LINGO
MEDIA CORPORATION
|
|||
Date:
April 30, 2009
|
By:
|
/s/ Michael
Kraft
|
|
Michael
Kraft
President
and CEO
|
CONTENTS
|
|
Page
|
|
Statement
of Management’s Responsibility
|
5
|
Auditors’
Report
|
6
|
Consolidated
Balance Sheets
|
7
|
Consolidated
Statements of Deficit
|
8
|
Consolidated
Statements of
Operations
|
9
|
Consolidated
Statements of Cash Flows
|
10
|
Notes
to Consolidated Financial Statements
|
11
|
/s/
Michael
Kraft
|
/s/
Khurram
Qureshi
|
|||
Chief
Executive Officer
|
Chief
Financial Officer
|
Collins
Barrow Toronto LLP
20
Eglinton Avenue West
Suite
2100, P.O. Box 2014
Toronto,
Ontario
M4R
1K8 Canada
T. 416.480.0160
F. 416.480.2646
www.collinsbarrow.com
|
|
/s/ Collins Barrow Toronto
LLP
|
||
Toronto,
Ontario
April 14, 2009
|
Collins Barrow Toronto
LLP
Independent Registered Chartered
Accountants
|
This
office is independently owned and operated by Collins Barrow Toronto
LLP.
The
Collins Barrow trademarks are used under License.
|
As
at December 31
|
2008
|
2007
|
||||||
|
Restated
(See
Note
10
&
26)
|
|||||||
Assets | ||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,279,937 | $ | 377,127 | ||||
Accounts
and grants receivable (note 4)
|
642,543 | 958,179 | ||||||
Inventory
|
- | 15,945 | ||||||
Prepaid
and sundry assets
|
160,161 | 89,631 | ||||||
Current
assets from discontinued operation (note 10)
|
34,608 | 276,021 | ||||||
3,117,249 | 1,716,903 | |||||||
Investment
and advances (note 5)
|
- | 182,520 | ||||||
Deferred
costs (note 5)
|
- | 157,419 | ||||||
Property
and equipment, net (note 6)
|
64,839 | 73,144 | ||||||
Development
costs, net (note 7)
|
111,517 | 267,910 | ||||||
Software
& web development costs, net (note 8)
|
5,233,187 | 4,352,341 | ||||||
Other
assets from discontinued operation (note 10)
|
- | 1,412,164 | ||||||
$ | 8,526,792 | $ | 8,162,401 | |||||
Liabilities
and Shareholders' Equity
|
||||||||
Current liabilities: | ||||||||
Accounts
payable
|
$ | 265,344 | $ | 351,196 | ||||
Accrued
liabilities
|
321,466 | 122,674 | ||||||
Loan
payable (note 11)
|
- | 228,674 | ||||||
Current
liabilities from discontinued operation (note 10)
|
734,601 | 806,152 | ||||||
1,321,411 | 1,508,696 | |||||||
Loans
payable (note 11)
|
- | 203,031 | ||||||
Future
income taxes (note 14)
|
564,997 | 564,997 | ||||||
1,886,408 | 2,276,724 | |||||||
Shareholders'
equity:
|
||||||||
Capital
stock (note 12 (a))
|
14,205,515 | 10,174,453 | ||||||
Warrants
(note 12 (b))
|
372,385 | 161,254 | ||||||
Contributed
surplus (note 12 (c))
|
847,768 | 452,411 | ||||||
Deficit
|
(8,785,284 | ) | (4,902,441 | ) | ||||
6,640,384 | 5,885,677 | |||||||
Commitments
and contingency (note 21)
|
||||||||
$ | 8,526,792 | $ | 8,162,401 |
/s/
Michael
Kraft
|
|
|||
Michael Kraft
Director
|
|
/s/
Sanjay
Joshi
|
|
|||
Sanjay
Joshi
Director
|
|
For
the years ended December 31
|
2008
|
2007
|
||||||
Restated
(See
Note 10)
|
||||||||
Deficit, beginning of year | $ | (4,902,441 | ) | $ |
(3,977,401
|
) | ||
Net
loss for the year
|
(3,882,843 | ) | (925,040 | ) | ||||
Deficit,
end of year
|
$ | (8,785,284 | ) | $ | (4,902,441 | ) |
For
the years ended December 31
|
2008
|
2007
|
2006
|
|||||||||
Restated
(See
Note 10)
|
Restated
(See
Note 10)
|
|||||||||||
Revenue
|
$ | 969,128 | $ | 879,626 | $ | 894,073 | ||||||
Direct
costs
|
126,329 | 113,318 | 132,968 | |||||||||
Gross
Margin
|
842,799 | 766,308 | 761,105 | |||||||||
Expenses:
|
||||||||||||
General
and administrative
|
2,127,726 | 946,307 | 809,260 | |||||||||
Inventory
write-off
|
15,618 | - | 36,279 | |||||||||
Development
cost write-down
|
27,915 | 28,184 | - | |||||||||
Deferred
cost, investment and advance write-off (note 5)
|
339,939 | - | - | |||||||||
Amortization
of property and equipment
|
21,243 | 13,465 | 64,402 | |||||||||
Amortization
of development costs
|
128,478 | 99,805 | 156,648 | |||||||||
Interest
and other financial expenses
|
95,544 | 27,077 | 31,260 | |||||||||
Stock-based
compensation
|
252,792 | 156,395 | 193,819 | |||||||||
3,009,225 | 1,271,233 | 1,291,668 | ||||||||||
Loss
before the following:
|
(2,166,456 | ) | (504,925 | ) | (530,563 | ) | ||||||
Income
taxes and other taxes (note 13)
|
145,018 | 127,267 | 160,455 | |||||||||
Loss
from continuing operations
|
(2,311,474 | ) | (632,192 | ) | (691,018 | ) | ||||||
Loss
from discontinued operation (note 10)
|
(1,571,369 | ) | (292,848 | ) | (57,906 | ) | ||||||
Net
loss for the period and comprehensive loss
|
$ | (3,882,843 | ) | $ | (925,040 | ) | $ | (748,924 | ) | |||
Loss
per share from continuing operations (note 12 (f))
|
$ | (0.22 | ) | $ | (0.11 | ) | $ | (0.17 | ) | |||
Loss
per share from discontinued operation (note 12 (f))
|
$ | (0.15 | ) | $ | (0.05 | ) | $ | (0.01 | ) | |||
Weighted
average number of
|
||||||||||||
common
shares outstanding (note 12 (f))
|
10,426,861 | 5,655,792 | 4,060,331 |
For
the years ended December 31
|
2008
|
2007
|
2006
|
|||||||||
Restated
(See
Note 10)
|
Restated
(See
Note 10)
|
|||||||||||
Cash
flows provided by (used in):
|
||||||||||||
Operations:
|
||||||||||||
Loss
from continuing operations
|
$ | (2,311,474 | ) | $ | (632,192 | ) | $ | (691,018 | ) | |||
Items
not affecting cash:
|
||||||||||||
Amortization
of property and equipment
|
21,243 | 13,465 | 11,399 | |||||||||
Amortization
of development costs
|
128,478 | 99,805 | 156,648 | |||||||||
Amortization
of acquired publishing content
|
- | - | 53,003 | |||||||||
Stock-based
compensation
|
252,792 | 156,395 | 193,819 | |||||||||
Income
taxes
|
- | - | (17,426 | ) | ||||||||
Inventory
write-off
|
15,618 | - | 36,279 | |||||||||
Investment
and advances write-off
|
182,520 | - | - | |||||||||
Deferred
costs write-off
|
157,419 | - | - | |||||||||
Development
cost write down
|
27,915 | 28,184 | - | |||||||||
Change
in non-cash balances related to operations:
|
||||||||||||
Accounts
and grants receivable
|
315,633 | (431,872 | ) | 208,278 | ||||||||
Inventory
|
327 | 418 | 17,720 | |||||||||
Prepaid
and sundry assets
|
(70,530 | ) | 29,606 | 15,111 | ||||||||
Accounts
payable
|
(158,933 | ) | (315,271 | ) | 10,743 | |||||||
Accrued
liabilities
|
198,793 | (25,904 | ) | 84,734 | ||||||||
Cash
provided by (used in) continuing operating activities
|
(1,240,199 | ) | (1,077,366 | ) | 79,290 | |||||||
Cash
provide by (used in) discontinued operation
|
10,657 | (77,294 | ) | (296,265 | ) | |||||||
Financing:
|
||||||||||||
Increase
(decrease) in bank loans
|
- | (135,000 | ) | 25,000 | ||||||||
Advances
(repayment) of loans payable
|
(431,705 | ) | 84,164 | 245,613 | ||||||||
Issuance
of capital stock
|
5,198,659 | 775,000 | 66,679 | |||||||||
Decrease
in advances from shareholders
|
- | (319,836 | ) | - | ||||||||
Share
issue costs
|
(726,402 | ) | (63,750 | ) | - | |||||||
Cash
provided by financing activities
|
4,040,552 | 340,578 | 337,292 | |||||||||
Investing:
|
||||||||||||
Cash
acquired on acquisition of Speak2Me
|
- | 1,508,521 | - | |||||||||
Expenditures
on software & web development costs
|
(895,262 | ) | (389,129 | ) | - | |||||||
Purchase
of property and equipment
|
(12,938 | ) | (23,079 | ) | (38,117 | ) | ||||||
Deferred
costs incurred
|
- | - | (40,316 | ) | ||||||||
Development
costs
|
- | - | (91,325 | ) | ||||||||
Cash
provided by (used in) investing activities
|
(908,200 | ) | 1,096,313 | (169,758 | ) | |||||||
Increase
/ (decrease) in cash
|
1,902,810 | 282,231 | (49,441 | ) | ||||||||
Cash
and cash equivalents, beginning of year
|
377,127 | 94,896 | 144,337 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 2,279,937 | $ | 377,127 | $ | 94,896 | ||||||
Supplemental
cash flow information (note 24)
|
1.
|
Nature
of Operations:
|
2.
|
Significant
accounting policies:
|
|
(a)
|
Basis
of presentation:
|
|
(b)
|
Revenue
recognition:
|
|
(c)
|
Inventory:
|
|
Inventory
is recorded at the lower of cost and net realizable value and expensed
based on the average cost.
|
2.
|
Significant
accounting policies (continued):
|
|
(d)
|
Property
and equipment:
|
Method
|
Rate | ||
Computer
and office equipment
|
declining
balance
|
20% |
|
(e)
|
Deferred
costs, investment and advances:
|
|
(f)
|
Development
costs:
|
|
(g)
|
Software
& web development costs:
|
2.
|
Significant
accounting policies (continued):
|
|
(h)
|
Goodwill:
|
|
(i)
|
Government
grants:
|
|
(j)
|
Future
income taxes:
|
|
(k)
|
Foreign
currency translation:
|
2.
|
Significant
accounting policies (continued):
|
|
(l)
|
Use
of estimates:
|
|
(m)
|
Earnings
(loss) per share:
|
|
(n)
|
Stock-based compensation
plan:
|
3.
|
Changes
in accounting policies:
|
|
(o)
|
Cash
and cash equivalents:
|
|
(a)
|
On
January 1, 2008, the Company adopted the recommendation of CICA Handbook
Section 3862, Financial Instruments – Disclosures which supersedes the
disclosure standards provided in Section 3861. This Section
provides standards for disclosures about financial instruments, including
disclosures about fair value and the credit, liquidity and market risks
associated with the financial instruments. Disclosure
requirements pertaining to this Section are contained in Note
18.
|
|
(b)
|
On
January 1, 2008, the Company adopted CICA Handbook Section 3031,
Inventories. The new Section prescribes that inventories should
be measured at the lower of cost and net realizable value and provides
guidance on the determination of cost. There has been no impact
on the Company’s financial statement as a result of adopting this
policy. Section 3031 replaces inventory standards provided in
Section 3030.
|
|
(c)
|
On
January 1, 2008, the Company adopted the recommendation of CICA Handbook
Section 3863, Financial Instruments – Presentation which carries forward
the presentation standards provided in Section 3861. This
section provides standards for presentation of financial instruments and
nonfinancial derivatives. Adoption of this standard had no
impact on the Company’s financial instrument related presentation
standards.
|
|
(d)
|
On
January 1, 2008, the Company adopted the recommendations of CICA Handbook
Section 1400, General Standards of Financial Statement Presentation, to
change the guidance related to management’s responsibility to assess the
ability of the entity to continue as a going
concern. Management is required to make an assessment of an
entity’s ability to continue as a going concern and should take into
account all available information about the future, which is at least, but
is not limited to 12 months from the balance sheet
dates. Disclosure is required of material uncertainties related
to events or conditions that may cast significant doubt upon the entity’s
ability to continue as a going
concern.
|
|
(e)
|
On
October 1, 2008, the Company adopted the recommendations of CICA Handbook
Section 1535 Capital Disclosures. The new standard requires an
entity to disclose information to enable users of its financial statements
to evaluate the entity’s objectives, policies and processes for managing
capital. Disclosure requirements pertaining to Section 1535 are
contained in Note 17.
|
|
(f)
|
Financial
instruments
|
3.
|
Changes
in accounting policies (continued):
|
|
(i)
|
Financial
Assets and Financial Liabilities
|
|
(ii)
|
Comprehensive
Income
|
3.
|
Changes
in accounting policies (continued):
|
|
(iii)
|
Hedge
Accounting
|
|
(g)
|
On
January 1, 2007, the Company adopted the new recommendations of the CICA
Handbook Section 1506, Accounting Changes. Under these new
recommendations, voluntary changes in accounting policy are permitted only
when they result in the financial statements providing reliable and more
relevant information, requires changes in accounting policy to be applied
retrospectively unless doing so is impractical, requires prior period
errors to be corrected retrospectively and requires enhanced disclosures
about the effects of changes in accounting policies, estimates and errors
on the financial statements. These recommendations also require
the disclosure of new primary sources of generally accepted accounting
principles that have been issued but not yet effective. The
impact that the adoption of this section will have on the Company’s
financial statements will depend on the nature of the accounting
changes. The additional disclosure requirement is within Note 3
under Future Accounting Changes.
|
|
(a)
|
In
January 2006, the CICA Accounting Standards Board (“AcSB”) adopted a
strategic plan for the direction of accounting standards in Canada. As
part of that plan, accounting standards in Canada for public companies are
expected to converge with International Financial Reporting Standards
(“IFRS”) by the start of 2011. The impact of the transition to
IFRS on the Company’s financial statements is not yet
determinable.
|
|
(b)
|
In
October 2008, the CICA issued new accounting standards Section 3064,
Goodwill and Intangible Assets, replaces Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development
Costs. Section 3064 establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its
initial recognition and of intangible assets. This section also
addresses when an internally developed intangible asset meets the criteria
for recognition as an assets. These standards are anticipated
to be adopted for the Company’s interim and annual reporting effective
periods commencing January 1, 2009. The Company does not expect
the adoption of this standard to have a material impact on its financial
statements.
|
4.
|
Accounts
and grants receivable:
|
2008
|
2007
|
|||||||
Trade receivables | $ | 615,501 | $ | 841,819 | ||||
Cash advance | - | 101,282 | ||||||
Grants receivable (note 14) | 27,042 | 15,078 | ||||||
$ | 642,543 | $ | 958,179 |
5.
|
Deferred
costs, investment and advances:
|
6.
|
Property
and equipment:
|
2008
|
2007
|
|||||||
Cost
|
$ | 200,879 | $ | 175,636 | ||||
Accumulated amortization | 136,040 | 102,492 | ||||||
Net
carrying value
|
$ | 64,839 | $ | 73,144 |
7.
|
Development
costs:
|
2008
|
2007
|
|||||||
Cost
|
$ | 1,431,567 | $ | 1,552,572 | ||||
Less: Accumulated amortization | (1,320,050 | ) | (1,284,662 | ) | ||||
$ | 111,517 | $ | 267,910 |
8.
|
Software and web development
costs:
|
2008
|
2007
|
|||||||
Cost
|
$ | 5,233,187 | $ | 4,352,341 |
9.
|
Acquisitions
|
Speak2Me
Inc.
|
||||
Current
assets
|
$ | 1,789,301 | ||
Property
and equipment, net
|
17,903 | |||
Software
and web development costs
|
3,963,212 | |||
Current
liabilities
|
(588,457 | ) | ||
Future
income tax liability
|
(564,997 | ) | ||
$ | 4,616,962 | |||
Cash
consideration
|
- | |||
Share
consideration
|
4,536,351 | |||
Business
acquisition costs
|
80,611 | |||
$ | 4,616,962 |
10.
|
Discontinued
Operations
|
2008
|
2007
|
|||||||
Current
assets of discontinued operation
|
||||||||
Cash
and short term investment
|
$ | 34,608 | $ | 116,211 | ||||
Account
receivable
|
- | 12,195 | ||||||
Inventory
|
- | 105,377 | ||||||
Prepaid
and sundry assets
|
- | 42,238 | ||||||
$ | 34,608 | $ | 276,021 | |||||
Non
current assets of discontinued operation
|
||||||||
Property
and equipment
|
$ | - | $ | 16,181 | ||||
Future
income taxes
|
- | 274,852 | ||||||
Goodwill
|
- | 1,121,131 | ||||||
$ | - | $ | 1,412,164 | |||||
Current
liabilities of discontinued operation
|
||||||||
Accounts
payable
|
$ | 653,615 | $ | 471,619 | ||||
Accrued
liabilities
|
- | 104,532 | ||||||
Bank
loan
|
80,986 | 230,000 | ||||||
$ | 734,601 | $ | 806,151 |
2008
|
2007
|
2006
|
||||||||||
Operating
revenue
|
$ | 2,575,559 | $ | 3,124,731 | $ | 680,264 | ||||||
Expenses
|
3,025,797 | 3,417,579 | 738,170 | |||||||||
Write-off
of goodwill
|
1,121,131 | - | - | |||||||||
Net
loss from discontinued operation
|
$ | 1,571,369 | $ | 292,848 | $ | 57,906 |
11.
|
Loans
payable:
|
2008
|
2007
|
|||||||
Loan
payable, interest bearing at 12% per annum payable monthly, unsecured and
due on demand.
|
$ | - | $ | 228,674 | ||||
Loan payable, interest bearing at 12% per annum with monthly interest payments, secured by a general | ||||||||
security
agreement and due on April 30, 2009.
|
$ | - | $ | 203,031 |
12.
|
Capital
stock, warrants and stock options:
|
|
(a)
|
Authorized:
|
Common
Shares
|
||||||||
Number
|
Amount
|
|||||||
Balance,
January 1, 2007
|
4,694,396 | $ | 5,088,106 | |||||
Issued:
|
||||||||
Private
placement (i)
|
387,500 | 613,746 | ||||||
Common
shares issued for the acquisition of Speak2Me Inc.
|
4,500,366 | 4,536,351 | ||||||
Less:
Share issue costs
|
- | (63,750 | ) | |||||
Balance,
December 31, 2007
|
9,582,262 | $ | 10,174,453 | |||||
Issued:
|
||||||||
Private
placement (ii)
|
2,857,143 | 4,718,645 | ||||||
Options
exercised
|
18,202 | 38,821 | ||||||
Less:
Share issue costs
|
- | (726,402 | ) | |||||
Balance,
December 31, 2008
|
12,457,607 | $ | 14,205,515 |
|
(i)
|
On
October 17, 2007, the Company closed a private placement offering of
subscription receipts. The gross proceeds of the offering totaled $775,000
with an aggregate of 387,500 subscription receipts issued at a price of
$2.00 per subscription receipt. Each subscription receipt entitles the
holder to receive one common share and one common share purchase warrant
of Lingo Media upon the closing of the acquisition of
Speak2Me. Each Warrant entitles the holder to purchase one (1)
additional common share of Lingo Media at a purchase price of $6.00 per
share and is exercisable for a period of twelve (12) months from the
closing date of the Offering.
|
|
(ii)
|
On
October 15, 2008, the shareholders approved a $5 million investment from
Orascom Telecom Holding S.A.E. ("Orascom Telecom") by issuing 2,857,143
Common Shares.
|
12.
|
Capital
stock, warrants and stock options
(continued):
|
|
(b)
|
Warrants:
|
Warrants
|
||||||||||||||||
Number
|
Amount
|
Weighted
Avg. Price
|
Weighted
Avg. Life
|
|||||||||||||
Balance,
January 1, 2007
|
- | $ | - | |||||||||||||
Issued:
|
||||||||||||||||
Warrants
issued with private placement (12
(a)(i))
|
387,500 | 161,254 | $ | 6.00 | 1.0 | |||||||||||
Balance,
December 31, 2007
|
387,500 | $ | 161,254 | $ | 6.00 | 1.0 | ||||||||||
Issued:
|
||||||||||||||||
Warrants
issued with private placement (12(a)(ii))
|
2,142,858 | 281,357 | $ | 4.00 | 2.0 | |||||||||||
Warrants
issued in relation to private placement
(12(a)(ii))
|
171,428 | 91,028 | $ | 2.00 | 1.0 | |||||||||||
Less:
Expired warrants issued with private placement
(12 (a)(i))
|
(387,500 | ) | (161,254 | ) | $ | 6.00 | 1.0 | |||||||||
Balance,
December 31, 2008
|
2,314,286 | $ | 372,385 | $ | 3.85 | 1.9 |
|
(c)
|
Contributed
Surplus:
|
Balance,
January 1, 2007
|
$ | 325,293 | ||
Stock-based compensation | 156,395 | |||
Options exercised | (29,277 | ) | ||
Balance, December 31, 2007 | 452,411 | |||
Stock-based compensation | 252,791 | |||
Options exercised | (18,688 | ) | ||
Warrants
expired
|
161,254 | |||
Balance,
December 31, 2008
|
$ | 847,768 |
12.
|
Capital
stock, warrants and stock options
(continued):
|
|
(d)
|
Stock
option plan
|
2008
|
2007
|
|||||||||||||||
Number
of
shares
|
Weighted
average exercise price
|
Number
of
shares
|
Weighted
average exercise price
|
|||||||||||||
Options
outstanding, beginning of year
|
516,738 | $ | 0.98 | 275,634 | $ | 1.33 | ||||||||||
Options
granted
|
290,000 | 1.21 | 300,000 | 0.68 | ||||||||||||
Options
exercised
|
(18,202 | ) | 1.11 | 40,372 | 0.84 | |||||||||||
Options
expired/canceled
|
(155,416 | ) | 1.13 | (68,524 | ) | - | ||||||||||
Options
outstanding, end of year
|
633,120 | 1.04 | 516,738 | 0.98 | ||||||||||||
Options
exercisable, end of year
|
502,287 | $ | 0.99 | 338,509 | $ | 1.10 |
Options outstanding | Options exercisable | |||||||||||||||||||||
Range
of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining contractual life
|
Weighted
average
exercise
price
|
Number
outstanding
|
Weighted
average
exercise
price
|
|||||||||||||||||
$ | 0.70 - $1.00 | 342,249 | 4.67 | $ | 0.73 | 299,749 | $ | 0.73 | ||||||||||||||
$ | 1.01 - $1.33 | 155,157 | 1.66 | 1.23 | 130,157 | 1.26 | ||||||||||||||||
$ | 1.34 - $2.00 | 135,714 | 2.18 | 1.62 | 72.381 | 1.55 | ||||||||||||||||
Total
|
633,120 | 3.40 | 1.04 | 502.287 | 0.99 |
12.
|
Capital
stock warrants and stock options
(continued):
|
|
(e)
|
Fair
value of options:
|
|
(f)
|
Loss
per share:
|
2008
|
2007
|
2006
|
||||||||||
Numerator: | ||||||||||||
Loss
for year – Continuing operations
|
$ | (2,311,474 | ) | $ | (632,192 | ) | $ | (691,018 | ) | |||
Loss
for year – Discontinued operation
|
(1,571,369 | ) | (292,848 | ) | (57,906 | ) | ||||||
Denominator:
|
||||||||||||
Number
of common shares outstanding
|
12,457,607 | 9,582,262 | 4,694,396 | |||||||||
Weighted
average number of common shares
|
10,426,861 | 5,655,792 | 4,060,331 | |||||||||
Loss per share, basic and diluted | ||||||||||||
–
Continuing operations
|
$ | (0.22 | ) | $ | (0.11 | ) | $ | (0.17 | ) | |||
Loss per share, basic and diluted | ||||||||||||
–
Discontinued operations
|
$ | (0.15 | ) | $ | (0.05 | ) | $ | (0.01 | ) |
13.
|
Income
taxes:
|
2008
|
2007
|
2006
|
||||||||||
Combined
basic Canadian federal and provincial income tax rate
|
33.50 | % | 36.12 | % | 36.12 | % | ||||||
Effective
income tax recovery on oss from continuing operations before income
taxes
|
$ | (725,763.00 | ) | $ | (182,378.00 | ) | $ | (191,639.00 | ) | |||
Increase
(decrease) resulting from change in the valuation
allowance:
|
14,309.00 | (555,893.00 | ) | (359,663.00 | ) | |||||||
Effect
of reduced income taxes in foreign jurisdiction and subsidiary with lower
tax rate
|
76,000.00 | 220,387.00 | 172,100.00 | |||||||||
Withholding
tax on sales to China
|
145,018.00 | 127,267.00 | 130,322.00 | |||||||||
Non-deductible
items
|
298,161.00 | 56,490.00 | 70,007.00 | |||||||||
Change
in enacted rates
|
57,438.00 | 121,222.00 | ||||||||||
Change
in prior year estimates
|
464,105.00 | 364,277.00 | 254,269.00 | |||||||||
Share
issue cost and other
|
(184,250.00 | ) | (24,105.00 | ) | 85,059.00 | |||||||
$ | 145,018.00 | $ | 127,267.00 | $ | 160,455.00 |
13.
|
Income
taxes (continued):
|
2008
|
2007
|
|||||||
Future
tax assets:
|
||||||||
Operating
loss carry forwards
|
$ | 2,223,329 | $ | 2,564,846 | ||||
Share
issue costs
|
186,235 | 92,559 | ||||||
2,409,564 | 2,657,405 | |||||||
Valuation
allowance
|
(2,006,309 | ) | (1,992,235 | ) | ||||
Future
tax assets recognized
|
403,255 | 665,170 | ||||||
Future
tax assets included in loss from discontinued operations
|
(274,852 | ) | ||||||
Software
& web development costs
|
(932,362 | ) | (932,362) | |||||
Property
and equipment
|
(35,890 | ) | (22,953 | ) | ||||
Net
future tax assets (liabilities)
|
$ | (564,997 | ) | $ | (564,997 | ) |
2009 | $ | 291,000 | ||
2010 | 951,830 | |||
2014 | 1,029,086 | |||
2015 | 992,566 | |||
2026 | 910,796 | |||
2027 | 1,395,602 | |||
2028
|
1,957,169 | |||
$ | 7,528,049 |
14.
|
Government
grants:
|
15.
|
Foreign
exchange gain or loss:
|
16.
|
Related
party balances and transactions:
|
|
(a)
|
The
Company had loans payable due to a corporation controlled by one of its
directors bearing interest at 12% (2007 - 12%) per
annum. During 2008, the Company received $60,000 (2007 -
$387,000, 2006 - $nil) and repaid $277,000 (2007 - $310,000, 2006 -
$50,000) of these loans. Interest expense related to these
loans for the year is $18,490 (2007 - $62,137, 2006 -
$5,878). At December 31, 2008, $9,344 (2007 - $217,000) was due
to those corporations.
|
|
(b)
|
During
the year, the Company charged $41,913 (2007 - $68,900, 2006 - $58,000) to
a corporation with one director in common for rent, administration, office
charges and telecommunications. At December 31, 2008,
$5,888 (2007 - $4,770) was outstanding as part of account
receivable.
|
|
(c)
|
During
the year, the Company paid $218,075 (2007 - $nil, 2006 - $nil) in legal
fees to a law firm in which a director of the Company is a
partner. These fees are included in general and administrative
expense and share issuance cost within share
capital.
|
|
(d)
|
During
the year the Company paid $180,000 (2007 - $120,000) for consulting fees
to a corporation owned by a director and officer of the
Company.
|
|
(e)
|
The
acquisition of Speak2Me constituted as a "related party transaction" as
the CEO of the Company was also a director of Speak2Me and partially owned
common shares of Speak2Me prior to its acquisition by Lingo
Media.
|
17.
|
Capital
risk management:
|
18.
|
Financial
instruments and risk management:
|
|
(a)
|
Currency
risk:
|
|
(b)
|
Financial
Instruments:
|
US
Denominated
|
China
Denominated
|
Taiwan
Denominated
|
||||||||||||||||||||||
CAD
|
USD
|
CAD
|
RMB
|
CAD
|
NTW
|
|||||||||||||||||||
Cash
|
346,260 | 284,286 | 6,938 | 38,157 | 40,797 | 1,101,514 | ||||||||||||||||||
Accounts
receivable
|
- | - | 612,901 | 3,413,861 | - | - | ||||||||||||||||||
Accounts
payable
|
60,900 | 50,000 | - | - | - | - |
|
(c)
|
Fair
market values:
|
|
(d)
|
Concentration
of risk:
|
18.
|
Financial
instruments and risk management
(continued):
|
|
(e)
|
Interest
rate risk:
|
19.
|
Economic
dependence
|
20.
|
Segmented
information:
|
Online
English Language Learning
|
English
Language
Learning
|
Total
|
||||||||||
Revenue
|
$ | - | $ | 969,128 | $ | 969,128 | ||||||
Cost
of sales
|
- | 126,329 | 126,329 | |||||||||
Margin
|
- | 842,799 | 842,799 | |||||||||
Acquisition
of property and equipment
|
- | 12,937 | 12,937 | |||||||||
Segment
Assets
|
5,511,426 | 2,980,758 | 8,492,184 | |||||||||
Segment
loss
|
507,894 | 1,803,580 | 2,311,474 |
2008
|
2007
|
2006
|
||||||||||
Canada
|
$ | 1,220 | $ | 1,920 | $ | 5,257 | ||||||
China
|
967,908 | 877,706 | 888,816 | |||||||||
$ | 969,128 | $ | 879,626 | $ | 894,073 |
2008
|
2007
|
|||||||
Canada
|
$ | 2,453,878 | $ | 3,304,571 | ||||
China
|
6,072,914 | 5,462,464 | ||||||
$ | 8,526,792 | $ | 8,162,401 |
21.
|
Commitments
and Contingency:
|
2009
|
$ | 345,091 | ||
2010 | 161,984 | |||
2011 | 39,736 | |||
2012 | 7,572 |
22.
|
Subsequent
Event:
|
|
(a)
|
On
March 27, 2009, the Notice of Intent to Make Proposal under the Bankruptcy
and Insolvency Act was accepted by A+’s creditors. The Company has allowed
for a provision to cover all anticipated costs associated with the
restructuring under its discontinued operations (note
10).
|
|
(b)
|
On
January 16, 2009, the Company fully repaid the utilized portion of the
$500,000 line of credit for A+. Subsequently the line of credit
was cancelled.
|
23.
|
Reconciliation
of Canadian and United States generally accepted accounting
principles:
|
Statements
of Operations:
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Restated
per Note 10
|
Restated
per
Note
10
|
|||||||||||
Loss
for the year - Canadian GAAP
|
$ | (3,882,843 | ) | $ | (925,040 | ) | $ | (748,924 | ) | |||
Impact
of US GAAP and adjustments:
|
||||||||||||
Amortization
of development costs (a)
|
128,478 | 99,805 | 156,648 | |||||||||
Development
cost write-off (a)
|
(218,795 | ) | - | - | ||||||||
Deferred
cost write-off (b)
|
157,419 | - | - | |||||||||
Deferred
cost expense (b)
|
- | - | (40,316 | ) | ||||||||
Software
and web development cost (c)
|
(880,846 | ) | (4,352,341 | ) | - | |||||||
Loss
for the year - United States GAAP
|
$ | (4,696,587 | ) | $ | (5,177,576 | ) | $ | (632,592 | ) | |||
Basic
and diluted loss per share for the year:
|
(0.45 | ) | (0.92 | ) | (0.16 | ) | ||||||
Cash (used in) provided by operating activities | ||||||||||||
-
Canadian GAAP
|
$ | (1,240,199 | ) | $ | (1,077,366 | ) | $ | 79,290 | ||||
Impact
of United States GAAP and
adjustments:
|
||||||||||||
Write-off
of software & web development cost
|
(880,846 | ) | (389,129 | ) | - | |||||||
Deferred
cost
|
- | - | (40,316 | ) | ||||||||
$ | (2,121,045 | ) | $ | (1,466,495 | ) | $ | 38,974 | |||||
Statement
of cash flows:
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Cash (used in) provided by investing activities | ||||||||||||
-
Canadian GAAP
|
$ | (908,200 | ) | $ | 1,096,313 | $ | (169,758 | ) | ||||
Impact
of United States GAAP and adjustments:
|
||||||||||||
Write-off
of software & web development cost
|
880,846 | 389,129 | - | |||||||||
Deferred
cost
|
- | - | 40,316 | |||||||||
Cash (used in) provided by investing activities | ||||||||||||
-
United States GAAP
|
$ | (27,354 | ) | $ | 1,485,442 | $ | (129,442 | ) | ||||
2008
|
2007
|
|||||||||||
Shareholders'
equity - Canadian GAAP
|
6,640,384 | 5,885,677 | ||||||||||
Development
costs (a)
|
(111,517 | ) | (21,200 | ) | ||||||||
Deferred
costs (b)
|
- | (157,419 | ) | |||||||||
Software
and web development costs (c)
|
(5,233,187 | ) | (4,352,341 | ) | ||||||||
$ | 1,295,680 | $ | 1,354,717 |
23.
|
Reconciliation
of Canadian and United States generally accepted accounting principles
(continued):
|
Number
of
shares
|
Amount
|
Number
of
warrants
|
Warrants
|
Contributed
Surplus
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance,
January 1, 2007
|
4,654,025 | $ | 5,028,656 | - | $ | - | $ | 568,543 | $ | (4,499,075 | ) | $ | 1 098,124 | |||||||||||||||
Private
placement for cash, net
|
387,500 | 549,996 | 387,500 | 161,254 | - | - | 711,250 | |||||||||||||||||||||
Common share issued for the acquisition | ||||||||||||||||||||||||||||
of
Speak2Me Inc.
|
4,500,366 | 4,536,351 | - | - | - | - | 4,536,351 | |||||||||||||||||||||
Options
exercised
|
40,371 | 59,450 | - | - | (29,277 | ) | - | 30,173 | ||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 156,395 | - | 156,395 | |||||||||||||||||||||
Net
loss for the year
|
- | - | - | - | - | (5,177,576 | ) | (5,177,576 | ) | |||||||||||||||||||
Balance,
December 31, 2007
|
9,582,262 | 10,174,453 | 387,500 | 161,254 | 695,661 | (9,676,651 | ) | 1,354,717 | ||||||||||||||||||||
Private
placement for cash, net
|
2,857,143 | 3,992,241 | 2,314,286 | 372,385 | - | - | 4,364,626 | |||||||||||||||||||||
Options
exercised
|
18,202 | 38,821 | - | - | (18,688 | ) | - | 20,133 | ||||||||||||||||||||
Expired
warrants
|
- | - | (387,500 | ) | (161,254 | ) | 161,254 | - | - | |||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 252,791 | - | 252,791 | |||||||||||||||||||||
Net
loss for the year
|
- | - | - | - | - | (4,696,587 | ) | (4,696,587 | ) | |||||||||||||||||||
Balance,
December 31, 2007
|
12,457,607 | $ | 14,205,515 | 2,314,286 | $ | 372,385 | $ | 1,091,018 | $ | (14,373,238 | ) | $ | 1,295,680 |
|
(a)
|
Development
Costs:
|
|
(b)
|
Under
Canadian GAAP, the pre-operating costs relating to establishing a joint
venture in China are recorded as deferred cost. Pre-operating
costs under United States GAAP are expensed when
incurred.
|
|
(c)
|
Under
Canadian GAAP, the Company capitalized the cost of the Speak2Me
acquisition and will begin amortization upon the selling of the products
on a straight-ling basis over three years. Under The Financial Accounting
Standard Board (“FASB”) Section 141 of the United States GAAP, acquisition
costs of the Speak2Me technology are considered acquired in-process
research and development. Since as of the acquisition date, the technology
acquired requires a substantial amount of development work in order to
begin selling as a product hence this cost is expensed in
2007. The Company failed to expense the acquisition costs for US GAAP purposes in its 2007
financial statement reconciliation of Canadian to US GAAP
disclosure and has now restated the reconciliation to reflect the
expense. Furthermore, the Company continues to expense any development
costs incurred during 2007 and 2008 for United States GAAP
purposes.
|
23.
|
Reconciliation
of Canadian and United States generally accepted accounting principles
(continued):
|
|
(d)
|
Starting
January 1, 2002 under United States and Canadian GAAP, the Company records
compensation expense based on the fair value for stock or stock options
granted in exchange for services from consultants. Before January 1, 2002,
for the options issued and completely vested the Company did not recognize
a compensation expense under Canadian GAAP but recorded a compensation
expense under US GAAP for the options issued to consultants. In respect to
options issued before January 1, 2002 but vesting in year 2002, the
Company records expense under US GAAP but recognized no expenses under
Canadian GAAP.
|
|
(e)
|
Recent
Accounting Pronouncements:
|
|
(i)
|
FASB
issued statement of Financial Accounting No. 157 Fair Value Measurement.
This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2008 and interim periods within those
fiscal years. Early adoption is permitted. The standard provides enhanced
guidance for using fair value to measure assets and liabilities, the
information used to measure fair value, and the effect of fair value
measurement on earnings. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value. It
does not expand the use of fair value in any new circumstances. The
Company does not expect there to be any material impact on the
Consolidated Financial Statements upon adoption of the
standard.
|
|
(ii)
|
Effective
January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109.” This
interpretation requires that an entity recognize in the financial
statements, the impact of a tax position, if that position is more likely
than not to be sustained on examination by the taxing authorities, based
on technical merits of the position. Tax benefits resulting from such a
position should be measured as the amount that is more likely than not on
a cumulative basis to be sustained on examination. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties on
income taxes and accounting in interim periods. The adoption of this
interpretation did not impact the Company’s Financial
Statements.
|
|
(iii)
|
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115 (SFAS No. 159). This statement permits entities to
choose to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair
value. It also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective on January 1, 2008. The Company is
currently evaluating the impact of this standard on its Financial
Statements.
|
23.
|
Reconciliation
of Canadian and United States generally accepted accounting principles
(continued):
|
|
(iv)
|
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. This statement affects only entities
that have an outstanding noncontolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement provides
guidance on the accounting and reporting for noncontrolling interest in a
subsidiary to improve the relevance, comparability, and transparency of
the financial information provided by consolidated financial statements.
The Company does not expect there to be any material impact on the
Consolidated Financial Statements upon adoption of the
standard.
|
|
(v)
|
In
March 2007, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. This statement improve
financial report about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand
their effects on the Company’s financial position, financial performance,
and cash flows. It is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008,
with early adoption encouraged. The Company does not expect
there to be any material impact on the Consolidated Financial Statements
upon adoption of the standard.
|
|
(vi)
|
In
April 2008, the FASB issued FAS 142-3, Determination of the Useful Life of
Intangible Assets. This statement requires that when the
Company develops assumption about renewal or extension used to determine
the useful life of a recognized intangible asset under FASB Statement No.
142, Goodwill and Other Intangible Assets to consider its own historical
experience in renewing or extending similar arrangements. In
the absence of that experience, the Company shall consider the assumptions
that market participants would use about renewal or
extension. The Company is currently evaluating the impact of
this standard on its Financial
Statements.
|
|
(vii)
|
In
October 2008, the FASB issued FAS 157-3, Fair Value Measurements to
provide additional guidance on determining the fair value of a financial
asset when the market for that asset is not active. This
statement is effective upon issuance, including prior periods for which
financial statements have not been issued. The Company is
currently evaluating the impact of this standard on its Financial
Statements.
|
|
(viii)
|
In
March 2009, the FASB issued Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles, to become the single source of
authoritative accounting principles used by nongovernmental entities in
the preparation of financial statements in conformity with United States
GAAP except for the rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
GAAP for SEC registrants. The statement is
effective July 1, 2009 and the Company is currently evaluating the impact
of this standard on its Financial
Statements.
|
|
(ix)
|
The
FASB revised Statement No. 141, Business Combination to improve the
relevance, representational faithfulness and comparability of information
a company provides about a business combination and its
effects. The statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest
in the acquiree at the acquisition date, measured at fair values as of
that date. It also requires an acquirer to recognize
contingencies arise as of the acquisition date, measured at their
acquisition-date fair value and that goodwill as of the acquisition date
is measured as a residual value. The impact of the statement
depends on whether the Company has such transaction in the
future.
|
24.
|
Supplemental
cash flow information:
|
2008
|
2007
|
2006
|
||||||||||
Income
taxes and other taxes paid
|
$ | 145,018 | $ | 127,267 | $ | 160,455 | ||||||
Interest
paid
|
$ | 95,544 | $ | 27,077 | $ | 31,260 |
|
(a)
|
In
2008, warrants were issued in connection with a private placement (see
note 12 (a)(ii)) are valued at $281,357. This amount
has been recorded as an increase in warrants amount charged against share
capital.
|
|
(b)
|
In
2008, compensation warrants were issued in connection with a private
placement (see note 12(a)(ii)) are valued at $91,025. This
amount has been recorded as an increase in warrants amount with a
corresponding increase in share issue costs which is charged against share
capital
|
|
(c)
|
In
2007, 4,500,366 common shares were issued as consideration for the
acquisition of Speak2Me Inc. in the amount of $4,536,351. As at December
31, 2007, this amount is included in capital
stock.
|
|
(d)
|
In
2006, 2,849,500 common shares (407,071 after reorganization) were issued
as consideration for the acquisition of A+ Child Development (Canada) Ltd.
in the amount of $569,900. As at December 31, 2006, this amount is
included in capital stock.
|
|
(e)
|
Included
in the capital stock is $18,688 (2007 - $29,277) representing the fair
value of stock options exercised (note
11(b)).
|
25.
|
Comparative
figures:
|
26.
|
Correction
of error and restatement:
|