Lingo Media is an Undervalued Edtech Company

Business Description

Lingo Media Corporation (TSXV:LM.V) is a EdTech company that claims it is “Changing the Way the World Learns English” through the combination of education with technology. The company has two distinct business units and markets and supports a suite of English language learning solutions consisting of web-based software licensing subscriptions, online and professional services, audio practice tools and multi-platform applications.

While it is usually a yellow flag for me whenever words like “changing the world”, “disruptive”, or “game changes” are used to describe themselves, what Lingo Media is referring to here is the rise of the EdTech industry and that is actually quite game changing in my opinion. The company is a nanocap that trades on the TSX Ventures and OTC bulletin and its current valuation of 8.14 million (OTC) simply does not give enough credit to its fast growing SaaS segment despite the recent run up from $0.1 to $0.3.

Industry Trends

There are two big trends going in which Lingo Media is a beneficiary of. First, there is the EdTech boom. Ed tech is the “use of technology in form of products/apps/tools to enhance learning, pedagogy and instruction. It is not replacing any current practices, but it is the use of those tools to aid in the delivery of education.”

Education has been an area that has lagged other industry in terms innovation, and especially mobile.  Even with the advances in technology, not much of it was applied to the education industry until recently and now it is considered a hot sector. Venture Capital Funds are pouring money into this sector. The second quarter of 2015 "set a new high-water market for ed-tech deals and financing," with $765 million in funding across 80 deals, according to a recent blog post by CB Insights, a market research and analysis firm.

(Source)

Some people even think EdTech is in a bubble right now, but people say that every time there is an industry that is booming. It might eventually be a bubble, but at this point, I believe it is too early to be called a bubble. The boom in Ed-tech has had a huge influence on the behavior of education institutions and facilities, in that it has made them more open to try new things. The education sector has historically been a sector that is reluctant to adopt change, but they are finally seeing some of the benefits in some EdTech products.

The second trend benefitting Lingo Media is the increase in English learning products and English learning in general. In their investor presentation, Lingo Media stated that:

“EXPENDITURES ON DIGITAL ENGLISH LANGUAGE LEARNING PRODUCTS WILL ACCOUNT FOR $2.5 BILLION OF THE GLOBAL MARKET BY 2016”

and

“EXPENDITURES IN LATIN AMERICA ALONE WILL GROW TO $260.9 MILLION BY 2016.”

The investor presentation stated that their sources were GSV Advisor and Ambient Learning.

I cannot confirm if those are the actual numbers in the original source as it probably came from the latest research but in a GSV Adivsor 2012 factbook, which was the latest one I can pull up, they forecasted 25% CAGR for Global English Language Learning and a market size of 193.2 billion in 2017. The fact that expenditure is growing in Latin America is not surprising. Latin America is a region with a low proficiency level in English but at the same time, they have the necessary income level and infrastructure to invest in English learning programs.  This is why you see VCs investing in Brazil and not in some random African country.

Latin America is a very important region for Lingo Media and they have already landed some licensing deals. According to Lingo Media’s blog, which by the way is quite informative, they said

“With more than 600 million people, smartphone penetration that is forecast to increase from about 25 percent today to approximately 50 percent by 2018, an educational system that has fallen behind the developed world and a historical lack of accessibility, Latin America presents an interesting opportunity for those in the EdTech space and investors who believe that there are ideal conditions for innovative disruption in education and language learning.”

I have to say management feels very excited about their prospects in this region. Competition, however, is indeed huge and that is something I will get to shortly.

Segments

1. Print Publishing

The print publishing segment is the legacy textbook publishing business segment from which Lingo collects a recurring royalty revenue. The company was one of the early That number initially sounded too high to me, but once you realize PEP is basically the Ministry of Education’s publishing arm which is tasked with “Lingo Media recognizes no revenues from its print-based English language learning business in the first and third quarters as the sales from print-based products in China are reported semi-annually in the second and fourth quarters.”

2. Online English language Learning

Ell Technologies is the fast growing ELearning segment of Lingo media. ELL Technologies was acquired in 2010 and its product offering include Winnie’s World, English Academy, Scholar, Campus, Master and Business, in addition to custom solutions. In other words, it covers pre-K. k-12, and adult learners.

At the time of acquisition, management believed the current product offering needed revision and scaled down the segment in an effort to focus on 2012 improving the product line. The company completed the revision on 2014 and has increased their sales effort since.  The current product offering includes Winnie’s World, English Academy, Scholar, Campus, Master and Business which pretty much spans the entire pre-K to adult learner spectrum.

One very interesting detail on this product is that “All of our products have been designed for our proprietary learning management system which completes the suite of products and allows ELL Technologies to market and sell to academic institutions, governments and corporations. Educators who license the platform will be able to easily create, convert, edit, and arrange lessons and courses as they see fit. ELL Technologies retains all rights to user generated content to continuously expand its digital library.”

What this does is give ELL Technologies an easier time to improve and expand their content. This might be a source of competitive advantage although I will need to talk to management to fully understand this feature.

Competition (Note: Still Need to Interview Managment)

Competition might be the biggest risk to Lingo Media. If you take a look at the features in each of Ell technologies’ products, they do not seem proprietary at all and can be easily imitated by a competitor. Startups backed by VC are popping up left and right and there are then there are English learning software like Rosetta Stone, Babel, and Duolingo. Open English is one of the 9 Latin America education startup profiled in the link I posted under the industry discussion and it raised 43m in 2012, giving it a larger market cap than Lingo.

Despite the competition, there are some specific niches in the area that is not as completive and Lingo Media seems to be going after these areas. In the latest press release, where management disclosed that they completed the development of Winnie’s World, the CEO also said about the Pre-K market, “Winnie's Worldto the early childcare market," commented Mr. Kraft.” In another press release, Lingo Media, disclosed that they won a licensing deal with the Peruvian navy, another area where competition is much smaller compared to the traditional K-12 space.

Having said that, there are low barriers to designing products and starting a company, it should be noted that there are some barriers to actually getting these foreign school districts and governments to adopt your products. I believe Lingo Media is not hindered by this barrier due to the fact that the CEO has been dealing with foreign governments for the last 20 years (China) and has already landed several licensing deals in Latin America shortly after ELL technologies finished its redevelopment.

Financial Strength

The company does not exactly have the best looking balance sheet in the world. In the latest quarter, cash on hand was $142,328, compared to a negative ~$200,000 last quarter due to the fact that the company closed a private placement on April 2015 and one director of the company participated in the private placement. The company has working capital of $887,826 and current ratio of 1.6. Cash flow from operations before working capital adjustment was 1.2 million. After adjusting for working capital, it is $138,764 which really shows how much working capital the company as a result of its expansion.  

Capex was $494,000 compared to $95,288 last year due to the investments in their online ELL segment. The company just released “Winnie’s World” so I expect capex to decrease, but I will need to confirm with management. In any case, FCF is negative $350,000 and while I expect the company will need further financing, which is something they’ve said themselves.

“The Company plans on raising additional working capital through an equity private placement financing or a debt financing, as the capital markets permit, in an effort to finance its growth plans and expansion into new international markets. The Company has been successful in raising sufficient working capital in the past.”

Currently, the company has 27m shares outstanding, 10m warrants, and 3.7m options.

Management

MICHAEL KRAFT – PRESIDENT & CEO

Michael Kraft co-founded Lingo Media on April 1996 and has served as its CEO ever since. In 1994, he founded ACC and served as its CEO. In 2012-2015, he was CEO of Htn Inc. I was curious as to what he was doing at Htn Inc. so I pulled up the filings. I usually don’t like CEOs running multiple companies as it is already difficult enough running one, but it looks like his responsibilities in Htn Inc. did not take too much of his time away from running Lingo.

Htn Inc.

Historically, HTN was a supplier of PC-based medical office automation software and became a public company through a reverse takeover transaction. However, when the Ontario medical Association had introduced a new requirements and certifications, the costs were too high for Htn Inc. to comply with. As a result of those circumstances, the Company on july 8, 2011 entered an agreement to sell most of the assets and discharged all liabilities. All remaining cash were distributed to shareholders. On January 2012, Htn Inc. entered a share purchase agreement where a group of investors purchased all shares of the company’s vendors which owned about 50% of Htn Inc. After the SPA, all directors and officers resigned on March 2012. HTN was maintained as a publicly traded company available for a possible future transaction to attempt to maximize shareholder value.  According to seda.ca, Michael Kraft became an insider of Htn Inc. on exactly March 2012 and stayed as CEO until April 2015. On Feb, 2014, Htn Inc. announced with a letter of intent to acquire two privately held companies, APT Software Canada Inc. and Double Door Communications Inc. On May 14, 2015, the Company received approval to transfer its listing from the NEX to the TSX Venture Exchange following the closing of the transactions. In the latest management circular, Mr. Kraft holds 15.5 million shares of Htn Inc. which has about 156 mil shares outstanding according to latest MD&A, so Kraft owns about 10%. Htn Inc. is now named Internet of Things Inc. Website: http://www.iotintl.com/. It looks like Mr. Kraft role in Htn Inc. was identifying acquisition targets. It is likely that he was one of the investors who purchased shares from the vendors in 2012 or if not, then he was most likely affiliated with them. Mr. Kraft was paid $30,000, and $25,000 for the past two fiscal years for his service which is very modest, but makes a lot of sense as you’re literally running a company with absolutely nothing.

Michael Kraft holds 1.8m shares of Lingo Media and warrants to purchase up to 816,670 shares. His total compensation is a modest $186,287 in 2015.

GALI BAR-ZIV – CHIEF OPERATING OFFICER

He was with the company since 2009 and most definitely played a role in the redesigning of Ell Technologies. According to Bloomberg “Mr. Bar-Ziv has more than 10 years of management and entrepreneurial experience, including financing, mergers and acquisitions, strategic planning, channel development and corporate development. Most recently, he profitably grew a sales, marketing and distribution start-up to sales growth of more than 700% year over year. Prior to that, he successfully turned around the largest service division of a $300MM financial services company.”

Valuation

For valuation, I believe a sum of parts method is suitable for this company. I use the latest quarter numbers and annualized the net income for each segment. For the online ELL segment, net income was $495,200 which annualized to  $1,980,800. For the print publishing segment, the last quarter net income was $563,751 which annualized to $845,626. (It was multiplied by 1.5 and NOT 2 because this segment incurs a loss during Q1 and Q3 when revenue from PEP is not recognized). A multiply of 10 on the print publishing segment and 25 on the online Ell segment will be used to reflect their difference in growth rate. As for shares outstanding, I just used 50m for the sake of conservatism.

(NOTE: This valuation is for LM.V on the TSX-V exchange. LM.V is currently priced at 40 cents. LMDCF on the OTC exchange is currently 29 cents.)

Misc. Information

1. “Selling, general and administrative expenses were $321,442 compared to $103,362 in 2014” (Q2 2014 MD&A). The company literally made a number mistake. The correct number instead of $103,362 was $103,362 plus $165,666. The $103,362 was just for the online segment and the above quoted statement was supposed to be a comparison that includes both segments. The company further breaks down information on the two segments, so this is not “that” big of a mistake, unlike some companies I’ve seen where the cash flow statement literally does not even add up.
2. The company changed their auditors 4 times in the last 15 years. Although to be fair, there are many reasons why auditors are changed and their current auditor has been with them since 2009.

DISCLAIMER: GeoInvesting has no affiliation with the author of this report in any way and is not endorsing his research, nor has GeoInvesting vetted this information in any way. The GeoTeam does not attest to the accuracy of the information contained in this report and always urges investors to conduct their own due diligence. The GeoTeam has received no compensation for the dissemination of this report.  The GeoTeam may or may not have a position in any stocks mentioned in this article prior to its publication.