UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULES 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2004
Commission File Number: 333-98397
LINGO MEDIA INC.
______________________________________________________________
151 Bloor Street West, Suite 890, Toronto, Ontario Canada M5S 1S4
_______________________________________________________________
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F [ X ] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information in this Form is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [ X ]
151 Bloor St West, Ste 890
Toronto ON
Canada, M5S 1S4
T +1 416 927 7000
F +1 416 927 1222
www.lingomedia.com
Form 51 – 102 F1
Management Discussion and Analysis
Third Quarter Ended September 30, 2004
(Unaudited – Prepared by Management)
April 15, 2005
Notice to Reader
Management has compiled the unaudited financial statements of Lingo Media Inc. (“Lingo Media” or the “Company”) consisting of the amended interim consolidated Balance Sheet as at September 30, 2004 and the amended interim Statements of Deficit, Operations, and Cash Flows for the nine months ended September 30, 2004. All amounts are stated in Canadian dollars. An accounting firm has not reviewed or audited this amended interim financial information.
2004 Third Quarter
Management Discussion and Analysis
The following management discussion and analysis is prepared as of April 15, 2005 (the “Report Date”) and should be read in conjunction with the amended interim financial statements for the nine months ended September 30, 2004 and the Company’s annual financial statements for the year ended December 31, 2003. These amended documents can be found on the SEDAR website atwww.sedar.com dated March 29, 2005.
Description of Business and Report Date
Lingo Media earns its revenues in two distinct geographic markets, China and Canada. Each market has its own distinct revenue stream and is accounted for differently from a revenue recognition standpoint. The Company develops, publishes, distributes and licenses books, audio/video cassettes, CD-based products and supplemental products for English language learning for the educational school and retail bookstore markets in China and in the school market in Canada.
In China, Lingo Media earns its royalty revenues from its key customer, People’s Education Press (“PEP”), a Chinese state-owned educational publisher on the following basis:
·
Finished Product Sales – PEP prints and sells Lingo Media’s English language learning programs to provincial distributors in China;
·
Licensing Sales – PEP licenses Lingo Media’s English language learning programs to provincial publishers who then print and sell the programs to provincial distributors 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 is entitled to invoice PEP on a quarterly basis at 40% of the prior six months actual sales. Consequently, Lingo Media historically recorded estimates for Q1 and Q3 revenues based upon an amount that is equal to 40% of the prior six months royalties reported by PEP. PEP then provides a reconciliation of the royalty revenues for Q1 and Q2 by the end of August and for Q3 and Q4 by the end of March. These estimates have historically been close to actual results.
During 2004, the Chinese State Ministry of Education (“MOE”) mandated PEP to increase its market share by shifting from Finished Product Sales to Licensing Sales. The Company was only informed of this change in 2005. As a result of this new MOE stance, PEP had significantly reduced the size of its print runs for Finished Product Sales in 2004 and is now focusing on Licensing Sales. The impact of this new policy stance resulted in significantly lower revenues from Finished Product Sales and only a marginal increase in Licensing Sales revenues in 2004. Given this change in the royalty revenue mix, the Company will no longer record revenues based on estimates and will only recognize revenues based on reconciliations provided by PEP on a semi-annual basis. The Company will still continue to invoice PEP on a quarterly basis so as to maintain a consistency in its cash flows thr oughout the year. Amounts received from these invoicing practices shall be recorded as unearned revenues during the respective quarter and will be reconciled to actual earned revenues at the end of Q2 and Q4.
The Company has implemented a revision in its revenue recognition policy on a retroactive basis. Lingo Media will now only recognize revenue at the end of June and at the end of December when it can reconcile to actual royalty revenues reported by PEP. Funds received for Q1 and Q3 will be recorded as customer advances and not as revenues. The Company has re-stated its Q1, Q2 and Q3 2004 financial statements to reflect this revision.
For 2003, the above revision of revenue recognition resulted in different numbers for Q1, Q2 and Q3 being recorded. However, the aggregate revenues for the fiscal year did not change. For 2004, the same revenue recognition change is now reflected in the Q1 and Q2 financial statements and will continue to be recorded in accordance with its new revised policy. PEP has recently provided Lingo Media with reconciled royalty amounts for 2004. Revenues from Licensing Sales increased marginally as a result of the MOE’s new stance and at the same time revenues from Finished Product Sales declined significantly. The Company expects that there will be an overall reduction in revenue in fiscal 2004 in comparison with fiscal 2003.
In Canada, the Company sells its products, The Outloud Program, directly into the school market mainly in the Province of Ontario.
Overall Performance
China
Having sold over 75 million copies of published titles, Lingo Media continues to maintain its 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 developing its relationship.
Based on the Company’s new practice of recording revenues from China, the Company will no longer recognize revenues from China in Q1 or Q3. In the past, the Company estimated Q1 and Q3 revenues based on prior results, as PEP provides Lingo Media with print run reconciliations on a semi-annual basis as their reporting systems are unable to provide quarterly sales information. However this practice has been revised such that only revenues based on actual sales information provided on a semi-annual will be recorded. Hence, the Q2 reconciliations will provide the sales information for both Q1 and Q2 in aggregate and Q4 reconciliations will provide the information for both Q3 and Q4 in aggregate.
Revenues from China for Q3 2004 have been revised to $nil and revenues for Q3 2003 have been revised to $nil respectively.
Canada
The Canadian school market continues to utilize English language learning materials like The Outloud Program currently offered by the Company. Lingo Media continues to pursue this market throughout the Province of Ontario and in select markets in other provinces. Revenues from The Outloud Program were $13,845 in Q3 2004 compared to $8,272 in Q3 2003. We anticipate sales to increase as the year progresses. Nine month revenues were $36,918 compared to $24,423 during 2003.
Total revenues for the nine months ended September 30, 2004 were $252,380 compared to $501,395 for the nine months ended September 30, 2003.
Market Trends and Business Uncertainties
Lingo Media believes that the trend in English language learning in China is still strong. The State Ministry of Education in China (MOE) is mandating and encouraging English learning programs to the students. During 2004, the Chinese State Ministry of Education (“MOE”) mandated PEP to increase its market share by shifting from Finished Product Sales to Licensing Sales. The Company was only informed of this change in 2005. As a result of this new MOE stance, PEP had significantly reduced the size of its print runs for Finished Product Sales in 2004 and is now focusing on Licensing Sales. The impact of this new policy stance resulted in significantly lower revenues from Finished Product Sales and only a marginal increase in Licensing Sales revenues in 2004. Lingo Media expects this shift from Finished Product Sales to Licensing Sales to continue in futur e periods as long as the MOE stance remains in effect and expects future Licensing Sales to increase and future Finished Products Sales to decrease which will result in an overall revenue reduction from these sources. 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.
General Financial Condition
As of September 30, 2004 the Company had a strong working capital surplus of $232,796. Net loss for the nine months ended September 30, 2004 was $484,684 compared to a net loss of $389,703 for the same period last year primarily due to the decrease in royalty revenues from China.
The Company had an outstanding loan balance of $100,000 payable to a shareholder as at September 30, 2004.
Results of Operations
Revenue and Margin
In keeping with the revised revenue recognition practice, royalty revenue from China for Q3 2004 was $nil and similarly, revenues for Q3 2003 were $nil. The Company had unearned revenues recorded at the end of the quarter of $78,796.
Revenues from The Outloud Program in Canada were $13,845 in Q3 2004 compared to $8,272 in Q3 2003, representing an increase of 67%. Canadian revenues show a mild upward trend which we anticipate continuing during the course of the year as we have engaged a new sales manager for the Canadian market.
General and Administrative (G&A)
General and administrative costs consist of executive compensation, consulting fees, office administration, 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.
The following set out the details for the G&A expenses for Q3 2004 as compared to Q3 of 2003:
Three Months Ended | Nine Months Ended | |||
September-04 | September-03 | September -04 | September-03 | |
Advertising and Promotion | 3,957 | 1,785 | 12,880 | 4,950 |
Executive Compensation | 40,444 | 34,724 | 104,097 | 108,551 |
Consulting Fees and Employee Compensation | 75,321 | 116,780 | 256,840 | 236,469 |
Travel | 11,425 | 6,100 | 29,587 | 22,220 |
Administration | 38,150 | 19,106 | 86,883 | 113,131 |
Premises | 10,236 | 12,967 | 31,027 | 33,063 |
Equipment leases | 2,268 | 869 | 5,895 | 2,610 |
Foreign Exchange | - | 1,754 | (2,810) | 59,150 |
Shareholder Services | 3,847 | 2,543 | 30,852 | 16,932 |
Professional Fees | 975 | 14,188 | 32,730 | 49,106 |
Sub-Total | 186,623 | 210,815 | 587,981 | 646,181 |
Less: Government Grants | (46,618) | (100,742) | (147,618) | (165,742) |
Total | 140,004 | 110,073 | 440,363 | 480,439 |
G&A expenses were $140,004 during Q3 2004 as compared to $110,073 for the similar quarter in 2003. Although the overall expenses for the quarter were marginally reduced, consulting fees and employee compensation decreased during Q3 2004.
The Company applies for government grants each year, the proceeds of which are used to develop new or ongoing English learning programs for its markets. The Company records the proceeds of these funds as a reduction of expenses and not as revenues. While the Company will continue to apply for various government assistance grants as it anticipates ongoing development needs, these grants also help to augment the cash flows of the Company. There can be no assurance that the Company will continue to meet future eligibility requirements, that future milestones will be achieved to continue assistance or even that the government will continue to support its assistance program available to Canadian publishers.
Interest on Debt
No interest payments were made during the quarter.
Amortization
Amortization expense includes amortization of property and equipment, development costs, acquired publishing content and software development costs. The amortization charge for Q3 2004 was marginally decreased to $70,306 from $72,542.
Net (Loss) Income
The Company reported a loss before income taxes of ($202,795) for the three months ended September 30, 2004 as compared to a loss of ($206,709) for the same period last year. The Company reported no taxes for the three months ended September 30, 2004 and for the same period last year resulting in a net loss of ($202,795) and ($206,709) respectively. For the nine months ended September 30, 2004 the Company reported a loss before income taxes of ($453,442) as compared to a loss of ($319,823) for the same period last year. The Company reported taxes of $31,242 for the nine months ended September 30, 2004 and $69,880 for the same period last year resulting in a net loss of ($484,684) and ($389,703) respectively. The increase in loss is mainly due to reduced revenue from China.
Summary of Quarterly Results
Q4-02 | Q1-03 | Q2-03 | Q3-03 | Q4-03 | Q1-04 | Q2-04 | Q3-04 | |
Revenue | 501,171 | 6,424 | 486,700 | 8,272 | 516,421 | 7,624 | 230,910 | 13,845 |
Income (Loss) Before | ||||||||
income taxes | 272,806 | (256,000) | 142,887 | (206,709) | 205,991 | (201,329) | (49,318) | (202,795) |
Net Income (Loss) | 228,930 | (256,000) | 73,007 | (206,709) | 132,620 | (201,329) | (80,560) | (202,795) |
Liquidity and Capital Resources
As of September 30, 2004, the Company had cash of $6,895 and accounts receivables of $643,050. The Company’s current assets amounted to $709,632 with current liabilities of $476,836 resulting in a working capital surplus of $232,796.
The accounts receivable are comprised of government grants receivable, trade receivables from Canada and China. The trade receivables from China are insured by the Export Development Corporation (EDC) of Canada. Notwithstanding that the Company has EDC insurance to guarantee its China-based receivables, the Company has always collected amounts owed to it from its customers in China and has never recorded an impairment nor does it expect to record one in the future in respect of amounts owed.
The Company receives government grants throughout the year from different sources. Each grant is applied for separately based on the Company either meeting certain eligibility requirements or by the Company achieving specific milestones to continue ongoing support for the specific project, the proceeds of which are used to develop new or ongoing English learning programs for its markets. Government grants are an important source of cash flows for the Company.
During 2004, the Chinese State Ministry of Education (“MOE”) mandated PEP to increase its market share by shifting from Finished Product Sales to Licensing Sales. As a result of this new MOE stance, PEP had significantly reduced the size of its print runs for Finished Product Sales in 2004 and is now focusing on Licensing Sales. This shift in product mix will have a significant impact on the overall revenues and a likely decrease in cash flows from operations from China during 2004.
During the nine months, the Company realized an additional $59,767 in funds through the exercise of stock options. No options were exercised during the quarter.
The Company has no credit facility with a financial institution but anticipates securing an operating line of credit during the year for working capital purposes. During the quarter, the company secured a shareholder loan in the amount of $100,000.
The Company believes that current cash on hand along with its accounts receivable and recurring sales will satisfy its working capital requirements for the next 12 months.
Contractual Obligations
Future minimum lease payments under operating leases for premises and equipment are as follows:
2004 | $ 16,790 |
2005 | 15,565 |
2006 | 8,744 |
2007 | 8,744 |
2008 | 8,744 |
2009 | 4,372 |
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance finance arrangements.
Transactions with Related Parties
During the first nine months of 2004, the Company had the following transactions with related parties made in the normal course of operations accounted for at an amount of consideration established and agreed to by the Company and shareholders.
Consulting fees of $90,000 (2003 - $90,000) were paid to a company controlled by a director of the Company in the normal course of business. At September 30, 2004, $15,050 (2003 - $5,350) is included in accounts payable. A success fee of $15,498 (2003 - $nil) was paid to a company controlled by a director of the Company.
Proposed Transactions
The board of directors of the Company is not aware of any proposed transactions involving a proposed asset or business or business acquisition or disposition which may have an effect on financial conditions, results of operations and cash flows.
Additional Disclosure
Development Costs
September 2004 | December 2003 | |
Cost | 1,411,804 | 1,259,796 |
Less: accumulated amortization | (659,000) | (553,124) |
752,804 | 706,672 |
Acquired Publishing Content
September 2004 | December 2003 | |
Cost | 353,349 | 353,349 |
Less: accumulated amortization | (206,119) | (159,007) |
147,230 | 194,342 |
Software Development Costs
September 2004 | December 2003 | |
Cost | 124,184 | 124,184 |
Less: accumulated amortization | (124,184) | (93,138) |
- | 31,046 |
Disclosure of Outstanding Share Data
Common Shares outstanding as at September 30, 2004
23,959,770
Options to purchase Common Shares outstanding
2,403,340
There are no other dilutive securities of the Company outstanding.
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, thereunto duly authorized.
LINGO MEDIA INC.
By: /s/ “Michael P. Kraft”___________
Michael P. Kraft
President and Chief Executive Officer
By: /s/ “Khurram R. Qureshi”________
Khurram R. Qureshi
Chief Financial Officer
April 18, 2005