Trading Symbols (TSX V:LMD; OTC BB: LNGMF) 151 Bloor St West Kenzo Oriental Tower 11K Suite 703 48 Dongzhimenwai Dajie Toronto, Ontario Dongcheng District Canada M5S 1S4 Beijing 100027 China Tel : 416.927.7000 Tel: 86.10.5160.0689 Fax : 416.927.1222 Fax: 86.10.5160.0788 www.lingomedia.com | |
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Form 51 – 102 F1
Management Discussion and Analysis
First Quarter Ended March 31, 2007
(Unaudited – Prepared by Management)
May 29, 2007
Notice to Reader
Management has compiled the unaudited financial statements of Lingo Media Inc. (“Lingo Media” or the “Company”) consisting of the interim consolidated Balance Sheets as at March 31, 2007 and the interim Statements of Deficit, Operations, and Cash Flows for the three months ended March 31, 2007. All amounts are stated in Canadian dollars. An accounting firm has not reviewed or audited this interim financial information.
2007 First Quarter
Management Discussion and Analysis
The following management discussion and analysis is prepared as of May 29, 2007 (the “Report Date”) and should be read in conjunction with the interim financial statements for the three months ended March 31, 2007 and the Company’s annual financial statements for the year ended December 31, 2006. These documents can be found on the SEDAR website, www.sedar.com.
Where we say “we”, “us”, “our”, “Lingo Media“ or the ”Company“, we mean Lingo Media Inc. and its subsidiaries unless otherwise indicated. All amounts are presented in Canadian dollars unless otherwise indicated.
Forward Looking Statements
This report may contain forward-looking statements, which reflect our expectations regarding the future performance, business prospects and opportunities of the Company. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward looking statements involve significant risks and uncertainties and a number of factors, most of which are beyond the control of the Company, could cause actual results to differ materially from results discussed in the forward-looking statements. Although the forward-looking statements contained in this report are based on what we believe to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward looking statements. Changes in circumstances in the future, many of which are outside of management's control, will impact on the Company's estimates o f future recoverability of net amounts to be realized from their assets. Actual results, sales levels, performance, or achievements could differ materially from those projected herein and depend on a number of factors, including the uncertainties related to the geographical region in which the Company operates and its ability to augment its existing revenue streams with new revenue opportunities thereafter.
2
Lingo Media Inc. (TSX V: LMD) Management Discussion & Analysis
Description of Business
The Company operates two distinct reportable business segments as follows:
English Language Learning: The Company develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China.
Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Calgary, Edmonton, Vancouver and Toronto.
English Language Learning - China:
Lingo Media earns royalty revenues from its key customer, People’s Education Press (“PEP”), a Chinese State Ministry of Education publisher on the following basis:
·
Finished Product Sales – PEP prints and sells Lingo Media’s English language learning programs to provincial publishers in China;
·
Licensing Sales – PEP licenses Lingo Media’s English language learning programs to provincial publishers who then print and sell the programs in China.
Lingo Media earns a significantly higher royalty rate from Finished Product Sales compared to Licensing Sales.
In accordance with the Co-Publishing Agreement between PEP and Lingo Media, PEP pays to Lingo Media a royalty on print runs of Finished Product Sales and a royalty on actual revenues of Licensing Sales. PEP provides Lingo Media with print run reconciliations on a semi-annual basis as their reporting systems are unable to provide quarterly sales information. Under the Co-Publishing Agreement, Lingo Media invoices PEP on a quarterly basis at 40% of the prior six months actual sales. PEP then provides a reconciliation of the royalty revenues for Q1 and Q2 of August 31st and for Q3 and Q4 by March 31st.
The Company invoices PEP on a quarterly basis so as to maintain a consistency in its cash flows throughout the year. Amounts received from these invoices are recorded as unearned revenues during the respective quarter and reconciled to actual earned revenues at the end of Q2 and Q4.
Early Childhood Development - Canada:
In December 2006, Lingo Media acquired a 62.33% controlling interest in A+ Child Development (Canada) Ltd. (“A +”). In March 2007, Lingo Media acquired an additional 8% interest, resulting in a 70.33% ownership interest. A+ derives revenues from publishing and distribution of educational materials aimed at the early childhood market on a direct to consumer basis. A+ has developed a proprietary curriculum for parents to use with their children based on the latest neuroscience research. To date, A+ has focused its marketing efforts only in Canada. With Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children in China. Future plans also include an expansion of A+’s markets to the United States and Latin America.
Under the terms of the acquisition, Lingo Media:
i)
acquired 50.33% of the outstanding capital stock of A+ from its shareholders for the purchase price of CAD$730,000 satisfied by issuing 2,650,000 common shares of Lingo Media and paying CAD$200,000 cash;
ii)
invested CAD$150,000 in A+ for an additional 12% interest;
iii)
subsequent to the year end, in March 2007, invested a further CAD$100,000 in A+ for an additional 8% interest; and
iv)
issued an additional 3,000,000 common shares to be held in escrow for the selling shareholders of A+ subject to meeting annual earnings milestones and released over a three-year period with a maximum of 1,000,000 shares released per year;
Revenue Recognition Policy
In China, royalty revenues from sales by licensees of finished products are recognized upon the confirmation of production runs. Royalty revenues from audiovisual products are recognized upon the confirmation of sales, and when collectibility is reasonably assured. Royalty revenues are not subject to right of return or product warranties. Amounts received in advance of the confirmation are treated as customer deposits. Revenues from the sale of published and supplemental products are recognized upon delivery and when the risk of ownership is transferred and collectibility is reasonably assured.
In Canada, revenues from the sale of educational products are recognized at the time of delivery and when the risk of ownership is transferred and collectibility is reasonably assured.
Overall Performance
China
With in excess of 165 million copies of published titles to date, Lingo Media continues to maintain its dominant market position in the primary English language learning publishing market in China.
Lingo Media’s key customer in China, PEP, represents a significant portion of its overall revenues on an annual basis and therefore the Company’s management team in China is focused on maintaining and further advancing this relationship.
Based on the Company’s current practice of recording revenues from China, the Company does not recognize revenues from China in Q1. In the past, the Company estimated Q1 revenues based on prior results, and reconciled the estimates to actual results provided by PEP in the next quarter. However this practice has been revised such that only revenues based on actual sales information provided on a semi-annual basis are being recognized. Revenues from China for Q1 2007 are $nil compared to $nil for the corresponding Q1 2006 and the financial statements for the second quarter will provide the sales information for both Q1 and Q2 in aggregate.
Although the Company is in its seventh year of its co-publishing contract with PEP, Lingo Media is developing in excess of ten new programs and has launched one new program to augment its existing royalty revenue stream.
·
The Company signed a Cooperation Agreement in Q2 2006, with Phoenix Publishing & Media Group (“PPMG”), the largest provincial publisher in China. PPMG is situated in the Jiangsu Province, an affluent province on the Yangtze Delta. This agreement will extend the Company’s content development, co-publishing and distribution of textbooks and supplemental books into new markets through PPMG’s numerous subsidiary companies and already established distribution channels in Jiangsu and neighbouring provinces.
·
During Q3-2006, the Company secured a publishing agreement with Yilin Press, a subsidiary of PPMG. The Company is co-publishing a four level vocational English learning program calledVocational English for College with Yilin Press. This publishing agreement will pay Lingo Media a royalty of 3.3% of the list price and 49% of profits generated from the sale of theVocational English for College over a four year term with an option to revise the program for an additional four years. This is the first project under the newly executed Cooperation Agreement with PPMG.
Canada
In Canada, Lingo Media earns its revenues through A+, its recently acquired subsidiary effective October 1, 2006.
A+ publishes and distributes educational materials aimed at the early childhood market. A+ has developed a proprietary curriculum for parents to use with their children based on the latest neuroscience research. A+ has focused its efforts in Canada and with Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children across China. Future plans also include an expansion in to the United States and Latin America.
Revenues and expenses of A+ for the 3-month period ending March 31, 2007 are consolidated in the operations of Lingo Media. Lingo Media reported revenues of $667,533 and expenses of $738,140 from A+. The expenses for this period are higher due to the non-recurring integration costs.
Market Trends and Business Uncertainties
Lingo Media believes that the trend in English language learning in China is strong and growing. The State Ministry of Education in China (MOE) is expanding its mandate for the teaching of English learning programs to students. Although the outlook for learning English in China remains positive,there can be no assurance that this trend will continue or that the Company will benefit from this trend.
In Canada, pre-school supplemental education market remains strong, there can be no assurance that this trend will continue or that the Company will benefit from this trend.
General Financial Condition
Financial Highlights
| Q1-2007 | Q1-2006 |
Revenues: |
|
|
China | - | - |
Canada | 667,533 | 2,397 |
| 667,533 | 2,397 |
Net Loss | (309,674) | (309,640) |
Total Assets | 2,817,574 | 1,521,195 |
Long Term Debt | (394,771) | - |
Working Capital (Deficiency) | (400,655) | 27,827 |
Cash Flow Used in Operations | (118,773) | (31,743) |
As at March 31, 2007, the Company had a working capital deficiency of ($400,655) compared to a surplus of $27,827 for the quarter ended March 31, 2006. Net loss for the quarter ended March 31, 2007 was ($309,674) compared to a net loss of ($309,640) for the quarter ended March 31, 2006.
As at March 31, 2007, the bank line of credit had an outstanding balance of $125,000. This bank facility bears interest at prime plus 2.5% per annum, is due on demand and is secured by Company’s China receivables which are, in turn, insured by the Export Development Corporation.
As of March 31, 2007, the Company’s newly acquired subsidiary A+ had a credit line of $500,000 with an outstanding balance of $360,000. This bank facility bears interest at prime plus 2% per annum and is secured by a Guaranteed Investment Certificate of $150,000 and a charge on all assets of A+.
The Company received government grants to subsidize certain expenses in the first quarter of 2007. During the quarter, the Company received $28,750 (Q1-2006 – $35,392) in government support, relating to the Company's publishing projects in China.
The Company had cash on hand as at March 31, 2007 of $133,299 and continues to rely on its recurring royalty stream and future equity and/or debt financings to fund its operations.
3
Lingo Media Inc. (TSX V: LMD) Management Discussion & Analysis
Results of Operations
Revenue and Margin
Lingo Media earned revenues in China and Canada as follows:
| English Language Learning | Early Childhood Development | Total |
Revenue | $ 587 | $ 666,946 | $ 667,533 |
Cost of Sales | 235 | 139,339 | 139,574 |
Margin | $ 352 | 527,607 | $ 527,959 |
Revenues from China for the quarter ended March 31, 2007 were $nil compared to $nil for Q1-2006. The Company continues to advance its relationship with PEP and has developed new programs to maintain and increase its royalty revenue.
In July 2006, the Company entered into a publishing agreement with Yilin Press to co-publish aVocational English For College program in China. In addition, the Company developed a new educational program –Lingo Kindergarten English – aimed at China’s vast pre-school market.
Lingo Media has expanded its in-house product development team with the appointment of Suzanne Robare as its Managing Editor in order to develop new English language learning programs. The Company has also appointed Jenny Bao as Director of Marketing to enhance its relationships with existing customers and to secure new business.
In 2006, Lingo Media expanded into early childhood development sector through the acquisition of A+ effective October 1, 2006. A+ publishes and distributes educational materials aimed at the early childhood market. A+ has developed a proprietary curriculum for parents to use with their children based on the latest neuroscience research. A+ has focused its efforts in Canada and with Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children across China. Future plans also include an expansion to the United States and Latin America.
The Company had unearned revenues of $177,778 as at March 31, 2007 as compared to $123,000 as at March 31, 2006.
General and Administrative
General and administrative costs consist of executive compensation, consulting fees, office administration, rent, marketing, professional fees, shareholders services, any foreign exchange losses or gains and government grants which are offset against the general and administration expenses incurred during the period.
General and administrative expenses were $770,319 during the first quarter of 2007 as compared to $178,927 for the similar period of 2006. Overall, general and administrative expenses increased due to the acquisition and consolidation of A+ operations into the financials of Lingo Media for the first quarter of 2007. Below is the detailed analysis of general and administrative expenses for the quarter ended March 31, 2007:
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Lingo Media Inc. (TSX V: LMD) Management Discussion & Analysis
| Early Childhood Development | English Language Learning | Total |
| English Language Learning |
|
| Q1-2007 |
|
| Q1-2006 |
Advertising and Promotion | 1,862 | 5,012 | 6,874 |
| 2,292 |
Selling | 403,823 | - | 403,823 |
| - |
Executive Compensation | - | 35,521 | 35,521 |
| 36,777 |
Consulting fees and Employee Compensation | 84,140 | 86,429 | 170,569 |
| 117,692 |
Travel | 12,454 | 3,517 | 15,971 |
| 16,365 |
Administration | 36,258 | 32,421 | 68,679 |
| 30,912 |
Premises | 33,142 | 31,701 | 64,843 |
| 27,071 |
Equipment Leases | 3,166 | 4,089 | 7,255 |
| 2,685 |
Foreign Exchange | - | (9,768) | (9,768) |
| (39,057) |
Shareholder | - | 5,120 | 5,120 |
| 9,947 |
Professional Fees | 4,862 | 25,320 | 30,182 |
| 9,636 |
| 579,707 | 219,362 | 799,069 |
| 214,319 |
Less: Grants |
| (28,750) | (28,750) |
| (35,392) |
Total | 579,707 | 190,612 | 770,319 |
| 178,927 |
Government Grants
The Company makes applications to the Canadian government for various types of grants to support its publishing and international marketing activities. Each year, the amount of any grant may vary depending on certain eligibility criteria (including prior year revenues) and the monies available to the pool of eligible candidates.
These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The Company records a liability for the repayment of the grants in the period in which conditions arise that will cause the government grant to be repayable. 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 quarter, the conditions for the repayment of grants did not arise and no liability was recorded. Included as a reduction of general and administrative expenses, are government grants of $28,750 for the first quarter of 2007 (Q1-2006 – $35,392), relating to the Company's publishing projects in China. While the Company will continue to apply for various government grants to fund its ongoing development and market expansion, there can be no assurance the Company will be successful in obtaining these grants in the future, that the Company will meet the eligibility requirements for the grants or that the programs will still be offered for qualifying companies.
Foreign Exchange
Included in general and administrative expenses is a foreign exchange loss of approximately $9,768 as compared to a gain of $39,057 during the first quarter of 2006, relating to the Company's currency risk through its activities denominated in foreign currencies as the Company is exposed to foreign exchange risk as a substantial portion of its revenue is denominated in US dollars and Chinese Renminbi.
Interest on Debt
During the quarter, the Company had loans payable bearing interest at 12 % (Q1-2006 - 12%) per annum. Interest expense related to these loans for the first quarter of 2007 is $11,366 (Q1-2006 - $1,479). At March 31, 2007, $394,771 (Q1-2006 - $52,992) was due to those lenders.
In addition, the Company has revolving lines of credit bearing interest at prime plus 2% and 2.5% per annum. These bank facilities are supported by general security agreements, a short term investment and a charge against the Company’s accounts receivable and inventory. Interest expense paid on the loan for the quarter is $18,646 (Q1-2006: $1,802). The outstanding balance of these loans at quarter-end was $485,000.
Amortization
The following is a summary amortization schedule:
| Q1-2007 |
| Q1-2006 |
Property Plant and Equipment | 4,120 |
| 2,401 |
Development Costs | 16,598 |
| 46,199 |
Acquired Publishing Content | - |
| 17,668 |
| 20,718 |
| 66,268 |
Amortization expense includes amortization of property and equipment, development costs and acquired publishing content. The amortization charge for Q1-2007 was $20,718 (Q1-2006 - $66,268). This represents a significant decrease over 2006 due to reduced carrying values of development costs.
Stock-Based Compensation
The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During the first quarter of 2007, the Company expensed $17,154 compared to $62,325 during Q1-2006.
Net Loss
The Company reported a net loss of ($309,674) for the first quarter of 2007 as compared to a net loss of ($309,640) for Q1-2006. The Company reported taxes paid of $nil for the first quarter ended March 31, 2007 compared to taxes paid of $nil during the first quarter of 2006.
Summary of Quarterly Results
| Q2-05 | Q3-05 | Q4-05 | Q1-06 | Q2-06 | Q3-06 | Q4-06 | Q1-07 |
|
|
|
|
|
|
|
|
|
Revenue | 349,768 | 5,843 | 545,272 | 2,397 | 283,871 | 601 | 1,287,468 | 667,533 |
Income (Loss) Before Taxes | 350 | (318,918) | (12,695) | (309,640) | (170,931) | (315,339) | 159,880 | (309,674) |
Net Income (Loss) | 350 | (318,918) | (141,534) | (309,640) | (211,886) | (315,339) | 87,941 | (309,674) |
Liquidity and Capital Resources
As at March 31, 2007, the Company had bank indebtedness of $16,701 (Q1-2006 - $14,779), short term investment of $150,000 and accounts and grants receivable of $251,805 (Q1-2006 - $533,511). The Company’s total current assets amounted to $933,049 (Q1-2006 - $705,613) with current liabilities of $1,333,852 (Q1-2006 - $677,786) resulting in a working capital deficiency of $400,802 (Q1-2006 - working capital of $27,827).
During the course of Q1-2007, the Company received $5,000 through the exercise of stock options. The Company secured additional loans in the amount of $47,230. As at March 31, 2007, the company had two lines of credit with a balance outstanding of $485,000. First bank facility is secured by the accounts receivable from China, which in turn are insured by the Export Development Corporation. Second bank facility is secured by a General Security Agreement and the short-term investment of $150,000.
The Company receives government grants based on certain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The Company receives these grants throughout the quarter from different agencies and government programs. Each grant is applied for separately based on the Company either meeting certain eligibility requirements. The Company has relied on obtaining these grants for its operations and has been successful at securing them in the past but it cannot be assured of obtaining these grants in the future.
Government grants received during Q1-2007 were $28,750 compared to $35,392 in Q1-2006.
The Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans in addition to finance ongoing working capital needs resulting therefrom. The Company has been successful in raising sufficient working capital in the past.
Contractual Obligations
Future minimum lease payments under operating leases for premises and equipment are as follows:
|
|
2007 | 304,539 |
2008 | 277,794 |
2009 | 182,937 |
2010 | 128,409 |
2011 | 21,521 |
Commitments
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”) to be 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 regulatory approval, specifically government approval in China. Pursuant to the June 2005 agreement, as at March 31, 2007 the Company had advanced $182,520 to fund working capital needs of Sanlong through a third party and incurred $154,419 in expenditures related to pre-operating costs. The joint venture is awaiting government approval in China.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance finance arrangements.
Transactions with Related Parties
During the quarter, the Company had the following transactions with related parties, made in the normal course of operations, and accounted for at an amount of consideration established and agreed to by the Company and related parties.
Consulting fees of $30,000 (Q1-2006 - $30,000) were paid/accrued to a company controlled by a director of the Company in the normal course of business. At March 31, 2007, a balance outstanding of $33,452 (Q1-2006 - $14,980) is included in accounts payable.
In Q1-2007, the Company was reimbursed $7,500 (Q1-2006 - $4,500) from a corporation with one director in common for rent, administration, office charges and telecommunications.
Proposed Transactions
The Board of Directors will continue to evaluate new transaction as part of the Company’s China Expansion Plan and North American Expansion Plan.
Additional Disclosure
Development Costs
Development Costs consist of the following:
| Mar-2007 | Dec-2006 |
Cost | $ 1,669,773 | $ 1,646,446 |
Less: Accumulated Amortization | (1,319,736) | (1,303,138) |
| $ 350,037 | $ 343,308 |
Acquired Publishing Content
Acquired Publishing Content consists of the following:
| Mar-2006 | Dec-2006 |
Cost | $ 353,349 | $ 353,349 |
Less: Accumulated Amortization | (353,349) | (353,349) |
| $ - | $ - |
Property and Equipment
Property and Equipment consist of the following:
| Mar-2006 | Dec-2006 |
Cost | $ 176,409 | $ 176,409 |
Less: Accumulated Amortization | (103,061) | (99,105) |
| $ 73,348 | $ 77,304 |
Disclosure of Outstanding Share Data
Common Shares outstanding as at March 31, 2007
32,628,170
Stock Options outstanding to purchase Common Shares
3,529,437
There are no other dilutive securities of the Company outstanding at March 31, 2007.
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures (as required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators). These responsibilities include: (i) designing the Company’s disclosure controls and procedures, or causing them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period during which the annual filings are being prepared; and (ii) evaluating the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the annual filings and causing the Company to disclose in this MD&A their conclusions about the effec tiveness of the disclosure controls and procedures based on such evaluation.
Lingo Media’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006 in providing reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
Internal Control over Financial Reporting
The Company’s Chief Executive Officer and Chief Financial Officer are also responsible for establishing and maintaining internal control over financial reporting (as required by Multilateral Instrument 52-109). These responsibilities include: (i) designing the Company’s internal control over financial reporting, or causing it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP; and (ii) causing the Company to disclose in this MD&A any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Internal control over f inancial reporting should include policies and procedures that establish, among others, the following items:
·
Maintenance of records in reasonable detail, that accurately and fairly reflect the transactions and dispositions of the Company’s assets;
·
Reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable GAAP;
·
Receipts and expenditures are only being made in accordance with authorizations of management and the Board of Directors; and
·
Reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Due to its inherent limitations, internal controls over financial reporting may not prevent or detect is statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the Chief Executive Officer and the Chief Financial Officer, carried out an assessment of the design of the Company’s internal controls over financial reporting and concluded that the following weaknesses existed as at December 31, 2006 and required disclosure. These items have been reported to the Audit Committee and the Board of Directors, and the remedial actions described below have been mandated by the Board.
Policies and Procedures
The Company did not maintain a complete set of policies and procedures governing decision and authorization processes. As such, reliance was placed on management’s substantive review of period end balances, transactions recorded in each period, scrutiny of business activity and centralized cash management to detect errors and ensure the financial statements do not contain material misstatements. The Company assigned dedicated staff to formulate a plan, using a generally recognized framework, to document key processes and controls, and initiated the creation of a comprehensive set of policies and procedures. The completion of documentation and implementation of the initiative will continue in 2007.
Segregation of Duties
Due to resource constraints, the Company is reliant on the performance of compensating procedures during its financial close process in order to ensure that the financial statements are presented fairly and accurately, in all material respects. Additional compensating control procedures have been performed in the preparation of our financial statements to ensure their reliability.
These compensating controls include:
·
Review of all balances and reconciliations;
·
Review of bank registers and disbursement details in risk locations; and
·
Analytical review and analysis of performance against expectations.
During 2006, the Company enhanced internal controls over financial reporting by introducing the following additional changes:
·
Improved budgetary controls; and
·
Strengthened technical expertise in the accounting and finance areas of the organization.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Foreign Currency Risk
We operate one segment of our business in China, and a substantial portion of our operating expenses and development expenditures are in Canadian dollars, whereas our revenue (current and potential) from co-publishing agreements are, and will be, primarily in US dollars. A significant adverse change in foreign currency exchange rates between the Canadian dollar relative to the US dollar could have a material effect on our consolidated results of operations, financial position or cash flows. We have not hedged exposures denominated in foreign currencies, as they are not material at this time.
Other Risks and Uncertainties
If any of the following risks occur, our business, results of operations or financial condition could be materially adversely affected.
We have not generated significant revenue to date in China or in Canada nor can we be assured of generating significant future revenues.
The Company continues to pursue its China Expansion Plan. There can be no assurance that any of the discussions or negotiations currently underway will lead to an executed transaction or mutually agreeable business arrangements.
We may not achieve our projected China Expansion Plan in the time frames we announce and expect.
If we cannot raise additional capital on acceptable terms, we may be unable to complete our China Expansion Plan.
If we are unable to protect our intellectual property rights in China, our competitors may develop and market products with similar features that may reduce demand for our products. It is nonetheless, difficult at best to protect your intellectual property rights in China.
If our major customer and manufacturer/distributor of our products in China fails to devote sufficient time and resources to our business, or if their performance is substandard, our revenues will be adversely affected.
We currently have a single key customer in China that represents over 56% (2005: 95%) of the Company’s overall revenues.
We have no experience in directly distributing our products in China and no internal capability to do so yet.
We have and will continue to establish collaborative relationships, and those relationships may expose us to a number of other unidentifiable risks.
If we are unable to retain key personnel and hire additional qualified sales and marketing, and other personnel, we may not be able to successfully achieve our goals.
We have international operations that expose us to additional business risks.
We may incur losses associated with foreign currency fluctuations.
Competition in the educational publishing industry is intense, and if we fail to compete effectively our financial results will suffer.
Our share price may be volatile, and an investment in our common shares could suffer a decline in value.
Future sales of common shares by us or our existing shareholders may cause our stock price to fall.
We have never paid dividends on our common shares, and we do not anticipate paying any cash dividends in the foreseeable future.
Approval
The Audit Committee of Lingo Media has approved the disclosure contained in this MD&A.
Additional Information
Additional information relating to the Company can be found on SEDAR atwww.sedar.com.
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Lingo Media Inc. (TSX V: LMD) Management Discussion & Analysis
SIGNATURE
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 hereunder duly authorized.
LINGO MEDIA INC.
June 01, 2007
By: “Khurram Qureshi”________
President and Chief Executive Officer
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Lingo Media Inc. (TSX V: LMD) Management Discussion & Analysis