UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20509


FORM 8-K


CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


September 26, 2012

Date of Report

(Date of earliest event reported)


WIZZARD SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)


 

 

 

COLORADO

001-33935

87-0609860

(State or other jurisdiction of

incorporation)

Commission File Number

(I.R.S. Employer

Identification No.)


5001 Baum Boulevard, Suite 770

Pittsburgh, Pennsylvania 15213

(Address of principal executive offices)


(412) 621-0902

Registrant's telephone number


N/A

Former name or former address, if changed since last report


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:


     [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)


     [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)


     [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))


     [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))







Item 1.01.   Entry into a Material Definitive Agreement.


On September 26, 2012, Wizzard Software Corporation, a Colorado corporation (the “Company”), entered into Employment Agreements with its Chief Executive Officer, Christopher J. Spencer, and its Chief Financial Officer, John Busshaus.  Under the terms of the Employment Agreements, the Company agreed to employ Messrs. Spencer and Busshaus for a period of three years, beginning on October 1, 2012, and terminating on September 30, 2015, at annual salaries of $400,000 and $350,000, respectively.  Each Employment Agreement will automatically be extended for an additional one year period unless the Company gives the employee at least 90 days’ written notice that it does not wish to extend such Employment Agreement.  At the end of the initial three year term of each employee’s respective Employment Agreement, he will receive a bonus equal to his highest annual salary.


Each Employment Agreement contains standard non-disclosure covenants, as well as standard non-competition and non-solicitation restrictions for a period of six months after termination of employment.  See Item 9.01 of this Current Report.  In addition to their compensation to be paid under their Employment Agreements, effective as of September 26, 2012, the Company’s Board of Directors resolved to grant to Messrs. Spencer and Busshaus cash bonuses of $100,000 in recognition of their efforts and diligence in closing the Securities Exchange Agreement.  See Item 2.01 of this Current Report.


The Employment Agreements of Messrs. Spencer and Busshaus are attached hereto as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference.  See the Exhibit Index, Item 9.01 of this Current Report.  The foregoing descriptions of the Employment Agreements do not purport to be complete and are qualified in their entirety by reference to such exhibits.


Item 2.01   Completion of Acquisition or Disposition of Assets .


On April 5, 2012, the Company executed a Share Exchange Agreement (the “Agreement”) with Universal Entertainment Group Limited, a British Virgin Islands company (“UEG”); Digital Entertainment International Ltd., a company incorporated under the law of the Hong Kong Special Administrative Region that is 100% owned by UEG (“Digital HKCO”); Beijing Dingtai Guanqun Culture Co. Ltd., a company incorporated under the law of the People’s Republic of China (the “PRC”) that is 100% owned by Digital HKCO (the “WOFE”); Beijing FAB Culture Co., Ltd., a company that is incorporated under the law of the PRC (“FAB Culture”); and Beijing FAB Digital Entertainment Products Co., Ltd., a company organized under the laws of the PRC (“FAB Digital” and together with FAB Culture the “VIE Entities”).  The execution of the Agreement was disclosed in the Company’s Current Report on Form 8-K dated April 5, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on April 10, 2012, and which is incorporated herein by reference.  See the Exhibit Index, Item 9.01 of this Current Report.





The terms of the Agreement were disclosed in the Company’s definitive proxy statement as filed with the SEC on June 15, 2012, which is incorporated herein by reference.  The Company’s common stockholders voted to approve the Agreement at the annual meeting of stockholders held on July 30, 2012, and this approval was disclosed in the Company’s Current Report on Form 8-K dated July 30, 2012, and filed with the SEC on the same date, and which is incorporated herein by reference.  See the Exhibit Index, Item 9.01 of this Current Report.


On September 26, 2012, the Company closed the Agreement, by which it acquired from UEG all of the issued and outstanding shares of capital stock of Digital HKCo in exchange for the issuance of a total of 10,282,611 “unregistered” and “restricted” shares of the Company’s common stock, representing 49% of the Company’s issued and outstanding common shares, on a fully-diluted basis, immediately after the closing (the “Closing”).  As additional consideration for the Digital HKCo shares, at the Closing the Company also issued 290 “unregistered” and “restricted” shares of its Series B Convertible Preferred Stock as described in Item 3.02 below.


Item 3.02   Unregistered Sales of Equity Securities .


In connection with the Closing of the Share Exchange Agreement, on September 26, 2012, the Company issued a total of 10,282,611 “unregistered” and “restricted” shares of its common stock (the “Initial Company Shares”) and 290 “unregistered” and “restricted” shares of its Series B Convertible Preferred Stock to 41 designees of UEG in consideration of the Company’s acquisition from UEG of all of the issued and outstanding shares of capital stock of Digital HKCo.  The Company relied on the exemption from registration provided by Regulation S of the Securities and Exchange Commission in reliance on each designee’s status as a non-“U.S. person” as that term is defined in Rule 902(k) of Regulation S of the Securities and Exchange Commission.


The Preferred Stock has no dividend rights or voting rights or the right to receive any assets of the Company upon liquidation, dissolution or winding up.  The Preferred Stock will be convertible into shares of the Company’s common stock in three (3) tranches upon the occurrence of the following conversion events:


(i) upon the successful completion of certain Corporate Governance Objectives for the four (4) consecutive and complete reporting quarters of the Company immediately following the Closing, UEG’s designees shall have the right to convert the first tranche of 210 shares of Preferred Stock into shares of the Company’s common stock;


 

(ii) upon the successful completion of:  (a) all of the Corporate Governance Objectives for the four (4) consecutive and complete reporting quarters of the Company immediately following the Closing; and (b)  a Revenue Objective requiring that Digital HKCo, the WFOE and the VIE Entities (collectively, the “FAB Companies”) receive sales revenues of at least US$60,000,000 and net income of US$12,000,000 in fiscal year 2011, UEG’s designees shall have the right to convert the second tranche of 40 shares of Preferred Stock into shares of the Company’s common stock; and





(iii) upon the successful completion of (a) all of the Corporate Governance Objectives for the six (6) consecutive and complete reporting quarters of the Company immediately following the Closing; and (b)  a Revenue Objective requiring that the FAB Companies receive sales revenues of at least US$70,000,000 and net income of US$14,000,000 in fiscal year 2012, UEG’s designees shall have the right to convert the third tranche of 40 shares of Preferred Stock into shares of the Company’s common stock.


Upon the occurrence of each conversion event, the three tranches of Preferred Stock will be convertible into a number of shares of common stock that will bring the overall equity position in the Company of the holders of the Initial Company Shares, the Preferred Stock and the common stock issuable upon conversion of the Preferred Stock, on a fully diluted basis as of the date of Closing, to 70%, 74% and 78%, respectively.  Based on a total of 10,702,309 fully-diluted outstanding common shares as of the Closing date, 14,689,444 common shares will be issuable upon conversion of the first tranche of Preferred Stock; 5,488,364 common shares upon conversion of the second tranche; and 7,484,132 common shares upon conversion of the third tranche.  On September 19, 2012, the Company filed with the Colorado Secretary of State Articles of Amendment containing a Certificate of Designation of Preferences, Rights and Limitations of the Preferred Stock.  See the Company’s Current Report on Form 8-K dated September 19, 2012, and filed with the SEC on the same date.


  

The Initial Company Shares are subject to the terms of a Voting Agreement, which has been executed by all of UEG’s designees, and which assigned to the Company’s Board of Directors the right to vote all of the Initial Company Shares for a period of eight (8) consecutive and complete reporting quarters of the Company after the Closing, provided, however, that:


(i)  if Digital HKCo and the VIE Entities successfully complete all of certain Corporate Governance Objectives for two (2) consecutive and complete reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to 50% of the Initial Company Shares held by the designees at such time;


(ii)  upon successful completion of all of the Corporate Governance Objectives for six (6) consecutive and complete  reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to another 25% of the Initial Company Shares held by UEG’s designees at such time; and


(iii) upon the successful completion of all of the Corporate Governance Objectives for eight (8) consecutive and complete reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to the remaining Initial Company Shares held by UEG’s designees at such time.


Fifty percent of the Initial Company Shares (the “Lock-up Shares”) are also subject to the terms of a Lock-up Agreement by which UEG’s designees have agreed not




to transfer, sell, hypothecate or gift such Lock-up Shares for a period of 12 months following the Closing date.  In addition, during the first 24 months after the Closing, Digital HKCo and each of its permitted transferees or designees will have piggyback registration rights with respect to all Initial Company Shares that are not then subject to the restrictions of the Lock-up Agreement or the Voting Agreement, and all Company shares that have been issued upon conversion of Preferred Stock to cause such shares to be included in (i) any registration statement that the Company files with the SEC to register under the Securities Act of 1933, as amended, common shares held by any person who was a stockholder of the Company at the time of Closing (or any transferee thereof); or (ii) any other registration statement filed by the Company so long as a majority of the Company’s Board of Directors has made a good faith determination that such piggyback registration will not significantly prejudice the Company’s ability to raise capital.   


Forms of the Voting Agreement and the Lock-up Agreement as executed by UEG’s designees are attached hereto as Exhibits 10.3 and 10.4, respectively, and are incorporated herein by reference.  See the Exhibit Index, Item 9.01 of this Current Report.  The foregoing descriptions of the Voting Agreement and the Lock-up Agreement do not purport to be complete and are qualified in their entirety by reference to such exhibits.


Item 4.01   Changes in Registrant’s Certifying Accountant


Effective as of September 26, 2012, the date of the closing of the Agreement, Gregory & Associates, LLC, resigned as the Company’s independent accountant.  With the exception of a “going concern” qualification, the reports of Gregory & Associates, LLC on the financial statements for the Company’s past two fiscal years contained no adverse opinion or any disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principles.  The resignation of Gregory & Associates, LLC was accepted by the Company’s Board of Directors effective as of September 26, 2012.


During the Company’s two most recent fiscal years and any subsequent interim period preceding such resignation, there were no disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreements in connection with its report.


During the Company’s two most recent fiscal years and any subsequent interim period preceding such resignation, Gregory & Associates, LLC:


did not advise the Company that the internal controls necessary for the Company to develop reliable financial statements do not exist;


did not advise the Company that information has come to the accountant's attention that has led it to no longer be able to rely on management’s




representations, or that has made it unwilling to be associated with the financial statements prepared by management;


did not advise the Company of the need to expand significantly the scope of its audit, or that information has come to the accountant's attention during such period that if further investigated may:


materially impact the fairness or reliability of either: a previously issued audit report or the underlying financial statements; or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent it from rendering an unqualified audit report on those financial statements), or


cause it to be unwilling to rely on management’s representations or be associated with the Company’s financial statements, due to the accountant’s resignation (due to audit scope limitations or otherwise), or for any other reason, the accountant did not so expand the scope of its audit or conduct such further investigation; or


did not advise the Company that information has come to the accountant’s attention that it has concluded materially impacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to the accountant's satisfaction, would prevent it from rendering an unqualified audit report on those financial statements), and


due to the accountant’s resignation, or for any other reason, the issue has not been resolved to the accountant's satisfaction prior to its resignation.


Effective as of September 27, 2012, the Company engaged Friedman LLP to audit the Company’s financial statements.  During the Company’s two most recent fiscal years, and any subsequent interim period prior to engaging Friedman LLP, neither the Company nor anyone on its behalf consulted the newly engaged accountant regarding:


either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and either a written report was provided to the Company or oral advice was provided that the new accountant concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or


any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) and the related instructions to Item 304 of Regulation




S-K of the SEC or a reportable event (as described in paragraph 304(a)(1)(v) thereof).


We have provided Gregory & Associates, LLC, with a copy of the disclosure provided under this Item of this Current Report and have advised them to provide us with a letter addressed to the SEC as to whether they agree or disagree with the disclosures made herein.  A copy of their response is attached hereto and incorporated herein by this reference.  See Item 9.01 of this Current Report.


Item 5.02  Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.


On September 26, 2012, in connection with the closing of the Share Exchange Agreement, and pursuant to the terms thereof:  (i) Christopher J. Spencer resigned as the Chairman of the Company’s Board of Directors, while remaining as a voting member of the Board; (ii) Zhang Hongcheng was designated as a director and the Chairman of the Company’s Board of Directors; and (iii) Gu Jian Fen was designated as a director of the Company, with Mr. Zhang and Ms. Gu each to serve an initial term of no less than two years as provided in Paragraph 8.3 of the Share Exchange Agreement.  The designation of Mr. Zhang and Ms. Gu to the Board of Directors was approved by a vote of the Company’s common stockholders at the annual stockholders’ meeting held on July 30, 2012, with such approval made subject to the prior closing of the Share Exchange Agreement.  This approval was disclosed in the Company’s Annual Report on Form 8-K dated July 30, 2012, and filed with the SEC on the same date, and which is incorporated herein by reference.  See the Exhibit Index, Item 9.01 of this Current Report.


Item 5.03  Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.


On September 27, 2012, pursuant to the terms of the Share Exchange Agreement, the Company filed with the Colorado Secretary of State Articles of Amendment by which it changed its name to “FAB Universal Corp.”  The Articles of Amendment are attached hereto as Exhibit 3, and are incorporated herein by reference.  See the Exhibit Index, Item 9.01 of this Current Report.  The foregoing description of the Articles of Amendment does not purport to be complete and is qualified in its entirety by reference to such exhibits.


Item 8.01   Other Events .


Also on September 26, 2012, the Company issued a total of 800,000 shares of its common stock to its directors and executive officers, as follows:









Name of Director or Officer

No. of Shares


Christopher J. Spencer

250,000

John Busshaus

250,000

Denis Yevstifeyev

100,000

Douglas Polinsky

100,000

J. Gregory Smith

100,000


These shares were issued pursuant to SEC Rule 16b-3(d)(1) as a bonus to acknowledge each director’s and executive officer’s substantial work in connection with the Closing of the Share Exchange Agreement.  The issuance of these shares was part of the shares registered in the Company’s Registration Statement on Form S-8 filed with the SEC on July 20, 2012.


Item 9.01   Financial Statements and Exhibits.


(a)

Financial statements of businesses acquired .


Audited financial statements of Digital Entertainment International Ltd. for the

            fiscal years ended September 30, 2011 and 2010*


Unaudited financial statements of Digital Entertainment International Ltd. for the nine months ended June 30, 2012*


(b)

Pro forma financial information .


Unaudited condensed consolidated pro forma financial information of Wizzard Software and subsidiaries and Digital Entertainment International Ltd. and subsidiaries at June 30, 2012*


*  These financial statements are filed respectively as Exhibits 99.1, 99.2 and 99.3, respectively to this Current Report.


(d)

Exhibits .


Exhibit No.

Exhibit Description


3

Articles of Amendment changing the Company’s name


10.1

Employment Agreement of Christopher J. Spencer


10.2

Employment Agreement of John Busshaus


10.3

Form of Voting Agreement





10.4

Form of Lock-up Agreement


16

Letter regarding change in certifying accountant


99.1

Audited financial statements of Digital

Entertainment International Ltd. for the fiscal years

ended September 30, 2011 and 2010


99.2

Unaudited financial statements of Digital Entertainment International Ltd. for the nine months ended June 30, 2012


99.3

Unaudited condensed pro forma financial

information of Digital Entertainment International

Ltd. for the six months ended June 30, 2012


Current Report on Form 8-K dated April 5, 2012, and filed with the SEC on April

10, 2012*


Exhibit 10.1 - Share Exchange Agreement with exhibits thereto

Exhibit 99 - Press Release dated April 10, 2012


Definitive Proxy Statement filed with the SEC on June 15, 2012*


Current Report on Form 8-K dated July 30, 2012, and filed with the SEC on the same

date*


Current Report on Form 8-K dated September 19, 2012, and filed with the SEC on

the same date*


Exhibit 3 – Articles of Amendment designating a class of preferred stock


*  Each of these filings, with exhibits thereto, is incorporated herein by this reference.


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


WIZZARD SOFTWARE CORPORATION,

a Colorado corporation


Dated:   9/28/2012

By /s/ Christopher J. Spencer

Christopher J. Spencer, President



ARTICLES OF AMENDMENT


OF


WIZZARD SOFTWARE CORPORATION



THE UNDERSIGNED President of Wizzard Software Corporation (the “Corporation”), a corporation organized and existing under the laws of the State of Colorado, does hereby certify:


1.

The name of the Corporation is “Wizzard Software Corporation.”


2.

Article I of the Corporation’s Articles of Incorporation is being amended to change the name of the Corporation to “FAB Universal Corp.”


3.

Accordingly, the text of Article I of the Corporation’s Articles of Incorporation is hereby amended to read as follows:


ARTICLE I

Name


The name of this Corporation is “FAB Universal Corp.”


The foregoing amendment to the Corporation’s Articles of Incorporation was adopted by the Board of Directors and by the common stockholders at a duly-called meeting held on the 30 th day of July, 2012.  The number of shares voted in favor of such amendment was sufficient for approval.


In witness whereof, I Christopher J. Spencer, the President of the Corporation, have subscribed this document and do hereby affirm, under penalty of perjury, that I have examined the statements contained herein and that such statements are true and correct as of this 26th day of September, 2012.


WIZZARD SOFTWARE CORPORATION




By /s/Christopher J. Spencer

Christopher J. Spencer, President



EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT, entered into as of this 26th day of  September 2012, by and between WIZZARD SOFTWARE CORPORATION, a Colorado corporation with an office at 5001 Baum Blvd. Suite 770, Pittsburgh, Pennsylvania 15213 (hereinafter called the “Company”) and CHRISTOPHER J. SPENCER (hereinafter called the “Executive”) residing at 60 Spanish River Dr., Boynton Beach, FL 33435.

RECITALS

WHEREAS, the Executive is employed by the Company as Chief Executive Officer (“CEO”) of the Company and its subsidiaries (“Subsidiaries”), and has performed duties of his employment in a capable and efficient manner, resulting in substantial benefit to the Company; and

WHEREAS, the Company desires to assure the continued service of the Executive, and Executive is desirous of committing himself to continued service to the Company on the terms herein provided.

AGREEMENTS

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged by the parties hereto, the Company and the Executive agree as follows:

1.  Employment . The Company will employ the Executive and the Executive accepts employment on the terms and conditions set forth in this Agreement.

2.  Duties .  The Executive shall serve the Company and Subsidiaries as CEO, under the terms and conditions provided herein.  The Executive’s duties hereunder shall include such duties as are normally incident to the position of CEO.  The Executive shall devote the majority of their working time to the merged Company and perform his duties hereunder faithfully and to the best of his abilities and in furtherance of the business of the Company and to the promotion of its interests. To further perform the Executive duties as are commonly incumbent upon that position, the Executive agrees to travel to or work at other locations, from time to time, as reasonable for the benefit of the company.

 

3.  Term of Employment . The term of the Executive’s employment hereunder shall be for a three (3) year term beginning on October 1, 2012 and ending September 30, 2015.  On October 1, 2015, and on each October 1 st  thereafter (each such date being hereinafter referred to as a “Renewal Date”), the term of the Executive’s employment hereunder shall automatically be extended for an additional one (1) year period unless the Company notifies the Executive in writing at least ninety (90) days prior to the applicable Renewal Date that the Company does not wish to extend this Agreement beyond the initial three (3) year term or the additional one (1) year term and subsequent additional one (1) year renewals. The Executive may terminate this Agreement upon thirty (30) days advance written notice to the Company at any point during the Executive’s term of employment.

4.  Salary .  The Company agrees to pay and the Executive agrees to accept, in accordance with the provisions contained herein, as compensation for performance of his duties and obligations to the Company hereunder, a salary at an annual rate set by the Board of Directors of the Company (the “Board”), but shall in no event be less than Four-Hundred Thousand Dollars ($400,000) per year, exclusive of the benefits described in Section 5, 6 and 7 hereof.  Such salary shall be payable in equal semi-monthly installments, less usual, customary and the applicable government mandated payroll deductions.  The Executive’s salary shall be reviewed annually by the Board for possible increases.  In addition, the Company agrees to pay and the Executive agrees to accept, in accordance with the provisions contained herein, as compensation for performance of his duties and obligations to the Company hereunder, any fees or payments authorized by the Board to be paid to the Executive for membership on the Board or any committee thereof.  All amounts described in this Section shall be referred to in this Agreement collectively as the Executive’s “Salary”. The Executive shall be entitled to participate in such bonus programs as the Board of Directors or the compensation committee may establish in the sole discretion of the Board.  The Executive, with Board




approval, shall be eligible to receive options to purchase shares of common stock pursuant to the stock option plans established by the board of directors.  At the end of the initial three (3) year term of the employment agreement, the Executive shall receive a bonus equal to the Executive’s highest annual salary. This additional (one time) bonus is only earned as of the renewal date of October 1, 2015.  If the Executive leaves by his own accord and not a “Resignation for Good Reason” as defined below,  at the end of the initial three (3) year term of the employment agreement, the Executive shall receive a bonus equal to or greater than the Executive's highest annual salary .


5.  Change in Control .   Whether via changes in the combined entity, or any change in the Executive's duties, titles, or capacities, the Executive is entitled to the same salaries and benefits as if the CEO contract had remained in force. 

(a) Unless the Executive unilaterally terminates his own contract, or for other reasons fails to complete the remainder of the three (3) year contract, the Executive will receive the same salary and benefits as were the stipulated remunerations for performing his duties as CEO. Such remunerations will continue to be paid for consulting and advisory services or a re-designation to another role in the Company as agreed to by the executive on a monthly basis for contract duration."

(b) The merger between Wizzard Software and Digital Entertainment International Ltd including the conversion of preferred stock by FAB’s shareholders does not constitute change in control.

6.  Expenses .  All reasonable travel and other expenses incidental to the rendering of services by the Executive hereunder shall be paid by the Company in accordance with the Company’s policies and procedures.

7.  Benefits .

(a) Benefit Plans .  The Executive shall be entitled to participate in all Executive benefit plans, including, without limitation, medical, hospital, insurance, pension and 401(k) plans hereafter adopted by the Board of Directors of the Company or its Subsidiary for its Executive employees and employees, and to receive any other fringe benefits that may be made generally available to the Company’s Executive employees from time to time.

(b) Vacations .  The Executive shall be entitled to vacations each year in accordance with the Company’s policies in effect from time to time, of up to four (4) weeks.  Vacation shall be granted on January 1 of each calendar year of this agreement and taken on a calendar basis.  Any unused vacation at the end of the calendar year will be forfeited and will not accrue or carry forward to the subsequent calendar year.

 (c) Health Benefits . Notwithstanding any other provision of this Agreement or any other agreement between the Executive and the Company, the Company agrees upon the termination of Executive’s employment for any reason other than Cause (as hereinafter defined), or upon Executive’s retirement from the Company, or upon the Executive’s death while employed by the Company, the Company shall provide at its sole cost, to Executive, and the Executive’s spouse at the time of termination of employment as well as applicable dependents, the same level of health care benefits as currently provided to Executive and his family, on the date hereof; for a term of 3 years from the date of separation of employment unless executive is covered by another company employment contract.

The Company further agrees that in the event that the level of health care benefits provided by the Company to its Executives is expanded at any time prior to the occurrence of the triggering event described in either Section 7(c)(i) or Section 7(c)(ii) hereof, the health care benefit that is required to be provided by Section 7(c)(i) or Section 7(c)(ii) shall be at such expanded level.




8.  Termination .

(a) Death .  The Executive’s employment hereunder shall terminate upon his death.

(b) Cause .  The Company may terminate the Executive’s employment hereunder for Cause. For the purpose of this Agreement, the Company shall have “Cause” to terminate the Executive’s employment hereunder upon (i) the willful failure of the Executive to substantially perform his duties hereunder; (ii) the engaging by the Executive in dishonesty or other misconduct materially injurious to the Company; (iii) the commission by the Executive of a felony (whether or not involving the Company); or (iv) a material breach by the Executive of this Agreement, provided that such breach shall not have been cured by the Executive within thirty (30) days after written notice thereof from the Company to the Executive. (v) Gross negligence in the performance of the duties of the executive.  Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than seventy-five percent (75%) of the entire membership of the Board of Directors of the Company at a meeting of the Board called and held for the purpose (after thirty (30) days prior written notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clause (i), (ii), (iii) or (iv) of this Section 8(b) and specifying the particulars thereof in detail.

 

(c) Resignation for Good Reason .  The Executive may terminate his employment hereunder for Good Reason.  For the purpose of this Agreement “Good Reason” shall mean:

(1)                                   a material breach by the Company, by act or omission, of this Agreement, which the Company fails to cure within thirty (30) days after receipt of written notice from the Executive of such material breach (or, in the case of a material breach which the Company cannot reasonably cure within said thirty (30) day period which the Company fails to commence within said thirty (30) day period to diligently cure);

(2)                                   material change by the Company of the Executive’s functions, duties or responsibilities which change would cause the Executive’s position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, a change from being senior officer of a publicly held company; except as consultant to the Chief Executive Officer (CEO) and or Board of Directors (BOD) in an advisory capacity as defined in Section 5.

(3)          permanent assignment or reassignment by the Company of the Executive without the Executive's consent to another place of employment more than 50 miles from the Executive's current place of employment; or

(4)                                  a reduction in the Executive’s base pay or bonus opportunity from the previous year.

No such event described above shall constitute Good Reason unless the Executive gives timely written notice to the Company, specifying the event relied upon for such termination of such event and the Company has not remedied such within 30 days of the notice. The Company and Executive, upon mutual written agreement may waive any of the foregoing provisions which would otherwise constitute a Good Reason.

(d) Disability .  If, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full time basis for ninety (90) consecutive business days, the Company may terminate the Executive’s employment hereunder.




9.  Effect of Termination .

(a) Termination by the Company for Cause or Due to Executive’s Death .  If the Executive’s employment hereunder shall be terminated due to the Executive’s death or for Cause, the Company shall pay the Executive his full Salary and other benefits through the date of termination at the rate then in effect.  Upon termination of the Executive’s employment pursuant to subsections 8(a) and 8(b) hereof, the Company shall have no further obligations to the Executive under this Agreement, except as specified in subsection 7(c).

(b)  Termination by the Company Due to the Executive’s Disability .  During any period that the Executive is prevented from performing his duties hereunder as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his Salary and benefits in the amounts or rates in effect upon the commencement of his disability (less any amounts payable to the Executive under any Company disability insurance policy or plan) until the Executive’s employment hereunder is terminated by the Company pursuant to Section 8(d) hereof.  Upon termination of the Executive’s employment pursuant to subsection 8(d) hereof, the Company shall have no further obligations to the Executive under this Agreement, except as specified in subsection 7(c).

(c) Termination by the Company without Cause or by Executive Resignation for Good Reason .  If the Executive’s employment hereunder shall be terminated by the Company, other than for death, Cause or disability, or the Executive Resigns for Good Reason, the Company agrees to pay as a severance pay an amount equal to the Salary which would have been payable over the remaining term of this Agreement or, if such remaining term is less than twelve (12) months, then for a period of twelve (12) months immediately following the termination.  All unvested stock options held by the Executive shall automatically vest, all bonuses due the Executive shall be paid immediately upon termination,  and all shares due the Executive shall be immediately issued to the Executive.  The Company shall also provide to the Executive the benefits described in Section 7(a) and Section 7(c) hereof for a term not shorter than the period that said severance pay shall be payable.  In addition, the Company shall pay to the Executive any accrued bonus through the date of termination.  The Company’s notice of non-extension of this Agreement, described in Section 3 hereof, shall not constitute a termination by the Company for the purposes of this Section 9(c).

10.  Change in Control .  If, and only if, the Executive’s employment is terminated following a Change in Control of the Company excluding the merger between Wizzard Software and Digital Entertainment International Ltd.(5b above), the provisions in Section 9(c) of this Agreement shall be followed in addition to the provisions in Section 5 of this agreement.

11.  Assignment; Successors .  The provisions of this Agreement shall survive any Change in Control and is subject to the provisions of Section 10 hereof, if the Company shall be merged or consolidated into any other corporation or if substantially all of the assets of the Company shall be transferred to another corporation, the provisions of this Agreement shall be binding upon the corporation resulting from such merger or consolidation or to which assets shall have been transferred (the “Surviving Corporation”), and this provision shall apply in the event of any subsequent merger, consolidation or transfer.  In any such event, the Surviving Corporation shall enter into an agreement with the Executive whereby the Surviving Corporation and the Executive shall agree to perform this Agreement, including Section 10 hereof, in the same manner and to the same extent the Company would be required to perform it if no such merger, consolidation or transfer had taken place. 

12.  Agreement Not to Compete .

(a) The Executive hereby covenants and agrees that, provided the Company makes any payments and provides any benefits which may be required under Section 9 and 10 hereof, at no time during the Executive’s employment by the Company, nor for a period of six (6) months immediately following the termination thereof, will the Executive for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in, provide consulting services to, be employed by, contract with, or own, manage, operate or control any business producing, manufacturing, selling, distributing, promoting or dealing in products or services identical or similar to the products or services of the Company or Subsidiaries, which is defined as providing “podcast hosting services,” or otherwise compete with the Company or Subsidiaries in the Company’s Service Area,


specifically the northeastern Region of the United States..  Nothing in this Agreement shall prevent the Executive from holding or investing in securities listed on a national securities exchange or sold in the over-the-counter market. 

(b) The Executive hereby covenants and agrees that, provided the Company makes any payments which may be required under Section 9 and 10 hereof, at all times during his employment by the Company, and for six (6) months after termination of such employment, the Executive shall not directly or indirectly contact or solicit any clients of the Company or employ or seek to employ any person or entity employed at that time by the Company, Subsidiary, affiliates or licensees or otherwise encourage or entice such person or entity to leave employment or terminate such employment.

(c) In the event that this Section 12 shall be determined by arbitrators or by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too large a geographic area or over too great a range of activities, it shall be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which it may be enforceable.

13.  Confidential Information .  The Executive acknowledges that, in and as a result of his relationship with the Company, the Executive has access to certain Confidential Information of the Company, as hereinafter defined.  The Executive recognizes that the Confidential Information is confidential and solely the property of the Company, and that unauthorized disclosure or use of such Confidential Information by the Executive will be deemed a breach of this Agreement.  The Executive agrees to use his best efforts to keep secret and retain in the strictest confidence all Confidential Information and confidential matters which relate to the Company, Subsidiary or any affiliate of the Company.  For purposes of this Agreement, Confidential Information means any and all information related to the Company and its business, including, but not limited to, products, services, suppliers, vendors, clients, prospects, business plans, marketing techniques, pricing, financial information, customer lists, supplier lists, trade secrets, pricing policies and other business affairs of the Company, Subsidiary and any affiliate of the Company, learned by him before or after the date of this Agreement, regardless of whether such information is reduced to writing and/or is in existence in the date hereof.    The Executive agrees not to disclose any such Confidential Information to anyone outside the Company, Subsidiary or any affiliates, whether during or after his period of service with the Company, except in the course of performing his duties hereunder. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of employment by the Company, or at any time thereafter as the Company may request, all Company, Subsidiary or any affiliate materials, memoranda, notes, records, reports, manuals, drawings, designs, computer files in any media and other documents (and all copies thereof) relating to the Company’s, Subsidiary’s or any affiliate’s business and all property of the Company, Subsidiary or any affiliate of the Company, which he may then possess or have under his control.

14.  Remedies .  The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others.  In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement.  Each party shall be responsible for its own expenses and legal fees incurred in connection with any arbitration, however, in the event that the Executive prevails in the Arbitration, the Company agrees to pay, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest  by or with the Company regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code.  In any such action brought by the parties, the parties voluntarily agree that any and all disputes under this Agreement, either an action at law or an action for injunctive relief, shall be settled exclusively by arbitration as set forth hereinafter.  The Arbitrator may award any remedies or damages that a judge could provide under the applicable statute or law.  The obligation of the Company under this Section 14 shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise).




15.  Arbitration .  To the extent permitted by applicable law, any controversy or dispute arising out of, or relating to, this Agreement, or any alleged breach hereof, the parties voluntarily agree that said disputes shall be settled exclusively by arbitration in Pittsburgh, Pennsylvania, in accordance with Pennsylvania law, and shall be conducted in accordance with the Rules of the American Arbitration Association then in effect.  The parties hereby consent to the jurisdiction of the courts of the Commonwealth of Pennsylvania and of the United States District Court for the Western District of Pennsylvania for all purposes in connection with the arbitration.  The arbitrator shall be selected by the Executive and Company, the parties.  In the event that the parties cannot agree on the arbitrator within thirty (30) days following receipt by one party of a demand for arbitration from another party, then the Arbitrator shall be selected by the American Arbitration Association.  The Arbitrator shall convene a hearing no later than thirty (30) days following the selection.  The arbitration award shall be final and binding upon both parties without any right of appeal by either of the parties.  Judgment may be entered and execution issued in any court of competent jurisdiction.  The Company shall pay the total cost of the Arbitrator’s professional fees and related expenses.  The parties further agree that arbitration proceedings must be instituted within one year after the claimed breach occurred, and that failure to institute arbitration proceedings within such period shall constitute an absolute bar to the institution of any proceedings and the waiver of all claims.. 

16.  Governing Law .  This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania.

17.  Entire Agreement .  This Agreement constitutes the full and complete understanding and agreement of the parties with respect to the subject matter hereof, supersedes all prior understandings and agreements as to employment of the Executive, and cannot be amended, changed, modified or terminated without the written consent of the parties hereto.

18.  Waiver of Breach .  No provision of this Agreement shall be deemed waived unless such waiver is in writing and signed by the party making such waiver. The waiver by either party of a breach of any term of this Agreement shall not operate nor be construed as a waiver of any subsequent breach thereof.

19.  Notices .  Any notice hereunder shall be in writing and shall be given by personal delivery or certified or registered mail, return receipt requested, to the following addresses: 

If to the Executive:

Christopher J. Spencer

60 Spanish River Dr.

Boynton Beach, FL 33435


or to such other address as the Executive may have furnished to the Company in writing:

If to the Company:

John Busshaus

Wizzard Software Corporation

5001 Baum Blvd

Suite 770

Pittsburgh, PA 15213

or to such other address as the Company may have furnished to the Executive in writing.

20.  Severability .  If any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and




enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

21.  Headings .  The headings, titles or captions of the Sections of this Agreement are included only to facilitate reference, and they shall not define, limit, extend or describe the scope or intent of this Agreement or any provision hereof; and they shall not constitute a part hereof or affect the meaning or interpretation of this Agreement or any part thereof. 

 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

EXECUTIVE


Date:

September 26, 2012

 

 

/s/ Christopher Spencer

 

 

 

 

Christopher Spencer

 

 

 

 

Chief Executive Officer

 

Wizzard Software Corporation




Date:

September 26, 2012

 

 

/s/ J. Gregory Smith

 

 

 

 

J. Gregory Smith

 

 

 

 

Compensation Committee Member

 

 

 

 

Director



Date:

September 26, 2012

 

 

/s/  Denis Yevstifeyev

 

 

 

 

Denis Yevstifeyev

 

 

 

 

Compensation Committee Member

 

 

 

 

Director



Date:

September 26, 2012

 

 

/s/  Douglas Polinsky

 

 

 

 

Douglas Polinsky

 

 

 

 

Compensation Committee Member

 

 

 

 

Director




EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT, entered into as of this 26th day of September 2012, by and between WIZZARD SOFTWARE CORPORATION, a Colorado corporation with an office at 5001 Baum Blvd. Suite 770, Pittsburgh, Pennsylvania 15213 (hereinafter called the “Company”) and JOHN BUSSHAUS (hereinafter called the “Executive”) residing at 3227 McAlister Farm Lane., Allison Park, PA 15101.

RECITALS

WHEREAS, the Executive is employed by the Company as Chief Financial Officer (“CFO”) of the Company and its subsidiaries (“Subsidiaries”), and has performed duties of his employment in a capable and efficient manner, resulting in substantial benefit to the Company; and

WHEREAS, the Company desires to assure the continued service of the Executive, and Executive is desirous of committing himself to continued service to the Company on the terms herein provided.

AGREEMENTS

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged by the parties hereto, the Company and the Executive agree as follows:

1.  Employment . The Company will employ the Executive and the Executive accepts employment on the terms and conditions set forth in this Agreement.

2.  Duties .  The Executive shall serve the Company and Subsidiaries as CFO, under the terms and conditions provided herein.  The Executive’s duties hereunder shall include such duties as are normally incident to the position of CFO.  The Executive shall devote the majority of their working time to the merged Company and perform his duties hereunder faithfully and to the best of his abilities and in furtherance of the business of the Company and to the promotion of its interests. To further perform the Executive duties as are commonly incumbent upon that position, the Executive agrees to travel to or work at other locations, from time to time, as reasonable for the benefit of the company.

 

3.  Term of Employment . The term of the Executive’s employment hereunder shall be for a three (3) year term beginning on October 1, 2012 and ending September 30, 2015.  On October 1, 2015, and on each October 1 st  thereafter (each such date being hereinafter referred to as a “Renewal Date”), the term of the Executive’s employment hereunder shall automatically be extended for an additional one (1) year period unless the Company notifies the Executive in writing at least ninety (90) days prior to the applicable Renewal Date that the Company does not wish to extend this Agreement beyond the initial three (3) year term or the additional one (1) year term and subsequent additional one (1) year renewals. The Executive may terminate this Agreement upon thirty (30) days advance written notice to the Company at any point during the Executive’s term of employment.

4.  Salary .  The Company agrees to pay and the Executive agrees to accept, in accordance with the provisions contained herein, as compensation for performance of his duties and obligations to the Company hereunder, a salary at an annual rate set by the Board of Directors of the Company (the “Board”), but shall in no event be less than Three-Hundred Fifty Thousand Dollars ($350,000) per year, exclusive of the benefits described in Section 5, 6 and 7 hereof.  Such salary shall be payable in equal semi-monthly installments, less usual, customary and the applicable government mandated payroll deductions.  The Executive’s salary shall be reviewed annually by the Board for possible increases.  In addition, the Company agrees to pay and the Executive agrees to accept, in accordance with the provisions contained herein, as compensation for performance of his duties and obligations to the Company hereunder, any fees or payments authorized by the Board to be paid to the Executive for membership on the Board or any committee thereof.  All amounts described in this Section shall be referred to in this Agreement collectively as the Executive’s “Salary”. The Executive shall be entitled to participate in such bonus programs as the Board of Directors or the compensation committee may establish in the sole discretion of the Board.  The




Executive, with Board approval, shall be eligible to receive options to purchase shares of common stock pursuant to the stock option plans established by the board of directors.  At the end of the initial three (3) year term of the employment agreement, the Executive shall receive a bonus equal to the Executive’s highest annual salary. This additional (one time) bonus is only earned as of the renewal date of October 1, 2015.  If the Executive leaves by his own accord and not a “Resignation for Good Reason” as defined below,  at the end of the initial three (3) year term of the employment agreement, the Executive shall receive a bonus equal to or greater than the Executive's highest annual salary .


5.  Change in Control .   Whether via changes in the combined entity, or any change in the Executive's duties, titles, or capacities, the Executive is entitled to the same salaries and benefits as if the CFO contract had remained in force. 

(a) Unless the Executive unilaterally terminates his own contract, or for other reasons fails to complete the remainder of the three (3) year contract, the Executive will receive the same salary and benefits as were the stipulated remunerations for performing his duties as CFO. Such remunerations will continue to be paid for consulting and advisory services or a re-designation to another role in the Company as agreed to by the executive on a monthly basis for contract duration."

(b) The merger between Wizzard Software and Digital Entertainment International Ltd including the conversion of preferred stock by FAB’s shareholders does not constitute change in control.

6.  Expenses .  All reasonable travel and other expenses incidental to the rendering of services by the Executive hereunder shall be paid by the Company in accordance with the Company’s policies and procedures.

7.  Benefits .

(a) Benefit Plans .  The Executive shall be entitled to participate in all Executive benefit plans, including, without limitation, medical, hospital, insurance, pension and 401(k) plans hereafter adopted by the Board of Directors of the Company or its Subsidiary for its Executive employees and employees, and to receive any other fringe benefits that may be made generally available to the Company’s Executive employees from time to time.

(b) Vacations .  The Executive shall be entitled to vacations each year in accordance with the Company’s policies in effect from time to time, of up to four (4) weeks.  Vacation shall be granted on January 1 of each calendar year of this agreement and taken on a calendar basis.  Any unused vacation at the end of the calendar year will be forfeited and will not accrue or carry forward to the subsequent calendar year.

 (c) Health Benefits . Notwithstanding any other provision of this Agreement or any other agreement between the Executive and the Company, the Company agrees upon the termination of Executive’s employment for any reason other than Cause (as hereinafter defined), or upon Executive’s retirement from the Company, or upon the Executive’s death while employed by the Company, the Company shall provide at its sole cost, to Executive, and the Executive’s spouse at the time of termination of employment as well as applicable dependents, the same level of health care benefits as currently provided to Executive and his family, on the date hereof; for a term of 3 years from the date of separation of employment unless executive is covered by another company employment contract.

The Company further agrees that in the event that the level of health care benefits provided by the Company to its Executives is expanded at any time prior to the occurrence of the triggering event described in either Section 7(c)(i) or Section 7(c)(ii) hereof, the health care benefit that is required to be provided by Section 7(c)(i) or Section 7(c)(ii) shall be at such expanded level.




8.  Termination .

(a) Death .  The Executive’s employment hereunder shall terminate upon his death.

(b) Cause .  The Company may terminate the Executive’s employment hereunder for Cause. For the purpose of this Agreement, the Company shall have “Cause” to terminate the Executive’s employment hereunder upon (i) the willful failure of the Executive to substantially perform his duties hereunder; (ii) the engaging by the Executive in dishonesty or other misconduct materially injurious to the Company; (iii) the commission by the Executive of a felony (whether or not involving the Company); or (iv) a material breach by the Executive of this Agreement, provided that such breach shall not have been cured by the Executive within thirty (30) days after written notice thereof from the Company to the Executive. (v) Gross negligence in the performance of the duties of the executive.  Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than seventy-five percent (75%) of the entire membership of the Board of Directors of the Company at a meeting of the Board called and held for the purpose (after thirty (30) days prior written notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clause (i), (ii), (iii) or (iv) of this Section 8(b) and specifying the particulars thereof in detail.

 

(c) Resignation for Good Reason .  The Executive may terminate his employment hereunder for Good Reason.  For the purpose of this Agreement “Good Reason” shall mean:

(1)                                   a material breach by the Company, by act or omission, of this Agreement, which the Company fails to cure within thirty (30) days after receipt of written notice from the Executive of such material breach (or, in the case of a material breach which the Company cannot reasonably cure within said thirty (30) day period which the Company fails to commence within said thirty (30) day period to diligently cure);

(2)                                   material change by the Company of the Executive’s functions, duties or responsibilities which change would cause the Executive’s position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, a change from being senior officer of a publicly held company; except as consultant to the Chief Financial Officer (CFO) and or Board of Directors (BOD) in an advisory capacity as defined in Section 5.

(3)          permanent assignment or reassignment by the Company of the Executive without the Executive's consent to another place of employment more than 50 miles from the Executive's current place of employment; or

(4)                                  a reduction in the Executive’s base pay or bonus opportunity from the previous year.

No such event described above shall constitute Good Reason unless the Executive gives timely written notice to the Company, specifying the event relied upon for such termination of such event and the Company has not remedied such within 30 days of the notice. The Company and Executive, upon mutual written agreement may waive any of the foregoing provisions which would otherwise constitute a Good Reason.

(d) Disability .  If, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full time basis for ninety (90) consecutive business days, the Company may terminate the Executive’s employment hereunder.




9.  Effect of Termination .

(a) Termination by the Company for Cause or Due to Executive’s Death .  If the Executive’s employment hereunder shall be terminated due to the Executive’s death or for Cause, the Company shall pay the Executive his full Salary and other benefits through the date of termination at the rate then in effect. Upon termination of the Executive’s employment pursuant to subsections 8(a) and 8(b) hereof, the Company shall have no further obligations to the Executive under this Agreement, except as specified in subsection 7(c).

(b)  Termination by the Company Due to the Executive’s Disability .  During any period that the Executive is prevented from performing his duties hereunder as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his Salary and benefits in the amounts or rates in effect upon the commencement of his disability (less any amounts payable to the Executive under any Company disability insurance policy or plan) until the Executive’s employment hereunder is terminated by the Company pursuant to Section 8(d) hereof.  Upon termination of the Executive’s employment pursuant to subsection 8(d) hereof, the Company shall have no further obligations to the Executive under this Agreement, except as specified in subsection 7(c).

(c) Termination by the Company without Cause or by Executive Resignation for Good Reason .  If the Executive’s employment hereunder shall be terminated by the Company, other than for death, Cause or disability, or the Executive Resigns for Good Reason, the Company agrees to pay as a severance pay an amount equal to the Salary which would have been payable over the remaining term of this Agreement or, if such remaining term is less than twelve (12) months, then for a period of twelve (12) months immediately following the termination.  All unvested stock options held by the Executive shall automatically vest, all bonuses due the Executive shall be paid immediately upon termination,  and all shares due the Executive shall be immediately issued to the Executive.  The Company shall also provide to the Executive the benefits described in Section 7(a) and Section 7(c) hereof for a term not shorter than the period that said severance pay shall be payable.  In addition, the Company shall pay to the Executive any accrued bonus through the date of termination.  The Company’s notice of non-extension of this Agreement, described in Section 3 hereof, shall not constitute a termination by the Company for the purposes of this Section 9(c).

10.  Change in Control .  If, and only if, the Executive’s employment is terminated following a Change in Control of the Company excluding the merger between Wizzard Software and Digital Entertainment International Ltd.(5b above), the provisions in Section 9(c) of this Agreement shall be followed in addition to the provisions in Section 5 of this agreement.

11.  Assignment; Successors .  The provisions of this Agreement shall survive any Change in Control and is subject to the provisions of Section 10 hereof, if the Company shall be merged or consolidated into any other corporation or if substantially all of the assets of the Company shall be transferred to another corporation, the provisions of this Agreement shall be binding upon the corporation resulting from such merger or consolidation or to which assets shall have been transferred (the “Surviving Corporation”), and this provision shall apply in the event of any subsequent merger, consolidation or transfer.  In any such event, the Surviving Corporation shall enter into an agreement with the Executive whereby the Surviving Corporation and the Executive shall agree to perform this Agreement, including Section 10 hereof, in the same manner and to the same extent the Company would be required to perform it if no such merger, consolidation or transfer had taken place. 

12.  Agreement Not to Compete .

(a) The Executive hereby covenants and agrees that, provided the Company makes any payments and provides any benefits which may be required under Section 9 and 10 hereof, at no time during the Executive’s employment by the Company, nor for a period of six (6) months immediately following the termination thereof, will the Executive for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in, provide consulting services to, be employed by, contract with, or own, manage, operate or control any business producing, manufacturing, selling, distributing, promoting or dealing in products or services identical or similar to the products or services of the Company or Subsidiaries, which is defined as providing “podcast hosting services,” or otherwise compete with the Company or Subsidiaries in the Company’s Service Area,


specifically the northeastern Region of the United States..  Nothing in this Agreement shall prevent the Executive from holding or investing in securities listed on a national securities exchange or sold in the over-the-counter market. 

(b) The Executive hereby covenants and agrees that, provided the Company makes any payments which may be required under Section 9 and 10 hereof, at all times during his employment by the Company, and for six (6) months after termination of such employment, the Executive shall not directly or indirectly contact or solicit any clients of the Company or employ or seek to employ any person or entity employed at that time by the Company, Subsidiary, affiliates or licensees or otherwise encourage or entice such person or entity to leave employment or terminate such employment.

(c) In the event that this Section 12 shall be determined by arbitrators or by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too large a geographic area or over too great a range of activities, it shall be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which it may be enforceable.

13.  Confidential Information .  The Executive acknowledges that, in and as a result of his relationship with the Company, the Executive has access to certain Confidential Information of the Company, as hereinafter defined.  The Executive recognizes that the Confidential Information is confidential and solely the property of the Company, and that unauthorized disclosure or use of such Confidential Information by the Executive will be deemed a breach of this Agreement.  The Executive agrees to use his best efforts to keep secret and retain in the strictest confidence all Confidential Information and confidential matters which relate to the Company, Subsidiary or any affiliate of the Company.  For purposes of this Agreement, Confidential Information means any and all information related to the Company and its business, including, but not limited to, products, services, suppliers, vendors, clients, prospects, business plans, marketing techniques, pricing, financial information, customer lists, supplier lists, trade secrets, pricing policies and other business affairs of the Company, Subsidiary and any affiliate of the Company, learned by him before or after the date of this Agreement, regardless of whether such information is reduced to writing and/or is in existence in the date hereof.    The Executive agrees not to disclose any such Confidential Information to anyone outside the Company, Subsidiary or any affiliates, whether during or after his period of service with the Company, except in the course of performing his duties hereunder. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of employment by the Company, or at any time thereafter as the Company may request, all Company, Subsidiary or any affiliate materials, memoranda, notes, records, reports, manuals, drawings, designs, computer files in any media and other documents (and all copies thereof) relating to the Company’s, Subsidiary’s or any affiliate’s business and all property of the Company, Subsidiary or any affiliate of the Company, which he may then possess or have under his control.

14.  Remedies .  The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others.  In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement.  Each party shall be responsible for its own expenses and legal fees incurred in connection with any arbitration, however, in the event that the Executive prevails in the Arbitration, the Company agrees to pay, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code.  In any such action brought by the parties, the parties voluntarily agree that any and all disputes under this Agreement, either an action at law or an action for injunctive relief, shall be settled exclusively by arbitration as set forth hereinafter.  The Arbitrator may award any remedies or damages that a judge could provide under the applicable statute or law.  The obligation of the Company under this Section 14 shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise).




15.  Arbitration .  To the extent permitted by applicable law, any controversy or dispute arising out of, or relating to, this Agreement, or any alleged breach hereof, the parties voluntarily agree that said disputes shall be settled exclusively by arbitration in Pittsburgh, Pennsylvania, in accordance with Pennsylvania law, and shall be conducted in accordance with the Rules of the American Arbitration Association then in effect.  The parties hereby consent to the jurisdiction of the courts of the Commonwealth of Pennsylvania and of the United States District Court for the Western District of Pennsylvania for all purposes in connection with the arbitration.  The arbitrator shall be selected by the Executive and Company, the parties.  In the event that the parties cannot agree on the arbitrator within thirty (30) days following receipt by one party of a demand for arbitration from another party, then the Arbitrator shall be selected by the American Arbitration Association.  The Arbitrator shall convene a hearing no later than thirty (30) days following the selection.  The arbitration award shall be final and binding upon both parties without any right of appeal by either of the parties.  Judgment may be entered and execution issued in any court of competent jurisdiction.  The Company shall pay the total cost of the Arbitrator’s professional fees and related expenses.  The parties further agree that arbitration proceedings must be instituted within one year after the claimed breach occurred, and that failure to institute arbitration proceedings within such period shall constitute an absolute bar to the institution of any proceedings and the waiver of all claims.. 

16.  Governing Law .  This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania.

17.  Entire Agreement .  This Agreement constitutes the full and complete understanding and agreement of the parties with respect to the subject matter hereof, supersedes all prior understandings and agreements as to employment of the Executive, and cannot be amended, changed, modified or terminated without the written consent of the parties hereto.

18.  Waiver of Breach .  No provision of this Agreement shall be deemed waived unless such waiver is in writing and signed by the party making such waiver. The waiver by either party of a breach of any term of this Agreement shall not operate nor be construed as a waiver of any subsequent breach thereof.

19.  Notices .  Any notice hereunder shall be in writing and shall be given by personal delivery or certified or registered mail, return receipt requested, to the following addresses: 

If to the Executive:

Christopher J. Spencer

60 Spanish River Dr.

Boynton Beach, FL 33435


or to such other address as the Executive may have furnished to the Company in writing:

If to the Company:

John Busshaus

Wizzard Software Corporation

5001 Baum Blvd

Suite 770

Pittsburgh, PA 15213

or to such other address as the Company may have furnished to the Executive in writing.

20.  Severability .  If any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and




enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

21.  Headings .  The headings, titles or captions of the Sections of this Agreement are included only to facilitate reference, and they shall not define, limit, extend or describe the scope or intent of this Agreement or any provision hereof; and they shall not constitute a part hereof or affect the meaning or interpretation of this Agreement or any part thereof. 

 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

EXECUTIVE


Date:

September 26, 2012

 

 

/s/ John Busshaus

 

 

 

 

John Busshaus

 

 

 

 

Chief Financial Officer

 

Wizzard Software Corporation



Date:

September 26, 2012

 

 

/s/ Christopher Spencer

 

 

 

 

Christopher Spencer

 

 

 

 

Chief Executive Officer



Date:

September 26, 2012

 

 

/s/ J. Gregory Smith

 

 

 

 

J. Gregory Smith

 

 

 

 

Compensation Committee Member

 

 

 

 

Director



Date:

September 26, 2012

 

 

/s/  Denis Yevstifeyev

 

 

 

 

Denis Yevstifeyev

 

 

 

 

Compensation Committee Member

 

 

 

 

Director



Date:

September 26, 2012

 

 

/s/  Douglas Polinsky

 

 

 

 

Douglas Polinsky

 

 

 

 

Compensation Committee Member

 

 

 

 

Director




VOTING AGREEMENT

This VOTING AGREEMENT (this “ Agreement ”) is dated as of   ______, 2012, by and between Universal Entertainment Group Limited, a company incorporated under the law of the British Virgin Islands, with its registered office at P.O. Box 3321, Drake Chambers, Road Town, Tortola, BVI ( Digital HKCo’s Shareholder ”), and Wizzard Software Corporation, a Colorado corporation (the “ Company ”).  Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to them in the Share Exchange Agreement (as defined below).

R ECITALS

WHEREAS , the execution and delivery of this Agreement by Digital HKCo’s Shareholder is a material inducement to the willingness of the Company to enter into that certain Share Exchange Agreement dated as of April 5, 2012, by and between Digital HKCo’s Shareholder; the Company ; Digital Entertainment International Ltd.; Beijing Dingtai Guanqun Culture Co., Ltd.; Beijing FAB Culture Co., Ltd.; and Beijing FAB Digital Entertainment Products Co., Ltd. (the “ Share Exchange Agreement ”);

WHEREAS, in partial consideration for the purchase of the Digital HKco Shares under the Share Exchange Agreement, the Company shall issue at Closing (as defined in Section 2.2 of the Share Exchange Agreement) such number of shares of the Company’s common stock, par value one mill ($0.001) per share, as constitutes forty-nine percent (49%) of the Company’s issued and outstanding common stock on a fully diluted basis immediately following the Closing after issuance of such shares (the “ Initial Company Shares ,” as defined in Section 2.3(a) of the Share Exchange Agreement), and shall also be known as the “ Shares ;

WHEREAS, in partial consideration for the purchase of the Digital HKCo Shares under the Share Exchange Agreement, the Company shall also issue to Digital HKCo’s Shareholder shares of convertible preferred stock of the Company at the Closing, which shall be convertible into up to an additional shares of the Company’s common stock and bring Digital HKCo ’s Shareholder’s equity position in the Company to 78%  on a fully diluted basis as of the date of the Closing,  upon the achievement of certain milestones in accordance with the Certificate of Designation of such convertible preferred stock (the “ Certificate of Designation ”) in the form attached as Exhibit B to the Share Exchange Agreement (the “ Convertible Preferred Shares ”, as defined in Section 2.3(b) of the Share Exchange Agreement) (for purposes of this Agreement, the shares of common stock issuable upon conversion of the Convertible Preferred Shares  shall be defined as the “ Conversion Shares ”) ;

NOW, THEREFORE, in consideration of the premises and the covenants and agreements set forth in the Share Exchange Agreement and in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Restrictions on Shares .

(a) Except pursuant to the terms of this Agreement, until the Expiration Time as defined in Section 1(b) below, that is applicable to its Shares, Digital HKCo’s Shareholder shall not, directly or indirectly, grant any proxies or powers of attorney with respect to any of the Shares, deposit any of the Shares into a voting trust, or enter into a voting agreement or similar arrangement or commitment with respect to any of the Shares.

(b) Digital HKCo’s Shareholder hereby grants to the Board of Directors of the Company the right to vote its Shares in accordance with Section 2 hereof and the Irrevocable Proxy that is attached as Exhibit A hereto.  Such provisions shall govern the voting of the Shares for a period of eight (8) consecutive and complete reporting quarters of the Company after the Closing of the Share Exchange Agreement, provided , however, that:


(i)   If  Digital HKco and the VIE Companies successfully complete all of the Corporate Governance Objectives for  two (2) con secutive and complete reporting quarters after the Closing, the Board of Directors of the Company will release  the voting rights of 50% of the Shares held by






Digital HKCo ’s Shareholder at such time and re-assign such voting rights back to Digital HKCo ’s Shareholder .

(ii)  Upon successful completion of all of the Corporate Governance Objectives for six ( 6 ) consecutive and complete reporting quarters after the Closing of the Share Exchange Agreement, the Board of Directors will release the voting rights to another 25% of the Shares held by Digital HKCo’s Shareholder at such time and re-assign such voting rights back to Digital HKCo’s Shareholder ; .

(iii)  Upon the successful completion of all of the Corporate Governance Objectives for eight ( 8) consecutive and complete reporting quarters after the Closing of the Share Exchange Agreement, the Board of Directors will release the voting rights to the remaining Shares held by Digital HKCo’s Shareholder at such time and re-assign such voting rights back to Digital HKCo’s Shareholder.

With respect to any Share, the earliest applicable release date pursuant to this Section 1(b) shall be referred to herein as the “ Expiration Time .”  The Expiration Time referred to in Section 1(b)(iii) hereof (or to the extent the conditions described in Section 1(b)(i) through (iii) are not satisfied with respect to any Shares, the end of eight (8) consecutive and complete reporting quarters after the Closing of the Share Exchange Agreement) shall be referred to herein as the “ Final Expiration Time .”  The release of Shares from the terms of this Agreement shall not have any effect on their status as “Lock-up Shares” within the meaning of the Lock-up Agreement (the “ Lock-up Agreement ”) executed by the parties contemporaneously herewith.

(c)  Except as otherwise provided herein, Digital HKCo’s Shareholder shall not, in its capacity as a stockholder of the Company, directly or indirectly, take any action that would make any representation or warranty contained herein untrue or incorrect in any material respect or be reasonably expected to have the effect of impairing the ability of Digital HKCo’s Shareholder to perform its obligations under this Agreement or preventing or delaying the consummation of any of the transactions contemplated hereby.

(d) Any shares of the Company’s common or other securities of the Company with respect to which Digital HKCo’s Shareholder acquires beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) after the date of this Agreement and prior to the Final Expiration Time, by reason of any stock split, stock dividend, reclassification, recapitalization or other similar transaction (the “ New Shares ”) shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Initial Company Shares.

2. Irrevocable Proxy . Concurrently with the execution and delivery of this Agreement, Digital HKCo’s Shareholder shall deliver to the Company a duly executed proxy in the form attached hereto as Exhibit A (the “ Proxy ”), which Proxy is coupled with an interest sufficient in law to support an irrevocable proxy, and, until the Expiration Time applicable to any given Share, shall be irrevocable to the fullest extent permitted by law, with respect to each and every meeting of stockholders of the Company or action or approval by written resolution or consent of stockholders of the Company covering the total number of Shares in respect of which Digital HKCo’s Shareholder is entitled to vote at any such meeting or in connection with any such written consent. Upon the execution of this Agreement, (i) Digital HKCo’s Shareholder hereby revokes any and all prior proxies (other than the Proxy) given by Digital HKCo’s Shareholder with respect to the Shares, and (ii) Digital HKCo’s Shareholder shall not grant any subsequent proxies with respect to such Shares, or enter into any agreement or understanding with any Person to vote or give instructions with respect to the Shares in any manner inconsistent with the terms of this Agreement, until after the Expiration Time applicable to such Shares.   Until such applicable Expiration Time, Digital HKCo’s Shareholder agrees that the subject Shares shall be voted only in accordance with the Proxy.

 

3. Representations, Warranties and Covenants of Digital HKCo’s Shareholder . Digital HKCo’s Shareholder hereby represents, warrants and covenants to the Company as follows:






(a) With the exception of the lien created under the Lock-up Agreement, all Shares are and will be at all times up until the applicable Expiration Time free and clear of any security interests, liens, claims, pledges, options, rights of first refusal, co-sale rights, agreements, limitations on Digital HKCo’s Shareholder’s voting rights, charges and other encumbrances of any nature that would adversely affect the exercise or fulfillment of the rights and obligations of the parties to this Agreement.

(b) If Digital HKCo’s Shareholder is a corporation, limited partnership or limited liability company, Digital HKCo’s Shareholder is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or constituted.

(c) Digital HKCo’s Shareholder has all requisite power, capacity and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Digital HKCo’s Shareholder and the consummation by Digital HKCo’s Shareholder of the transactions contemplated hereby have been duly authorized by all necessary action, if any, on the part of Digital HKCo’s Shareholder (or its board of directors or similar governing body, as applicable), and no other actions or proceedings on the part of Digital HKCo’s Shareholder are necessary to authorize the execution and delivery by Digital HKCo’s Shareholder of this Agreement and the consummation by Digital HKCo’s Shareholder of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Digital HKCo’s Shareholder and constitutes a valid and binding obligation of Digital HKCo’s Shareholder, enforceable against Digital HKCo’s Shareholder in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and to general principles of equity.

(d) The execution and delivery of this Agreement does not, and the performance by Digital HKCo’s Shareholder of its agreements and obligations hereunder will not conflict with, result in a breach or violation of or default under (with or without notice or lapse of time or both), or require notice to or the consent of any person under, any provisions of the organizational documents of Digital HKCo’s Shareholder (if applicable), or any agreement, commitment, law, rule, regulation, judgment, order or decree to which Digital HKCo’s Shareholder is a party or by which Digital HKCo’s Shareholder is, or any of its assets are, bound, except for such conflicts, breaches, violations or defaults that would not, individually or in the aggregate, prevent or delay consummation of the Share Exchange Agreement and this Agreement or otherwise prevent or delay Digital HKCo’s Shareholder from performing its obligations under this Agreement.

(e) Digital HKCo’s Shareholder agrees that it will not in its capacity as a stockholder of the Company bring, commence, institute, maintain, prosecute or voluntary aid any action, claim, suit or cause of action, in law or in equity, in any court or before any governmental entity, which challenges the validity or seeks to enjoin the operation of any provision of this Agreement (provided that nothing herein shall limit Digital HKCo’s Shareholder’s rights to enforce the terms of this Agreement) .

4.   Miscellaneous .


(a) Notices . All notices, demands, consents, requests, instructions and other communications to be given or delivered or permitted under or by reason of the provisions of this Agreement or in connection with the transactions contemplated hereby shall be in writing and shall be deemed to be delivered and received by the intended recipient as follows: (i) if personally delivered, on the business day of such delivery (as evidenced by the receipt of the personal delivery service), (ii) if delivered by overnight courier (with all charges having been prepaid), on the business day of such delivery (as evidenced by the receipt of the overnight courier service of recognized standing), or (iii) if delivered by facsimile transmission, on the business day of such delivery if sent by 6:00 p.m. in the time zone of the recipient, or if sent after that time, on the next succeeding business day (as evidenced by the printed confirmation of delivery generated by the sending party’s telecopier machine). If any notice, demand, consent, request, instruction or other communication cannot be delivered because of a changed address of which no notice was given (in accordance with this Section 5), or the refusal to accept same, the notice, demand, consent, request, instruction or other communication shall be deemed received on the second business day the notice is sent (as evidenced by a sworn affidavit of the sender). All such notices, demands, consents, requests,






instructions and other communications will be sent to the following addresses or facsimile numbers as applicable.

 

If to the Company:


Wizzard Software Corporation

5001 Baum Blvd.

Suite 770

Pittsburgh, PA  15213

Attention: John Busshaus

Telephone No.: (412) 621-0902

Facsimile No.: (412) 621-2625


with copies (which copies shall not constitute notice to the Company) to:


Branden T. Burningham, Esq.

Burningham & Burningham

455 East 500 South

Suite 205

Salt Lake City, UT  84111

Tel. No.: (801) 363-7411

Fax No.: (801) 355-7126


If to the Digital HKCo’s Shareholder:


Address: 21 Fl., Wan-Shang Building    

Shijingshan District, Beijing, China

Attn:  Bob (Zhong Bing-Bin)       

Telephone: 100186-135-8190-0771

Fax: 01186-1066032873


or to such other address for either party as such party may specify by notice given to the other party in accordance with this Section 5.

 (b) Interpretation . When a reference is made in this Agreement to paragraphs or exhibits, such reference shall be to a paragraph of or an exhibit to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The phrases “the date of this Agreement”, “the date hereof”, and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date first above written. Unless the context of this Agreement otherwise requires: (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,” “hereunder” and derivative or similar words refer to this entire Agreement.

(c) Specific Performance; Injunctive Relief . The parties hereto acknowledge that the Company will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of Digital HKCo’s Shareholder set forth herein or in the Proxy. Therefore, it is agreed that, in addition to any other remedies that may be available to the Company upon any such violation of this Agreement or the Proxy, the Company shall have the right to enforce such covenants and agreements and the Proxy by specific performance, injunctive relief or by any other means available to the Company at law or in equity and Digital HKCo’s Shareholder hereby waives any and all equitable defenses that could exist in its favor in connection with such enforcement and waives any requirement for the security or posting of any bond in connection with such enforcement.

(d) Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same instrument and shall become effective when one or more






counterparts have been signed by each of the parties and delivered to the other parties hereto; it being understood that all parties need not sign the same counterpart. Delivery of an executed counterpart of a signature page to this Agreement by telecopy or by electronic delivery in Adobe Portable Document Format or other electronic format based on common standards will be effective as delivery of a manually executed counterpart of this Agreement.

(e) Entire Agreement; Nonassignability; Parties in Interest; Death or Incapacity . This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto (including, without limitation, the Proxy) (i) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) are not intended to confer, and shall not be construed as conferring, upon any person other than the parties hereto any rights or remedies hereunder.  Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by Digital HKCo’s Shareholder without the prior written consent of the Company except in connection with a transfer of Shares permitted by the Lock-up Agreement , and any such assignment or delegation that is not consented to shall be null and void.  Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and assigns.

 

(f) Severability . In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the application of such provision to other persons or circumstances shall be interpreted so as reasonably to effect the intent of the parties hereto. The parties hereto further agree to use their commercially reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that shall achieve, to the extent possible, the purposes of such void or unenforceable provision.

(g) Remedies Cumulative . Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party shall be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy shall not preclude the exercise of any other remedy.

(h) Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted.

(i) Termination . This Agreement shall terminate and shall have no further force or effect from and after the Final Expiration Time, and thereafter there shall be no liability or obligation on the part of Digital HKCo’s Shareholder, provided , that no such termination shall relieve any party from liability for any willful breach of this Agreement prior to such termination.

(j) Amendment . Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by each of the parties hereto, or in the case of a waiver, by the party against which the waiver is to be effective. Notwithstanding the foregoing, no failure or delay by any party hereto in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any right hereunder.

(k) Rules of Construction . The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document shall be construed against the party drafting such agreement or document.







(l) WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK LOCATED IN NEW YORK COUNTY AND THE FEDERAL DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND EACH OF THE PARTIES HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN NEW YORK COUNTY OR SUCH DISTRICT, AND AGREES THAT SERVICE OF ANY SUMMONS, COMPLAINT, NOTICE OR OTHER PROCESS RELATING TO SUCH SUIT, ACTION OR OTHER PROCEEDING MAY BE EFFECTED IN THE MANNER PROVIDED IN SECTION 5.

 

IN WITNESS WHEREOF, the parties hereto have caused this Voting Agreement to be executed as of the date first above written.

 

 

 

 

WIZZARD SOFTWARE CORPORATION

 

 

By:

 

/s/Christopher Spencer

Name: Christopher Spencer

Title:   President and CEO


 

 

 

DIGITAL HKCO’S SHAREHOLDER:

Universal Entertainment Group Limited

 

 

By:

 

 /s/

Name:

Title:   









EXHIBIT A

IRREVOCABLE PROXY

TO VOTE STOCK OF

WIZZARD SOFTWARE CORPORATION

The undersigned stockholder (“ Digital HKCo’s Shareholder ”) of Wizzard Software Corporation, a Colorado corporation (the “ Company ”), hereby irrevocably (to the fullest extent permitted by applicable law) appoints the Board of Directors of the Company as the sole and exclusive attorney and proxy of Digital HKCo’s Shareholder, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the fullest extent that Digital HKCo’s Shareholder is entitled to do so) with respect to all of the Shares of common stock of the Company as defined in the Voting Agreement dated ______________, 2012 (the “ Voting Agreement ”) to which this Irrevocable Proxy is an exhibit in accordance with the terms of this Irrevocable Proxy. Upon Digital HKCo’s Shareholder’s execution of this Irrevocable Proxy, any and all prior proxies (other than this Irrevocable Proxy) given by Digital HKCo’s Shareholder with respect to the subject matter contemplated by this Irrevocable Proxy are hereby revoked and Digital HKCo’s Shareholder agrees not to grant any subsequent proxies with respect to such Shares or enter into any agreement or understanding with any Person (as defined in the Share Exchange Agreement (as defined below)) to vote or give instructions with respect to such Shares in any manner inconsistent with the terms of this Irrevocable Proxy until after the Expiration Time (as defined in Section 1(b) of the Voting Agreement) applicable to such Shares.

Until the Expiration Time applicable to the Shares, this Irrevocable Proxy is irrevocable (to the fullest extent permitted by applicable law), is coupled with an interest sufficient in law to support an irrevocable proxy, is granted pursuant to the terms of the Voting Agreement, and is granted in consideration of the Company entering into that certain Share Exchange Agreement, dated as of April 5, 2012, by and among Digital HKCo’s Shareholder; the Company ; Digital Entertainment International Ltd.; Beijing Dingtai Guanqun Culture Co., Ltd.; Beijing FAB Culture Co., Ltd.; and Beijing FAB Digital Entertainment Products Co., Ltd.

The proxies named above, and each of them, are hereby authorized and empowered by Digital HKCo’s Shareholder, at any time prior to the Expiration Time applicable to the Shares, to act as Digital HKCo’s Shareholder’s proxy to vote the Shares, and to exercise all voting and other rights of Digital HKCo’s Shareholder with respect to the Shares (including, without limitation, the power to execute and deliver written consents pursuant to applicable provisions of the Colorado Statutes), at every annual, special or adjourned meeting of the stockholders of the Company and in every written consent in lieu of such meeting.

All authority herein conferred shall survive the death or incapacity of Digital HKCo’s Shareholder and any obligation of Digital HKCo’s Shareholder hereunder shall be binding upon the heirs, personal representatives, successors and assigns of Digital HKCo’s Shareholder.

[S IGNATURE P AGE F OLLOWS ]















This Irrevocable Proxy is coupled with an interest as aforesaid and is irrevocable. This Irrevocable Proxy may not be amended or otherwise modified without the prior written consent of the Company. This Irrevocable Proxy shall terminate in full , and be of no further force and effect, automatically at the Final Expiration Time as defined in Section 1(b) of the Voting Agreement , and may terminate in part with respect to certain Shares at the Expiration Time or Expiration Times set forth in the Voting Agreement .

 

 

 

 

Dated:

 

 

 

 Universal Entertainment Group Limited

 

 /s/

(Signature of Digital HKCo’s Shareholder)








LOCK-UP AGREEMENT

 

This LOCK-UP AGREEMENT (this “ Agreement ”) is dated as of ________, 2012 by and among Universal Entertainment Group Limited, a company incorporated under the law of the British Virgin Islands , with its registered office at P.O. Box 3321, Drake Chambers, Road Town, Tortola ( Digital HKco’s Shareholder ”), and Wizzard Software Corporation, a Colorado corporation (the “ Company ”).

 

WHEREAS, Digital HKco ’s Shareholder owns 100% of the issued and outstanding shares of capital stock (the “ Digital HKco Shares ”) of Digital Entertainment International Ltd., a company incorporated under the law of the Hong Kong Special Administrative Region (“ Digital HKco ”), free and clear of any Liens;


WHEREAS, the Company wishes to acquire, and Digital HKco’s Shareholder wishes to sell, all of the Digital HKco Shares in accordance with and subject to the terms and conditions of that certain Share Exchange Agreement dated as of April 5, 2012, by and among Digital HKco’s Shareholder; Digital HKco; Beijing Dingtai Guanqun Culture Co., Ltd.; Beijing FAB Culture Co., Ltd.; and Beijing FAB Digital Entertainment Products Co., Ltd. (the “ Share Exchange Agreement ) (capitalized terms used herein without definition shall have the meanings assigned to such terms in the Share Exchange Agreement );


WHEREAS, in partial consideration for the purchase of the Digital HKco Shares under the Share Exchange Agreement, the Company shall issue to Digital HKco’s Shareholder at Closing (as defined in Section 2.2 of the Share Exchange Agreement) such number of shares of the Company’s common stock, par value one mill ($0.001) per share, as constitutes forty-nine percent (49%) of the Company’s issued and outstanding common stock on a fully diluted basis immediately following the Closing after issuance of such shares (the “ Initial Company  Shares ,” as defined in Section 2.3(a) of the Share Exchange Agreement);


WHEREAS, in partial consideration for the purchase of the Digital HKco Shares under the Share Exchange Agreement, the Company shall also issue to Digital HKco’s Shareholder at Closing a certain number of shares of the Company’s Series B Convertible Preferred Stock , which shares shall give Digital HKco’s Shareholder the right to convert into the Company’s common stock and increase Digital HKco’s Shareholder’s equity position in the Company  to 78% on a fully diluted basis as of the date of the Closing, upon attainment of certain milestones  in the next 12 to 18 months in accordance with the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock attached as Exhibit B to the Share Exchange Agreement (the “ Convertible Preferred Shares ”, as defined in Section 2.3(b) of the Share Exchange Agreement) ; and

 

WHEREAS, in order to enter into the Share Exchange Agreement, the Company and Digital HKco’s Shareholder have agreed to define fifty percent (50%) of the Initial Company Shares as the “Lock-up Shares”, and Digital HKco’s Shareholder agrees not to sell any of the Lock-up Shares except in accordance with the terms and conditions set forth herein (at the Closing, Digital HKco’s Shareholder will provide a specific list of beneficiaries’ names and respective number of shares which are subject to the Lock-up );

 


NOW, THEREFORE, in consideration of the covenants and conditions hereinafter contained, the parties hereto agree as follows:

 

1. Restriction on Transfer; Term .

 

(a) Digital HKco’s Shareholder hereby agrees not to offer, sell, contract to sell, assign, transfer, hypothecate, gift, pledge or grant a security interest in, or otherwise dispose of, or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition of (whether by actual disposition or effective economic disposition due to cash settlement or otherwise, directly or indirectly) (each, a “ Transfer ”), any of the Lock-Up Shares until a date that is twelve (12) months following the date of the Closing of the Share Exchange Agreement (the “ Lock-Up Period ”).









(b)   It is the intention of the parties hereto that this Lock-up Agreement shall create a first lien on the Lock-up Shares for the term of the Lock-Up Period to secure the indemnification obligations of Digital HKCo ’s Shareholder under Article XI of the Share Exchange Agreement, which lien on the Lock-up Shares shall be enforceable in accordance with the New York Uniform Commercial Code in the event of any Claim under such Article XI.  The provisions of Section 1(a) notwithstanding, such lien shall not be released during the pendency of any such Claim asserted by a third party unrelated to the Company prior to the end of the Lock-Up Period to the extent of the amount of such Claim, but shall otherwise be released at the end of the Lock-Up Period.  The provisions of this Section 1(b) shall not be exclusive of any other remedies that the Company may have under the terms of the Share Exchange Agreement.


(c)   Notwith standing the foregoing, Digital HKco’s Shareholder may transfer Shares without the prior consent of the Company in connection with (a) transfers of Lock-up Shares as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of a family member, ( b ) transfers of Lock-up Shares to a charity or educational institution, ( c) transfers of Lock-up Shares to any shareholder, partner or member of, or owner of similar equity interests in, Digital HKco’s Shareholder, and (d) transfers of Lock-up Shares to any corporation, partnership, limited liability company or other business entity controlled by or under common control with Digital HKco’s Shareholder, provided, in each case, that such transfer is not for value and does not violate the Securities Act of 1933, as amended, or applicable Chinese securities laws rules and regulations and further provided  that prior to any transfer of Lock-up Shares under this Section 1(c), the transferee of such Lock-up Shares shall first have executed a Lock-up Agreement on the same terms and conditions as set forth in this Agreement and shall have forwarded such executed Lock-up Agreement to the Company no later than five (5) business days prior to such transfer.


2. Ownership .  During the Lock-Up Period, Digital HKco’s Shareholder shall retain all rights of ownership in all Lock-Up Shares except as otherwise provided in this Agreement, the Share Exchange Agreement, or the Voting Agreement as defined therein .

 

3. Company and Transfer Agent; Legends .  


(a)  The Company is hereby authorized and required to disclose the existence of this Agreement to its transfer agent. The Company and its transfer agent are hereby authorized and required to decline to make any transfer of the Lock-up Shares if such transfer would constitute a violation or breach of this Agreement and/or the Share Exchange Agreement.  


(b)  The following legend describing this Agreement shall be imprinted on each stock certificate representing Lock-up Shares, in addition to the usual and customary restrictive legend relating to “restricted” shares, and the transfer records of the Company’s transfer agent shall reflect such restrictions:


THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS OF A LOCK-UP AGREEMENT AND A SHARE EXCHANGE AGREEMENT WITH THE ISSUER.  THESE SHARES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, GIFTED OR OTHERWISE DISPOSED OF OTHER THAN IN ACCORDANCE WITH THE TERMS OF SUCH AGREEMENTS, AND ANY ATTEMPT TO DO SO SHALL BE VOID.  THESE SHARES ARE ALSO THE SUBJECT OF A LIQUIDATED DAMAGES CLAUSE OF THE SHARE EXCHANGE AGREEMENT, WHICH PROVIDES THAT, IN THE EVENT OF ANY UNCURED   MATERIAL BREACH THEREOF, THE SHARES REPRESENTED HEREBY SHALL BE IMMEDIATELY AND AUTOMATICALLY FORFEITED AND CANCELLED ON THE BOOKS AND RECORDS OF THE ISSUER, WITHOUT THE REQUIREMENT FOR DELIVERY OF THIS INSTRUMENT AND WITHOUT THE REQUIREMENT FOR THE ISSUER TO POST ANY BOND OR TAKE ANY FURTHER ACTION WHATSOEVER.

 

(c)  At the end of the Lock-up Period, the Company shall promptly coordinate with its transfer agent to replace the Lock-up stock certificates with new ones eliminating the above Legends upon request of Digital HKCo’s Shareholder.









4. Notices .  All notices, demands, consents, requests, instructions and other communications to be given or delivered or permitted under or by reason of the provisions of this Agreement or in connection with the transactions contemplated hereby shall be in writing and shall be deemed to be delivered and received by the intended recipient as follows: (i) if personally delivered, on the business day of such delivery (as evidenced by the receipt of the personal delivery service), (ii) if delivered by overnight courier (with all charges having been prepaid), on the business day of such delivery (as evidenced by the receipt of the overnight courier service of recognized standing), or (iii) if delivered by facsimile transmission, on the business day of such delivery if sent by 6:00 p.m. in the time zone of the recipient, or if sent after that time, on the next succeeding business day (as evidenced by the printed confirmation of delivery generated by the sending party’s telecopier machine). If any notice, demand, consent, request, instruction or other communication cannot be delivered because of a changed address of which no notice was given (in accordance with this Section 4), or the refusal to accept same, the notice, demand, consent, request, instruction or other communication shall be deemed received on the second business day the notice is sent (as evidenced by a sworn affidavit of the sender). All such notices, demands, consents, requests, instructions and other communications will be sent to the following addresses or facsimile numbers as applicable.

 

If to the Company:


Wizzard Software Corporation

5001 Baum Blvd.

Suite 770

Pittsburgh, PA  15213

Attention: John Busshaus

Telephone No.: (412) 621-0902

Facsimile No.: (412) 621-2625


with copies (which copies shall not constitute notice to the Company) to:


Branden T. Burningham, Esq.

Burningham & Burningham

455 East 500 South

Suite 205

Salt Lake City, UT  84111

Tel. No.: (801) 363-7411

Fax No.: (801) 355-7126


If to Digital HKco’s Shareholder:

Address: 21 Fl., Wan-Shang Building    

Shijingshan District, Beijing, China

Attn:  Bob (Zhong Bing-Bin)       

Telephone: 100186-135-8190-0771

Fax: 01186-1066032873


or to such other address for either party as such party may specify by notice given to the other party in accordance with this Section 4.

 

5. Amendment .  This Agreement may not be modified, changed, supplemented, amended or terminated, nor may any obligations hereunder be waived, except by written instrument signed by each of the parties hereto.

 

 

6. Entire Agreement .  This Agreement contains the entire understanding and agreement of the parties relating to the subject matter hereof and supersedes all prior and/or contemporaneous








understandings and agreements of any kind and nature (whether written or oral) among the parties with respect to such subject matter.

 

7. Governing Law .  This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted.

 

8. Waiver of Jury Trial .  EACH OF THE PARTIES HERETO HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK LOCATED IN NEW YORK COUNTY AND THE FEDERAL DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND EACH OF THE PARTIES HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN NEW YORK COUNTY OR SUCH DISTRICT, AND AGREES THAT SERVICE OF ANY SUMMONS, COMPLAINT, NOTICE OR OTHER PROCESS RELATING TO SUCH SUIT, ACTION OR OTHER PROCEEDING MAY BE EFFECTED IN THE MANNER PROVIDED IN SECTION 4.

 

9. Severability .  The provisions of this Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement and such provision shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible.

 

10. Binding Effect; Assignment .  This Agreement and the rights and obligations hereunder may not be assigned by Digital HKco’s Shareholder without the prior written consent of the Company , except in connection with a transfer of Lock-up Shares pursuant to Section 1(c) . This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

11. Headings .  The section headings contained in this Agreement are inserted for reference purposes only and shall not affect in any way the meaning, construction or interpretation of this Agreement. Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. References to the singular shall include the plural and vice versa.

  

12. Counterparts .  This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

 

 

 








 

 

 

 

 

 

 

 

 

 

 



 

 

[SIGNATURE PAGE TO LOCK-UP AGREEMENT]

 


 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above herein.

 


  

WIZZARD SOFTWARE CORPORATION

 

By:    /s/Christopher Spencer

         Name: Christopher Spencer

         Title:  President and Chief Executive Officer

 

 

  

DIGITAL HKCO’S SHAREHOLDER:

  

 

Universal Entertainment Group Limited

 

By:/s/

         Name:

         Title:


 




 

 







 

 


[RESIGNATIONLETTERS002.JPG]

4397 SOUTH ALBRIGHT DRIVE • SALT LAKE CITY, UTAH 84124

(801) 277-2763 PHONE • (801) 277-6509 FAX

September 27, 2012


U.S. Securities and Exchange Commission

Office of the Chief Accountants

100 F Street, NE

Washington, DC 20549


RE: Wizzard Software Corporation File No. 001-33935

Dear Sir or Madam,

We have notified in the attached letter that Gregory & Associates, LLC has resigned as the Independent Registered Public Accounting Firm of record of Wizzard Software Corporation File No. 001-33935.  Gregory & Associates, LLC does not have the ability to audit the financial statements of Wizzard Software after the acquisition of FAB.  We have read the 8-K as it pertains to the change in registrant’s certifying accountant and agree with the disclosures made therein. We confirm that Gregory & Associates, LLC has not had any disagreement with management over accounting and or financial disclosure.


/s/Gregory & Associates, LLC

Gregory & Associates, LLC

 














DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


CONSOLIDATED FINANCIAL STATEMENTS


YEARS ENDED SEPTEMBER 30, 2011 AND 2010


AND


REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM




DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED








TABLE OF CONTENTS


Page


Report of Independent Registered Public Accounting Firm

1


Consolidated Financial Statements


Balance Sheets

2


Statements of Income and Comprehensive Income

3


Statements of Changes in Shareholders’ Equity

4


Statements of Cash Flows

5


Notes to Consolidated Financial Statements

6














REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors and Shareholder
Digital Entertainment International Limited



We have audited the accompanying consolidated balance sheets of Digital Entertainment International Limited (the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


[F2011AUDITEDFABFINANCIALS001.JPG]


January 19, 2012



1









DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

  CONSOLIDATED BALANCE SHEETS

 (IN US DOLLARS)

 

 

 

September 30,

 

 

 

2011

 

2010

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

  Cash

 

 $     8,401,778

 

 $     4,395,565

 

  Accounts receivable, net

 

        5,044,078

 

        1,716,523

 

  Advances to suppliers, net

 

        1,357,986

 

        3,672,116

 

  Loan receivable

 

        7,581,005

 

               -

 

  Inventory

 

        3,250,698

 

        3,815,190

 

  Deferred tax assets, current

 

        1,087,070

 

          842,150

 

  Other current assets

 

      141,550

 

          991,303

 

         Total current assets

 

    26,864,165

 

    15,432,847

 

  Property, plant and equipment, net  

 

      15,164,534

 

        1,675,077

 

  Deferred tax assets, non-current

 

        1,059,393

 

            55,932

 

  Long-term deposits

 

        3,796,504

 

        2,558,660

 

  Long-term advances to suppliers  

 

               -

 

        6,791,095

 

         Total assets

 

 $ 46,884,596

 

 $ 26,513,611

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

  Short-term bank loans

 

 $     6,265,370

 

 $     4,483,528

 

  Accounts payable

 

        5,644,217

 

        3,689,665

 

  Accrued expenses  

 

        1,716,730

 

          883,218

 

  Deferred revenue

 

      14,927,957

 

        3,471,431

 

  Other payable

 

        1,860,729

 

          318,765

 

  Taxes payable

 

        2,202,375

 

        1,818,061

 

  Due to related parties

 

         27,112

 

          665,008

 

  Dividend payable

 

        1,613,333

 

        2,153,588

 

         Total current liabilities

 

    34,257,823

 

    17,483,264

 

  Long-term deposits from customers

 

        2,210,109

 

        1,484,048

 

  Long-term payable

 

          140,971

 

                    -

 

         Total liabilities

 

    36,608,903

 

    18,967,312

 

Contingency and commitment

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

Common shares, $ 0.13 par value, 10,000 shares  authorized

 

 

 

 

 

 and 100 shares issued at September 30, 2011

 

                  13

 

                    -

 

  Additional paid-in capital

 

          430,555

 

          263,651

 

  Statutory reserve

 

          131,825

 

          131,825

 

  Accumulated other comprehensive income

 

          706,945

 

            99,221

 

  Retained earnings  

 

        9,006,355

 

        7,051,602

 

         Total shareholders' equity

 

    10,275,693

 

      7,546,299

 

         Total liabilities and shareholders' equity

 

 $ 46,884,596

 

 $ 26,513,611




2








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

 

 

 

 

 

 

 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 (IN US DOLLARS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended September 30,

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues

 $     70,852,332

 

 $      55,520,738

Cost of revenues

   (46,592,658)

 

     (35,191,894)

 

 

 

 

 

                      Gross profit

    24,259,674

 

     20,328,844

 

 

 

 

 

Selling, general and administrative expenses

    (5,127,130)

 

     (4,860,659)

 

 

 

 

 

                      Income from operations

      19,132,544

 

      15,468,185

 

 

 

 

 

Other income (expenses)

 

 

 

 

Interest expense

      (185,046)

 

         (48,868)

 

Subsidy income

        69,960

 

        369,944

 

Other income

     40,726

 

        58,760

                      Total other income (expenses)

    (74,360)

 

     379,836

 

 

 

 

 

 

                      Income before income taxes

  19,058,184

 

  15,848,021

 

 

 

 

 

Provision for income taxes

   4,332,747

 

      4,275,291

 

 

 

 

 

                      Net income

  14,725,437

 

     11,572,730

 

 

 

 

 

 Other comprehensive income

 

 

 

 

Foreign currency translation gain

      607,724

 

         140,490

 

 

 

 

 

                     Comprehensive income

 $    15,333,161

 

 $      11,713,220



3









DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(IN US DOLLARS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED SEPTEMBER 30, 2011 AND 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

Common Shares

 

 

 

Retained earnings

 

Other

 

 

 

 

Number of

 

 

 

Additional Paid

 

Statutory

 

 

 

Comprehensive

 

 

 

 

Shares

 

Amount

 

in Capital

 

  Reserve

 

Unrestricted

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2009

       -

 

 $      -

 

  263,651

 

 $   131,825

 

 $  2,839,725

 

 $   (41,269)

 

 $  3,193,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

          -

 

         -

 

              -

 

            -

 

  11,572,731

 

               -

 

  11,572,731

 

Dividends declared

      -

 

       -

 

             -

 

            -

 

(7,360,854)

 

            -

 

  (7,360,854)

 

Foreign currency translation gain

      -

 

     -

 

          -

 

         -

 

          -

 

     140,490

 

     140,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2010

     -

 

     -

 

   263,651

 

  131,825

 

  7,051,602

 

     99,221

 

    7,546,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares

    100

 

      13

 

    166,904

 

 

 

 

 

 

 

  166,917

 

Net income for the year

     -

 

      -

 

           -

 

        -

 

  14,725,437

 

            -

 

  14,725,437

 

Dividends declared

     -

 

     -

 

           -

 

         -

 

(12,770,684)

 

           -

 

 (12,770,684)

 

Foreign currency translation gain

      -

 

      -

 

           -

 

          -

 

           -

 

     607,724

 

    607,724

Balance at September 30, 2011

    100

 

 $      13

 

 $       430,555

 

 $    131,825

 

 $  9,006,355

 

 $       706,945

 

 $ 10,275,693



4









DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN US DOLLARS)

 

Year Ended September 30,

 

2011

 

2010

Cash flows from operating activities

 

 

 

 Net income

 $       14,725,437

 

 $       11,572,730

 Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

   Depreciation and amortization

    620,184

 

      375,543

   Provision for (recovery of) doubtful accounts

    (975,036)

 

        98,816

   Loss on uncollectible rent deposit

      118,915

 

             -

   Loss on disposal of leasehold improvement

     346,770

 

            -

 

   Deferred tax benefit

     (1,177,008)

 

     (137,284)

 

Changes in operating assets and liabilities

 

 

 

   Accounts receivable

      (2,647,512)

 

     268,179

 

 Loan receivable

    (6,713,672)

 

           -

 

 Inventory

      712,322

 

     (1,282)

 

 Advances to suppliers

     2,885,783

 

   (6,842,079)

 

 Other current assets

      67,576

 

    (899,175)

 

 Deferred revenue

    11,025,449

 

     1,163,501

 

 Accounts payable

    1,735,615

 

      330,301

 

 Taxes payable

     289,980

 

       658,856

 

 Accrued expenses

     772,546

 

       203,739

 

 Other payable

     (38,771)

 

     (667,753)

Net cash provided by operating activities

    21,748,578

 

     6,124,092

Cash flows from investing activities

 

 

 

 

 Repayment of long-term advances to suppliers

      6,950,928

 

            -

 

 Payments on construction in progress

    (229,453)

 

            -

 

 Purchase of property and equipment

    (12,147,224)

 

    (13,890)

 

 Payments for long-term deposits

    (1,088,770)

 

    (2,094,724)

Net cash used in investing activities

     (6,514,519)

 

  (2,108,614)

Cash flows from financing activities

 

 

 

 

 Net proceeds from capital contributions

                166,917

 

 

 

 Proceeds from short-term loans

             6,118,734

 

            4,404,093

 

 Proceeds from long-term customer deposits

                639,408

 

               820,629

 

 Repayment of related parties loans

              (654,183)

 

          (2,939,002)

 

 Repayment of short-term loans

           (4,589,051)

 

                          -

 

 Dividend paid

         (13,209,582)

 

          (5,583,068)

Net cash used in financing activities

         (11,527,757)

 

          (3,297,348)

 Effect of exchange rate change on cash

                299,911

 

                 85,514

Net increase in cash

             4,006,213

 

               803,644

Cash, beginning of year

             4,395,565

 

            3,591,921

Cash, end of year

 $         8,401,778

 

 $         4,395,565

Supplemental cash flow disclosure

 

 

 

Income taxes paid

 $          5,457,796

 

 $         4,195,695

Interest paid

                339,152

 

                 85,033

Noncash investing transactions:

 

 

 

 

Obligation payable on acquisition of property and equipment

             1,685,398

 

 -



5






DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1 - ORGANIZATION AND BASIS OF PRESENTATION


Organization

The accompanying consolidated financial statements include the financial statements of Digital Entertainment International Limited (“Digital HK”, or the “Company”); its wholly owned subsidiary, Beijing Dingtai Guanqun Culture Co., Ltd. (“DGC”); Beijing FAB Cultural Media Co., Ltd. (“FAB Media”) and Beijing FAB Digital Entertainment Products Co., Ltd. (“FAB Digital”), which are variable interest entities (“VIEs”) of DGC; and subsidiary of FAB Digital, Beijing Jing Lvtong Travel and Science Technology Co., Ltd. (“JLTST”).


The Company, through its wholly owned subsidiary and its VIEs, is engaged in marketing and distributing various officially licensed digital entertainment products under the “FAB” brand throughout the PRC, including but not limited to audiovisual products such as Compact Discs, Video Compact Discs and Digital Video Disks as well as books, magazines, mobile phone accessories and cameras. The Company’s products and services are primarily distributed through its flagship stores, proprietary “FAB” kiosks and online virtual stores. FAB kiosks, located in high-traffic areas of office buildings, shopping malls, retails stores and airports, are self-service terminals that provide a range of entertainment and business applications.


Digital HK was incorporated under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“PRC”) in November 2010. It was 85% owned by Universal Entertainment Group Limited (“UEG”), and 15% owned by Eon Capital International Inc. (“ECI”). In June, 2011, ECI agreed to transfer its 15% ownership of Digital HK to UEG at HK$1.00 per share. As of September 30, 2011, Digital HK is wholly owned by UEG.


Digital HK is a holding company and conducts its business through its wholly owned subsidiary, DGC, which is a wholly foreign-owned enterprise (“WFOE”) with limited liability incorporated in the PRC in March 2011. DGC has entered into a series of contractual agreements with the owners of FAB Digital and FAB Media.


FAB Digital was incorporated as a private enterprise in the PRC in September 2003 with a registered capital of 1 million Renminbi (“RMB”). FAB Digital specializes in the distribution of cultural and audio visual products through its two flagship stores in Beijing as well as its online stores. JLTST, which is fully owned by FAB Digital, was incorporated in the PRC in November 2010 with a registered capital of RMB 1 million.



6




DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)


FAB Media was incorporated as a private enterprise in the PRC in April 2008 with a registered capital of RMB 1 million.). FAB Media is primarily engaged in operating and providing proprietary multimedia kiosks for music downloads, information exchange and advertising.


In February and March 2011, a series of contractual arrangements were entered into among DGC, FAB Digital, FAB Media and its individual shareholders.  Such arrangements include an Exclusive Service Agreement, a Share Pledge Agreement, an Option Agreement and a Voting Right Proxy Agreement.


Pursuant to these agreements, DGC has the exclusive right to provide to FAB Digital and FAB Media consulting services related to business operation and management.  The key terms of these agreements include:

1)

DGC has the sole discretion to make all operating and business decisions for FAB Digital and FAB Media on behalf of the equity owners, including business operations, policies and management, approving all matters requiring shareholder approval;

2)

FAB Digital and FAB Media have agreed to pay all of the operating costs incurred by DGC, and intended to transfer 100% of the income earned to DGC; DGC also has the right to determine the amount of the fees it will receive;

3)

During the term of these agreements, DGC will retain the rights to the intellectual properties if they are created by DGC;

4)

FAB Digital and FAB Media may not enter into any other agreements with any third party to receive consulting service without the prior consent of DGC;

5)

The equity owners pledge their respective equity interests in the FAB Digital and FAB Media as a guarantee for the payment of technical and consulting services fees under the Exclusive Service Agreement;

6)

The shareholders of FAB Digital and FAB Media have irrecoverably and unconditionally granted DGC or its designee an exclusive option to purchase, to the extent permitted by PRC laws, all or any portion of equity interest of the FAB Digital and FAB Media.


7


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)


All these contractual agreements obligate DGC to absorb a majority of the risk of loss from FAB Digital and FAB Media’s activities and entitle DGC to receive a majority of its residual returns.  In essence, DGC has gained effective control over both FAB Digital and FAB Media. Based on these contractual arrangements, the Company believes that both FAB Digital and FAB Media should be considered as variable interest entities (“VIEs”) under the FASB Accounting Standards Codification (“ASC”) 810, “Consolidation”. Accordingly, management believes that the accounts of these two entities should be consolidated with those of DGC, the primary beneficiary.


Digital HK is effectively controlled by the majority shareholders of FAB Digital and FAB Media. Digital HK has 100% equity interest in DGC. Accordingly, DGC, FAB Digital and FAB Media are effectively controlled by the same majority shareholders.


Therefore, DGC, FAB Digital and FAB Media are considered under common control. The consolidation of DGC, FAB Digital and FAB Media has been accounted for at historical cost and prepared on the basis as if the aforementioned exclusive contractual agreements between DGC and FAB Digital and FAB Media had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.



2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“U. S. GAAP”).


Principles of Consolidation

The consolidated financial statements include the financial statements of Digital HK, DGC, FAB Digital, FAB Media and JLTST. All intercompany transactions and balances have been eliminated upon consolidation.


8





DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Use of Estimates

The preparation of consolidated financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; the allowance for doubtful accounts; the realization of deferred tax assets, the valuation of inventories, land use right and property, plant and equipment; and accruals for income tax uncertainties and other contingencies when applicable. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.


Risks and Uncertainties

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, and foreign currency exchange rates.


The Company has significant operating risk in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in a material adverse effect upon the Company’s business and financial condition.


Cash

For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.




9





DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Accounts Receivable

Accounts receivable consist of balances due from wholesale customers. Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible amounts. The Company does periodical reviews to determine whether the outstanding amounts are collectible. If the collectability of the balances becomes doubtful, an allowance is established for possible uncollectible balances.


Advances to Suppliers

Advances to suppliers represent payments made in advance for goods and services to be received. The Company makes advances to audiovisual products publishers in order to maintain long-term relationships with the vendor. In addition, the Company is required to pay the FAB kiosks manufacturer in advance.


Inventory

Inventory is recorded at the lower of cost or market, using the first-in, first-out (“FIFO”) method. The Company estimates net realizable value based on current market value and inventory aging analyses. The Company writes down inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and their estimated market values based upon certain assumptions about future demand and market conditions. As of September 30, 2011 and 2010, inventory consists of finished goods, and no reserve for slow-moving or obsolete inventory is considered necessary.


Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization is calculated on the straight-line method over the estimated useful lives of the assets as set out below:


 

Estimated Useful Life

Electronic equipment

5 years

Office furniture and equipment

5 years

Vehicles

5 years

Building

50 years

Leasehold improvements

Shorter of lease terms or estimated useful life


 

10



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Revenue Recognition

Product revenue is recognized when title to the product has transferred to customers in accordance with the terms of the sale; the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Revenues are recorded net of applicable sales taxes.


The Company derives revenue from retail sales, wholesales of merchandise inventory, and FAB kiosk sales. Revenue from FAB kiosk sales includes download service revenue, membership card revenue, advertisement revenue and licensing revenue.


Revenue from retail sales and wholesales is recognized at the point-of-sale. Download service revenue is recognized when substantially all material services or conditions relating the sales have been performed or satisfied, and the Company has no obligation to refund any payment (cash or otherwise) received. Membership card revenue is amortized over the life of the membership period, membership cards with par value of RMB 100 have an expiration period of three months, and par value of RMB 200, 300, 400 and 500 have an expiration period of twelve months. Advertisement revenue is recognized over the contract period which usually expires within four months. Licensing revenue is amortized ratably over the term of the agreement which is generally five years long.


Cost of Revenues

Cost of revenues consists primarily of costs associated with purchasing, receiving, shipping, inspecting and warehousing products.


Selling, General and Administrative (“SG&A”) Expenses

Included in SG&A expenses are payroll and related costs, store operating costs, occupancy charges, professional and service fees, general operating and overhead expenses and depreciation charges.





11






DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Foreign Currency Translation

The Company principally operates in the PRC and its functional currency is the Chinese currency RMB.  The reporting currency of the Company is the US dollar. The Company does not enter into any transactions denominated in foreign currencies. The financial statements of the Company are translated into United States dollars using the year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from translating the local currency financial statements into U.S. dollars are included in comprehensive income. The cumulative translation adjustment was included as an item of accumulated other comprehensive income/ (loss) in the shareholders’ equity section of the balance sheet.


Comprehensive Income

The Company has adopted ASC 220, Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. The Company’s accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.


Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement”, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures.


The three levels are defined as follows:


Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value.



12



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Fair Value of Financial Instruments (Continued)

Estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates. The carrying amounts of short-term loans approximate their fair values because the applicable interest rates approximate current market rates.


As of September 30, 2011 and 2010, the Company's financial instruments include cash, accounts receivable, advances to suppliers, inventory, loan receivable, short-term bank loans, accounts payable, deposits from customer, deferred revenues, accrued expenses, taxes payable, dividends payable and due to related parties. The fair values of these financial instruments approximate their carrying amounts due from/to their short-term nature. The carrying value of long-term deposits, advances and payables approximates fair value based on their terms, which represent those available to the Company for similar instruments.


Income Taxes

The Company is subject to the Income Tax Laws of the PRC. It did not generate any taxable income outside of the PRC for the years ended September 30, 2011 and 2010. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The components of deferred tax assets are individually classified as current and non-current based on their characteristics.


13


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Income Taxes (Continued)

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of September 30, 2011 and 2010, respectively. All tax returns since inception are subject to examination by tax authorities.


Value Added Taxes

The Company is subject to a value added tax (“VAT”) for selling merchandise. The applicable VAT rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty based on the amount of the taxes which are determined to be late or deficient, and will be expensed in the period if and when a determination is made by the tax authorities that a penalty is due.


Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU 2011-04 expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption of this standard will not materially affect its consolidated financial statements.

14


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statements of changes in equity. ASU 2011-05 requires that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption of this standard will not change the presentation of its consolidated financial statements.



3 - ADVANCES TO SUPPLIERS


Advances to suppliers as of September 30, 2011 and 2010 consist of the following:


 

September 30,

 

2011

2010

Advances to suppliers

$   1,359,564

$  10,907,735

Allowance for doubtful accounts

(1,578)

(444,524)

Advances to suppliers, net

1,357,986

10,463,211

Current portion

(1,357,986)

(3,672,116)

Advances to suppliers - long-term

$             -

$  6,791,095


The Company reviews the advances to suppliers periodically to determine whether the carrying value has become impaired. The Company considers the assets to be impaired if facts and circumstances indicate that the collectability of the services or materials become doubtful. The Company uses the aging method to estimate the allowance for uncollectible balances. Historically if the Company cannot receive goods within 270 days, the possibility of collectability is rare. As a result, the company’s policy is to provide 100% allowance.

 

15


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




3 - ADVANCES TO SUPPLIERS (Continued)


The valuation allowance is adjusted to the amount computed as a result of the aging method. Whenever facts subsequently become available to indicate that the allowance provided requires an adjustment, then the adjustment will be classified as a change in estimate. The allowances of doubtful accounts were $1,578 and $444,524 for the years ended September 30, 2011 and 2010, respectively. During the year ended September 30, 2011, the Company recovered $ 453,445 of previously reserved doubtful account balances.


The long-term advances to suppliers consist mainly of a prepayment to Beijing Yide Real Estate Development Co., LTD (“YIDE”) for land purchase and building construction. In May 2011, the contract with YIDE was terminated, and the prepayment was fully refunded.



4 - ACCOUNTS RECEIVABLE


Accounts receivable as of September 30, 2011 and 2010 consist of the following:


 

September 30,

 

2011

2010

Accounts receivable

$5,044,078

$2,226,120  

Allowance for doubtful accounts

-

(509,597)

Accounts receivable, net

$5,044,078

$1,716,523


Currently, the Company grants credit to customers with well-established credit history with a term of six to twelve months while the Company generally requests other customers to pay either in advance or upon delivery. For past due receivables, the Company usually provides full provision. During the year ended September 30, 2011, the Company recovered $ 521,591 of previously reserved doubtful account balances.


16


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




5 - PROPERTY AND EQUIPMENT


Property and equipment and their related accumulated depreciation are as follows:


 

September 30,

 

2011

2010

Electronic equipment

$1,207,738

$809,390

Office furniture and equipment

114,389

93,653

Vehicles

56,094

53,521

Building

12,530,739

-

Leasehold improvements

2,752,229

1,764,783

 

16,661,189

2,721,347

Less: Accumulated depreciation

(1,731,606)

(1,046,270)

 

14,929,583

1,675,077

Construction in process

234,951

-

Total property, plant and equipment, net  

$15,164,534

$1,675,077


In April 2011, the Company purchased a building for $12,237,468 (RMB 80,000,000). As of the date of this report, the Company has not received the related property ownership certificate and the land use right certificate. Management of the Company estimate these certificates will be obtained in the first half of 2012, and the building is used for operations since April 2011. As a result, depreciation expense on the building has been recorded.


Construction-in-progress included leasehold improvements in progress at a newly leased location for a new flagship store. This new store is currently under remodeling and is not in operation. No depreciation is provided for construction-in-progress until   the assets are placed into service.


Depreciation expense for the years ended September 30, 2011 and 2010 was $620,184 and $375,543, respectively.


17





DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




6 - LONG-TERM DEPOSITS


Deposits include no-piracy sales guaranty deposits made to product licensors by FAB Digital and rent deposits made to landlords. The deposits for no-piracy sales guaranties are fully refundable when FAB Digital decides to terminate the license agreements with the licensors to sell their products. The rent deposits are also fully refundable at the end of the lease term.



7 - LOANS RECEIVABLE


Loans receivable consists of the following:


 

September 30,

 

2011

2010

Beijing Yirun Baiyuan Trading Co., Ltd.

$6,312,360

$        -

Beijing Long Xingtang Advertising Co., Ltd.

1,268,645

-

Total loan receivable

$7,581,005

$        -


In 2011, the Company entered into various loan arrangements providing credit lines to unrelated third parties with no maximum borrowing levels and a maximum term of six months plus options to renew. Interest is at 10% per annum.


The interest receivables imputed on the outstanding loan receivable were $121,266 and $0 for the year ended September 30, 2011 and 2010, respectively.





18






DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8 - SHORT-TERM BANK LOANS


Short-term bank loans consist of the following:


 

September 30,

 

2011

2010

 

Loan from China Development Bank

$4,699,027

$4,483,528

 

Loan from China Merchants Bank

1,566,343

-

 

Total short-term bank loans

$6,265,370

$4,483,528


Short-term bank loans are primarily used for working capital needs. On March 23, 2011, FAB Digital entered into a new loan agreement with China Merchants Bank (“CMB”) for a one-year term loan (due March 31, 2012) in the amount of RMB 10,000,000 (approximately $1.5 million). The loan has a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China plus 30 basis points, adjustable on a monthly basis. The loan was guaranteed and collateralized by the video product copyrights of FAB Digital, and the software copyrights and personal house property owned by the Chief Executive Officer.


The loan from China Development Bank (“CDB”) had a one-year term due May 24, 2011 which was fully repaid.  On June 10, 2011, FAB Digital entered into another loan agreement with CDB for a one-year term loan due June 14, 2012 in the amount of RMB 30,000,000 (approximately $4.7 million). The loan has a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China plus 10 basis points, adjustable on a monthly basis. In connection with the loan agreement, the major shareholders of the FAB Digital entered into a share pledge agreement with Beijing Medium and Small Business Credit Guarantee Company (“CGC”) in which 100% of their respective equity interest in the Company is collateralized, as well as the copyright and trademark of FAB Digital, and the personal house property owned by the Chief Finance Officer. Accordingly, CGC provides commercial guaranty to the loan from CDB.




19



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




9 - RELATED-PARTY TRANSACTIONS


The table below sets forth the related parties and their affiliation with the Company:


Related Parties

Affiliation with the Company

 

 

Hongxiang Audio & Video Products Co., Ltd.

Affiliated Company controlled by Mr. Zhang Hongcheng

 

 

Guangdong Endless Culture Co., Ltd.

Affiliated Company controlled by Mr. Zhang Hongcheng


Amounts due to related parties are as follows:


 

September 30,

 

2011

2010

Loans from related parties

 

 

Hongxiang Audio & Video Products Co., Ltd.

$           -

$    29,890

Guangdong Endless Culture Co., Ltd.

27,112

635,118

Total due to related parties

$     27,112

$   665,008


From time to time, employees of the related parties may perform certain business functions for the Company and vise versa.  For the year ended September 30, 2011 and 2010, Guangdong Endless Culture Co., Ltd. (“GEC”) paid $101,633 and $38,268, respectively to the employees of the Company as compensation expenses for services rendered to GEC and not included in the Company’s consolidated financial statements. The Company paid $79,221 and $50,381, respectively to the employees of GEC as compensation for services rendered to the Company.  The amounts are included in the Company’s consolidated financial statements.


The Company has eight business locations, and two of them are subleased from GEC. In March 2008, GEC entered into a lease agreement with Xidan Joy City on behalf of FAB Media for a term of eight-year from April 2008 to March 2016. Subsequently, FAB Media entered into a sublease agreement with GEC. The average monthly rent expense is $47,420. FAB Media paid the rental and promotion expense to Xidan Joy City directly.


20


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




9 - RELATED-PARTY TRANSACTIONS (Continued)


In May 2011, GEC entered into another lease agreement with Guoson Mall on behalf of FAB Digital for a term of five-year period from May 2011 to August 2016. The average monthly rent expense is $ 66,169; the promotion expense and property management fees are $ 1,361 and $ 20,004 per month respectively. FAB Digital paid the rental and promotion expense to Guoson Mall directly.


Future minimum annual rental payments due for Xidan Joy city and Guoson Mall are as follows:


 

Rental

Fiscal Year

Commitments

2012

$1,658,252

2013

1,658,252

2014

1,658,252

2015

1,658,252

2016

1,187,650

Total

$7,820,658



10 - CASH DIVIDENDS


In February 2010, the Board of Directors of both FAB Media and FAB Digital declared and approved a total of $7,360,854 (RMB 50,141,000) cash dividends to their shareholders. $5,583,068 (RMB 38,031,000) and $2,197,429 (RMB 14,410,000) were paid in 2010 and 2011, respectively.


In March, 2011, the Board of Directors of FAB Digital declared and approved and declared a total of $5,670,417 (RMB 37,245,000) cash dividends to its shareholders according to their relative percentage, of which $5,728,082 (RMB 37,245,000) was subsequently paid.


In September, 2011, the Board of Directors of FAB Media also declared and approved and declared a total of $7,050,960 (RMB 45,000,000) cash dividends to their shareholders, of which $5,429,269 (RMB 34,700,000) was subsequently paid.

 


21



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




11 - STATUTORY RESERVE


The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net income. Such appropriation may cease if the balance of the fund is equal to 50% of the entities’ registered capital or shareholders’ equity. The Company has reserved $131,825 at both September 30, 2011 and 2010 since the amount has reached the statutory limit of 50% of the registered capital.



12 - INCOME TAXES


The Company was incorporated in Hong Kong in November 2010, and did not earn any income that was derived in Hong Kong for the years ended September 30, 2011 and 2010 and therefore was not subject to Hong Kong income tax.


DGC, FAB Digital and JLTST were organized under the laws of the People’s Republic of China (“PRC”) which are subject to Enterprise Income Tax (“EIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax Law. Pursuant to the PRC Income Tax Laws, DGC, FAB Digital and JLT are subject to EIT at a statutory rate of 25%.


FAB Media was qualified as a High and New Technology Enterprise in Beijing High-Tech Zone in December 24, 2010, and was entitled to a preferential tax rate of 15% for three years from January 2011 to December 2013.

 

   The Company files income tax returns with both the National Tax Bureau and the Local Tax Bureaus in

   the PRC. All tax returns of the Company since inception are subject to tax examination by tax  

   authorities.



22



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




12 - INCOME TAXES


The Company recognized a deferred tax asset in the amount of $ 2,146,463 and $ 898,082 at September 30, 2011 and 2010, respectively.  Deferred tax assets represent deductible temporary differences arising from deferred revenue and the allowance for doubtful accounts. The components of deferred tax assets are as follows:

 

September 30,

 

2011

2010

 

 

 

Deferred tax assets

 

 

Allowance for doubtful accounts

$      395

$   238,530

Deferred revenue

2,146,068

659,552

Total deferred tax assets

$ 2,146,463

$   898,082

 

 

 

Classification on consolidated balance sheets

 

 

-

Deferred tax assets, current

$ 1,087,070

$   842,150

-

Deferred tax assets, non-current

1,059,393

55,932


The Company has identified deferred tax related errors from periods prior to the year ended September 30, 2011. Accordingly, the balance sheet for September 30, 2010 has been adjusted to increase deferred income tax assets by $842,150 in the current asset section, increase deferred tax assets by $56,000 in the noncurrent section. A deferred tax benefit of $139,761 is reflected in the consolidated statement of income and comprehensive income with a corresponding increase to retained earnings. In addition, the Company recorded an increase to retained earnings as of September 30, 2009 by $739,297 in the consolidated statements of changes in shareholders' equity


Income tax expense (benefit) consists of:

 

Year Ended September 30,

 

2011

2011

Current income tax

$ 5,509,755

$ 4,412,575

Deferred income tax benefit

(1,177,008)  

(137,284)  

 

$ 4,332,747

$ 4,275,291



23




DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




12 - INCOME TAXES (Continued)


The following table reconciles PRC statutory rates to the Company’s effective tax rate for the years ended September 30, 2011 and 2010:


  

2011

2010

 



Statutory income tax rate

25%

25%

Exemption rendered by local tax authorities

-5%

0%

Nondeductible expenses - permanent differences

3%

2%

Effective tax rate

23%

27%


Taxes payable consist of the following as of September 30, 2011 and 2010:


 

September 30,

 

2011

2010

VAT payable

$  484,187

$   339,807

Income tax payable

1,183,157

1,077,996

Business tax payable

385,294

314,107

Other

149,737

86,151

Total taxes payable

$ 2,202,375

$ 1,818,061



13 - SUBSIDY INCOME


As an incentive for cultural creative industry development, FAB Media received a special grant for a carton project from Finance Bureau of Eastern District of Beijing, amounting to $69,960 as subsidy income for the year ended September 30, 2011.


As an incentive for selling genuine entertainment products, the Company received a special grant from the Management Committee of Yonghe Garden, Eastern District of Beijing, amounting to   $369,944 as subsidy income for the year ended September 30, 2010.



24






DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




14 - LEASE AND RENTAL COMMITMENTS


The Company conducts all of its retail sales and corporate operations in leased facilities.


Rent expense under noncancellable operating leases for the Company’s flagship stores and warehouses was as follows:

 

Year Ended September 30,

 

2011

2010

FAB Media

$

650,825

$

1,065,244

FAB Digital

 

1,286,631

 

1,029,600

Total rent expense

$

1,937,456

$

2,094,844


The Company recognizes fixed minimum rent expense on noncancellable leases on a straight-line basis over the term of leases, and records the difference between the rental expense paid and the amounts due under the leases as a rent liability or asset. Rent liability in the amount of $1,716,730 and $159,784 at September 30, 2011 and 2010, respectively, is included in accrued expenses. 


Future minimum annual rental payments due under these noncancellable operating leases are as follows:

 

Rental

Fiscal Year

Commitments

 

 

2012

$ 1,862,666

2013

1,709,355

2014

1,658,252

2015

1,658,252

2016

1,187,650

Total

$8,076,175



25



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




15 - CONCENTRATIONS


Major Customers and Suppliers

For the years ended September 30, 2011 and 2010, no individual customer accounted for more than 10% of the total revenues, no single customer accounted for more than 10% of total outstanding accounts receivable.  


For the year ended September 30, 2011, no individual suppliers accounted for more than 10% of the Company’s purchases, no single vendor accounted for more than 10% of total outstanding accounts payable. For the year ended September 30, 2010, four vendors accounted for 48% of the Company’s total purchases, individually accounting for 15%, 13%, 10% and 10%.  Two vendors accounted for 24% of the total outstanding accounts payable, individually accounting for 13% and 11%.



16 - SEGMENT INFORMATION


ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments.


The Company is engaged in distribution of digital entertainment products and services. The Company's chief operating decision maker (“CODM”) has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the group. Based on management's assessment, the Company has determined that it has three operating segments which are wholesale, retail and FAB kiosks.


26


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




16 - SEGMENT INFORMATION (Continued)


The following tables present summary information by segment for the years ended September 30, 2011 and 2010, respectively:


 

Year Ended September 30, 2011

 

 

 

Revenue from

 

 

Wholesale

Retail

FAB Kiosks

Consolidated

Revenues

$

44,745,502

$

9,731,922

$

16,374,908

$

70,852,332

Cost of revenues

 

37,027,596

 

7,261,104

 

2,303,958

 

46,592,658

Gross profit

 

7,717,906

 

2,470,818

 

14,070,950

 

24,259,674

Depreciation and amortization

 

155,491

 

404,204

 

60,489

 

620,184

Total capital expenditures

 

7,712,006

 

2,977,182

 

3,143,434

 

13,832,622

Total assets

 

23,991,074

 

13,560,563

 

9,332,959

 

46,884,596



 

Year Ended September 30, 2010

 

 

 

Revenue from

 

 

Wholesale

Retail

FAB Kiosks

Consolidated

Revenues

$

31,937,150

$

7,822,811

$

15,760,777

$

55,520,738

Cost of revenues

 

25,549,720

 

5,354,537

 

4,287,637

 

35,191,894

Gross profit

 

6,387,430

 

2,468,274

 

11,473,140

 

20,328,844

Depreciation and amortization

 

236,217

 

101,021

 

38,305

 

375,543

Total capital expenditures

 

8,737

 

3,736

 

1,417

 

13,890

Total assets

 

16,677,061

 

7,132,161

 

2,704,389

 

26,513,611


27





DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




17- CONTINGENCY


In August 9, 2011, Wizzard Software Corporation (“WSC”), a Colorado corporation, executed a Memorandum of Understanding with Digital HK to acquire 100% of the outstanding shares of Digital HK.  In return for 100% of the outstanding shares of Digital HK, Wizzard will issue 49% of its outstanding shares at the time of the closing to Digital HK and two new seats on the Board of Directors.  The transaction, which is expected to close in February 2012, is subject to substantial due diligence, approvals by each company’s shareholders, the satisfaction of customary closing conditions and regulatory approvals both in the U.S. and China. As of the date of this report, due diligence is approaching the completion stage.


The Labor Contract Law of the People’s Republic of China requires employers to assure the liability of the severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month for severance pay for each year of the service provided by the employees. Based on management estimate, the probability of payment is remote.


In April 2010, FAB Media filed suit against Beijing Times Square Development Company in the Beijing Xicheng District People’s Court, alleging breach of contract of an agreement entered into with the defendants in 2008 and seeking damages of $281,942 (RMB1,800,000). As of the date of the report, the lawsuit remains pending.



18 - SUBSEQUENT EVENTS


On December 27, 2011, Mr. Wang Gang and Mr. Zhang Hongcheng entered into a share transfer agreement. Pursuant to the agreement, Mr. Wang Gang, one of the major shareholders of FAB Media, agreed to transfer his 60% equity interest of FAB Media to Mr. Zhang Hongcheng. As of the date of this report, Mr. Zhang Hongcheng and Mr. Ma Jiliang are the owners of FAB Media, with the percentage of ownership of 60% and 40%, respectively.


These consolidated financial statements were approved by management and available for issuance on January 19, 2012.  In accordance with ASC 855, the Company evaluated subsequent events through the date these consolidated financial statements were issued.



28












DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30, 2012 AND SEPTEMBER 30, 2011

AND

 THE THREE AND NINE MONTHS ENDED JUNE 30, 2012 AND 2011







DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED







TABLE OF CONTENTS


Page


Report of Independent Registered Public Accounting Firm

1


Unaudited Condensed Consolidated Financial Statements



Balance Sheets as of June 30, 2012 and September 30, 2011

2


Statements of Income and Comprehensive Income for three and nine months                                                                                                                                        3


Statements of Cash Flows for the nine months ended

June 30, 2012 and 2011

4


Notes to Unaudited Condensed Consolidated Financial Statements

5


















 








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Digital Entertainment International Limited


We have reviewed the accompanying consolidated balance sheets of Digital Entertainment International Limited as of June 30, 2012 and September 30, 2011, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended June 30, 2012 and 2011 and the related consolidated statements of cash flows for the nine-month period ended June 30, 2012 and 2011. These interim consolidated financial statements are the responsibility of the company’s management.


We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

/s/Friedman LLP

Friedman LLP

New York, NY

July 30, 2012






1








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

  CONDENSED CONSOLIDATED BALANCE SHEETS

 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

September 30, 2011

 

 ASSETS

 

 

 

 

 

 

 Current assets

 

 

 

 

 

 

 Cash  

 

$

     15,947,068

$

      8,401,778

 

 

 Accounts receivable, net

 

        7,565,554

 

     5,044,078

 

 

 Advances to suppliers, net  

 

         1,174,236

 

        1,357,986

 

 

 Loan receivable

 

                -   

 

        7,581,005

 

 

 Inventory

 

        3,382,645

 

        3,250,698

 

 

 Deferred tax assets, current

 

        1,311,708

 

       1,087,070

 

 

 Other current assets

 

        3,179,836

 

        141,550

 

 

 

 Total current assets

 

      32,561,047

 

      26,864,165

 

 

 

 

 

 

 

 

 

 

 Property, plant and equipment, net

 

      15,021,206

 

       15,164,534

 

 

 Deferred tax assets, non-current

 

       2,422,923

 

       1,059,393

 

 

 Long-term deposits

 

       3,472,891

 

       3,796,504

 

 Total Assets

$

    53,478,067

$

      46,884,596

 

 

 

 

 

 

 

 

 

 LIABILITIES AND EQUITY

 

 

 

 

 

 Current liabilities

 

 

 

 

 

 

 Short-term bank loans

$

       1,573,539

 $

       6,265,370

 

 

 Accounts payable

 

       4,792,209

 

       5,644,217

 

 

 Accrued expenses  

 

       2,098,489

 

       1,716,730

 

 

 Deferred revenue

 

       8,866,216

 

      8,892,688

 

 

 Other payable

 

      1,747,864

 

       1,860,729

 

 

 Taxes payable

 

      2,391,692

 

      2,202,375

 

 

 Due to related parties

 

        28,607

 

          27,112

 

 

 Dividend payable

 

             -   

 

      1,613,333

 

 

 

 Total current liabilities

 

   21,498,616

 

     28,222,554

 

 

 

 

 

 

 

 

 

 

 Long-term deposits from customers

 

     2,394,927

 

      2,210,109

 

 

 Deferred revenue

 

     16,076,094

 

     6,035,269

 

 

 Long-term payable

 

           141,619

 

         140,971

 

 

 

 Total  liabilities

 

    40,111,256

 

     36,608,903

 

 

 

 

 

 

 

 

 

 

 Contingency and commitment

 

 

 

 

 

 

 

 

 

 

 

 

 

 Equity

 

 

 

 

 

 

 

 Common shares ($ 0.13 par value, 10,000 shares Authorized and 100 shares issued at June 30, 2012 and September 30, 2011)

 

             13

 

             13

 

 

 Additional paid-in capital

 

       537,554

 

        430,555

 

 

 Statutory reserve

 

       131,825

 

        131,825

 

 

 Accumulated other comprehensive income

 

         796,431

 

        706,945

 

 

 Retained earnings  

 

        11,900,988

 

        9,006,355

 

 

 

 Total  equity  

 

      13,366,811

 

      10,275,693

 

 

 

 Total liabilities and  equity

$

      53,478,067

$

     46,884,596

 

 

2


DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For three months ended June 30,

 

For Nine months ended June 30,

 

 

 

 

 

2012

 

2011

 

2012

 

2011

 

 Revenues

$

  20,515,747

$

 20,573,383

$

 62,766,926

$

 51,397,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 Cost of revenues

 

 (12,586,580)

 

(13,630,046)

 

(38,929,253)

 

(33,475,539)

 

 

 

 

 

 

 

 

 

 

 

 

 

 Gross profit

 

    7,929,167

 

   6,943,337

 

 23,837,673

 

 17,922,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 Selling, general and administrative expenses

 

  (2,058,866)

 

 (2,219,677)

 

(5,148,162)

 

 (4,207,411)

 

 

 

 

 

 

 

 

 

 

 

 

 

 Income from operations

 

   5,870,301

 

  4,723,660

 

 18,689,511

 

 13,714,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 Interest expense

 

     (50,372)

 

   (71,708)

 

   (21,116)

 

  (197,985)

 

 

 Subsidy income

 

          -   

 

         -   

 

 443,340

 

    69,519

 

 

 Other income (expense)

 

    (88,399)

 

  (171,559)

 

  (120,625)

 

     (6,830)

 

 

 

 Total other income (expenses)

 

  (138,771)

 

  (243,267)

 

  301,599

 

   (135,296)

 

 

 

 

 

 

 

 

 

 

 

 

 

 Income before income taxes

 

   5,731,530

 

 4,480,393

 

18,991,110

 

 13,579,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Current

 

    1,114,012

 

  881,939

 

3,403,565

 

 3,726,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 Provision for income taxes

 

   1,114,012

 

   881,939

 

 3,403,565

 

  3,726,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net income

 

  4,617,518

 

  3,598,454

 

15,587,545

 

  9,852,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 Foreign currency translation gain

 

   (102,768)

 

   130,181

 

   89,486

 

    340,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 Comprehensive income

$

   4,514,750

$

  3,728,635

 

 15,677,031

$

 10,193,342




3








 

 DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED

 

  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

For Nine months ended June 30,

 

 

 

 

2012

 

2011

 

 CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 Net income  

$

          15,587,545

$

    9,852,944

 

 

 Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 provided by operating activities:

 

 

 

 

 

 

 Depreciation and amortization

 

            685,948

 

      396,124

 

 

 Recovery of  doubtful accounts

 

                   -

 

   (323,655)

 

 

  Loss on disposal of property, plant and equipment

 

               7,824

 

            181

 

 

  Loss on disposal of leasehold improvement

 

                   -

 

      344,345

 

 

  Deferred tax benefit

 

         (1,585,468)

 

     (672,340)

 

 Changes in operating assets and liabilities

 

 

 

 

 

 

 Accounts receivable

 

         (2,509,633)

 

  (1,037,876)

 

 

 Inventory

 

           (117,541)

 

     688,101

 

 

 Advances to suppliers

 

           190,852

 

    (690,050)

 

 

 Other current assets

 

        (3,051,416)

 

      163,060

 

 

 Deferred revenue  

 

          9,990,881

 

  6,263,397

 

 

 Accounts payable

 

         (881,924)

 

   1,413,836

 

 

 Taxes payable

 

           180,011

 

    (18,632)

 

 

 Accrued expenses  

 

           375,453

 

     446,584

 

 

 Other payables

 

         (121,965)

 

    (92,505)

 

             Net cash provided by operating activities

 

         18,750,567

 

 16,733,514

 

 CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 Payments on construction in progress

 

          (474,203)

 

           -

 

 

 Purchase of property and equipment  

 

           (5,597)

 

  (1,138,213)

 

 

 Proceeds from (payment for) Loan receivable

 

      7,650,386

 

 (3,648,573)

 

 

 Refund (payment) of long-term deposits  

 

         342,604

 

  (1,214,914)

 

             Net cash provided by (used in) investing activities

 

       7,513,190

 

  (6,001,700)

 

 CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 Net proceeds from capital contributions

 

         107,000

 

     160,917

 

 

 Proceeds from long-term customer deposits

 

           175,455

 

      626,493

 

 

 Proceeds (Repayment) of related parties loans

 

          1,377

 

   (684,734)

 

 

 Proceeds from (repayment of) short-term loans

 

       (4,742,033)

 

   1,538,840

 

 

 Dividend paid

 

        (14,273,520)

 

    (7,855,010)

 

             Net cash used in financing activities

 

       (18,731,721)

 

 (6,213,494)

 

 EFFECT OF EXCHANGE RATE CHANGE ON  

 

 

 

 

 

 

 CASH  

 

            13,254

 

    286,538

 

 NET INCREASE IN CASH  

 

       7,545,290

 

   4,804,858

 

 CASH , BEGINNING OF PERIOD

 

        8,401,778

 

    4,395,565

 

 CASH , END OF PERIOD

$

        15,947,068

$

   9,200,423

 

 SUPPLEMENTAL CASH FLOW DISCLOSURE

 

 

 

 

 

    Income taxes paid

$

            4,769,470

$

    4,304,991

 

    Interest paid

$

          266,793

$

     223,646



4









DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1 - ORGANIZATION AND BASIS OF PRESENTATION


Organization

The accompanying unaudited condensed consolidated financial statements include the financial statements of Digital Entertainment International Limited (“Digital HK”, or the “Company”); its wholly owned subsidiary, Beijing Dingtai Guanqun Culture Co., Ltd. (“DGC”); Beijing FAB Cultural Media Co., Ltd. (“FAB Media”) and Beijing FAB Digital Entertainment Products Co., Ltd. (“FAB Digital”), which are variable interest entities (“VIEs”) of DGC; and subsidiary of FAB Digital, Beijing Jing Lvtong Travel and Science Technology Co., Ltd. (“JLTST”).


The Company, through its wholly owned subsidiary and its VIEs, is engaged in marketing and distributing various officially licensed digital entertainment products under the “FAB” brand throughout the PRC, including but not limited to audiovisual products such as Compact Discs, Video Compact Discs and Digital Video Disks as well as books, magazines, mobile phone accessories and cameras. The Company’s products and services are primarily distributed through its flagship stores, proprietary “FAB” kiosks and online virtual stores. FAB kiosks, located in high-traffic areas of office buildings, shopping malls, retails stores and airports, are self-service terminals that provide a range of entertainment and business applications.


Digital HK was incorporated under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“PRC”) in November 2010. It was 85% owned by Universal Entertainment Group Limited (“UEG”), and 15% owned by Eon Capital International Inc. (“ECI”). In June, 2011, ECI agreed to transfer its 15% ownership of Digital HK to UEG at HK$1.00 per share. As of September 30, 2011, Digital HK is wholly owned by UEG.


Digital HK is a holding company and conducts its business through its wholly owned subsidiary, DGC, which is a wholly foreign-owned enterprise (“WFOE”) with limited liability incorporated in the PRC in March 2011. DGC has entered into a series of contractual agreements with the owners of FAB Digital and FAB Media.


FAB Digital was incorporated as a private enterprise in the PRC in September 2003 with a registered capital of 1 million Renminbi (“RMB”). FAB Digital specializes in the distribution of cultural and audio visual products through its two flagship stores in Beijing as well as its online stores. JLTST, which is fully owned by FAB Digital, was incorporated in the PRC in November 2010 with a registered capital of RMB 1 million.






5








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)


FAB Media was incorporated as a private enterprise in the PRC in April 2008 with a registered capital of RMB 1 million. FAB Media is primarily engaged in operating and providing proprietary multimedia kiosks for music downloads, information exchange and advertising.


On December 27, 2011, Mr. Wang Gang and Mr. Zhang Hongcheng entered into a share transfer agreement. Pursuant to the agreement, Mr. Wang Gang, one of the major shareholders of FAB Media, agreed to transfer his 60% equity interest of FAB Media to Mr. Zhang Hongcheng. Mr. Zhang Hongcheng and Mr. Ma Jiliang are the owners of FAB Media, with the percentage of ownership of 60% and 40%, respectively.


In February and March 2011, a series of contractual arrangements were entered into among DGC, FAB Digital, FAB Media and its individual shareholders.  Such arrangements include an Exclusive Service Agreement, a Share Pledge Agreement, an Option Agreement and a Voting Right Proxy Agreement.


Pursuant to these agreements, DGC has the exclusive right to provide to FAB Digital and FAB Media consulting services related to business operation and management.  The key terms of these agreements include:


1)

DGC has the sole discretion to make all operating and business decisions for FAB Digital and FAB Media on behalf of the equity owners, including business operations, policies and management, approving all matters requiring shareholder approval;

2)

FAB Digital and FAB Media have agreed to pay all of the operating costs incurred by DGC, and intended to transfer 100% of the income earned to DGC; DGC also has the right to determine the amount of the fees it will receive;

3)

During the term of these agreements, DGC will retain the rights to the intellectual properties if they are created by DGC;

4)

FAB Digital and FAB Media may not enter into any other agreements with any third party to receive consulting service without the prior consent of DGC;

5)

The equity owners pledge their respective equity interests in the FAB Digital and FAB Media as a guarantee for the payment of technical and consulting services fees under the Exclusive Service Agreement;



6








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)


6)

The shareholders of FAB Digital and FAB Media have irrecoverably and unconditionally granted DGC or its designee an exclusive option to purchase, to the extent permitted by PRC laws, all or any portion of equity interest of the FAB Digital and FAB Media.


All these contractual agreements obligate DGC to absorb a majority of the risk of loss from FAB Digital and FAB Media’s activities and entitle DGC to receive a majority of its residual returns.  In essence, DGC has gained effective control over both FAB Digital and FAB Media. Based on these contractual arrangements, the Company believes that both FAB Digital and FAB Media should be considered as variable interest entities (“VIEs”) under the FASB Accounting Standards Codification (“ASC”) 810, “Consolidation”. Accordingly, management believes that the accounts of these two entities should be consolidated with those of DGC, the primary beneficiary.


Digital HK is effectively controlled by the majority shareholders of FAB Digital and FAB Media. Digital HK has 100% equity interest in DGC. Accordingly, DGC, FAB Digital and FAB Media are effectively controlled by the same majority shareholders.


Therefore, DGC, FAB Digital and FAB Media are considered under common control. The consolidation of DGC, FAB Digital and FAB Media has been accounted for at historical cost and prepared on the basis as if the aforementioned exclusive contractual agreements between DGC and FAB Digital and FAB Media had become effective as of the beginning of the first period presented in the accompanying unaudited condensed consolidated financial statements.


On April 5, 2012, Wizzard Software Corporation, a Colorado corporation, executed a Share Exchange Agreement with Digital HK, under the terms of the Agreement, the parties agreed that Wizzard shall acquire from UEG all of the issued and outstanding shares of Digital HK’s capital stock in exchange for a number of “unregistered” and “restricted” shares of Wizzard's common stock that is equal to 49% of the issued and outstanding common stock of Wizzard immediately following the closing of the transaction (the “Closing”) on a fully-diluted basis (the “Initial Company Shares”). If Digital HK and the VIE Entities successfully complete all of certain Corporate Governance Objectives for two consecutive and complete reporting quarters after the Closing, Wizzard’s Board of Directors will release the voting rights to 50% of the Initial Company Shares held by UEG at such time; upon successful completion of all of the Corporate Governance Objectives for six consecutive and complete reporting quarters after the Closing, Wizzard’s Board of Directors will release the voting rights to another 25% of the Initial Company Shares held by UEG at such time; and upon the successful completion of all of the Corporate Governance Objectives for eight consecutive and complete reporting quarters after the



7








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)


Closing, Wizzard s Board of Directors will release the voting rights to the remaining Initial Company Shares held by UEG at such time.


2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rules of the Securities and Exchange Commission relating to interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“US GAAP”) for complete financial statements. In the opinion of the management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended September 30, 2011.  Operating results for the nine months ended June 30, 2012 may not be necessarily indicative of the results that may be expected for the full year ending September 30, 2012.


Principles of Consolidation

The unaudited condensed consolidated financial statements include the financial statements of Digital HK, DGC, FAB Digital, FAB Media and JLTST. All intercompany transactions and balances have been eliminated upon consolidation.


Use of Estimates

The preparation of unaudited consolidated financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; the allowance for doubtful accounts; the realization of deferred tax assets, the valuation of inventories, land use right and property, plant and equipment; and accruals for income tax uncertainties and other contingencies when applicable. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.



8








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Inventory

Inventory includes books and video products and is recorded at the lower of cost or market, using the first-in, first-out (“FIFO”) method. The Company estimates net realizable value based on current market value and inventory aging analyses. As of June 30, 2012 and September 30, 2011 no reserve for slow-moving or obsolete inventory is considered necessary.


Revenue Recognition

Product revenue is recognized when title to the product has transferred to customers in accordance with the terms of the sale; the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Revenues are recorded net of applicable sales taxes.


The Company derives revenue from retail sales, sales to retailers, and FAB kiosk sales. Revenue from FAB kiosk sales includes download service revenue, membership card revenue, advertisement revenue and licensing revenue.


Revenue from retail sales and sales to retailers is recognized at the point-of-sale. Download service revenue is recognized when substantially all material services or conditions relating the sales have been performed or satisfied, and the Company has no obligation to refund any payment (cash or otherwise) received. Membership card revenue is amortized over the life of the membership period, membership cards with par value of RMB 100 have an expiration period of three months, and par value of RMB 200, 300, 400 and 500 have an expiration period of twelve months. Advertisement revenue is recognized over the contract period which usually expires within four months. Licensing revenue is amortized ratably over the term of the agreement which is generally five years long. Deferred revenue represents primarily unearned licensing revenues related to FAB kiosk sales.


Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement”, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures.


The three levels are defined as follows:


Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.




9








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Fair Value of Financial Instruments (Continued)


Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3 - Inputs to the valuation methodology are unobservable.


Estimated fair values of the financial instruments were not materially different from their carrying values as presented on the accompanying condensed consolidated balance sheets. This is attributed to the short maturities of the instruments and that interest rates accompanying condensed consolidated on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.


Income Taxes

The Company is subject to the Income Tax Laws of the PRC. It did not generate any taxable income outside of the PRC for the nine months ended June 30, 2012 and 2011. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The components of deferred tax assets are individually classified as current and non-current based on their characteristics.


ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of June 30, 2012 and September 30, 2011, respectively. All tax returns since inception are subject to examination by tax authorities.



10








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Reclassifications:

Deferred revenue in the prior period has been reclassified to indicate the long term portion. The reclassification has no effect on the previously reported total assets, equity, results of operations and cash flows.


Subsequent Events:

These condensed consolidated financial statements were approved by management and available for issuance on July 30, 2012. In accordance with ASC 855, the Company evaluated subsequent events through this date.  


3 - SHORT-TERM BANK LOANS


Short-term bank loans consist of the following:


 

 

June 30,

 

September 30,

 

 

2012

 

2011

Loan from China Development Bank

$

-

$

4,699,027

Loan from China Merchants Bank

 

1,573,539

 

1,566,343

Total Short-term Bank Loan

$

1,573,539

$

6,265,370


Short-term bank loans are primarily used for working capital needs. On April 25, 2012, FAB Digital entered into a new loan agreement with China Merchants Bank (“CMB”) for a short term loan due April 25, 2013 in the amount of RMB 10,000,000 (Approximately $1.57 million). The loan has a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China plus 35 basis points, adjustable on a monthly basis. In connection with the loan agreement, the Company’s chief executive officer entered into a pledge agreement with Beijing Lianhekaiyuan Investment and Guarantee Co. LTD (“LIGC”), the loan was guaranteed and collateralized by the software copyrights owned by the chief executive officer.


On June 10, 2011, FAB Digital entered into a loan agreement with China Development Bank (“CDB”) for a one-year term loan due June 14, 2012 in the amount of RMB 30,000,000 (approximately $4.7 million). The loan has a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China plus 10 basis points, adjustable on a monthly basis. In connection with the loan agreement, the major shareholders of the FAB Digital entered into a share pledge agreement with Beijing Medium and Small Business



11








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




3 - SHORT-TERM BANK LOANS (Continued)


Credit Guarantee Company (“CGC”) in which 100% of their respective equity interest in the Company is security for the loan, as well as the copyright and trademark of FAB Digital, and the personal property of the Company’s chief finance officer. Accordingly, CGC provides commercial guaranty of the loan from CDB. The loan was fully repaid at maturity.


On March 23, 2011, FAB Digital entered into a new loan agreement with China Merchants Bank (“CMB”) for a short-term loan due March 31, 2012 in the amount of RMB 10,000,000 (approximately $1.5 million). The loan has a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China plus 30 basis points, adjustable on a monthly basis. The loan was guaranteed and collateralized by the video product copyrights of FAB Digital, and the software copyrights and personal property owned by the Company’s chief executive officer. The loan was fully repaid at maturity.


4 - RELATED-PARTY TRANSACTIONS


The table below sets forth the related parties and their affiliation with the Company:

Related Parties

Affiliation with the Company

 

 

Guangdong Endless Culture Co., Ltd.(“GEC”)

Affiliated Company controlled by Mr. Zhang Hongcheng


Amounts due to related parties are as follows:


 

 

June 30,

 

September 30,

 

 

2012

 

2011

Salary payable to

 

 

 

 

Guangdong Endless Culture Co., Ltd.

 

28,607

 

27,112

Total due to related parties

$

28,607

$

27,112


From time to time, employees of the related parties may perform certain business functions for the Company and employees of the Company may perform functions for the related party.  Compensation expense for these services are included in selling, general and administrative expenses in the Company’s unaudited condensed consolidated financial statements. For the three and nine months ended June 30, 2012, no such compensation expense was incurred.




12








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




4 - RELATED-PARTY TRANSACTIONS (Continued)

The Company has four business locations, two of which are subleased from GEC. In addition, GEC entered into a lease agreement with Xidan Joy City on behalf of FAB Media for a term of eight-years from April 2008 to March 2016. Subsequently, FAB Media entered into a sublease agreement with GEC. The average monthly rent expense is $47,420. FAB Media paid the rental and promotion expense to Xidan Joy City directly.


In May 2011, GEC entered into another lease agreement with Guoson Mall on behalf of FAB Digital for a term of five-years expiring in August 2016. The average monthly rent expense is $66,169; the promotion expense and property management fees are $1,361 and $20,004 per month respectively. FAB Digital paid the rental and promotion expense directly to the landlord of Guoson Mall.


Future minimum annual rental payments due for Xidan Joy City and Guoson Mall are as follows:


 

 

Rental

Twelve months ending June 30,

 

Commitments

2013

 

 $1,665,866

2014

 

 $1,665,866

2015

 

 $1,665,866

2016

 

 $1,519,527

2017

 

 $180,085

Total

 

 $6,697,210




5 - CASH DIVIDENDS


On March 2, 2012, the Board of Directors of FAB Media declared and approved $9,527,257 (RMB 60,000,000) of cash dividends to the Company’s shareholders, all of which was paid immediately.


On March 21, 2012, the Board of Directors of FAB Digital declared and approved a total of $3,165,654 (RMB 20,000,000) cash dividends to the company’s shareholders, all of which was paid immediately.



13








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





6- INCOME TAXES


The Company was incorporated in Hong Kong in November 2010, and did not earn any income that was derived in Hong Kong since inception and therefore was not subject to Hong Kong income tax.


DGC, FAB Digital and JLTST were organized under the laws of the People’s Republic of China (“PRC”) which are subject to Enterprise Income Tax (“EIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax Law. Pursuant to the PRC Income Tax Laws, DGC, FAB Digital and JLT are subject to EIT at a statutory rate of 25%.


FAB Media was qualified as a High and New Technology Enterprise in Beijing High-Tech Zone in December 24, 2010, and was entitled to a preferential tax rate of 15% for three years from January 2011 to December 2013.


The Company files income tax returns with both the National Tax Bureau and the Local Tax Bureaus in the PRC. All tax returns of the Company since inception are subject to tax examination by tax authorities.


The Company recognized a deferred tax asset in the amount of $ 3,734,631 and $ 2,146,463 as of June 30, 2012 and September 30, 2011, respectively. Deferred tax assets represent temporary differences arising from deferred revenue and the allowance for doubtful accounts. The components of deferred tax assets are as follows:


 

 

June 30,

 

September 30,

 

 

2012

 

2011

Deferred tax assets

 

 

 

 

Allowance for doubtful accounts

$

396

$

395

Deferred revenue

 

3,734,235

 

2,146,068

Total deferred tax assets

 

3,734,631

 

2,146,463

Current portion

 

(1,311,708)

 

(1,087,070)

Deferred tax assets, non-current

$

2,422,923

$

1,059,393



14








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





6- INCOME TAXES (Continued)


Income tax expense (benefit) consists of:


 

 

Three months ended June 30,

 

 

Nine months ended June 30,

 

 

2012

 

2011

 

 

2012

 

2011

Current income tax

$

1,644,380

$

1,253,356

 

$

4,992,024

$

4,395,269

Deferred income tax benefit

 

( 530,368)

 

(371,417)

 

 

(1,588,459)

 

(668,662)

 

$

1,114,012

$

881,939

 

$

3,403,565

$

3,726,607



Taxes payable consist of the following:


 

 

June 30,

 

September 30,

 

 

2012

 

2011

VAT payable

$

282,158

$

484,187

Income tax payable

 

1,410,077

 

1,183,157

Business tax payable

 

527,550

 

385,294

Other

 

171,907

 

149,737

Total taxes payable

$

2,391,692  

$

2,202,375




15








DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





7 - SEGMENT INFORMATION


ASC 280, Segment Reporting , establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments.


The Company is engaged in distribution of digital entertainment products and services. The Company's chief operating decision maker (“CODM”) has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the group. Based on management's assessment, the Company has determined that it has three operating segments which are wholesale, retail and FAB kiosks.


The following tables present summary information by segment for the three months ended June 30, 2012 and 2011, respectively:


 

Three months Ended June 30, 2012

 

 

 

Revenue from

 

 

Wholesale

Retail

FAB Kiosks

Consolidated

Revenues

$

12,842,207

$

1,206,984

$

6,466,556

$

20,515,747

Cost of revenues

 

10,746,824

 

912,395

 

927,361

 

12,586,580

Gross profit

 

2,095,383

 

294,589

 

5,539,195

 

7,929,167

Depreciation and amortization

 

54,217

 

135,700

 

21,518

 

211,435

Total capital expenditures

 

-

 

-

 

-

 

-

Total assets

 

27,110,579

 

15,607,663

 

10,759,825

 

53,478,067


 

Three months Ended June 30, 2011

 

 

 

Revenue from

 

 

Wholesale

Retail

FAB Kiosks

Consolidated

Revenues

$

13,004,783

$

2,963,731

$

4,604,869

$

20,573,383

Cost of revenues

 

10,909,526

 

2,225,660

 

494,860

 

13,630,046

Gross profit

 

2,095,257

 

738,071

 

4,110,009

 

6,943,337

Depreciation and amortization

 

78,369

 

145,993

 

30,313

 

254,675

Total capital expenditures

 

1,077

 

822,409

 

-

 

823,486

Total assets

 

22,829,965

 

12,879,445

 

8,830,502

 

44,539,912




16



DIGITAL ENTERTAINMENT INTERNATIONAL LIMITED


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






7- SEGMENT INFORMATION (Continued)


 

Nine months Ended June 30, 2012

 

 

 

Revenue from

 

 

Wholesale

Retail

FAB Kiosks

Consolidated

Revenues

$

39,861,012

$

3,821,268

$

19,084,646

$

62,766,926

Cost of revenues

 

33,321,876

 

2,855,761

 

2,751,616

 

38,929,253

Gross profit

 

6,539,136

 

965,507

 

16,333,030

 

23,837,673

Depreciation and amortization

 

188,830

 

422,173

 

74,945

 

685,948

Total capital expenditures

 

-

 

-

 

5,597

 

5,597

Total assets

 

27,110,579

 

15,607,663

 

10,759,825

 

53,478,067



 

Nine months Ended June 30, 2011

 

 

 

Revenue from

 

 

Wholesale

Retail

FAB Kiosks

Consolidated

Revenues

$

31,542,133

$

8,284,899

$

11,570,765

$

51,397,797

Cost of revenues

 

25,862,942

 

6,337,258

 

1,275,339

 

33,475,539

Gross profit

 

5,679,191

 

1,947,641

 

10,295,426

 

17,922,258

Depreciation and amortization

 

92,076

 

268,433

 

35,615

 

396,124

Total capital expenditures

 

583,417

 

329,133

 

225,663

 

1,138,213

Total assets

 

22,829,965

 

12,879,445

 

8,830,502

 

44,539,912



8- CONTINGENCY


In April 2010, FAB Media filed suit against Beijing Times Square Development Company in the Beijing Xicheng District People’s Court, alleging breach of contract of an agreement entered into with the defendants in 2008 and seeking damages of $281,942 (RMB1,800,000). As of the date of this report, the lawsuit remains pending, the management of FAB Media expects that they will reconcile with Beijing Time Square Development Company through the mediation of court.







17



WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES

AND DIGITAL HKCo AND SUBSIDIARIES



Unaudited pro forma combined consolidated financial information


The following unaudited pro forma combine consolidated balance sheet reflects the estimated adjustments to Wizzard’s historical consolidated balance sheet as of June 30, 2012.  Also, the unaudited pro forma combined consolidated statement of income reflects the estimated adjustments to Wizzard’s historical consolidated statement of operations for the year ended December 31, 2011, and for the six months ended June 30, 2012, to give effect to:


·

The acquisition of Digital Entertainment International Co. (“Digital HKCo”), per the terms of the Share Exchange Agreement signed on April 5, 2012, and the related issuance of 37,944,551shares of common stock (including the 10,282,611 shares of common stock at closing and 27,611,940 shares of common stock issued upon the conversion of the 290 shares of Series B Convertible Preferred Stock) as if both had occurred on January 1, 2011.

·

The proposed spin-off of Interim Healthcare of Wyoming, Inc., a wholly owned subsidiary of Wizzard, as if both had occurred on January 1, 2011.

 

The acquisition is treated as purchase transactions.  The initial accounting for the business combination is not complete as of the filing of these proforma condensed combined financial statements.   We are reporting in these proforma condensed combined financial statements provisional estimated amounts of the fair market value of the assets acquired.  The determination of the Digital HKCo purchase price and allocation of the purchase price to the underlying tangible and intangible assets in the proforma condensed combined financial statements are subject to change as additional information becomes available.  The unaudited pro forma combined consolidated statements of operations are not necessarily indicative of Wizzard’s actual results of operations assuming the transaction were completed on January 1, 2011, nor do they purport to represent Wizzard’s results of operations for the future periods.


The unaudited pro forma combined consolidated financial statements should be read in conjunction with the historical financial statements and related notes of Wizzard appearing in the Annual Report.





WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES

AND DIGITAL HKCo AND SUBSIDIARIES


Unaudited pro forma combined consolidated balance sheet

As of June 30, 2012


 

Historical

 

 

 

 

Wizzard

June 30, 2012

Digital HKCo. June 30, 2012

Pro forma adjustments(c)

Pro forma adjustments(a)

Pro forma Combined

 

 

 

(In thousands, except per share data)

Cash

792

15,947

(385)

0

16,354

Accounts receivable, net

774

7,565

(607)

0

7,732

Advances to Suppliers, net

0

1,174

0

0

1,174

Inventory

0

3,383

0

0

3,383

Deferred tax asset, current

0

1,312

0

0

1,312

Other current assets

51

3,180

(31)

0

3,200

Total current assets

1,617

32,561

(1,023)

0

33,155

 

 

 

 

 

 

PP&E, net

33

15,021

(2)

0

15,052

Goodwill and Intangibles

12,674

0

(1,190)

55,172

(a,d)   66,656

Deferred tax asset, noncurrent

0

2,423

0

0

2,423

Long-term deposits

4

3,473

0

0

3,477

Total assets

14,328

53,478

(2,215)

55,172

120,763

 

 

 

 

 

 

Accounts payable

638

4,792

(31)

0

5,399

Short-term loan

0

1,574

0

0

1,574

Accrued expenses

158

2,098

(86)

0

2,170

Deferred revenue

52

8,866

(3)

0

8,915

Taxes payable

0

2,392

0

0

2,392

Due to related parties

0

29

0

0

29

Other payables

0

1,748

0

0

1,748

Total current liabilities

848

21,499

(120)

0

22,227

 

 

 

 

 

 

Long-term deposits

0

2,395

0

0

2,395

Deferred Revenue

0

16,076

0

0

16,076

Long-term payables

0

141

0

0

141

Total Liabilities

848

40,111

(120)

0

40,839

 

 

 

 

 

 

Preferred Stock

0

0

0

0

0

Common Stock

9

0

0

38

(a)            47

APIC

85,055

538

(1,788)

62,484

(a)   146,289

Statutory reserve

0

132

0

0

132

Accum. comprehensive income

0

796

0

0

796

Retained earnings

(71,584)

11,901

(307)

(7,350)

(a,d,e)  (67,340)

Total shareholders’ equity

13,480

13,367

(2,095)

55,172

79,924

 

 

 

 

 

 

Total liabilities & shareholder’s equity

14,328

53,478

(2,215)

55,172

120,763






WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES

AND DIGITAL HKCo AND SUBSIDIARIES


Unaudited pro forma condensed combined consolidated statement of operations and comprehensive income

For the six months ended June 30, 2012


 

Historical

 

(d)

(a)

 

Wizzard

June 30, 2012

Digital HKCo. June 30, 2012 (b)

Pro forma adjustments(c)

Pro forma adjustments(e)

Pro forma Combined

 

(In thousands, except per share data)

Total revenues

$    3,893

$      41,373

$       (2,175)

$       0

$    43,091

 

 

 

 

 

 

Cost of sales

2,090

25,178

(1,427)

0

25,841

Operating expense

3,136

3,802

(456)

       (d)    2,450

  8,932

Other income(loss)

6

(51)

(1)

0

(46)

Income Taxes

0

2,116

0

0

2,116

Net Income (loss)

(1,327)

10,226

(293)

(2,450)

6,156

Foreign Currency( loss)

0

(81)

0

0

(81)

Comprehensive income(loss)

$  (1,327)

$      10,145

$          (293)

$      (2,450)

$     6,075

Earnings (loss) per common share:

 

 

 

 

 

Basic

$    (0.16)

 

 

 

$       0.13

Diluted

$    (0.16)

 

 

 

$       0.13

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

8,425

 

 

(f)  37,945

46,370

Diluted

8,425

 

 

(f)  37,945

 46,370




Unaudited pro forma condensed combined consolidated statement of operations and comprehensive income

For the year ended December 31, 2011

 

 

Historical

 

(d)

(a)

 

Wizzard  December 31,   2011

Digital HKCo. September 30, 2011 (b)

Pro forma adjustments(c)

Pro forma adjustments(e)

Pro forma Combined

 

(In thousands, except per share data)

Total revenues

$    6,540

$      70,852

$      ( 3,426)

$       5,709

$    79,675

 

 

 

 

 

 

Cost of sales

3,475

46,592

(2,306)

3,178

50,939

Operating expense

12,659

5,127

(1,663)

  (d)  4,836

 20,959

Other income(loss)

(386)

(74)

(1)

378

(83)

Income Taxes

0

4,333

0

85

4,418

Net Income

(9,980)

14,726

(542)

(2,012)

3,276

Foreign currency gain

0

607

0

63

670

Comprehensive income(loss)

$  (9,980)

$      15,333

$       (542)

$      (1,949)

3,946

Earnings (loss) per common share:

 

 

 

 

 

Basic

$    (1.31)

 

 

 

$       0.09

Diluted

$    (1.31)

 

 

 

$       0.09

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

7,616

 

 

(f)  37,945

45,561

Diluted

7,616

 

 

(f)  37,945

 45,561






WIZZARD SOFTWARE CORPORATION AND SUBSIDIARIES

AND DIGITAL HKCo AND SUBSIDIARIES


Notes to the unaudited pro forma condensed combined consolidated statement of operations


NOTE 1 – Wizzard Software Corporation and Subsidiaries.


Wizzard Software Corporation ("Parent or Wizzard"), a Colorado corporation, was organized on July 1, 1998. The Company operates in three segments, Software, Healthcare and Media Services.  The Software segment engages primarily in the development, sale, and service of custom and packaged computer software products. The Media Services provides podcast hosting, content management tools and advertising services.  The Healthcare segment operates primarily in the home healthcare and healthcare staffing services in Wyoming and Montana.  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.  On February 27, 2007, Parent organized Wizzard Acquisition Corp., a Pennsylvania corporation, to acquire and dissolve into the operations of Webmayhem, Inc. (Libsyn), a Pennsylvania corporation, in a transaction accounted for as a purchase.  On April 3, 2007, Interim purchased the operations of Professional Personnel, Inc., d.b.a., Professional Nursing Personnel Pool (“PNPP”).


NOTE 2 – Digital HKCo and Subsidiaries


The consolidated financial statements include the financial statements of Digital HKCo; its wholly owned subsidiary, Beijing Dingtai Guanqun Culture Co., Ltd. (“DGC”); Beijing FAB Cultural Media Co., Ltd. (“FAB Media”) and Beijing FAB Digital Entertainment Products Co., Ltd. (“FAB Digital”), which are variable interest entities (“VIEs”) of DGC; and subsidiary of FAB Digital, Beijing Jing Lvtong Travel and Science Technology Co., Ltd. (“JLTST”).


The Company, through its wholly owned subsidiary and its VIEs, is engaged in marketing and distributing various officially licensed digital entertainment products under the “FAB” brand throughout the PRC, including but not limited to audiovisual products such as Compact Discs, Video Compact Discs and Digital Video Disks as well as books, magazines, mobile phone accessories and cameras. The Company’s products and services are primarily distributed through its flagship stores, proprietary “FAB” kiosks and online virtual stores. FAB kiosks, located in high-traffic areas of office buildings, shopping malls, retails stores and airports, are self-service terminals that provide a range of entertainment and business applications.

Digital HKCo was incorporated under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“PRC”) in November 2010. Digital HKCo is wholly owned by Universal

Entertainment Group Limited (“UEG”). Digital HKCo is a holding company and conducts its business through its wholly owned subsidiary, DGC, which is a wholly foreign-owned enterprise (“WFOE”) with limited liability incorporated in the PRC in March 2011. DGC has entered into a series of contractual agreements with the owners of FAB Digital and FAB Media. FAB Digital was incorporated as a private enterprise in the PRC in September 2003 with a registered capital of 1 million Renminbi (“RMB”). FAB Digital specializes in the distribution of cultural and audio visual products through its flagship stores in Beijing as well as its online stores. JLTST, which is fully owned by FAB Digital, was incorporated in the PRC in November 2010 with a registered capital of RMB 1 million. FAB Media was incorporated as a private enterprise in the PRC in April 2008 with a registered capital of RMB 1 million. FAB Media is primarily engaged in operating and providing proprietary multimedia kiosks for music download, information exchange and advertising.


In February and March 2011, a series of contractual arrangements were entered into among DGC, FAB Digital, FAB Media and its individual shareholders. Such arrangements include an Exclusive Service Agreement, a Share Pledge Agreement, an Option Agreement and a Voting Right Proxy Agreement.  Pursuant to these agreements, DGC has the exclusive right to provide to FAB Digital and FAB Media consulting services related to business operation and management. The key terms of these agreements include:


1) DGC has the sole discretion to make all operating and business decisions for FAB Digital and FAB Media on behalf of the equity owners, including business operations, policies and management, approving all matters requiring shareholder approval;




2) FAB Digital and FAB Media have agreed to pay all of the operating costs incurred by DGC, and intended to transfer 100% of the income earned to DGC; DGC also has the right to determine the amount of the fees it will receive;

3) During the term of these agreements, DGC will retain the rights to the intellectual properties if they are created by DGC;

4) FAB Digital and FAB Media may not enter into any other agreements with any third party to receive consulting service without the prior consent of DGC;

5) The equity owners pledge their respective equity interests in the FAB Digital and FAB Media as a guarantee for the payment of technical and consulting services fees under the Exclusive Service Agreement;

6) The shareholders of FAB Digital and FAB Media have irrecoverably and unconditionally granted DGC or its designee an exclusive option to purchase, to the extent permitted by PRC laws, all or any portion of equity interest of the FAB Digital and FAB Media.


All these contractual agreements obligate DGC to absorb a majority of the risk of loss from FAB Digital and FAB Media’s activities and entitle DGC to receive a majority of its residual returns.  In essence, DGC has gained effective control over both FAB Digital and FAB Media. Based on these contractual arrangements, the Company believes that both FAB Digital and FAB Media should be considered as VIEs under the FASB Accounting Standards Codification (“ASC”) 810, “Consolidation”. Accordingly, management believes that the accounts of FAB Digital and FAB Media should be consolidated with those of DGC, the primary beneficiary.


Digital HKCo is effectively controlled by the majority shareholders of FAB Digital and FAB Media. Digital HKCo has 100% equity interest in DGC. Accordingly, DGC, FAB Digital and FAB Media are effectively controlled by the same majority shareholders.


Functional Currency / Foreign currency translation - The functional currency is the Renminbi (“RMB”) and its reporting currency is U.S. dollars for the purpose of these financial statements. The Company’s consolidated balance sheet accounts are translated into U.S. dollars at the period-end exchange rates (6.3551 RMB and 6.3843 RMB to $1 at June 30, 2012 and September 30, 2011, respectively) and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during 2012 and 2011 (6.3264 RMB and 6.5373 RMB to $1) in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.


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.  Management made assumptions and estimates for determining fair value of the consideration paid, fair value of the underlying assets acquire and resulting goodwill and amortization of intangible assets.  Actual results could differ from those estimated by management.


The initial accounting for the business combination is not complete as of the filing of these proforma condensed combined financial statements.  We are reporting in these proforma condensed combined financial statements provisional estimated amounts of the fair market values of the assets acquired, and are subject to change as additional information, including the final determination of the Digital HKCo purchase price and allocation of the purchase price to the underlying tangible and intangible assets becomes available.


We shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.


NOTE 3 - ACQUISITION AND PROFORMA ADJUSTMENTS


On September 25, 2012, pursuant to a Share Exchange Agreement, dated April 5, 2012, by and among, Wizzard Software Corporation and Universal Entertainment Group Limited, a British Virgin Islands company (“UEG”); Digital Entertainment International Ltd., a company incorporated under the law of the Hong Kong Special Administrative Region that is 100% owned by UEG (“Digital HKCo; Beijing Dingtai




Guanqun Culture Co. Ltd., a company incorporated under the law of the People’s Republic of China (the “PRC”) that is 100% owned by Digital HKCo (the “WOFE”); Beijing FAB Culture Co., Ltd., a company that is incorporated under the law of the PRC (“FAB Culture”); and Beijing FAB Digital Entertainment Products Co., Ltd., a company organized under the laws of the PRC (“FAB Digital” and together with FAB Culture the “VIE Entities”). The Digital HKCo, the WOFE and the VIE Entities shall be collectively referred to herein as the “FAB Companies.”


Under the terms of the Agreement, the parties agreed that Wizzard shall acquire from UEG all of the issued and outstanding shares of Digital HKCo’s capital stock in exchange for 10,282,611 “unregistered” and “restricted” shares of Wizzard’s common stock that is equal to 49% of the issued and outstanding common stock of Wizzard at Closing on a fully-diluted basis (the “Initial Company Shares”). The Initial Company Shares are subject to the terms of the Voting Agreement, which assigns to the Company’s Board of Directors the right to vote all of the Initial Company Shares until the following milestones are achieved:


(i) if Digital HKCo and the VIE Entities successfully complete all of certain Corporate Governance Objectives for two (2) consecutive and complete reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to 50% of the Initial Company Shares held at such time;

(ii) upon successful completion of all of the Corporate Governance Objectives for six (6) consecutive and complete reporting quarters, the Company’s Board of Directors will release the voting rights to another 25% of the Initial Company Shares held at such time; and

(iii) upon the successful completion of all of the Corporate Governance Objectives for eight (8) consecutive and complete reporting quarters, the Company’s Board of Directors will release the voting rights to the remaining Initial Company Shares at such time.


As additional consideration for the Digital HKCo shares, Wizzard issued 290 shares of its Series B Convertible Preferred Stock (the “Preferred Stock”).  The Preferred Stock will have no dividend rights or voting rights or the right to receive any assets of the Company upon liquidation, dissolution or winding up.  The Preferred Stock shall be convertible into shares of the Company’s common stock in three (3) tranches upon the occurrence of the following conversion events:


(i) upon the successful completion of the Corporate Governance Objectives for the four (4) consecutive and complete reporting quarters of the Company, UEG or its lawful designees shall have the right to convert the first tranche of 210 shares of Preferred Stock into 14,689,444 shares of the Company’s common stock;

 

(ii) upon the successful completion of:  (a) all of the Corporate Governance Objectives for the four (4) consecutive and complete reporting quarters of the Company; and (b) a Revenue Objective requiring that the FAB Companies receive sales revenues of at least US$60,000,000 and net income of US$12,000,000 in fiscal year 2011, UEG or its lawful designees shall have the right to convert the second tranche of 40 shares of Preferred Stock into 5,488,364 shares of the Company’s common stock; and


(iii) upon the successful completion of (a) all of the Corporate Governance Objectives for the six (6) consecutive and complete reporting quarters of the Company; and (b) a Revenue Objective requiring that the FAB Companies receive sales revenues of at least US$70,000,000 and net income of US$14,000,000 in fiscal year 2012, UEG or its lawful designees shall have the right to convert the third tranche of 40 shares of Preferred Stock into 7,484,132 shares of the Company’s common stock.


Upon the occurrence of each conversion event, the three tranches of Preferred Stock will be convertible into a number of shares of common stock that will bring the overall equity position of the Company of the holders of the Initial Company Shares, the Preferred Stock and the common stock issuable upon conversion of the Preferred Stock, on a fully diluted basis as of the date of Closing, to 70%, 74% and 78%, respectively.


Of  the Initial Company Shares (the “Lock-up Shares”) 5,142,700 shares are subject to the terms of a Lock-up Agreement by which shareholders agree not to transfer, sell, hypothecate or gift such Lock-up Shares for a period of 12 months following the Closing date.  


a.

The pro forma balance sheet assumes the Digital HKCo acquisition occurred on January 1, 2011, through the issuance of 10,282,611 common shares and 290 Series B Convertible Preferred shares with an




estimated value of $76,000,000.  For purposes of the pro forma balance sheet as of June 30, 2012, Digital HKCo’s historical balance sheet as of June 30, 2012 was combined with Wizzard’s historical balance sheet as of June 30, 2012.  The pro forma balance sheet assumes the spin-off of the Home Healthcare (HHC) subsidiary occurred on January 1, 2011, through the issuance of a share for share stock dividend to Wizzard shareholders of record on September 5, 2012.  For purposes of the pro forma balance sheet as of June 30, 2012, the HHC was removed from Wizzard’s historical balance sheet as of June 30, 2012.


b.

The pro forma statement of operations and comprehensive income assumes that the Digital HKCo acquisition occurred on January 1, 2011. For purposes of the pro forma statement of operations for the year ended December 31, 2011, Digital HKCo's historical statements of operations for the year ended September 30, 2011 were combined with Wizzard's historical statement of operations for the year ended December 31, 2011.  For purposes of presenting pro forma financial statements, the results of operations of Digital HKCo listed here in column (b) are from October 1, 2010 to September 30, 2011, with an adjustment in column (e) to conform with the same period as that of Wizzard. For the purposes of the pro forma statement of operations for the six-month period ended June 30, 2012, Digital HKCo's historical statements of operations for the six-month period ended June 30, 2012 were combined with Wizzard's historical statement of operations for the six-month period ended June 30, 2012.


c.

The pro forma statement of operations assumes the spin-off of the Home Healthcare (HHC) subsidiary occurred on January 1, 2011.  For purposes of the pro forma statement of operations for the year ended December 31, 2011, the HHC was removed from Wizzard’s historical statement of operations for the year ended December 31, 2011. For purposes of the pro forma statement of operations for the six months ended June 30, 2012, the HHC was removed from Wizzard’s historical statement of operations for the six months ended June 30, 2012.


d.

The acquisition of Digital HKCo was accounted for by the purchase method of accounting. The adjustments reflect the estimated incremental amortization of  intangible assets resulting from the acquisition of Digital HKCo as if Wizzard owned Digital HKCo as of January 1, 2011:


 

 

Year ended

December 31,

2011

(in thousands)

Six Months

June 30,

2012

Depreciation and Amortization of assets

 

 

 

 

Amortization of non-compete – 2 year life

$

1,500

$

750

Amortization of work force – 5 year life

 

400

 

200

Amortization of intellectual property – 3 year life

 

1,000

 

500

Amortization of trademark– 15 year life

 

333

 

167

Amortization of customer relationships - 3 year life

 

1,667

 

833

 

 

 

 

 

 

$

4,900

$

2,450


        e.    Before the acquisition, the fiscal year end of Digital HKCo was September 30 while Wizzard has a

               fiscal year end of December 31. The following table   reflects the net of the results of operations and

               comprehensive income of Digital HKCo for the three month ended December 31, 2011 and for the

               three month ended December 31, 2010, in order to reconcile the results of operations and

               comprehensive income of Digital HKCo to conform with the operating results of Wizzard for the same

               period.





 

 

Historical

 

 

 

 

 

Digital HKCo

 

 

 

 

 

Three month ended

 

 

 

 

 

December 31,

(in thousands)

 

 

 

 

 

2011

 

2010

 

 

Net

 

 

 

 

 

 

 

 

Total Revenue

$

21,394

$

15,685

 

$

5,709

 

 

 

 

 

 

 

 

Cost of sales

 

13,751

 

10,573

 

 

3,178

Operating expense

 

1,346

 

1,410

 

 

(64)

Other income (loss)

 

353

 

(25)

 

 

378

Income Taxes

 

1,288

 

1,203

 

 

85

Net Income

 

5,362

 

2,474

 

 

2,888

Foreign Currency Gain (Loss)

 

170

 

107

 

 

63

Comprehensive Income

$

5,532

$

2,581

 

$

2,951


 f.     Shares anticipated to be issued in connection with acquisition Digital HKCo assumed to be

        outstanding for entire periods presented.


NOTE 4 - PROFORMA EARNINGS (LOSS) PER SHARE


The  proforma  earnings  (loss)  per  share  is  computed  based on the weighted average number of common shares  outstanding during the period plus the estimated  shares issued in the acquisition had the acquisition  occurred at the beginning of the periods presented (in thousands).


 

 

For the Six Months

 

For the Year

 

 

June 30, 2012

 

December 31, 2011

 

 

 

 

 

Weighted average number of Common shares outstanding

 

8,425

 

7,616

 

 

 

 

 

Shares issued in acquisition

 

37,945

 

37,945

 

 

 

 

 

Pro forma weighted average number of common shares outstanding during the period used in income per share after acquisition (denominator)

 

46,370

 

45,561