UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
 
For the month of September 30, 2012
 
Commission File Number 333-98397
 
Lingo Media Corporation
(Translation of registrant's name into English)
 
151 Bloor Street West, Suite 703, Toronto, Ontario Canada M5S 1S4
(Address of principal executive offices)
 
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F x Form 40-F o
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
 
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
 
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
 
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes  o No x
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-________________.
 
 
 
 
 
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunder duly authorized.
 
 
LINGO MEDIA CORPORATION
 
       
Date: November 23, 2012
By:
/s/ Michael Kraft
 
   
Michael Kraft
President and CEO
 
 
 
 
 
 
 

LINGO MEDIA CORPORATION

Condensed Consolidated Interim Financial Statements

For the nine-month period ended September 30, 2012


 
1
 

LINGO MEDIA CORPORATION
Condensed Consolidated Interim Financial Statements
As at September 30, 2012



Notice to Reader

Management has compiled the Condensed Consolidated Interim Financial Statements of Lingo Media Corporation (“Lingo Media” or the “Company”) consisting of the Condensed Consolidated Interim Balance Sheet as at September 30, 2012 and the Condensed Consolidated Interim Statements of Comprehensive Income, Changes in Equity and Cash Flows for the nine months then ended.  All amounts are stated in Canadian Dollars. An accounting firm has not reviewed or audited these Condensed Consolidated Interim Financial Statements and Management Discussion and Analysis thereon.
 
 
2
 
 
LINGO MEDIA CORPORATION
Condensed Consolidated Interim Financial Statements
As at September 30, 2012


Contents
 
   
Condensed Consolidated Interim Financial Statements
Page
   
Balance Sheet
4
Statement of Comprehensive Income
5
Statement of Changes in Equity
6
Statement of Cash Flows
7
Notes to the Financial Statements
8

 
 
3
 

LINGO MEDIA CORPORATION
Condensed Consolidated Interim Balance Sheet
As at September 30, 2012
(Unaudited, expressed in Canadian Dollars, unless otherwise stated)

   
Notes
   
September 30,
2012
   
December 31,
2011
 
ASSETS
                 
Current Assets
                 
                   
Cash and cash equivalents
        $ 98,872     $ 482,767  
Accounts receivable
    5       981,560       1,175,330  
Prepaid and other receivables
            173,224       103,618  
                         
              1,253,655       1,761,715  
Non-Current Assets
                       
                         
Property and equipment, net
    6       40,771       48,321  
Intangibles, net
    7       900,402       1,099,521  
Goodwill
            139,618       139,618  
                         
TOTAL ASSETS
          $ 2,334,446     $ 3,049,175  
                         
LIABILITIES AND EQUITY
                       
                         
Current Liabilities
                       
                         
Accounts payable
          $ 548,026     $ 373,521  
Accrued liabilities
            323,543       335,820  
Loans payable
    8       1,140,000       890,000  
                         
TOTAL LIABILITIES
            2,011,569       1,599,341  
                         
Equity
                       
                         
Share capital
    9       18,014,347       17,925,347  
Warrants
    11       1,046,365       1,046,365  
Share-based payment reserve
            2,318,126       2,130,735  
Accumulated other comprehensive income
            (11,025 )     (86,760 )
Deficit
            (21,044,936 )     (19,565,853 )
                         
TOTAL EQUITY
            322,877       1,449,834  
                         
TOTAL LIABILITIES AND EQUITY
          $ 2,334,446     $ 3,049,175  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.
 
/s/ Michael Kraft
 
/s/ Tommy Gang
Director
 
Director
 
 
4
 
 
LINGO MEDIA CORPORATION
Condensed Consolidated Interim Statement of Comprehensive Income
For the nine-months ended September 30, 2012 and 2011
(Unaudited, expressed in Canadian Dollars, unless otherwise stated)

   
 
   
For the three months
ended September 30
   
For the nine months
ended September 30
 
    Notes    
2012
   
2011
   
2012
   
2011
 
                               
Revenue
        $ 129,424     $ 349,544     $ 1,124,514     $ 1,106,118  
                                       
Expenses
                                     
                                       
Selling, general and administrative expenses
          475,975       642,788       1,659,255       1,841,660  
Share-based payment
          145,608       55,883       187,391       587,268  
Direct costs
          32,183       34,322       173,092       159,811  
Amortization – publishing development costs
          -       -       -       16,501  
Depreciation – property and equipment
    6       2,463       3,149       7,362       9,276  
Amortization – intangibles
    7       83,445       601,385       277,688       1,844,894  
Total Expenses
            739,674       1,337,527       2,304,788       4,459,410  
                                         
Loss from Operations
            (610,250 )     (987,983 )     (1,180,274 )     (3,353,292 )
                                         
Net Finance Charges
                                       
                                         
Interest expense
            41,633       13,866       102,244       77,502  
Foreign exchange (gain) / loss
            81,128       (154,668 )     88,198       (29,370 )
                                         
                                         
Loss before Tax
            (733,011 )     (847,181 )     (1,370,716 )     (3,401,424 )
                                         
Income Tax Expense
            10,930       11,115       108,367       95,811  
                                         
Loss for the Period – Continuing Operations
            (743,941 )     (858,296 )     (1,479,083 )     (3,497,235 )
                                         
                                         
Other Comprehensive Income
                                       
                                         
Exchange differences on translating foreign operations
            53,889       (141,255 )     75,735       (166,288 )
                                         
Total Comprehensive Loss, Net of Tax
          $ (690,052 )   $ (999,551 )   $ (1,403,348 )   $ (3,663,523 )
                                         
Loss per Share
                                       
Basic and Diluted
          $ (0.03 )   $ (0.05 )   $ (0.07 )   $ (0.20 )
                                         
Weighted Number of Common Shares Outstanding
                                       
Basic and Diluted
            20,622,288       20,543,177       20,562,684       18,582,366  
 
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
 
 
5
 

LINGO MEDIA CORPORATION
Condensed Consolidated Interim Statement of Changes in Equity
For the nine-months ended September 30, 2012
(Unaudited, expressed in Canadian Dollars, unless otherwise stated)
 
   
Issued share capital
     
Share
           
Accumulated
             
   
Number
of
shares
   
Amount
   
based
payment
reserve
   
Warrants
   
other
comprehensive
income
   
Deficit
   
Total
equity
 
                                           
Balance as at
January 1, 2011
    13,949,189     $ 15,131,192     $ 1,612,621       -     $ (4,181 )   $ (14,848,806 )   $ 1,890,826  
Loss for the period / year
    -       -       -       -       -       (3,497,235 )     (3,497,235 )
Issued shares – equity financing
    5,557,001       3,053,985       -       -       -       -       3,053,985  
Issued shares – balance of ELL Technologies Limited acquisition payment due
    1,036,987       786,535       -       -       -       -       786,535  
Warrants issued
    -       (792,058 )     -       792,058       -       -       -  
Other comprehensive income / (loss)
    -       -       -       -       (166,288 )     -       (166,288 )
Share-based payments charged to operations
    -       -       587,268       -       -       -       587,268  
Balance as at
September 30, 2011
    20,543,177       18,179,654       2,199,889       792,058       (170,469 )     (18,346,041 )     2,655,091  
Loss for the period / year
    -       -       -       -       -       (1,219,812 )     (1,219,812 )
Other comprehensive income / (loss)
    -       -       -       -       83,709       -       83,709  
Warrants issued
    -       (254,307 )     -       254,307       -       -       -  
Share-based payments charged to operations
    -       -       (69,154 )     -       -       -       (69,154 )
                                                         
Balance as at December 31, 2011
    20,543,177       17,925,347       2,130,735       1,046,365       (86,760 )     (19,565,853 )     1,449,834  
                                                         
Loss for the period
    -       -       -       -       -       (1,479,083 )     (1,479,083 )
Issued shares – bonus shares
    356,000       89,000       -       -       -       -       89,000  
Share-based payments charged to operations
    -       -       187,391       -       -       -       187,391  
Other comprehensive Loss
    -       -       -       -       75,735       -       75,735  
Balance as at
September 30, 2012
    20,899,177     $ 18,014,347     $ 2,318,126     $ 1,046,365     $ (11,025 )   $ (21,044,936 )   $ 322,877  
 
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
 
 
6
 
 
LINGO MEDIA CORPORATION
Condensed Consolidated Interim Statement of Cash Flows
For the nine-months ended September 30, 2012
(Unaudited, expressed in Canadian Dollars, unless otherwise stated)

   
For the three months
ended September 30
   
For the nine months
ended September 30
 
   
2012
   
2011
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
                         
Loss before Tax
  $ (690,052 )   $ (999,551 )   $ (1,403,348 )   $ (3,663,523 )
                                 
Adjustments to Net Profit for Non Cash Items:
                               
                                 
Depreciation / amortization
    85,908       604,533       285,050       1,870,669  
Amortization – deferred financing charges
    5,364       -       5,364       -  
Share-based payment
    145,608       55,883       187,391       587,268  
Unrealized foreign exchange gain
    (7,688 )     49,604       (15,358 )     52,952  
                                 
Operating Loss before Working Capital Changes
    (460,860 )     (289,531 )     (940,901 )     (1,152,634 )
                                 
Working Capital Adjustments:
                               
                                 
(Increase)/decrease in accounts receivable
    (14,906 )     139,395       193,770       138,331  
(Increase)/decrease in prepaid and other receivables
    (22,883 )     57,095       19,394       (319,509 )
Increase/(decrease) in accounts payable
    85,162       90,505       174,504       (531,979 )
Increase/(decrease) in accrued liabilities
    (8,989 )     (31,086 )     (12,277 )     (332,449 )
                                 
Cash Generated from / (used in) Operations
    (376,710 )     (33,622 )     (565,551 )     (2,198,240 )
                                 
CASH FLOWS FROM INVESTING ACTIVITIES
                               
                                 
Expenditures on software & web development costs
    (38,525 )     (30666 )     (68,383 )     (132,087 )
Purchase of property, plant and equipment
    -       (891 )     -       (891 )
 
                               
Net Cash Flows Generated from / (used in) Investing Activities
    (38,525 )     (31,557 )     (68,383 )     (132,978 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES
                               
                                 
Share capital issue during the period
    -       -       -       3,320,200  
Share issue costs
    -       (22,850 )     -       (266,215 )
Increase/(decrease) in loans payable
    250,000       (50,000 )     250,000       (1,410,729 )
Balance of acquisition payment due - settled by shares
    -       -       -       777,229  
                                 
Net Cash Flows Generated from / (used in) Financing Activities
    250,000       (72,850 )     250,000       2,420,485  
                                 
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS
    (165,237 )     (138,030 )     (383,895 )     89,267  
                                 
Cash and Cash Equivalents at the Beginning of the Period
    264,109       458,203       482,767       230,906  
                                 
Cash and Cash Equivalents at the End of the Period
  $ 98,872     $ 320,173     $ 98,872     $ 320,173  
 
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
 
 
7
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
1.
CORPORATE 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 and its shares are listed on the TSX Venture Exchange and inter-listed on the OTC Bulletin Board. The condensed consolidated interim financial statements of the Company as at and for the quarter ended September 30, 2012 comprise the Company and its subsidiaries.

Lingo Media is an ESL industry acquisition company in online and print-based education product and services.  The Company is focused on English language learning on an international scale through its four distinct business units: ELL Technologies Limited (“ELL Technologies”); Parlo Corporation (“Parlo”); Speak2Me Inc. (“Speak2Me”); and Lingo Learning Inc. (“Lingo Learning”).  ELL Technologies is a globally-established English language multi-media and online training company marketed under the Q Group brand.  Parlo is a fee-based online English language training and assessment service.  Speak2Me is a free-to-consumer advertising-based online English language learning service in China.  Lingo Learning is a print-based publisher of English learning language programs in China.

The head office, principal address and registered and records office of the Company are located at 151 Bloor Street West, Suite 703, Toronto, Ontario, Canada, M5S 1S4.
 
2.
BASIS OF PREPARATION
 
2.1     Statement of compliance and going concern
 
These condensed consolidated interim financial statements are unaudited and have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ (“IAS 34”) using accounting policies consistent with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).
 
These condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The Company has a working capital deficiency as at September 30, 2012 and has incurred significant losses recurring over the years. This raises significant doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon raising additional financing through share issuance, borrowing, sales contracts and distribution agreements. There are no assurances that the Company will be successful in achieving these goals.

The condensed consolidated interim financial statements for the period ended September 30, 2012 (including comparatives) were approved and authorized for issue by the board of directors on November 23, 2012.
 
2.2     Basis of measurement
 
These condensed consolidated interim financial statements have been prepared on the historical cost basis. The comparative figures presented in these condensed consolidated interim financial statements are in accordance with IFRS .
 
2.3     Basis of consolidation
 
The condensed consolidated interim financial statements comprise the financial statements of the Company and the entities controlled by the Company (i.e. subsidiaries) as at September 30, 2012 (the “Group”). Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

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.
 
 
8
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
2.4
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 and presentation currency. The functional currency of its Lingo Learning and Speak2Me subsidiaries is Chinese Renminbi (“RMB”) and the functional currency of its ELL Technologies subsidiary is the United States Dollar (“US$”).

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”.
 
3.
SIGINFICANT ACCOUTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
 
The preparation of the Company’s consolidated financial statements in conformity with IFRS requires management to make judgments, 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 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 and presentation currency
 
·
Determination of impairment loss
 
·
Income taxes
 
·
Valuation of share-based payments
 
4.
SUMMARY OF SIGINFICANT ACCOUTING POLICIES
 
The accounting policies applied by the Company in these condensed consolidated interim financial statements are the same as those applied by the Company in its consolidated financial statements for the year ended December 31, 2011.
 
5.
ACCOUNTS RECEIVABLE
 
Accounts receivable includes trade receivables and grant receivables as follows:
 
   
September 30,
2012
   
December 31,
2011
 
Trade receivable
  $ 803,512     $ 1,042,730  
Grants receivable
    178,048       132,600  
    $ 981,560     $ 1,175,330  
 
6.
PROPERTY AND EQUIPMENT
 
Cost, January 1, 2011
  $ 209,733  
Additions
    2,585  
Effect of foreign exchange
    844  
Cost, December 31, 2011
  $ 213,162  
Additions
       
Effect of foreign exchange
    (1,255 )
Cost, September 30, 2012
  $ 211,907  
 
 
9
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
6.
PROPERTY AND EQUIPMENT (Cont’d)
 
Accumulated depreciation, January 1, 2011
    151,572  
Charge for the year
    58,159  
Effect of foreign exchange
    (44,890 )
Accumulated depreciation, December 31, 2011
  $ 164,841  
Charge for the period
    7,362  
Effect of foreign exchange
    (1,067 )
Accumulated depreciation, September 30, 2012
  $ 171,136  
         
Net book value, January 1, 2011
  $ 58,161  
Net book value, December 31, 2011
  $ 48,321  
Net book value, September 30, 2012
  $ 40,771  
 
7.
INTANGIBLES
 
In October 2007, the Company acquired Speak2Me, a software company combining speech recognition and animation technology for the teaching and practice of spoken English.  From that point until late 2009, the Company continued to develop this technology and capitalized it as software and web development costs.  Upon acquisition of ELL Technologies Limited in 2010, the Company started capitalizing costs related to their new software and web development initiatives.
 
 
September 30, 2011
 
Cost
    Accumulated
Amortization
   
Net
 
Software and web development (i)
  $ 6,673,437     $ 5,328,788     $ 1,344,649  
Content platform (ii)
    1,477,122       394,774       1,082,348  
Customer relationships (iii)
    130,000       86,860       43,140  
    $ 8,280,559     $ 5,810,422     $ 2,470,137  
                         
December 31, 2011
 
Cost
   
Accumulated
Amortization
   
Net
 
Software and web development (i)
  $ 5,931,786     $ 5,865,705     $ 66,081  
Content platform (ii)
    1,477,112       470,214       1,006,898  
Customer relationships (iii)
    130,000       103,458       26,542  
    $ 7,538,898     $ 6,439,377     $ 1,099,521  
                   
September 30, 2012
 
Cost
   
Accumulated
Amortization
   
Net
 
Software and web development (i)
  $ 306,566     $ 191,302     $ 115,264  
Content platform (ii)
    1,477,122       691,984       785,138  
Customer relationships (iii)
    130,000       130,000       -  
    $ 1,913,688     $ 1,013,286     $ 900,402  
 
 
(i)
The Company began commercial production and sale of its services and products during 2009 and started amortizing the cost of software and web development costs on a straight-line basis over the useful life of the assets which is estimated to be 3 years. At December 31, 2011, management assessed the value of this asset and found it to be impaired. Accordingly, an impairment loss of $703,600 was recorded.
 
 
10
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
7.
INTANGIBLES (Cont’d)
 
 
 (ii)
In 2010, the Company acquired a content platform from its acquisition of ELL Technologies, which was already commercialized.  The content platform costs are being amortized on a straight-line basis over the useful life of the assets which is estimated to be 5 years.
 
 
(iii)
In 2010, the Company acquired customer relationships from its acquisition of ELL Technologies.  The customer relationships are being amortized on a straight-line basis over the useful life of the assets which is estimated to be 2 years. As at June 30, 2012, this asset is fully amortized.
 
8.
LOANS PAYABLE
 
   
September 30,
2012
   
December 31,
 2011
 
Loans payable, interest bearing at 9% per annum with monthly interest payments, secured by a general security agreement and due on September 8, 2013 (i) .
    890,000       890,000  
Loans payable, interest bearing at 12% per annum (ii) with monthly interest payments, secured by accounts receivable and due on January 31, 2013
    250,000       -  
    $ 1,140,000     $ 890,000  
 
 
(i)
On September 8, 2012, the Company extended the term of the $890,000 loan originally advanced on Sept. 8, 2010, and extended for a further one-year term on Sept. 8, 2011. As additional consideration for the extension of the loan, the Company issued to the lenders an aggregate of 356,000 common shares of Lingo Media. The common shares were issued based on 10 per cent of the value of the loan, divided by a deemed issue price of $0.25 per common share.
 
 
(ii)
Included in the $250,000 loans is a loan in the amount of $100,000 to a related party as disclosed in Note 15.
 
9.        SHARE CAPITAL
 
a)
Common shares - Authorized
 
Unlimited number of preference shares with no par value
Unlimited number of common shares with no par value
 
b)
Common shares - Transactions:
 
 
(i)
On March 4, 2011, the Company closed a non-brokered private placement financing of 2,500,000 units (each a "Unit") at $0.60 per Unit and an over-allotment of 1,158,668 Units for gross proceeds of $2,195,200 (the "Financing").  Each Unit is comprised of one common share (each a "Common Share") in the capital of the Company and one non-transferable common share purchase warrant (each a "Warrant").  Each Warrant entitles the holder to purchase one Common Share at an exercise price of $0.75 per share until September 4, 2012.  The Warrants are callable, at the option of Lingo Media, after July 5, 2011 in the event its Common Shares trade at or over $1.20 per share for 10 consecutive trading days.
 
In connection with the Financing, the Company agreed to pay a 7% finder's fee payable in cash (the "Cash Finder's Fee") or Units (the "Finder's Units") to eligible persons (the "Finders"), along with finder's warrants ("Finder's Warrants") equal to 6% of the Units placed by the Finder in the Financing.  Each Finder Unit entitles the holder to one Common Share and one Warrant.  Each Finder's Warrant entitles the holder to acquire one Common Share of Lingo Media at $0.60 until September 4, 2012.  On closing, the Company issued 23,333 Finder's Units, 151,620 Finder's Warrants which have expired and paid a $92,135 Cash Finder's Fee to the Finders. The lenders waived their right to be repaid $0.50 of every $1.00 raised by Lingo Media through this financing.

The warrants were valued using the Black-Scholes pricing model using the following assumption: weighted average risk free interest rates of 1.78% weighted average expected dividend yields of NIL, the weighted average expected common stock price volatility (based on historical trading) of 83% and a weighted average expected life of 1.5 years.
 
 
11
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
c)
Common shares - Transactions: (Cont’d)
 
On August 23, 2012, the expiry date of the Warrants was extended for additional 18 months to March 4, 2014.
 
 
(ii)
On May 11, 2011, Lingo Media closed a non-brokered private placement financing of 1,875,000 units at $0.60 per Unit for gross proceeds of $1,125,000 (the "Second Financing").  Each Unit is comprised of one common share in the capital of the Company and one non-transferable common share purchase warrant.  Each Warrant entitles the holder to purchase one Common Share at an exercise price of $0.75 per share until November 11, 2012. The Warrants are callable, at the option of Lingo Media, after September 11, 2011 in the event its Common Shares trade at or over $1.20 per share for 10 consecutive trading days.

In connection with the Second Financing, the Company agreed to pay a 7% Cash Finder’s Fee along with Finder's Warrants equal to 6% of the Units placed by the Finder in the Financing.  Each Finder's Warrant entitles the holder to acquire one Common Share of Lingo at $0.60 until November 11, 2012.  On closing, the Company issued 78,900 Finder's Warrants which have expired and paid a $55,230 Cash Finder's Fee to the Finders. The lenders waived their right to be repaid $0.50 of every $1.00 raised by Lingo Media through this Second Financing.

The warrants were valued using the Black-Scholes pricing model using the following assumption: weighted average risk free interest rates of 1.51% weighted average expected dividend yields of NIL, the weighted average expected common stock price volatility (based on historical trading) of 65% and a weighted average expected life of 1.5 years.

On August 23, 2012, the expiry date of the Warrants from the Second Financing was extended for an additional 18 months to May 11, 2014.
 
 
(iii)
On June 3, 2011, the Company issued 1,036,987 common shares (the "Payment Shares") as the second and final payment representing the US$763,729 (CAD$786,535) balance payable to SCP Partners, for the acquisition of ELL Technologies.  This payment was made pursuant to the purchase agreement between Lingo Media and SCP Partners announced on May 13, 2010, whereby Lingo Media acquired all of issued and outstanding shares of ELL Technologies.  The Payment Shares are subject to a four month regulatory hold period from the date of issuance and are also subject to a 24 month lock-up and leak-out agreement whereby the Payment Shares will be held in escrow and released in a monthly leak-out of equal instalments of 43,208 shares released each month.
 
 
(iv)
On September 8, 2012, the Company extended the term of the $890,000 loan originally advanced on Sept. 8, 2010, and extended for a further one-year term on Sept. 8, 2011. As additional consideration for the extension of the loan, the Company issued to the lenders an aggregate of 356,000 common shares of Lingo Media. The common shares were issued based on 10 per cent of the value of the loan, divided by a deemed issue price of $0.25 per common share.
 
10.     STOCK OPTIONS
 
In December 2011, the Company amended its stock option plan (the “2011 Plan“).  The 2011 Plan was established to provide an incentive to employees, officers, directors and consultants of the Company and its subsidiaries.  The maximum number of shares which may be reserved for issuance under the 2011 Plan is limited to 4,108,635 common shares less the number of shares reserved for issuance pursuant to options granted under the 1996 Plan, the 2000 Plan, the 2005 Plan and the 2009 Plan, provided that the Board of Directors of the Company has the right, from time to time, to increase such number subject to the approval of the relevant exchange on which the shares are listed and the approval of the shareholders of the Company.

The maximum number of common shares that may be reserved for issuance to any one person under the 2011 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares of the Company granted as a compensation or incentive mechanism.
 
 
12
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
10.     STOCK OPTIONS (Cont’d)
 
The exercise price of each option cannot be less than the market price of the shares on the day immediately preceding the day of the grant less any permitted discount.  The exercise period of the options granted cannot exceed 10 years.  Options granted under the 2011 Plan do not have any required vesting provisions. The Board of Directors of the Company may, from time to time, amend or revise the terms of the 2011 Plan or may terminate it at any time.
The following summarizes the options outstanding:
 
   
Number of Options
   
Weighted Average Exercise Price
 
Outstanding as at January 1, 2011
    708,356     $ 1.27  
Granted
    1,922,000          
Expired
    (14,286 )        
Forfeited
    (195,000 )        
Outstanding as at September 30, 2011
    2,421,070     $ 0.91  
Forfeited
    (396,000 )        
Outstanding as at December 31, 2011
    2,035,070     $ 0.89  
Expired
    (227,570 )        
Forfeited
    (243,500 )        
Outstanding as at September 30, 2012
    1,564,000     $ 0.90  
                 
Options exercisable as at January 1, 2011
    658,356     $ 1.24  
Options exercisable as at September 30, 2011
    1,737,350     $ 1.12  
Options exercisable as at December 31, 2011
    1,600,763     $ 0.95  
Options exercisable as at September 30, 2012
    1,426,000     $ 0.93  
 
The following table summarizes information about stock options outstanding at September 30, 2012:
 
   
Options Exercisable
   
Options Outstanding
 
Expiry Date
 
Number
Outstanding
   
Weighted Average Remaining Contractual Life (Years)
   
Weighted Average Exercise Price
   
Number
Outstanding
   
Weighted Average Exercise Price
 
1/12/2013
    85,000       0.54       0.70       85,000       0.70  
3/10/2013
    15,000       0.69       1.40       15,000       1.40  
4/10/2013
    50,000       0.78       1.70       50,000       1.70  
4/22/2013
    5,000       0.81       2.00       5,000       2.00  
6/26/2013
    25,000       0.99       1.80       25,000       1.80  
5/1/2014
    121,500       1.58       1.75       121,500       1.75  
2/15/2016
    1,024,500       3.38       0.78       1,162,500       0.80  
2/22/2016
    100,000       3.40       0.70       100,000       0.70  
      1,426,000                       1,564,000          
 
The weighted average grant-date fair value of options granted to management, employees, directors and consultants has been estimated at $0.60 (2011 - $0.47) using the Black-Scholes option-pricing model. The estimated fair value of the options granted is expensed over the options vesting periods.
 
 
13
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
10.     STOCK OPTIONS (Cont’d)
 
The pricing model assumes the weighted average risk free interest rates of 1.50% (2011 – 1.78%) weighted average expected dividend yields of NIL (2011 – NIL), the weighted average expected common stock price volatility (based on historical trading) of 80% (2011 – 81%) and a weighted average expected life of 5 years (2011 – 5 years), which were estimated based on past experience with options and option contract specifics
 
11.     WARRANTS
 
The following summarizes the warrants outstanding:
 
   
Weighted Average Remaining Contractual Life (Years)
   
Series
   
Number of
Warrants
   
Weighted
Average
Exercise
Price
 
January 1, 2011
             
Nil
   
Nil
 
Issued
    0.61       2011 a     3,658,668       0.75  
Issued
    0.38       2011 b     1,875,000       0.75  
December 31, 2011
                    5,533,668          
September 30, 2012
                    5,533,668          
 
The following summarizes the compensation warrants outstanding:

   
Weighted Average Remaining Contractual Life (Years)
   
Series
   
Number of
Warrants
   
Weighted
Average
Exercise
Price
 
January 1, 2011
             
Nil
   
Nil
 
Issued
    -       2011 a     151,620       0.60  
Issued
    -       2011 b     78,900       0.60  
December 31, 2011
                    230,520          
Expired
    -       2011       (230,520 )        
September 30, 2012
                 
Nil
         
 
12.     FINANCIAL INSTRUMENTS
 
Fair values
 
The carrying value of cash and cash equivalent and accounts and grants receivable, approximates its fair value due to the liquidity of this instrument. The carrying value of accounts payables and accrued liabilities and loans payables approximates its fair value due to the requirement to extinguish the liability on demand.
 
Financial risk management objectives and policies
 
The financial risk arising from the Company’s operations are currency risk and liquidity 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 these financial instruments and the policies on how to mitigate these risks are set out below.

Management oversees and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. The Board of Directors reviews and agrees on policies for managing each of these risks which are summarized below.
 
 
14
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)

12.      FINANCIAL INSTRUMENTS (Cont’d)
 
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 operating activities (when revenue or expense is denominated in a different currency from the Company’s functional currency) 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 foreign currencies.
 
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 September 30, 2012, the Company had cash and cash equivalent of $98,872, accounts and grants receivable of $981,560 and prepaid and other receivables of $173,224 to settle current liabilities of $2,011,569.
 
13.     CAPITAL MANAGEMENT
 
The Company’s primary objectives when managing capital are to (a) safeguard the Company’s ability to develop, market, distribute and sell English language learning products and services, and (b) provide a sound capital structure for raising capital at a reasonable cost for the funding of ongoing development of its products and new growth initiatives. The Board of Directors does not establish quantitative capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business.

The Company includes equity, comprised of issued share capital, warrants, share-based payments reserve and deficit, in the definition of capital. The Company is dependent on cash flow from co-publishing and distribution agreements and external financing to fund its activities. In order to carry out planned development of its products and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.  There has been no change to the Company’s capital management.
 
14.       SEGMENTED INFORMATION
 
The Company operates two distinct reportable business segments as follows:

Print-based English Language Learning: Lingo Learning Inc. ("Lingo Learning") is a print-based publisher of English language learning programs for the school market in China.

Online English Language Learning: ELL Technologies, a subsidiary acquired in 2010, is a globally-established English language learning multi-media and online training company marketed under the Q Group brand.  Parlo is a fee-based online English language training and assessment service.  Speak2Me, a subsidiary acquired in 2007, is a free-to-customer advertising-based online English language learning service in China.

Segmented Information for Nine Months Ended September 30, 2012 (Before Other Financial Items Below)
 
   
Online
   
Print-Based
       
   
English
   
English
       
 
 
Language
    Language        
 
 
Learning
    Learning    
Total
 
Revenue
    434,869       689,645       1,124,514  
Acquisition of property and equipment
    -       -       -  
Segment assets
    1,274,833       1,059,613       2,334,446  
Segment income (loss)
    (1,098,467 )     (2,783 )     (1,101,250 )
 
 
15
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
14.
SEGMENTED INFORMATION (Cont’d)
 
For Print-Based English Language Learning Segment
 
   
September 30,
2012
   
September 30,
 2011
 
Revenue
    689,645       592,629  
Segment assets
    1,059,613       888,645  
Segment income (loss)
    (2,783 )     (1,121,943 )
 
For Online English Language Learning Segment
 
   
September 30,
2012
   
September 30,
2011
 
Revenue
    434,869       513,489  
Segment assets
    1,274,833       ,300,985  
Segment income (loss)
    (1,098,467 )     (1,739,892 )
 
   
September 30,
2012
   
September 30,
2011
 
Print-Based English Language Learning segment income (loss)
    (2,783 )     (1,121,943 )
Online English Language Learning segment income (loss)
    (1,098,467 )     (1,739,892 )
Foreign exchange
    (88,198 )     29,370  
Interest and other financial
    (102,244 )     (77,502 )
Share-based payments
    (187,391 )     (587,268 )
Other comprehensive income
    75,735       (166,288 )
                 
Total Comprehensive Loss
  $ (1,403,348 )   $ (3,663,523 )
 
Revenue by Geographic Region
 
   
2012
   
2011
 
China
  $ 695,393     $ 759,709  
Other
    429,121       346,409  
    $ 1,124,514     $ 1,106,118  
 
Identifiable Assets
 
   
2012
   
2011
 
Canada
  $ 2,291,769     $ 3,978,292  
China
    42,677       211,338  
    $ 2,334,446     $ 4,189,630  
 
   
Online
   
Print-Based
       
   
English
   
English
       
   
Language
   
Language
       
 
 
Learning
   
Learning
   
Total
 
Segment assets
  $ 1,274,833     $ 1,059,613     $ 2,334,446  
Current assets
    216,514       1,037,141       1,253,655  
Long-term assets
    1,058,320       22,471       1,080,791  
 
 
16
 
LINGO MEDIA CORPORATION
Notes to Condensed Consolidated Interim Financial Statements
September 30, 2012
(Unaudited - See Notice to Reader)
 
15.     RELATED PARTY BALANCES AND TRANSACTIONS
 
For the nine months ended September 30, the Company had the following transactions with related parties, made in the normal course of operations, and accounted for at an amount of consideration established and agreed to by the Company and related parties.

 
(a)
In 2012, the Company charged $5,000 (2011 - $38,500) to a corporation with one director in common for rent.

 
(b)
Management compensation was $288,000 (2011 – $343,980) and is reflected as consulting fees paid to corporations owned by a director and officers of the Company. As of September 30, 2012, $274,970 of management compensation is deferred and included in accounts payable.

 
(c)
At September 30, 2012, the Company had loans payable due to corporations controlled by directors and officers of the Company in the amount of $435,000 (2011 - $435,000) bearing interest at 9% per annum.  Interest expense related to these loans is $29,389 (2011 - $29,437).
 
In the third quarter, the Company secured loans in the amount of $250,000, bearing interest at 12% per annum, secured by accounts receivable and due on January 31, 2012. Included in $250,000 loans is a loan in the amount of $100,000 due to a related party.
 
 
(d)
Common shares issued for extension of the $890,000 loan include 174,000 shares issued to corporations controlled by directors and officer of the Company.
 
16.     SUPPLEMENTAL CASH FLOW INFORMATION
 
      2012        2011   
Income taxes and other taxes paid
  $ 108,367     $ 84,696  
Interest paid
  $ 96,880     $ 63,636  
Balance of ELL Technologies acquisition payment due settled by shares                              
  $ -     $ 777,229  
Financing changes paid through issuance of common shares                                                 
  $ 89,000     $ -  
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