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EX-31.2 - EXHIBIT 31.02 SECTION 302 CERTIFICATION - WORDLOGIC CORPf10q093011_ex31z2.htm
EX-32.2 - EXHIBIT 32.02 SECTION 906 CERTIFICATION - WORDLOGIC CORPf10q093011_ex32z2.htm
EX-32.1 - EXHIBIT 32.01 SECTION 906 CERTIFICATION - WORDLOGIC CORPf10q093011_ex32z1.htm
EX-31.1 - EXHIBIT 31.01 SECTION 302 CERTIFICATION - WORDLOGIC CORPf10q093011_ex31z1.htm
EX-10.25 - EXHIBIT 10.25 CANCELLATION AGREEMENT - WORDLOGIC CORPf10q093011_ex10z25.htm
EXCEL - IDEA: XBRL DOCUMENT - WORDLOGIC CORPFinancial_Report.xls
EX-10.24 - EXHIBIT 10.24 SETTLEMENT AGREEMENT - WORDLOGIC CORPf10q093011_ex10z24.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 


FORM 10-Q


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


For the quarterly period ended September 30, 2011


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


For the transition period from ______ to _______


Commission File Number 333-149000

 

WORDLOGIC CORPORATION

[f10q093011_10q002.gif]

(Exact name of registrant as specified in its charter)

 

Nevada

 

88-0422023

(State of incorporation)

  

(I.R.S. Employer Identification No.)

 

1130 West Pender St., Suite 230

Vancouver, BC Canada V6E 2P4

(Address of principal executive offices)

 

(604) 257-3660

(Registrant’s telephone number)


with a copy to:

Carrillo Huettel, LLP

3033 Fifth Ave. Suite 400

San Diego, CA 92103

Telephone (619) 546-6100

Facsimile (619) 546-6060


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X . No      .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  X . No      .


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


Large accelerated filer

      .

Accelerated filer

      .

Non-accelerated filer

      . (Do not check if a smaller reporting company)

Smaller reporting company

  X .


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      . No  X .


As of November 10, 2011, there were 80,935,606 shares of the registrant’s $0.001 par value common stock issued and outstanding.






WORDLOGIC CORPORATION*


TABLE OF CONTENTS 


  

Page

PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

3

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

19

ITEM 4.

CONTROLS AND PROCEDURES

20

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

20

ITEM 1A.

RISK FACTORS

20

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

20

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

20

ITEM 4.

[REMOVED AND RESERVED]

21

ITEM 5.

OTHER INFORMATION

21

ITEM 6.

EXHIBITS

21


Special Note Regarding Forward-Looking Statements


Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of WordLogic Corporation (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.


*Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "WLGC" refers to WordLogic Corporation.



2





PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

Index



Unaudited Consolidated Balance Sheets

4


Unaudited Consolidated Statements of Operations

5


Unaudited Consolidated Statements of Cash Flows

6


Notes to the Unaudited Consolidated Financial Statements

7




3






WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Balance Sheets

(Expressed in US Dollars)


 

 

September 30,

2011

 

December 31,

2010

 

 

(Unaudited)

 

 

Assets

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash

$

10,712

$

49,467

Restricted cash (Note 3)

 

18,960

 

37,350

Accounts receivable

 

38

 

37

HST/GST refund receivable

 

32,250

 

20,438

Employee advances

 

210

 

221

Prepaid expenses

 

11,905

 

12,547

 

 

 

 

 

Total Current Assets

 

74,075

 

120,060

 

 

 

 

 

Property and equipment, net of accumulated depreciation (Note 4)

 

1,901

 

2,672

 

 

 

 

 

Total Assets

$

75,976

$

122,732

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

481,402

$

498,763

Bank loan payable (Note 5)

 

26,192

 

35,160

Indebtedness to related parties (Note 6)

 

119,545

 

216,685

Accrued interest

 

32,098

 

48,350

Notes payable (Note 7)

 

13,900

 

53,400

 

 

 

 

 

Total Current Liabilities

 

673,137

 

852,358

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

673,137

 

852,358

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

 

 

 

Common stock, $.001 par value; 100,000,000 shares authorized,  80,400,606 and 67,798,786 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively (Note 8)

 

80,401

 

67,799

Additional paid-in capital

 

22,699,172

 

20,729,373

Accumulated deficit

 

(2,264,854)

 

(2,264,854)

Deficit accumulated during development stage

 

(20,507,045)

 

(18,627,589)

Accumulated other comprehensive loss

 

(604,835)

 

(634,355)

 

 

 

 

 

Total Stockholders’ Deficit

 

(597,161)

 

(729,626)

 

 

 

 

 

Total Liabilities and Stockholders’ Deficit

$

75,976

$

122,732

 

 

 

 

 


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



4





WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Statements of Operations

(Expressed in US Dollars)


 

 

Accumulated

from May 27,

2003 (Date of Inception of Development Stage) to

 

For the

Three Months
Ended

(Unaudited)

For the

Nine Months
Ended

(Unaudited)

 

 

September 30,

2011 (Unaudited)

 

September 30,

2011

 

September 30,

2010

 

September 30,

2011

 

September 30,

2010

 

 


 


 

 



 


Revenues

 


 


 

 

 

 

 


Product sales

$

 22,776

$

 33

$

 95

$

1,095

$

 1,110

Royalty revenue

 

 32,962

 

 –

 

 –

 

 

 –

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

 55,738

 

 33

 

 95

 

1,095

 

 1,110

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Rent, related party (Note 6)

 

 810,795

 

 17,892

 

 5,758

 

53,596

 

 85,367

Selling, general and administrative (Note 6)

 

 17,289,064

 

 542,788

 

 1,070,387

 

1,478,692

 

 2,020,005

Research and development

 

 2,912,482

 

 108,581

 

 36,252

 

346,024

 

 201,727

 

 

 

 

 

 

 

 

 

 

 

Total Operating Expenses

 

 21,012,341

 

 669,261

 

 1,112,397

 

1,878,312

 

 2,307,099

 

 

 

 

 

 

 

 

 

 

 

Loss from Operations

 

 (20,956,603)

 

 (669,228)

 

 (1,112,302)

 

(1,877,217)

 

 (2,305,989)

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 1,760

 

 –

 

 –

 

 

 –

Interest expense:

 

 

 

 

 

 

 

 

 

 

Related parties (Note 6)

 

 (84,152)

 

 –

 

 (2,390)

 

 

 (8,092)

Amortization of discount on convertible note

 

 (145,243)

 

 –

 

 –

 

 

 –

Other notes, advances and amounts

 

 (437,808)

 

 (734)

 

 (934)

 

(2,239)

 

 (6,488)

Gain on derivative liability

 

 142,861

 

 –

 

 –

 

 

Loss (gain) on settled payables

 

 (627,860)

 

 –

 

 3,180

 

 

(11,207)

 

 

 

 

 

 

 

 

 

 

 

Loss Before Extraordinary Item

 

 (22,107,045)

 

 (669,962)

 

 (1,112,446)

 

(1,879,456)

 

 (2,331,776)

 

 

 

 

 

 

 

 

 

 

 

Net extraordinary gain on litigation settlement, less applicable income taxes of $nil

 

 1,600,000

 

 –

 

 –

 

 –

 

 –

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 (20,507,045)

 

 (669,962)

 

 (1,112,446)

 

(1,879,456)

 

 (2,331,776)

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

  Net Gain/(Loss) of Foreign Currency Translation adjustment

 

 (604,835)

 

 51,583

 

 (95,407)

 

29,520

 

 (111,315)

Net Comprehensive Income

$

 (21,111,880)

$

 (618,379)

$

 (1,207,853)

$

 (1,849,936)

$

 (2,443,091)

Basic and diluted loss per share

 

 

$

 (0.01)

$

 (0.02)

$

(0.03)

$

 (0.05)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 78,051,439

 

 52,721,633

 

72,239,998

 

 45,575,313

 

 


 




 

 

 



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



5





WORDLOGIC CORPORATION

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Expressed in US Dollars)


 

 

Accumulated from

May 27, 2003 (Date of Inception of

Development Stage) to

 

For the Nine

Months Ended

(Unaudited)

 

 

September 30,

2011

(Unaudited)

 

September 30,

2011

 

September 30,

2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 


 


 


Net loss

$

 (20,507,045)

$

 (1,879,456)

$

 (2,331,776)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 61,619

 

 505

 

 1,800

Common stock issued for services and payables

 

 47,457

 

 –

 

 –

Stock-based compensation

 

 13,175,307

 

 1,151,329

 

 2,171,801

Amortization of debt discount

 

 145,243

 

 –

 

 –

Loss on settled liabilities

 

 710,000

 

 17,500

 

 11,207

Gain on derivative liability

 

 (142,861)

 

 –

 

 –

Changes in current assets and liabilities:

 

 

 

 

 

 

Receivables

 

 18,475

 

 (11,813)

 

 (9,311)

Employee advances

 

 (15,578)

 

 11

 

 (5)

Prepaid expenses

 

 (11,905)

 

 642

 

 (12,127)

Accounts payable and accrued liabilities

 

 598,428

 

 (17,094)

 

 (205,218)

Accrued interest payable

 

 62,861

 

 (16,252)

 

 (52,809)

 

 

 

 

 

 

 

Net cash used in operating activities

 

 (5,857,999)

 

 (754,628)

 

 (426,438)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of equipment

 

 (26,942)

 

 –

 

 –

 

 

 

 

 

 

 

Net cash used in investing activities

 

 (26,942)

 

 –

 

 –

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from related party advances

 

 1,220,986

 

 (97,140)

 

 82,458

Repayment of related party advances

 

 (814,215)

 

 –

 

 –

Proceeds from promissory notes issued to related parties

 

 411,509

 

 –

 

 4,461

Repayment of related party promissory notes

 

 (493,941)

 

 –

 

 –

Proceeds from convertible promissory note

 

 933,926

 

 –

 

 –

Repayment of convertible promissory notes

 

 (947,462)

 

 –

 

 –

Proceeds from other promissory note

 

 979,120

 

 3,000

 

 9,500

Repayment of other promissory notes

 

 (443,220)

 

 –

 

 (17,511)

Payments on capital lease obligation

 

 (12,071)

 

 –

 

 –

Proceeds from line of credit

 

 26,192

 

 (8,968)

 

 (6,371)

Repayment of line of credit

 

 –

 

 –

 

 –

Proceeds from stock options and warrants exercised

 

 532,915

 

 

80,100

Proceeds from sale of common shares

 

 5,124,178

 

771,070

 

413,128

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 6,517,917

 

 667,962

 

 565,765

Effect of exchange rate changes on cash

 

 (604,835)

 

 29,521

 

 (111,315)

Net change in cash

 

 28,142

 

 (57,145)

 

 28,012

Cash, beginning of period

 

 1,530

 

 86,817

 

 21,793

Cash, end of period

$

 29,672

$

 29,672

$

 49,805

 

 

 

 

 

 

 

Non-Cash Information:

 

 

 

 

 

 

Cashless exercise of warrants

$

 275

$

 187

$

 –

Stock issued to settle notes payable plus accrued interest

$

 1,285,453

$

 –

$

 118,754

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for income taxes

$

 –

$

 –

$

 –

 

 

 

 

 

 

 

Cash paid for interest

$

 208,866

$

 1,233

$

 2,965


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



6





WORDLOGIC CORPORATION

(A Development Stage Company)

Footnotes to the Financial Statements


1.

NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS


Nature of Operations


WordLogic Corporation (the “Company” or “WLGC”), 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, WLGC 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, WLGC 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 WLGC the legal surviving entity. Since WLGC 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 WLGC. Following the closing, WLGC 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, WLGC 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”. WLGC’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 September 30, 2011 the Company has a working capital deficiency of $599,062 and has incurred losses of $20,507,045 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.


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.



7






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.  The Company had no cash equivalents at September 30, 2011 or December 31, 2010.


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%


Amortization is recorded at one-half of the normal rate in the year of acquisition. We have compared the depreciation taken using the declining balance method to the straight-line method and have determined the difference to be immaterial for the nine months ended September 30, 2011 and 2010.


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.


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.



8






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 collectability 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.


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.    



9






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. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin 107 (“SAB 107”) relating to this standard. The Company has applied the provisions of SAB 107 in its adoption of this standard. The Company adopted the FASB standard using the modified prospective transition method, which requires the application of the accounting standard as of the beginning in 2006. The Company’s financial statements as of and for the year ended December 31, 2007 reflect the impact of this standard. In accordance with the modified prospective transition method, the Company’s financial statements for prior periods do not include the impact of this standard.


The Company’s determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviours.


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 September 30, 2011, there were 14,925,667 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 nine month periods ended September 30, 2011 and 2010, the Company’s only component of comprehensive loss was foreign currency translation adjustments.


q)

Advertising Costs


Advertising costs are charged to operations as incurred.


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.



10






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 September 30, 2011 and December 31, 2010 we had restricted cash balances of $18,960 and $37,350, respectively.  This cash was held in trust by our attorneys for the payment of future legal invoices.


4.

PROPERTY AND EQUIPMENT


 

Cost

$

Accumulated

Depreciation

as of

September 30,

2011

$

Net Carrying

Amount

as of

September 30,

2011

$

Net Carrying

Amount

as of

December 31,

2010

$

Office equipment

 3,682

3,410

272

337

Computer equipment

 134,868

134,319

549

995

Computer software

 6,764

6,764

-

-

Furniture and fixtures

 14,549

13,469

1,080

1,340

 

 

 

 

 

 

 159,863

157,962

1,901

2,672


Depreciation expense totalled $505 and $1,800 for the nine months ended September 30, 2011 and 2010, respectively.


5.

BANK LOAN PAYABLE


Represents a loan from the Royal Bank of Canada, repayable upon demand, requiring monthly blended payments of CDN$835 (US$797) 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$47,700).  The loan is secured by a personal guarantee of an officer of the Company.  The balance at September 30, 2011 is $26,192.


6.

RELATED PARTY TRANSACTIONS AND BALANCES


The Company incurred the following related party transactions:


a)

The Company entered into an agreement with a private company controlled by a director to rent office premises requiring monthly lease payments of $CAD 13,846, which expired June 30, 2010. Office rent incurred by the Company with this private company totalled $nil and $79,668 ($CAD 83,078) for the nine months ended September 30, 2011 and 2010, respectively.


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 30,000, expiring December 31, 2011. Management fees incurred by the Company totalled $276,202 ($CAD 270,000) and $143,843 ($CAD 150,000) for the nine months ended September 30, 2011 and 2010, respectively.  As at September 30, 2011 the amount owed to this private company totalled $84,041.



11






c)

During the year ended December 31, 2008, the Company received proceeds of $150,810 ($CAD150,000) from a director on an unsecured promissory note.  During the year ended December 31, 2010, the Company settled the loan through the issuance of shares of its common stock. The note bears interest at 8% per annum, matures December 31, 2010 and includes $150,810 ($CAD 150,000) of principal and all related accrued interest.  Accrued interest payable on the note totalled $30,324 ($CAD 31,786) at September 30, 2011. Interest expense on the note during the nine months ended September 30, 2011 and 2010 totalled nil and $8,092 ($CAD 8,438), respectively.


d)

During the nine months ended September 30, 2011, the Company incurred accounting fees of $25,500 with a private company of which an officer is also an officer.  As at September 30, 2011, the amount owing to this private company totaled $35,504.


e)

During the nine months ended September 30, 2011, the Company incurred $147,308 with an officer for wages and salaries.


7.

NOTES PAYABLE


Promissory Notes


During the year ended December 31, 2010, the Company received proceeds of $20,400 on an unsecured promissory note and repaid $9,500, leaving a balance owing of $10,900 at December 31, 2010.  During the nine months ended September 30, 2011, the Company received further proceeds of $3,000, leaving a balance owing of $13,900 at September 30, 2011. The note bears interest at 10% per annum, which totaled $1,774, which remained outstanding at September 30, 2011.


Interest expense on the note during the nine months ended September 30, 2011 and 2010 totaled $1,006 and $nil, respectively.


During the year ended December 31, 2010, the Company received proceeds of $42,500 on an unsecured promissory note, which remained outstanding at December 31, 2010.  During the nine months ended September 30, 2011, the Company settled the loan through the issuance of shares of its common stock. The note bears interest at 10% per annum, with no interest outstanding at September 30, 2011.


Interest expense on the note during the nine months ended September 30, 2011 and 2010 totaled $nil and $nil, respectively.


8.

COMMON STOCK


a)

In January 2011, the Company issued 10,000 shares of its common stock at $0.30 per share for services rendered by a consultant valued at $3,000 based on the price on the date of grant.


b)

Also in January 2011, the Company conducted private placement offerings whereby it issued 570,000 units at a price of $0.15 per share for total proceeds of $85,500. 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 $0.25 per share.


c)

Also in January 2011, the Company issued 390,000 shares of its common stock at $0.265 per share for services rendered by consultants valued at $103,350 based on the price on the date of grant.  140,000 of these shares were issued to an officer of the Company.


d)

Also in January 2011, the Company issued 200,000 shares of its common stock at $0.25 per share for services rendered by a consultant valued at $50,000 based on the price on the date of grant.


e)

Also in January 2011, the Company issued 100,000 shares of its common stock registered on a Form S-8 at $0.26 per share for services rendered by an officer valued at $26,000 based on the price on the date of grant.


f)

Also in January 2011, the Company issued 150,000 shares of its common stock at $0.21 per share for services rendered by consultants valued at $31,500 based on the price on the date of grant.


g)

In February 2011, the Company conducted private placement offerings whereby it issued 600,000 units at a price of $0.10 per share for total proceeds 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 $0.25 per share.


h)

Also in February 2011, the Company issued 85,000 shares of its common stock at $0.20 per share for services rendered by consultants valued at $17,000 based on the price on the date of grant.



12






i)

Also in February 2011, the Company issued 97,220 shares of its common stock at $0.25 per share for services rendered by an officer valued at $24,305 based on the price on the date of grant.  


j)

In March 2011, the Company issued 10,000 shares of its common stock at $0.19 per share for services rendered by a consultant valued at $1,900 based on the price on the date of grant.


k)

Also in March 2011, the Company settled $42,500 of an outstanding promissory note through the issuance of 300,000 shares of the Company's common stock.  Shares issued were valued at fair value of $0.20 which resulted in a loss on conversion of $17,500.


l)

Also in March 2011, the Company issued 40,000 shares of its common stock at $0.22 per share for services rendered by a consultant valued at $8,800 based on the price on the date of grant.


m)

Also in March 2011, the Company issued 575,000 shares of its common stock at $0.19 per share for services rendered by consultants valued at $109,250 based on the price on the date of grant.


n)

Also in March 2011, the Company conducted a private placement offering whereby it issued 55,000 units at a price of $0.15 per share for total proceeds of $8,250. 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 $0.25 per share.


o)

In April 2011, the Company issued 10,000 shares of its common stock at $0.19 per share for services rendered by a consultant valued at $1,900 based on the price on the date of grant.


p)

Also in April 2011, the Company conducted private placement offerings whereby it issued 1,610,600 units at a price of $0.10 per share for total proceeds of $161,060.  1,310,600 of the units consisted of one share of the Company's common stock and one warrant to purchase an additional share of common stock, exercisable at $0.10 per share and 300,000 of the units consisted of one share of the Company’s common stock and two warrants to purchase two additional shares of common stock, also exercisable at $0.10 per share.


q)

Also in April 2011, the Company conducted a private placement offering whereby it issued 112,500 shares of its common stock at $0.10 per share for proceeds receivable of $11,250.


r)

Also in April 2011, the Company issued 187,500 shares of its common stock in exercise of stock options, cashless.


s)

Also in April 2011, the Company conducted a private placement offering whereby it issued 175,000 units at a price of $0.18 per share for total proceeds of $31,500. 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 $0.40 per share.


t)

Also in April 2011, 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.


u)

Also in April 2011, the Company issued 40,000 shares of its common stock at $0.235 per share for services rendered by a consultant valued at $9,400 based on the price on the date of grant.


v)

Also in April 2011, the Company issued 132,000 shares of its common stock at $0.25 per share for services rendered by a consultant valued at $33,000 based on the price on the date of grant.


w)

Also in April 2011, the Company issued 100,000 shares of its common stock at $0.258 per share for services rendered by consultants valued at $9,030 based on the price on the date of grant.


x)

In May 2011, the Company issued 10,000 shares of its common stock at $0.258 per share for services rendered by a consultant valued at $2,580 based on the price on the date of grant.


y)

Also in May 2011, the Company conducted a private placement offering whereby it issued 357,000 units at a price of $0.18 per share for total proceeds of $64,260. 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 $0.40 per share.



13






z)

Also in May 2011, the Company conducted a private placement offering whereby it issued 320,000 units at a price of $0.10 per share for total proceeds of $32,000. 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.


aa)

Also in May 2011, the Company issued 115,000 shares of its common stock at $0.25 per share for services rendered by consultants valued at $28,750 based on the price on the date of grant.


bb)

In June 2011, the Company issued 260,000 shares of its common stock at $0.259 per share for services rendered by consultants valued at $67,340 based on the price on the date of grant.


cc)

Also in June 2011, the Company issued 225,000 shares of its common stock at $0.24 per share for services rendered by  consultants valued at $54,000 based on the price on the date of grant.


dd)

Also in June 2011, the Company issued 115,000 shares of its common stock at $0.19 per share for services rendered by consultants valued at $21,850 based on the price on the date of grant.


ee)

Also in June 2011, the Company conducted a private placement offering whereby it issued 100,000 shares of its common stock at $0.15 per share for proceeds of $15,000.


ff)

In July 2011, the Company issued 110,000 shares of its common stock at $0.19 per share for services rendered by consultants valued at $20,900 based on the price on the date of grant.


gg)

Also in July 2011, the Company issued 583,000 shares of its common stock at $0.18 per share for services rendered by consultants valued at $104,940 based on the price on the date of grant.


hh)

Also in July 2011, the Company issued 250,000 shares of its common stock at $0.15 per share for services rendered by consultants valued at $37,500 based on the price on the date of grant.


ii)

Also in July 2011, the Company issued 120,000 shares of its common stock at $0.20 per share for services rendered by a consultant valued at $24,000 based on the price on the date of grant.


jj)

Also in July 2011, the Company conducted a private placement offering whereby it issued 125,000 units at a price of $0.10 per share for total proceeds of $12,500. 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 $0.10 per share.


kk)

Also in July 2011, the Company conducted a private placement offering whereby it issued 185,000 shares of its common stock at $0.10 per share for total proceeds of $18,500.


ll)

In August 2011, the Company issued 10,000 shares of its common stock at $0.19 per share for services rendered by a consultant valued at $1,900 based on the price on the date of grant.


mm)

Also in August 2011, the Company issued 165,000 shares of its common stock at $0.16 per share for services rendered by consultants valued at $26,400 based on the price on the date of grant.


nn)

Also in August 2011, the Company issued 100,000 shares of its common stock at $0.15 per share for services rendered by a consultant valued at $15,000 based on the price on the date of grant.


oo)

Also in August 2011, the Company issued 10,000 shares of its common stock at $0.13 per share for services rendered by a consultant valued at $1,300 based on the price on the date of grant.


pp)

Also in August 2011, the Company settled outstanding debt totaling $48,000 through the issuance of 480,000 shares of the Company’s common stock at a price recorded at the market price on the date of grant, being $0.17 per share.  Accordingly, we recorded a loss on settlement for the difference in the fair value of the shares issued and the debt extinguished of $33,600.


qq)

Also in August 2011, the Company settled outstanding debt totaling $48,000 through the issuance of 480,000 shares of the Company’s common stock at a price recorded at the market price on the date of grant, being $0.18 per share.  Accordingly, we recorded a loss on settlement for the difference in the fair value of the shares issued and the debt extinguished of $38,400.



14






rr)

Also in August 2011, the Company conducted a private placement offering whereby it issued 150,000 shares of its common stock at $0.10 per share for proceeds of $15,000.


ss)

Also in August 2011, the Company conducted a private placement offering whereby it issued 2,375,000 units at a price of $0.10 per share for total proceeds of $237,500. 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 $0.10 per share.


tt)

In September 2011, the Company issued 142,000 shares of its common stock at $0.16 per share for services rendered by consultants valued at $22,720 based on the price on the date of grant.


uu)

Also in September 2011, the Company issued 115,000 shares of its common stock at $0.15 per share for services rendered by consultants valued at $17,250 based on the price on the date of grant.


vv)

Also in September 2011, the Company conducted a private placement offering whereby it issued 300,000 units at a price of $0.10 per share for total proceeds of $30,000. 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 $0.10 per share.


The following table summarizes 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, 2009

1,768,555

 

0.72

 

0.33

Issued

1,834,000

 

0.16

 

0.62

Exercised

 

 

Expired/Cancelled

(1,025,000)

 

 

 

 

 

 

 

 

Balance, December 31, 2010

2,577,555

 

0.20

 

1.77

Issued

6,787,600

 

0.15

 

1.66

Exercised

 

 

Expired/Cancelled

 

 

 

 

 

 

 

 

Outstanding, September 30, 2011

9,365,155

 

0.17

 

1.69


9.

STOCK-BASED COMPENSATION


The Company has, since incorporation, 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.


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.  On May 14, the Company adopted the 2010 Share Incentive Plan on Form S-8 under which the Company is authorized to issue up to 10,000,000 registered shares of its common stock to qualified persons.


The Company did not grant any options during the six months ended September 30, 2011.


The total intrinsic value of stock options exercised during the nine months ended September 30, 2011 and 2010 were $nil and $nil respectively.



15






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, 2010

16,496,517

$ 0.48

 

 

 

 

 

 

 

Granted

 

 

Exercised

(250,000)

$0.05

 

 

Expired/Cancelled

(1,320,850)

$ 0.54

 

 

 

 

 

 

 

Outstanding, September 30, 2011

14,925,667

$ 0.58

1.77

$nil

 

 

 

 

 

Exercisable, September 30, 2011

14,865,667

$0.59

1.78

$nil


A summary of the status of the Company’s nonvested shares as of September 30, 2011, and changes during the nine months ended September 30, 2011, is presented below:


Nonvested shares

 

Number of

Shares

Weighted

Average

Grant Date

Fair Value

 

 

 

 

Nonvested at January 1, 2011

 

420,000

$0.20

Granted

 

Vested

 

(360,000)

$0.20

 

 

 

 

Nonvested at September 30, 2011

 

60,000

$ 0.20


As at September 30, 2011 there was $11,950 total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 1.00 years.


10.

SUBSEQUENT EVENTS


There were no subsequent events items as at the filing date of these financial statements.



16






ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION


FORWARD-LOOKING STATEMENTS


This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements.  You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms.  These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements.  Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.


RESULTS OF OPERATIONS


Working Capital


  

September 30, 2011

September 30, 2010

Current Assets

$74,075

$77,432

Current Liabilities

$673,137

$892,359

Working Capital (Deficit)

$(599,062)

$(814,927)


Cash Flows


  

September 30, 2011

September 30, 2010

Cash Flows from (used in) Operating Activities

$(754,628)

$(426,438)

Cash Flows from (used in) Financing Activities

$667,962

$565,765

Net Increase (decrease) in Cash During Period

$(57,145)

$28,012


Operating Revenues


Operating revenues for the nine months ended September 30, 2011 were $1,095 and is comprised of product sales totaling $1,095.


Operating revenues for the nine months ended September 30, 2010 were $1,110 and is comprised of product sales totaling $1,110.


Operating Expenses and Net Loss


Operating expenses for the nine months ended September 30, 2011 were $1,878,312 and is comprised of $53,596 in rent, $1,478,692 in selling, general and administrative and $346,024 in research and development.


Operating expenses for the nine months ended September 30, 2010 were $2,307,099 and is comprised of $85,367 in rent, $2,020,005 in selling, general and administrative and $201,727 in research and development.


Net loss for the nine months ended September 30, 2011 was $1,879,456 and is comprised of $1,877,217 loss from operations and $2,239 in interest expense.  


Net loss for the nine months ended September 30, 2010 was $2,331,776 and is comprised of $2,305,989 loss from operations and $14,580 in interest expense and $11,207 loss on settlement of debt.



17






Liquidity and Capital Resources


As at September 30, 2011, the Company’s cash and current asset balance was $74,075 compared to $77,432 as at September 30, 2010. The decrease in current assets of $3,357 is attributed to an increase of $10,476 in cash, an increase of $38 in accounts receivable, an increase of $16,964 in HST/GST refund receivable, a decrease in prepaid expenses of $222 and other current assets of $4 and a decrease in restricted cash of $30,609.  


As at September 30, 2011, the Company had current and total liabilities of $673,137 compared with current and total liabilities of $892,359 as at September 30, 2010. The decrease in total liabilities of $219,222 was primarily attributed to a decrease in accounts payable and accrued liabilities, bank loan payable, note payable to a related party and accrued interest, net of increases in indebtedness to related parties and notes payable.


As at September 30, 2011, the Company had a working capital deficit of $599,062 compared with a working capital deficit of $814,927 as at September 30, 2010.  The decrease in working capital deficit was primarily attributed to an increase in HST/GST refund receivable and a reduction in accounts payable and accrued liabilities and note payable to a related party.


Cashflow from Operating Activities


During the period ended September 30, 2011, the Company used $754,628 of cash for operating activities compared to the use of $426,438 of cash for operating activities during the period ended September 30, 2010. The change in net cash used in operating activities is primarily attributed to an increase in operating costs (net of stock-based compensation).


Cashflow from Financing Activities


During the period ended September 30, 2011, the Company received $667,962 of cash from financing activities compared to $565,765 for the period ended September 30, 2010.  The change in cash flows from financing activities is primarily attributed to an increase in proceeds from sale of common stock net of repayment of promissory notes and related party advances.


Going Concern


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


Off-Balance Sheet Arrangements


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


Future Financings


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


Critical Accounting Policies


Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

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



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Recently Issued Accounting Pronouncements


In March 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-11 (“ASU No. 2010-11”), “Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives.” The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company’s adoption of provisions of ASU No. 2010-11 did not have a material effect on the financial position, results of operations or cash flows of the Company.


In February 2010, the FASB issued ASU 2010-10 (“ASU No. 2010-10”), “Consolidation (Topic 810): Amendments for Certain Investment Funds.” The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for interim periods within that first reporting period. Early application is not permitted. The Company’s adoption of provisions of ASU No. 2010-10 did not have a material effect on the financial position, results of operations or cash flows of the Company.


In February 2010, the FASB issued ASU 2010-09 (“ASU No. 2010-09”), “Subsequent Events (ASC Topic 855): Amendments to Certain Recognition and Disclosure Requirements.”  ASU No. 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose a date, in both issued and revised financial statements, through which the filer had evaluated subsequent events. The Company’s adoption of provisions of ASU No. 2010-09 did not have a material effect on the financial position, results of operations or cash flows of the Company.


In January 2010, the FASB issued ASU 2010-06 (“ASU No. 2010-06”), “Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 amends FASB Accounting Standards Codification (“ASC”) 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements and employers’ disclosures about postretirement benefit plan assets. This ASU is effective for interim and annual reporting periods beginning after December 15, 2009. The Company’s adoption of provisions of ASU No. 2010-06 did not have a material effect on the financial position, results of operations or cash flows of the Company.


In January 2010, the FASB issued an amendment to ASC Topic 505, “Equity”, where entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders are considered to be a share issuance that is reflected prospectively in EPS, and is not accounted for as a stock dividend. This standard is effective for interim and annual periods ending on or after December 15, 2009 and is to be applied on a retrospective basis. The Company’s adoption of the amendment to ASC Topic 505 did not have a material effect on the financial position, results of operations or cash flows of the Company.


In January 2010, the FASB issued an amendment to ASC Topic 820, “Fair Value Measurements and Disclosure”, to require reporting entities to separately disclose the amounts and business rationale for significant transfers in and out of Level 1 and Level 2 fair value measurements and separately present information regarding purchase, sale, issuance, and settlement of Level 3 fair value measures on a gross basis. This standard, for which the Company is currently assessing the impact, is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of disclosures regarding the purchase, sale, issuance, and settlement of Level 3 fair value measures which are effective for fiscal years beginning after December 15, 2010. The Company’s adoption of the amendment to ASC Topic 820 did not have a material effect on the financial position, results of operations or cash flows of the Company.


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


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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



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ITEM 4. 

CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2011, due to the material weaknesses resulting from the Board of Directors not currently having any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K, and controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Please refer to our Annual Report on Form 10-K as filed with the SEC on April 15, 2011, for a complete discussion relating to the foregoing evaluation of Disclosures and Procedures.

 

Changes in Internal Control over Financial Reporting

 

Our management has also evaluated our internal control over financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.

 

The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.


PART II - OTHER INFORMATION


ITEM 1. 

LEGAL PROCEEDINGS


We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.


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 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


1.  

Quarterly Issuances:


During the quarter, the Company issued 1,352,778 shares of common stock for services, to settle outstanding debt and/or for cash.


2.  

Subsequent Issuances:


On October 21, 2011, the Company issued 250,000 shares of its common stock each to Mr. Luis Carrillo and to Mr. Wade Huettel, for an aggregate of 500,000 shares, pursuant to that certain Settlement Agreement dated October 21, 2011, as settlement for the $21,900 balance owing to Mr. Carrillo under the terms of those certain Promissory Notes dated December 2, 2010, March 9, 2011 and April 15, 2011.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


None.



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ITEM 4.  

[REMOVED AND RESERVED]


ITEM 5.

OTHER INFORMATION


On October 21, 2011, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Luis Carrillo (“Mr. Carrillo”) to settle a $21,900 balance owing to Mr. Carrillo under the terms of those certain Promissory Notes dated December 2, 2010, March 9, 2011 and April 15, 2011, by and through the issuance of an aggregate of 500,000 restricted shares of the Company's common stock, per the terms of the Settlement Agreement.


On October 27, 2011, the Company entered into a Cancellation Agreement with Frank Evanshen (“Mr. Evanshen”) whereby Mr. Evanshen has agreed to cancel and retire any and all outstanding and unexercised stock options to purchase additional shares of the Company’s common stock.


On October 27, 2011, the Company cancelled and retired all outstanding and unexercised stock options to purchase additional shares of the Company’s common stock, held by Peter Knaven.


ITEM 6.

EXHIBITS


Exhibit

 

 

 

 

Number

 

Description of Exhibit

 

Filing

3.01

 

Articles of Incorporation

 

Filed with the SEC on June 8, 2001 as part of our Registration Statement on Form 10SB12G.

3.01a

 

Certificate of Amendment to Articles of Incorporation

 

Filed with the SEC on May 21, 2003 as part of our Quarterly Report on Form 10QSB.

3.02

 

Bylaws

 

Filed with the SEC on June 8, 2001 as part of our Registration Statement on Form 10SB12G.

4.01

 

2010 Share Incentive Plan

 

Filed with the SEC on May 14, 2010 as part of our Registration Statement on Form S-8.

4.02

 

 Sample Performance-Based Award Agreement

 

Filed with the SEC on May 14, 2010 as part of our Registration Statement on Form S-8.

4.03

 

Sample Non-Qualified Stock Option Grant Agreement

 

Filed with the SEC on May 14, 2010 as part of our Registration Statement on Form S-8.

4.04

 

Sample Qualified Stock Option Grant Agreement

 

Filed with the SEC on May 14, 2010 as part of our Registration Statement on Form S-8.

10.01

 

Debt Settlement Agreement between the Company and Richard Kozukan dated January 11, 2010

 

Filed with the SEC on February 8, 2010 as part of our Current Report on Form 8-K.

10.02

 

Consulting Agreement between the Company and Advidea, Inc. dated April 1, 2010

 

Filed with the SEC on May 18, 2010 as part of our Quarterly Report on Form 10-Q.

10.03

 

Subscription Agreement between the Company and Ulrich Rutsch dated January 5, 2010

 

Filed with the SEC on May 18, 2010 as part of our Quarterly Report on Form 10-Q.

10.04

 

Subscription Agreement between the Company and Michael C. O’Brian dated March 29, 2010

 

Filed with the SEC on May 18, 2010 as part of our Quarterly Report on Form 10-Q.

10.05

 

Subscription Agreement between the Company and Pamela A. Vandy dated March 31, 2010

 

Filed with the SEC on May 18, 2010 as part of our Quarterly Report on Form 10-Q.

10.06

 

Consulting Agreement between the Company and Douglas A. Glaser dated April 1, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.07

 

Consulting Agreement between the Company and Mirador Consulting, Inc. dated July 8, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.08

 

Consulting Agreement between the Company and Linda Gaal dated August 2, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.09

 

Promissory Note to Luis Carrillo for $6,000 dated August 5, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.10

 

Promissory Note to Luis Carrillo for $3,500 dated August 5, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.11

 

Settlement Agreement between Richard Kozukan and Jim Yano dated August 25, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.12

 

Website Services Agreement between the Company and Creative Web, Inc. dated August 31, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.13

 

Consulting Agreement between the Company and Douglas Schreiner dated September 8, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.14

 

Promissory Note to Luis Carrillo for $3,500 dated October 28, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.



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10.15

 

Promissory Note to Luis Carrillo for $2,500 dated October 28, 2010

 

Filed with the SEC on November 22, 2010 as part of our Quarterly Report on Form 10-Q.

10.16

 

Settlement Agreement between the Company and Luis Carrillo dated November 29, 2010

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.17

 

Promissory Note to Luis Carrillo for $4,900 dated January 13, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.18

 

Settlement Agreement between the Company and Mirador Consulting, Inc. dated February 2, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.19

 

Settlement Agreement between the Company and Luis Carrillo dated March 9, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.20

 

Promissory Note to Anthony Amado for $42,500 dated March 24, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.21

 

Settlement Agreement between the Company and Anthony Amado dated March 24, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.22

 

Promissory Note to Luis Carrillo for $3,000 dated March 25, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.23

 

Promissory Note to Luis Carrillo for $14,000 dated May 9, 2011

 

Filed with the SEC on May 23, 2011 as part of our Quarterly Report on Form 10-Q.

10.24

 

Settlement Agreement between the Company and Luis Carrillo dated October 21, 2011

 

Filed herewith.

10.25

 

Cancellation Agreement between the Company and Frank R. Evanshen dated October 27, 2011

 

Filed herewith.

16.01

 

Letter from Former Accountant Manning Elliott LLP dated March 13, 2009

 

Filed with the SEC on March 16, 2009 as part of our Amended Current Report on Form 8-K/A.

31.01

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14

 

Filed herewith.

31.02

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14

 

Filed herewith.

32.01

 

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

 

Filed herewith.

32.02

 

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

 

Filed herewith.

101.INS*

 

XBRL Instance Document

 

Filed herewith.

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

Filed herewith.

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith.

101.LAB*

 

XBRL Taxonomy Extension Labels Linkbase Document

 

Filed herewith.

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith.

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith.


*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.




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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 CORPORATION



Dated:  November 11, 2011

/s/ Franklin Evanshen       

By: Franklin Evanshen

Its: President & Chief Executive Officer



Dated:  November 11, 2011

/s/ Darrin McCormack     

By: Darrin McCormack

Its:  Chief Financial Officer & 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:  November 11, 2011

/s/ Franklin Evanshen      

By: Franklin Evanshen

Its:  Director



Dated:  November 11, 2011

/s/ T. Allen Rose               

By: T. Allen Rose

Its:  Director



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