notice of the
termination of the Consulting
Agreement.
|
The Consulting
Agreement may be terminated by either Mr. Yano or the Company with 7 days
written notice.
Option
Grants
|
Outstanding
Equity Awards at Fiscal Year End
|
|||||
|
OPTION
AWARDS
|
|||||
|
Name
|
Number
of Common Shares Underlying Unexercised Options
(#)
Exercisable
|
Number
of Common Shares Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option Expiration Date
|
|
Franklin R.
Evanshen
|
850,000
|
nil
|
nil
|
$1.00
|
January 3,
2013
|
|
Darrin
McCormack
|
nil
|
nil
|
nil
|
nil
|
nil
|
|
Peter
Knaven
|
880,850
|
nil
|
90,000
|
$0.60
|
Jul 1,
2011
|
|
David
Stirling
|
100,000
|
nil
|
nil
|
$0.60
|
Nov 10,
2009
|
|
50,000
|
nil
|
nil
|
$0.70
|
Sep 1,
2009
|
|
|
James P.
Yano
|
120,000
|
nil
|
1,380,000
|
$0.80
|
Sep 30, 2013
(1)
|
(1) The options
will vest at a rate of 40,000 per month, with any remainder vesting on September
30, 2011. Vested Options will expire 24 months after
vesting. All options, whether vested or unvested, will expire upon
the delivery of notice of the termination of the Consulting Agreement with Mr.
Yano.
21
Pension, Retirement or
Similar Benefit Plans
There are no
arrangements or plans in which we provide pension, retirement or similar
benefits for directors or executive officers. We have no material bonus or
profit sharing plans pursuant to which cash or non-cash compensation is or may
be paid to our directors or executive officers, except that stock options may be
granted at the discretion of the Board of Directors or a committee
thereof.
Compensation
Committee
We
currently do not have a compensation committee of the Board of Directors. The
Board of Directors as a whole determines executive compensation.
Compensation of
Directors
|
DIRECTOR
COMPENSATION
|
|||||||
|
Name
(a)
|
Fees
Earned
or Paid
in Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(d)
|
Non-Equity
Incentive
Plan
Compensation
($)
(e)
|
Nonqualified
Deferred
Compensation
Earnings
($)
(f)
|
All
Other
Compensation
($)
(g)
|
Total
($)(h)
|
|
T. Allen
Rose
|
13,080
|
13,080
|
|||||
We
do not pay members of the Board of Directors any set fees for attendance at the
Board meetings or similar remuneration or reimburse them for any out-of-pocket
expenses incurred by them in connection with our business.
Change of
Control
As of March 31,
2009 we had no pension plans or compensatory plans or other arrangements which
provide compensation on the event of termination of employment or change in
control of us.
Compensation Committee
Interlocks and Insider Participation
We
do not currently have a compensation committee of the Board of Directors or a
committee performing similar functions. The Board of Directors as a whole
participates in the consideration of executive officer and director
compensation.
Compensation Committee
Report
Our Chief Financial
Officer and Chief Executive Officer have reviewed the Compensation Discussion
and Analysis and the requirements pertaining to this item. They have determined
that no disclosure is necessary as we have not adopted any compensation programs
and we have approved that a statement to that effect be disclosed in this Form
10-K.
22
The following table
sets forth certain information concerning the number of shares of our common
stock owned beneficially as of March 27, 2009 by: (i) each of our directors;
(ii) each of our named executive officers; and (iii) each person or group known
by us to beneficially own more than 5% of our outstanding shares of common
stock. Unless otherwise indicated, the shareholders listed below
possess sole voting and investment power with respect to the shares they
own.
As
of March 27, 2009, there were 34,703,496 common shares, 5,250,850 stock purchase
options, and 5,835,797 stock purchase warrants issued and
outstanding.
|
Name and Address of
Beneficial
Owner
|
Title of
Class
|
Amount and Nature
of Beneficial
Ownership
(1)
(#)
|
Percent of Class (2)
(%)
|
|
Frank R.
Evanshen (3)
3710
Southridge Place
West
Vancouver
British
Columbia V7V
3H8
|
Common
|
10,684,334
(4)
|
23
|
|
Darrin
McCormack (5)
1729 Pavenham
Rd.
Cowichan
Bay
British
Columbia V0R 1N1
|
Common
|
40,000
(6)
|
(15)
|
|
Peter Knaven
(7)
1924 Limerick
Place
North
Vancouver
British
Columbia V7J 3A1
|
Common
|
2,400,370
(8)
|
5
|
|
T. Allen Rose
(9)
724 Colborne
Street
New
Westminster
British
Columbia
|
Common
|
250,000
(10)
|
(15)
|
|
David
Stirling (11)
650 West
Georgia Street, Suite 2400, Vancouver, BC, V6B 4N7
|
Common
|
216,666
(12)
|
(15)
|
|
James P.
Yano
2508 Stanford
Way
Antioch, CA
94531 (13)
|
Common
|
240,000(14)
|
(15)
|
|
All
Officers and Directors as a Group
|
Common
|
13,831,370
|
30
|
|
Harold
Gunn
1116 Ironwork
Passage
Vancouver
British
Columbia V6M 3P1
|
Common
|
6,054,836
|
13
|
(1) The number and
percentage of shares beneficially owned is determined under rules of the SEC and
the information is not necessarily indicative of beneficial ownership for any
other purpose.
Under such rules,
beneficial ownership includes any shares as to which the individual has sole or
shared voting power or investment power and also any shares which the individual
has the right to acquire within 60 days through the exercise of any stock option
or other right. The persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them, subject to community property laws where applicable and the information
contained in the footnotes to this table.
(2) Based on
34,703,496 issued and outstanding shares of common stock as of March 27, 2009
plus shares issuable upon exercise of options and warrants.
(3) Frank R.
Evanshen is our director, President and Chief Executive Officer.
(4) Includes 8,226,883 common shares and held under
his own name, 57,451 common shares held by MCC Meridian Capital Corp., a
company controlled by Frank R. Evanshen as well as options and
warrants to purchase 2,400,000 common shares held under his own
name.
(5) Darrin McCormack
was appointed as our Chief Financial Officer on August 31, 2007.
(6) Includes 20,000
common shares and warrants to purchase 20,000 common shares held directly by
Darrin McCormack.
(7) Peter Knaven is
our Senior Vice President and was appointed as a director on August 13, 2007. He
was also appointed as Chief Technology Officer on November 7, 2007.
(8) Includes 699,787 common shares, warrants to
purchase 670,637 common shares and options to purchase 970,850 common shares
held under his own name, and 59,096 common shares
held by Dete Contracting Ltd., a company controlled by Peter
Knaven.
(9) T. Allen Rose
is our director, Secretary and Treasurer.
(10) Includes
options to purchase 250,000 shares of our common stock.
(11) David Stirling
has been our Executive Vice President since November 16, 2004.
(13) Includes
33,333 shares of our common stock and options to purchase 183,333 shares of our
common stock held directly by David Stirling.
(13) James P. Yano
has been our Chief Operations Officer since September 30, 2008.
(14) Includes
options to purchase 240,000 shares of our common stock.
(15) Less than
1%.
23
As
of December 31, 2007, we had prepaid office rent and fees of $22,757 to a
private company controlled by one of our directors, which was applied to general
and administrative expenses during the year ended December 31,
2008.
We
have entered into an agreement with a private company controlled by one of our
directors to rent office premises requiring monthly lease payments of
approximately $11,150 ($CAD 13,846) expiring February 28,
2010. Office rent incurred by us totaled approximately $143,109 ($CAD
153,177) and approximately $97,853 ($CAD 104,376) for the years ended December
31, 2008 and 2007, respectively. As of December 31, 2008, our future
minimum lease payments under our non-cancellable operating leases are as
follows:
|
Twelve months
ended December 31, 2009
|
$ | 155,231 | ||
|
Twelve months
ended December 31, 2010
|
$ | 25,872 | ||
|
Total
|
$ | 181,103 |
We
have also entered into an agreement with a private company controlled by one of
our directors to provide management services requiring monthly payments of
approximately $13,400 ($CAD 16,667), expiring June 1,
2009. Management fees incurred by us totaled $186,854 ($CAD 200,000)
and $187,496 ($CAD 200,000) for the years ended December 31, 2008 and 2007,
respectively. As at December 31, 2008 the amount owing to this
private company totaled $59,252.
During the year
ended December 31, 2008, we received proceeds of $122,300 ($CAD150,000) from a
director on an unsecured promissory note. The note bears interest at
8% per annum, matures on May 31, 2009 and includes $CAD 150,000 of principal and
all related accrued interest. Accrued interest payable on the note
totalled $8,953 ($CAD 10,981) at December 31, 2008. Interest expense
on the note during the year ended December 31, 2008 totalled $10,259 ($CAD
10,981).
During the year
ended December 31, 2008, we paid $63 to a director for operating expenses
incurred in the year ended December 31, 2007.
During the year
ended December 31, 2008, we paid $4,384 to a private company controlled by an
officer for accounting services incurred in the year ended December 31,
2007. During the year ended December 31, 2008, we incurred accounting
fees of $30,951 with this private company, of which $7,905 is outstanding as at
December 31, 2008.
During the year
ended December 31, 2007, we advanced $951 to a corporation having former
management in common with us. During the year ended December 31, 2008
we advanced a further $241, increasing the balance to $1,192, all of which was
repaid leaving no balance outstanding at December 31, 2008.
During the year
ended December 31, 2008, we paid $13,080 to a director for director’s
fees.
During the year
ended December 31, 2008, we paid $93,427 to a director for wages and
salaries.
Other than as described above, we have not entered into any
transactions with our officers, directors, persons nominated for these
positions, beneficial owners of 5% or more of our common stock, or family
members of these persons wherein the amount involved in the transaction or a
series of similar transactions exceeded the lesser of $120,000 or 1% of the
average of our total assets for the last three fiscal years.
24
Director
Independence
The OTC Bulletin
Board on which our common stock is listed on does not have any director
independence requirements.
We
also do not currently have a definition of independence as the substantial
majority of our directors are also employed in management positions as our
executive officers. Once we engage further directors and officers, we
will develop a definition of independence and scrutinize our Board of Directors
with regard to this definition.
Audit and Non-Audit
Fees
The following table
represents fees for the professional audit services and fees billed for other
services rendered by our former auditors, Manning Elliott LLP for the audit of
our annual financial statements for the year ended December 31, 2007 and by our
current auditors, M &K CPAs, LLP, for the year ended December 31, 2008 and
any other fees billed for other services rendered by Manning Elliott LLP and M
&K CPAs, LLP during these periods. All fees are denominated in US
dollars.
|
Year Ended
December 31,
2007
|
Year Ended
December 31,
2008
|
|||||||
|
Audit
fees
|
$ | 14,444 | $ | 59,484 | ||||
|
Audit-related
fees
|
- | - | ||||||
|
Tax
fees
|
- | - | ||||||
|
All other
fees
|
- | - | ||||||
|
Total
|
$ | 14,444 | $ | 59,484 | ||||
Since our
inception, our Board of Directors, performing the duties of the Audit Committee,
reviews all audit and non-audit related fees at least annually. The Board of
Directors acted as our Audit Committee until February 19, 2008 and pre-approved
all audit related services in the year ended December 31, 2008.
We established a
separately-designated standing audit committee on February 19,
2008. The committee consists of Darrin McCormack, our Chief Financial
Officer, Peter Knaven, our Director, Senior Vice President and Chief Technology
Officer, as well as T. Allen Rose, our Director, Secretary and
Treasurer.
Darrin McCormack is
the financial expert serving on our audit committee, but as he also serves as
our Chief Financial Officer, he is not an independent member of our
committee.
25
PART
IV
|
Financial
Schedules
|
|
None. The
financial statement schedules are omitted because they are inapplicable or
the requested information is shown in our financial statements or related
notes thereto.
|
|
Exhibit
|
Exhibit
|
|
Number
|
Description
|
|
10.1
|
Loan
Agreement with Peter Knaven, our Senior Vice President, Chief Technology
Officer and director dated February 1, 2008 (1)
|
|
10.2
|
Promissory
Note to Peter Knaven dated February 1, 2008 (1)
|
|
10.3
|
Promissory
Note Extension Agreement with Peter Knaven dated March 1, 2008
(1)
|
|
10.4
|
Commercial
Lease Renewal Agreement with MCC Meridian Capital Corp., a private company
controlled by Frank Evanshen, our President Chief Executive Officer and
director, dated March 1, 2008. (1)
|
|
10.5
|
Promissory
Note Extension Agreement with Peter Knaven dated April 30,
2008 (2)
|
|
10.6
|
Promissory
Note Extension Agreement with Peter Knaven dated June 30,
2008 (3)
|
|
10.7
|
Renewal
Agreement with MCC Meridian Capital Corp. dated June 1, 2008
(3)
|
|
10.8
|
Consulting
Agreement between the Company and James P. Yano dated September 30, 2008
(4)
|
|
10.9
|
Promissory
Note Extension Agreement with Peter Knaven dated August 31, 2008
(5)
|
|
10.10
|
Consulting
Agreement with William Pipkin dated September 12,
2008 (5)
|
|
10.11
|
Debt
Settlement Agreement with EH & P Investments AG executed on December
17, 2008. (6)
|
|
10.12
|
|
|
31.1
|
|
|
31.2
|
|
|
32.1
|
|
|
32.2
|
(1) Filed with the
SEC on April 4, 2008 as part of our Annual Report on Form 10-K.
(2) Filed with the
SEC on May 14, 2008 as part of our Quarterly Report on Form 10-Q.
(3) Filed with the
SEC on August 14, 2008 as part of our Quarterly Report on Form
10-Q.
(4) Filed with the
SEC on October 17, 2008 as part of our Current Report on Form 8-K.
(5) Filed with the
SEC on November 14, 2008 as part of our Quarterly Report on Form
10-Q.
(6) Filed with the SEC on December 22, 2008 as part of our Current Report on
Form 8-K.
26
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
Wordlogic
Corporation
|
|
|
By: /s/
Franklin
R. Evanshen
|
|
|
Date: March
31, 2009
|
Franklin R.
Evanshen
|
|
President,
Chief Executive Officer, Director
|
|
|
|
Pursuant to the
requirements of the Exchange Act this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
Franklin
R. Evanshen
|
President,
Chief Executive
|
March 31,
2009
|
|
Franklin R.
Evanshen
|
Officer,
Director
|
|
|
/s/
Darrin
McCormack
|
Chief
Financial Officer,
|
March 31,
2009
|
|
Darrin
McCormack
|
Principal
Accounting Officer
|
|
|
/s/
T.
Allen Rose
|
Secretary,
Treasurer
|
March 31,
2009
|
|
T. Allen
Rose
|
Director
|
|
|
/s/
Peter
Knaven
|
Director,
Senior Vice
|
March 31,
2009
|
|
Peter
Knaven
|
President,
Chief Technology Officer
|
|
|
|
27