PROSPECTUS SUPPLEMENT NO. 3 Filed Pursuant to Rule 424(b)(3)
TO PROSPECTUS DATED AUGUST 23, 2005 Registration No. 333-123715
WIZZARD SOFTWARE CORPORATION
Supplement No. 3
to
Prospectus Dated August 23, 2005
This Prospectus Supplement No. 3 supplements and amends certain
information contained in our Prospectus, dated August 23, 2005. This
Prospectus Supplement No. 3 should be read in conjunction with, and may not be
delivered or utilized without, the Prospectus and our Prospectus Supplement
Nos. 1 and 2, which were filed with the Securities and Exchange Commission on
January 6, 2006, and May 15, 2006, respectively. This Prospectus Supplement
No. 3 is qualified by reference to the Prospectus and Prospectus Supplement
Nos. 1 and 2, except to the extent that the information in this Prospectus
Supplement No. 3 supercedes the information contained in the Prospectus and
Prospectus Supplement Nos. 1 and 2.
This Prospectus Supplement No. 3 includes the attached Annual Reports on
Form 10-KSB and Form 10-KSB-A1 for the calendar year ended December 31, 2005,
filed with the Securities and Exchange Commission on April 3, 2006, and May
26, 2006, respectively.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENCE.
The date of this Prospectus Supplement No. 3 is June 15, 2006.
U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-KSB-A1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 333-69415
WIZZARD SOFTWARE CORPORATION
----------------------------
(Name of Small Business Issuer in its Charter)
COLORADO 87-0575577
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5001 Baum Blvd.
Pittsburgh, Pennsylvania 15213
-------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (412) 621-0902
Securities Registered under Section 12(b) of the Exchange Act: None
Name of Each Exchange on Which Registered: None
Securities Registered under Section 12(g) of the Exchange Act: Common, $0.001
par value.
Check whether the issuer is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. [ ]
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ...
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
State Issuer's revenues for its most recent fiscal year: December 31,
2005 - $1,694,075.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a specified
date within the past 60 days.
March 29, 2006 - $43,375,124.70. There are approximately 22,829,013
shares of common voting stock of the Registrant held by non-affiliates. The
aggregate market value was determined based on the average of the closing bid
and asked prices of the issuer's common stock on March 29, 2005.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Not Applicable.
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
March 29, 2006
29,085,650
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in
Part III, Item 13.
Transitional Small Business Issuer Format Yes X No
--- ---
Item 6. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
Results of Operations.
- ----------------------
2005 Compared to 2004
---------------------
Wizzard derives it revenue from the sale of desktop and enterprise speech
technology (speech recognition and text-to-speech) programming tools,
distributable engines and speech related consulting services and support, as
well as through the sale of talking prescription bill bottles and the offering
of home healthcare services through its wholly-owned subsidiary Interim
Healthcare of Wyoming, Inc.
During 2005, Wizzard recorded revenues of $1,694,075, an increase of
$1,168,641, or approximately 222%, from our revenues of $525,434 in 2004.
This increase was due in large part to increased sales of our AT&T and IBM
licensed products as well as from revenues from our acquisition of Interim
HealthCare of Wyoming.
During 2005, cost of goods sold was $991,005, an increase of $582,656, or
approximately 143%, over the 2004 figure of $408,349. This is attributed to
an increase in labor cost associated with our subsidiary, Interim of Wyoming,
as well as to consulting and custom programming and increased payments to AT&T
and IBM on licensed products which accompany increased sales.
Wizzard generated a gross profit of $703,070 in 2005, versus a gross
profit of $117,085 in 2004, an increase of 500%. We feel our gross margin for
our speech technologies should hold steady over the next several years based
on current products and other offerings continuing to be of value to our
customers and the fact that we have finalized the amortization of the
technologies purchased in the Speech Systems acquisition. The cost of goods
for our talking prescription pill bottle is higher than for our core speech
technologies but has been reduced significantly from the initial acquisition
date and will continue to fall as sales increase. Gross profit from our
subsidiary, Interim, has historically remained stable.
Selling expenses increased to $457,636 in 2005, from $292,851 in the
prior year, due to increased marketing efforts, specifically for our talking
prescription pill bottle. We plan to continue marketing our own and strategic
third party products through various forms of customer interaction mentioned
above. Additionally, our Interim subsidiary increased selling expenses by
$10,681.
In 2005, Wizzard had operating expenses of $5,163,209, as compared to
$5,581,604 in 2004. The decrease is primarily attributed to a decrease in
stock issued for services to our investor relations firm.
General and administrative expenses decreased to $3,150,259 in 2005, from
$4,369,899 in the prior year, a decrease of 28%, due principally to a decrease
in investor relations expenses and other non-cash consulting services.
Research and development expense increased to $69,089, from $65,705 in the
prior year related to the integration of the text to speech technology into
the talking pill bottle.
Wizzard incurred non-cash legal, public relations and consulting fees of
$3,165,447 in fiscal 2004, as compared to $1,668,966 in 2005. Of this non-
cash amount in fiscal 2005, $1,328,200 was for investor relations, $229,664
was for general and administrative expense, $111,132 for selling expense and
$0 for research and development expense. For fiscal 2004, the non-cash
amount included $1,545,400 for investor relations, $657,738 was for general
and administrative expense, $548,582 for selling expense and $115,838 for
research and development expense. Due to the increased liquidity of its
common stock traded on the OTC Bulletin Board exchange, Wizzard has been able
to pay for valuable and sometimes critical services with restricted and
unrestricted common stock. This has helped us to use our cash for general and
administrative operations. For all such stock issuances, we valued the stock
at the market price at the close of the day of issuance. All related expense
was recorded the same day.
During 2005, the Company performed its annual test of impairment of
goodwill and intangible assets by comparing the net carrying value including
goodwill of the assets with the present value of future cash flows. Fair
value was estimated using the expected present value of discounted future cash
flows of the businesses within Wizzard Software Corporation. When making
these estimates, we were required to make estimates of future operating trends
and judgments on discount rates and other variables. Actual future results and
other assumed variables could differ from those estimated.
The result of the annual impairment test indicated that the carrying
value of goodwill and intangible assets exceeded their implied fair value and
an impairment charge of $1,191,967 respectfully was recorded in the
consolidated statement of operations during 2005. All of the goodwill
impaired relates to the acquisition of the remaining interest of Wizzard
Delaware Corporation.
Interest expense increased to $1,538,736 in 2005, from $20,155 in 2004,
due to the $1,400,000 discount on our $1,400,000 5% convertible note payable
related the conversion feature and warrants issued in connection with the
convertible note payable.
Net loss increased to $5,966,862 in 2005, as compared to a net loss of
$5,523,485 in 2004. We have a basic and diluted loss per common share of
$0.22 in 2005, which is the same amount as in 2004.
Effective as of December 19, 2005, Wizzard and three investors executed a
Warrant Amendment Agreement under which we agreed to amend the holders' Class
B Warrants to (i) make one-half of each holder's such warrants, totaling
466,665 warrants, exercisable at a price of $1.15 per share, exercisable until
5:00 p.m. EST on the 150th day on which the Registration Statement under which
the shares underlying such warrants has been effective; and (ii) extending the
period of exercisability of the remaining 466,668 Class B Warrants to 5:00
p.m. EST on February 8, 2007. As of the date hereof, all of the 466,665
repriced warrants have been exercised at $1.15 per share. As a result of this
repricing we incurred compensation expense of $294,258.
Liquidity and Capital Resources.
- --------------------------------
2005 compared to 2004
---------------------
Current assets at December 31, 2005 included $1,168,656 in cash and
accounts receivable, an increase of $704,254 from our cash and accounts
receivable of $464,402 at December 31, 2004. On February 8, 2005, we closed a
$1,400,000, 5% convertible note subscription agreement.
During fiscal 2005, our operating activities used net cash of $1,118,830,
as compared to $1,468,064 in net cash used by operating activities during
2004.
In 2005, depreciation and amortization expense was $44,889, which was
down from $152,103 in 2004. In both periods, this expense was primarily
attributed to impairment of intangible assets during 2004.
Net cash used in investing activities increased to $(469,581) in 2005,
versus $(38,354) in 2004. During 2005, the Company paid $518,000 and issued
201,045 common shares to acquire Interim HealthCare of Wyoming, Inc. Cash used
for the purchase of property and equipment was $18,776 in 2005 versus $36,682
in 2004.
In 2005, net cash provided by financing activities increased to
$2,038,986, from $1,898,576 in 2004. Net cash of $682,918 was provided by the
issuance of common stock in 2005, less the payment of offering costs of
$8,433; in 2004, these figures were $2,025,859 and $127,283, respectively. In
2005, we received $1,400,000 in proceeds from convertible notes payable to
related parties. We also paid related party notes of $25,076 in fiscal 2005.
At December 31, 2005, the Company had a working capital deficit of
$348,661, as compared to working capital of $396,892 at December 31, 2004.
This decrease in working capital is due to cash used and liabilities assumed
to acquired Interim Health Care of Wyoming, Inc. The Company believes it is
still in the early stages of the new and developing speech technology market
and estimates it will require approximately $120,000 per month to maintain
current operations. As mentioned in Note 2 to the accompanying financial
statements, the Company has not yet been able to establish profitable
operations and has not generated cashflows from operations, thus raising
substantial doubt about its ability to continue as a going concern. The
Company has been successful over the past ten years in obtaining working
capital and will continue to seek to raise additional capital from time to
time as needed and until profitable operations can be established.
We have estimated the costs of remedying the material weakness identified
with respect to our internal controls over financial reporting at
approximately $150,000. See Item 8A of this Report.
Item 7. Financial Statements.
---------------------
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Gregory & Associates, LLC [Letterhead]
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
Pittsburgh, Pennsylvania 15213
We have audited the accompanying consolidated balance sheet of Wizzard
Software Corporation and subsidiaries as of December 31, 2005, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2005 and 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board in the United States of America. 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 controls over financial reporting. Our audit included
consideration of internal controls 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 controls over financial reporting. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
audited by us present fairly, in all material respects, the financial position
of Wizzard Software Corporation and subsidiaries as of December 31, 2005 and
the results of their operations and their cash flows for the years ended
December 31, 2005 and 2004, in conformity with generally accepted accounting
principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has not yet established profitable
operations and has incurred significant losses since its inception. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/S/ Gregory & Associates, LLC
March 2, 2006, except for Note 1,
for which the Date is May 18, 2006
Salt Lake City, Utah
F-1
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2005
___________
CURRENT ASSETS:
Cash $ 869,277
Accounts receivable, net of $74,738 allowance 299,379
Inventory, net of $61,690 allowance 16,877
Prepaid expenses 24,514
-----------
Total current assets 1,210,047
LEASED EQUIPMENT, net 139,844
PROPERTY AND EQUIPMENT, net 106,104
GOODWILL 896,570
OTHER ASSETS 5,582
-----------
Total assets $ 2,358,147
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 214,953
Accrued expenses 105,619
Capital Lease current portion 35,250
Notes payable 239,576
Deferred revenue 13,311
Convertible notes payable related party 949,999
-----------
Total current liabilities 1,558,708
CAPITAL LEASE, less current portion 119,224
-----------
Total liabilities $ 1,677,932
-----------
COMMITMENT & CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $.001 par value, 100,000,000 shares
authorized,29,035,576 shares issued and outstanding 29,036
Additional paid-in capital 20,126,555
Accumulated deficit (19,475,376)
------------
Total Stockholders' Equity 680,215
------------
Total liabilities and stockholders equity $ 2,358,147
============
The accompanying notes are an integral part of this consolidated financial
statement.
F-2
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
______________________
2005 2004
__________ _________
NET SALES $ 1,694,075 $ 525,434
COST OF GOODS SOLD 991,005 408,349
---------- ---------
Gross Profit 703,070 117,085
---------- ---------_
OPERATING EXPENSES:
Selling expenses 457,636 292,851
General and administrative 3,150,259 4,369,899
Research and development 69,089 65,705
Compensation for re-pricing warrants 294,258 160,420
Impairment of goodwill 1,191,967 522,932
Impairment of intangible asset - 169,797
_________ _________
Total Expenses 5,163,209 5,581,604
--------- ---------
LOSS FROM OPERATIONS (4,460,139) (5,464,519)
--------- ---------
OTHER INCOME (EXPENSE):
Gain (loss) on disposal of assets (4,527) (38,811)
Interest expense related party (1,519,692) (20,155)
Interest expense (19,044)
Interest income 36,540 -
---------- ----------
Total Other Income (Expense) (1,506,723) (58,966)
_________ _________
LOSS BEFORE INCOME TAXES (5,966,862) (5,523,485)
CURRENT INCOME TAX EXPENSE - -
DEFERRED INCOME TAX EXPENSE - -
--------- ---------
NET LOSS $(5,966,862)$(5,523,485)
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE: $ (.22) $ (.22)
========= =========
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARE OUTSTANDING: 27,576,608 24,824,265
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WIZZARD SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common Stock Additional
_________________________ Paid in Accumulated
Shares Amount Capital (Deficit)
___________ ____________ ___________ ___________
BALANCE, December 31, 2003 22,176,256 22,176 7,877,822 (7,985,029)
Issuance of common stock for
cash, less $127,254 offering
costs, at $0.73 per share,
January and May 2004 1,648,352 1,648 1,070,085 -
Compensation for the
re-pricing of warrants to
purchase common stock from
$1.50 to $1.00 per share - - 160,420 -
Stock issued upon exercise
of warrants at $0.25 to
$1.55 per share 646,076 646 663,380 -
Stock issued upon exercise
of options at $1.81 per
share, March 2004 90,210 90 162,756 -
Stock issued for employees
services upon exercise of
options at $1.77 per share 77,666 78 137,391 -
Stock issued for consulting
services upon exercise of
options at $1.99 to $4.24
per share 62,300 62 129,088 -
Stock issued for investor
relations consulting
services at $2.77 to $3.30
per share, March 2004 370,000 370 1,157,030 -
Subsidiary stock issued to
for investor relations
services at $1.94 per share - - 388,000 -
Stock issued for consulting
services at $1.73 to $3.18
per share 468,867 469 1,114,102 -
Stock issued in payment of
a $10,016 note payable $614
in accrued expenses and
$78,437 in consulting
services at $3.18 per share,
May 2004 27,999 28 89,039 -
Stock issued in payment of
accrued interest at accrued
expenses at $3.50 per share,
May 2004 18,117 18 63,360 -
Stock issued related to the
acquisition of MedivoxRx
Technologies, May 2004 150,035 150 536,975 -
Continued
F-4
WIZZARD SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Continued)
Common Stock Additional
_________________________ Paid in Accumulated
Shares Amount Capital (Deficit)
Stock issued related to the
acquisition of MedivoxRx
Technologies at $1.70 per
share, July 2004 51,375 52 87,285 -
Stock issued in payment of
penalties related to Delay
in registration of shares
underlying the 8% convertible
note payable at $3.50 per share 19,286 19 67,481 -
Stock issued upon conversion
of note payable at $0.50 per
share and $47,837 of accrued
interest at $2.70 May to
October 2004 287,689 288 182,549 -
Net loss for the year ended
December 31, 2004 - - - (5,523,485)
___________ ____________ ___________ __________
BALANCE, December 31, 2004 26,094,228 $ 26,094 $13,886,763$(13,508,514)
---------- ----------- ----------- -----------
Acquisition of minority
interest in Wizzard
Delaware, January 2005 787,176 787 1,191,180 -
Class B Warrants issued in
connection with convertible
note payable, February 2005 - - 308,989 -
Class A Warrants issued in
connection with convertible
note payable, February 2005 - - 516,827 -
Value of Beneficial Conversion
Feature of Convertible notes
payable, February 2005 - - 574,184 -
Stock issued upon exercise of
warrants at Prices ranging
from $1.15 to $1.55 per share
January through December, 2005 561,004 561 682,329 -
Acquisition of Interim
Healthcare September 2005 201,045 201 385,805 -
Stock issued upon conversion
of notes payable and $11,915
in accrued interest at $.50 per
share February through
November 2005 223,850 224 111,701 -
Compensation for warrant which
were repriced and had an
extension of terms,
December 2005 - - 294,258 -
Continued
F-5
WIZZARD SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Continued)
Common Stock Additional
_________________________ Paid in Accumulated
Shares Amount Capital (Deficit)
Stock issued for services
and other non-cash expenses at
pricing ranging from $1.85 to
$2.35 per share, February
through December 2005 739,570 740 1,465,507 -
Stock issued upon the exercise
of options for services at
pricing ranging from $1.82 to
$2.44 per share, February
through December 2005 97,434 98 202,651 -
Stock issued upon conversion
of notes payable and $56,692
in accrued interest at $1.50
per share August through
December 2005 306,173 306 458,954 -
Stock issued for debt relief
at $1.89 per share December
2005 25,096 25 47,407 -
Net loss for the year ended
December 31, 2005 - - - (5,966,862)
---------- --------- ----------- ------------
Balance 12/31/2005 29,035,576 $ 29,036 $20,126,559 $(19,475,376)
---------- --------- ----------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
______________________
2005 2004
__________ _________
Cash Flows from Operating Activities:
Net loss $(5,966,862) $(5,523,485)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization of discount on notes payable 1,400,000 -
Stock for non cash expenses 1,668,966 3,005,027
Compensation for extension and repricing
warrants 294,258 160,420
Change in allowance for doubtful accounts (58,084) -
Change in allowance for inventory 53,789 -
Impairment of definite-life intangible assets - 169,797
Impairment of goodwill 1,191,967 522,932
Loss on disposal of assets 1,743 38,811
Depreciation and amortization expense 44,889 152,103
Change in assets and liabilities:
Restricted cash - 34,771
Accounts receivable 125,626 (5,882)
Inventory 17,158 (11,496)
Prepaid expenses 44,224 (48,570)
Accounts payable 27,601 (29,940)
Accrued expense 62,098 50,903
Deferred revenue (26,203) -
------------ -----------
Net Cash Used in Operating Activities (1,118,830) (1,468,064)
------------ -----------
Cash Flows from Investing Activities:
Purchase of property & equipment (18,776) (36,682)
Proceeds from sale of equipment 3,000 -
Payment for business acquisitions (518,000) -
Change in other assets 2,542 (1,672)
Cash acquired in business acquisition 34,653 -
------------- -----------
Net Cash Used in Investing Activities (496,581) (38,354)
------------- -----------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock 682,918 2,025,859
Payment of stock offering cost (8,433) (127,283)
Payments on Capital Lease (10,423) -
Proceeds from note payable related party 1,400,000 -
Payments on note payable - related party (25,076) -
------------ -----------
Net Cash Provided by Financing Activities 2,038,986 1,898,576
------------ -----------
Net Increase in Cash 423,575 392,158
------------ -----------
Cash at Beginning of Period 445,702 53,544
------------ -----------
Cash at End of Period $ 869,277 $ 445,702
------------ -----------
(Continued)
F-7
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended
December 31,
______________________
2005 2004
__________ ___________
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 23,874 $ 4,387
Income taxes $ - $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the Year Ended December 31, 2005
The Company issued 787,176 shares of common stock valued at $1,191,967,
for the acquisition of minority interest of Wizzard-Delaware. The
$1,191,967 was recorded as goodwill which was impaired.
The Company issued Class B warrants valued at $308,989, Class B warrants
valued at $516,827 in connection with convertible notes payable. These
convertible notes payable also had a beneficial conversion feature valued
at $574,184.
The Company issued 201,045 shares of common stock in connection with the
acquisition of Interim Healthcare of Wyoming.
The Company issued 223,850 shares of common stock upon the conversion of
$100,000 in notes payable and $11,925 of accrued interest.
The Company recorded $294,258 in expenses related to the repricing and
extension of terms of certain warrants.
The Company issued 739,570 shares of common stock for non-cash expenses
which totaled $1,466,247.
The Company issued 97,434 shares of common stock upon the exercise of
options for services which totaled $202,749.
The Company issued 306,173 shares of common stock upon the conversion of
$450,001 in notes payable and $56,892 of accrued interest.
The Company issued 25,096 shares of common stock for debt relief of
$47,432.
For the Year Ended December 31, 2004
The Company recorded $160,420 in compensation for the re-pricing of
408,076 warrants from $1.50 to $1.00 per share and extending the
expiration date from January 1, 2004 to February 29, 2004.
The Company issued 370,000 common shares for investor relations services
valued at $1,157,400.
The Parent recorded a $388,000 in investor relations expense and a
capital contribution for the issuance of 200,000 common shares of
Wizzard Software Corp. (Subsidiary).
The Company issued 18,117 common shares in payment of $63,408 in accrued
interest.
(Continued)
F-8
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Year Ended December 31, 2004
The Company issued 531,167 common shares for consulting services valued
at $1,243,721.
The Company issued 77,666 common shares to employees for services valued
at $137,469.
The Company issued 27,999 common shares in payment of a $10,016 note
payable and $614 in related accrued interest and $78,437 in consulting
services.
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the Year Ended December 31, 2004
On April 23, 2004, the Company acquired MedivoxRx Technologies, Inc.
through a triangular purchase wherein the Company's newly formed wholly
owned subsidiary acquired the operations MedivoxRx Technologies through
the Company issuing 150,035 common shares to acquire all of the issued
and outstanding shares of MedivoxRx Technologies, Inc. As a result of
the purchase, the Company recorded goodwill of $435,594 as the purchase
price of $537,125 exceeded the $101,531 net book value of the assets.
On July 9, 2004, the Company issued 51,375 restricted common shares to
the former stockholders upon Wizzard Merger Corp. receiving Federal
Supply Schedule approval on the talking pill bottle and recorded
additional goodwill of $87,337.
The Company issued 19,286 common shares in payment of $67,500 in
penalties related to the delay in the registering shares underlying the
8% convertible note payable.
The Company issued 287,689 common shares upon conversion of $135,000 of
the 8% convertible note payable and payment of related accrued interest
payable of $47,837.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization Wizzard Software Corporation ["Parent"], a Colorado
corporation, was organized on July 1, 1998. The Company has, at the present
time, not paid any dividends and any dividends that may be paid in the future
will depend upon the financial requirements of the Company and other relevant
factors. On January 19, 2005, Parent acquired the remaining 5% minority
interest of Wizzard Software Corp. ["WSC"], wherein WSC was merged into
Parent. The Company engages primarily in the development, sale, and service
of custom and packaged computer software products. On May 22, 2001, Parent
purchased all of the issued and outstanding shares of Speech Systems, Inc.
["Speech"], a Florida corporation, in a transaction accounted for as a
purchase. On April 9, 2004, Parent organized Wizzard Merger Corp. ["WMC"], a
New York corporation, to acquired and dissolve into the operations of
MedivoxRx Technologies, Inc. ["MedivoxRx"], a New York corporation, in a
transaction accounted for as a purchase. WMC engages primarily in the
development, sale, and service of a talking prescription pill bottle. On
September 8, 2005, Parent purchased all of the issued and outstanding shares
of Interim Healthcare of Wyoming, Inc. ["Interim"], a Wyoming corporation, in
a transaction accounted for as a purchase. Interim engages primarily in
providing healthcare services in Wyoming.
Consolidation The financial statements presented reflect the accounts of
Parent, WSC, Speech, MedivoxRx, and Interim, the "Company." All significant
inter-company transactions have been eliminated in consolidation.
Accounting Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimated
by management.
Reclassification The financials statements for the period ended prior to
December 31, 2005 have been reclassified to conform to the headings and
classifications used in the December 31, 2005 financial statements.
Cash and Cash Equivalents At December 31, 2005, the Company had cash
balances of $669,277 in excess of federally insured limits.
Accounts Receivable - Accounts receivable consist of trade receivables arising
in the normal course of business. At December 31, 2005, the Company has an
allowance for doubtful accounts of $74,738 which reflects the Company's best
estimate of probable losses inherent in the accounts receivable balance. The
Company determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence. During the years ended
December 31, 2005 and 2004, the Company adjusted the allowance for bad debt by
$ (58,084) and $16,545, respectively.
Inventory Inventory consists of software, health care products and supplies
and is carried at the lower of cost or market on a first in first out basis.
Depreciation Depreciation of property and equipment is provided on the
straight-line method over the estimated useful lives of the assets of five
years to ten years.
F-10
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Goodwill and Definite-life intangible assets Goodwill represented the excess
of costs over the fair value of the identifiable net assets of businesses
acquired. Definite-life intangible assets consist of website development
cost, patents, trademarks, purchased rights to a Merchant Operating
Understanding (for the distribution of the Company's products) and trade
secrets of the speech recognition software ActiveX Voice Tools, purchased in
the acquisition of Speech Systems, Inc., and a patents pending and trademarks
acquired in the purchase of MedivoxRx Technologies, Inc. The Company
accounts for Goodwill and definite-life intangible assets in accordance with
provisions of Statement of Financial Accounting Standards "SFAS" No. 142,
"Goodwill and Other Intangible Assets". Goodwill and intangible assets
acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead are tested for
impairment at least annually in accordance with the provisions of SFAS
No. 142. Impairment losses arising from this impairment test, if any, are
included in operating expenses in the period of impairment. SFAS No. 142
requires that definite intangible assets with estimable useful lives be
amortized over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Definite-life intangible assets were being
amortized over two to five years on a straight-line basis before they were
impaired during 2004.
Software Development Costs - Statement of Financial Accounting Standards
("SFAS") No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" requires software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management
with respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalizable software development costs have not been significant and
accordingly no amounts are shown as capitalized at December 31, 2005.
Loss Per Share The Company computes loss per share in accordance with
Statement of Financial Accounting Standards "SFAS" No. 128 "Earnings Per
Share," which requires the Company to present basic earnings per share and
diluted earnings per share when the effect is dilutive (see Note 12).
Income Taxes The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires an asset and liability approach for
accounting for income taxes.
Advertising Costs Advertising costs are expensed as incurred and amounted to
$92,475 and $3,800 for the period ending December 31, 2005 and 2004.
Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and notes payable are determined by reference to
market data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their recorded
values due to their short-term maturities.
F-11
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition Revenue is recognized when earned. The Company's revenue
recognition policies are in compliance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2 (as amended by
SOP 98-4 and SOP 98-9) and related interpretations, "Software Revenue
Recognition" and the Securities and Exchange Commission Staff Accounting
Bulletin No. 101 and 104.
Software - The Company sells packaged and custom software products and related
voice recognition product development consulting.
Software product revenues are recognized upon shipment of the software product
only if no significant Company obligations remain, the fee is fixed or
determinable, and collection is received or the resulting receivable is deemed
probable. Revenue from package software products are recorded when the payment
has been received and the software has been shipped. Revenue is recognized,
net of discount and allowances, at the time of product shipment. For packaged
software products the Company offers a 30 day right of return. Provisions are
recorded for returns, concessions, and bad debts and at December 31, 2005 and
2004 amounted to $0. Revenue related to obligations, which include telephone
support for certain packaged products, are based on the relative fair value of
each of the deliverables determined based on vendor-specific objective
evidence ("VSOE") when significant. The Company VSOE is determined by the
price charged when each element is sold separately. Revenue from packaged
software product sales to and through distributors and resellers is recorded
when payment is received and the related products are shipped. The Company's
distributors or resellers do not carry packaged software product inventory and
thus the Company does not offer any price protections or stock balancing
rights. Revenue from non-recurring programming, engineering fees, consulting
service, support arrangements and training programs are recognized when the
services are provided. Such items are included in net revenues and amounted to
$ 16,250 and $29,050 at December 31, 2005 and 2004, respectively.
Healthcare The Company recognizes revenue from the providing of healthcare
services when the services are provided and collection is probable Revenues
for the talking bottle are recognized when the product is shipped and
collections are probable.
Recently Enacted Accounting Standards - Statement of Financial Accounting
Standards ("SFAS") No. 152, "Accounting for Real Estate Time-Sharing
Transactions - an amendment of FASB Statements No. 66 and 67", SFAS No. 153,
"Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29", and
SFAS No. 123 (revised 2004), "Share-Based Payment", which replaces SFAS No.
123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No.
25, "Accounting for stock Issued to Employees" and Emerging Issues Task Force
("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments," were recently issued. SFAS No. 152,
153, and EITF 03-1 have no current applicability to the Company or their
effect on the financial statements would not have been significant.
F-12
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS No.
151 requires abnormal amounts of inventory costs related to idle facility,
freight handling and wasted material (spoilage) to be recognized as current-
period charges. In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company will be required to adopt
the provisions of SFAS No. 151 for fiscal years beginning after June 15, 2005.
Management believes the provisions of this Standard will not have a
significant effect on our financial position or results of operations.
SFAS No. 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The cost will be
measured based on the fair value of the instruments issued. The Company will
be required to apply SFAS No. 123(R) as of the first interim reporting period
that begins after June 15, 2005. Accordingly, The Company will adopt SFAS No.
123(R) in the third quarter of fiscal 2005 using the modified-prospective
method. Management is currently evaluating the impact SFAS No. 123(R) will
have on the Company's results of operations as a result of adopting this new
Standard.
Stock Options - The Company accounts for the stock option plans in accordance
with the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. Under
this method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost under SFAS No. 123 has been
recognized for the stock option plans or other agreements in the accompanying
statement of operations. Had compensation cost for the Company's stock option
plans and agreements been determined based on the fair value at the grant date
for awards in 2005 and 2004 consistent with the provisions of SFAS No. 123,
the Company's net earnings net of taxes and earnings per share would have been
reduced to the pro forma amounts indicated below:
2005 2004
----------- -----------
Net (Loss) As reported $(5,966,862)$(5,523,485)
Add: Stock-based employee compensation
expense included in reported net income - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method - -
----------- -----------
Net (Loss) Proforma $(5,966,862)$(5,523,485)
----------- -----------
Basic and diluted loss per share
As reported $ (.22)$ (.22)
Proforma $ (.22)$ (.22)
F-13
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Research and Development Cost - The Company expenses the cost of developing
new products as incurred as research and product development costs. Included
in general and administrative expense at December 31, 2005 and 2004 are
$69,089 and $65,705, respectively, of research and development costs
associated with the development of new products.
RESTATEMENT - The financial statements have been restated to record $44,861
in payroll liabilities associated with stock issued to employees during 2005
and 2004. The effect on the financial statements at December 31, 2005 and
2004 and for the Years Ended December 31, 2005 and 2004 are as follows:
December 31, 2005 December 31, 2004
___________________________ __________________________
As Previously As Previously
Reported Restated Reported Restated
___________________________ __________________________
Accrued expenses $ 60,758 $ 105,619 $ 13,064 $ 49,709
Accum. (Deficit) (19,430,515) (19,475,376) (13,471,869) (13,508,514)
General &
Administrative 3,142,043 3,150,253 4,333,254 4,369,899
Net (Loss) (5,958,646) (5,966,862) (5,486,840) (5,523,485)
Net (Loss) Per Share $ (.22) $ (.22) $ (.22) $ (.22)
NOTE 2 GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles of the United States
of America, which contemplate continuation of the Company as a going concern.
However, the Company has incurred significant losses from inception, has
current liabilities in excess of current assets, has not generated any cash
flow from operating activities, and has not yet been successful in
establishing profitable operations. These factors raise substantial doubt
about the ability of the Company to continue as a going concern. In this
regard, management plans to mitigate this doubt by raising additional funds
through debt and/or equity offerings and by substantially increasing sales.
There is no assurance that the Company will be successful in achieving
profitable operations. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
NOTE 3 ACQUISITION
On September 8, 2005, Parent acquired Interim Health Care of Wyoming pursuant
to a Stock Purchase Agreement signed September 8, 2005. The agreement called
for Parent to pay $518,000 and to issue 201,045 shares of common stock valued
at $386,006 for 100% of the outstanding stock of Interim Health Care of
Wyoming. The financial statements include the operations of Interim from
September 8, 2005 through December 31, 2005. The Company acquired Interim with
the intention of diversifying the Company's operations into other industries.
Contingent incentives As part of the Interim of Wyoming, Inc. acquisition,
the Company agreed to issue additional shares of common stock upon Interim
achieving certain financial results. Phase I incentives would include the
seller to receive an additional payment of two (2) times the Interim EBITDA
for the year ended September 30, 2006, based upon the amounts that exceeds the
Interim EBITDA for the year ended December 31, 2004. Twenty-five percent of
which will be paid in cash and seventy-five percent paid in stock.
Phase II incentives include the seller to receive an additional payment of two
times the EBITDA for the year ended September 30, 2007, based upon the amount
that exceeds the Interim EBITDA for the year ended September 30, 2006. Twenty-
five percent of which will be paid in cash and seventy-five percent paid in
stock.
F-14
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ACQUISITION continued
The following unaudited proforma information summarizes the estimated fair
values of the assets acquired and the liabilities assumed at September 8, 2005
(purchase date):
Cash $ 34,653
Accounts receivable 389,705
Inventory 1,130
Property & equipment 177,478
Accounts payable (79,644)
Accrued expenses (63,466)
Note payable (250,000)
Capital lease obligation (162,906)
Deferred revenue (39,514)
------------
Net estimated fair value of assets
acquired 7,436
Goodwill 896,570
------------
Purchase Price $ 904,006
The following unaudited proforma information summarizes the estimated
results of operations as if the acquisition had occurred at the
beginning of the period presented:
For the Year
Ended
December 31,
____________________
2005 2004
----------- ----------
Net revenues $3,027,160 $2,711,555
----------- ----------
Net loss $(5,961,572)$(5,341,731)
---------- ----------
Loss per common share $ (.22) $ (.21)
---------- ----------
NOTE 4 INVENTORY
The following is a summary of inventory at December 31, 2005:
Raw materials $ 65,485
Finished goods 13,082
Less: Allowance for obsolete inventory (61,690)
----------
$ 16,877
----------
The Company estimates that an allowance for slow moving or obsolete
inventory was necessary at December 31, 2005 in the amount of $61,690.
During the year ended December 31, 2005, the Company expensed $61,690
related to the allowance.
F-15
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 PROPERTY & EQUIPMENT
The following is a summary of property and equipment at:
December 31
Life 2005
__________
Furniture, fixtures and equipment 2 10 yrs $ 168,023
Production molds 3 yrs 47,710
Software 2 5 yrs 11,964
----------
177,997
(Less) Accumulated Deprecation (121,593)
----------
Property & Equipment, net $ 106,104
----------
Depreciation expense for the year ended December 31, 2005 and 2004 was $37,640
and $34,943, respectively. The Company terminated its lease agreement in 2004
and recorded a loss of $38,869 in abandoned leasehold improvement.
The following is a summary of leased equipment at:
December 31
Life 2005
__________
Leased Equipment 5.25 Yrs $ 223,750
Less: Accumulated Depreciation (83,906)
___________
Net Leased Equipment $ 139,844
Amortization expense for the year ended December 31, 2005 and 2004 was $7,249
and $0, respectively.
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLES ASSETS
The Company has classified its intangible assets as a definite-life intangible
asset and is amortizing them on a straight-line basis over two to five years.
During December 2004 the Company used the estimated future cash flows to test
the remaining intangible assets for impairment and recorded an impairment of
intangible assets determined that the Company's intangible assets were
impaired. Amortization expense of $0 and $117,160 was recorded for the year
ended December 31, 2005 and 2004 and has been included in cost of goods sold.
F-16
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLES ASSETS - continued
The following is a summary of intangibles:
December 31,
Life 2005
Active X Voice Tools Software 5 years $500,000
Trademarks, patents, website registrations 2 to 5 years 23,503
Memorandum of Understanding 5 years 66,227
--------
589,730
Accumulated amortization (419,933)
Impairment (169,797)
Intangibles, net $ -
---------
Goodwill - On April 23, 2004, the Company recorded goodwill of $435,594 in
connection with the acquisition of MedivoxRx Technologies, Inc. as the
purchase price of $537,125 exceeds the $101,531 net book value of the assets
acquired. During July 2004, the Parent recorded an additional $88,120 in
goodwill with the issuance of 51,375 restricted common shares to the former
stockholders upon Wizzard Merger Corp. receiving Federal Supply Schedule
approval.
The following is a summary of goodwill:
For the Year
Ended
December 31,
2005 2004
Goodwill at beginning of period $ - $ -
Goodwill from acquisition of
MedivoxRx - 435,594
Additional goodwill from acquisition
of MedivoxRx from the issuance
of contingent consideration - 88,120
Goodwill from acquisition of 5%
Minority interest 1,191,967 -
Goodwill from acquisition of Interim 896,570 -
Impairment of goodwill (1,191,967) (523,714)
----------- ---------
Goodwill at end of period $ 896,570 $ -
----------- ---------
F-17
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLES ASSETS - continued
Impairment - During 2005 and 2004, the Company performed its annual test of
impairment of goodwill and intangible assets by comparing the net carrying
value including goodwill of the assets with the present value of future
cashflows. Fair value was estimated using the expected present value of
discounted future cash flows of the businesses within Wizzard Software
Corporation. When making these estimates, we were required to make estimates
of future operating trends and judgments on discount rates and other
variables. Actual future results and other assumed variables could differ from
those estimated.
The result of the annual impairment test indicated that the carrying value of
$1,191,967 and $522,932 in goodwill and $0 and $169,797 in intangible assets
exceeded their implied fair value and an impairment charge and was recorded in
the consolidated statement of operations. The goodwill impaired relates to the
acquisition of the remaining minority interest of Wizzard Delaware and of the
acquisition of MedivoxRx Technologies. The intangibles assets impaired related
to the unamortized balance of the Active X Voice Tools Software, Trademarks,
patents, website registrations and Memorandum of Understanding.
NOTE 7 NOTES PAYABLE
Convertible Note Payable - On September 14, 2001, the Company issued a Series
2001-A 8% convertible note payable of the Company in the amount of $250,000,
with a maturity date of August 1, 2011. The Note was convertible into the
Company's common stock at the lesser of $0.50 per share or 75% of the closing
bid price. During the year ended December 31, 2001, $15,000 of the note with
related accrued interest of $208 was converted into 30,416 shares of common
stock. During the year ended December 31, 2004 $135,000 of the note with
related accrued interest of $47,837 was converted into 287,689 common shares.
As the conversion price was below the fair value of the common stock on the
date issued the Company has recorded the beneficial conversion feature of the
note in accordance with the provisions found in EITF 98-5 by recording a
$250,000 discount on the note. The discount was recorded as interest expense
on September 14, 2001 as the note was immediately convertible. The note called
for the Company to register the underlying shares into which the note can be
converted by March 15, 2002, which did not occur. On May 3, 2004 the Company
issued 19,286 restricted common shares for the payment of the $67,500 penalty
for the delay in the registration equal to $7,500 for the first month then
$10,000 for every month thereafter through October 2002. During the year ended
December 31, 2005, the Company issued 223,850 shares of common stock in
payment of the remaining $100,000 and $11,925 in accrued interest.
Related Party Note Payable During the year ended December 31, 2001, a
shareholder loaned the Company $46,076. The demand note is unsecured and
accrues interest at 5% per annum. In May 2005, the Company repaid the
remaining $25,076 in principle and $4,830 in accrued interest.
F-18
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 NOTES PAYABLE - continued
On February 8, 2005, the Company closed a Subscription Agreement by which
three institutional investors purchased promissory notes having a total
principal amount of $1,400,000, convertible into shares of the Company's
common stock at a price of $1.50 per share, and bearing an annual interest
rate of five percent; Class A Warrants to purchase a total of 466,667 shares
of common stock at a price of $2.50 per share, exercisable for three years;
and Class B Warrants to purchase a total of 933,334 shares of common stock at
a price of $1.50 per share, exercisable until 150 days after the effective
date of the Registration Statement. In December 2005, the Company repriced
466,667 of the Class B warrants from $1.50 to $1.15 exercise price and were
immediately exercised. Also in December 2005, the remaining 466,667 Class B
warrants had their life extended one year.
NOTE 8 CAPITAL STOCK
Preferred Stock - The Company has authorized 10,000,000 shares of preferred
stock, $0.001 par value. As of December 31, 2005, no shares were issued and
outstanding.
Common Stock - The Company has authorized 100,000,000 shares of common stock,
$0.001 par value. As of December 31, 2005, 29,035,576 shares were issued and
outstanding.
During 2004, the Company issued 646,076 common shares upon the exercise of
warrants outstanding to purchase common stock of the Company at $0.25 to $1.55
per share.
F-19
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CAPITAL STOCK - continued
During 2004, the Company issued a total of 167,876 common shares upon exercise
of options issued for $300,315 in employee compensation.
During 2004, the Company issued 62,300 common shares upon exercise of options
issued for $129,150 in consulting services.
During January 2004, the Company raised an additional $1,071,733 through the
issuance of 1,648,352 common shares and 824,174 warrants to purchase common
shares at $1.55 per share, expiring January 23, 2007. The Company has
registered the common shares issued and all of the shares of common stock
underlying the Warrants (the "Warrant Shares").
During the year ended December 31, 2004, the Company issued 370,000 common
shares for $1,157,400 in investor relations consulting services.
During 2004, the Company issued 468,867 common shares in payment of $1,114,571
in consulting services.
On April 23, 2004, the Company acquired MedivoxRx Technologies, Inc. through a
triangular purchase wherein the Company's newly formed wholly owned subsidiary
acquired the operations MedivoxRx Technologies through the Company issuing
150,035 common shares to acquire all of the issued and outstanding shares of
MedivoxRx Technologies, Inc. During July 2004, the Parent issued an
additional 51,375 restricted common shares to the former stockholders upon
Wizzard Merger Corp. receiving Federal Supply Schedule approval. Additionally,
the Company has agreed to issue as many as additional 1,500,000 common shares
to the former shareholders of MedivoxRx Technologies, Inc. if certain
development, acceptance and profitability milestones are met (See Note 3).
On May 3, 2004, the Company issued 19,286 common shares in payment of $67,500
in penalties related to the delay in the registering shares underlying the 8%
convertible note payable (See Note 6).
The Company issued 287,689 common shares upon conversion of $135,000 of the 8%
convertible note payable and payment of related accrued interest payable of
$47,837.
On May 3, 2004, the Company issued 18,117 common shares in payment of $63,408
in accrued interest.
On May 3, 2004, the Company issued 27,999 common shares in payment of a
$10,016 note payable and $614 in related accrued interest and $78,408 in
consulting services.
Common Stock of Wizzard Software Corp. (Subsidiary) On September 23, 2004,
the board of directors of Wizzard Software Corp (Subsidiary) approved the
issuance of 200,000 common shares to an investor relations firm of the Parent.
The issuance decreased the Parent's ownership percentage in Wizzard Software
Corp. (Subsidiary) from 96% to 95%. The Parent recorded the issuance as
consulting expense for the $388,000 or $1.94 per share in consulting services.
F-20
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CAPITAL STOCK - continued
During January 2005, the Company issued 787,176 shares of common stock valued
at $1,191,967, for the acquisition of minority interest of Wizzard-Delaware.
The $1,191,967 was recorded as goodwill which was impaired.
During February 2005, the Company issued Class B warrants valued at $308,989,
Class B warrants valued at $516,827 in connection with convertible notes
payable. These convertible notes payable also had a beneficial conversion
feature valued at $574,184.
During September 2005, the Company issued 201,045 shares of common stock in
connection with the acquisition of Interim Heathcare of Wyoming, Inc.
During 2005, the Company issued 561,004 shares of common stock upon the
exercise of warrants at prices ranging from $1.15 to $1.55.
During 2005, the Company issued 223,850 shares of common stock upon the
conversion of $100,000 in notes payable and $11,925 of accrued interest.
During December 2005, the Company recorded $294,258 in expenses related to the
repricing and extension of terms of certain warrants.
During 2005, the Company issued 739,570 shares of common stock for services
which totaled $1,466,247.
During 2005, the Company issued 97,434 shares of common stock upon the
exercise of options for services which totaled $202,749.
During 2005, the Company issued 306,173 shares of common stock upon the
conversion of $450,001 in notes payable and $56,892 of accrued interest.
During 2005, the Company issued 25,096 shares of common stock for debt relief
of $47,432.
NOTE 9 STOCK OPTIONS & WARRANTS
2002 Stock Option Plan - During 2002, the Board of Directors adopted a Stock
Option Plan (2002 Plan). Under the terms and conditions of the Plan, the board
is empowered to grant stock options to employees, officers, directors and
consultants of the Company. Additionally, the Board will determine at the
time of granting the vesting provisions and whether the options will qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code
(Section 422 provides certain tax advantages to the employee recipients).
The total number of shares of common stock available under the Plan may not
exceed 1,000,000. At December 31, 2005 and 2004, total options available to
be granted under the Plan amounted to 14,259 and 14,259, respectively. During
2004, the Company granted 90,210 options which were immediately exercised for
services valued at $152,020.
F-21
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 STOCK OPTIONS & WARRANTS - continued
2004 Stock Option Plan - During 2004, the Board of Directors adopted a Stock
Option Plan (2004 Plan). Under the terms and conditions of the Plan, the board
is empowered to grant stock options to employees, officers, directors and
consultants of the Company. Additionally, the Board will determine at the
time of granting the vesting provisions and whether the options will qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code
(Section 422 provides certain tax advantages to the employee recipients).
The total number of shares of common stock available under the Plan may not
exceed 200,000. At December 31, 2005, total options available to be granted
under the Plan amounted to 60,034. During 2005 and 2004, the Company granted
56,334 and 139,966 options which were immediately exercised for services
valued at $127,947 and $266,619, respectively.
2005 Stock Option Plan - During 2005, the Board of Directors adopted a Stock
Option Plan (2005 Plan). Under the terms and conditions of the Plan, the board
is empowered to grant stock options to employees, officers, directors and
consultants of the Company. Additionally, the Board will determine at the
time of granting the vesting provisions and whether the options will qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code
(Section 422 provides certain tax advantages to the employee recipients).
The total number of shares of common stock available under the Plan may not
exceed 200,000. At December 31, 2005, total options available to be granted
under the Plan amounted to 158,900, respectively. During 2005, the Company
granted 41,100 options which were immediately exercised for services valued at
$74,802.
The fair value of each option granted is estimated on the date granted using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the period ended December 31, 2005 and 2004
risk-free interest rates of 3.2% and 1.2% expected dividend yields of zero,
expected volatility 0.0%, and no expected life as the options were immediately
exercised.
A summary of the status of the options granted under the Company's 2005, 2004,
and 2002 stock option plans and other agreements at December 31, 2005 and 2004
and changes during the year then ended is presented below:
December 31, 2005 December 31, 2004
_____________________ _____________________
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
________ _____________ _________ __________
Outstanding at beginning
of period - $ - - $ -
Granted 97,434 2.08 230,176 1.87
Exercised (97,434) 2.08 (230,176) 1.87
Forfeited - - - -
Expired - - - -
________ _____________ _________ ___________
Outstanding at end
of Period - $ - - $ -
________ _____________ _________ ___________
Weighted average fair value of options granted
during the year 97,434 $ 0.00 230,176 $ 0.00
________ _____________ _________ ___________
Warrants The Company granted warrants to purchase 408,076 shares of common
stock at $1.50 per share, expiring August 6, 2002 through January 1, 2004, for
services rendered in connection with the Company's private placement. On
January 1, 2004, the Company recorded a $160,420 expense for re-pricing of
408,076 warrants to purchase common stock from an exercise price of $1.50 per
share reduced to $1.00 per share and extending the expiration date of the
warrants from January 1, 2004 to February 29, 2004. The warrants were
exercised during February 2004.
On January, 23, 2004, and May 17, 2004, the Company issued a total of 824,174
warrants to purchase common stock at exercise prices of $1.55 per share, which
expire on January 23, 2007. The warrants were granted in connection with a
private placement. During December 2004, 58,000 of the warrants were
exercised.
F-22
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 STOCK OPTIONS & WARRANTS - continued
During 2001, the Company granted warrants to purchase 115,000 shares of common
stock at prices ranging from $.25 to $1.00 per share, expiring through October
18, 2004 in connection with consulting contract and recorded $56,660 in
consulting expense. During February, 2004, 75,000 and 40,000 of these warrants
were exercised at $1.00 and $0.25 per share, respectively.
In August 2000, the Company granted warrants to purchase 65,000 shares of
common stock at $1.25 per share. On February 13, 2004, these warrants were
exercised.
The Company issued 20,584 common shares upon the exercise of options valued at
$48,372 to employees.
During 2005, the Company issued 561,004 shares of common stock upon the
exercise of warrants at prices ranging from $1.15 to $1.55.
A summary of the status of the warrants granted at December 31, 2005 and 2004
and changes during the year then ended is presented below:
December 31, 2005 December 31, 2004
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of year 844,172 $1.55 1,788,076 $1.28
Granted 1,400,001 1.72 20,000 $1.55
Exercised (581,006) 1.24 (600,000) $1.03
Forfeited - - - -
Expired - - - -
----------- ----- --------- -----
Outstanding at end of year 1,663,167 $1.89 786,174 $1.55
----------- ----- --------- -----
NOTE 10 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". SFAS
No. 109 requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting
differences between book and tax accounting methods and any available
operating loss or tax credit carryforwards. The Company has available at
December 31, 2005 operating loss carryforwards of approximately $18,500,000
which may be applied against future taxable income and which expires in
various years through 2025.
The amount of and ultimate realization of the benefits from the operating loss
carryforward for income tax purposes is dependent, in part, upon the tax laws
in effect, the future earnings of the Company, and other future events, the
effects of which cannot be determined. Because of the uncertainty surrounding
the realization of the loss carryforward and significant changes in the
ownership of the Company, a valuation allowance has been established equal to
the tax effect of the loss carryforward and, therefore, no deferred tax asset
has been recognized for the loss carryforward. The net deferred tax asset is
approximately $6,290,000 as of December 31, 2005, with an offsetting valuation
allowance of the same amount. The change in the valuation allowance for the
year ended December 31, 2005 is approximately $2,040,000.
F-23
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 LEASES
Capital Lease - The Company is leasing equipment on a 63-month capital lease
terminating in August 2008. Monthly payments of $3,750 began in June 2003 and
a payment of $54,688 is due at termination. At December 31, 2005, the Company
had recorded equipment on capital lease at $223,750 with related accumulated
depreciation of $83,906. During the year ended December 31, 2005 and 2004,
depreciation expense for equipment on capital lease amounted to $7,249 and $0,
respectively, and has been included in depreciation expense. During the year
ended December 31, 2005 and 2004, interest expense on capital lease obligation
amounted to $3,789 and $0, respectively.
Future minimum capital lease payments are as follows for the twelve-month
periods ended December 31,:
2006 $ 45,000
2007 45,000
2008 84,688
_________
Total minimum lease payments 174,688
Less amount representing interest (20,214)
_________
Present value of minimum lease payments 154,474
Less current portion (35,250)
_________
$ 119,224
_________
The Company leases office space, in Pennsylvania, under an operating lease
agreement, which calls for monthly payments of $3,672 and expires on August 1,
2007. The Company leases additional office space, in Casper, Wyoming from the
former owner of Interim Healthcare of Wyoming, Inc. and current shareholder
and employee, under an operating lease agreement, which calls monthly payments
of $4,750 and expired on June 1, 2007.
The future minimum lease payments for non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 2005 are as follows:
Year ending December 31, Lease Payments
2006 101,064
2007 49,454
2008 -
Thereafter -
______________
Total Minimum Lease Payments $ 150,518
Lease expense charged to operations was $75,340 and $62,737 for the years
ended December 31, 2005 and 2004.
NOTE 12 LOSS PER SHARE
The following data show the amounts used in computing loss per share and the
weighted average number of shares of common stock outstanding for the periods
presented for the years ended December 31,:
2005 2004
Loss) from continuing operations
available to common shareholders (numerator) $(5,966,862) $(5,523,485)
----------- -----------
Weighted average number of common
shares outstanding during the period
used in loss per share (denominator) 27,576,608 24,824,265
----------- -----------
At December 31, 2004, the Company had 786,174 warrants outstanding to purchase
common stock of the Company at $0.25 to $1.55 per share and a convertible note
payable wherein the holder could convert the note into a minimum of 200,000
shares of common stock; which were not included in the loss per share
computation because their effect would be anti-dilutive.
At December 31, 2005, the Company had 1,663,167 warrants outstanding to
purchase common stock of the Company at prices ranging from $1.50 to $2.50 per
share and a convertible note payable which may be converted into
approximately 633,000 shares of common stock which were not included in the
loss per share computation because their effect would be anti-dilutive. See
Note 16 for subsequent issuances of common stock and common stock equivalents.
The Company may be obligated to issue additional shares in connection with the
acquisitions of MedivoxRx and Interim Health Care of Wyoming, Inc. (See Note
14).
F-24
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 CONCENTRATION OF REVENUES
During the year ended December 31, 2005 and 2004, 33% and 47%, respectively,
of the Company's revenue was derived from the sale of AT&T's OEM Natural
Voices desktop products.
During the year ended December 31, 2005 and 2004, 24% and 35%, respectively,
of the Company's revenue was derived from the sale of IBM's OEM ViaVoice
desktop products.
NOTE 14 COMMITMENTS & CONTINGENCIES
The Company is from time to time involved in routine legal and administrative
proceedings and claims of various types. While any proceedings or claim
contains an element of uncertainty, Management does not expect on our results
of operations or financial position.
Contingent Consideration for the Acquisition of MedivoxRX In connection with
the acquisition of MedivoxRx, Parent will issue an additional 100,000
restricted common shares to the former stockholders of MedivoxRx if Wizzard
Merger Corp. achieves repeat sales of at least 250 units per month from at
least 15 VA sites for three consecutive months with a specified gross margin.
Parent will also issue an additional 50,000 restricted common shares to the
former stockholders of MedivoxRx if Wizzard Merger Corp. pill bottle
simultaneously loads the prescription while the label is being printed and is
approved and accepted by any Veterans Administration Hospital. Parent will
further issue an additional 625,000 restricted common shares to the former
stockholders of MedivoxRx if Wizzard Merger Corp. meets revenue and profit
projections for the second year of operations forward from the April 23, 2004
acquisition date.
In connection with the agreement with AT&T to sell to AT&T's OEM Natural
Voices desktop product licenses the Company is required to make minimum
purchase of $125,000 per each six month period beginning July 2004 through
June 2007.
In connection with the agreement with IBM to sell IBM's OEM ViaVoice desktop
products licenses the Company is required to make minimum purchases of $12,500
per quarter beginning July 2003 through June 2005.
Contingent Consideration for the Acquisition of Interim Health Care of
Wyoming, Inc. As part of the Interim of Wyoming, Inc. acquisition, the
Company agreed to issue additional shares of common stock upon Interim
achieving certain financial results. Phase I incentives would include the
seller to receive an additional payment of two (2) times the Interim EBITDA
for the year ended September 30, 2006, based upon the amounts that exceeds the
Interim EBITDA for the year ended December 31, 2004. Twenty-five percent of
which will be paid in cash and seventy-five percent paid in stock.
Phase II incentives include the seller to receive an additional payment of two
times the EBITDA for the year ended September 30, 2007, based upon the amount
that exceeds the Interim EBITDA for the year ended September 30, 2006. Twenty-
five percent of which will be paid in cash and seventy-five percent paid in
stock.
F-25
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 SEGMENT REPORTING
The Company's operations are divided into two independent segments software
and healthcare. The Company does not have any inter-segment revenues and the
Company uses the same accounting principles used to prepare the consolidated
financial statements for both operating segments.
At December 31, 2005, all of the Company's assets are located within the
United States of America.
Software - The Company attributes revenues from the development, sale, and
service of custom and packaged computer software products at the time the
product is shipped and collections are likely.
Healthcare - The Company attributes revenue from the development, sale, and
service of talking prescription pill bottles and healthcare services at the
time the services are rendered and collections are likely.
The following is a summary of the Company's operations by segment for the year
ended December 31, 2005 and 2004:
2005 2004
___________________________________________________
Software Healthcare Total Software Healthcare Total
Net revenues $1,012,091 $ 681,984 $1,694,075 $ 510,334 $15,100 $ 525,434
Cost of sales 494,044 495,961 991,005 392,924 15,425 408,349
General and
administrative 1,224,661 2,219,856 3,444,517 4,431,403 97,916 4,529,319
Selling 183,846 273,790 457,636 126,462 166,389 292,851
Research and
development 58,795 10,294 69,089 - 65,705 65,705
Impairment of
goodwill/
Intangibles 1,191,967 - 1,191,967 164,205 528,524 692,729
Interest income - 36,540 36,540 - - -
Interest expense 1,518,906 19,830 1,538,736 20,155 - 20,155
Loss on disposal
of assets 4,527 - 4,527 38,811 - 38,811
Income tax benefit
(expense) - - - - - -
--------- --------- ---------- --------- ------- ---------
Net Income
(loss) $(3,665,655)$(2,301,206)$(5,966,862)$(4,664,626)$(858,859)$(5,523,485)
Financial information is summarized by geographic segment for the year
ended December 31, 2005 and 2004:
2005 2004
______________________________________________
Domestic Foreign Total Domestic Foreign Total
---------- -------- ---------- -------- -------- --------
Net revenues $1,337,896 $356,179 $1,694,075 $372,867 $152,567 $525,434
---------- -------- ---------- -------- -------- --------
F-26
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 SUBSEQUENT EVENTS
On January 19, 2006, the Company issued 100,000 common shares for consulting
services valued at $180,000.
Subsequent to December 31, 2005, the Company issued 38,255 shares of common
stock to employees and non-employees for services rendered upon the exercise
of options at $1.82 per share. These options were granted subsequent to
December 31, 2005
Subsequent to December 31, 2005, The Company issued 50,569 shares of common
stock upon the conversion of $75,000 and related accrued interest of $854 at
$1.50 per share.
F-27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WIZZARD SOFTWARE CORPORATION
Date: 5/26/06 By /s/ Christopher J. Spencer
------- ---------------------------
Christopher J. Spencer
Chief Executive Officer, President,
Treasurer and Director
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date: 5/26/06 /s/ Christopher J. Spencer
------- ---------------------------
Christopher J. Spencer
Chief Executive Officer, President,
Treasurer and Director
Date: 5/26/06 /s/ Gordon Berry
------- -----------------
Gordon Berry, Interim Chief Financial
Officer, Controller and Director
Date: 5/26/06 /s/ Armen Geronian
------- -------------------
Armen Geronian
Director
Date: 5/26/06 /s/ Alan Costilo
------- -----------------
Alan Costilo
Director
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher J. Spencer, President, CEO and Treasurer of Wizzard
Software Corporation (the "small business issuer"), certify that:
1. I have reviewed this annual report on Form 10-KSB-A1 of the small
business issuer;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to me by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Dated: 5/26/06 Signature: /s/ Christopher J. Spencer
---------------------------
Christopher J. Spencer
President, CEO and Treasurer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gordon Berry, Interim Chief Financial Officer and Controller of
Wizzard Software Corporation (the "small business issuer"), certify that:
1. I have reviewed this annual report on Form 10-KSB-A1 of the small
business issuer;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to me by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Dated: 5/26/06 Signature: /s/ Gordon Berry
---------------------------
Gordon Berry
Interim Chief Financial Officer
and Controller
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Wizzard Software Corporation
(the "Registrant") on Form 10-KSB-A1 for the calendar year ending December 31,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the "Annual Report"), we, Christopher J. Spencer, President, CEO and
Treasurer of the Registrant, and Gordon Berry, Interim CEO and Controller of
the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Annual Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report fairly presents,
in all material respects, the financial condition and result of operations of
the Registrant.
Date: 5/26/06 /s/ Christopher J. Spencer
---------------------------
Christopher J. Spencer
President, CEO, Treasurer and
director
Date: 5/26/06 /s/ Gordon Berry
-----------------
Gordon Berry
Acting Chief Financial Officer and
Controller
U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 333-69415
WIZZARD SOFTWARE CORPORATION
----------------------------
(Name of Small Business Issuer in its Charter)
COLORADO 25-1786180
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5001 Baum Blvd.
Pittsburgh, Pennsylvania 15213
-------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (412) 621-0902
Securities Registered under Section 12(b) of the Exchange Act: None
Name of Each Exchange on Which Registered: None
Securities Registered under Section 12(g) of the Exchange Act: Common, $0.001
par value.
Check whether the issuer is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. [ ]
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ...
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
State Issuer's revenues for its most recent fiscal year: December 31,
2005 - $1,694,075.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a specified
date within the past 60 days.
March 29, 2006 - $43,375,124.70. There are approximately 22,829,013
shares of common voting stock of the Registrant held by non-affiliates. The
aggregate market value was determined based on the average of the closing bid
and asked prices of the issuer's common stock on March 18, 2005.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Not Applicable.
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
March 29, 2006
29,085,650
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in
Part III, Item 13.
Transitional Small Business Issuer Format Yes X No
--- ---
PART I
Item 1. Description of Business.
------------------------
OVERVIEW
Founded in 1995, the business of Wizzard Software Corporation includes
software and hardware products and services that focus on speech recognition
and text-to-speech technology to allow computers, telephones and other devices
to understand spoken commands, dictation and respond to users through human
sounding synthetic speech. Wizzard provides software programming tools and
services which allow companies to incorporate speech technology into their
products and services. Wizzard offers speech technology software programming
tools and speech engines from AT&T and IBM for which Wizzard receives a
royalty for each licensed copy of these engines distributed with our
customer's products and services. Through its acquisition of MedivoxRx
Technologies, Wizzard offers a Talking Prescription Bottle to assist the
elderly, visually impaired and other individuals in the taking of their
prescription medication. Additionally, in September of 2005, Wizzard
finalized its acquisition of Interim Healthcare of Wyoming with plans to
increase internal productivity and provide better home healthcare services
through the use of speech technologies
Our products and services include:
Speech Products Rex -The Talking Prescription Bottle "talks" to the
patient, allowing him or her to distinguish what type of medication is in the
bottle along with information on dosage and refill instructions. Initially,
Rex was manually recorded by a pharmacist using a built-in microphone. Now,
with Wizzard's text-to-speech technology and programming expertise, Rex is
automatically loaded with verbal instructions directly from the label data,
saving pharmacists valuable time and significantly lowering the chance for
error. Wizzard also offers a "starter kit" for caretakers to provide in-home
talking prescription bottles.
Speech Tools - Wizzard's proprietary VoiceTools are programming tools for
software developers to incorporate the speech technology of their choice into
their products and services in a fast, efficient and inexpensive manner.
VoiceTools have been distributed over 100,000 times since their creation in
2000. In addition to our own marketing efforts, IBM promotes our VoiceTools
on their website through a linking agreement with Wizzard.
Speech Engines - Wizzard offers Text-To-Speech Engines from IBM and AT&T
to software developers and businesses around the world, as well as speech
recognition engines from IBM. Wizzard receives payments for each copy/license
distributed by its customers and in turn, pays a percentage of that payment to
IBM or AT&T.
Speech Services - Wizzard provides support, customized programming and
other speech related services to businesses and software programmers
worldwide. These services compliment Wizzard's Voice Tools and other
programming-oriented product lines and assist in putting the speech engines
Wizzard distributes for IBM and AT&T incorporated into customers' products,
resulting in royalty payments for each copy/license distributed by the
customer.
Home Healthcare Services - Interim HealthCare of Wyoming is a state
licensed and Medicare certified home health agency. In addition, Interim
HealthCare of Wyoming provides temporary staffing of healthcare professionals
to facilities across the state of Wyoming. Wizzard plans to increase worker
productivity and provide better home health services through the use of speech
technologies such as medical transcription/dictation and Rex - The Talking
Prescription Bottle. Currently, the healthcare industry is the largest
customer of speech technologies.
Our principal executive offices consist of approximately 3,100 square
feet of office space located at 5001 Baum Boulevard, Suite 770, Pittsburgh,
Pennsylvania 15213. Our telephone number is (412) 621-0902. We also maintain
an office in Casper, Wyoming for our Home Health Services. We have sales
representatives located in New York, Chicago, Florida, New Jersey and
Cleveland and a total of 51 full time and contract workers.
BUSINESS
From years of experience, Wizzard management has found that the adoption
of speech technology by our customers is usually the result of one of the
following three reasons:
1) Saves Labor - Lowers costs for businesses by saving labor and
increasing worker productivity.
2) Provides a Better Quality of Life - For individuals with visual and
other disabilities, speech products can allow them to live more independent
lives.
a) Compliance with Rules and Regulations - As a result of speech
having the benefit of providing access to otherwise inaccessible technology,
customers are using speech to better comply with new and newly enforced
governmental regulations and other rules which require businesses to provide
complete access to their technology, products and workplace environment.
3) Product Differentiator - Businesses can use speech to stand out from
their competition and differentiate their product or service.
Our core business is helping other companies incorporate high quality
speech recognition and text-to-speech technologies into their own products and
services. Through relationships with IBM and AT&T, we receive leads from
businesses worldwide who desire to add speech technology to a wide variety of
products and services. From time to time, Wizzard Software comes across a
unique idea for a speech-enabled product or an industry that would
substantially benefit from the use of speech recognition or text-to-speech
technology. Over the last two years we've made two acquisitions in the
healthcare industry: MedivoxRx Technologies and their product, Rex - The
Talking Prescription Bottle; and Interim Healthcare of Wyoming, a home
healthcare agency. We made both acquisitions with a single mission in mind:
to demonstrate how speech technology can improve worker productivity and
provide a better quality of life for its users.
Below is an overview of each Business Group within Wizzard, including:
1. Speech Technology and Services Group
2. Speech Products Group - Healthcare
3. Speech Services Group - Healthcare
1. Speech Technology and Services Group
Wizzard Software's Speech Technology and Services Group sells and
licenses speech programming tools, related speech products and services, and
distributable speech engines in over 13 languages worldwide. Wizzard receives
the majority of its sales leads through arrangements with IBM and AT&T as well
as through internal internet marketing efforts through Google, Yahoo and other
major internet search engines.
Wizzard's management feels it has effectively positioned the Speech
Technology and Services Group as the "go-between" for developers and corporate
users seeking to incorporate speech technology from IBM and AT&T, two of the
world's leading industry speech providers. Having created world class speech
technologies in their worldwide laboratories, these technology providers
license the core speech engines and programming tools to Wizzard. Wizzard then
adds the expertise of tool usage and integration experience and re-licenses
them to developer customers for large volume distribution or internal
deployment projects. In most cases, developers who plan to include speech
technology in their product or service will require specific programming tools
and support which is available through Wizzard. In some instances these
programming tools are proprietary to Wizzard. In other instances they are
licensed through Wizzard, but proprietary to the manufacturer of the speech
engine. In addition to programming tools distributable runtime engines and
support, Wizzard also creates Windows and Linux based applications for
customer distribution or internal deployment.
Major accomplishments in 2005 by our Speech Technology and Services Group
include:
* Wizzard's Speech Technology and Services Group records best revenue
generating quarter to date in 1st quarter.
* Wizzard's Speech Technology and Services Group adds 125 new customers
Wizzard extends distribution agreement with AT&T for five additional years.
* Wizzard's Speech Technology and Services Group tops record 1st Quarter
2005 revenues to set new record in 2nd quarter.
* Wizzard's Speech Technology and Services Group sees increase in sales
to Fortune 500 companies.
* Wizzard's Speech Technology and Services Group has third consecutive
quarterly revenue growth over previous year.
* Wizzard and IBM extend sales, support and linking agreements.
* Wizzard and AT&T extend sales and support agreements.
* Wizzard's Speech Technology and Services Group sets new quarterly
revenue record in 4th quarter, exceeding all internal estimates.
* Wizzard's Speech Technology and Services Group exceeds $1.0M in annual
revenues for first time in company history.
* Wizzard and IBM expand distribution to include Asia Pacific region.
In 2005, the Technology & Services Group grew full year revenues to their
highest in company history. Many factors contributed to this achievement
including a growing market propelled by broader usage models for speech
technologies, as well as our three pillar customer oriented strategy
consisting of world class speech technologies, compelling prices, and
excellent support. The net result of these and other successes was the best
4th quarter and annual revenue performance in company history.
Over the course of 2005, our Technology and Services business helped
hundreds of companies add speech technology to their products or services
through our speech programming engines, tools and consulting services. The
number of quarterly royalty- reporting customers is growing each quarter, and
we have several customers who have the potential to require large volume
licenses in the coming quarters. Recently, there have been substantial
consolidation and workforce shifts in the speech industry and management
believes these events have created opportunity for our Technology and Services
Group to capture new, high volume telephony server customers specifically,
while at the same time reducing the number of high quality product choices on
the market.
Wizzard's speech offerings continue to make an impact on the assistive
and education categories. The re-order side of the business is strong and many
leading developers of assistive and educational products have repeatedly
chosen Wizzard as their source for text-to-speech technology. Higher Education
and commercial offerings are using speech technology to provide accessibility
of text books and learning materials to impaired students.
Government agencies and organizations are using Wizzard's speech
offerings to streamline processes, improve efficiency and promote safety. An
application deployed by an agency of the Canadian government collects
road/weather/incident conditions and uses text-to-speech to disseminate vital
information to travelers. One mid-Western U.S. city government is using text-
to-speech to convert text from a building management monitoring system into
voice files in order to notify emergency personnel from a pre-determined
contact list. Another mid-Western U.S. city government is using text-to-speech
in a server-based application to make public address announcements to patrons
of their metro system.
Service companies are choosing Wizzard's offerings to help them improve
customer service and company productivity. A U.S. based wireless data and
messaging service company has enhanced their user experience by allowing
subscribers to have text-to-speech read their messages to them. A different
U.S. based company, specializing in home organization, has implemented an
internal retrieval application that increases field agent productivity by
using text to speech to provide them with customer information while on the
road. Yet another U.S. based financial services company is using one of
Wizzard's text to speech offerings to create a better user experience with
online product and service training. Finally, a U.S. based company has added
another level of automation to electric utility monitoring systems by using
text to speech to alert the appropriate personnel when infrastructure problems
occur.
Wizzard's speech offerings are also adding value in the healthcare
category. Wizzard's speech recognition offering is being used to power voice-
activated ultra-sound machines in order to create a hands-free environment for
medical staff, while a U.S. based advocacy group is using text to speech to
assist in the rehabilitation of patients who have lost the ability to speak.
The Technology & Services Group is a cross divisional team within Wizzard
that consists of the Technology and Services Division, plus key members of
Wizzard's development, I/S and marketing departments. Together, they are
working to implement our strategy to increase market share and brand awareness
and become the preferred supplier of speech technologies and services for both
domestic and international business developers. The Group anticipates
increased overall revenue through significant expansion of its customer base,
product portfolio and customer reach resulting from continued focus on three
imperatives: best technologies, best pricing and responsive support.
For 2006, we envision a year of increased opportunities due to the
momentum achieved in 2005 and by taking advantage of the consolidation
happening in our industry today. Our low cost sales support model is
functioning well and world-class technologies continue to be available to us.
We believe that the fastest developing, leading edge of the speech market is
anxious to take speech technology into new environments on new platforms,
while the more traditional, high-revenue speech market is demanding more
complex requirements, driven by standards and functional necessity, all at
lower cost.
Prospects from industry segments such as automated voice alerts,
electronic audio books, telephony IVR, accessibility and the healthcare market
continue to show interest in our speech products and services. We plan to
continue a strong internet marketing campaign via IBM, AT&T, Google, Yahoo,
Skype and Apple websites, and will further strengthen our marketing effort
with targeted initiatives aimed at the general product development community.
With the increase in large, high profile customer adoption of our products,
plus new and improved speech technology coming from our partners, combined
with growing acceptance of enabling technologies like VoIP and wireless
communication, we remain very excited about the future of our Speech
Technology & Services business.
In summary, speech opportunities continue to grow and management feels
that Wizzard is well positioned to compete in the speech market with a winning
combination of low cost delivery model and linkages into worldwide speech
technology providers.
2. Speech Products Group - Healthcare
From time to time, Wizzard identifies products or services that, through
the addition of speech technology, can have a significant impact on an
industry. This gives Wizzard an opportunity to make strategic acquisitions to
expand its product offerings while demonstrating the capabilities of our
speech technologies and speech development capabilities. Currently, the sale
of prescription medication bottles is a mature, low margin business with very
little room for increased margins or revenue growth. The addition of speech
technology to the bottle allows for increased compliance with prescription
medication instructions, and we believe customers (pharmacies, drug
manufacturers and individual users) will be willing to pay more for the newly
resulting "technology" based product. With higher profit margins and the
potential for additional add-on technology-based features, we believe a
company offering this new "technology" based traditional product would merit a
higher valuation than a traditional prescription medication bottle
manufacturer/distributor.
In 2004, Wizzard acquired MedivoxRx Technologies and its Talking
Prescription Bottle product line. Branded with the name "Rex," the Talking
Prescription Bottle allows end-users to "hear" medication instructions if
reading a medication label is not practical or possible. There are several
billion prescriptions filled each year in the U.S. and pharmaceutical errors
create billions of dollars in additional medical spending with the number one
error being identified as labeling problems and education. Using unique
microprocessor electronics and Wizzard's advanced text-to-speech technology,
pharmacists automatically create a "talking" label while the traditional
instruction label is being printed. At the push of a button, the prescription
bottle talks to the patient, telling him or her the name of the medication,
the dosage the patient should consume, the frequency of administration, refill
instructions, warnings and other important information necessary to educate
and help people take their prescription medication properly.
The objectives for the Speech Products Group - Healthcare, is to
establish successful sales channels for select products offered directly by
the Company which incorporate speech technology created by our Speech
Technology and Services Group. At this time, the main focus for our Speech
Products Group - Healthcare is the Rex - The Talking Prescription Bottle
product line.
Major accomplishments in 2005 by our Speech Products Group - Healthcare
include:
* 2005 - Wizzard's Speech Products Group launches Rex on Quixtar partner
store.
* 2005 - Wizzard's Speech Products Group grows the number of retail
stores carrying Rex.
* 2005 - Wizzard's Speech Products Group sponsors Adam Nelson, Olympic
silver medalist.
* 2005 - Wizzard's Talking Prescription Bottle receives positive press
in USA Today, Sports Illustrated, Washington Post and T.V. Guide.
* 2005 - Wizzard's Speech Products Group signs Cardinal Health to
distribute Rex The Talking Prescription Bottle.
* 2005 - Wizzard's Talking Prescription Bottle featured on CNN and
MSNBC.
Our Speech Products Group - Healthcare has been working as hard as any
group in Wizzard and is starting to make measurable progress in obtaining
product distribution and recruiting new customers for our talking prescription
bottle product line. We are working with several government entities,
nationwide retail pharmacy chains, international humanitarian groups and large
pharmaceutical product distributors. The reaction we are experiencing when
presenting our talking prescription bottle remains overwhelmingly positive and
almost every single pharmacist we show the bottle to suggest that 10% to 30%
of their patients could benefit from its use.
In 2005, we signed a distribution agreement with Cardinal Health, one of
the nation's largest pharmaceutical distributors who, after time spent
educating their sales associates, began marketing the Talking Prescription
Bottle in the fourth quarter. We also signed an agreement with Healthcare
Purchasing Partners International, the Prime Vendor for the Federal 340B
program. The Speech Products Group - Healthcare is focusing its marketing
efforts on pharmacies and caregivers and is working hard towards getting
Medicare reimbursement and insurance coverage for our Talking Prescription
Bottle customers. While there are no guarantees of approval, management
believes reimbursement approval from Medicare and insurance companies is the
key to large unit sales and we are in the process of collecting clinical data
from independent third party studies for our product to provide to the
governmental and insurance agencies. We have a gone a long way in achieving
name and product recognition for Rex and continue to institute programs for
greater market penetration.
In 2005, our Speech Products Group Healthcare, through MedivoxRx
Technologies, sponsored Adam Nelson, Olympic Silver medalist and current world
champion, to promote Rex - The Talking Prescription Bottle. As a result, Rex
received national press coverage, including the CBS Evening News, numerous ABC
and FOX affiliates, National Public Radio, USA Today, Sports Illustrated, The
Washington Post, T.V. Guide and The Economist. To take advantage of the
positive press Rex had been receiving, the marketing team launched a redesign
of the MedivoxRx website and launched a telemarketing campaign through
Cardinal Health.
In 2006, we plan to continue to make strides to establish ourselves with
a major pharmacy chain and a major retailer. We hope to achieve contract
closure with both organizations very soon. We will continue to work on
obtaining reimbursement and subsidies from insurance companies as well as
Medicare/Medicaid. We have just completed a position paper which we hope to
have published in major medical, pharmaceutical and trade journals. We will
also be conducting a clinical study to further that goal.
Additionally in 2006, we will continue to work with legislators in
several states that support legislation requiring pharmacies to carry
assistive aid devices that help ensure patient safety. We have received
attention and support from members of Congress at the Federal and State levels
in conjunction with the proposed legislation in Maryland as well as use of the
product in federally funded programs.
With the positive sales channel, end user and legislator reactions that
we are receiving, we remain committed to our belief that the Talking
Prescription Bottle will begin to achieve the success in 2006 that we have
envisioned from the onset. We expect to make several announcements in the
near future which should demonstrate progress on our plan to grow bottle
sales. As with most new technology products, the adoption cycle sometimes
takes longer than anticipated but with all the positive feedback we've heard,
we remain confident that the Talking Prescription Bottle has the potential to
be a big success for Wizzard.
3. Speech Services Group - Healthcare
From time to time, Wizzard identifies products or services that, through
the addition of speech technology, can have a significant impact on an
industry. This gives Wizzard an opportunity to make strategic acquisitions to
expand our product offerings while demonstrating the capabilities of our
speech technologies and speech development capabilities. After months of
investigation, we believe we have done so in the Home Health Care Industry.
The Home Health Care market offers Wizzard the most clear cut opportunity to
showcase its products and services, helping these agencies improve their
profit margins by utilizing speech recognition and text-to-speech in an
already growing, profitable setting. Both Wizzard's management and the owners
of our targeted home health care agencies believe that strong synergies exist
between their business (the services they offer, the compliances they must
adhere to, and the job functions of their workers), and our offerings (the
Talking Prescription Bottle, various talking medical devices, WizzScribe
transcription product, medical speech recognition dictation and form-fill
applications.) By combining the latest advances in speech technology with the
already profitable home health services, we believe we can grow the company
faster and become profitable sooner for our shareholders while demonstrating
to the world how speech related products and services can make profitable
businesses even more lucrative.
Our acquisition of Interim Healthcare of Wyoming was completed in the
third quarter of 2005 and we continue to be excited about the impact our
speech technology can have on the home healthcare industry. Based in Casper,
Wyoming, Interim Health Care of Wyoming has been serving its community for
fifteen years and is part of the fast growing home health segment of the
healthcare industry, providing a wide range of visiting nurse services to the
elderly, disabled and sick. It is one of the 300 home health agencies that
comprise Interim Health Care, the largest home healthcare franchise in the
U.S.
Interim HealthCare is licensed by the state of Wyoming and is certified
to provide services for the Medicare and Medicaid programs. Interim provides
a full spectrum of skilled and unskilled services to allow people the
opportunity to remain in their homes while they recover from an acute illness
or are managing a long term disabling condition. Interim HealthCare is
involved with many programs and payor sources, including contract staffing,
Medicare, Medicaid, insurance and private pay. Interim provides the following
services to their clients: Registered Nurses, Physical Therapists,
Occupational Therapists, Speech Therapists, Social Workers, Home Health Aides,
and Companions. Interim also serves as a placement service for emergency
response systems.
Interim receives referrals in a number of ways. Customers come to
Interim primarily on the recommendations of other health care providers in the
community. The discharge planners from hospital and nursing homes play a
large role in facilitating the after care of the clients who have used their
services. Physicians refer to the agency directly from their offices and
families frequently call seeking assistance for their relatives. Other social
programs working with the aged or disabled population often identify home care
needs and send clients to Interim. Maintaining name recognition and community
relationships are critical for building and maintaining the flow of customers.
Growth in the home health division is possible by further developing the
services area and participation in various social programs.
Interim HealthCare also operates a staffing division that serves the
entire state of Wyoming. The Interim Staffing Division markets itself as
serving both the Wyoming professionals and Wyoming facilities. The facilities
in Wyoming are frequently small with small pools of available staff, therefore
absence of one or two personnel would create a hole and, consequently, a risk
for the patients. Through the Interim Staffing Division, healthcare
professionals, (primarily registered nurses), are recruited, screened and
placed in facilities across the state, including nursing homes, hospitals,
clinics and correctional facilities. These placements can be for short or long
term assignments, or for permanent positions, depending on the needs of those
involved. The customer base is built through individual contact, marketing
collateral, and word of mouth. Interim's ability to provide personnel to
fill vacancies has been a significant contribution to the health care
facilities of Wyoming. Growth in this business can come from acquiring new
customers and professionals in the region as well as expanding the areas where
we seek to serve.
Interim also seeks out government support to further its success. The
legislative session for 2006 in Wyoming was a budget planning session. The
Medicaid program has not seen an increase in reimbursement for home health
since 1989. Interim staff has put effort into gaining acknowledgement from
the legislators of this concern for home health providers. As a result, an
increase in the home health budget has been approved. Though the exact
increase has not yet been announced, we expect to see a benefit from these
efforts beginning in the second half of 2006.
Focus for 2006 is on a few key areas. First, the opportunities for
providing Part B Medicare Therapy services are apparent and procedures are
being set in place to add this care to services available at Interim.
Secondly, telemedicine and its benefits for clients is a factor that sets
Interim apart from the competitors. Interim's use of this technology is being
reinforced and promoted among referral sources to increase the volume of home
health referrals. Thirdly, education programs for the senior population are
being presented by Interim staff to increase our visibility and accessibility
with the senior population. Finally, expansion of Interim's Staffing Division
is planned. Though Interim Staffing is a familiar name in Wyoming, untapped
opportunity is present in the rural areas of surrounding states. These
opportunities are being explored and business developed in these regions.
Recruitment of qualified staff is the greatest challenge at this time. The
Wyoming economy is robust with opportunity for employees and competition for
employers. Balancing the needs of employees and the needs of clients is the
continuing challenge for our organization.
We believe that our speech technology (Talking Prescription Bottle,
WizzScribe transcription service, MedOasis InfoPath forms, ViaVoice speech
medical recognition, etc.) can make a significant impact on the bottom line of
HHC agencies and we are aggressively working towards our first speech
implementation in 2006. Currently, most nurses and health aides fill out
mandatory paperwork by hand while owners of the home healthcare agencies
continuously strive for timely and accurate data. With a 10% to 25% rejection
rate, and 25% to 50% of a worker's time spent filling out paperwork, having
the ability to collect and submit accurate data for payment forms and other
aspects of the home healthcare business is a compelling proposition. We
believe that speech is the most efficient, accurate method for entering and
retaining medical records in this thriving vertical market with almost no
competition for us in speech technology implementations. We're starting with
the phone as the interface device because everyone is comfortable with it and
this allows us to accurately capture data at the point of care. We believe we
are now in position to build the best, most affordable home health medical
records solution and be the first in the industry to do so.
General and Administrative
--------------------------
In 2005, management closed a subscription agreement by which three
institutional investors purchased $1.4M in unsecured debt from the Company.
The subscription agreement, including notes and warrants if fully exercised,
will bring the aggregate gross proceeds realized to approximately $3.96M for
the Company.
The Wizzard Internal System, which was created as an internal workflow
system to run a substantial portion of Wizzard's internal operations, was
updated and ten new modules were added in 2005, covering e-commerce credit
card processing, purchase order streamlining, order entry and customer payment
scheduling. This system has already made our workers more efficient and
management believes that as we continue to improve the processes and
procedures of the system, our employees will continue to increase their
productivity. At the same time, the Company's controls and oversights will
improve for better compliance with Sarbanes-Oxley regulations.
Research and Development
------------------------
During the calendar years ended December 31, 2005, and 2004, we spent
$69,089 and $65,705, respectively, on research and development.
Necessary Material
-------------------
Beyond basic materials such as CD-ROMs, jewel cases that hold the CD-ROMs
and printing, which are all readily available from multiple sources, we depend
upon two to four speech recognition companies to license us their speech
recognition engines. It is these engines upon which we create our
applications. We do not foresee any difficulty in continuing to license these
engines, due to the competitive market between their manufacturers.
Furthermore, Microsoft is beginning to distribute its new speech recognition
engine for free in upcoming versions of its Windows operation system and its
Office suite of business products.
Licenses
--------
We have the following licenses, which are integral to our business
operations:
* IBM ViaVoice speech recognition and text-to-speech engines; and
* AT&T Natural Voices text-to-speech engine.
Patents Pending
---------------
MedivoxRx Technologies currently has two patents pending in the United
States and one patent pending in Canada for the talking prescription
medication bottle.
Environmental Compliance
------------------------
We do not believe that there are any material laws, rules or regulations
regarding environmental concerns that are applicable to our present or
intended business operations.
Governmental Regulations
------------------------
There are no present governmental regulations that are likely to affect
our present or proposed business operations. State sales taxes are not
currently required to be collected on Internet sales, but any future sales tax
requirements may affect our customer's purchasing decisions, and some
purchasers may stop ordering products over the Internet. Congress' four-year
extension on the moratorium on state taxes and regulation of the Internet is
scheduled to expire in November, 2007, and the effects of this cannot yet be
predicted.
Employees
---------
Currently, we have 22 full time employees and 29 contractors who spend a
significant amount of their time working for Wizzard.
Item 2. Description of Property.
------------------------
Wizzard's offices are located at 5001 Baum Blvd., Suite 770, Pittsburgh,
PA 15213. They consist of approximately 3,500 square feet of space, which are
rented for $3,672 per month. The lease terminates on August 1, 2007. Wizzard
also maintains offices in Casper, Wyoming for our Interim Healthcare
operations which are rented for $4,750 per month. The lease terminates on
June 1, 2007.
Item 3. Legal Proceedings.
------------------
Wizzard is involved in routine legal and administrative proceedings and
claims of various types. We have no material pending legal or administrative
proceedings, other than as discussed above or ordinary routine litigation
incidental to our business, to which we or any of our subsidiaries are a party
or of which any property is the subject. While any proceeding or claim
contains an element of uncertainty, management does not expect that any such
proceeding or claim will have a material adverse effect on our results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
During the fourth quarter of the calendar year ended December 31, 2005,
we did not submit any matter to a vote of our security holders, whether
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.
- -----------------------------------------------
Market Information.
- -------------------
Our common stock is currently traded on the OTC Bulletin Board of the
NASD under the symbol "WIZD." We can not guarantee that the present market
for our common stock will continue or be maintained. In addition, the sale of
unregistered and restricted common stock pursuant to Rule 144, or of 5,120,027
shares that we have registered for resale, may substantially reduce the market
price of our common stock. See the caption "Recent Sales of Unregistered
Securities," below.
The quarterly high and low bid prices for our shares of common stock
since public trading of these shares for the last two years are as follows:
Bid*
---
Quarter or period ending: High Low
- ------------------------- ---- ---
January 1, 2004 through
March 31, 2004 $4.28 $1.06
April 1, 2004 through
June 30, 2004 $3.73 $1.87
July 1, 2004 through
September 30, 2004 $2.86 $1.48
October 1, 2004 through
December 31, 2004 $2.23 $1.50
January 1, 2005 through
March 31, 2005 $2.76 $1.85
April 1, 2005 through
June 30, 2005 $2.10 $1.40
July 1, 2005 through
September 30, 2005 $2.25 $1.60
October 1, 2005 through
December 31, 2005 $1.97 $1.54
* These bid prices were obtained from Pink Sheets, LLC, formerly known
as the "National Quotation Bureau, LLC," and do not necessarily reflect actual
transactions, retail markups, mark downs or commissions.
Resales of Restricted Securities.
- ---------------------------------
As of March 29, 2006, approximately 15,639,995 shares of our common stock
were publicly traded. We expect that this number will increase by the
2,800,001 shares that we registered for resale by certain security holders
during the third quarter of 2005. This increase of approximately 18% in the
available shares for public trading may dramatically reduce the price of our
common stock on the basis of supply and demand alone. In addition, in May,
2004, we registered a total of 2,472,526 shares of our common stock on a
registration statement on Form SB-2. The sale of all or any portion of these
shares may have a further negative effect on our stock price.
Holders.
- --------
As of the date of this Report, we have about 351 stockholders. This
figure does not include an indeterminate number of stockholders who may hold
their shares in street name.
Dividends.
- ----------
We have not declared any cash dividends on our common stock, and do not
intend to declare dividends in the foreseeable future. Management intends to
use all available funds for the development of our plan of operation. There
are no material restrictions limiting, or that are likely to limit, our
ability to pay dividends on our common stock.
Securities Authorized for Issuance under Equity Compensation Plans.
- -------------------------------------------------------------------
Equity Compensation Plan Information
------------------------------------
The following information is provided as of December 31, 2005:
Number of Number of securities
securities remaining available
to be issued for future issuance
upon exercise Weighted-average under equity
of outstanding exercise price of compensation plans
Plan options, warrants outstanding options, excluding securities
category and rights warrants and rights reflected in column (a)
- -------- ---------- ------------------- -----------------------
(a) (b) (c)
Equity -0- -0- -0-
compen-
sation
plans
approved
by
security
holders
Equity -0- -0- 159,900
compen-
sation
plans not
approved
by
security
holders
Total -0- -0- 159,900
Recent Sales of Unregistered Securities.
- -----------------------------------------
We have sold the following restricted shares of common stock during the
quarterly period ended December 31, 2005:
Date Number of Aggregate
Name of Owner Acquired Shares Consideration
- ------------- -------- ------ -------------
Bruce Phifer 12-1-05 7,000 Services rendered
11 employees 12-8-05 2,600 Services rendered
Alpha Capital AG 12-8-05 104,274 Conversion of $150,000
principal and $6,411 interest
on convertible note
29 employees of 12-20-05 8,800 Services rendered
Interim Healthcare of
Wyoming, Inc.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
- -----------------------------------------------------------------------
None; not applicable.
Item 6. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
Results of Operations.
- ----------------------
2005 Compared to 2004
---------------------
Wizzard derives it revenue from the sale of desktop and enterprise speech
technology (speech recognition and text-to-speech) programming tools,
distributable engines and speech related consulting services and support, as
well as through the sale of talking prescription bill bottles and the offering
of home healthcare services through its wholly-owned subsidiary Interim
Healthcare of Wyoming, Inc.
During 2005, Wizzard recorded revenues of $1,694,075, an increase of
$1,168,641, or approximately 222%, from our revenues of $525,434 in 2004.
This increase was due in large part to increased sales of our AT&T and IBM
licensed products as well as from revenues from our acquisition of Interim
HealthCare of Wyoming.
During 2005, cost of goods sold was $991,005, an increase of $582,656, or
approximately 143%, over the 2004 figure of $408,349. This is attributed to
an increase in labor cost associated with our subsidiary, Interim of Wyoming,
as well as to consulting and custom programming and increased payments to AT&T
and IBM on licensed products which accompany increased sales.
Wizzard generated a gross profit of $703,070 in 2005, versus a gross
profit of $117,085 in 2004, an increase of 500%. We feel our gross margin for
our speech technologies should hold steady over the next several years based
on current products and other offerings continuing to be of value to our
customers and the fact that we have finalized the amortization of the
technologies purchased in the Speech Systems acquisition. The cost of goods
for our talking prescription pill bottle is higher than for our core speech
technologies but has been reduced significantly from the initial acquisition
date and will continue to fall as sales increase. Gross profit from our
subsidiary, Interim, has historically remained stable.
Selling expenses increased to $457,636 in 2005, from $292,851 in the
prior year, due to increased marketing efforts, specifically for our talking
prescription pill bottle. We plan to continue marketing our own and strategic
third party products through various forms of customer interaction mentioned
above. Additionally, our Interim subsidiary increased selling expenses by
$10,681.
In 2005, Wizzard had operating expenses of $5,154,993, as compared to
$5,544,959 in 2004. The decrease is primarily attributed to a decrease in
stock issued for services to our investor relations firm.
General and administrative expenses decreased to $3,142,043 in 2005, from
$4,333,254 in the prior year, a decrease of 27%, due principally to a decrease
in investor relations expenses and other non-cash consulting services.
Research and development expense increased to $69,089, from $65,705 in the
prior year related to the integration of the text to speech technology into
the talking pill bottle.
Wizzard incurred non-cash legal, public relations and consulting fees of
$3,165,447 in fiscal 2004, as compared to $1,668,966 in 2005. Of this non-
cash amount in fiscal 2005, $1,328,200 was for investor relations, $229,664
was for general and administrative expense, $111,132 for selling expense and
$0 for research and development expense. For fiscal 2004, the non-cash
amount included $1,545,400 for investor relations, $657,738 was for general
and administrative expense, $548,582 for selling expense and $115,838 for
research and development expense. Due to the increased liquidity of its
common stock traded on the OTC Bulletin Board exchange, Wizzard has been able
to pay for valuable and sometimes critical services with restricted and
unrestricted common stock. This has helped us to use our cash for general and
administrative operations. For all such stock issuances, we valued the stock
at the market price at the close of the day of issuance. All related expense
was recorded the same day.
During 2005, the Company performed its annual test of impairment of
goodwill and intangible assets by comparing the net carrying value including
goodwill of the assets with the present value of future cash flows. Fair
value was estimated using the expected present value of discounted future cash
flows of the businesses within Wizzard Software Corporation. When making
these estimates, we were required to make estimates of future operating trends
and judgments on discount rates and other variables. Actual future results and
other assumed variables could differ from those estimated.
The result of the annual impairment test indicated that the carrying
value of goodwill and intangible assets exceeded their implied fair value and
an impairment charge of $1,191,967 respectfully was recorded in the
consolidated statement of operations during 2005. All of the goodwill
impaired relates to the acquisition of the remaining interest of Wizzard
Delaware Corporation.
Interest expense increased to $1,538,736 in 2005, from $20,155 in 2004,
due to the $1,400,000 discount on our $1,400,000 5% convertible note payable
related the conversion feature and warrants issued in connection with the
convertible note payable.
Net loss increased to $5,958,646 in 2005, as compared to a net loss of
$5,486,840 in 2004. We have a basic and diluted loss per common share of
$0.22 in 2005, which is the same amount as in 2004.
Effective as of December 19, 2005, Wizzard and three investors executed a
Warrant Amendment Agreement under which we agreed to amend the holders' Class
B Warrants to (i) make one-half of each holder's such warrants, totaling
466,665 warrants, exercisable at a price of $1.15 per share, exercisable until
5:00 p.m. EST on the 150th day on which the Registration Statement under which
the shares underlying such warrants has been effective; and (ii) extending the
period of exercisability of the remaining 466,668 Class B Warrants to 5:00
p.m. EST on February 8, 2007. As of the date hereof, all of the 466,665
repriced warrants have been exercised at $1.15 per share. As a result of this
repricing we incurred compensation expense of $294,258.
Liquidity and Capital Resources.
- --------------------------------
2005 compared to 2004
---------------------
Current assets at December 31, 2005 included $1,168,656 in cash and
accounts receivable, an increase of $704,254 from our cash and accounts
receivable of $464,402 at December 31, 2004. On February 8, 2005, we closed a
$1,400,000, 5% convertible note subscription agreement.
During fiscal 2005, our operating activities used net cash of $1,118,830,
as compared to $1,468,064 in net cash used by operating activities during
2004.
In 2005, depreciation and amortization expense was $44,889, which was
down from $152,103 in 2004. In both periods, this expense was primarily
attributed to impairment of intangible assets during 2004.
Net cash used in investing activities increased to $(469,581) in 2005,
versus $(38,354) in 2004. During 2005, the Company paid $518,000 and issued
201,045 common shares to acquire Interim HealthCare of Wyoming, Inc. Cash used
for the purchase of property and equipment was $18,776 in 2005 versus $36,682
in 2004.
In 2005, net cash provided by financing activities increased to
$2,038,986, from $1,898,576 in 2004. Net cash of $682,918 was provided by the
issuance of common stock in 2005, less the payment of offering costs of
$8,433; in 2004, these figures were $2,025,859 and $127,283, respectively. In
2005, we received $1,400,000 in proceeds from convertible notes payable to
related parties. We also paid related party notes of $25,076 in fiscal 2005.
At December 31, 2005, the Company had a working capital deficit of
$303,800, as compared to working capital of $433,537 at December 31, 2004.
This decrease in working capital is due to cash used and liabilities assumed
to acquired Interim Health Care of Wyoming, Inc. The Company believes it is
still in the early stages of the new and developing speech technology market
and estimates it will require approximately $120,000 per month to maintain
current operations. As mentioned in Note 2 to the accompanying financial
statements, the Company has not yet been able to establish profitable
operations and has not generated cashflows from operations, thus raising
substantial doubt about its ability to continue as a going concern. The
Company has been successful over the past ten years in obtaining working
capital and will continue to seek to raise additional capital from time to
time as needed and until profitable operations can be established.
We have estimated the costs of remedying the material weakness identified
with respect to our internal controls over financial reporting at
approximately $150,000. See Item 8A of this Report.
Safe Harbor Statement.
- ----------------------
Statements made in this Form 10-KSB which are not purely historical are
forward-looking statements with respect to the goals, plan objectives,
intentions, expectations, financial condition, results of operations, future
performance and business of Wizzard, including, without limitation, (i)
our ability to gain a larger share of the speech recognition software
industry, our ability to continue to develop products acceptable to that
industry, our ability to retain our business relationships, and our ability to
raise capital and the growth of the speech recognition software industry, and
(ii) statements preceded by, followed by or that include the words "may",
"would", "could", "should", "expects", "projects", "anticipates", "believes",
"estimates", "plans", "intends", "targets" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and
important factors (many of which are beyond Wizzard's control) that could
cause actual results to differ materially from those set forth in the forward-
looking statements, including the following, in addition to those contained in
our reports on file with the SEC: general economic or industry conditions,
nationally and/or in the communities in which Wizzard conducts business,
changes in the interest rate environment, legislation or regulatory
requirements, conditions of the securities markets, changes in the casino
industry, the development of products that may be superior to the products
offered by Wizzard, demand for financial services, competition, changes in
the quality or composition of Wizzard's products, our ability to develop
new products, our ability to raise capital, changes in accounting principals,
policies or guidelines, financial or political instability, acts of war or
terrorism, other economic, competitive, governmental, regulatory and technical
factors affecting Wizzard's operations, products, services and prices.
Accordingly, results actually achieved may differ materially from
expected results in these statements. Forward-looking statements speak only
as of the date they are made. Wizzard does not undertake, and specifically
disclaims, any obligation to update any forward-looking statements to reflect
events or circumstances occurring after the date of such statements.
Item 7. Financial Statements.
---------------------
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Gregory & Associates, LLC [Letterhead]
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
Pittsburgh, Pennsylvania 15213
We have audited the accompanying consolidated balance sheet of Wizzard
Software Corporation and subsidiaries as of December 31, 2005, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2005 and 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board in the United States of America. 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 controls over financial reporting. Our audit included
consideration of internal controls 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 controls over financial reporting. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
audited by us present fairly, in all material respects, the financial position
of Wizzard Software Corporation and subsidiaries as of December 31, 2005 and
the results of their operations and their cash flows for the years ended
December 31, 2005 and 2004, in conformity with generally accepted accounting
principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has not yet established profitable
operations and has incurred significant losses since its inception. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/S/ Gregory & Associates, LLC
March 2, 2006
Salt Lake City, Utah
F-1
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2005
___________
CURRENT ASSETS:
Cash $ 869,277
Accounts receivable, net of $74,738 allowance 299,379
Inventory, net of $61,690 allowance 16,877
Prepaid expenses 24,514
-----------
Total current assets 1,210,047
LEASED EQUIPMENT, net 139,844
PROPERTY AND EQUIPMENT, net 106,104
GOODWILL 896,570
OTHER ASSETS 5,582
-----------
Total assets $ 2,358,147
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 214,953
Accrued expenses 60,758
Capital Lease current portion 35,250
Notes payable 239,576
Deferred revenue 13,311
Convertible notes payable related party 949,999
-----------
Total current liabilities 1,513,847
CAPITAL LEASE, less current portion 119,224
-----------
Total liabilities $ 1,633,071
-----------
COMMITMENT & CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $.001 par value, 100,000,000 shares
authorized,29,035,576 shares issued and outstanding 29,036
Additional paid-in capital 20,126,555
Accumulated deficit (19,430,515)
------------
Total Stockholders' Equity 725,076
------------
Total liabilities and stockholders equity $ 2,358,147
============
The accompanying notes are an integral part of this consolidated financial
statement.
F-2
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
______________________
2005 2004
__________ _________
NET SALES $ 1,694,075 $ 525,434
COST OF GOODS SOLD 991,005 408,349
---------- ---------
Gross Profit 703,070 117,085
---------- ---------_
OPERATING EXPENSES:
Selling expenses 457,636 292,851
General and administrative 3,142,043 4,333,254
Research and development 69,089 65,705
Compensation for re-pricing warrants 294,258 160,420
Impairment of goodwill 1,191,967 522,932
Impairment of intangible asset - 169,797
_________ _________
Total Expenses 5,154,993 5,544,959
--------- ---------
LOSS FROM OPERATIONS (4,451,923) (5,427,874)
--------- ---------
OTHER INCOME (EXPENSE):
Gain (loss) on disposal of assets (4,527) (38,811)
Interest expense related party (1,519,692) (20,155)
Interest expense (19,044)
Interest income 36,540 -
---------- ----------
Total Other Income (Expense) (1,506,723) (58,966)
_________ _________
LOSS BEFORE INCOME TAXES (5,958,646) (5,486,840)
CURRENT INCOME TAX EXPENSE - -
DEFERRED INCOME TAX EXPENSE - -
--------- ---------
NET LOSS $(5,958,646)$(5,486,840)
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE: $ (.22) $ (.22)
========= =========
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARE OUTSTANDING: 27,576,608 24,824,265
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WIZZARD SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common Stock Additional
_________________________ Paid in Accumulated
Shares Amount Capital (Deficit)
___________ ____________ ___________ ___________
BALANCE, December 31, 2003 22,176,256 22,176 7,877,822 (7,985,029)
Issuance of common stock for
cash, less $127,254 offering
costs, at $0.73 per share,
January and May 2004 1,648,352 1,648 1,070,085 -
Compensation for the
re-pricing of warrants to
purchase common stock from
$1.50 to $1.00 per share - - 160,420 -
Stock issued upon exercise
of warrants at $0.25 to
$1.55 per share 646,076 646 663,380 -
Stock issued upon exercise
of options at $1.81 per
share, March 2004 90,210 90 162,756 -
Stock issued for employees
services upon exercise of
options at $1.77 per share 77,666 78 137,391 -
Stock issued for consulting
services upon exercise of
options at $1.99 to $4.24
per share 62,300 62 129,088 -
Stock issued for investor
relations consulting
services at $2.77 to $3.30
per share, March 2004 370,000 370 1,157,030 -
Subsidiary stock issued to
for investor relations
services at $1.94 per share - - 388,000 -
Stock issued for consulting
services at $1.73 to $3.18
per share 468,867 469 1,114,102 -
Stock issued in payment of
a $10,016 note payable $614
in accrued expenses and
$78,437 in consulting
services at $3.18 per share,
May 2004 27,999 28 89,039 -
Stock issued in payment of
accrued interest at accrued
expenses at $3.50 per share,
May 2004 18,117 18 63,360 -
Stock issued related to the
acquisition of MedivoxRx
Technologies, May 2004 150,035 150 536,975 -
Continued
F-4
WIZZARD SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Continued)
Common Stock Additional
_________________________ Paid in Accumulated
Shares Amount Capital (Deficit)
Stock issued related to the
acquisition of MedivoxRx
Technologies at $1.70 per
share, July 2004 51,375 52 87,285 -
Stock issued in payment of
penalties related to Delay
in registration of shares
underlying the 8% convertible
note payable at $3.50 per share 19,286 19 67,481 -
Stock issued upon conversion
of note payable at $0.50 per
share and $47,837 of accrued
interest at $2.70 May to
October 2004 287,689 288 182,549 -
Net loss for the year ended
December 31, 2004 - - - (5,486,840)
___________ ____________ ___________ __________
BALANCE, December 31, 2004 26,094,228 $ 26,094 $13,886,763$(13,471,869)
---------- ----------- ----------- -----------
Acquisition of minority
interest in Wizzard
Delaware, January 2005 787,176 787 1,191,180 -
Class B Warrants issued in
connection with convertible
note payable, February 2005 - - 308,989 -
Class A Warrants issued in
connection with convertible
note payable, February 2005 - - 516,827 -
Value of Beneficial Conversion
Feature of Convertible notes
payable, February 2005 - - 574,184 -
Stock issued upon exercise of
warrants at Prices ranging
from $1.15 to $1.55 per share
January through December, 2005 561,004 561 682,329 -
Acquisition of Interim
Healthcare September 2005 201,045 201 385,805 -
Stock issued upon conversion
of notes payable and $11,915
in accrued interest at $.50 per
share February through
November 2005 223,850 224 111,701 -
Compensation for warrant which
were repriced and had an
extension of terms,
December 2005 - - 294,258 -
Continued
F-5
WIZZARD SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Continued)
Common Stock Additional
_________________________ Paid in Accumulated
Shares Amount Capital (Deficit)
Stock issued for services
and other non-cash expenses at
pricing ranging from $1.85 to
$2.35 per share, February
through December 2005 739,570 740 1,465,507 -
Stock issued upon the exercise
of options for services at
pricing ranging from $1.82 to
$2.44 per share, February
through December 2005 97,434 98 202,651 -
Stock issued upon conversion
of notes payable and $56,692
in accrued interest at $1.50
per share August through
December 2005 306,173 306 458,954 -
Stock issued for debt relief
at $1.89 per share December
2005 25,096 25 47,407 -
Net loss for the year ended
December 31, 2005 - - - (5,958,646)
---------- --------- ----------- ------------
Balance 12/31/2005 29,035,576 $ 29,036 $20,126,559 $(19,430,515)
---------- --------- ----------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
______________________
2005 2004
__________ _________
Cash Flows from Operating Activities:
Net loss $(5,958,646) $(5,486,840)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization of discount on notes payable 1,400,000 -
Stock for non cash expenses 1,668,966 3,005,027
Compensation for extension and repricing
warrants 294,258 160,420
Change in allowance for doubtful accounts (58,084) -
Change in allowance for inventory 53,789 -
Impairment of definite-life intangible assets - 169,797
Impairment of goodwill 1,191,967 522,932
Loss on disposal of assets 1,743 38,811
Depreciation and amortization expense 44,889 152,103
Change in assets and liabilities:
Restricted cash - 34,771
Accounts receivable 125,626 (5,882)
Inventory 17,158 (11,496)
Prepaid expenses 44,224 (48,570)
Accounts payable 27,601 (29,940)
Accrued expense 53,882 14,258
Deferred revenue (26,203) -
------------ -----------
Net Cash Used in Operating Activities (1,118,830) (1,468,064)
------------ -----------
Cash Flows from Investing Activities:
Purchase of property & equipment (18,776) (36,682)
Proceeds from sale of equipment 3,000 -
Payment for business acquisitions (518,000) -
Change in other assets 2,542 (1,672)
Cash acquired in business acquisition 34,653 -
------------- -----------
Net Cash Used in Investing Activities (496,581) (38,354)
------------- -----------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock 682,918 2,025,859
Payment of stock offering cost (8,433) (127,283)
Payments on Capital Lease (10,423) -
Proceeds from note payable related party 1,400,000 -
Payments on note payable - related party (25,076) -
------------ -----------
Net Cash Provided by Financing Activities 2,038,986 1,898,576
------------ -----------
Net Increase in Cash 423,575 392,158
------------ -----------
Cash at Beginning of Period 445,702 53,544
------------ -----------
Cash at End of Period $ 869,277 $ 445,702
------------ -----------
(Continued)
F-7
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended
December 31,
______________________
2005 2004
__________ ___________
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 23,874 $ 4,387
Income taxes $ - $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the Year Ended December 31, 2005
The Company issued 787,176 shares of common stock valued at $1,191,967,
for the acquisition of minority interest of Wizzard-Delaware. The
$1,191,967 was recorded as goodwill which was impaired.
The Company issued Class B warrants valued at $308,989, Class B warrants
valued at $516,827 in connection with convertible notes payable. These
convertible notes payable also had a beneficial conversion feature valued
at $574,184.
The Company issued 201,045 shares of common stock in connection with the
acquisition of Interim Healthcare of Wyoming.
The Company issued 223,850 shares of common stock upon the conversion of
$100,000 in notes payable and $11,925 of accrued interest.
The Company recorded $294,258 in expenses related to the repricing and
extension of terms of certain warrants.
The Company issued 739,570 shares of common stock for non-cash expenses
which totaled $1,466,247.
The Company issued 97,434 shares of common stock upon the exercise of
options for services which totaled $202,749.
The Company issued 306,173 shares of common stock upon the conversion of
$450,001 in notes payable and $56,892 of accrued interest.
The Company issued 25,096 shares of common stock for debt relief of
$47,432.
For the Year Ended December 31, 2004
The Company recorded $160,420 in compensation for the re-pricing of
408,076 warrants from $1.50 to $1.00 per share and extending the
expiration date from January 1, 2004 to February 29, 2004.
The Company issued 370,000 common shares for investor relations services
valued at $1,157,400.
The Parent recorded a $388,000 in investor relations expense and a
capital contribution for the issuance of 200,000 common shares of
Wizzard Software Corp. (Subsidiary).
The Company issued 18,117 common shares in payment of $63,408 in accrued
interest.
(Continued)
F-8
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Year Ended December 31, 2004
The Company issued 531,167 common shares for consulting services valued
at $1,243,721.
The Company issued 77,666 common shares to employees for services valued
at $137,469.
The Company issued 27,999 common shares in payment of a $10,016 note
payable and $614 in related accrued interest and $78,437 in consulting
services.
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the Year Ended December 31, 2004
On April 23, 2004, the Company acquired MedivoxRx Technologies, Inc.
through a triangular purchase wherein the Company's newly formed wholly
owned subsidiary acquired the operations MedivoxRx Technologies through
the Company issuing 150,035 common shares to acquire all of the issued
and outstanding shares of MedivoxRx Technologies, Inc. As a result of
the purchase, the Company recorded goodwill of $435,594 as the purchase
price of $537,125 exceeded the $101,531 net book value of the assets.
On July 9, 2004, the Company issued 51,375 restricted common shares to
the former stockholders upon Wizzard Merger Corp. receiving Federal
Supply Schedule approval on the talking pill bottle and recorded
additional goodwill of $87,337.
The Company issued 19,286 common shares in payment of $67,500 in
penalties related to the delay in the registering shares underlying the
8% convertible note payable.
The Company issued 287,689 common shares upon conversion of $135,000 of
the 8% convertible note payable and payment of related accrued interest
payable of $47,837.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization Wizzard Software Corporation ["Parent"], a Colorado
corporation, was organized on July 1, 1998. The Company has, at the present
time, not paid any dividends and any dividends that may be paid in the future
will depend upon the financial requirements of the Company and other relevant
factors. On January 19, 2005, Parent acquired the remaining 5% minority
interest of Wizzard Software Corp. ["WSC"], wherein WSC was merged into
Parent. The Company engages primarily in the development, sale, and service
of custom and packaged computer software products. On May 22, 2001, Parent
purchased all of the issued and outstanding shares of Speech Systems, Inc.
["Speech"], a Florida corporation, in a transaction accounted for as a
purchase. On April 9, 2004, Parent organized Wizzard Merger Corp. ["WMC"], a
New York corporation, to acquired and dissolve into the operations of
MedivoxRx Technologies, Inc. ["MedivoxRx"], a New York corporation, in a
transaction accounted for as a purchase. WMC engages primarily in the
development, sale, and service of a talking prescription pill bottle. On
September 8, 2005, Parent purchased all of the issued and outstanding shares
of Interim Healthcare of Wyoming, Inc. ["Interim"], a Wyoming corporation, in
a transaction accounted for as a purchase. Interim engages primarily in
providing healthcare services in Wyoming.
Consolidation The financial statements presented reflect the accounts of
Parent, WSC, Speech, MedivoxRx, and Interim, the "Company." All significant
inter-company transactions have been eliminated in consolidation.
Accounting Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimated
by management.
Reclassification The financials statements for the period ended prior to
December 31, 2005 have been reclassified to conform to the headings and
classifications used in the December 31, 2005 financial statements.
Cash and Cash Equivalents At December 31, 2005, the Company had cash
balances of $669,277 in excess of federally insured limits.
Accounts Receivable - Accounts receivable consist of trade receivables arising
in the normal course of business. At December 31, 2005, the Company has an
allowance for doubtful accounts of $74,738 which reflects the Company's best
estimate of probable losses inherent in the accounts receivable balance. The
Company determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence. During the years ended
December 31, 2005 and 2004, the Company adjusted the allowance for bad debt by
$ (58,084) and $16,545, respectively.
Inventory Inventory consists of software, health care products and supplies
and is carried at the lower of cost or market on a first in first out basis.
Depreciation Depreciation of property and equipment is provided on the
straight-line method over the estimated useful lives of the assets of five
years to ten years.
F-10
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Goodwill and Definite-life intangible assets Goodwill represented the excess
of costs over the fair value of the identifiable net assets of businesses
acquired. Definite-life intangible assets consist of website development
cost, patents, trademarks, purchased rights to a Merchant Operating
Understanding (for the distribution of the Company's products) and trade
secrets of the speech recognition software ActiveX Voice Tools, purchased in
the acquisition of Speech Systems, Inc., and a patents pending and trademarks
acquired in the purchase of MedivoxRx Technologies, Inc. The Company
accounts for Goodwill and definite-life intangible assets in accordance with
provisions of Statement of Financial Accounting Standards "SFAS" No. 142,
"Goodwill and Other Intangible Assets". Goodwill and intangible assets
acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead are tested for
impairment at least annually in accordance with the provisions of SFAS
No. 142. Impairment losses arising from this impairment test, if any, are
included in operating expenses in the period of impairment. SFAS No. 142
requires that definite intangible assets with estimable useful lives be
amortized over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Definite-life intangible assets were being
amortized over two to five years on a straight-line basis before they were
impaired during 2004.
Software Development Costs - Statement of Financial Accounting Standards
("SFAS") No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" requires software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management
with respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalizable software development costs have not been significant and
accordingly no amounts are shown as capitalized at December 31, 2005.
Loss Per Share The Company computes loss per share in accordance with
Statement of Financial Accounting Standards "SFAS" No. 128 "Earnings Per
Share," which requires the Company to present basic earnings per share and
diluted earnings per share when the effect is dilutive (see Note 12).
Income Taxes The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires an asset and liability approach for
accounting for income taxes.
Advertising Costs Advertising costs are expensed as incurred and amounted to
$92,475 and $3,800 for the period ending December 31, 2005 and 2004.
Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and notes payable are determined by reference to
market data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their recorded
values due to their short-term maturities.
F-11
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition Revenue is recognized when earned. The Company's revenue
recognition policies are in compliance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2 (as amended by
SOP 98-4 and SOP 98-9) and related interpretations, "Software Revenue
Recognition" and the Securities and Exchange Commission Staff Accounting
Bulletin No. 101 and 104.
Software - The Company sells packaged and custom software products and related
voice recognition product development consulting.
Software product revenues are recognized upon shipment of the software product
only if no significant Company obligations remain, the fee is fixed or
determinable, and collection is received or the resulting receivable is deemed
probable. Revenue from package software products are recorded when the payment
has been received and the software has been shipped. Revenue is recognized,
net of discount and allowances, at the time of product shipment. For packaged
software products the Company offers a 30 day right of return. Provisions are
recorded for returns, concessions, and bad debts and at December 31, 2005 and
2004 amounted to $0. Revenue related to obligations, which include telephone
support for certain packaged products, are based on the relative fair value of
each of the deliverables determined based on vendor-specific objective
evidence ("VSOE") when significant. The Company VSOE is determined by the
price charged when each element is sold separately. Revenue from packaged
software product sales to and through distributors and resellers is recorded
when payment is received and the related products are shipped. The Company's
distributors or resellers do not carry packaged software product inventory and
thus the Company does not offer any price protections or stock balancing
rights. Revenue from non-recurring programming, engineering fees, consulting
service, support arrangements and training programs are recognized when the
services are provided. Such items are included in net revenues and amounted to
$ 16,250 and $29,050 at December 31, 2005 and 2004, respectively.
Healthcare The Company recognizes revenue from the providing of healthcare
services when the services are provided and collection is probable Revenues
for the talking bottle are recognized when the product is shipped and
collections are probable.
Recently Enacted Accounting Standards - Statement of Financial Accounting
Standards ("SFAS") No. 152, "Accounting for Real Estate Time-Sharing
Transactions - an amendment of FASB Statements No. 66 and 67", SFAS No. 153,
"Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29", and
SFAS No. 123 (revised 2004), "Share-Based Payment", which replaces SFAS No.
123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No.
25, "Accounting for stock Issued to Employees" and Emerging Issues Task Force
("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments," were recently issued. SFAS No. 152,
153, and EITF 03-1 have no current applicability to the Company or their
effect on the financial statements would not have been significant.
F-12
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS No.
151 requires abnormal amounts of inventory costs related to idle facility,
freight handling and wasted material (spoilage) to be recognized as current-
period charges. In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company will be required to adopt
the provisions of SFAS No. 151 for fiscal years beginning after June 15, 2005.
Management believes the provisions of this Standard will not have a
significant effect on our financial position or results of operations.
SFAS No. 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The cost will be
measured based on the fair value of the instruments issued. The Company will
be required to apply SFAS No. 123(R) as of the first interim reporting period
that begins after June 15, 2005. Accordingly, The Company will adopt SFAS No.
123(R) in the third quarter of fiscal 2005 using the modified-prospective
method. Management is currently evaluating the impact SFAS No. 123(R) will
have on the Company's results of operations as a result of adopting this new
Standard.
Stock Options - The Company accounts for the stock option plans in accordance
with the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. Under
this method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost under SFAS No. 123 has been
recognized for the stock option plans or other agreements in the accompanying
statement of operations. Had compensation cost for the Company's stock option
plans and agreements been determined based on the fair value at the grant date
for awards in 2005 and 2004 consistent with the provisions of SFAS No. 123,
the Company's net earnings net of taxes and earnings per share would have been
reduced to the pro forma amounts indicated below:
2005 2004
----------- -----------
Net (Loss) As reported $(5,956,654)$(5,486,840)
Add: Stock-based employee compensation
expense included in reported net income - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method - -
----------- -----------
Net (Loss) Proforma $(5,956,654)$(5,486,840)
----------- -----------
Basic and diluted loss per share
As reported $ (.22)$ (.22)
Proforma $ (.22)$ (.22)
F-13
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Research and Development Cost - The Company expenses the cost of developing
new products as incurred as research and product development costs. Included
in general and administrative expense at December 31, 2005 and 2004 are
$69,089 and $65,705, respectively, of research and development costs
associated with the development of new products.
NOTE 2 GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles of the United States
of America, which contemplate continuation of the Company as a going concern.
However, the Company has incurred significant losses from inception, has
current liabilities in excess of current assets, has not generated any cash
flow from operating activities, and has not yet been successful in
establishing profitable operations. These factors raise substantial doubt
about the ability of the Company to continue as a going concern. In this
regard, management plans to mitigate this doubt by raising additional funds
through debt and/or equity offerings and by substantially increasing sales.
There is no assurance that the Company will be successful in achieving
profitable operations. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
NOTE 3 ACQUISITION
On September 8, 2005, Parent acquired Interim Health Care of Wyoming pursuant
to a Stock Purchase Agreement signed September 8, 2005. The agreement called
for Parent to pay $518,000 and to issue 201,045 shares of common stock valued
at $386,006 for 100% of the outstanding stock of Interim Health Care of
Wyoming. The financial statements include the operations of Interim from
September 8, 2005 through December 31, 2005. The Company acquired Interim with
the intention of diversifying the Company's operations into other industries.
Contingent incentives As part of the Interim of Wyoming, Inc. acquisition,
the Company agreed to issue additional shares of common stock upon Interim
achieving certain financial results. Phase I incentives would include the
seller to receive an additional payment of two (2) times the Interim EBITDA
for the year ended September 30, 2006, based upon the amounts that exceeds the
Interim EBITDA for the year ended December 31, 2004. Twenty-five percent of
which will be paid in cash and seventy-five percent paid in stock.
Phase II incentives include the seller to receive an additional payment of two
times the EBITDA for the year ended September 30, 2007, based upon the amount
that exceeds the Interim EBITDA for the year ended September 30, 2006. Twenty-
five percent of which will be paid in cash and seventy-five percent paid in
stock.
F-14
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ACQUISITION continued
The following unaudited proforma information summarizes the estimated fair
values of the assets acquired and the liabilities assumed at September 8, 2005
(purchase date):
Cash $ 34,653
Accounts receivable 389,705
Inventory 1,130
Property & equipment 177,478
Accounts payable (79,644)
Accrued expenses (63,466)
Note payable (250,000)
Capital lease obligation (162,906)
Deferred revenue (39,514)
------------
Net estimated fair value of assets
acquired 7,436
Goodwill 896,570
------------
Purchase Price $ 904,006
The following unaudited proforma information summarizes the estimated
results of operations as if the acquisition had occurred at the
beginning of the period presented:
For the Year
Ended
December 31,
____________________
2005 2004
----------- ----------
Net revenues $3,027,160 $2,711,555
----------- ----------
Net loss $(5,953,356)$(5,305,086)
---------- ----------
Loss per common share $ (.22) $ (.21)
---------- ----------
NOTE 4 INVENTORY
The following is a summary of inventory at December 31, 2005:
Raw materials $ 65,485
Finished goods 13,082
Less: Allowance for obsolete inventory (61,690)
----------
$ 16,877
----------
The Company estimates that an allowance for slow moving or obsolete
inventory was necessary at December 31, 2005 in the amount of $61,690.
During the year ended December 31, 2005, the Company expensed $61,690
related to the allowance.
F-15
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 PROPERTY & EQUIPMENT
The following is a summary of property and equipment at:
December 31
Life 2005
__________
Furniture, fixtures and equipment 2 10 yrs $ 118,323
Production molds 3 yrs 47,710
Software 2 5 yrs 11,964
----------
177,997
(Less) Accumulated Deprecation (71,893)
----------
Property & Equipment, net $ 106,104
----------
Depreciation expense for the year ended December 31, 2005 and 2004 was $37,640
and $34,943, respectively. The Company terminated its lease agreement in 2004
and recorded a loss of $38,869 in abandoned leasehold improvement.
The following is a summary of leased equipment at:
December 31
Life 2005
__________
Leased Equipment 5.25 Yrs $ 223,750
Less: Accumulated Depreciation (83,906)
___________
Net Leased Equipment $ 139,844
Amortization expense for the year ended December 31, 2005 and 2004 was $7,249
and $0, respectively.
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLES ASSETS
The Company has classified its intangible assets as a definite-life intangible
asset and is amortizing them on a straight-line basis over two to five years.
During December 2004 the Company used the estimated future cash flows to test
the remaining intangible assets for impairment and recorded an impairment of
intangible assets determined that the Company's intangible assets were
impaired. Amortization expense of $0 and $117,160 was recorded for the year
ended December 31, 2005 and 2004 and has been included in cost of goods sold.
F-16
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLES ASSETS - continued
The following is a summary of intangibles:
December 31,
Life 2005
Active X Voice Tools Software 5 years $500,000
Trademarks, patents, website registrations 2 to 5 years 23,503
Memorandum of Understanding 5 years 66,227
--------
589,730
Accumulated amortization (419,933)
Impairment (169,797)
Intangibles, net $ -
---------
Goodwill - On April 23, 2004, the Company recorded goodwill of $435,594 in
connection with the acquisition of MedivoxRx Technologies, Inc. as the
purchase price of $537,125 exceeds the $101,531 net book value of the assets
acquired. During July 2004, the Parent recorded an additional $88,120 in
goodwill with the issuance of 51,375 restricted common shares to the former
stockholders upon Wizzard Merger Corp. receiving Federal Supply Schedule
approval.
The following is a summary of goodwill:
For the Year
Ended
December 31,
2005 2004
Goodwill at beginning of period $ - $ -
Goodwill from acquisition of
MedivoxRx - 435,594
Additional goodwill from acquisition
of MedivoxRx from the issuance
of contingent consideration - 88,120
Goodwill from acquisition of 5%
Minority interest 1,191,967 -
Goodwill from acquisition of Interim 896,570 -
Impairment of goodwill (1,191,967) (523,714)
----------- ---------
Goodwill at end of period $ 896,570 $ -
----------- ---------
F-17
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLES ASSETS - continued
Impairment - During 2005 and 2004, the Company performed its annual test of
impairment of goodwill and intangible assets by comparing the net carrying
value including goodwill of the assets with the present value of future
cashflows. Fair value was estimated using the expected present value of
discounted future cash flows of the businesses within Wizzard Software
Corporation. When making these estimates, we were required to make estimates
of future operating trends and judgments on discount rates and other
variables. Actual future results and other assumed variables could differ from
those estimated.
The result of the annual impairment test indicated that the carrying value of
$1,191,967 and $522,932 in goodwill and $0 and $169,797 in intangible assets
exceeded their implied fair value and an impairment charge and was recorded in
the consolidated statement of operations. The goodwill impaired relates to the
acquisition of the remaining minority interest of Wizzard Delaware and of the
acquisition of MedivoxRx Technologies. The intangibles assets impaired related
to the unamortized balance of the Active X Voice Tools Software, Trademarks,
patents, website registrations and Memorandum of Understanding.
NOTE 7 NOTES PAYABLE
Convertible Note Payable - On September 14, 2001, the Company issued a Series
2001-A 8% convertible note payable of the Company in the amount of $250,000,
with a maturity date of August 1, 2011. The Note was convertible into the
Company's common stock at the lesser of $0.50 per share or 75% of the closing
bid price. During the year ended December 31, 2001, $15,000 of the note with
related accrued interest of $208 was converted into 30,416 shares of common
stock. During the year ended December 31, 2004 $135,000 of the note with
related accrued interest of $47,837 was converted into 287,689 common shares.
As the conversion price was below the fair value of the common stock on the
date issued the Company has recorded the beneficial conversion feature of the
note in accordance with the provisions found in EITF 98-5 by recording a
$250,000 discount on the note. The discount was recorded as interest expense
on September 14, 2001 as the note was immediately convertible. The note called
for the Company to register the underlying shares into which the note can be
converted by March 15, 2002, which did not occur. On May 3, 2004 the Company
issued 19,286 restricted common shares for the payment of the $67,500 penalty
for the delay in the registration equal to $7,500 for the first month then
$10,000 for every month thereafter through October 2002. During the year ended
December 31, 2005, the Company issued 223,850 shares of common stock in
payment of the remaining $100,000 and $11,925 in accrued interest.
Related Party Note Payable During the year ended December 31, 2001, a
shareholder loaned the Company $46,076. The demand note is unsecured and
accrues interest at 5% per annum. In May 2005, the Company repaid the
remaining $25,076 in principle and $4,830 in accrued interest.
F-18
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 NOTES PAYABLE - continued
On February 8, 2005, the Company closed a Subscription Agreement by which
three institutional investors purchased promissory notes having a total
principal amount of $1,400,000, convertible into shares of the Company's
common stock at a price of $1.50 per share, and bearing an annual interest
rate of five percent; Class A Warrants to purchase a total of 466,667 shares
of common stock at a price of $2.50 per share, exercisable for three years;
and Class B Warrants to purchase a total of 933,334 shares of common stock at
a price of $1.50 per share, exercisable until 150 days after the effective
date of the Registration Statement. In December 2005, the Company repriced
466,667 of the Class B warrants from $1.50 to $1.15 exercise price and were
immediately exercised. Also in December 2005, the remaining 466,667 Class B
warrants had their life extended one year.
NOTE 8 CAPITAL STOCK
Preferred Stock - The Company has authorized 10,000,000 shares of preferred
stock, $0.001 par value. As of December 31, 2004, no shares were issued and
outstanding.
Common Stock - The Company has authorized 100,000,000 shares of common stock,
$0.001 par value. As of December 31, 2005, 29,035,576 shares were issued and
outstanding.
During 2004, the Company issued 646,076 common shares upon the exercise of
warrants outstanding to purchase common stock of the Company at $0.25 to $1.55
per share.
F-19
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CAPITAL STOCK - continued
During 2004, the Company issued a total of 167,876 common shares upon exercise
of options issued for $300,315 in employee compensation.
During 2004, the Company issued 62,300 common shares upon exercise of options
issued for $129,150 in consulting services.
During January 2004, the Company raised an additional $1,071,733 through the
issuance of 1,648,352 common shares and 824,174 warrants to purchase common
shares at $1.55 per share, expiring January 23, 2007. The Company has
registered the common shares issued and all of the shares of common stock
underlying the Warrants (the "Warrant Shares").
During the year ended December 31, 2004, the Company issued 370,000 common
shares for $1,157,400 in investor relations consulting services.
During 2004, the Company issued 468,867 common shares in payment of $1,114,571
in consulting services.
On April 23, 2004, the Company acquired MedivoxRx Technologies, Inc. through a
triangular purchase wherein the Company's newly formed wholly owned subsidiary
acquired the operations MedivoxRx Technologies through the Company issuing
150,035 common shares to acquire all of the issued and outstanding shares of
MedivoxRx Technologies, Inc. During July 2004, the Parent issued an
additional 51,375 restricted common shares to the former stockholders upon
Wizzard Merger Corp. receiving Federal Supply Schedule approval. Additionally,
the Company has agreed to issue as many as additional 1,500,000 common shares
to the former shareholders of MedivoxRx Technologies, Inc. if certain
development, acceptance and profitability milestones are met (See Note 3).
On May 3, 2004, the Company issued 19,286 common shares in payment of $67,500
in penalties related to the delay in the registering shares underlying the 8%
convertible note payable (See Note 6).
The Company issued 287,689 common shares upon conversion of $135,000 of the 8%
convertible note payable and payment of related accrued interest payable of
$47,837.
On May 3, 2004, the Company issued 18,117 common shares in payment of $63,408
in accrued interest.
On May 3, 2004, the Company issued 27,999 common shares in payment of a
$10,016 note payable and $614 in related accrued interest and $78,408 in
consulting services.
Common Stock of Wizzard Software Corp. (Subsidiary) On September 23, 2004,
the board of directors of Wizzard Software Corp (Subsidiary) approved the
issuance of 200,000 common shares to an investor relations firm of the Parent.
The issuance decreased the Parent's ownership percentage in Wizzard Software
Corp. (Subsidiary) from 96% to 95%. The Parent recorded the issuance as
consulting expense for the $388,000 or $1.94 per share in consulting services.
F-20
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CAPITAL STOCK - continued
During January 2005, the Company issued 787,176 shares of common stock valued
at $1,191,967, for the acquisition of minority interest of Wizzard-Delaware.
The $1,191,967 was recorded as goodwill which was impaired.
During February 2005, the Company issued Class B warrants valued at $308,989,
Class B warrants valued at $516,827 in connection with convertible notes
payable. These convertible notes payable also had a beneficial conversion
feature valued at $574,184.
During September 2005, the Company issued 201,045 shares of common stock in
connection with the acquisition of Interim Heathcare of Wyoming, Inc.
During 2005, the Company issued 561,004 shares of common stock upon the
exercise of warrants at prices ranging from $1.15 to $1.55.
During 2005, the Company issued 223,850 shares of common stock upon the
conversion of $100,000 in notes payable and $11,925 of accrued interest.
During December 2005, the Company recorded $294,258 in expenses related to the
repricing and extension of terms of certain warrants.
During 2005, the Company issued 739,570 shares of common stock for services
which totaled $1,466,247.
During 2005, the Company issued 97,434 shares of common stock upon the
exercise of options for services which totaled $202,749.
During 2005, the Company issued 306,173 shares of common stock upon the
conversion of $450,001 in notes payable and $56,892 of accrued interest.
During 2005, the Company issued 25,096 shares of common stock for debt relief
of $47,432.
NOTE 9 STOCK OPTIONS & WARRANTS
2002 Stock Option Plan - During 2002, the Board of Directors adopted a Stock
Option Plan (2002 Plan). Under the terms and conditions of the Plan, the board
is empowered to grant stock options to employees, officers, directors and
consultants of the Company. Additionally, the Board will determine at the
time of granting the vesting provisions and whether the options will qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code
(Section 422 provides certain tax advantages to the employee recipients).
The total number of shares of common stock available under the Plan may not
exceed 1,000,000. At December 31, 2005 and 2004, total options available to
be granted under the Plan amounted to 14,259 and 14,259, respectively. During
2004, the Company granted 90,210 options which were immediately exercised for
services valued at $152,020.
F-21
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 STOCK OPTIONS & WARRANTS - continued
2004 Stock Option Plan - During 2004, the Board of Directors adopted a Stock
Option Plan (2004 Plan). Under the terms and conditions of the Plan, the board
is empowered to grant stock options to employees, officers, directors and
consultants of the Company. Additionally, the Board will determine at the
time of granting the vesting provisions and whether the options will qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code
(Section 422 provides certain tax advantages to the employee recipients).
The total number of shares of common stock available under the Plan may not
exceed 200,000. At December 31, 2005, total options available to be granted
under the Plan amounted to 60,034. During 2005 and 2004, the Company granted
56,334 and 139,966 options which were immediately exercised for services
valued at $127,947 and $266,619, respectively.
2005 Stock Option Plan - During 2005, the Board of Directors adopted a Stock
Option Plan (2005 Plan). Under the terms and conditions of the Plan, the board
is empowered to grant stock options to employees, officers, directors and
consultants of the Company. Additionally, the Board will determine at the
time of granting the vesting provisions and whether the options will qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code
(Section 422 provides certain tax advantages to the employee recipients).
The total number of shares of common stock available under the Plan may not
exceed 200,000. At December 31, 2005, total options available to be granted
under the Plan amounted to 158,900, respectively. During 2005, the Company
granted 41,100 options which were immediately exercised for services valued at
$74,802.
The fair value of each option granted is estimated on the date granted using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the period ended December 31, 2005 and 2004
risk-free interest rates of 3.2% and 1.2% expected dividend yields of zero,
expected volatility 0.0%, and no expected life as the options were immediately
exercised.
A summary of the status of the options granted under the Company's 2005, 2004,
and 2002 stock option plans and other agreements at December 31, 2005 and 2004
and changes during the year then ended is presented below:
December 31, 2005December 31, 2004
_____________________
_____________________
Weighted Average
Weighted Average
Shares Exercise Price
Shares Exercise Price
________ _____________
_________ __________
Outstanding at beginning of period - $ -
- $ -
Granted 97,434
2.08 230,176 1.87
Exercised 97,434
2.08 (230,176) 1.87
Forfeited - -
- -
Expired - -
- -
________ ______________
________ ____________
Outstanding at end of Period - $ -
- $ -
________ ______________
________ ____________
Weighted average fair value of options granted
during the year 97,434 $
0.00 230,176 $ 0.00
________ ______________
________ ____________
Warrants The Company granted warrants to purchase 408,076 shares of common
stock at $1.50 per share, expiring August 6, 2002 through January 1, 2004, for
services rendered in connection with the Company's private placement. On
January 1, 2004, the Company recorded a $160,420 expense for re-pricing of
408,076 warrants to purchase common stock from an exercise price of $1.50 per
share reduced to $1.00 per share and extending the expiration date of the
warrants from January 1, 2004 to February 29, 2004. The warrants were
exercised during February 2004.
On January, 23, 2004, and May 17, 2004, the Company issued a total of 824,174
warrants to purchase common stock at exercise prices of $1.55 per share, which
expire on January 23, 2007. The warrants were granted in connection with a
private placement. During December 2004, 58,000 of the warrants were
exercised.
F-22
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 STOCK OPTIONS & WARRANTS - continued
During 2001, the Company granted warrants to purchase 115,000 shares of common
stock at prices ranging from $.25 to $1.00 per share, expiring through October
18, 2004 in connection with consulting contract and recorded $56,660 in
consulting expense. During February, 2004, 75,000 and 40,000 of these warrants
were exercised at $1.00 and $0.25 per share, respectively.
In August 2000, the Company granted warrants to purchase 65,000 shares of
common stock at $1.25 per share. On February 13, 2004, these warrants were
exercised.
The Company issued 20,584 common shares upon the exercise of options valued at
$48,372 to employees.
During 2005, the Company issued 561,004 shares of common stock upon the
exercise of warrants at prices ranging from $1.15 to $1.55.
A summary of the status of the warrants granted at December 31, 2005 and 2004
and changes during the year then ended is presented below:
December 31, 2005 December 31, 2004
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of year 844,172 $1.55 1,788,076 $1.28
Granted 1,400,001 1.72 20,000 $1.55
Exercised (581,006) 1.24 (600,000) $1.03
Forfeited - - - -
Expired - - - -
----------- ----- --------- -----
Outstanding at end of year 1,663,167 $1.89 786,174 $1.55
----------- ----- --------- -----
NOTE 10 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". SFAS
No. 109 requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting
differences between book and tax accounting methods and any available
operating loss or tax credit carryforwards. The Company has available at
December 31, 2005 operating loss carryforwards of approximately $18,500,000
which may be applied against future taxable income and which expires in
various years through 2025.
The amount of and ultimate realization of the benefits from the operating loss
carryforward for income tax purposes is dependent, in part, upon the tax laws
in effect, the future earnings of the Company, and other future events, the
effects of which cannot be determined. Because of the uncertainty surrounding
the realization of the loss carryforward and significant changes in the
ownership of the Company, a valuation allowance has been established equal to
the tax effect of the loss carryforward and, therefore, no deferred tax asset
has been recognized for the loss carryforward. The net deferred tax asset is
approximately $6,290,000 as of December 31, 2005, with an offsetting valuation
allowance of the same amount. The change in the valuation allowance for the
year ended December 31, 2005 is approximately $2,040,000.
F-23
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 LEASES
Capital Lease - The Company is leasing equipment on a 63-month capital lease
terminating in August 2008. Monthly payments of $3,750 began in June 2003 and
a payment of $54,688 is due at termination. At December 31, 2005, the Company
had recorded equipment on capital lease at $223,750 with related accumulated
depreciation of $83,096. During the year ended December 31, 2005 and 2004,
depreciation expense for equipment on capital lease amounted to $7,249 and $0,
respectively, and has been included in depreciation expense. During the year
ended December 31, 2005 and 2004, interest expense on capital lease obligation
amounted to $3,789 and $0, respectively.
Future minimum capital lease payments are as follows for the twelve-month
periods ended December 31,:
2006 $ 45,000
2007 45,000
2008 84,688
_________
Total minimum lease payments 174,688
Less amount representing interest (20,214)
____________
Present value of minimum lease payments 154,474
Less current portion (35,250)
_________
$ 119,224
_________
The Company leases office space, in Pennsylvania, under an operating lease
agreement, which calls for monthly payments of $3,672 and expires on August 1,
2007. The Company leases additional office space, in Casper, Wyoming from the
former owner of Interim Healthcare of Wyoming, Inc. and current shareholder
and employee, under an operating lease agreement, which calls monthly payments
of $4,750 and expired on June 1, 2007.
The future minimum lease payments for non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 2005 are as follows:
Year ending December 31, Lease Payments
2006 101,064
2007 49,454
2008 -
Thereafter -
______________
Total Minimum Lease Payments $ 150,518
Lease expense charged to operations was $75,340 and $62,737 for the years
ended December 31, 2005 and 2004.
NOTE 12 LOSS PER SHARE
The following data show the amounts used in computing loss per share and the
weighted average number of shares of common stock outstanding for the periods
presented for the years ended December 31,:
2005 2004
Loss) from continuing operations
available to common shareholders (numerator) $(5,958,646) $(5,486,840)
----------- -----------
Weighted average number of common
shares outstanding during the period
used in loss per share (denominator) 27,576,608 24,824,265
----------- -----------
At December 31, 2004, the Company had 786,174 warrants outstanding to purchase
common stock of the Company at $0.25 to $1.55 per share and a convertible note
payable wherein the holder could convert the note into a minimum of 200,000
shares of common stock; which were not included in the loss per share
computation because their effect would be anti-dilutive.
At December 31, 2005, the Company had 1,663,167 warrants outstanding to
purchase common stock of the Company at prices ranging from $1.50 to $2.50 per
share and a convertible note payable which may be converted into
approximately 633,000 shares of common stock which were not included in the
loss per share computation because their effect would be anti-dilutive. See
Note 16 for subsequent issuances of common stock and common stock equivalents.
The Company may be obligated to issue additional shares in connection with the
acquisitions of MedivoxRx and Interim Health Care of Wyoming, Inc. (See Note
14).
F-24
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 CONCENTRATION OF REVENUES
During the year ended December 31, 2005 and 2004, 33% and 47%, respectively,
of the Company's revenue was derived from the sale of AT&T's OEM Natural
Voices desktop products.
During the year ended December 31, 2005 and 2004, 24% and 35%, respectively,
of the Company's revenue was derived from the sale of IBM's OEM ViaVoice
desktop products.
NOTE 14 COMMITMENTS & CONTINGENCIES
The Company is from time to time involved in routine legal and administrative
proceedings and claims of various types. While any proceedings or claim
contains an element of uncertainty, Management does not expect on our results
of operations or financial position.
Contingent Consideration for the Acquisition of MedivoxRX In connection with
the acquisition of MedivoxRx, Parent will issue an additional 100,000
restricted common shares to the former stockholders of MedivoxRx if Wizzard
Merger Corp. achieves repeat sales of at least 250 units per month from at
least 15 VA sites for three consecutive months with a specified gross margin.
Parent will also issue an additional 50,000 restricted common shares to the
former stockholders of MedivoxRx if Wizzard Merger Corp. pill bottle
simultaneously loads the prescription while the label is being printed and is
approved and accepted by any Veterans Administration Hospital. Parent will
further issue an additional 625,000 restricted common shares to the former
stockholders of MedivoxRx if Wizzard Merger Corp. meets revenue and profit
projections for the second year of operations forward from the April 23, 2004
acquisition date.
In connection with the agreement with AT&T to sell to AT&T's OEM Natural
Voices desktop product licenses the Company is required to make minimum
purchase of $125,000 per each six month period beginning July 2004 through
June 2007.
In connection with the agreement with IBM to sell IBM's OEM ViaVoice desktop
products licenses the Company is required to make minimum purchases of $12,500
per quarter beginning July 2003 through June 2005.
Contingent Consideration for the Acquisition of Interim Health Care of
Wyoming, Inc. As part of the Interim of Wyoming, Inc. acquisition, the
Company agreed to issue additional shares of common stock upon Interim
achieving certain financial results. Phase I incentives would include the
seller to receive an additional payment of two (2) times the Interim EBITDA
for the year ended September 30, 2006, based upon the amounts that exceeds the
Interim EBITDA for the year ended December 31, 2004. Twenty-five percent of
which will be paid in cash and seventy-five percent paid in stock.
Phase II incentives include the seller to receive an additional payment of two
times the EBITDA for the year ended September 30, 2007, based upon the amount
that exceeds the Interim EBITDA for the year ended September 30, 2006. Twenty-
five percent of which will be paid in cash and seventy-five percent paid in
stock.
F-25
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 SEGMENT REPORTING
The Company's operations are divided into two independent segments software
and healthcare. The Company does not have any inter-segment revenues and the
Company uses the same accounting principles used to prepare the consolidated
financial statements for both operating segments.
At December 31, 2005, all of the Company's assets are located within the
United States of America.
Software - The Company attributes revenues from the development, sale, and
service of custom and packaged computer software products at the time the
product is shipped and collections are likely.
Healthcare - The Company attributes revenue from the development, sale, and
service of talking prescription pill bottles and healthcare services at the
time the services are rendered and collections are likely.
The following is a summary of the Company's operations by segment for the year
ended December 31, 2005 and 2004:
2005 2004
___________________________________________________
Software Healthcare Total Software Healthcare Total
Net revenues $1,012,091 $ 681,984 $1,694,075 $ 510,334 $15,100 $ 525,434
Cost of sales 494,044 495,961 991,005 392,924 15,425 408,349
General and
administrative 1,216,445 2,219,856 3,436,301 4,394,758 97,916 4,493,674
Selling 183,846 273,790 457,636 126,462 166,389 292,851
Research and
development 58,795 10,294 69,089 - 65,705 65,705
Impairment of
goodwill/
Intangibles 1,191,967 - 1,191,967 164,205 528,524 692,729
Interest income - 36,540 36,540 - - -
Interest expense 1,518,906 19,830 1,538,736 20,155 - 20,155
Loss on disposal
of assets 4,527 - 4,527 38,811 - 38,811
Income tax benefit
(expense) - - - - - -
--------- --------- ---------- --------- ------- ---------
Net Income
(loss) $(3,657,439)$(2,301,206)$(5,958,646)$(4,627,981)$(858,859)$(5,486,840)
Financial information is summarized by geographic segment for the year
ended December 31, 2005 and 2004:
2005 2004
______________________________________________
Domestic Foreign Total Domestic Foreign Total
---------- -------- ---------- -------- -------- --------
Net revenues $1,337,896 $356,179 $1,694,075 $372,867 $152,567 $525,434
---------- -------- ---------- -------- -------- --------
F-26
WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 SUBSEQUENT EVENTS
On January 19, 2006, the Company issued 100,000 common shares for consulting
services valued at $180,000.
Subsequent to December 31, 2005, the Company issued 38,255 shares of common
stock to employees and non-employees for services rendered upon the exercise
of options at $1.82 per share. These options were granted subsequent to
December 31, 2005
Subsequent to December 31, 2005, The Company issued 50,569 shares of common
stock upon the conversion of $75,000 and related accrued interest of $854 at
$1.50 per share.
F-27
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ---------------------
Pritchett, Siler & Hardy, P.C., of Salt Lake City, Utah, audited our
financial statements for the fiscal year ended December 31, 2002, and reviewed
our financial statements for the quarterly periods ended March 31, 2003; June
30, 2003; and September 30, 2003. These financial statements accompanied our
Form 10-KSB Annual Report for the year ended December 31, 2002, and our Form
10-QSB Quarterly Reports for the quarters ended March 31, 2003; June 30, 2003;
and September 30, 2003, which have been filed with the Securities and Exchange
Commission.
On January 22, 2004, our Board of Directors resolved to dismiss
Pritchett, Siler & Hardy, P.C., as our principal independent accountant and to
retain Gregory & Associates, LLC, Certified Public Accountants, of Salt Lake
City, Utah, as our new principal independent accountant, and to audit our
financial statements for the fiscal year ended December 31, 2003. Alan
Gregory, CPA, the principal of Gregory & Associates, LLC, had been Pritchett,
Siler & Hardy, P.C.'s engagement partner with respect to our company, and Mr.
Gregory has recently left Pritchett, Siler & Hardy, P.C. to form his own firm.
On January 27, 2004, we filed with the Securities and Exchange Commission a
Current Report on Form 8-K with respect to this change in accountants. See
the Exhibit Index, Item 13 of this Report.
During the most recent fiscal year, and through the date of the Current
Report, there were no disagreements between us and Pritchett, Siler & Hardy,
P.C., whether resolved or not resolved, on any matter of accounting principles
or practice, financial statement disclosure or auditing scope or procedure,
which, if not resolved, would have caused them to make reference to the
subject matter of the disagreement in connection with their reports.
With the exception of a "going concern" qualification, the reports of
Pritchett, Siler & Hardy, P.C. did not contain any adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During our most recent fiscal year, and through the date of the Current
Report, Pritchett, Siler & Hardy, P.C. has not advised us that any of the
following exists or is applicable:
(1) That the internal controls necessary for us to develop
reliable financial statements do not exist, or that information
has come to their attention that has led them to no longer be able
to rely on our management's representations or that has made them
unwilling to be associated with the financial statements prepared
by management;
(2) That our company needs to expand significantly the scope of our
audit, or that information has come to their attention that if
further investigated may materially impact the fairness or
reliability of a previously issued audit report or the underlying
financial statements or any other financial presentation, or cause
them to be unwilling to rely on management's representations or be
associated with our financial statements for the foregoing reasons
or any other reason; or
(3) That they have advised us that information has come to their
attention that they have concluded materially impacts the fairness
or reliability of either a previously issued audit report or the
underlying financial statements for the foregoing reasons or any
other reason.
During our most recent fiscal year, and through the date of the Current
Report, we have not consulted Gregory & Associates, LLC, regarding the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
our financial statements or any other financial presentation whatsoever.
We may continue our search for auditors whose business location is more
closely proximate to the principal executive offices and the location where
our principal business operations are conducted in Pittsburgh, Pennsylvania.
Item 8A. Controls and Procedures.
- ----------------------------------
In connection with the completion of its audit of, and the issuance of
its report on our consolidated financial statements for the year ended
December 31, 2004, Gregory & Eldredge, LLC (now known as "Gregory &
Associates, LLC") identified deficiencies that existed in the design or
operation of our internal control over financial reporting that it considered
to be "material weaknesses." The Public Company Accounting Oversight Board
had defined a material weakness as a "significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not
be prevented or detected."
The material weakness identified relate to:
* the lack of sufficient knowledge and experience among the internal
accounting personnel regarding the application of US GAAP and SEC
requirements;
* insufficient written policies and procedures for accounting and
financial reporting with respect to the current requirements and application
of US GAAP and SEC disclosure requirements; and
* segregation of duties, in that we had only one person performing all
accounting-related duties.
We believe that each of these material weaknesses existed at December 31,
2005. The following changes in our internal controls over financial reporting
occurred during the third quarter of 2005 (unless indicated otherwise):
* In the first quarter of 2005, we updated and added 10 new modules to
our internal workflow system to cover e-commerce credit card processing,
purchase order streamlining, order entry and customer payment scheduling.
During the second quarter, we added two new modules to this system for a
total of twelve through June 30, 2005. This system has already made our
workers more efficient and management believes that as we continue to improve
the processes and procedures of the system our employees will continue to
increase their productivity while at the same time the Company's controls and
oversights will improve for better compliance with Sarbanes-Oxley regulations.
This system provides a platform for us to determine where we should undertake
additional segregation of duties among our employees and for determining how
we can otherwise improve our disclosure controls and procedures; and
* the hiring of William F. McLay as our Chief Financial Officer on April
4, 2005, and the education of Christopher J. Spencer and Armen Geronian and
our accounting staff about GAAP and Securities and Exchange Commission
requirements;
* the segregation of accounting duties that had formerly been performed
by one person among three persons, including Mr. McLay. As we continue to
incorporate written policies and procedures for accounting and financial
reporting, we will continue to implement additional segregation of duties.
We believe that these steps have fully addressed the first material
weakness identified above. However, during the third quarter of 2005, Mr.
McLay resigned as our Chief Financial Officer for personal reasons. Although
Gordon Berry is currently acting as interim Chief Financial Officer and we are
have identified a full-time replacement for Mr. McLay, whom we expect to begin
his duties early in the second quarter of 2006, we believe that Mr. McLay's
resignation has recreated the first and third material weaknesses identified
above. We are actively working on implementing written policies and
procedures that will fully address the second material weakness, which we also
believe still exists. We expect that this process may take 9-12 months. As
we continue to refine our internal workflow system and our written policies
and procedures, we believe that we will identify other areas in which we can
further segregate our employees' duties. Although we have taken significant
steps to address this material weakness, we believe that it will continue to
exist until we have fully addressed the written policies and procedures
material weakness.
The principal cost associated with our remediation of these material
weaknesses will be the hiring of a replacement for Mr. McLay, whose annual
compensation totaled approximately $100,000. The other remedial actions have
been undertaken as part of Mr. McLay's job description, or the job
descriptions of other already existing employees, which has not resulted in
any additional increased costs. During the next 9-12 months, we expect to
retain outside consultants to advise us and test our Sarbanes-Oxley
compliance. We expect that the cost of these consultants will be
approximately $50,000. We plan to hire a replacement to Mr. McLay on or
before April 15, 2006. We expect to pay the new hire approximately $120,000,
plus stock options (amount to be determined), which should reduce the cost of
any outside consultants by $20,000 to $30,000.
As required by Rule 13a-15(b) of the Securities and Exchange Commission,
and as of the end of the period covered by this Report, we carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and acting Chief Financial Officer, or
the persons performing similar functions, of the effectiveness of the design
and operation of our disclosure controls and procedures as of December 31,
2005. Based on this evaluation, our President/Treasurer has concluded that
the Company's controls and procedures as of December 31, 2005, are not
effective. This is management's conclusion, despite the compensating control
provided by the significant day-to-day involvement of the Company's Chief
Executive Officer in all aspects of the Company's operations in a small
company atmosphere, and the Company's engagement of an outside professional
with sufficient expertise in the application of US GAAP and SEC requirements.
The significant day-to-day involvement of our Chief Executive Officer
includes:
* his approval of all new hires and all Company purchases over the amount
of $500;
* the requirement that all checks over the amount of $2,500 bear two
signatures, one of which must be the Chief Executive Officer's signature;
* his approval of all transactions requiring credit approval; and
* his involvement in the analysis and approval of all acquisitions and
dispositions of assets.
These policies have been in place since Wizzard's inception.
The outside accounting professional was engaged during the first quarter
of 2005 to advise the Company in the preparation of its financial statements
and Form 10-KSB for the calendar year ended December 31, 2004. This outside
professional has significant expertise in the application of US GAAP and
Securities and Exchange Commission requirements, which has compensated for the
lack of such expertise within the Company prior to the hiring Mr. McLay as our
former Chief Financial Officer, as discussed above. The fees for the outside
professional's services have totaled approximately $14,531 in 2005. These
professionals were not associated with our independent public accounting
firm.
The Company will continue to monitor, assess and work to improve the
effectiveness of our internal control procedures related to internal controls,
financial reporting and certain entity-wide controls related to corporate
governance in order to comply with Section 404 of the Sarbanes Oxley Act of
2002.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
- --------------------------------------------------
Identification of Directors and Executive Officers.
- ---------------------------------------------------
The following table sets forth the names of all of our current directors
and executive officers. These persons will serve until the next annual
meeting of our stockholders or until their successors are elected
or appointed and qualified, or their prior resignations or terminations.
Date of Date of
Positions Election or Termination
Name Held Designation or Designation
---- ---- ----------- --------------
Christopher J. Director and President 2/07/01 *
Spencer Treasurer 12/17/01 *
Armen Geronian Director and Assistant 2/07/01 *
Secretary
Gordon Berry Director 2/07/01 *
Alan Costilo Director 6/04/01 *
* Presently serving in these capacities.
Christopher J. Spencer, Chairman, President and Treasurer.
- ----------------------------------------------------------
Mr. Spencer, age 37, has served as our Chief Executive Officer, President
and as a director of Wizzard since February 7, 2001, and of our subsidiary,
Wizzard Delaware, since its formation in 1995. Mr. Spencer has been
responsible for our overall direction since our inception and has been
instrumental in leading us to our current position in the speech recognition
industry. In an online poll conducted by Speech Technology magazine, Mr.
Spencer was recently recognized as one of 20 top visionaries in the speech
recognition industry. The poll was targeted to the speech recognition
professionals who read the magazine; poll responses were monitored to ensure
that employees of a nominee's company could not vote for that nominee. Through
Mr. Spencer's efforts, we have successfully obtained financing of
approximately $12 million to date. These funds have helped us complete the
development and begin marketing of our talking pill bottle product and our
variety of programming tools.
From 1994 until 1996, Mr. Spencer founded and worked for ChinaWire, Inc.,
a high-technology company engaged in financial remittance between
international locations and China. Mr. Spencer's efforts were responsible for
ChinaWire's exclusive contract with the Ministry of Posts and
Telecommunications of the People's Republic of China. Mr. Spencer was also
involved in raising over $3,500,000 for the venture.
Mr. Spencer worked for Lotto USA, Inc. from 1992-1994, where he was
founder and Chief Executive Officer for the Pennsylvania computer networking
company. Besides assisting in designing the technology, Mr. Spencer helped
Lotto USA implement an additional $1.00 service charge for every out-of-state
lottery ticket sold in the State of Pennsylvania, which substantially
increased the revenues of this company.
From 1990 until 1992, Mr. Spencer worked for John Valiant, Inc., and was
responsible for business concept development and obtaining financing. Mr.
Spencer's efforts combined an effective advertising/promotions campaign with
proper timing in the young adult/college restaurant/nightclub market. John
Valiant was sold for a profit in 1992 after successfully operating three
revenue-generating divisions.
Mr. Spencer attended West Virginia University from 1987 to 1989.
Armen Geronian, Director and Chief Technical Officer.
- -----------------------------------------------------
Mr. Geronian, age 37, co-founded and has served as Chief Technical
Officer, Assistant Secretary, and a director of Wizzard Delaware since its
inception and of Wizzard since February 7, 2001. Mr. Geronian has spearheaded
the development of our IVA product, and is responsible for all of our
technical decisions regarding the software code and other attributes of our
products and services.
Mr. Geronian has extensive software development knowledge and experience.
In 1995, he created custom software for an industrial furnace control company.
In 1994, Mr. Geronian was the lead developer of a money transfer service
software system for ChinaWire, Inc.; he also created custom software packages
for warehouse inventory, a project which included over fifteen large databases
for reporting, accounts payable/receivable, and complete auditing control
functions.
In 1993, Mr. Geronian helped create a custom software package for medical
claims processing that provided communications between offices and System One.
>From 1988 until 1992, Mr. Geronian was part of a large project developing
accounting, economic development and financial software to be sold to several
large Russian corporations. In 1988, he was engaged in software development
for the Russian version of Novell, designed to assist students in math and
statistics.
Mr. Geronian received his B.S. in Computer Science from the University of
Moscow in 1990.
Gordon Berry, Director and VP Business Development.
- ---------------------------------------------------
Mr. Berry, age 66, has served as a director of Wizzard since February 7,
2001, and of Wizzard Delaware since 1997. Mr. Berry is involved in all of our
business, corporate and financial decisions, serving as a guide and counsel
for the executive officers and Board of Directors. Since 1990, Mr. Berry has
been a consultant to a variety of businesses, assisting them in the areas of
sales, marketing and strategic planning. From 1985-1990, Mr. Berry was Vice
President of Sales/Marketing for Champion Commercial Industry, a
multi-division manufacturer of metal products, where Mr. Berry increased the
firm's revenues by 60% while developing several new product lines.
From 1980-1985, Mr. Berry was Vice President for Trundle Consultants,
Inc., where he specialized in all areas of sales and marketing, dealing
primarily with firms having sales of less than $100 million annually. From
1974-1979, Mr. Berry ran IMI, a sole proprietorship specializing in venture
capital and business consulting. IMI was subsequently merged with Trundle
Consultants Inc.
From 1963-1974, Mr. Berry worked in manufacturing for Electric Products
Company, and concluded his tenure as Division Manager and member of the
Executive Committee.
Mr. Berry attended Cornell University and received his Bachelor's degree
in Industrial Management from Georgia Tech in 1962.
Alan Costilo, M.D., Director and VP Custom Solutions.
- -----------------------------------------------------
Dr. Costilo, age 56, was the President, CEO and founder of Speech
Solutions, Inc., a Florida-based speech recognition software company, from
1993 until 2001. He was responsible for that company's overall business
strategy, technical development and for developing vendor relationships. He
also was responsible for the development of the ActiveX Voice Tools product,
under three separate IBM development contracts, which was acquired by Wizzard
Software in May 2001.
From 1985-1993, Dr. Costilo practiced as a Doctor of Chiropractic
Medicine in Philadelphia, Pennsylvania. During this period, he implemented
computer office management systems; created office networks for doctors'
insurance/business offices and treatment rooms; and developed an automatic
progress notes software called ProNotes, which allowed for the easy creation
of medical progress notes directly in the computer system using a digitizer
board as interface and WordPerfect as the software environment. He used this
product to develop ProNotes, Inc., the predecessor of Speech Solutions, Inc.
>From 1973-1994, he was the President of numerous seasonal retail
establishments that operated profitably for 21 years, employing more than 30
people.
He received his Doctor of Medicine and Surgery Degree from Universidad
CETEC, Santo Domingo, in 1982; and his Doctor of Chiropractic Degree from
Cleveland Chiropractic College, Kansas City, Missouri, in 1985.
Marc Lord, Strategic Advisory Board Member.
- -------------------------------------------
Marc Lord, age 42, currently works for InSpeech Consultancy. Prior
to that, he had worked at AT&T, ScanSoft, and in Microsoft's speech product
group (Speech.Net) since its formation, and has managed development and
product integration for all Microsoft releases that employ speech
technologies, including WindowsXP, OfficeXP, AutoPC, MS Agent, Encarta and
Sidewinder. While serving as Program Manager for Voice Output Technologies at
Microsoft, Mr. Lord drove product development for several major product
releases that feature speech recognition and synthesis capabilities. He has
managed Microsoft's key vendors, established partnerships and negotiated
license agreements with numerous speech industry companies. In his fifteen-
year software career, Mr. Lord has worked both in the U.S. and internationally
and helped commercialize a number of cutting-edge technologies, including
applications for multimedia language instruction, AI-based financial risk
analysis, wearable digital photonics and browser-based training systems.
He completed his undergraduate studies in International Business and
Computer Science at Brigham Young University prior to attending the University
of Washington for a Master's Degree in Business Administration.
We added Mr. Lord to our strategic advisory board because of his
experience in the speech recognition technology area. He was instrumental in
obtaining our link between our web site and Microsoft's web site. He has also
introduced our management to leaders in the industry and has used his
experience to advise management on many industry matters. We plan to continue
to use Mr. Lord's contacts in the industry to help us gain a higher profile.
Strategic Advisory Board.
- -------------------------
We formed our strategic advisory board as a group of successful people
with experience in speech recognition technology, brand building and public
relations. We do not have any secrecy agreements with the board members, as
they are not privy to technical information or trade secrets about our
products. The board members are free to provide services to other companies
in our industry. The strategic advisory board members have no written or
specific duties to Wizzard Software. They use their expertise and contacts in
the fields of speech recognition technology and branding and marketing to
offer suggestions to management and to review branding and promotional
materials that we have prepared. Management has found this assistance to be
invaluable.
Family Relationships.
- ---------------------
There are no family relationships between any of our directors or
executive officers.
Involvement in Certain Legal Proceedings.
- -----------------------------------------
During the past five years, none of our present or former directors,
executive officers or persons nominated to become directors or executive
officers:
* was a general partner or executive officer of any business
against which any bankruptcy petition was filed, either at the
time of the bankruptcy or two years prior to that time;
* was convicted in a criminal proceeding or named subject to a
pending criminal proceeding, excluding traffic violations and
other minor offenses;
* was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; or
* was found by a court of competent jurisdiction in a civil
action, the Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed,
suspended or vacated.
Audit Committee.
- ----------------
We do not have a formal audit committee. The functions that would
normally be undertaken by such a committee are undertaken by our Board of
Directors as a whole.
Compliance with Section 16(a) of the Exchange Act.
- --------------------------------------------------
Each of Wizzard's directors, executive officers and 10% owners
have filed a Form 3 Initial Statement of Beneficial Ownership with the
Securities and Exchange Commission as follows:
Name Filing Date
---- -----------
Christopher J. Spencer 2/04/02
Armen Geronian 2/04/02
Gordon Berry 2/04/02
Alan Costilo 2/04/02
Voice Recognition Investment, L.P. 2/06/02
In addition, the following directors filed Form 4 Statements of Changes
in Beneficial Ownership of securities on or about the dates indicated:
Filing Transaction
Name Date Date
---- ---- ----
Christopher J. Spencer 3/14/05 10/8/04
3/14/05 2/15/05
Gordon Berry 9/09/02 8/28/02
3/12/03 3/04/03
1/06/04 12/10/03
12/16/04 10/8/04
1/18/05 1/12/05
3/14/05 2/15/05
Armen Geronian 9/11/03 9/05/02
3/12/03 3/04/03
3/15/04 3/12/04
5/25/04 (1) 3/12/04
3/14/05 10/8/05
3/14/05 2/15/05
Alan Costilo 11/01/02 10/28/02
12/16/04 10/8/04
12/16/04 12/15/04
3/14/05 2/15/05
(1) This filing was an amendment to the Form 4 that Mr. Geronian
initially filed on March 15, 2004.
Code of Ethics.
- ---------------
We have adopted a Code of Ethics for our executive officers and have
attached a copy as Exhibit 14 to our Form 10KSB Annual Report for the year
ended December 31, 2003. See the Exhibit Index, Item 13 of this Report.
Item 10. Executive Compensation.
-----------------------
Cash Compensation.
- ------------------
The following table shows the aggregate compensation that we have paid to
directors and executive officers for services rendered during the periods
indicated:
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Secur-
ities All
Name and Year or Other Rest- Under- LTIP Other
Principal Period Salary Bonus Annual rictedlying Pay- Comp-
Position Ended ($) ($) Compen-Stock Optionsouts ensat'n
- -----------------------------------------------------------------
Christopher 12/31/03 $ 70000 0 0 0 0 0 0
J. Spencer 12/31/04 $ 70000 0 0 6000 0 0 0
President, 12/31/05 $ 80000 9000 0 500 0 0 0
Treasurer
and Director
Armen 12/31/03 $ 0 0 0 0 0 0 0 (1)
Geronian 12/31/04 $ 70000 0 0 6000 0 0 0
Asst. Sec. 12/31/05 $ 56517 44500 0 500 0 0 0
and Director
Gordon 12/31/03 0 0 $24000(2) 0 0 0 0
Berry 12/31/04 0 0 $48000(2) 0 0 0 0
Director 12/31/05 0 0 $48000(2) 500 0 0 0
Alan 12/31/03 0 0 $24000(2) 0 0 0 0
Costilo 12/31/04 0 0 $48000(2) 0 0 0 0
Director 12/31/05 0 0 $48000(2) 0 0 0 0
Bill McLay 12/31/05 $34,135 0 0 0 0 0 0
(1) Medical insurance is paid as part of Mr. Spencer's salary; Mr.
Geronian gets his medical insurance paid; and through 2002 Mr.
Berry received a $1,500 automobile allowance.
(2) We paid these amounts to Messrs. Berry and Costilo as
independent contractors, rather than as employees.
Bonuses and Deferred Compensation.
- ----------------------------------
None.
Compensation Pursuant to Plans.
- -------------------------------
None.
Options/SAR Grants.
- -------------------
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
-----------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ---- ----------- ----------- ------ ----
Christopher J. 500 5.9% (1) (2)
Spencer
Armen Geronian 500 5.9% (1) (2)
Gordon Berry 500 5.9% (1) (2)
Alan Costilo 500 5.9% (1) (2)
(1) Services valued at the bid price of Wizzard's common stock per
share.
(2) These options were exercised immediately after they were granted.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
- ---------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY End (#) at FY End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Christopher J. 500 (1) -0- -0-
Spencer
Armen Geronian 500 (1) -0- -0-
Gordon Berry 500 (1) -0- -0-
Alan Costilo 500 (1) -0- -0-
(1) Services valued at the bid price of Wizzard's common stock per
share.
Pension Table.
- --------------
None.
Other Compensation.
- -------------------
None.
Compensation of Directors.
- --------------------------
None.
Employment Contracts.
- ---------------------
None.
Termination of Employment and Change of Control Arrangements.
- -------------------------------------------------------------
None.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following tables set forth the share holdings of our directors and
executive officers and those persons who own more than five percent of our
common stock as of March 17, 2006:
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Number of Shares Percent
Name and Address Title Beneficially Owned of Class (1)
- ---------------- ----- ------------------ --------
Christopher J. Spencer Director, 2,848,667 9.8%
5001 Baum Blvd., #770 President and
Pittsburgh, PA 15213 Treasurer
Armen Geronian Director and 2,891,970 9.9%
5001 Baum Blvd., #770 Assistant
Pittsburgh, PA 15213 Secretary
Gordon Berry Director, 515,500 1.8%
5001 Baum Blvd., #770 Controller and
Pittsburgh, PA 15213 Interim CFO
Alan Costilo Director 500 <0.1%
5001 Baum Blvd., #770
Pittsburgh, PA 15213
All officers and directors
as a group (4 persons) 6,256,637 21.5%
(1) Based upon 29,085,650 outstanding shares at March 29, 2006.
24
FIVE PERCENT STOCKHOLDERS
-------------------------
Number of Shares Percent
Name and Address Title Beneficially Owned of Class(1)
- - ---------------- ----- ------------------ -----------
Christopher J. Spencer (2) Director 2,848,667 9.8%
5001 Baum Blvd., #700 President
Pittsburgh, PA 15213 and Treasurer
Armen Geronian Director and 2,891,970 9.8%
5001 Baum Blvd., #700 Assistant
Pittsburgh, PA 15213 Secretary
Voice Recognition Stockholder 3,431,078 11.8%
Investment, L.P.
812 Kenmore Rd.
Chapel Hill, NC 27514
Total: 9,171,715 31.5%
(1) Based upon 29,085,650 outstanding shares at March 29, 2006.
Changes in Control.
- -------------------
To our knowledge, there are no present arrangements or pledges of our
securities which may result in a change in control of our company.
Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------
Transactions with Management and Others.
- ----------------------------------------
Except as indicated below, during the past two years, there have been no
material transactions, series of similar transactions or currently proposed
transactions, to which our company or any of our subsidiaries was or is to be
a party, in which the amount involved exceeded $60,000 and in which any
director or executive officer, promoter or founder or any security holder who
is known to us to own of record or beneficially more than five percent of our
common stock, or any member of the immediate family of any of the foregoing
persons, or any promoter or founder had a material interest.
In April, 2003, we borrowed a total of $10,017 from a stockholder. The
note is payable on demand and accrues interest at a rate of prime plus 1%, or
approximately 5.75%, and amounted to $410 at December 31, 2003. On May 3,
2004, Wizzard issued 27,999 shares of its common stock in payment of a $10,016
note payable and $614 in related accrued interest and $78,408 in consulting
services.
On January 8, 2004, a stockholder loaned us an additional $50,000. The
note was repaid with interest of $5,000 on January 24, 2004.
Item 13. Exhibits and Reports on Form 8-K.
---------------------------------
Reports on Form 8-K.
- - --------------------
8-K Current Report dated February 8, 2005, filed on February 9, 2005,
regarding Subscription Agreements with three institutional investors.
8-K Current Report dated March 18, 205, filed on March 22, 2005,
regarding letter of intent to acquire assets of Interim Healthcare of Wyoming,
Inc.
8-K Current Report dated April 4, 2005, filed on May 4, 2005, regarding
appointment of William F. McLay as Chief Financial Officer
8-K Current Report dated September 8, 2005, filed on September 14, 2005,
regarding the acquisition of Interim Healthcare of Wyoming, Inc.
8-K Current Report dated September 15, 2005, filed on September 19, 2005,
regarding the resignation of William F. McLay as Chief Financial Officer
8-K Current Report dated October 31, 2005, filed on November 1, 2005,
regarding appointment of Gordon Berry as interim Chief Financial Officer
8-K/A1 Current Report dated September 8, 2005, filed on November 22,
2005, regarding the acquisition of Interim Healthcare of Wyoming, Inc.
Exhibits*
- - --------
(i)
Where Incorporated
in this Report
--------------
Annual Report on Form 10-KSB for the year Part I
ended December 31, 2004.**
(ii)
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation**
3.2 Bylaws**
31.1 302 Certification of Christopher J. Spencer
31.2 302 Certification of Gordon Berry
32 906 Certification
* Summaries of all exhibits contained within this
Report are modified in their entirety by reference
to these Exhibits.
** This document and related exhibits have been
previously filed with the Securities and Exchange
Commission and are incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
---------------------------------------
The following is a summary of the fees billed to Wizzard by its principal
accountants during the calendar years ended December 31, 2004, and December
31, 2003:
Fee category 2005 2004
------------ ---- ----
Audit fees $68,226 (1) $42,761
Audit-related fees $ -0- $ -0-
Tax fees $ -0- $ -0-
All other fees $ -0- $ -0-
Total fees $ -0- $42,761
(1) Consists of fees for audit of the Company's annual financial
statements, audit of the financial statements of acquired subsidiaries, the
review of interim financial statements included in the Company's quarterly
reports, and the review of other documents filed with the Securities and
Exchange Commission.
Audit fees. Consists of fees for professional services rendered by our
principal accountants for the audit of our annual financial statements and the
review of financial statements included in our Forms 10-QSB or services that
are normally provided by our principal accountants in connection with
statutory and regulatory filings or engagements.
Audit-related fees. Consists of fees for assurance and related services
by our principal accountants that are reasonably related to the performance of
the audit or review of Wizzard's financial statements and are not reported
under "Audit fees."
Tax fees. Consists of fees for professional services rendered by our
principal accountants for tax compliance, tax advice and tax planning.
All other fees. Consists of fees for products and services provided by
our principal accountants, other than the services reported under "Audit
fees," "Audit-related fees" and "Tax fees" above.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WIZZARD SOFTWARE CORPORATION
Date: 3/30/06 By /s/ Christopher J. Spencer
------- ---------------------------
Christopher J. Spencer
Chief Executive Officer, President,
Treasurer and Director
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date: 3/30/06 /s/ Christopher J. Spencer
------- ---------------------------
Christopher J. Spencer
Chief Executive Officer, President,
Treasurer and Director
Date: 3/30/06 /s/ Gordon Berry
------- -----------------
Gordon Berry, Interim Chief Financial
Officer, Controller and Director
Date: 3/30/06 /s/ Armen Geronian
-------- -------------------
Armen Geronian
Director
Date: 3/30/06 /s/ Alan Costilo
------- -----------------
Alan Costilo
Director
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher J. Spencer, President, CEO and Treasurer of Wizzard
Software Corporation (the "small business issuer"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the small
business issuer;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Dated: 3/30/06 Signature: /s/ Christopher J. Spencer
---------------------------
Christopher J. Spencer
President, CEO and Treasurer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gordon Berry, Interim Chief Financial Officer and Controller of
Wizzard Software Corporation (the "small business issuer"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the small
business issuer;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Dated: 3/30/06 Signature: /s/ Gordon Berry
-----------------
Gordon Berry
Interim Chief Financial Officer
and Controller
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Wizzard Software Corporation (the
"Registrant") on Form 10-KSB for the calendar year ending December 31, 2005,
as filed with the Securities and Exchange Commission on the date hereof (the
"Annual Report"), we, Christopher J. Spencer, President, CEO and Treasurer of
the Registrant, and Gordon Berry, Interim CEO and Controller of the
Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Annual Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report fairly presents, in
all material respects, the financial condition and result of operations of the
Registrant.
Date: 3/30/06 /s/ Christopher J. Spencer
---------------------------
Christopher J. Spencer President, CEO,
Treasurer and director
Date: 3/30/06 /s/ Gordon Berry
-----------------
Gordon Berry Acting Chief Financial
Officer and Controller