Company Quick10K Filing
Lingo Media
20-F 2019-12-31 Filed 2020-06-15
20-F 2018-12-31 Filed 2019-05-15
20-F 2017-12-31 Filed 2018-05-16
20-F 2016-12-31 Filed 2017-05-16
20-F 2015-12-31 Filed 2016-05-17
20-F 2013-12-31 Filed 2014-04-30
20-F 2012-12-31 Filed 2013-05-01
20-F 2011-12-31 Filed 2012-07-02
20-F 2010-12-31 Filed 2011-07-18
20-F 2009-12-31 Filed 2010-05-05

LMDC 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisors
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Not Applicable
Item 16E. Not Applicable
Item 16F. Not Applicable
Item 16G. Not Applicable
Item 16H. Not Applicable
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-12.1 ex_188214.htm
EX-12.2 ex_188215.htm
EX-13.1 ex_188216.htm

Lingo Media Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 lmdcf20191231_20f.htm FORM 20-F lmdcf20191231_20f.htm
 

 UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Annual Report

FORM 20-F

 

☐    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☒    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

 

OR

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☐   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

        For the transition period from __________ to __________

 

Commission file number 333-98397

 

LINGO MEDIA CORPORATION

(FORMERLY LINGO MEDIA INC.)

(Exact name of Registrant as specified in its charter)

 

Ontario, Canada

(Jurisdiction of incorporation or organization)

 

151 Bloor Street West, Suite 703, Toronto, Ontario, Canada M5S 1S4

(Address of principal executive offices)

 

Gali Bar-Ziv, President & CEO

Tel: (416) 927-7000 x33 Fax: (416) 927-1222 Email: investor@lingomedia.com

Lingo Media Corporation 151 Bloor Street West, Suite 703, Toronto, Ontario, Canada M5S 1S4

 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Title of each class

Trading Symbol(s)

Name of each exchange on

which registered

Common Shares

LM

TSX Venture Exchange

Common Shares

LMDCF

OTC Markets

Common Shares

LIMA

Frankfurt Stock Exchange

 

Securities to be registered pursuant to Section 12(b) of the Act:

None

 

 

 

Securities to be registered pursuant to Section 12(g) of the Act:

Common Shares, without par value

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 35,529,192

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act

Yes ☐ No ☒

 

If this report is an annual transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☐ No ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer ☐   Accelerated Filer ☐

Non-accelerated filer ☒

Emerging growth company ☐

                                                                               

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒  Other ☐

 

If “Other” has been checked in response to the previous question mark, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ☐   Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

 

2

 

 

LINGO MEDIA CORPORATION

FORM 20-F ANNUAL REPORT

TABLE OF CONTENTS

 

PART I

     

Item 1.  

Identity of Directors, Senior Management and Advisors

4

Item 2.  

Offer Statistics and Expected Timetable 

4

Item 3.  

Key Information

4

Item 4.  

Information on the Company

13

Item 4A.    

Unresolved Staff Comments 21

Item 5.  

Operating and Financial Review and Prospects

21

Item 6.  

Directors, Senior Management and Employees

38

Item 7.  

Major Shareholders and Related Party Transactions

47

Item 8.  

Financial Information

48

Item 9.  

The Offer and Listing

49

Item 10.

Additional Information

53

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

63

Item 12.

Description of Securities Other Than Equity Securities

64

     
     

PART II

     

Item 13.

Default, Dividend Arrearages and Delinquencies

65

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

65

Item 15.

Controls and Procedures

65

Item 16.     

Reserved 66

Item 16A.

Audit Committee Financial Expert

66

Item 16B.

Code of Ethics

67

Item 16C.

Principal Accountant Fees and Services.

67

Item 16D.  

Exemptions from the Listing Standards for Audit Committees 67

Item 16E.  

Purchase of Equity Security by the Issuer and Affiliated Purchasers 67

Item 16F.  

Change in Registrant’s Certifying Accountant 67

Item 16G. 

Corporate Governanc 67

Item 16H.

Mine Safety Disclosure 67
     
     
     

PART III

     

Item 17.

Financial Statements.

68

Item 18.

Financial Statements.

68

Item 19.

Exhibits

68

 

 

3

 

 

Forward-Looking Statements

 

This Annual Report on Form 20-F contains certain forward-looking statements, which reflect management’s expectations regarding the Company’s results of operations, performance, growth, and business prospects and opportunities.

 

Statements about the Company’s future plans and intentions, results, levels of activity, performance, goals or achievements or other future events constitute forward-looking statements. Wherever possible, words such as "may," "will," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," or "potential" or the negative or other variations of these words, or similar words or phrases, have been used to identify these forward-looking statements. These statements reflect management’s current beliefs and are based on information currently available to management as at the date hereof.

 

Forward-looking statements involve significant risk, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. Although the forward-looking statements contained in this Annual Report are based upon what management believes to be reasonable assumptions, the Company cannot assure readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this Annual Report, and the Company assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including: general economic and market segment conditions, competitor activity, product capability and acceptance, international risk and currency exchange rates and technology changes. More detailed assessment of the risks that could cause actual results to materially differ than current expectations is contained in the sections entitled "Risk Factors", “Information on the Company” and “Operating and Financial Review and Prospects”.

 

PART I

 

ITEM 1. Identity of Directors, Senior Management and Advisors

 

SEE ITEM 6

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

Lingo Media Corporation (“Lingo Media” or the “Company”) is a publicly listed company incorporated in Canada with limited liability under the legislation of the Province of Ontario whose shares are listed on the TSX Venture Exchange and inter-listed on the OTC Marketplace. The consolidated financial statements of the Company as at and for the year ended December 31, 2019 comprise the Company and its wholly owned subsidiaries: Lingo Learning Inc., ELL Technologies Ltd., Lingo Group Limited, ELL Technologies Limited, Vizualize Technologies Corporation, Speak2Me Inc., and Parlo Corporation (the “Group”).

 

Lingo Media is an EdTech company that is ‘Changing the way the world learns languages’. The Group provides online and print-based solutions through its two distinct business units: ELL Technologies Ltd. (“ELL Technologies”) and Lingo Learning Inc. (“Lingo Learning”). ELL Technologies provides online training and assessment for language learning. Lingo Learning is a print-based publisher of English language learning school programs in China.

 

4

 

The head office, principal address and registered office of the Company is located at 151 Bloor Street West, Suite 703, Toronto, Ontario, Canada, M5S 1S4.

 

3.A      Selected Financial Data

 

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

 

The selected financial data should be read in conjunction with the consolidated financial statements and other financial information included elsewhere in the Annual Report.

 

The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain any future earnings for use in its operations and the expansion of its business.

 

The following data for the fiscal years ended December 31, 2019, 2018, 2017, 2016, and 2015 is derived from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB and all are expressed in Canadian Dollars.

 

   

Fiscal Year Ended December 31

 

         
   

2019

   

2018

   

2017

   

2016

   

2015

 

Revenue

  $ 1,956,222     $ 1,940,182     $ 2,776,768     $ 3,195,221     $ 4,925,735  

Profit/(Loss) from Operations

    440,188       98,925       (5,839,868 )     434,319       2,601,824  

Total Comprehensive Profit/(Loss)

    113,817       (71,954 )     (6,262,792 )     124,420       2,374,699  

Total Assets

    1,951,990       1,302,004       1,534,072       7,176,192       5,232,951  

Current Assets

    1,402,594       1,248,840       1,503,383       3,709,077       2,858,710  

Issued Share Capital

    35,529,192       35,529,192       35,529,192       35,529,192       29,518,343  

Weighted Average Number of Common Shares Outstanding

    35,529,192       35,529,192       35,529,192       33,987,383       26,288,889  

Total Equity

    766,276       558,594       553,754       6,445,033       4,046,784  

Dividends per Common Share

 

NIL

   

NIL

   

NIL

   

NIL

   

NIL

 

Earnings/(Loss) per Share

                                       

Basic

  $ 0.00     $ (0.00 )   $ (0.18 )   $ 0.00     $ 0.10  

Diluted

  $ 0.00     $ (0.00 )   $ (0.18 )   $ 0.00     $ 0.09  

 

3.A.3.      Exchange Rates

 

In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian Dollars ($). The Government of Canada permits a floating exchange rate to determine the value of the Canadian Dollar against the U.S. Dollar (USD).

 

5

 

The table sets forth the rate of exchange for the Canadian Dollar at the end of the five most recent fiscal periods ended December 31st, the average rates for the period and the range of high and low rates for the period. The data for each month during the previous twelve months is also provided.

 

Table No. 4

U.S. Dollar/Canadian Dollar

 

   

Average

   

High

   

Low

   

Close

 

March - 2020

    1.3071       1.4501       1.3326       1.4118  

February - 2020

    1.3903       1.3340       1.3220       1.3411  

January – 2020

    1.3071       1.3212       1.2965       1.3222  

December -2019

    1.3178       1.3307       1.3062       1.2962  

November -2019

    1.3232       1.3304       1.3119       1.3279  

October -2019

    1.3190       1.3338       1.3056       1.3138  

September -2019

    1.3242       1.3340       1.3119       1.3242  

August - 2019

    1.3264       1.3329       1.3197       1.3320  

July - 2019

    1.3095       1.3171       1.3029       1.3142  

June -2019

    1.3304       1.3523       1.3093       1.3092  

May - 2019

    1.3451       1.3524       1.3390       1.3522  

April -2019

    1.3379       1.3494       1.3314       1.3429  
                                 

Fiscal Yr Ended December 31, 2019

    1.3266       1.3638       1.2965       1.2962  

Fiscal Yr Ended December 31, 2018

    1.2961       1.3642       1.2552       1.3644  

Fiscal Yr Ended December 31, 2017

    1.2986       1.3743       1.2128       1.2545  

Fiscal Yr Ended December 31, 2016

    1.3219       1.4691       1.2458       1.3433  

Fiscal Yr Ended December 31, 2015

    1.1048       1.1643       1.0614       1.1601  

 

3.B.      Capitalization and Indebtedness

 

Not applicable

 

3.C.      Reasons for the Offer and Use of Proceeds

 

Not applicable

 

3.D.      Risk Factors

 

Financial risk management objectives and policies

 

The financial risk arising from the Company’s operations are currency risk, liquidity risk and credit risk. These risks arise from the normal course of operations and all transactions undertaken are to support the Group’s ability to continue as a going concern. The risks associated with accounts receivable and the policies on how to mitigate these risks are as follows:

 

Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. The Company’s Management oversees these risks. The Board of Directors reviews and agrees on policies for managing each of these risks are as follows:

 

6

 

Foreign Currency Risk

 

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s monetary assets and liabilities denominated in currencies other than the Canadian Dollar and the Company’s net investments in foreign subsidiaries.

 

The Company operates internationally and is exposed to foreign exchange risk as certain expenditures are denominated in non-Canadian Dollar currencies.

 

The Company has been exposed to this fluctuation and has not implemented a program against these foreign exchange fluctuations.

 

A 10% strengthening of the US Dollar against the Canadian Dollar would have increased the net equity by approximately $79,527 (2018 - $63,030) due to reduction in the value of net liability balance. A 10% weakening of the US Dollar against the Canadian Dollar at December 31, 2019 would have had the equal but opposite effect. The significant financial instruments of the Company, their carrying values and the exposure to other denominated monetary assets and liabilities, as of December 31, 2019 are as follows:

 

   

2019

   

2018

 
   

USD

   

USD

 

Cash

    61,075       14,741  

Accounts receivable

    613,127       660,704  

Accounts payable

    61,885       189,586  

Accrued liabilities

    -       23,882  

 

Liquidity Risk

 

The Company manages its liquidity risk by preparing and monitoring forecasts of cash expenditures to ensure that it will have sufficient liquidity to meet liabilities when due. The Company’s accounts payable and accrued liabilities generally have maturities of less than 90 days. At December 31, 2019, the Company had cash of $442,489 (2018 - $233,843), accounts and grants receivable of $838,502 (2018 - $913,458) to settle current liabilities of $686,068 (2018 - $743,410).

 

Credit Risk 

 

Credit risk refers to the risk that one party to a financial instrument will cause a financial loss for the counterparty by failing to discharge an obligation. The Company is primarily exposed to credit risk through accounts receivable. The maximum credit risk exposure is limited to the reported amounts of these financial assets. Credit risk is managed by ongoing review of the amount and aging of accounts receivable balances. As at December 31, 2019, the Company has outstanding receivables of $838,502 (2018 - $913,458). The Company reviews the components of these accounts on a regular basis to evaluate and monitor this risk. The Company’s customers are generally financially established organizations, which limits the credit risk relating to the customers. In addition, credit reviews by the Company take into account the counterparty’s financial position, past experience and other factors. As at December 31, 2019, approximately 68%, $133,740 (2018–86%, $148,500) of accounts receivable balances over 30 days were not impaired. The consolidated entity has a credit risk exposure with a company located in China, which as at December 31, 2019 owed the consolidated entity $740,494 (89% of trade receivables) (2018: $812,978 (89% of trade receivables)). This balance was within its terms of trade and no impairment was made as at December 31, 2019. The Company’s payment terms range from 30 days to 60 days from the invoice date. There are no guarantees of payment of this receivable but management closely monitors the receivable balance on a monthly basis and is in regular contact with this customer to mitigate risk. Management believes that the expected credit loss allowance is adequate.  The Company deposits its cash with high credit quality financial institutions, with the majority deposited within Canadian Tier 1 Banks.

 

7

 

Dependence on Major Customer

 

The Company had sales to a major customer in 2019 and 2018, a government agency of the People’s Republic of China. The total percentage of sales to this customer during the year was 86% (2018 – 80%, 2017 – 59%) and the total percentage of accounts receivable at December 31, 2019 was 91% (2018 – 89%, 2017 – 84%).

 

Market Trends and Business Uncertainties

 

Lingo Media believes that the global market trends in English language learning are strong and will continue to grow. Developing countries around the world, specifically in Latin America and Asia are expanding their mandates for the teaching of English amongst students, young professionals and adults.

 

The British Council suggests that there are 1.6 Billion people learning English globally. English language learning products and services are currently a US$8.9 Billion global market notes Orbit Research.

 

GlobalEnglish forecasts the global eLearning market to grow to 17% year over year. Markets and Markets forecasts the global EdTech market to grow from US$43.27 Billion in 2015 to US$93.76 Billion to 2020, or at a CAGR or 16.72%.

 

Latin American Region

 

The Inter-American Dialogue recently noted that while English language training programs exist in various forms throughout Latin American region, there are three key factors that these programs must address to be successful: ensuring continuity, developing a strong monitoring and evaluation framework that informs adaptation, and addressing the lack of sufficient quality teachers. Students attending English language training (“ELT”) classes in Latin America accounted for approximately 14 per cent of worldwide revenues, or US$321-million in 2017. Growth has been very rapid in the Latin American region and represents a particularly strong opportunity moving forward relative to other geographic regions.

 

Asia-Pacific Region

 

Technavio forecasts the English language training (ELT) market in China to be worth $75 billion by 2022, growing at a CAGR of 22%. The growth of the ELT market in China is driven by more people desiring to learn English, the adaptation of smartphones, increasing levels of disposable income, and the inherent advantages of online education. Technavio also notes that 49% of the growth in the global digital English language learning market will come from the Asia-Pacific region.

 

Lingo Media is positioned to take advantage of the market opportunity for English language training in Latin America and Asia, with its scalable digital language learning technology and solutions. Although the market outlook remains positive, there can be no assurance that this trend will continue or that the Company will benefit from this trend.

 

8

 

Competitive Markets

 

We operate in competitive and evolving markets locally, nationally and globally. These markets are subject to rapid technological change and changes in customer preferences and demand. There can be no assurance that we will be able to obtain market acceptance or compete for market share. We must be able to keep current with the rapidly changing technologies, to adapt our services to evolving industry standards and to improve the performance and reliability of our services. New technologies could enable competitive product offerings and adversely affect us and our failure to adapt to such changes could seriously harm our business.

 

Failure of Delivery Infrastructure to Perform Consistently

 

Our success as a business depends, in part, on our ability to provide consistently high-quality online services to users via the delivery infrastructure. There is no guarantee that the Company’s delivery infrastructure and/or its software will not experience problems or other performance issues. If the delivery infrastructure or software fails or suffers performance problems, then it would likely affect the quality and interrupt the continuation of our services and significantly harm the business.

 

The Company’s delivery infrastructure is susceptible to natural or man-made disasters such as earthquakes, floods, fires, power loss and sabotage, as well as interruptions from technology malfunctions, computer viruses and hacker attacks. Other potential service interruptions may result from unanticipated demands on network infrastructure, increased traffic or problems in customer service. Significant disruptions in the delivery infrastructure could harm the Company’s goodwill and its brands and ultimately could significantly and negatively impact the amount of revenue it may earn from its service. Like all Internet transmissions, our services may be subject to interception and malicious attack. Pirates may be able to obtain or copy our products without paying fees. The delivery infrastructure is exposed to spam, viruses, worms, trojan horses, malware, spyware, denial of service or other attacks by hackers and other acts of malice. The Company uses security measures intended to make theft of its software more difficult. However, if the Company is required to upgrade or replace existing security technology, the cost of such security upgrades or replacements could have a material adverse effect on our financial condition, profitability and cash flows.

 

Limited Intellectual Property Protection

 

The Company relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. In addition, our success may depend, in part, on its ability to obtain patent protection and operate without infringing the rights of third parties. There can be no assurance that, once filed, the Company’s patent applications will be successful, that we will develop future proprietary products that are patentable, that any issued patents will provide us with any competitive advantages or will not be successfully challenged by any third parties or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate some or all of our products or, if patents are issued, design their products so as to circumvent the patent protection held by the Company. We protect our product documentation and other written materials under trade secret and copyright laws which afford only limited protection. Despite precautions taken by the Company, it may be possible for unauthorized third parties to copy aspects of our business and marketing plans or future strategic documents or to obtain and use information that we regard as proprietary. There can be no assurance that the Company’s means of protecting its proprietary rights will be adequate or that our competitors will not independently develop similar or superior technology. Litigation may be necessary in the future to enforce our intellectual property rights, to protect trade secrets or to determine the validity and scope of the propriety rights of others. Such litigation could result in substantial costs and diversion of resources, and there can be no guarantee of the ultimate success thereof.

 

9

 

Government Regulation and Licensing

 

The Company’s operations may be subject to Canadian and foreign provincial and/or state and federal regulations and licensing. There can be no assurance that we will be able to comply with the regulations or secure and maintain the required licensing for its operations. Government regulation and licensing could seriously impact our ability to achieve its financial and operational objectives. The Company is subject to local, provincial and/or state, federal, and international laws affecting companies conducting business on the Internet, including user privacy laws, laws giving special protection to children, regulations prohibiting unfair and deceptive trade practices and laws addressing issues such as freedom of expression, pricing and access charges, quality of products and services, taxation, advertising, intellectual property rights and information security. The restrictions imposed by and the costs of complying with, current and possible future laws and regulations related to its business could limit our growth and reduce client base and revenue.

 

Operating in Foreign Jurisdictions

 

The Company’s current and future development opportunities relate to geographical areas outside of Canada. There are a number of risks inherent in international business activities, including government policies concerning the import and export of goods and services, costs of localizing products and subcontractors in foreign countries, costs associated with the use of foreign agents, potentially adverse tax consequences, limits on repatriation of earnings, the burdens of complying with a wide variety of foreign laws, nationalization and possible social, labor, political and economic instability. There can be no assurance that such risks will not adversely affect the business, financial condition and results of operations. Furthermore, a portion of expenditures and revenues will be in currencies other than the Canadian Dollar. Foreign exchange exposure may change over time with changes in the geographic mix of its business activities. Foreign currencies may be unfavorably impacted by global developments, country-specific events and many other factors. As a result, future results may be adversely affected by significant foreign exchange fluctuations.

 

Economic Conditions

 

Unfavorable economic and market conditions could increase our financing costs, reduce demand for our products and services, limit access to capital markets and negatively impact any access to future credit facilities. Expenditures by educational institution, government and corporation tend to be cyclical, reflecting overall economic conditions as well as budgeting and purchasing patterns.

 

Working Capital

 

The Company expects that corporate growth will be funded from operation funds with some support from Canadian Government. Ensuring that capital is available to increase production; sales and marketing capacity; and to provide support materials and training in the market place and to expand is essential to success. 

 

10

 

Uncertainty of Assumptions Underlying Business Plan

 

The Company’s business plan is based upon numerous assumptions that may later prove to be incorrect. The Company’s ability to adhere to its business plan will depend upon a variety of factors, many of which are beyond the Company’s control. Likewise, the Company’s management is not bound to follow its business plan, and may elect to adopt other strategies and courses of action based upon changes in circumstances and/or market conditions. The Company cannot assure that the actual results of the Company’s operations will materially conform to its business plan.

 

Success Dependent on Key Management Personnel

 

The success of the Company is highly dependent on the skills, experience and successful performance of the Company’s management team. The loss of such services could adversely affect development of the Company’s business, revenues, cash flows and profitability.

 

Managing Growth

 

The Company must expand its business to achieve greater profitability. Any further expansion of the Company’s business may strain its current managerial, financial, operational, and other resources. Success in managing this expansion and growth will depend, in part, upon the ability of senior management to manage growth effectively. Any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects.

 

Supply Failures

 

The Company relies on third parties for the timely supply of maintenance services. Although the Company actively manages these third-party relationships to ensure continuity of services on time and to its required specifications, some events beyond its control could result in the complete or partial failure of services or services not being delivered on time. Any such failure could negatively affect the Company’s operating results.

 

Our Public Trading Market is Highly Volatile

 

The Company's common shares trade on the TSX Venture Exchange under the symbol "LM", and had previously traded on the OTC Markets under the symbol “LMDCF”.

 

The market price of our common shares could fluctuate substantially due to:

 

 

Quarterly fluctuations in operating results;

 

 

Announcements of new products or services by us or our competitors;

 

 

Technological innovations by us or our competitors;

 

 

General market conditions or market conditions specific to our or our customer’s industries; or

 

 

Changes in earning estimates or recommendations by analysts.

 

11

 

Penny Stock Rules

 

Our common shares had previously been quoted on the OTC Marketplace; a quotation system for equity securities. It is a more limited trading market than the NASDAQ, and timely, accurate quotations of the price of our common shares may not always be available. You may expect trading volume to be low in such a market. Consequently, should trading resume on such market, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.

 

Our common shares had been listed on the OTC Marketplace, and had been subject to the requirements of Rule 15(g)- 9, promulgated under the Securities Exchange Act. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trade involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.

 

The stock market has experienced significant price and volume fluctuations, and the market prices of companies, have been highly volatile. Investors may not be able to sell their shares at or above the then current price. In addition, our results of operations during future fiscal periods might fail to meet the expectations of stock market analysts and investors. This failure could lead the market price of our common shares to decline.

 

There is Uncertainty as to the Company’s Shareholders’ Ability to Enforce Civil Liabilities Both Within and Outside of the United States

 

The preponderance of our assets are located outside the United States and are held through companies incorporated under the laws of Canada, Hong Kong, China, and the United Kingdom and representative office in China. In addition, all of our directors and officers are nationals and/or residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for shareholders to effect service of process within the United States upon these persons. In addition, investors may have difficulty enforcing, both in and outside the United States, judgments based upon the civil liability provisions of the securities laws of the United States or any State thereof.

 

The outbreak of COVID-19 has had and may continue to have an adverse effect on our business, results of operations and financial condition.

 

Since December 2019, a novel strain of coronavirus (2019-nCov, referred to as COVID-19) has spread throughout the world. On March 11, 2020, COVID-19 was categorized as a pandemic by the World Health Organization. The COVID-19 pandemic has resulted in numerous deaths and the imposition of local, municipal and national governmental “shelter-in-place” and other quarantine measures, border closures and other travel restrictions, causing unprecedented commercial disruption in a number of jurisdictions, including Canada. Many countries around the world, including Canada, are suffering significant economic and social crises as a result of the ongoing COVID-19 pandemic and measures taken to contain or mitigate it, which have had dramatic adverse consequences on demand, operations, supply chains and financial markets. While the nature and scope of the consequences to date are difficult to evaluate precisely, and their future course is impossible to predict with confidence, these events may continue for a sustained period of time.

 

As of the date hereof, the Canadian Government has adopted certain measures intended to help mitigate the spread of COVID-19 in Canada. However, we cannot predict the range of future policies that may be enacted by the Canadian Government, or any other government, or the impact these policies will have on our business and operations. Despite these precautions, the COVID-19 pandemic, or any future pandemic or epidemic, has and may further impact the places where we operate or our workforce. In turn, this could significantly disrupt our operations and cause health restrictions to our workforce and, therefore, impact the operation of our facilities, including our platforms, refineries and terminals, among others. These conditions could adversely affect our business, results of operations and financial condition.

 

12

 

If the impact of the COVID-19 pandemic continues for an extended period of time, it could adversely affect our ability to operate our business in the manner and on the timelines previously planned. Further, it could have accounting consequences, such as decreases in our revenues and inventories, foreign exchange losses, impairments of fixed assets, and affect our ability to operate effective internal control over financial reporting.

 

The extent to which COVID-19 or other health pandemics or epidemics may continue to impact Canada, the Canadian economy and the global economy and, in turn, our business, results of operations and financial condition is highly uncertain and will depend on numerous evolving factors that we cannot predict, including, but not limited to:

 

 

the duration, scope, and severity of the COVID-19 pandemic;

 

 

the impact of travel bans, work-from-home policies, or shelter-in-place orders;

 

 

staffing shortages;

 

 

general economic, financial, and industry conditions, particularly conditions relating to liquidity, financial performance, which may be amplified by the effects of COVID-19; and

 

 

the long-term effects of COVID-19 on the national and global economy, including on consumer confidence and spending, financial markets and availability of credit for us, our suppliers and our customers.

 

 

ITEM 4. INFORMATION ON THE COMPANY

 

4.A.      History and Development of the Company

 

Incorporation and Name Changes

 

The Company was incorporated under the name Alpha Publishing Inc. pursuant to the Business Corporations Act (Alberta) on April 22, 1996. The name was changed to Alpha Ventures Inc. on May 24, 1996. Pursuant to Articles of Continuance effective April 22, 1998, the Company was continued as an Ontario company under the provisions of the Business Corporations Act (Ontario) under the name, Alpha Communications Corp. The name was changed to Lingo Media Inc. on July 4, 2000, and changed to Lingo Media Corporation on October 16, 2007.

 

The Company currently has two active segments: Lingo Learning Inc. ("LLI") and ELL Technologies Ltd. (“ELL Technologies”)

 

Lingo Learning Inc. was incorporated pursuant to the Business Corporations Act (Ontario) on November 21, 1994 under the name Alpha Corporation. Alpha Corporation changed its name to Lingo Media Ltd. on August 25, 2000 and again on March 6, 2008 to Lingo Learning Inc.

 

ELL Technologies Limited was incorporated pursuant to the Companies Act of United Kingdom under the name The Q Group Limited. On April 29, 2010, the Company changed its name to ELL Technologies Limited.

 

ELL Technologies Ltd. was incorporated pursuant to the Business Corporations Act (Ontario) on February 23, 2012 under the name 2318041 Ontario Inc. 2318041 Ontario Inc. changed its name to ELL Technologies Ltd. on January 15, 2014.

 

13

 

Vizualize Technologies Corporation was incorporated pursuant to the Business Corporation Act (Ontario) on March 22, 2010.

 

Speak2Me Inc. was incorporated pursuant to the Business Corporations Act (Ontario) on February 22, 2007.

 

Parlo Corporation was incorporated pursuant to the Business Corporations Act (Ontario) on September 24, 2009.

 

The Company’s Executive Office is located at:

 

151 Bloor Street West

Suite 703

Toronto, Ontario, Canada M5S 1S4

Telephone: (416) 927-7000

Facsimile: (416) 927-1222

E-mail: investor@lingomedia.com

Website: www.lingomedia.com

 

The Company’s Beijing Representative Office is located at:

8 Xiao Yun Road, Suite 201, Unit 083A

Chao Yang District, Beijing China 100020

 

The Company's fiscal year ends on December 31st.

 

The Company's common shares trade on the TSX Venture Exchange under the symbol "LM", are quoted on the Frankfurt Stock Exchange under the symbol “LIMA”, and inter-listed on the OTC Marketplace under the symbol “LMDCF”. OTC Markets halted trading in the Company’s shares on August 29, 2017 because of a regulatory trading halt placed by the TSX Venture Exchange. While the TSX Venture Exchange has released its regulatory halt of trading, the trading halt on OTC Markets has not yet been lifted, although limited trading continues.

 

4.B.      BUSINESS OVERVIEW

 

Background

 

Lingo Media (“Lingo Media,” the “Company,” “we” or” us”) is an EdTech company that is ‘Changing the way the world learns Languages’ through the combination of education with technology. The Company is focused on online and print-based technologies and solutions through its two subsidiaries: Lingo Learning Inc. (Lingo Learning”) and ELL Technologies Ltd. (“ELL Technologies”). Through its two distinct business units, Lingo Media develops, markets and supports a suite of English and other language learning solutions consisting of web-based software licensing subscriptions, online and professional services, audio practice tools and multi-platform applications. The Company operates its textbook publishing business from which it collects recurring royalty revenues.

 

Lingo Learning is a print-based publisher of English language learning textbook programs in China. The Company has formed successful relationships with key government and industry organizations, establishing a strong presence in China’s education market.

 

ELL Technologies is an online educational technology (“EdTech”)  language learning training and assessment company that creates innovative software-as-a-service e-learning solutions. ELL Technologies’ market consists of educational institutions (such as schools, high schools, vocational schools, universities, etc.) and corporations. ELL Technologies sells and markets its online language learning solutions in Latin America, Asia, Europe, and the U.S.

 

14

 

The Company continues to invest in its underlying technology, including features and scalability, as well as, language content and leverage its industry expertise to expand into more scalable education technology. Recent product initiatives have allowed us to expand the breadth of our language learning product offerings. The Company’s web-based EdTech learning segment continues to present a significant opportunity for long-term value creation and its  strategy is to focus on sales channels and relationships while continuously developing its content and technology offerings.

 

As of December 31, 2019, the Company operated two distinct business segments as follows:

 

Print-Based English Language Learning

 

The Company has been operating a textbook publishing business through Lingo Learning, a print-based publisher of English language learning programs in China since 2001. Lingo Learning has an established presence in China’s education market of over 300 million students. To date, it has co-published more than 708 million units from its library of program titles.

 

China Publishing

 

Lingo Media has spent 19 years developing English Language Learning (ELL), products, programs, and relationships in the Chinese market. Learning to communicate in English is seen as a top priority for Chinese school students and young adult learners. The Company’s ELL books, audio and CD-based programs are unique in that they have a special focus on the spoken language. In addition to developing learning materials, considerable resources have been expended on the development of relationships with leading Chinese publishers, both in the education and trade sectors, as well as in extensive marketing of Lingo Media’s programs.

 

The Company is capitalizing on its co-development approach in the Chinese market. Lingo Media sees its relationships with leading Chinese publishers; its Canadian and Chinese author teams; and its original custom-developed content as key factors in opening up the Chinese educational market. The Company has secured long-term publishing contracts for the Kindergarten to Grade 12 (K-12) and higher educational markets, which it anticipates will generate ongoing revenue streams from the sale of its programs.

 

Co-Publishing Partner in China

 

People's Education Press

 

People's Education Press (“PEP”) a division of China's State Ministry of Education, publishes more than 60% of educational materials for the Kindergarten to Grade 12 (“K-12”) market throughout China, for all subjects, including English Language Learning. PEP has a readership of more than 120 million students. Lingo Learning has two programs with PEP. These series target the elementary market of 100 million students: PEP Primary English (for Grades 3-6; Chinese students now begin learning English in Grade 3); and Starting Line (Grades 1-6); All series include the core textbooks in addition to supplemental activity books, audiocassettes, teacher resource books, and other materials.

 

Seasonality

 

The Company may experience some seasonal trends in the sale of its publications. For example, sales of educational published materials experience seasonal fluctuations with higher sales in the Spring (second calendar quarter) and Fall (fourth calendar quarter).

 

15

 

Online English Language Learning

 

ELL Technologies has developed and is marketing one of the largest libraries of online language learning resources in the world. The library has more than 3,000 hours of interactive learning through a number of product offerings that include Winnie’s World, English Academy, Campus, English for Success, Master and Business in addition courses to learn French, Spanish, Portuguese, and Mandarin languages. ELL Technologies is primarily marketed in Latin America, Asia, Europe, and now the U.S. through a network of distributors and earns its revenues from online and offline licensing fees from its suite of web-based language learning products and applications.

 

 

All products have been designed with our proprietary tools enabling ELL Technologies to market and sell to academic institutions and governments. Educators who license the platform are able to easily assign and arrange lessons and courses as they see fit, personalizing the learning to a particular individual’s needs and progress.

 

Formative assessments and data gathering functionality allows us to adapt and improve content. Based on that data, we are able to adapt the platform and content to address specific problem areas and to make learning more accessible, efficient and measurable. Built for learners, by seasoned educators, we empower teachers to track student’ s progress, identify challenges, and to easily transition from pure classroom paper-based teaching to the online world.

 

16

 

Formative assessments and data gathering functionality allows us to adapt and improve content. Based on that data, we are able to program iterations to address specific problem areas and to make learning more accessible, efficient and measurable. Built for learners, by learners, we empower educators and allow them to easily transition from pure classroom paper-based teaching to the online world.

 

Segmented Information (Before Other Financial Items Below)

 

The Company operates two distinct reportable business segments as follows:

 

License of intellectual property: Lingo Learning is a print-based publisher of English language learning textbook programs in China. It earns significantly higher royalties from Licensing Sales compared to Finished Product Sales.

 

Online and offline Language Learning: ELL Technologies is a global web-based educational technology (“EdTech”) language learning, training, and assessment company. The Company provides the right to access to hosted software over a contract term without the customer taking possession of the software. The Company also provides Offline licenses for the right to use perpetual language-learning.

 

2019

 

Online English

Language Learning

   

Print-Based English

Language Learning

   

Head Office

   

Total

 

Segmented assets

  $ 136,648     $ 1,739,269     $ 75,973     $ 1,951,990  

Segmented liabilities

    286,109       675,856       223,749       1,185,714  

Segmented revenue - online

    259,172       -       -       259,172  

Segmented revenue – royalty

    22,846       1,674,204               1,697,050  

Segmented direct costs

    124,471       87,836       -       212,307  

Segmented selling, general & administrative

    224,320       247,673       525,166       997,159  

Segmented other expense

    116,212       279,056       723       395,991  

Segmented profit (loss)

    (182,985 )     1,059,639       (525,889 )     350,765  

 

2018

 

Online English

Language Learning

   

Print-Based English

Language Learning

   

Head Office

   

Total

 

Segmented assets

  $ 141,238     $ 1,087,463     $ 73,303     $ 1,302,004  

Segmented liabilities

    348,214       160,750       234,446       743,410  

Segmented revenue - online

    206,955       -       -       206,955  

Segmented revenue – offline

    8,012       -               8,012  

Segmented revenue – royalty

    38,701       1,686,514               1,725,215  

Segmented direct costs

    180,832       90,188       -       271,020  

Segmented selling, general & administrative

    348,436       64,580       787,750       1,200,766  

Segmented other expense

    10,918       196,079       905       207,902  

Segmented profit (loss)

    (475,131 )     1,335,666       (788,655 )     71,879  

 

17

 

 

2017

 

Online English

Language Learning

   

Print-Based English

Language Learning

   

Head Office

   

Total

 

Segmented assets

  $ 189,200     $ 1,257,239     $ 87,633     $ 1,534,072  

Segmented liabilities

    228,418       164,294       587,606       980,318  

Segmented revenue

    1,088,197       1,688,571       -       2,776,768  

Segmented direct costs

    134,695       90,923       -       225,618  

Segmented selling, general & administrative

    455,915       97,404       814,834       1,368,153  

Segmented intangible amortization

    1,051,928       -       -       1,051,928  

Segmented other expense

    1,074       182,461       1,131       184,666  

Segmented impairment

    2,087,700       -       -       2,087,700  

Segmented profit (loss)

    (6,148,195 )     1,317,783       (815,965 )     (5,646,377 )

 

 

2016

 

Online English

Language Learning

   

Print-Based English

Language Learning

   

Head Office

   

Total

 

Segmented assets

  $ 4,521,560     $ 1,675,740     $ 978,892     $ 7,176,192  

Segmented liabilities

    206,784       198,315       326,059       731,158  

Segmented revenue

    1,456,421       1,738,800       -       3,195,221  

Segmented direct costs

    167,597       217,787       -       385,384  

Segmented selling, general & administrative

    168,161       295,549       901,025       1,364,735  

Segmented intangible amortization

    1,003,485       -       -       1,003,485  

Segmented other expense

    806       192,658       1,539       195,003  

Segmented profit

    116,372       1,032,806       (902,564 )     246,614  

Segmented intangible addition

    1,798,687       -       -       1,798,687  

 

 

2015

 

Online English

Language Learning

   

Print-Based English

Language Learning

   

Head Office

   

Total

 

Segmented assets

  $ 3,503,171     $ 1,306,848     $ 422,932     $ 5,232,951  

Segmented liabilities

    158,399       96,536       931,232       1,186,167  

Segmented revenue

    2,954,614       1,971,121       -       4,925,735  

Segmented direct costs

    276,049       106,822       -       382,871  

Segmented selling, general & administrative

    273,078       68,248       718,377       1,059,703  

Segmented intangible amortization

    721,720       -       -       721,720  

Segmented other expense

    2,187       315,161       1,520       318,868  

Segmented profit

    1,681,580       1,480,891       (719,897 )     2,442,574  

Segmented intangible addition

    2,071,440       -       -       2,071,440  

 

18

 

Other Financial Items

 

2019

   

2018

   

2017

   

2016

   

2015

 

Print-Based English Language Learning segmented income

  $ 1,059,639     $ 1,335,666     $ 1,317,783     $ 1,032,806     $ 1,480,891  

Online English Language Learning segmented income (loss)

    (182,985 )     (475,131 )     (6,148,195 )     116,372       1,681,580  

Head Office

    (525,889 )     (788,655 )     (815,965 )     (902,564 )     (719,897 )

Foreign exchange gain (loss)

    (10,584 )     38,351       (189,783 )     (146,599 )     399,314  

Interest and other financial

    (83,750 )     (51,898 )     (53,709 )     (35,768 )     (158,792 )

Share-based payments

    (93,865 )     (162,489 )     (371,513 )     -       (151,038 )

Other comprehensive loss

    (48,749 )     32,202       (1,410 )     60,173       (157,358 )

Total Comprehensive Income /(Loss)

  $ 113,817     $ (71,954 )   $ (6,262,792 )   $ 124,420     $ 2,374,699  

 

Revenue by Geographic Region

 

   

2019

   

2018

   

2017

   

2016

   

2015

 

Latin America

  $ 214,381     $ 187,008     $ 997,661     $ 821,762     $ 2,660,535  

China

    1,684,872       1,702,249       1,712,079       2,252,170       2,069,253  

Other

    56,969       50,925       67,028       121,289       195,947  
    $ 1,956,222     $ 1,940,182     $ 2,776,768     $ 3,195,221     $ 4,925,735  

 

Identifiable Non-Current Assets by Geographic Region

 

   

2019

   

2018

   

2017

   

2016

   

2015

 

Canada

  $ 548,829     $ 52,131     $ 29,804     $ 3,467,115     $ 2,374,241  

China

    567       1,033       885       -       -  
    $ 549,396     $ 53,164     $ 30,689     $ 3,467,115     $ 2,374,241  

 

 

Intangibles

 

Software and Web Development

   

Content

Platform

   

Content Development

   

Total

 

Cost, January 1, 2015

    7,781,611       1,477,112       -       9,258,723  

Additions

    782,945       -       1,288,495       2,071,440  

Effect of foreign exchange

    66,450       -       -       66,450  

Cost, December 31, 2015

    8,631,006       1,477,112       1,288,495       11,396,613  

Additions

    613,162       -       1,185,525       1,798,687  

Effect of foreign exchange

    (5,081 )     -       -       (5,081 )

Cost, December 31, 2016

    9,239,088       1,477,112       2,474,020       13,190,219  

Cost, December 31, 2018 and 2019

  $ 9,239,088     $ 1,477,112     $ 2,474,020     $ 13,190,219  

Accumulated amortization, January 1, 2015

    7,053,835       1,357,290       -       8,411,125  

Charge for the year

  $ 510,366     $ 119,822     $ 91,532     $ 721,720  

Effect of foreign exchange

    58,024       -       -       58,024  

Accumulated amortization, December 31, 2015

    7,622,225       1,477,112       91,532       9,190,869  

Charge for the year

    611,865       -       391,620       1,003,485  

Effect of foreign exchange

    (4,144 )     -       -       (4,144 )

Accumulated amortization, December 31, 2016

    8,229,946       1,477,112       483,152       10,190,210  

Charge for the year

    557,124       -       494,804       1,051,928  

Impairment

    452,018       -       1,496,064       1,948,082  

Accumulated amortization, December 31, 2018 and 2019

  $ 9,239,088     $ 1,477,112     $ 2,474,020     $ 13,190,219  
                                 

Net book value, December 31, 2015

  $ 1,008,781     $ -     $ 1,196,963     $ 2,205,744  

Net book value, December 31, 2016

  $ 1,009,142     $ -     $ 1,990,867     $ 3,000,009  

Net book value, December 31, 2018 and 2019

  $ -     $ -     $ -     $ -  

 

19

 

4.C.      Organization Structure

 

See 4.A. “History and Development of the Company” for more information.

 

Name of subsidiary

Principal activity

Place of

incorporation

and operation

Proportion of ownership interest and

voting rights held

     

December 31, 2018

December 31, 2017

December 31, 2016

Lingo Learning Inc.

 

Developer and publisher of English language learning print and audio-based products

Canada

100%

100%

100%

ELL Technologies Ltd.

English language learning multi-media & online training service

Canada

100%

100%

100%

ELL Technologies Limited

English language learning multi-media & online training service

U.K.

100%

100%

100%

Speak2Me Inc.

Free English language learning online service

Canada

100%

100%

100%

Parlo Corporation

Fee-based online English language learning training and assessment service

Canada

100%

100%

100%

 

4.D.      Property and Equipment

 

The Company’s executive offices are located in rented premises of approximately 4,270 sq. ft. at 151 Bloor Street West, Suite 703, Toronto, Ontario, M5S 1S4 Canada. The Company began occupying these facilities, through its subsidiary Lingo Learning Inc. in March 2006.

 

The Company’s Beijing representative offices are located in rented premises of approximately 2,174 sq. ft. at 6 Chao Wai Street, Vantone Center, Tower A, Suite 401, Chaoyang District, Beijing, China 100020

 

The Company has office equipment, furniture and computer equipment located in these offices and for the fiscal years ended December 31, 2019, 2018, 2017, 2016, and 2015, they have a net carrying value of $35,215, $53,164, $30,689, $27,488, and $28,879, respectively.

 

20

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None. 

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion for the fiscal years ended December 31, 2019, December 31, 2018, and December 31, 2017 should be read in conjunction with the consolidated financial statements of the Company and the notes thereon.

 

The following discussion contains forward-looking statements that are subject to significant risks and uncertainties. Readers should carefully review the risk factors described herein and in other documents the Company files from time to time with the Securities and Exchange Commission.

 

5.A      Overview

 

Critical Accounting Policies and Estimates

 

BASIS OF PREPARATION

 

Statement of Compliance

 

These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”).

 

Basis of Measurement

 

These consolidated financial statements have been prepared on the historical cost basis except as provided in note 4. The comparative figures presented in these consolidated financial statements are in accordance with the same accounting policies; except for the adoption of IFRS 16 - Leases.

 

Basis of Consolidation

 

The consolidated financial statements comprise the financial statements of the Company and its wholly owned subsidiaries controlled by the Company (the “Group”). Control exists when the Company is exposed to, or has the rights to variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity.

 

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All inter-group balances, transactions, unrealized gains and losses resulting from inter-group transactions and dividends are eliminated in full.

 

21

 

Functional and Presentation Currency

 

The functional currency is the currency of the primary economic environment in which the entity operates and has been determined for each entity within the Group. These consolidated financial statements are presented in Canadian Dollars, which is the Company’s functional currency. The functional currency of ELL Technologies Limited and Lingo Group Limited are United States Dollars (“USD”). All other subsidiaries’ functional currency is the Canadian Dollar (“CAD”).

 

The functional currency determinations were conducted through an analysis of the consideration factors identified in IAS 21, “The Effects of Changes in Foreign Exchange Rates”.

 

SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

 

The preparation of the Company’s consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets, liabilities and contingent liabilities, revenues and expenses at the date of the consolidated financial statements and during the reporting period.

 

Estimates and assumptions are continuously evaluated and are based on management’s historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and further periods if the review affects both current and future periods.

 

Information about critical judgements and estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes:

 

 

Determination of functional currency

 

Determination of expected credit loss

 

Recognition of internally developed intangibles

 

Recognition of government grants and grant receivable

 

Recognition of deferred tax assets

 

Valuation of share-based payments

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Lease, New Standard Adopted

 

The Company has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparative information, as permitted under the specific transitional provisions in the standard in accordance with the modified retrospective approach for adoption. The reclassifications and the adjustments arising from the new leasing standard are therefore recognized in the opening consolidated balance sheet on January 1, 2019.

 

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Under IFRS 16, a lessee recognizes a right-of-use asset and a lease obligation. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses) as an assumed linear depreciation of the right-of-use asset and the decreasing interest on the liability will lead to an overall decrease of expense over the reporting period. Upon adoption, the Company has elected to apply the available exemptions for short-term leases and leases of low-value assets. The Company has also elected to apply the practical expedient whereby leases whose term ends within 12 months of the date of the initial application would be accounted for in the same way as short-term leases. The Company has elected to use the practical expedient of excluding initial direct costs from the measurement of the right of use asset cost at the date of initial application. The Company has recognized low-value assets and short-term lease payments as an expense on a straight-line basis over the lease term.

 

The lease obligation is initially recognized as the present value of future lease payments discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s applicable incremental borrowing rate. Lease payments do not include variable lease payments other than those that depend on an index or rate. The incremental borrowing rate is the rate which the Company would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset.

 

The Company has included the estimated extension of their lease in the lease term in assessing the present value of future lease payments. The lease obligation is subsequently measured by reducing the carrying amount to reflect lease payments made and to reflect any reassessments or modifications.

 

The right-of-use asset is initially measured at cost, which comprises the amount of the initial measurement of the lease liability adjusted for lease inducements. The right-of-use asset is subsequently measured at cost less accumulated depreciation and any accumulated impairment losses and adjusted for any remeasurement of the lease obligation. Right-of use assets are depreciated in accordance with the Company’s accounting policy for property and equipment.

 

On transition to IFRS 16, the Company recognized a right of use asset and lease obligation of $644,121. The recognition of the right of use asset is considered non-cash items within the statement of cash flows.

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. The Company enters into contracts that can include various combinations of goods and services, which are generally capable of being distinct and accounted for as separate performance obligations. A product or service is distinct if the customer can benefit from it on its own or together with other readily available resources and the promise to transfer the good or service is separately identifiable from other promises in the contractual arrangement with the customer. Non-distinct goods and services are combined with other goods or services until they are distinct as a bundle and therefore form a single performance obligation.

 

The consideration (including any discounts) is allocated between separate goods and services in a bundle on a relative basis based on their standalone selling prices (“SSP”). Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. In addition to these general policies, the specific revenue recognition policies for each major category of revenue are included below.

 

License of intellectual property

 

Royalty revenues primarily consist of revenues received from the license of intellectual property for print-based and audio-visual learning products. Royalty revenues are recognized based on the confirmation of sales by the Company’s co-publishing partners, and when the underlying sale occurs. Training and support services provided for royalty contracts are delivered in advance of the underlying sale occurring, and, as such, royalty revenue is recognized when the underlying sale occurs, being the later of the satisfaction of the performance obligation and the underlying sale. Royalty revenues are not subject to right of return or product warranties. Royalty revenues are earned by Print-Based English Language Learning segment and relate to long-term contracts.

 

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Online-based licenses

 

Online-based licensing revenue is generated from contracts with customers. The Company provides the right to access to hosted software over a contract term without the customer taking possession of the software. Revenue recognition commences on the date an executed contract exists and the customer has the right to access to the hosted software. Online based licensing revenues are generated by online language learning segment and relate to short-term contracts.

 

Offline licenses

 

Offline licensing revenue is generated from contracts with customers. Offline licenses provide the right to use perpetual language-learning software and is recognized at the point in time when the software is made available to the customer. When providing offline licenses, the customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is made available to the customer and the right to use the software has commenced. Offline license revenues are generated by online language learning segment and relate to short-term contracts.

 

Costs to Obtain a Contract with a Customer

 

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the Company expects the costs to be recoverable. The Company has determined that sales commissions meet the requirements to be capitalized. These capitalized costs are amortized consistent with the pattern of transfer to the customer for the goods and services to which the asset relates. Amortization of the asset is included in cost of sales in the consolidated statements of operations. Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.

 

Contract Assets and Liabilities

 

The payment terms and conditions in our customer contracts may vary from the timing of revenue recognition. In some cases, customers pay in advance of delivery of products or services; in other cases, payment is due as services are performed. Timing differences between revenue recognition and invoicing primarily results in contract liabilities. Contract liabilities are relieved as revenue is recognized. Contract assets and contract liabilities are reported on a contract-by-contract basis at the end of each reporting period.

 

Significant Judgments

 

The Company distributes its products and services both directly to the end customer and indirectly through resellers. The Company evaluates each of its reseller relationships to determine whether it is the principal (where revenue is recognized at the gross amount) or agent (where revenue is recognized net of the reseller commission). In making this determination, the Company evaluates a variety of factors including the amount of control the Company is able to exercise over the transactions. The Company concluded that it acts as principal in all contracts with customers. The recognition of revenue requires judgement in the assessment of performance obligations within a contract and the assessment of recognizing at a point in time or over a period of time.

 

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Comprehensive income (loss)

 

Comprehensive income (loss) measures net profit for the period plus other comprehensive income. Other comprehensive income (loss) consists of changes in equity, such as changes to foreign currency translation adjustments of foreign operations during the period. Amounts reported as other comprehensive income are accumulated in a separate component of shareholders’ equity as accumulated other comprehensive income.

 

Property and equipment

 

Property and equipment are initially recorded at cost. Depreciation is provided using methods outlined below at rates intended to depreciate the cost of assets over their estimated useful lives.

 

Method

Rate

   

Computer and office equipment

Declining balance 20 %

Leasehold improvement

Straight line over the term of the lease

 

Software and web development costs

 

The Company capitalizes all costs related to the development of its fee-based language learning products and services when the feasibility and profitability of the project can be reasonably considered certain. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalized includes the cost of material, and direct labor. Other development expenditure is recognized in the statement of comprehensive income (loss) as an expense as incurred.

 

Content development costs

 

The Company capitalizes all costs related to content development of its fee-based language learning products and services when the feasibility and profitability of the project can be reasonably considered certain. Expenditure on content development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalized includes the cost of material, and direct labor. Other development expenditure is recognized in the statement of comprehensive income (loss) as an expense as incurred.

 

Government grants

 

The Company receives government grants based on certain eligibility criteria for book publishing industry development in Canada. These government grants are recognized quarterly and are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant during the period in which the criteria to receive the grant is met. The Company records a liability for the repayment of the grants and a charge to operations in the period in which conditions arise that will cause the government grants to be repayable.

 

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Current and deferred income taxes

 

Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.

 

Deferred taxation is recognized using the liability method on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

 

However, the deferred taxation is not recognized if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred taxation is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.

 

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

 

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to offset current income tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

 

Foreign currency translation

 

Foreign currency transactions are initially recorded in the functional currency at the transaction date exchange rate. At the balance sheet date, monetary assets and liabilities denominated in a foreign currency are translated into the functional currency at the reporting date exchange rate. Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement of monetary items at year-end exchange rates are recognized in the income statement. Non-monetary items measured at historical cost are translated using the historical exchange rate. Non-monetary items measured at fair value are translated using the exchange rates at the date when fair value was determined.

 

Financial statements of subsidiaries, affiliates and joint ventures for which the functional currency is not the Canadian Dollar are translated into the Canadian Dollar as follows: all asset and liability accounts are translated at the balance sheet exchange rate and all earnings and expense accounts and cash flow statement items are translated at average exchange rates for the period. The resulting translation gains and losses are recorded as foreign currency translation adjustments in other comprehensive income (loss) and recorded in accumulated other comprehensive income in equity. On disposal of a foreign operation the cumulative translation differences recognized in equity are reclassified to the statement of comprehensive income (loss) and recognized as part of the gain or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have been treated as assets and liabilities of the foreign entity and translated into Canadian Dollars at the balance sheet rate.

 

26

 

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income (loss).

 

Earnings (loss) per share

 

Earnings (loss) per share is computed by dividing the earnings (loss) for the year by the weighted average number of common shares outstanding during the year, including contingently issuable shares which are included when the conditions necessary for issuance have been met. Diluted earnings per share is calculated in a similar manner, except that the weighted average number of common shares outstanding is increased to include potentially issuable common shares from the assumed exercise of common share purchase options and warrants, if dilutive.

 

Share-based compensation plan

 

The share-based compensation plan allows the Company executives, management, employees and consultants to acquire shares of the Company. The fair value of share-based payment awards granted is recognized as management, employee or consultant expense with a corresponding increase in equity. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee.

 

Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value is measured at grant date and each tranche is recognized on a graded vesting basis over the period during which the share purchase options vest. The fair value of the share-based payment awards granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the awards were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the actual number of awards, for which the related service and non-market vesting conditions are expected to be met.

 

For equity-settled share-based payment transactions with consultants, the Company measures the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which cases, the Company measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.

 

Financial instruments

 

A financial asset shall be measured at amortized cost if it is held with the objective of holding assets in order to collect contractual cash flows which arise on specified dates and that are solely principal and interest.

 

A debt investment shall be measured at fair value through other comprehensive income if it is held with the objective of holding assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling the asset on the basis of its fair value.

 

All other financial assets are classified and measured at fair value through profit or loss (“FVPL”) unless the Company makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading or contingent consideration recognized in a business combination) in other comprehensive income (“OCI”).

 

Despite these requirements, a financial asset may be irrevocably designated as measured at fair value through profit or loss to reduce the effect of, or eliminate, an accounting mismatch.

 

27

 

For financial liabilities designated at fair value through profit or loss, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch).

 

The Company is required to use an “expected credit loss” (“ECL”) model to recognize an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted.

 

For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available. The investment classifications “Available-for-sale financial assets” and “Held-to-maturity investments” are no longer used and “Financial assets at fair value through other comprehensive income” was introduced.

 

Trade and other receivables

 

Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 60 days. The Company has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue.

 

Other receivables are recognized at amortized cost, less any allowance for expected credit losses.

 

Impairment of long-lived assets

 

The Company’s property and equipment and intangibles with finite lives are reviewed for an indication of impairment at each balance sheet date. The Company’s intangible assets that have an indefinite life or are not ready for use are not subject to amortization and are tested annually for impairment. Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists. If indication of impairment exists, the asset’s recoverable amount is estimated. The recoverable amount is the greater of the asset’s fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses are recognized in profit and loss for the period.

 

An impairment loss, other than goodwill impairment, is reversed if there is an indication that there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

 

Goodwill represented the excess of the cost of an acquisition over the fair value of the Company’s share of identifiable net assets of the acquired subsidiary at the date of acquisition. Goodwill was carried at cost less accumulated impairment losses. Goodwill was allocated to each cash generating unit (“CGU”) or group of CGUs that are expected to benefit from the related business combination. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment.

 

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An impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Determining whether goodwill is impaired requires an estimation of the higher of fair value less costs of disposal and value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

 

Warrants

 

From time to time, the Company may issue warrants as a means of raising capital.  The Company values warrants using the Black-Scholes pricing model.  Any transaction costs arising on the issue of warrants are recognized in equity as a reduction of the proceeds from warrants. In the event that warrants are exercised, the fair value of the warrants issued is reclassified from warrants to share capital.  In the event that warrants expire unexercised, their value is transferred from warrants to share-based payment reserve.

 

Operating Results

 

Financial information for the year ended December 31, 2019, 2018, 2017, and 2016 was prepared in accordance with IFRS as issued by the IASB.

 

Fiscal Year Ended December 31, 2019 vs. Fiscal Year Ended December 31, 2018

 

Revenues from Print-Based English language learning for the period were $1,674,204 compared to $1,686,514 in 2018 as a result of foreign exchange fluctuations in the Chinese RMB and Canadian Dollar vs. the US Dollar. Direct costs associated with publishing revenue are relatively modest and have been consistent throughout the years. The Company continues to maintain its relationship with PEP and is investing in the development of its existing and new programs and marketing activities to maintain and increase its royalty revenues.

 

During 2019, Lingo Media recorded revenues of $1,956,222 as compared to $1,940,182 in 2018. Net profit was $162,566 as compared to net loss $104,156 in 2018 resulting in a $0.00 earnings per share as compared to $(0.00) loss per share in 2018.

 

Selling, General and Administrative Costs

 

Selling, general and administrative expenses were $997,159 compared to $1,200,766 in 2018. Selling, general and administrative expenses for the two segments are segregated below.

 

29

 

(i) Print-Based English Language Learning

 

Selling, general and administrative cost for print-based publishing increased from $64,580 in 2018 to $247,673 in 2019 due to the increase in consulting fees & salaries and professional fees. The following is a breakdown of selling, general and administrative costs directly related to print-based English language learning:

 

For the Year Ended December 31

 

2019

   

2018

 

Sales, marketing & administration

  $ 53,056     $ 72,154  

General admin expense recovery

    (83,771 )     (82,464 )

Consulting fees & salaries

    399,044       246,783  

Travel

    40,402       48,465  

Premises

    59,665       11,577  

Professional fees

    14,664       10,878  

Less: Grants

    (235,387 )     (242,813 )
    $ 247,673     $ 64,580  

 

(ii) Online English Language Learning

 

Selling, general and administrative costs related to online English language learning was $224,320 for the year compared to $348,436 in 2018. Travel, consulting fees and salaries and professional fees for this business unit decreased in 2019 as compared to 2018.

 

For the Year Ended December 31

 

2019

   

2018

 

Sales, marketing & administration

  $ 152,803     $ 120,629  

General admin expense recovery

    (1,737 )     -  

Consulting fees & salaries

    560       146,202  

Travel

    11,331       18,593  

Premises

    48,000       48,000  

Professional fees

    13,362       15,012  
    $ 224,320     $ 348,436  

 

(iii) Head Office

 

Selling, general and administrative costs related to head office was $525,166 for the year compared to $787,750 in 2018. Selling, general and administrative costs for this reporting unit decreased in 2019 as compared to 2018, which is the result of a decrease in expenditures related to professional fees and shareholder services.

 

For the Year Ended December 31

 

2019

   

2018

 

Sales, marketing & administration

  $ 67,862     $ 117,538  

Consulting fees & salaries

    315,810       481,574  

Travel

    1,248       9,322  

Shareholder services

    62,465       76,240  

Professional fees

    77,781       103,076  
    $ 525,166     $ 787,750  
Total Selling and Administrative Expenses   $ 997,159     $ 1,200,766  

 

Government Grants

 

Included as a reduction of selling, general and administrative expenses are government grants of $235,387 (2018 - $242,813), relating to the Company’s publishing and software projects. At the end of the year, $22,276(2018 - $nil) is included in accounts and grants receivable.

 

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One government grant for the print-based English language learning segment is repayable in the event that the segment’s annual net income before tax for the current year and the previous two years exceeds 15% of revenue. During 2019 and 2018, the conditions for the repayment of grants did not arise and no liability was recorded.

 

One grant, relating to the Company’s “Development of Comprehensive, Interactive Phonetic English Learning Solution” project, is repayable semi-annually at a royalty rate of 2.5% per year’s gross sales derived from this project until 100% of the grant is repaid. No royalty was paid in 2019, 2018 or 2017 as no sales were generated from this project

 

Segmented Information

 

Total comprehensive income for the Company was $113,817 for the year ended December 31, 2019 as compared to total comprehensive loss $71,954 in 2018. Total comprehensive income can be attributed to the two operating segments and reduction in head office as a reporting segment as shown below:

 

Online English Language Learning (“ELL”)

 

2019

   

2018

 

Revenue

  $ 282,018     $ 253,668  

Expenses:

               

Direct costs

    124,471       180,832  

General & administrative

    224,320       348,436  

Bad debt expense

    (85,491 )     (293,379 )

Amortization of property & equipment

    1,280       1,605  

Development costs

    196,609       481,992  

Income taxes and other taxes

    3,814       9,313  
      465,003       728,799  

Segmented Loss Online ELL

    (182,985 )     (475,131 )
                 
                 
                 
                 
                 

Print-Based English Language Learning

               

Revenue

  $ 1,674,204     $ 1,686,514  

Expenses:

               

Direct costs

    87,836       90,188  

General & administrative

    247,673       64,580  

Amortization of property & equipment

    16,201       15,859  

Amortization of office lease

    83,381       -  

Income taxes and other taxes

    179,475       180,221  
      614,565       350,848  

Segmented Profit – Print-Based ELL

    1,059,639       1,335,666  

Head Office

               

Expenses:

               

General & administrative

  $ 525,166     $ 787,750  

Amortization of property & equipment

    723       905  
      525,889       788,655  

Total Segmented Profit

  $ 350,765     $ 71,880  

Other

               

Foreign exchange

    (10,584 )     38,351  

Interest and other financial expenses

    (83,750 )     (51,898 )

Share-based payment

    (93,865 )     (162,489 )

Other comprehensive income (loss)

    (48,749 )     32,202  
      (236,948 )     (143,834 )

Total Comprehensive Income (Loss)

  $ 113,817     $ (71,954 )

 

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Share-Based Payments

 

The Company amortizes share-based payments with a corresponding increase to the contributed surplus account. During the year, the Company recorded an expense of $93,865 compared to $162,489 in 2018.

 

Foreign Exchange

 

The Company recorded foreign exchange loss of $10,584 as compared to foreign exchange gain of $38,351 in 2018, 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 significant portion of its revenue and expenses are denominated in Chinese Renminbi and US Dollars.

 

Income Tax Expense

 

The Company recorded a tax expense of $183,288 for the year ended December 31, 2019 compared to a tax expense of $189,534 in 2018. This tax is a withholding tax paid on revenues earned in China and repatriated outside of China.

 

Net Profit (Loss) for the Year

 

The Company reported a net profit of $162,566 for the year as compared to net loss of $104,156 in 2018. The earnings per share is $0.00.

 

Fiscal Year Ended December 31, 2018 vs. Fiscal Year Ended December 31, 2017

 

Revenues from Print-Based English language learning for the period were $1,686,514 compared to $1,688,571 in 2017 as a result of foreign exchange fluctuations in the Chinese RMB and Canadian Dollar vs. the US Dollar. Direct costs associated with publishing revenue are relatively modest and have been consistent throughout the years. The Company continues to maintain its relationship with PEP and is investing in new updated editions of its programs and marketing activities to maintain and ideally to increase its royalty revenues.

 

During 2018, Lingo Media recorded revenues of $1,940,182 as compared to $2,776,768 in 2017, a decrease of 30%. Net loss was $104,156 as compared to $6,261,382 in 2017 resulting in a $0.00 loss per share as compared to $0.18 loss per share in 2017.

 

Selling, General and Administrative Costs

 

Selling, general and administrative expenses were $1,200,766 compared to $1,368,153 in 2017. Selling, general and administrative expenses for the three segments are segregated below.

 

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(i) Print-Based English Language Learning

 

Selling, general and administrative cost for print-based publishing decreased from $97,404 in 2017 to $64,580 in 2018 due to the increase in government grants and general administrative expense recovery. The following is a breakdown of selling, general and administrative costs directly related to print-based English language learning:

 

For the Year Ended December 31

 

2018

   

2017

 

Sales, marketing & administration

  $ 72,154     $ 38,022  

General admin expense recovery

    (82,464 )     (9,673 )

Consulting fees & salaries

    246,783       167,708  

Travel

    48,465       37,951  

Premises

    11,577       83,550  

Professional fees

    10,878       12,259  

Less: Grants

    (242,813 )     (232,413 )
    $ 64,580     $ 97,404  

 

ii) Online English Language Learning

 

Selling, general and administrative costs related to online English language learning was $348,436 for the year compared to $455,915 in 2017. Selling, general and administrative costs for this operating unit decreased in 2018 as compared to 2017, which is the result of managing expenses.

 

For the Year Ended December 31

 

2018

   

2017

 

Sales, marketing & administration

  $ 120,629     $ 189,698  

Consulting fees & salaries

    146,202       165,940  

Travel

    18,593       36,759  

Premises

    48,000       48,000  

Professional fees

    15,012       15,518  
    $ 348,436     $ 455,915  

 

iii) Head Office

 

Selling, general and administrative costs related to head office was $787,750 for the year compared to $814,834 in 2017. Selling, general and administrative costs for this reporting unit decreased in 2018 as compared to 2017, which is the result of decrease on expenditures related to shareholder services and professional fees.

 

For the Year Ended December 31

 

2018

   

2017

 

Sales, marketing & administration

  $ 117,538     $ 57,230  

Consulting fees & salaries

    481,574       354,112  

Travel

    9,322       11,861  

Shareholder services

    76,240       137,517  

Professional fees

    103,076       254,114  
    $ 787,750     $ 814,834  
Total Selling and Administrative Expenses   $ 1,200,766     $ 1,368,153  

 

33

 

Government Grants

 

Included as a reduction of selling, general and administrative expenses are government grants of $242,813 (2017 - $232,413), relating to the Company's publishing and software projects. At the end of the year, $nil (2017 - $22,556) is included in accounts and grants receivable.

 

One government grant for the print-based English language learning segment is repayable in the event that the segment’s annual net income before tax for the current year and the previous two years exceeds 15% of revenue. During 2018 and 2017, the conditions for the repayment of grants did not arise and no liability was recorded.

 

One grant, relating to the Company’s “Development of Comprehensive, Interactive Phonetic English Learning Solution” project, is repayable semi-annually at a royalty rate of 2.5% per year’s gross sales derived from this project until 100% of the grant is repaid. No royalty was paid in 2018 and 2017 as no sales were generated from this project.

 

Segmented Information

 

Total comprehensive loss for the Company was $71,954 for the year ended December 31, 2018 as compared to total comprehensive loss $6,262,793 in 2017. Total comprehensive loss can be attributed to the two operating segments and head office as a reporting segment as shown below:

 

Online English Language Learning

 

2018

   

2017

 

Revenue

  $ 253,668     $ 1,088,197  

Expenses:

               

Direct costs

    180,832       134,695  

General & administrative

    348,436       455,915  

Bad debt expense

    (293,379 )     732,254  

Amortization of property & equipment

    1,605       894  

Amortization of development costs

    -       1,051,928  

Development costs

    481,992       2,692,009  

Loss on acquisition

    -       80,818  

Impairment loss - goodwill

    -       139,618  

Impairment – intangible assets

    -       1,948,081  

Income taxes and other taxes

    9,313       180  
      728,799       7,236,392  

Segmented Loss - Online ELL

  $ (475,131 )   $ (6,148,195 )
                 

Print-Based English Language Learning

               

Revenue

    1,686,514       1,688,571  

Expenses:

               

Direct costs

    90,188       90,923  

Selling, general & administrative

    64,580       97,404  

Amortization of property & equipment

    15,859       4,619  

Income taxes and other taxes

    180,221       177,842  
      350,848       370,788  

Segmented Income – Print-Based ELL

    1,335,666       1,317,783  

Head Office

               

Expenses:

               

General & administrative

    787,750       814,834  

Amortization of property & equipment

    905       1,131  
      788,655       815,965  

Total Segmented Profit (Loss)

  $ 71,880     $ (5,646,377 )

Other

               

Foreign exchange

    38,351       (189,783 )

Interest and other financial expenses

    (51,898 )     (53,709 )

Share-based compensation

    (162,489 )     (371,513 )

Other comprehensive loss

    32,202       (1,410 )
      (143,834 )     (616,415 )

Total Comprehensive Income (Loss)

  $ (71,954 )   $ (6,262,792 )

 

34

 

Share-Based Payments

 

The Company amortizes share-based payments with a corresponding increase to the contributed surplus account. During the year, the Company recorded an expense of $162,489 compared to $371,513 in 2017.

 

Foreign Exchange

 

The Company recorded foreign exchange gain of $38,351 as compared to foreign exchange loss of $189,783 in 2017, 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 significant portion of its revenue and expenses are denominated in Chinese Renminbi and US Dollars.

 

Income Tax Expense

 

The Company recorded a tax expense of $189,534 for the year ended December 31, 2018 compared to a tax expense of $178,022 in 2017. This tax is a withholding tax paid on revenues earned in China and repatriated outside of China.

 

Net Profit for the Year

 

The Company reported a net loss of $104,156 for the year as compared to $6,261,382 in 2017. The loss per share is $(0.00).

 

5.B      Liquidity and Capital Resources

 

Financial information for the years ended December 31, 2019, 2018 and 2017 was prepared in accordance with IFRS as issued by the IASB.

 

As at December 31, 2019, the Company had cash of $442,489 compared to $233,843 in 2018. Accounts and grants receivable of $838,502 were outstanding at the end of the year compared to $913,458 in 2018. With 91% of the receivables from PEP and the balance due from ELL Technologies’ customers, the Company does not anticipate an effect on its liquidity. Total current assets amounted to $1,402,594 (2018 - $1,248,840) with current liabilities of $686,068 (2018 - $743,410) resulting in working capital balance of $716,526 (2018 - $505,430).   

 

35

 

Lingo Learning receives government grants based on certain eligibility criteria for publishing industry development in Canada and for international marketing support. These government grants are recorded as a reduction of general and administrative expenses to offset direct expenditure funded by the grant. The Company receives these grants throughout the year. The grant is applied based on Lingo Learning 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.

 

Lingo Media has access to working capital through equity or debt financings, if and as required to finance its growth plans. To date, the Company has been successful in raising sufficient working capital in the past.  No assurance can be made that such will be available in the future or, if available, on acceptable terms.

 

5.C      Research and Development

 

During the years ended December 31, 2019, 2018 and 2017, the Company spent $Nil on intangibles, under the categories of “software and web development costs” and “content platform”. Respectively, $196,605, $481,489, and $2,692,009 was recorded as development cost.

 

5.D      Trend Information

 

Lingo Media believes that the global market trends in English language learning are strong and will continue to grow at a rapid pace. Developing countries around the world, specifically in Latin America and Asia are expanding their mandates for the teaching of English amongst students, young professionals and adults.

 

5.E      Off-Balance Sheet Arrangements

 

The Company has not entered into any off-balance sheet finance arrangements.

 

5.F      Tabular disclosure of contractual obligations

 

The Company has one office facility under lease. The lease term is 5 years from 2016, with an option to renew the lease for another 5 year term after that date.

 

On adoption of IFRS 16, the Company recognized lease obligations in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17, “Leases”. These obligations were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The lessee’s incremental borrowing rate applied to the lease obligations on January 1, 2019 was 8%.

 

36

 

The reconciliation from the operating lease commitment disclosued in the Annual Financial Statements as at December 31, 2018 and the lease obligation as at January 1, 2019 is as follows:

 

Operating lease commitment as at December 31, 2018

  $ 482,813  

Discounted using incremental borrowing rate as at January 1, 2019

  $ 256,280  

Recognition exemption of leases with terms less than 1 year

    (21,500 )

Extension options reasonably certain to be exercised

    409,341  

Lease obligation as at January 1, 2019

  $ 644,121  

 

For the year ended December 31, 2019, an accretion of $48,239 in carrying amount of lease liability was recorded because of the use of present value factor at initial measurement.

 

5.G. Safe Harbor

 

Portions of this Annual Report on Form 20-F may include "forward-looking statements" within the meaning of securities laws. These statements are made in reliance upon Sections 21E and 27A of the Securities Exchange Act of 1934, which involve known and unknown risks, uncertainties or other factors that could cause actual results to differ materially from the results, performance, or expectations implied by these forward-looking statements. These statements are based on management's current expectations and involve certain risks and uncertainties. Actual results may vary materially from management's expectations and projections and thus readers should not place undue reliance on forward-looking statements. The Company has tried to identify these forward-looking statements by using words such as "may," "should," "expect," "hope," "anticipate," "believe," "intend," "plan," "estimate" and similar expressions. The Company’s expectations, among other things, are dependent upon general economic conditions, the continued and growth in demand for its products, retention of its key management and operating personnel, its need for and availability of additional capital as well as other uncontrollable or unknown factors. No assurance can be given that the actual results will be consistent with the forward-looking statements. Except as otherwise required by US Federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. See also under “Forward Looking Statements” above.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6.A.      Directors and Senior Management 

 

Table No. 6

Directors and Senior Management

December 31, 2019

 

Name

Position

Age

Date of Election/ Appointment

Michael P. Kraft

Chairman/Director

56

November 1996/December 2018

Khurram Qureshi

CFO/Secretary/Treasurer

57

April 1997/December 2011

Gali Bar-Ziv

President /CEO

48

June 2009//December 2018

Jerry Grafstein

Director

85

September 2010

Tommy Weibing Gong

Director

52

September 2010

Robert Martellacci

Director

58 December 8, 2017

 

Michael P. Kraft is a Co-Founder, Chairman and a Director of Lingo Media and has been since its inception in 1996.  He is also the President of MPK Inc. a management services and consulting business providing strategic planning, business development and corporate development since 1989. Mr. Kraft is the Chairman of Buckingham Group Limited, a small privately-owned merchant bank that has played a significant role in the capital formation strategy and financing as a principal of various emerging and growth enterprises. He is also a Co-Founder, former Chaiman and Strategic Advisor of WeedMD Inc. and a Director of TruTrace Technologies, Inc., Pioneering Techology Corp., JM Capital II Corp. He is also a Founder, Co-Founder and/or Board Director of several private companies including Cannabio Corporation, Safeguard Biosystems Corporation, MakMera Upstream Inc., REIN Capital Corp. amongst others.

 

Khurram R. Qureshi was the Chief Financial Officer of the Company from 1997 to July 2009, and was reappointed as such in December 2011.  He received a Bachelor of Administrative Studies from York University in 1987 and received the Chartered Accountant designation in 1990. Mr. Qureshi is also a partner at CQK Chartered Accountants LLP.

 

Gali Bar-Ziv is the President and Chief Executive Officer of Lingo Media. He brings more than 15 years of management and entrepreneurial experience, including financing, mergers and acquisitions, strategic planning, channel development and corporate development with extensive international experience in Israel, China and Latin America. Mr. Bar-Ziv profitably grew a sale, marketing and distribution start-up to sales growth of more than 700% year over year. He also successfully turned around the largest service division of a $300 million financial services company while at Fairfax Financial. Mr. Bar-Ziv holds a Bachelor of Law (LL.B) degree from the University of London and an MBA in Strategic and Entrepreneurial studies from the Schulich School of Business in Toronto.

 

38

 

The Hon. Jerry S. Grafstein, Q.C., holds degrees from the University of Western Ontario and the University of Toronto and has taught the Bar Admission Course at Osgoode Hall. He serves as counsel emeritus at Minden Gross LLP in Toronto and practices corporate finance and communication law.  Mr. Grafstein devotes most of his business time to technology start-ups in Canada, the U.S. and Latin America. Mr. Grafstein has wide-ranging legal and business experience in all aspects of media. He was a co-founder of a range of media companies, focusing on broadcasting, cable, communications, film production and public enterprises in Canada, the U.S., the U.K., and South America. Mr. Grafstein recently co-founded online news sites from Canada, the U.S., the U.K., Brazil, China, Russia, Africa, Europe and the Mideast. In addition to his media experience, Mr. Grafstein advised several key government ministries, including Transportation, External Affairs, Consumer and Corporate Affairs and Justice. He was appointed to the Senate of Canada in 1984 by then Prime Minister Pierre Elliott Trudeau and served on all Senate Committees, including: Foreign Affairs; Legal and Constitutional Affairs; and (as Chairman) Senate Banking, Trade and Commerce. While in the Senate, He was a long serving Co-Chair of the Canada-United States Inter-Parliamentary Group, and a long serving senior officer of the Organization for Security and Co-Operation in Europe Parliamentary Assembly (OSCE PA). He retired from the Senate on January 1, 2010.

 

Tommy Weibing Gong holds an Engineering degree from Huazhong University of Science and Technology in China, and IT certifications through his North American education and started his IT career in 1996 in Silicon Valley. He is Founder of Polar Bear Energy Inc., a business in the Cleantech and Greentech sector. Mr. Gong is now a leading commercial property developer in Shanghai. He serves as Chairman of Shanghai Green Town Plaza Real Estate Development Co., Ltd, Shanghai Zhetie Green Town Real Estate Development Co., Ltd, Zysteq North America Corporation, Shanghai Tommy Real Estate Development Co., Ltd, Shanghai Tommy & Jane Property Investment and Management Co., Ltd., and Canada & China Real Estate Management Co., Ltd. He was appointed as Economy Advisor by Shanghai Yangpu District Government in 2010. He is the recipient of “2009: China’s Top 10 Intelligent and Financial Person”; “2010: Person of the Year in Overseas Business”, “2013: China’s Top 10 Outstanding Business Leaders”.

 

Robert Martellacci is founder and President, MindShare Learning Technology since 2002 and President and Co-Founder, C21 Canada—Canadians for 21st Century Learning & Innovation. He has over 25 years of expertise in the learning and technology field as an administrator at York University & Country Manager, TLC Canada School Division and MLS. Mr. Martellacci served on the President’s Task Force on the College System at York University. His board appointments include: Past Chair, Canadian eLearning Enterprise Alliance and board member York University Institute on Learning Technology. Mr. Martellacci was also appointed to the ICTC Task Force on Driving Change Education and Skills DigitalTalent2020. He was awarded the 2016 Chair’s Global Best Partnership Award for outstanding work nationally and internationally for taking a leadership role in forging strategic partnerships between industry and education. Mr. Martellacci is also founder and CEO of MindShare WorkSpace, a coworking/innovation space on a mission to redefine the future of work and learning. He is a graduate of Pepperdine University with a Master’s degree in Educational Technology.

 

The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.

 

The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.

 

No Director and/or Executive Officer has been the subject of any order, judgment, or decree of any governmental agency or administrator or of any court or competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation of which he is a Director and/or Executive Officer, to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining or enjoining any such person or any corporation of which he is an officer or director from engaging in or continuing any conduct, practice, or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security or any aspect of the securities business or of theft or of any felony.

 

39

 

There are no arrangements or understandings between any two or more Directors or Executive Officers, pursuant to which he was selected as a Director or Executive Officer. There are no family relationships between any two or more Directors or Executive Officers.

 

6.B.      Compensation

 

The table below sets forth information concerning the compensation paid, during each of the last three fiscal years (as applicable), to the Company’s Chief Executive Officer, Chief Financial Officer, and other Executive Officers of the Company and its subsidiaries who received total remuneration, determined on the basis of base salary and bonuses in excess of $100,000 during the last three fiscal years ended December 31 (the “Named Executive Officers”).

 

Summary Compensation Table

 

 

 

 

 

 

Non-equity

incentive plan

compensation

 

 

 

Name and principal

position

Year

Salary

($)

Share-

based

awards

($)

Option-

based

awards

($)(2)

Annual incentive

plans

Long-

term

incentive plans(3)

Pension

Value

($)

All other

compensation

($)(1)

Total

compensation

($)

Michael P. Kraft

Chairman, and Director

2019

2018

2017

72,000

115,500

120,000

Nil

Nil

Nil

Nil

Nil

100,000

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

23,916

25,854

72,000

139,416

245,854

Gali Bar-Ziv

President, Chief Executive Officer

2019

2018

2017

186,000

 153,000

 150,000

Nil

Nil

Nil

Nil

Nil

100,000

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

21,308

37,844

186,000

174,308

287,844

Khurram Qureshi

Chief Financial Officer

2019

2018

2017

 60,000

 60,000

 60,000

Nil

Nil

Nil

Nil

Nil

50,000

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

10,000

18,999

Nil

70,000

78,999

110,000

 

Notes:

(1)

Perquisites and other personal benefits, securities or property that do not in the aggregate exceed the lesser of $10,000 and 10% of the total of the annual salary and bonus for any NEO for the financial year, if any, are not disclosed.

(2)

The weighted average grant date fair value was calculated in accordance with the Black-Scholes model using the common share price on the date of grant, with the key valuation assumptions being stock-price volatility of 79%, risk free interest rate of 1.35%, no dividend yields, and expected life of 5 years.

(3)

"LTIP" or "long term incentive plan" means any plan which provides compensation intended to serve as incentive for performance to occur over a period longer than one financial year, but does not include option or stock appreciation right plans or plans for compensation through restricted shares or restricted share units.

 

Management Agreements

 

Michael P. Kraft

 

The Company entered into a consulting agreement (the "Kraft Consulting Agreement") dated as of October 18, 2007 with MPK Inc. pursuant to which the Company engaged MPK Inc. to provide the services of Michael P. Kraft (the "Consultant") to be the President & Chief Executive Officer of the Company. MPK Inc. is a corporation wholly-owned and controlled by Michael P. Kraft.

 

40

 

The Kraft Consulting Agreement provides for an initial term of twenty-four (24) months to begin on January 1, 2008 and was renewed in September 2009, 2011, 2013, 2015 and 2017. (The Kraft Consulting Agreement and Amendment provide that the Company pay MPK Inc. an aggregate of $38,000 plus applicable HST for the Applicable Period. In consideration of the Consultant agreeing to a reduction of consulting fees from $180,000 to $150,000. A further reduction was taken in 2013, from $150,000 to $38,000. The Company agrees to pay the Consultant a cash bonus in the amount of $100,000 upon completion of a merger or acquisition as approved by the board of directors or if the Company’s market capitalization increases from approximately $3,000,000 to $6,000,000.) Beginning on January 1, 2014, the Kraft Consulting Agreement resumed to $150,000 per year. An amendment was entered into whereby the monthly consulting fees were reduced from $12,500 to $10,000 as of June 1, 2015. In addition to providing an allowance for a health plan, the Kraft Consulting Agreement also provides for an automobile allowance of up to $1,500 per month. A further amendment was entered into whereby the monthly consulting fees were reduced from $10,000 to $6,000 as of December 1, 2018.

 

Gali Bar-Ziv

 

The Company entered into a consulting agreement (the "Bar-Ziv Consulting Agreement") dated as of June 1, 2009 with Busy Babies Inc. pursuant to which the Company engaged Busy Babies Inc. to provide the services of Gali Bar-Ziv (the "Consultant") to be the Chief Operating Officer of the Company. Busy Babies Inc. is a corporation wholly-owned and controlled by Gali Bar-Ziv.

 

The Bar-Ziv Consulting Agreement provided for an initial term of twelve (12) months to begin on June 1, 2009 and automatic renewals for a further one (1) year unless terminated pursuant to the terms thereof. The Bar-Ziv Consulting Agreement, as amended, provides that the Company pay Busy Babies Inc. an aggregate of $186,000 plus applicable HST per annum. The Company has also agreed to enable the Consultant to participate in a bonus program based upon agreed-to KPIs. The Bar-Ziv Consulting Agreement also provides for an allowance for mobile phone and parking allowance.

 

Khurram Qureshi

 

The Corporation has entered into a consulting agreement (the “Qureshi Consulting Agreement”) dated as of August 1, 2011 with CQK Chartered Accountants LLP (“CQK”), to provide the services of Khurram Qureshi as Chief Financial Officer of the Corporation. The agreement was renewed and amended agreement with 2240525 Ontario Inc. in August 2018.

 

The Qureshi Consulting Agreement provided for an initial term of 12 months to begin on August 1, 2011, and automatically renews for subsequent one-year terms unless terminated in accordance with its terms. The Corporation pays to 2240525 Ontario Inc. a base consulting fee of $5,000 per month, plus applicable HST. Mr. Qureshi is eligible for reimbursement for certain expenses properly incurred in connection with the Corporation’s business. Mr. Qureshi is eligible to receive annual incentive bonuses and grants stock of options pursuant to the Option Plan from time to time, in each case at the discretion of the Board. The Qureshi Consulting Agreement also provides that the Corporation will provide to Mr. Qureshi extended health benefits.

 

Stock Options

 

The Company grants stock options to Directors, Senior Management, employees and consultants; refer to ITEM #6.E., "Share Ownership, Stock Options”.

 

41

 

Director Compensation

 

The non-management directors of the Company are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors. The Board of Directors may award special remuneration to any Director undertaking any special services on behalf of the Company other than services ordinarily required of a Director. Other than indicated below no Director received any compensation for his services as a Director, including committee participation and/or special assignments.

 

Change of Control Remuneration

 

Michael P. Kraft

 

1.

The Consultant may terminate the Kraft Consulting Agreement upon ninety (90) days written notice to the Company and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination. The Consultant may also terminate the Kraft Consulting Agreement for the following reasons: (i) a material change in the position, duties and responsibilities of the Consultant; (ii) the Consultant ceases to be the most senior officer of the Company; (iii) any material reduction in the compensation payable to the Consultant in accordance with the terms of the Kraft Consulting Agreement; and (iv) the Company's head office being located more than 50 kilometres from its current location and the Consultant's current residence ("Good Cause"). If the Consultant terminates the Kraft Consulting Agreement for Good Cause the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to eighteen (18) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination.

 

2.

The Kraft Consulting Agreement may be terminated by the Company by giving written notice to the Consultant and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to eighteen (18) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination.

 

3.

In the event of a change of control, the Consultant may, for a period of six (6) months after the effective date of any such change of control, elect to terminate the Kraft Consulting Agreement with the Company upon eight weeks’ notice and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to eighteen (18) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination by voluntary resignation. In the event of a change of control and if the Company terminates the Consultant without cause, the settlement amount shall be equal to twenty-four (24) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination.

 

The Consultant is subject to an 18 month non-compete period following the termination of the Kraft Consulting Agreement.

 

Gali Bar-Ziv

 

1.

The Consultant may terminate the Bar-Ziv Consulting Agreement upon ninety (90) days written notice to the Company and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination. The Consultant may also terminate the Bar-Ziv Consulting Agreement for the following reasons: (i) a material change in the position, duties and responsibilities of the Consultant; (ii) the Consultant ceases to be a senior officer of the Company; (iii) any material reduction in the compensation payable to the Consultant in accordance with the terms of the Bar-Ziv Consulting Agreement; and (iv) the Company's head office being located more than 50 kilometres from its current location and the Consultant's current residence ("Good Cause"). If the Consultant terminates the Bar-Ziv Consulting Agreement for Good Cause the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination as well as a settlement amount.

 

42

 

2.

The Bar-Ziv Consulting Agreement may be terminated by the Company by giving written notice to the Consultant and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to nine (9) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination.

 

The Consultant is subject to a nine month non-compete period following the termination of the Bar-Ziv Consulting Agreement.

 

Khurram Qureshi

 

1.

Mr. Qureshi may terminate the Qureshi Consulting Agreement upon 90 days’ written notice to the Corporation and the Corporation shall pay to CQK Chartered Accountants LLP all amounts due and owing up to the effective date of termination. The Corporation shall pay to CQK Chartered Accountants LLP all amounts due and owing up to the effective date of termination, and a settlement amount equal to three months’ compensation at the rate of compensation payable within 30 days of the termination date.

 

2.

The Corporation may terminate the Qureshi Consulting Agreement for convenience by giving written notice to CQK Chartered Accountants LLP and payment by the Corporation of all amounts due and owing up to the effective date of termination plus a settlement amount equal to three months’ compensation at the rate of compensation payable to CQK Chartered Accountants LLP within 30 days of the termination date.

 

Other Compensation

 

Except as set forth above under “Summary Compensation Table”, no Executive Officer/Director received “other compensation” in excess of the lesser of US$10,000 or 10% of such officer's cash compensation, and all Executive Officers/Directors as a group did not receive other compensation which exceeded US$10,000 times the number of persons in the group or 10% of the compensation.

 

Bonus/Profit Sharing/Non-Cash Compensation

 

Except for the stock option program discussed in ITEM #6.E, the Company also agreed to enable Gali Bar-Ziv to participate in the Company’s sales commission program, pursuant to which Mr. Bar-Ziv is to receive 7% of net revenue for business initiative, 2% of net revenue for direct influence, other discretionary bonus by the board if applicable. Effective December 1, 2018, Bar-Ziv’s was amended to provide bonus compensation based upon agreed-to KPIs: 3% of company’s consolidated revenue from $1 million to $ 5 million, 5 % of company’s consolidated revenue greater than $ 5 million. Plus 3% of company’s consolidated EBITA from $250,000 to $1 million and 4% of company’s consolidated EBITA from $1 million to $5 million.

 

43

 

Pension/Retirement Benefits

 

No funds were set aside or accrued by the Company during fiscal 2017 to provide pension, retirement or similar benefits for Directors or Executive Officers.

 

6.C.      Board Practices

 

6.C.1.   Terms of Office.

 

The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.

 

The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.

 

6.C.2.   Termination benefits

 

Not applicable

 

6.C.3.   Board of Director Committees.

 

The Company has established an Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee in compliance with the Guidelines.

 

The Audit Committee assists the Board in its oversight of: (i) the integrity of the financial reporting of the Company; (ii) the independence and performance of the Company's external auditors; and (iii) the Company's compliance with legal and regulatory requirements. The members of the Audit Committee during the past fiscal year were Jerry Grafstein (Chairman), Tommy Weibing Gong, and Michael Kraft, Messrs. Grafstein and Gong being independent as defined in the Guidelines. Following the 2018 shareholder meeting, the Committee was comprised of Martin Bernholtz (Chairman), Tommy Gong, and Michael Kraft, with Messrs. Bernholtz and Gong being independent as defined in the Guidelines.

 

The Compensation Committee assists the Board in fulfilling its obligations relating to human resource and compensation matters of the Company and its subsidiaries and to establish a plan for the continuity and development of senior management.  The members of the Compensation Committee during the past fiscal year were Jerry Grafstein (Chairman), Michael Kraft, and Robert Martellacci, with Messrs. Grafstein and Martellacci being independent as defined in the Guidelines. Following the 2018 shareholder meeting, the Committee was comprised of Martin Bernholtz (Chairman), Jerry Grafstein, and Tommy Weibing Gong, all being independent as defined in the Guidelines

 

The Corporate Governance and Nominating Committee assists the Board by: (i) developing, reviewing and planning the Company's approach to corporate governance issues, including developing a set of corporate governance principles and guidelines specifically applicable to the Company; (ii) identifying and recommending to the Board potential new nominees to the Board; (iii) monitoring management's succession plan for the Chief Executive Officer (the "CEO") and other senior management; and (iv) overseeing enforcement of and compliance with the Company's proposed Code of Business Conduct.  The members of the Corporate Governance Committee during the past fiscal year were Messrs. Grafstein (Chairman), Bar-Ziv and Martellacci, Messrs. Grafstein and Martellacci being independent directors as defined in the Guidelines. Following the 2018 shareholder meeting, the Committee was comprised of Grafstein (Chairman), Bernholtz, and Kraft with Messrs. Grafstein and Bernholtz being independent as defined in the Guidelines

 

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6.E.      Share Ownership

 

Table No. 7 lists, as of April 30, 2020, Directors and Executive Officers who beneficially own the Company's voting securities and the amount of the Company's voting securities owned by the Directors and Executive Officers as a group. Table No. 7 includes all persons/companies where the Company is aware that they have 5% or greater beneficial interest in the Company’s securities.

 

Table No. 7

Shareholdings of Directors and Executive Officers

Shareholdings of 5% Shareholders

 

Title of Class

Name of Beneficial Owner

Amount and Nature of

Beneficial Ownership (1)

Percent of Class

Common

Michael P. Kraft(2)(3)

2,376,012(5)

6.69%

Common

Khurram Qureshi

392,606 (6)

1.11%

Common

Gali Bar-Ziv(4)

242,864(7)

0.68%

Common

Tommy Gong(2)

[nil](8)

0.00%

Common

Jerry Grafstein(2)(3)(4)

900,000(9)

2.53%

Common

Robert Martellacci(3)(4)

[nil](11)

0.00%

As a group (8 parties)

6,793,625

19.12%

 

* Less than 1%.

 

 

(1)

The information as to voting securities beneficially owned, controlled or directed, not being within the knowledge of the Company, has been furnished by the respective individuals.

 

(2)

Member of the Audit Committee.

 

(3)

Member of the Compensation Committee.

 

(4)

Member of the Corporate Governance and Nominating Committee.

 

(5)

Of such shares, 95,636 are held in Mr. Kraft's RRSP and 2,280,376 are held by Buckingham Group Limited, a company controlled by Mr. Kraft.  Mr. Kraft also holds options and to purchase up to an additional 500,000 common shares of the Company.

 

(6)

Of such shares, 38,606 are held in Mr. Qureshi’s RRSP. Mr. Qureshi also holds options to purchase up to 250,000 common shares of the Company.

 

(7)

Of such shares, 2,000 are held in Mr. Bar-Ziv's RRSP, and 240,864 are held by Busy Babies Inc., a company controlled by Mr. Bar-Ziv.  Mr. Bar-Ziv also holds options to purchase up to an additional 500,000 common shares of the Company.

 

(8)

Tommy Gong holds options to purchase up to 340,000 common shares of the Company.

 

(9)

Of such shares, 900,000 are held by New Court Corporation, a company controlled by Mr. Grafstein.  New Court Corporation also holds options to purchase up to an additional 500,000 common shares of the Company.

 

(10)

Robert Martellacci holds options to purchase up to 130,000 common shares of the Company.

 

Stock Options

 

TSX Venture Exchange Rules and Policies

 

Incentive options granted by the Company are made in accordance with the rules and policies of the TSX Venture Exchange ("TSX-V"), including the number of common shares under option, the exercise price and expiration date of such options, and any amendments thereto.

 

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Such terms and conditions, including the pricing of the options, expiration and the eligibility of personnel for such stock options; are described below. The TSX-V policy in respect of incentive stock options provides that shareholder approval is not required if the aggregate number of common shares that may be reserved for issuance pursuant to incentive stock options does not exceed 10% of the issued common shares of the Company, 5% to any one individual and 2% to any consultant at the time of granting.

 

Shareholder approval of the grant of incentive stock options is required pursuant to the rules of the TSX VEN where the grant will result in the Company having options outstanding which, in aggregate, are exercisable to acquire over 10% (to a maximum of 20%) of the outstanding common shares of the Company. In addition, disinterested shareholders (all shareholders excluding insiders and associates of insiders) approval is required pursuant to the rules of the TSX-V where:

 

(a) grant of incentive stock options could result at any time in:

 

 

(i)

the Company having options outstanding to insiders which, in aggregate, are exercisable to acquire over 20% of the outstanding common shares of the Company; or

 

(ii)

the issuance to insiders, within a one-year period, of common shares which, in aggregate, exceed 10% of the outstanding common shares of the Company; or

 

(iii)

the issuance to any one insider and such insider's associates, within a one-year period, of common shares which, in aggregate, exceed 5% of the outstanding common shares of the Company; or

 

(iv)

the issuance to any consultant of common shares which, in aggregate, exceed 2% of the outstanding common shares of the Company; or

 

(b) the Company is proposing to decrease the exercise price of stock options held by any insiders.

 

Company Stock Option Plan 

 

The Board has approved an amended stock option plan (the "Stock Option Plan") on November 3, 2017 whereby options may be granted to directors, officers, employees, consultants of the Company and its subsidiaries. The number of shares which may be reserved for issuance under the Stock Option Plan is limited to 7,105,838 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at November 3, 2017.

 

The maximum number of common shares which may be reserved for issuance in a 12 month period to any one individual under the Stock Option Plan, shall not, in the aggregate, exceed 5% of the issued and outstanding common shares of the Company at the time of grant. The maximum number of common shares which may be reserved for issuance in a 12 month period to any consultants and persons engaged in investor relations activities for the Company, shall not, in the aggregate, exceed 2% of the issued and outstanding common shares at the time of grant. Any common shares subject to a prior option granted under the Stock Option Plan which for any reason are cancelled or terminated prior to exercise will be available for a subsequent grant under the Stock Option Plan.

 

The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount. Options may be granted under the Stock Option Plan to be exercisable for a maximum period of ten years, subject to earlier termination, upon the termination of the optionee’s employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or any of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying. The options under the Stock Option Plan are non-transferable. The Stock Option Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of the common shares, a merger or other relevant changes in the Company’s capitalization.

 

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As of the date hereof, options to purchase an aggregate of 7,090,000 common shares are outstanding under the Stock Option Plan.

 

The names and titles of the Directors/Executive Officers of the Company to whom outstanding stock options have been granted and the number of common shares subject to such options are set forth in the Table below as of April 30, 2020, as well as the number of options granted to Directors and officers as a group.

 

Stock Options Outstanding 

Expressed in Canadian Dollars

 

 

Number of securities

underlying unexercised options (#)

Option exercise

price (C$)

Option

expiration date

Jerry Grafstein 

Director