Consolidated Financial Statements
(Expressed in Canadian dollars)
LINGO MEDIA INC.
September 30, 2006 and 2005
(Unaudited)
The consolidated balance sheet of Lingo Media Inc. as at September 30, 2006 and the consolidated statements of operations, deficits and cash flows for the three months then ended have not been reviewed by the Company’s auditors. These financial statements are the responsibility of the management and have been reviewed and approved by the Company’s Audit Committee.
LINGO MEDIA INC.
September 30, 2006 and 2005
(Unaudited)
(Expressed in Canadian Dollars)
CONTENTS
| Page |
Consolidated Interim Balance Sheets | 3 |
Consolidated Interim Statements of Deficit | 4 |
Consolidated Interim Statements of Operations | 5 |
Consolidated Interim Statements of Cash Flows | 6 |
Notes to Interim Consolidated Financial Statements | 7 |
LINGO MEDIA INC.
Consolidated Interim Statements of Deficit
(Expressed in Canadian dollars)
(Unaudited)
| September 30 2006 | December 31 2005 |
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Assets |
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Current assets: |
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Cash | $ 15,924 | $ 144,337 |
Accounts and grants receivable (note 2) | 470,015 | 488,303 |
Prepaid and sundry assets | 110,534 | 134,348 |
Inventory | 32,963 | 34,084 |
| 629,436 | 801,072 |
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Investment and advances (note 3) | 182,520 | 182,520 |
Deferred costs (note 3) | 148,341 | 117,102 |
Property and equipment, net | 52,400 | 48,770 |
Development costs, net | 417,040 | 408,633 |
Acquired publishing content, net | - | 53,003 |
| $ 1,429,737 | $ 1,611,100 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable | $ 396,064 | $ 247,547 |
Accrued liabilities | 50,770 | 63,844 |
Unearned revenue | 145,945 | - |
Bank Loan (note 4) | 150,000 | 110,000 |
Loan payable (note 5) | - | 101,929 |
| 742,779 | 523,320 |
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Loan Payable (note 5) | 186,792 | - |
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Shareholders’ equity: |
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Capital stock (note 6) | 4,070,116 | 3,996,971 |
Contribute surplus | 464,543 | 288,437 |
Warrants | 30,849 | 30,849 |
Deficit | (4,065,342) | (3,228,477) |
500,166 | 1,087,780 | |
| $ 1,429,737 | $ 1,611,100 |
See accompanying notes to Consolidated Interim Financial Statements.
Approved on behalf of the Board:
“Michael Kraft”
Director
“Richard Boxer”
Director
LINGO MEDIA INC.
Consolidated Interim Statements of Deficit
(Expressed in Canadian dollars)
(Unaudited)
| Three months ended September 30 | Nine months ended September 30 | ||||||
2006 | 2005 | 2006 | 2005 | |||||
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Deficit, beginning for the period | $ | (3,750,004) | $ | (2,768,025) | $ | (3,228,477) | $ | (2,502,745) |
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Net loss for the period |
| (315,338) |
| (318,918) |
| (836,865) |
| (584,198) |
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Deficit, end of the period | $ | (4,065,342) | $ | (3,086,943) | $ | (4,065,342) | $ | (3,086,943) |
See accompanying notes to consolidated interim financial statements.
LINGO MEDIA INC.
Consolidated Interim Statements of Operations
(Unaudited)
(Expressed in Canadian dollars)
| Three months ended September 30 | Nine months ended September 30 | ||
| 2006 | 2005 | 2006 | 2006 |
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Revenue | $ 601 | $ 5,843 | $ 286,869 | $ 361,085 |
Direct costs | 157 | 3,543 | 38,262 | 48,682 |
Margin | 444 | 2,300 | 248,607 | 312,403 |
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Expenses: |
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General and administrative | 181,997 | 149,179 | 634,270 | 489,594 |
Amortization | 68,420 | 54,251 | 202,372 | 163,172 |
Stock-based compensation | 51,457 | 106,294 | 176,106 | 161,103 |
Interest and other financial expenses | 13,908 | 11,494 | 31,768 | 32,584 |
| 315,782 | 321,218 | 1,044,516 | 846,453 |
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Loss before income taxes and other taxes | (315,338) | (318,918) | (795,909) | (534,050) |
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Income taxes and other taxes | - | - | 40,956 | 50,148 |
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Net loss for the period | $ (315,338) | $ (318,918) | $ (836,865) | $ (584,198) |
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Loss per share | $ (0.01) | $ (0.01) | $ (0.03) | $ (0.02) |
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Weighted average number of common shares outstanding | 28,004,539 | 23,745,070 | 28,004,539 | 23,745,070 |
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See accompanying notes to consolidated interim financial statements.
LINGO MEDIA INC.
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Expressed in Canadian dollars)
| Three months ended September 30 | Nine months ended September 30 | ||
| 2006 | 2005 | 2006 | 2005 |
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Cash flows provided by (used in): |
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Operations: |
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Net loss for the period: | $ (315,339) | $ (318,918) | $ (836,865) | $ (584,198) |
Items not affecting cash |
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Amortization of property and equipment | 3,069 | 2,747 | 8,029 | 8,657 |
Amortization of development costs | 47,682 | 33,838 | 141,339 | 101,515 |
Amortization of acquired publishing content | 17,668 | 17,667 | 53,003 | 53,002 |
Amortization of software development costs | - | - | - | - |
Stock-based compensation | 51,457 | 106,294 | 176,106 | 161,103 |
Change in non-cash balances related to operations: |
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Accounts and grants receivable | 50,611 | (99,500) | 18,287 | 156,276 |
Prepaid and sundry assets | (32,934) | (311) | 23,813 | (5) |
Inventory | 157 | 2,141 | 1,121 | (11,186) |
Account payable | 24,083 | (188,622) | 148,518 | (137,094) |
Accrued liabilities | 13,194 | 8,025 | (13,075) | (7,467) |
Unearned revenue | 145,945 | 115,412 | 145,945 | 115,412 |
Cash (used in) provided by operating activities: | 5,593 | (321,227) | (133,779) | (143,985) |
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Financing: |
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Increase in bank loan | 35,000 | (5,000) | 40,000 | 50,000 |
Increase (decrease) in loan payable | (33,900) | (36,666) | 84,864 | 6,956 |
Issuance of capital stock | 19,000 | 635,790 | 73,145 | 635,790 |
Cash provided by financing activities | 20,100 | 594,124 | 198,009 | 692,746 |
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Investing: |
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Increase in investment and advances | - | (182,520) | - | (182,520) |
Purchase of property and equipment | (6,071) | (38) | (12,514) | (4,746) |
Development costs | (54,098) | (70,168) | (148,891) | (89,569) |
Increase in deferred cost | - | (114,345) | (31,239) | (114,345) |
Cash (used in) investing activities | (60,169) | (367,071) | (192,644) | (391,180) |
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Increase (decrease) in cash | (34,475) | (94,174) | (128,413) | 157,581 |
Cash, beginning of period | 50,399 | 281,546 | 144,337 | 29,791 |
Cash, end of period | $ 15,924 | $ 187,372 | $ 15,924 | $ 187,372 |
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Supplemental cash flow information: |
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Income taxes and other taxes paid | $ 43,104 | $ - | $ 76,452 | $ 68,884 |
Interest paid | $ 13,367 | $ 16,410 | $ 26,924 | $ 37,500 |
See accompanying notes to Consolidated Interim Financial Statements.
LINGO MEDIA INC.
Consolidated Interim Statements of Deficit
(Unaudited)
(Expressed in Canadian Dollars)
Lingo Media Inc. (the "Company") develops, publishes, distributes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school and retail bookstore market in China and for the educational school market in Canada.
1. Significant accounting policies:
(a)
Basis of presentation:
The disclosures contained in these unaudited interim consolidated financial statements do not include all the requirements of generally accepted accounting principles (GAAP) for annual financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2005.
The unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary to present fairly the financial position of the Company as of September 30, 2006 and the results of operations and cash flows for the nine months ended September 30, 2006 and 2005.
2. Accounts and grants receivable:
Accounts and grants receivable consist of:
| September 2006 | December. 2005 | |||
Trade receivables |
| $ 380,926 |
| $ 466,483 | |
Grants receivables |
| 89,089 |
| 21,820 | |
Total |
| $ 470,015 |
| $ 488,303 |
3. Deferred costs, investment and advances:
In June 2005, the Company signed a definitive Joint Venture Agreement (“JV Agreement”) with Sanlong Cultural Communication Co. Ltd. (“Sanlong”). The joint venture company will be known as Hebei Jintu Education Book Co. Ltd. (“Jintu”). Jintu will continue Sanlong’s recently launched direct-to-consumer business of distributing educational newspapers and product extensions located in Shijiazhuang, Hebei Province, China. Under the JV Agreement, Lingo Media will invest approximately CDN $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The closing is subject to government approval in China.
Pursuant to the June 2005 agreement, as at September 30, 2006 the Company advanced funds for working capital to Sanlong through a trust of $182,520 with a view to establishing Jintu and incurred $148,341 in expenditures related to pre-operating costs.
4. Bank loan:
In May 2004, the company negotiated a line of credit of $150,000 with its bank. The line of credit bears interest at prime plus 2.5% per annum, is due on demand, and is secured by the Company’s accounts receivables from customers in China, which, in turn, are insured by the Export Development Corporation. At September 30, 2006, $150,000 (December 2005: $110,000) of the line of credit was utilized.
LINGO MEDIA INC.
Consolidated Interim Statements of Deficit
(Unaudited)
(Expressed in Canadian Dollars)
5. Loans payable:
Loans payable consists of the following:
| September 2006 | December. 2005 |
Loan payable, due to a corporation controlled by a director, is interest bearing at 12% per annum and is secured by a general security agreement and is due on October 31, 2007 (December 2005: due on demand) | $ 56,000 | $ 51,649 |
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Unsecured loan payable, due to a non-related party, interest bearing at 12% per annum, with no fixed terms of repayment | - | 50,280 |
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Unsecured loan payable, due to a non-related party, interest bearing at 12% per annum, due on October 31, 2007 | 80,315 | - |
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Unsecured loan payable, due to a non-related party, interest bearing at 12% per annum, due on October 31, 2007 | 50,477 | - |
| $ 186,792 | $ 101,929 |
Less: Current Portion | - | (101,929) |
| $ 186,792 | $ - |
6. Capital Stock:
(a) Issued
| Common Shares | ||
Number | Amount | ||
Balance, January 1, 2006 | 27,874,773 | $3,996,971 | |
Issued: |
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| Option exercised | 545,500 | 73,145 |
Balance, September 30, 2006 | 28,420,273 | $4,070,116 |
LINGO MEDIA INC.
Consolidated Interim Statements of Deficit
(Unaudited)
(Expressed in Canadian Dollars)
(b) Options
| Weighted |
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Number of Options | Average Exercise Price | |
Outstanding, January 1, 2006 | 3,683,334 | $ 0.17 |
Exercised | (545,500) | 0.12 |
Issued | 100,000 | 0.15 |
Outstanding, September 30, 2006 |
3,237,834 | $0.18 |
Options exercisable, September 30, 2006 |
2,919,501 | $0.17 |
(c) Warrants
As of September 30, 2006 the Company had no (December 2005: 1,837,500) warrants and no (December 2005:118,650) compensation warrants outstanding.
7. Government grants:
Included as a reduction of general and administrative expenses are government grants of $132,835 (2005 – $182,506), relating to the Company's publishing projects in China and Canada.
Certain government grants are repayable in the event that the Company's annual net income for each of the previous two years exceeds 15% of revenue. During the year, the conditions for the repayment of grants did not arise and no liability was recorded.
8.
Segmented information:
The Company operates as an international business and has no distinct reportable business segments.
The Company develops, publishes, distributes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school and retail bookstore market in China and for educational school market in Canada.
The Company's revenue by geographic region based on the region in which the customers are located is as follows:
LINGO MEDIA INC.
Consolidated Interim Statements of Deficit
(Unaudited)
(Expressed in Canadian Dollars)
The Company's revenue by geographic region based on the region in which the customers are located is as follows:
Nine months ended September 30 | 2006 | 2005 |
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Canada | $ 4,415 | $ 15,237 |
China | 282,454 | 345,848 |
| $ 286,869 | $ 361,085 |
The majority of the Company’s identifiable assets as at March 31, 2006 are located in Canada, except for $182,520 (December 2005: $182,520) that are located in China.
9. Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):
These consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada. Except as set out below, these financial statements also comply, in all material aspects, with the United States generally accepted accounting principles.
The following tables reconcile results as reported under Canadian GAAP with those that would have been reported under United States GAAP.
Statements of Operations:
Nine months ended September 30 | 2006 | 2005 |
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Loss for the period- Canadian GAAP | $ (836,865) | $ (584,198) |
Impact of United States GAAP and adjustments |
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Amortization of development costs (a) | 141,339 | 101,515 |
Deferred costs (g) | - | - |
Loss for the year – United States GAAP | $ (695,526) | $ (482,683) |
9. Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP") (continued):
The cumulative effect of these adjustments on the consolidated shareholders' equity of the Company is as follows:
| September 30 2006 | December 31 2005 |
Shareholders’ equity – Canadian GAAP | $ 500,166 | $ 1,087,780 |
Development costs | (249,849) | (102,624) |
Compensation expense | (243,250) | (243,250) |
Deferred costs | (148,341) | (117,102 |
Shareholders’ equity – United States GAAP | $ (141,274) | $ 624,804 |
Under United States GAAP, the amounts shown on the consolidated balance sheets for development costs would be $167,190 (December 2005: $306,009).