ITEM 1. BUSINESS
Description of Business
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 to $5,000 per car. We will 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 Aspectrics, 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.In January 2010, we were granted an allowance by the United States Patent and Trademark Office (USPTO) for our third patent (Application No. 11/133 770), covering multiple database searches on any keyboard-based computing device. The patent Notice of Allowability covers claim numbers 81, 104-110, 112, 123, 128-134 and 136-147 and reinforces the claims established in our existing patent. This includes searches through such data sources as thesauruses, encyclopedias, databases and the use of web and mobile services on such devices as personal computers, servers, PDAs, smartphones and netbooks.
Employees; Identification of Certain Significant Employees
As of March 22, 2010, we employed 3 full-time employees and no part-time employees. None of our employees is subject to a collective bargaining agreement and we believe that relations with our employees are very good. We also frequently use third party consultants to assist in the completion of various projects. Third parties are instrumental to keep the development of projects on time and on budget.
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.
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.
WHERE YOU CAN GET ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy our reports or other filings made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.W., Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also access these reports and other filings electronically on the SEC’s web site, www.sec.gov.
In addition, certain of our SEC filings, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, can be viewed and printed from the investor information section of our website at www.wordlogic.com, as soon as reasonably practicable after filing with the SEC. Certain materials relating to our corporate governance, including our senior financial officers’ code of ethics, are also available in the investor relations section of our website.
The information on the website listed above, is not and should not be considered part of this Report on Form 10-K and is not incorporated by reference in this document. These websites are, and are only intended to be, inactive textual references.
ITEM 1A.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our offices are currently located at Suite 2400 on 650 West Georgia Street, Vancouver, BC V6B 4N7, and our telephone number is (604) 257-3600. As of the date of this filing, we have not sought to move or change our office site. We rent, on a monthly basis, approximately 3,561 square feet of industrial/office space for $12,182 per month. The space we lease is utilized for general office purposes. It is our belief that the space is adequate for our immediate needs. Additional space may be required as we expand our operations. We do not foresee any significant difficulties in obtaining any required additional space. We do not own any real estate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2009, there were no matters submitted to a vote of the stockholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is currently quoted on the OTC Bulletin Board. Our common stock has been quoted on the OTC Bulletin Board since April 14, 2003, originally traded under the symbol “TAWS.OB.” On May 27, 2003, we began trading under our current name, WordLogic Corporation, and symbol of “WLGC.OB.” Because we are quoted on the OTC Bulletin Board, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if they were listed on a national securities exchange.
The following table sets forth the high and low bid quotations for our common stock as reported on the OTC Bulletin Board for the periods indicated.
2009 Fiscal Year
High Bid
Low Bid
Fourth Quarter: 10/1/09 to 12/31/09
$
0.45
$
0.13
Third Quarter: 7/1/09 to 9/30/09
$
0.52
$
0.22
Second Quarter: 4/1/09 to 6/30/09
$
0.67
$
0.27
First Quarter: 1/1/09 to 3/31/09
$
0.94
$
0.25
Record Holders
As of December 31, 2009, an aggregate of 40,916,384 shares of our common stock were issued and outstanding and were owned by approximately 100 holders of record, based on information provided by our transfer agent.
Recent Sales of Unregistered Securities
Other than those previously reported, none.
Re-Purchase of Equity Securities
None.
Dividends
We have not paid any cash dividends on our common stock since inception and presently anticipate that all earnings, if any, will be retained for development of our business and that no dividends on our common stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of our Board of Directors and will depend upon, among other things, future earnings, operating and financial condition, capital requirements, general business conditions and other pertinent facts. Therefore, there can be no assurance that any dividends on our common stock will be paid in the future.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company adopted two stock option plans. The first plan is dated February 15, 2001, amended on October 15, 2009, under which the Company is authorized to grant options to acquire up to a total of 6,000,000 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: 933,000 and 985,000, respectively under each plan, for a total remaining of 1,918,000 as at December 31, 2009.
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, 2009, shares remaining to be issued under each plan were nil and 1,482,000, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or our behalf. We disclaim any obligation to update forward-looking statements.
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, 2009, we had total cash of $21,793 and a working capital deficit of $1,774,842. At December 31, 2009 our deficit accumulated during the development stage was $13,881,778. Our net loss of $13,881,778 from May 27, 2003 (inception) to December 31, 2009 was mostly funded by our equity financing and related party loans. During the fiscal year ended December 31, 2009, we raised $374,056 through the sale of our equity securities and the exercise of options compared to $1,035,010 during the same period in 2008. We were provided a net cash amount of $824,309 from financing activities for the year ended December 31, 2009 compared to $898,093 during the same period in 2008. During the fiscal year ended December 31, 2009 our cash position increased by $17,516, compared to a decrease of $18,974 during the same period in 2008.
We used net cash of $691,189 in operating activities for the fiscal year ended December 31, 2009 compared to net cash of $1,008,376 in operating activities for the same period in 2008. From our inception on May 27, 2003 to December 31, 2009 we have used net cash of $4,422,266 in operating activities. We did not use any cash in investing activities during the years ended December 31, 2009 and 2008. During the fiscal year ended December 31, 2009 our monthly cash requirement to fund our operations was approximately $58,000, compared to approximately $84,000 for the same period in 2008.
The effect of exchange rates on cash was a decrease in cash of $115,604 for the fiscal year ended December 31, 2009 compared to an increase in cash of $91,309 for the fiscal year ended December 31, 2008. This was due to the decrease in value of the US dollar versus the Canadian dollar in 2009.
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 2010. Our planned expenditures for the next twelve months include:
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, 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. No amounts were repaid during the year ended December 31, 2009, leaving a balance of $17,511 owing as at December 31, 2009. The note bears interest at 8% per annum and matures on June 15, 2010. Accrued interest payable on the note totalled $54,422 at December 31, 2009.
Interest expense on the notes during the years ended December 31, 2009 and 2008 totalled $1,401 and $33,792, respectively.
During the year ended December 31, 2008, we also received proceeds of $142,721 ($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 $142,721 ($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.
Results of Operations
Revenues
Our total revenues decreased $208 from $3,386 for the fiscal year ended December 31, 2008 to $3,178 for the fiscal year ended December 31, 2009. 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, 2009 we generated total revenues of $53,621.
Total revenues during the fiscal year ended December 31, 2009 consisted of $3,178 from product sales and $nil from royalty revenue. Total revenues during the fiscal year ended December 31, 2008 consisted of $2,020 from product sales and $1,366 from royalty revenue.
Expenses
Our total operating expenses increased $509,707 to $4,400,178 for the fiscal year ended December 31, 2009 from $3,890,471 for the same period in 2008. 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, 2009. From May 27, 2003 (inception) to December 31, 2009 our total operating expenses were $14,113,012, including $654,019 in rent, $11,185,805 in selling, general and administrative expenses, and $2,273,188 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 $226,590 to $3,661,787 for the fiscal year ended December 31, 2009 from $3,435,197 for the same period in 2008. The significant increase in selling, general and administrative expenses during the fiscal year ended December 31, 2009 was mainly due to an increase of our non-cash, stock-based compensation granted to newly hired consultants.
Research and development expenses were $592,207 for the year ended December 31, 2009 compared to $312,165 for the same period in 2008. Our rent expenses increased $3,075 to $146,184 for the year ended December 31, 2009 from $143,109 for the same period in 2008. 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 $4,418,579 for the year ended December 31, 2009, compared to net loss of $4,923,057 for the same period in 2008. The decrease of $504,478 in net loss was largely the result of a non-recurring loss on settled liabilities in 2008, net of increased non-cash, stock-based compensation to newly hired consultants during the fiscal year ended December 31, 2009. We incurred a loss of $4,397,000 from operations for the year ended December 31, 2009, compared to a loss from operations of $3,887,085 for the same period in 2008. Since May 27, 2003 (inception) to December 31, 2009, we have incurred losses from operations of $14,059,391 and a net loss of $13,881,778.
Our net loss per share was $0.12 for the fiscal year ended December 31, 2009 compared to $0.17 for the same period in 2008.
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, 2009, 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.
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 standards issued by the FASB. 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.
Stock-based Compensation
On January 1, 2006, the Company adopted standards issued by the FASB, 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. 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 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.
Cash Requirements
Our cash on hand as of December 31, 2009 is $21,629. We do not have sufficient cash on hand to pay the costs of our operations as projected to twelve (12) months or less or to fund our operations for that same period of time. We will require additional financing in order to proceed with some or all of our goals as projected over the next twelve (12) months. We presently do not have any arrangements for additional financing, and no potential lines of credit or sources of financing are currently available for the purpose of proceeding with any of our goals projected over the next twelve (12) months and beyond.
Any additional growth of the Company will require additional cash infusions. We may face expenses or other circumstances such that we will have additional financing requirements. In such event, the amount of additional capital we may need to raise will depend on a number of factors. These factors primarily include the extent to which we can achieve revenue growth, the profitability of such revenues, operating expenses, research and development expenses, and capital expenditures. Given the number of programs that we have ongoing and not complete, it is not possible to predict the extent or cost of these additional financing requirements.
Notwithstanding the numerous factors that our cash requirements depend on, and the uncertainties associated with each of the major revenue opportunities that we have, we believe that our plan of operation can build long-term value if we are able to demonstrate clear progress toward our objectives.
Progress in the development of our business plan will likely lend credibility to our plan to achieve profitability.
The Company does not anticipate any contingency upon which it would voluntarily cease filing reports with the SEC. It is in the compelling interest of this Registrant to report its affairs quarterly, annually and currently, as the case may be, generally to provide accessible public information to interested parties, and also specifically to maintain its eligibility for the OTCBB.
The failure to secure any necessary outside funding could have an adverse affect on our development and results therefrom and a corresponding negative impact on shareholder liquidity.
Future Financings
We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund planned acquisitions and exploration activities.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Recent Accounting Pronouncements
On January 1, 2009, the Company adopted a new accounting standard issued by the FASB related to accounting for business combinations using the acquisition method of accounting (previously referred to as the purchase method). Among the significant changes, this standard requires a redefining of the measurement date of a business combination, expensing direct transaction costs as incurred, capitalizing in-process research and development costs as an intangible asset and recording a liability for contingent consideration at the measurement date with subsequent re-measurement recorded in the results of operations. This standard also requires costs for business restructuring and exit activities related to the acquired company to be included in the post-combination financial results of operations and also provides new guidance for the recognition and measurement of contingent assets and liabilities in a business combination. In addition, this standard requires several new disclosures, including the reasons for the business combination, the factors that contribute to the recognition of goodwill, the amount of acquisition related third-party expenses incurred, the nature and amount of contingent consideration, and a discussion of pre-existing relationships between the parties. The adoption of this standard is not expected to have a material effect on the Company's future reported financial position or results of operations.
On January 1, 2009, the Company adopted a new accounting standard issued by the FASB that establishes accounting and reporting standards for noncontrolling interests in a subsidiary in consolidated financial statements, including deconsolidation of a subsidiary. This standard requires entities to record new presentation on the face of the consolidated financial statements to separately classify noncontrolling interest within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and noncontrolling interests within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and noncontrolling interests in the consolidated statements of operations, comprehensive income and changes in equity for all periods presented. 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.
On January 1, 2009, the Company adopted a new accounting standard issued by the FASB related to the disclosure of derivative instruments and hedging activities. This standard expanded the disclosure requirements about an entity's derivative financial instruments and hedging activities, including qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
On January 1, 2009, the Company adopted a new accounting standard issued by the FASB related to the disclosure requirements of the fair value of financial instruments. This standard expands the disclosure requirements of fair value (including the methods and significant assumptions used to estimate fair value) of certain financial instruments to interim period financial statements that were previously only required to be disclosed in financial statements for annual periods. In accordance with this standard, the disclosure requirements have been applied on a prospective basis and did not have a material impact on the Company's consolidated financial statements.
On June 30, 2009, the Company adopted changes issued by the FASB to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued, otherwise known as "subsequent events". Specifically, these changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Deficit
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Wordlogic Corporation
(A Development Stage Company)
We have audited the accompanying balance sheets of Wordlogic Corporation (A Development Stage Company) as of December 31, 2009 and 2008 and the related statements of operations, shareholders' equity (deficit) and cash flows for each of the twelve month periods then ended. 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 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wordlogic Corporation as of December 31, 2009 and 2008, and the results of its operations and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statement, 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 are also 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
www.mkacpas.com
Houston, Texas
April 14, 2010
WORDLOGIC CORPORATION
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in US Dollars)
December 31,
December 31,
Assets
Current Assets
Cash
$
$
Restricted cash (Note 3)
21,422
4,157
Accounts receivable
Goods and services tax receivable
5,851
6,206
Employee advances
Total Current Assets
27,977
10,784
Property and equipment, net of accumulated depreciation (Note 4)
7,938
9,778
Total Assets
$
35,915
$
20,562
Liabilities and Stockholders’ Deficit
Current Liabilities
Bank overdraft
$
$
4,468
Accounts payable and accrued liabilities
792,585
339,345
Line of credit (Note 5)
-
40,196
Bank loan payable (Note 5)
43,601
-
Indebtedness to related parties (Note 6)
93,584
67,157
Accrued interest
112,653
126,564
Note payable to related party
142,721
122,300
Current portion of long-term debt (Note 7)
17,511
17,511
Total Current Liabilities
1,202,819
717,541
Stockholders’ Deficit
Common stock, $.001 par value; 100,000,000 shares authorized, 40,916,384 and 34,222,996 shares issued and outstanding, respectively (Note 8)
40,916
34,223
Additional paid-in capital
15,428,747
11,371,182
Accumulated deficit
(2,264,854)
(2,264,854)
Deficit accumulated during development stage
(13,881,778)
(9,463,199)
Accumulated other comprehensive loss
(489,935)
(374,331)
Total Stockholders’ Deficit
(1,166,904)
(696,979)
Total Liabilities and Stockholders’ Deficit
$
35,915
$
20,562
The accompanying notes are an integral part of these consolidated financial statements.
WORDLOGIC CORPORATION
(A Development Stage Company)
Consolidated Statements of Operations
(Expressed in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
WORDLOGIC CORPORATION
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
WORDLOGIC CORPORATION
(A Development Stage Company)
Consolidated Statement of Stockholders’ Deficit
(Expressed in US Dollars)
WORDLOGIC CORPORATION
(A Development Stage Company)
Consolidated Statement of Stockholders’ Deficit
(Expressed in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
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, 2009 the Company has a working capital deficiency of $1,174,842 and has incurred losses of $13,881,778 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.
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, 2009 or 2008.
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.
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%
Depreciation 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, 2009 and 2008.
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.
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 issued by the FASB which 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 the provisions issued by the FASB as follows. 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 issued by the FASB which 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. The Company computes 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 standards issued by the FASB; accordingly 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.
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.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 standards issued by the FASB. 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 standards issued by the FASB, 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.
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 behaviors.
o)
Loss per Common Share
The Company reports net loss per share in accordance with provisions of the FASB. The provisions require 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, 2009, there were 12,720,072 vested common stock options and warrants outstanding, which were excluded from the calculation of net loss per share-diluted because they were antidilutive.
p)
Comprehensive Income (Loss)
The Company reports its comprehensive income (loss) in accordance with provisions of the FASB. For the years ended December 31, 2009 and 2008, the Company’s only component of comprehensive loss was foreign currency translation adjustments.
q)
Advertising Costs
Advertising costs are charged to operations as incurred.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
r)
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.
In December 2009, the FASB issued Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 167. The Company does not expect the provisions of ASU 2009-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. The Company does not expect the provisions of ASU 2009-16 to have a material effect on the financial position, results of operations or cash flows of the Company.
In October 2009, the FASB issued Accounting Standards Update 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This Accounting Standards Update amends the FASB Accounting Standard Codification for EITF 09-1. The Company does not expect the provisions of ASU 2009-15 to have a material effect on the financial position, results of operations or cash flows of the Company.
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, 2009 and 2008 we had restricted cash balances of $21,422 and $4,157, respectively. This cash was held in trust by our attorneys for the payment of future legal invoices.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
4.
PROPERTY AND EQUIPMENT
Cost
$
Accumulated
Depreciation
as of
December 31,
$
Net Carrying
Amount
as of
December 31,
$
Net Carrying
Amount
as of
December 31,
$
Office equipment
3,672
3,274
Computer equipment
134,510
128,555
5,955
7,654
Computer software
6,746
6,746
-
-
Furniture and fixtures
14,511
12,926
1,585
1,698
159,439
151,501
7,938
9,778
Depreciation expense totalled $3,212 and $6,424 for the years ended December 31, 2009 and 2008, respectively.
5.
BANK LOAN PAYABLE
Represents a loan from the Royal Bank of Canada in the amount of $43,601 (CDN $45,825) as at December 31, 2009 (nil - December 31, 2008), repayable upon demand, requiring monthly blended payments of CDN$835 (US$742) including principal and interest at 4.25% per annum. Proceeds of the loan were used to fully repay and discharge a line of credit in the amount of CDN$50,000 (US$47,574). The loan is secured by a personal guarantee of an officer of the Company. The balance due at December 31, 2009 is $43,601.
6.
RELATED PARTY TRANSACTIONS AND BALANCES
The Company incurred the following related party transactions:
a)
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 $146,184 ($CAD 166,156) and $143,109 ($CAD 153,177) for the years ended December 31, 2009 and 2008, respectively. On March 1, 2010 the Company renewed the agreement to rent office premises for another 12 months until February 28, 2011 at the same monthly rate of $CAD 13,846.
As of December 31, 2009, the Company’s future minimum lease payments under non-cancellable operating leases are as follows:
Twelve months ended December 31, 2010
$
158,089
Twelve months ended December 31, 2011
$
26,348
Total
$
184,437
b)
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, 2010. Management fees incurred by the Company totalled $175,960 ($CAD 200,000) and $186,854 ($CAD 200,000) for the years ended December 31, 2009 and 2008, respectively. As at December 31, 2009 the amount owing to this private company totalled $78,357. The increase in the payable during the year ended December 31, 2009 of $19,105 is shown as a financing activity on the Statement of Cash Flows.
c)
During the year ended December 31, 2008, the Company received proceeds of $142,721 ($CAD150,000) from a director on an unsecured promissory note. The note bears interest at 8% per annum, matures April 30, 2010 and includes $142,721 ($CAD 150,000) of principal and all related accrued interest. Accrued interest payable on the note totalled $21,866 ($CAD 22,981) and $8,953 ($CAD 10,981) at December 31, 2009 and 2008, respectively. Interest expense on the note during the years ended December 31, 2009 and 2008 totalled $10,584 ($CAD 12,030) and $10,259 ($CAD 10,981), respectively.
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, 2009, the Company paid $2,688 to a private company controlled by an officer for accounting services incurred in the year ended December 31, 2008. During the year ended December 31, 2009, the Company incurred accounting fees of $25,387 with this private company. As at December 31, 2009, the amount owing to this private company totalled $15,227.
e)
During the years ended December 31, 2009 and 2008, the Company incurred $87,980 and $93,427 with a director for wages and salaries, respectively.
f)
During the years ended December 31, 2009 and 2008, the Company paid $nil and $13,080 to a director for director’s fees, respectively.
7.
NOTES PAYABLE
Promissory Note
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. No amounts were repaid during the year ended December 31, 2009, leaving a balance owing of $17,511. The note bears interest at 8% per annum and matures on June 15, 2010. Accrued interest payable on the note totalled $54,422 at December 31, 2009.
Interest expense on the notes during the years ended December 31, 2009 and 2008 totalled $1,401 and $33,792, respectively.
Maturities
Aggregate maturities required on long-term debt at December 31, 2009, are as follows:
Year
Amount
$ 17,511
8.
COMMON STOCK
For the year ended December 31, 2009:
a)
In January 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 valued at $60,000 based on the price on date of grant.
b)
Also in January 2009, the Company issued 30,500 shares of its common stock registered on a Form S-8 at $0.53 per share for services rendered by a consultant valued at $16,165 based on the price on the date of grant.
c)
Also in January 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 valued at $170,000 based on the price on the date of grant.
d)
In April 2009, the Company issued 100,000 shares of its common stock at $0.40 per share for services rendered by consultants valued at $40,000 based on the price on the date of grant.
e)
Also in April 2009, the Company issued 100,000 shares of its common stock at $0.49 per share for services rendered by consultants valued at $49,000 based on the price on the date of grant.
f)
Also in April 2009, the Company issued 100,000 shares of its common stock at $0.31 per share for services rendered by consultants valued at $31,000 based on the price on the date of grant.
g)
Also in April 2009, the Company issued 300,000 shares of its common stock at $0.45 per share for services rendered by consultants valued at $135,000 based on the price on the date of grant.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
8.
COMMON STOCK (Continued)
h)
Also in April 2009, the Company issued 15,000 shares of its common stock at $0.41 per share for services rendered by consultants valued at $6,150 based on the price on the date of grant.
i)
In May 2009, the Company conducted a private placement offering whereby it issued 175,000 units at a price of $0.20 per unit for total proceeds of $35,000. 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 $0.50 per share.
j)
Also in May 2009, the Company issued 100,000 shares of its common stock at $0.62 per share for services rendered by consultants valued at $62,000 based on the price on the date of grant.
k)
Also in May 2009, the Company issued 40,000 shares of its common stock at $0.41 per share for services rendered by consultants valued at $16,400 based on the price on the date of grant.
l)
Also in May 2009, the Company issued 50,000 shares of its common stock at a price of $0.30 per share for total proceeds of $15,000.
m)
In June 2009, the Company issued 30,000 shares of its common stock at $0.43 per share for services rendered by consultants valued at $12,900 based on the price on the date of grant.
n)
Also in June 2009, the Company issued 100,000 shares of its common stock at $0.40 per share for services rendered by consultants valued at $40,000 based on the price on the date of grant.
o)
Also in June 2009, the Company issued 20,000 shares of its common stock at a price of $0.35 per share for total proceeds of $7,000.
p)
Also in June 2009, the Company issued 50,000 shares of its common stock at $0.36 per share for services rendered by consultants valued at $18,000 based on the price on the date of grant.
q)
Also in June 2009, the Company issued 33,333 shares of its common stock at $0.35 per share related to the exercise of stock options to a director for total proceeds of $11,667.
r)
In July 2009, the Company issued 100,000 shares of its common stock at $0.47 per share for services rendered by consultants valued at $47,000 based on the price on the date of grant.
s)
Also in July 2009, the Company conducted a private placement offering whereby it issued 2,500,000 shares of the Company's common stock at a price of $0.16 per share for total consideration of $400,000.
t)
Also in July 2009, the Company issued 50,000 shares of its common stock at $0.44 per share for services rendered by consultants valued at $22,000 based on the price on the date of grant.
u)
In August 2009, the Company conducted a private placement offering whereby it issued 125,000 shares of the Company's common stock at a price of $0.16 per share for total consideration of $20,000.
v)
Also in August 2009, the Company issued 100,000 shares of its common stock at $0.30 per share for services rendered by consultants valued at $30,000 based on the price on the date of grant.
w)
Also in August 2009, the Company conducted a private placement offering whereby it issued 400,000 shares of the Company's common stock at a price of $0.16 per share for total consideration of $64,000.
x)
Also in August 2009, the Company issued 100,000 shares of its common stock at $0.31 per share for services
y)
rendered by consultants valued at $31,000 based on the price on the date of grant. 50,000 of these shares were issued to a close relative of an officer of the Company.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
8.
COMMON STOCK (Continued)
z)
In September 2009, the Company conducted a private placement offering whereby it issued 50,000 shares of the Company's common stock at a price of $0.30 per share for total consideration of $15,000.
aa)
Also in September 2009, the Company issued 100,000 shares of its common stock at $0.35 per share for services rendered by consultants valued at $35,000 based on the price on the date of grant.
bb)
Also in September 2009, the Company issued 90,000 shares of its common stock at $0.33 per share for services rendered by consultants valued at $29,700 based on the price on the date of grant. 30,000 of these shares were issued to a close relative of an officer of the Company.
cc)
In October 2009, the Company conducted a private placement offering whereby it issued 377,497 units at a price of $0.30 per unit for total proceeds of $113,249. 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 $0.75 per share.
dd)
Also in October 2009, the Company issued 100,000 shares of its common stock at $0.40 per share for services rendered by consultants valued at $40,000 based on the price on the date of grant.
ee)
Also in October 2009, the Company issued 50,000 shares of its common stock at $0.37 per share for services rendered by consultants valued at $18,500 based on the price on the date of grant.
ff)
Also in October 2009, the Company issued 40,000 shares of its common stock at $0.31 per share for services rendered by consultants valued at $12,400 based on the price on the date of grant. 30,000 of these shares were issued to a close relative of an officer of the Company.
gg)
In November 2009, the Company issued 20,000 shares of its common stock at $0.35 per share related to the exercise of stock options to a director for total proceeds of $7,000.
hh)
Also in November 2009, the Company issued 100,000 shares of its common stock at $0.28 per share for services rendered by consultants valued at $28,000 based on the price on the date of grant.
ii)
Also in November 2009, the Company issued 127,500 shares of its common stock at $0.26 per share for services rendered by consultants valued at $33,150 based on the price on the date of grant. 30,000 of these shares were issued to a close relative of an officer of the Company.
jj)
Also in November 2009, the Company conducted a private placement offering whereby it issued 78,558 units at a price of $0.30 per unit for total proceeds of $23,567. 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 $0.75 per share.
kk)
In December 2009, the Company issued 10,000 shares of its common stock at $0.21 per share for services rendered by consultants valued at $2,100 based on the price on the date of grant.
ll)
Also in December 2009, the Company issued 76,000 shares of its common stock at $0.35 per share related to the exercise of stock options to a director for total proceeds of $22,800.
mm)
Also in December 2009, the Company issued 100,000 shares of its common stock at $0.20 per share for services rendered by consultants valued at $20,000 based on the price on the date of grant.
nn)
Also in December 2009, the Company conducted a private placement offering whereby it issued 265,000 shares of its common stock at a price of $0.15 per share for total proceeds of $39,750.
oo)
Also in December 2009, the Company issued 40,000 shares of its common stock at $0.22 per share for services rendered by consultants valued at $8,800 based on the price on the date of grant. 30,000 of these shares were issued to a close relative of an officer of the Company.
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, 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.
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.
i)
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.
j)
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.
k)
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.
l)
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.
m)
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.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
8.
COMMON STOCK (continued)
n)
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.
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, 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
-
Balance, December 31, 2008
5,835,797
1.00
1.25
Issued
631,055
0.68
1.79
Exercised
-
-
-
Expired/Cancelled
(4,698,297)
1.07
-
Outstanding, December 31, 2009
1,768,555
0.72
1.08
9.
STOCK-BASED COMPENSATION
The Company adopted two stock option plans. The first plan is dated February 15, 2001, amended on October 15, 2009, under which the Company is authorized to grant options to acquire up to a total of 6,000,000 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: 933,000 and 985,000 respectively under each plan, for a total remaining of 1,918,000 as at December 31, 2009.
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, 2009, shares remaining to be issued under each plan were nil and 1,482,000, respectively.
On March 6, 2009, the Company granted options to purchase a total 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. The options expire March 6, 2014. 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 $0.24. During the year ended December 31, 2009, the Company recorded stock-based compensation of $23,510 as a general and administrative expense in connection with these options.
Also on March 6, 2009, the Company granted options to purchase a total 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. The options expire March 6, 2014. 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 $0.24. During the year ended December 31, 2009, the Company recorded stock-based compensation of $47,020 as a general and administrative expense in connection with these options.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
9.
STOCK-BASED COMPENSATION (continued)
On April 7, 2009, the Company granted options to purchase a total of 1,000,000 shares of the Company’s common stock to a director and officer. The options carry an exercise price of $0.35 per share and vested immediately. The options expire April 7, 2014. 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 $0.26. During the year ended December 31, 2009, the Company recorded stock-based compensation of $259,735 as a general and administrative expense in connection with these options.
Also on April 7, 2009, the Company granted options to purchase a total of 240,000 shares of the Company’s common stock to a consultant. The options carry an exercise price of $0.35 per share and vest monthly. The options expire April 7, 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 $0.23. During the year ended December 31, 2009, the Company recorded stock-based compensation of $27,308 as a general and administrative expense in connection with these options.
On April 27, 2009, the Company granted options to purchase a total of 1,500,000 shares of the Company’s common stock to a director and officer. The options carry an exercise price of $0.52 per share and vested immediately. The options expire April 27, 2014. 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 $0.46. During the year ended December 31, 2009, the Company recorded stock-based compensation of $687,383 as a general and administrative expense in connection with these options.
Also on April 27, 2009, the Company granted options to purchase a total of 200,000 shares of the Company’s common stock to an officer. The options carry an exercise price of $0.52 per share and vested immediately. The options expire April 27, 2014. 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 $0.46. During the year ended December 31, 2009, the Company recorded stock-based compensation of $91,651 as a general and administrative expense in connection with these options.
Also on April 27, 2009, the Company granted options to purchase a total of 300,000 shares of the Company’s common stock to certain employees. The options carry an exercise price of $0.52 per share and vested immediately. The options expire April 27, 2014. 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 $0.46. During the year ended December 31, 2009, the Company recorded stock-based compensation of $137,476 as a general and administrative expense in connection with these options.
On August 17, 2009, the Company granted options to purchase a total of 200,000 shares of the Company’s common stock to a consultant. The options carry an exercise price of $0.30 per share and vested immediately. The options expire August 17, 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 $0.22. During the year ended December 31, 2009, the Company recorded stock-based compensation of $44,628 as a general and administrative expense in connection with these options.
On October 29, 2009, the Company granted options to purchase a total of 2,000,000 shares of the Company’s common stock to a director and officer. The options carry an exercise price of $0.30 per share and vested immediately. The options expire October 29, 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 $0.24. During the year ended December 31, 2009, the Company recorded stock-based compensation of $472,041 as a general and administrative expense in connection with these options.
On October 29, 2009, 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 $0.30 per share and vested immediately. The options expire October 29, 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 $0.24. During the year ended December 31, 2009, the Company recorded stock-based compensation of $236,021 as a general and administrative expense in connection with these options
Also on October 29, 2009, the Company granted options to purchase a total of 100,000 shares of the Company’s common stock to an officer. The options carry an exercise price of $0.30 per share and vested immediately. The options expire October 29, 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 $0.24. During the year ended December 31, 2009, the Company recorded stock-based compensation of $23,602 as a general and administrative expense in connection with these options.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
9.
STOCK-BASED COMPENSATION (continued)
Also on October 29, 2009, the Company granted options to purchase a total of 200,000 shares of the Company’s common stock to certain employees. The options carry an exercise price of $0.30 per share and vested immediately. The options expire October 29, 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 $0.24. During the year ended December 31, 2009, the Company recorded stock-based compensation of $47,204 as a general and administrative expense in connection with these options.
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 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.
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, 2009 and 2008 were $0.42 and $0.69 per share, respectively. The weighted average assumptions used are as follows:
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, 2009 and 2008 were $nil and $123,000 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, 2008
5,250,850
$ 0.80
Granted
7,040,000
$ 0.32
Exercised
(129,333)
$ 0.32
Expired/Cancelled
(250,000)
$ 0.66
Outstanding, December 31, 2009
11,911,517
$ 0.56
3.24
$nil
Exercisable, December 31, 2009
10,951,517
$ 0.51
3.33
$nil
A summary of the status of the Company’s nonvested shares as of December 31, 2009, and changes during the years ended December 31, 2009, is presented below:
Nonvested shares
Number of Shares
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2009
1,486,662
$0.23
Granted
7,040,000
$0.30
Vested
(7,566,662)
$0.30
Nonvested at December 31, 2009
960,0000
$ 0.20
As at December 31, 2009, there was $192,898 total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.59 years.
10.
INCOME TAXES
Deferred income taxes reflect the tax consequences on future years of differences between the tax bases:
Net operating loss carry-forward
$ 4,690,569
$3,562,192
Valuation allowance
(4,690,569)
(3,2562,192)
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.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
11.
SUBSEQUENT EVENTS
On January 1, 2010, the Company issued 10,000 shares of its common stock at $0.25 per share for services rendered by consultants valued at $2,500 based on the price on the date of grant.
On January 5, 2010, the Company conducted a private placement offering whereby it issued 125,000 shares of its common stock at a price of $0.20 per share for total proceeds of $25,000.
On January 9, 2010, the Company issued 100,000 shares of its common stock at $0.24 per share for services rendered by consultants valued at $24,000 based on the price on the date of grant.
On January 11, 2010, the Company settled outstanding promissory notes and accrued interest totalling $71,933 through the issuance of 479,554 shares of the Company’s common stock at a price recorded at the market price on the date of grant.
On January 19, 2010, the Company issued 40,000 shares of its common stock at $0.20 per share for services rendered by consultants valued at $8,000 based on the price on the date of grant. 30,000 of these shares were issued to a close relative of an officer of the Company.
On January 25, 2010, the Company issued 19,412 shares of its common stock at $0.17 per share for services rendered by consultants valued at $3,300 based on the price on the date of grant.
Also on January 25, 2010, the Company issued 13,750 shares of its common stock at $0.24 per share for services rendered by consultants valued at $3,300 based on the price on the date of grant.
On February 1, 2010, the Company issued 10,000 shares of its common stock at $0.20 per share for services rendered by consultants valued at $2,000 based on the price on the date of grant.
On February 9, 2010, the Company issued 100,000 shares of its common stock at $0.20 per share for services rendered by consultants valued at $20,000 based on the price on the date of grant.
On February 17, 2010 the Company issued 62,500 shares of its common stock registered on Form S-8 at $0.18 per share for services rendered by consultants valued at $11,250 based on the price on the date of grant.
On February 19, 2010, the Company issued 40,000 shares of its common stock at $0.19 per share for services rendered by consultants valued at $7,600 based on the price on the date of grant. 30,000 of these shares were issued to a close relative of an officer of the Company.
On March 1, 2010, the Company issued 10,000 shares of its common stock at $0.19 per share for services rendered by consultants valued at $1,900 based on the price on the date of grant.
On March 22, 2010, the Company issued 140,200 shares of its common stock at $0.14 per share for total proceeds of $19,628.
On March 9, 2010, the Company issued 200,000 shares of its common stock at $0.40 per share related to the exercise of stock options to an officer, for a total proceeds of $80,000.
On March 26, 2010, the Company conducted a private placement offering whereby it issued 1,000,000 units at a price of $0.10 per unit for total consideration of $100,000. 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 $0.15 per share.
On March 31, 2010, the Company conducted a private placement offering whereby it issued 600,000 units at a price of $0.10 per unit for total consideration of $60,000. 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 $0.15 per share.
WORDLOGIC CORPORATION
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
11.
SUBSEQUENT EVENTS (Continued)
On April 1, 2010, the Company issued 10,000 shares of its common stock at $0.13 per share for services rendered by consultants valued at $1,300 based on the price on the date of grant.
Also on April 1, 2010 the Company entered into an agreement with a consultant, whereby the Company initially issued 1,400,000 shares of its common stock registered on Form S-8 at $0.08 per share for services valued at $112,000 and 500,000 shares of its common stock at $0.13 per share for services valued at $65,000.
Subsequent events have been reviewed through the date of this report, April 13, 2010.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T).
ITEM 9A(T). 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, 2009. 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, 2009 using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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, 2009, 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 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 continues to evaluate 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, 2009, 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, 2009 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 year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS.
Identify of directors and executive officers
Our current directors and executive officers are as follows:
Name and Age
Position(s) Held
Tenure
Other Public Company
Directorships
Frank R. Evanshen, 61
Director, President, and Chief Executive Officer
From May 27, 2003 to present
None
Darrin McCormack, 44
Chief Financial Officer
From August 13, 2007 to present
None
T. Allen Rose, 53
Director, Secretary and Treasurer
May 27, 2003 to present
None
James P. Yano, 43
Chief Operations Officer
September 30, 2008 to present
None
Term of Office
Each director serves until our next annual meeting of the stockholders or unless they resign earlier. The Board of Directors elects officers and their terms of office are at the discretion of the Board of Directors. Each of our directors serves until his or her successor is elected and qualified. Each of our officers is elected by the board of directors to a term of one (1) year and serves until his or her successor is duly elected and qualified, or until he or she is removed from office. At the present time, members of the board of directors are not compensated for their services to the board.
Background and Business Experience
The business experience during the past five years of each of the persons presently listed above as an Officer or Director of the Company is as follows:
Frank R. Evanshen has been 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 Inc. 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.
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 Aspectrics, Inc., a process instrument manufacturer. At Aspectrics, Inc., Mr. Yano identified new products and market opportunities and commercialized the company’s concepts through the development of relationships with manufacturers and distribution agents.
Peter Knaven has served as our Senior Vice President since July 1, 2004, and as our Chief Technology Officer since November 7, 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.
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.
Involvement in Certain Legal Proceedings
During the last five years no director, executive officer, promoter or control person of the Company has had or has been subject to:
(1)
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;
(2)
any conviction in a criminal proceeding or being subject to a pending criminal proceeding;
(3)
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
(4)
being found by a court of competent jurisdiction, the Commission or the Commodity Futures Trading Commission to have violated any federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and persons who own more than ten percent of the Company's Common Stock, to file initial reports of beneficial ownership on Form 3, changes in beneficial ownership on Form 4 and an annual statement of beneficial ownership on Form 5, with the SEC. Such executive officers, directors and greater than ten percent shareholders are required by SEC rules to furnish the Company with copies of all such forms that they have filed.
Based solely on its review of the copies of such forms filed with the SEC electronically, received by the Company and representations from certain reporting persons, the Company believes that for the fiscal year ended December 31, 2009, all the officers, directors and more than 10% beneficial owners complied with the above described filing requirements.
Code of Ethics
Our board of directors has not adopted a code of ethics due to the fact that we presently only have three directors and we are in the development stage of our operations. We anticipate that we will adopt a code of ethics when we increase either the number of our directors and officers or the number of our employees.
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, a Director, Senior Vice President and Chief Technology Officer, as well as T. Allen Rose, a 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.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The table set forth below summarizes the annual and long-term compensation for services in all capacities to us payable to our executive officers during the years ending December 31, 2009 and 2008.
Summary Compensation Table
(1)
Represents management consulting fees paid to 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 $14,663 ($16,667 CAD) 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 $97 ($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 $7,332 ($8,333 CAD) 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. Subsequent to December 31, 2009, Mr. Knaven resigned as a director.
(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.
d.
The Consulting Agreement may be terminated by either Mr. Yano or the Company with 7 days written notice.
Mr. Yano’s Consulting Agreement was amended on October 1, 2009. According to the amendment agreement monthly salary of $18,000 was cancelled. Mr. Yano will continue his services and will remain entitled to the above options.
Option Grants
(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.
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
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 December 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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the number of shares of our common stock, owned beneficially as of March 9, 2010 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 April 13, 2010, there were 45,776,800 common shares, 12,411,517 stock purchase options, and 2,268,555 stock purchase warrants issued and outstanding.
Name and Address of Beneficial Owner
Title of Class
Amount &
Nature of
Beneficial
Ownership
(1)(#)
Percent of Class
(2)(%)
Frank R. Evanshen (3)
3710 Southridge Place
West Vancouver
British Columbia V7V 3H8
Common
13,522,024 (4)
29.53%
Darrin McCormack (5)
1729 Pavenham Rd.
Cowichan Bay
British Columbia V0R 1N1
Common
20,000 (6)
*
Peter Knaven (7)
1924 Limerick Place
North Vancouver
British Columbia V7J 3A1
Common
2,400,370 (8)
5.24%
T. Allen Rose (9)
724 Colborne Street
New Westminster
British Columbia
Common
250,000 (10)
*
James P. Yano
2508 Stanford Way
Antioch, CA 94531 (11)
Common
800,000(12)
1.47%
All Officers and Directors as a Group
Common
16,992,394
36.24%
Harold Gunn
1116 Ironwork Passage
Vancouver
British Columbia V6M 3P1
Common
6,054,836
13.22%
* equals less than 1%.
(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 45,776,800 issued and outstanding shares of common stock as of April 13, 2010 plus shares issuable upon exercise of options and warrants.
(3)
Frank R. Evanshen is our director, President and Chief Executive Officer.
(4)
Includes 8,445,681 common shares and held under his own name, 5,676 common shares held by MCC Meridian Capital Corp., a company controlled by Frank R. Evanshen as well as options and warrants to purchase 5,070,667 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 held directly by Darrin McCormack.
(7)
Peter Knaven resigned on March 12, 2010 as a Director with the Company.
(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)
James P. Yano has been our Chief Operations Officer since September 30, 2008.
(12)
Includes options to purchase 800,000 shares of our common stock.
Less than 1%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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 $12,182 ($CAD 13,846) expiring February 28, 2010. Office rent incurred by us totalled approximately $146,184 ($CAD 166,156) and approximately $143,109 ($CAD 153,177) for the years ended December 31, 2009 and 2008, respectively. On March 1, 2010 the Company renewed the agreement to rent office premises for another 12 months until February 28, 2011 at the same monthly rate of $CAD 13,846.
As of December 31, 2009, our future minimum lease payments under our non-cancellable operating leases are as follows:
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 $14,663 ($CAD 16,667), expiring June 1, 2010. Management fees incurred by us totaled $175,960 ($CAD 200,000) and $186,854 ($CAD 200,000) for the years ended December 31, 2009 and 2008, respectively. As at December 31, 2009 the amount owing to this private company totaled $78,357.
During the year ended December 31, 2008, we received proceeds of $142,721 ($CAD150,000) from a director on an unsecured promissory note. The note bears interest at 8% per annum, matures April 30, 2010 and includes $CAD 150,000 of principal and all related accrued interest. Accrued interest payable on the note totaled $21,866 ($CAD 22,981) at December 31, 2009. Interest expense on the note during the year ended December 31, 2009 totaled $10,583 ($CAD 12,030).
During the year ended December 31, 2009, we paid $2,688 to a private company controlled by an officer for accounting services incurred in the year ended December 31, 2008. During the year ended December 31, 2009, we incurred accounting fees of $25,387 with this private company, of which $15,227 is outstanding as at December 31, 2009.
During the year ended December 31, 2009, we paid $87,980 to a director for wages and salaries.
Related Party Transactions
There have been no related party transactions, or any other transactions or relationships required to be disclosed pursuant to Regulation S-K, except as reported elsewhere in this Report.
With regard to any future related party transaction, we plan to fully disclose any and all related party transactions in the following manor:
·
disclosing such transactions in reports where required;
·
disclosing in any and all filings with the SEC, where required;
·
obtaining disinterested directors consent; and
·
obtaining shareholder consent where required.
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.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit and Non-Audit Fees
Audit Fees
During the fiscal years ended December 31, 2009, we incurred $29,688 in fees to our principal independent accountants for professional services rendered in connection with the audit and reviews of our financial statements for fiscal years ended December 31, 2009 and 2008.
During the fiscal year ended December 31, 2008, we incurred approximately $67,933 in fees to our principal independent accountants for professional services rendered in connection with the audit and reviews of our financial statements for fiscal year ended December 31, 2008.
Audit-Related Fees
The aggregate fees billed during the fiscal years ended December 31, 2009 and 2008 for assurance and related services by our principal independent accountants that are reasonably related to the performance of the audit or review of our financial statements (and are not reported under Item 9(e)(1) of Schedule 14A was $0 and $0, respectively.
Tax Fees
The aggregate fees billed during the fiscal years ended December 31, 2009 and 2008 for professional services rendered by our principal accountant tax compliance, tax advice and tax planning was $0.00 and $0.00, respectively.
All Other Fees
The aggregate fees billed during the fiscal years ended December 31, 2009 and 2008for products and services provided by our principal independent accountants (other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A was $0 and $0, respectively.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS.
(a)
Documents filed as part of this Report.
1.
Financial Statements. The Consolidated Balance Sheet of WordLogic Corporation., and subsidiary as of December 31, 2009 and 2008, the Consolidated Statements of Operations for the year ended December 31, 2009 and 2008, the Consolidated Statements Stockholders’ Deficit from January 1, 2009 to December 31, 2009, and Statements of Cash Flows for the year ended December 31, 2009, and together with the notes thereto and the report of M&K CPAS, PLLC thereon appearing in Item 8 are included in this 2009 Annual Report on Form 10-K.
3.
Exhibits. The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers correspond to the numbering system in Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WORDLOGIC CORP.
Dated: April 14, 2010
/s/ Franklin Evanshen
By: Franklin Evanshen
Its: President and Chief Executive Officer
Dated: April 14, 2010
/s/ Darrin McCormack
By: Darrin McCormack
Its: Chief Financial Officer and Principal Accounting Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Dated: April 14, 2010
/s/ Franklin Evanshen
Franklin Evanshen, Director
Dated: April 14, 2010
/s/ T. Allen Rose
T. Allen Rose, Director