Form 10-Q DESTINY MEDIA TECHNOLOGI For: Nov 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from _____ to _____
Commission File Number
(Exact name of registrant as specified in its charter)
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(Former name, former address and former fiscal year, if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
[ ]Yes [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:
The number of shares outstanding of the registrant's common stock, par value $0.001, as of January 7, 2022 was
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Interim Financial Statements
Destiny Media Technologies Inc.
(Unaudited)
November 30, 2021
(Expressed in United States dollars)
Destiny Media Technologies Inc.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(Expressed in United States Dollars)
Unaudited
| As at, | November 30, | August 31, | ||||
| 2021 | 2021 | |||||
| $ | $ | |||||
| ASSETS | ||||||
| Current | ||||||
| Cash and cash equivalents | ||||||
| Short-term investments [note 3] | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ |
||||||
| Other receivables | ||||||
| Prepaid expenses | ||||||
| Total current assets | ||||||
| Deposits | ||||||
| Property and equipment, net [note 4] | ||||||
| Intangible assets, net [note 4] | ||||||
| Right of use asset [note 5] | ||||||
| Total assets | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| Current | ||||||
| Accounts payable | ||||||
| Accrued liabilities | ||||||
| Deferred revenue | ||||||
| Current portion of operating lease liability [note 5] | ||||||
| Total current liabilities | ||||||
| Operating lease liability, net of current portion [note 5] | ||||||
| Total liabilities | ||||||
| Commitments and contingencies [note 7] | ||||||
| Stockholders' equity | ||||||
| Common stock, par value $ |
||||||
| Authorized: |
||||||
| Issued and outstanding: |
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| [August 31, 2021 - issued and outstanding |
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| Additional paid-in capital [note 6] | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||
| Total stockholders' equity | ||||||
| Total liabilities and stockholders' equity |
See accompanying notes
Destiny Media Technologies Inc.
INCOME
| 2021 | 2020 | |||||
| $ | $ | |||||
| Service revenue [note 9] | ||||||
| Cost of revenue | ||||||
| Hosting costs | ||||||
| Internal engineering support | ||||||
| Customer support | ||||||
| Third party and transaction costs | ||||||
| Gross Margin | ||||||
| Operating expenses | ||||||
| General and administrative | ||||||
| Sales and marketing | ||||||
| Product development | ||||||
| Depreciation and amortization | ||||||
| Income from operations | ||||||
| Other income | ||||||
| Interest income | ||||||
| Net income | ||||||
| Net income per common share, basic and diluted | ||||||
| Weighted average common shares outstanding: | ||||||
| Basic | ||||||
| Diluted |
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Expressed in United States dollars)
Unaudited
Three months ended November 30,
| 2021 | 2020 | |||||
| $ | $ | |||||
| Net income | ||||||
| Foreign currency translation adjustments | ( |
) | ||||
| Total comprehensive income |
See accompanying notes
Destiny Media Technologies Inc.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Expressed in United States dollars)
Unaudited
Three months ended November 30, 2021 and 2020
| Accumulated | Total | |||||||||||||||||
| Additional | other | stockholders' | ||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | equity | ||||||||||||||
| Shares | Amount | capital | Deficit | loss | ||||||||||||||
| # | $ | $ | $ | $ | $ | |||||||||||||
| Balance, August 31, 2021 | ( |
) | ( |
) | ||||||||||||||
| Total comprehensive income | - | - | - | ( |
) | |||||||||||||
| Shares repurchased for cancellation | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Stock based compensation [note 6] | - | - | - | - | ||||||||||||||
| Balance, November 30, 2021 | ( |
) | ( |
) | ||||||||||||||
| Balance, August 31, 2020 | ( |
) | ( |
) | ||||||||||||||
| Total comprehensive income | - | - | - | |||||||||||||||
| Stock based compensation [note 6] | - | - | - | - | ||||||||||||||
| Balance, November 30, 2020 | ( |
) | ( |
) | ||||||||||||||
See accompanying notes
Destiny Media Technologies Inc.
| Three months ended November 30, | (Expressed in United States dollars) | |||||
| 2021 | 2020 | |||||
| $ | $ | |||||
| OPERATING ACTIVITIES | ||||||
| Net income | ||||||
| Items not involving cash: | ||||||
| Depreciation and amortization [note 4] | ||||||
| Stock-based compensation | ||||||
| Deferred leasehold inducement | ||||||
| Unrealized foreign exchange (gain) loss | ||||||
| Changes in non-cash working capital: | ||||||
| Accounts receivable | ( |
) | ||||
| Other receivables | ( |
) | ( |
) | ||
| Prepaid expenses and deposits | ( |
) | ||||
| Accounts payable | ( |
) | ||||
| Accrued liabilities | ( |
) | ||||
| Deferred revenue | ( |
) | ( |
) | ||
| Operating lease liability | ( |
) | ||||
| Net cash (used in) provided by operating activities | ( |
) | ||||
| INVESTING ACTIVITIES | ||||||
| Redemption (purchase) of short-term investments, net | ||||||
| Development of software | ( |
) | ||||
| Purchase of property, equipment and intangibles | ( |
) | ( |
) | ||
| Net cash provided by (used in) investing activities | ( |
) | ||||
| FINANCING ACTIVITY | ||||||
| Repurchase of common stock for retirement | ( |
) | ||||
| Net cash used in financing activity | ( |
) | ||||
| Effect of foreign exchange rate changes on cash | ( |
) | ||||
| Net increase (decrease) in cash and cash equivalents | ( |
) | ||||
| Cash and cash equivalents, beginning of period | ||||||
| Cash and cash equivalents, end of period | ||||||
| Supplementary disclosure | ||||||
| Interest paid | ||||||
| Income taxes paid | ||||||
| Non-cash investing and financing activities | ||||||
| Right of use asset | ||||||
| Operating lease liability | ||||||
See accompanying notes
Destiny Media Technologies Inc.
FINANCIAL STATEMENTS
1. ORGANIZATION
Destiny Media Technologies Inc. (the "Company") was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. The Company develops technologies that allow for the distribution over the internet of digital media files in either a streaming or digital download format. The technologies are proprietary. The Company operates out of Vancouver, BC, Canada and serves customers predominantly located in the United States, Europe and Australia.
The Company's stock is listed for trading under the symbol "DSNY" on the OTCQB U.S. in the United States, under the symbol "DSY" on the TSX Venture Exchange and under the symbol "DME" on the Berlin, Frankfurt, Xetra and Stuttgart exchanges in Germany.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended November 30, 2021 are not necessarily indicative of the results that may be expected for the year ended August 31, 2022.
The balance sheet at August 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended August 31, 2021.
COVID-19 Pandemic
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses, including the Company's. This outbreak could decrease spending, adversely affect demand for the Company's product and harm the Company's business and results of operations. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company's business or results of operations at this time.
1
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
3. SHORT TERM INVESTMENTS
The Company's short-term investments consisted of one-year Guaranteed Investment Certificates with a major Canadian financial institution that earn interest at variable interest rates ranging from
4. PROPERTY AND EQUIPMENT AND INTANGIBLES
| Cost |
Accumulated |
Net book |
|||||||
| November 30, 2021 | $ | $ | $ | ||||||
| Property and equipment | |||||||||
| Furniture and fixtures | |||||||||
| Computer hardware | |||||||||
| Computer software | |||||||||
| Leasehold improvement | |||||||||
| Intangibles | |||||||||
| Software under development | |||||||||
| Patents, trademarks and lists | |||||||||
| Accumulated | Net book | ||||||||
| Cost | amortization | value | |||||||
| August 31, 2021 | $ | $ | $ | ||||||
| Property and equipment | |||||||||
| Furniture and fixtures | |||||||||
| Computer hardware | |||||||||
| Computer software | |||||||||
| Leasehold improvements | |||||||||
| Intangibles | |||||||||
| Software under development | |||||||||
| Patents, trademarks and lists | |||||||||
2
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
Depreciation and amortization for the three-month period ended November 30, 2021 was $
3
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
5. RIGHT OF USE ASSET
The Company entered into a lease agreement commencing July 1, 2017 and expiring June 30, 2022 consisting of approximately 6,600 square feet. Subsequent to November 30, 2021, the Company entered into an agreement to terminate the office lease effective January 31, 2022.
On adoption of ASC 842, Lease Accounting, the Company recognized right-of-use assets and a corresponding increase in lease liabilities, in the amount of $
| Right of Use Asset Continuity | November 30, 2021 | August 31, 2021 | ||||
| $ | $ | |||||
| Balance, September 1 | ||||||
| Depreciation | ( |
) | ( |
) | ||
| Foreign Currency Translation Adjustment | ( |
) | ||||
| Balance, End of Period |
The Company has operating lease payments committed as follows:
| $ | |||
| 2022 | |||
| Total lease payments payable | |||
| Less amounts representing interest | ( |
) | |
| Total Operating Lease Liability | |||
| Less current portion of operating lease liability | ( |
) | |
| Long term portion of operating lease liability |
|
Operating Lease Liability Continuity |
November 30, 2021 | August 31, 2021 | ||||
| $ | $ | |||||
| Balance, September 1 | ||||||
| Less Lease Payments | ( |
) | ( |
) | ||
| Interest | ||||||
| Foreign Currency Translation Adjustment | ( |
) | ||||
| Balance, End of Period |
During the three-month period ended November 30, 2021 the Company recorded depreciation expense of $
On December 17, 2021, the Company entered into an agreement to terminate the property lease effective January 31, 2022.
4
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
6. STOCKHOLDERS' EQUITY
[a] Common stock issued and authorized
The Company is authorized to issue up to
Effective January 15, 2021, the Company commenced a Normal Course Issuer Bid ("NCIB"), pursuant to which the Company may purchase up to a maximum of
[b] Stock option plan
The Company has a stock option plan, namely the 2015 Stock Option Plan (the "Plan"), under which up to
The options generally vest over a range of periods from the date of grant, some are immediate, and others are 12 or 24 months. Any options that do not vest as the result of a grantee leaving the Company are forfeited and the common shares underlying them are returned to the reserve. The options generally have a contractual term of five years.
5
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
6. STOCKHOLDERS' EQUITY (cont'd.)
[b] Stock option plan (cont'd.)
Stock-Based Payment Award Activity
A summary of stock option activity under the Plan as of November 30, 2021, and changes during the period then ended is presented below:
| Weighted | ||||||||||||
| Weighted | Average | Aggregate | ||||||||||
| Average | Remaining | Intrinsic | ||||||||||
| Exercise Price | Contractual | Value | ||||||||||
| Options | Shares | $ | Term | $ | ||||||||
| Outstanding at August 31, 2021 |
|
|||||||||||
| Granted |
|
|||||||||||
| Forfeited | ( |
) |
|
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| Outstanding at November 30, 2021 |
|
|||||||||||
| Exercisable at November 30, 2021 |
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's common stock for the options that were in-the-money at November 30, 2021.
The following table summarizes information regarding the non-vested options outstanding as of November 30, 2021 and changes during the period then ended:
| Weighted | ||||||
| Average | ||||||
| Grant Date | ||||||
| Number of Options | Fair Value | |||||
| $ | ||||||
| Non-vested options at August 31, 2021 | ||||||
| Granted | ||||||
| Vested | ( |
) | ||||
| Forfeited | ( |
) | ||||
| Non-vested options at November 30, 2021 |
As of November 30, 2021, there was $
6
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
6. STOCKHOLDERS' EQUITY (cont'd.)
[b] Stock option plan (cont'd.)
Stock-Based Payment Award Activity (cont'd.)
Total stock-based compensation expense of $
| 2021 | 2020 | |||||
| $ | $ | |||||
| Stock-based compensation | ||||||
| General and administrative | ||||||
| Sales and marketing | ||||||
| Product development | ||||||
| Total stock-based compensation |
Valuation Assumptions
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:
| 2021 | 2020 | |||||
| Expected term of stock options (years) |
|
|
||||
| Expected volatility | ||||||
| Risk-free interest rate | ||||||
| Dividend yields | ||||||
| Weighted average grant date fair value | $ | $ |
Expected volatilities are based on historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the options is based on US Treasury bill rates in effect at the time of grant.
7
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
6. STOCKHOLDERS' EQUITY (cont'd.)
[c] Employee Stock Purchase Plan
The Company's 2011 Employee Stock Purchase Plan (the "Plan") became effective on February 22, 2011. Under the Plan, employees of the Company are able to contribute up to 5% of their annual salary into a pool which is matched equally by the Company in order to purchase Company shares under certain terms. Directors are able to contribute a maximum of $
During the three month period ended November 30, 2021, the Company recognized compensation expense of $
[d] Earnings Per Share
Net income per common share (basic) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Net income per common share (diluted) is calculated by dividing net income for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding common share equivalents. This method requires that the dilutive effect of outstanding options and warrants issued be calculated using the treasury stock method. Under the treasury stock method, all common share equivalents have been exercised at the beginning of the period (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the period, but only if dilutive.
| 2021 | 2020 | |||||
| $ | $ | |||||
| Net Income | ||||||
| Weighted average shares outstanding | ||||||
| Dilutive impact of outstanding stock options | ||||||
| Diluted weighted average common shares outstanding |
At November 30, 2021, the Company had an aggregate of
8
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
7. CONTINGENCIES
The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company's financial statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its consolidated financial statements.
On September 5, 2017, the Company's former President and Chief Executive Officer filed a Notice of Civil Claim in the Supreme Court of British Columbia against the Company, its subsidiaries, independent directors and current Chief Executive Officer, claiming damages for conspiracy, breach of contract, wrongful dismissal, defamation and aggravated and punitive damages. The Company believes the claims are without merit and is defending itself against the claims. The quantum of loss, if any, is not determinable at this time and management believes it is unlikely that the outcome of this matter will have an adverse impact on its results of operations, cash flows and financial condition.
8. NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Standards
None
9
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
9. CONCENTRATIONS AND ECONOMIC DEPENDENCE
The Company operates solely in the digital media software segment and all revenue from its products and services are made in this segment.
Revenue from external customers, by product and location of customer, is as follows:
| 2021 | 2020 | |||||
| $ | $ | |||||
| Play MPE® | ||||||
| United States | ||||||
| Europe | ||||||
| Australia | ||||||
| Africa | ||||||
| Total Play MPE® Revenue | ||||||
| Clipstream ® | ||||||
| United States | ||||||
| Total Clipstream ® Revenue | ||||||
| Total Revenue |
Revenue in the above table is based on location of the customer's billing address. Some of these customers have distribution centres located around the globe and distribute around the world. During the three month period ended November 30, 2021, the Company generated
It is in management's opinion that the Company is not exposed to significant credit risk.
As at November 30, 2021, one customer represented $
The Company has substantially all its assets in Canada and its current and planned future operations are, and will be, located in Canada.
10. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current period's presentation. These reclassifications did not affect prior periods' net earnings.
10
Destiny Media Technologies Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
November 30, 2021
11. SUBSEQUENT EVENTS
On December 17, 2021 the Company entered into an agreement to terminate the office lease effective January 31, 2022. The Company's lease was previously expected to terminate June 30, 2022.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the accompanying financial statements and notes thereto included within this Quarterly Report on Form 10-Q. In addition to historical information, the information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements involve risks and uncertainties, including statements regarding the Company's capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors described in this Quarterly Report, including the risk factors under "Item 1A. Risk Factors." of part II, and, from time to time, in other reports the Company files with the Securities and Exchange Commission. These factors may cause the Company's actual results to differ materially from any forward-looking statement. The Company disclaims any obligation to publicly update these statements or disclose any difference between its actual results and those reflected in these statements. Such information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
OVERVIEW AND CORPORATE BACKGROUND
Destiny Media Technologies Inc. was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. We carry out our business operations through our wholly owned subsidiary, Destiny Software Productions Inc., a British Columbia company that was incorporated in 1992, MPE Distribution, Inc. a Nevada company that was incorporated in 2007 and Sonox Digital Inc. incorporated under the Canada Business Corporations Act in 2012. The "Company", "Destiny Media", "Destiny", "we" or "us" refers to the consolidated activities of all four companies.
Our principal executive office is located at Suite 1110, 885 West Georgia Street, Vancouver, British Columbia V6C 3E8. Our telephone number is (604) 609-7736 and our facsimile number is (604) 609-0611.
Our common stock trades on TSX Venture Exchange in Canada under the symbol "DSY", on the OTCQB U.S. ("OTCQB") under the symbol "DSNY", and on various German exchanges (Frankfurt, Berlin, Stuttgart and Xetra) under the symbol DME, WKN 935 410.
Our corporate website is located at http://www.dsny.com.
OUR PRODUCTS AND SERVICES
Destiny develops and markets software as a service (SaaS) solutions that solve critical digital distribution and promotion problems for businesses in the music industry. The core of our business is Play MPE®. Play MPE® is a service for promoting and securely distributing broadcast quality audio, video, images, promotional information and other digital content through the internet. The system is currently used by the recording industry for transferring pre-release broadcast quality music, radio shows, and music videos to trusted recipients such as radio stations, media reviewers, VIP's, DJ's, film and TV personnel, sports stadiums and retailers. Music is protected by Play MPE®'s patented proprietary watermarking system which provides watermarks unique to each recipient.
Destiny is currently developing additional functionality and services that are expected to increase the services to existing platform users and therefore expand Play MPE®'s addressable market, or act as catalysts to the Company's sales activities. As well, the Company is investing into research and development on incremental product offerings expected to add addressable market opportunities.
Play MPE®
The Company's core business is the Play MPE® platform. Play MPE® is a two-sided B2B marketplace that enables music labels and artists to distribute promotional content and musical assets on the one side, and for music broadcasting professionals, music curators and music reviewers to discover, download, broadcast and review the music, on the other. Play MPE® provides a software-based tool to assist record labels and artists in marketing their music. Record labels and artists are Play MPE®'s customers and pay for submission into the system. Recipients are provided no charge access to review music. When adding music to the Play MPE® system, record labels are targeting specific industry recipients who review and broadcast their music. With this marketing effort, record labels are targeting an increase in their revenue directly through on-air broadcast royalties, streaming royalties and synchronization revenue (revenue when the reproduction of a song is coordinated with video advertisements, television, or film), and indirect increases in revenue through growing song and artists' popularity (for example concert ticket sales etc.).
Customers range from small independent artists, to the world's largest record labels; (the "Major Record Labels") (Universal Music Group ("Universal"), Warner Music Group "Warner" and Sony Music Entertainment "Sony"). Customers choose Play MPE® for its powerful set of tools, ease of use and its effectiveness in achieving the record label's promotional objectives. Recipients enjoy easy access to desirable music in high quality audio files.
Play MPE® CASTER (Distribution software)
Play MPE®'s Caster is a full-service distribution management system that includes a complete set of operational functions that provide all necessary software tools to enable labels to manage global marketing campaigns. Broadly, these components include administration functions and distribution functions. Administration functions allow management of labels and sub-labels, management of the assets (audio files, video files, and associated cover art, artist information) that are distributed, and management of client-side users and user permissions (roles with selectable capabilities). Distribution management functions offer powerful contacts management capabilities, release creation, distribution announcements and distribution scheduling, digital rights management by release and by recipient, and release replication and its associated scheduling and digital rights management components.
This full suite of tools within Play MPE® was developed for the music industry and in close collaboration with Universal to cater the functions to its global marketing workflow. Many clients do not use the full suite of tools. However, this full set of tools is critical to Universal's global promotional campaign workflow and the core reason Play MPE® distributes internationally for Universal.
Caster is available in English, Spanish, German, Japanese and French.
Play MPE® is a permissions-only access system such that only recipients designated or targeted to receive content obtain access to that content. Record labels can use Play MPE®'s contacts management system to administer recipient lists. Contacts management offers several features that facilitate efficient updates and maintenance actions that are critically important where users maintain a large recipient database, across multiple users, and multiple recipient lists. Absent these features, list maintenance becomes overly cumbersome, inefficient and leads to inaccuracies. The functionality within the contacts management system is critically important to both distribution hubs at Universal and the Play MPE® operations team to efficiently maintain accurate and active recipient lists.
Within Play MPE®'s contacts management platform, the Company's operations team offers for sale carefully curated and actively maintained recipient lists with more than 14,000 music curators around the world. These lists include complete lists in 12 countries, and lists under construction in an additional 38. These selectable lists eliminate the need for our clients to maintain current recipient contact information. These lists offer significant value to all customers, but are necessary for smaller independent labels and artists who do not have the resources to maintain current contacts. Without these curators lists, many sales would not be possible. As active lists in new territories are completed, Play MPE® will grow revenue.
In addition to the contacts management functionality, the Play MPE® product and engineering staff are developing new technical processes to facilitate list development and maintenance. With these technical solutions, it is expected that Play MPE® will expand saleable lists and thereby increase revenue.
Play MPE® Player
Music curators enjoy free access to review and download content through an easy-to-use web-based player or mobile player apps (iOS and Android). Web-players are currently available in 15 different languages; English, Spanish, Swedish, Finnish, Italian, Dutch, Portuguese, French, Japanese, German, Norwegian, Latvian, Lithuanian, Estonian, and Danish.
In developing Play MPE®'s recipient interfaces, the Company's product and engineering teams focus on providing a very positive user experience. Recipients enjoy many features that make it easy to access, collaborate, review, and search for content. Play MPE®'s mobile apps offer off-line listening capabilities, the ability to utilize Google Chromecast and Apple Airplay streaming capabilities, creation of playlists, sorting, flagging and archiving features, and easier to access release metadata. Recipient side satisfaction directly increases activity which directly improves the effectiveness of promotional efforts of record label customers.
Recipients on the Play MPE® platform have a wide variety of personas and include programming directors for internet streaming, satellite or terrestrial radio, retail store broadcasters, sports stadium DJs, clubs, events, music reviews in newspapers or magazines, on-air personalities, music supervisors who program TV, movies, commercials or video games, or "A&R" representatives at larger record labels. Each recipient within the Play MPE® platform has a unique library of music catered and appropriate for that recipient.
Clipstream®
The Company also developed Clipstream® for the online video industry for which it is pursuing strategic alternatives. The Clipstream® Online Video Platform (OVP) is a self-service system, for encoding, hosting and reporting on video playback which can be embedded in third party websites or emails. Playback is currently through the Company's proprietary JavaScript codec engine, which is only available on the internet through the Company. The unique software-based approach to rendering video, has patents claiming initial priority to 2011. This product has incidental revenues and is not supported or marketed.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED NOVEMBER 30, 2021 AND 2020
Revenue
Total revenue for the three-month period ending November 30, 2021 increased by approximately 1% ($1,134,151 in 2021 - $1,123,977 in 2020). Play MPE® represents virtually all the Company's revenue. Play MPE®'s year to date revenue grew by 1% (or 1.7% after adjusting for favorable foreign exchange). Play MPE® continued to experience growth in the independent labels in the United States, Europe, and Australia with an average revenue growth of 3% in this segment.
Operating Expenses
Overview
As our technologies and products are developed and maintained in-house, the majority of our expenditures are on salaries and wages and associated expenses such as office space, supplies and benefits. Our operations are primarily conducted in Canada and therefore, our costs are primarily incurred in Canadian dollars while our revenues are primarily denominated in Euros and US dollars. Thus, operating expenses and the results of operations are impacted, to the extent they are not hedged, by the rise and fall of the relative values of the Canadian dollar to these currencies. The Company maintains a large portion of its financial reserves in Canadian dollars to mitigate the downside risk of adverse exchange rates on its operating expenditures.
Total operating costs during the three-month period ended November 30, 2021 increased by 8.6% to $852,029 (2020 - $784,426). Operating Costs in the comparative period, include one-time, non-recuring costs associated with staff restructuring. Adjusting for these one-time costs associated with staff restructuring, overall costs increased by 11.8%. The increase in costs is primarily the result of expanded business development staffing costs designed to expand Play MPE®‘s global market share. The Company also increased staffing costs to more quickly expand the company's product offering. A portion of these costs were capitalized. Also increasing overall costs are impacts a weakening of the US Dollar. Foreign exchange impacts are generally temporarily in nature and generally reverse over time.
| General and administrative | November 30 | November 30 | ||||||||||
| 2021 | 2020 | |||||||||||
| (3 months) | (3 months) | Change | Change | |||||||||
| $ | $ | $ | % | |||||||||
| Bad debt | 4,316 | - | 4,316 | 0.0% | ||||||||
| Office and miscellaneous | 50,478 | 40,241 | 10,237 | 25.4% | ||||||||
| Professional fees | 18,295 | 46,825 | (28,530 | ) | (60.9% | ) | ||||||
| Rent | 5,744 | 6,715 | (971 | ) | (14.5% | ) | ||||||
| Telecommunications | 821 | 776 | 45 | 5.8% | ||||||||
| Travel | 1,395 | 1,112 | 283 | 25.4% | ||||||||
| Wages and benefits | 69,575 | 63,880 | 5,695 | 8.9% | ||||||||
| 150,624 | 159,549 | (8,925 | ) | (5.6% | ) |
Our general and administrative expenses consist of salaries and related personnel costs including overhead, office rent, and general office supplies. General and administrative costs also include professional fees and general travel expenditures. The decrease in professional fees is due to a reduction of corporate administration costs and a reduction of litigation costs.
| Sales and marketing | November 30 | November 30 | ||||||||||
| 2021 | 2020 | |||||||||||
| (3 months) | (3 months) | Change | Change | |||||||||
| $ | $ | $ | % | |||||||||
| Advertising and marketing | 33,011 | 9,020 | 23,991 | 266.0% | ||||||||
| Rent | 33,062 | 31,536 | 1,526 | 4.8% | ||||||||
| Telecommunications | 5,322 | 4,053 | 1,269 | 31.3% | ||||||||
| Wages and benefits | 344,415 | 257,865 | 86,550 | 33.6% | ||||||||
| 415,810 | 302,474 | 113,336 | 37.5% |
Sales and marketing expenses consist of salaries and related personnel costs including overhead, office rent, and telecommunications costs. Sales and marketing expenses also include advertising and marketing expenditures, which consist of promotional materials, online or print advertising, business development tools, and marketing or business development related travel costs including attendance at conference or trade shows, and record label and client visits. The increase in staffing costs primarily relates to the employment of additional staff designed to grow Play MPE®‘s market share. The increase in advertising and marketing expenses is related to increased advertising, sponsorship, and attendance at industry events in the first quarter.
| Product Development | November 30 | November 30 | ||||||||||
| 2021 | 2020 | |||||||||||
| (3 months) | (3 months) | Change | Change | |||||||||
| $ | $ | $ | % | |||||||||
| Rent | 22,591 | 25,079 | (2,488 | ) | (9.9% | ) | ||||||
| Software services | 18,177 | 17,576 | 601 | 3.4% | ||||||||
| Telecommunications | 16,318 | 16,805 | (487 | ) | (2.9% | ) | ||||||
| Wages and benefits | 201,338 | 238,628 | (37,290 | ) | (15.6% | ) | ||||||
| 258,424 | 298,088 | 39,664 | (13.3% | ) |
Product development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. The increase in wages and benefits is related to an increase in staffing in product development, offset by $72,290 capitalized as internal use software in the quarter (November 30, 2020: $Nil).
Depreciation and Amortization
Depreciation and amortization expense increased to $27,172 for the three-month period ended November 30, 2021 from $24,315 for the period ended November 30, 2020, an increase of 11.7% due to a amortization of software development costs associated with Play MPE® recipient player applications.
Other earnings and expenses
Interest income was $1,043 for the three-month period ended November 30, 2021 (2020: $1,464) and is derived from one-year Guaranteed Investment Certificates.
Net income
During the three-month period ended November 30, 2021 we had net income of $165,601 (2020 - $250,702).
For the three-month period ended November 30, 2021, adjusted EBITDA was $217,635 (2020 - EBITDA $286,402). Adjusted EBITDA is not defined under generally accepted accounting principles ("GAAP") and it may not be comparable to similarly titled measures reported by other companies. We used Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe Adjusted EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to Adjusted EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of net income (loss) from operations to Adjusted EBITDA over the eight most recently completed fiscal quarters:
| 2022 Q1 | 2021 Q4 | 2021 Q3 | 2021 Q2 | 2021 Q1 | 2020 Q4 | 2020 Q3 | 2020 Q2 | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net Income (loss) | 165,601 | 91,699 | 69,594 | (29,466 | ) | 250,702 | 158,187 | 54,899 | (155,331 | ) | ||||||||||||||
| Amortization, stock-based compensation and deferred leasehold inducements | 53,077 | 40,589 | 39,806 | 39,533 | 37,164 | 49,085 | 48,470 | 37,307 | ||||||||||||||||
| Interest income | (1,043 | ) | (869 | ) | (823 | ) | (875 | ) | (1,464 | ) | (4,672 | ) | (5,266 | ) | (8,110 | ) | ||||||||
| Adjusted EBITDA | 217,635 | 131,419 | 108,577 | 9,192 | 286,402 | 202,600 | 98,103 | (126,134 | ) |
LIQUIDITY AND FINANCIAL CONDITION
As at November 30, 2021, we held $2,536,426 (August 31, 2021 - $2,752,662) in cash and cash equivalents and short-term investments. Our short-term investments consisted of one-year Guaranteed Investment Certificates (GICs) held through a major Canadian financial institution, and had reached maturity prior to November 30, 2021.
At November 30, 2021, we had working capital of $2,682,199 compared to $2,561,480 as at August 31, 2021. During the three-month period ended November 30, 2021, the Company completed NCIB purchases totaling $44,166.
Net cash used in operating activities for the three-month period ended November 30, 2021 was $52,626 (2020: net cash provided by operating activities of $441,654). The primary reason for the decrease in cash flows from operating activities is related to changes in working capital which are expected to reverse over time.
Net cash used in investing activities for the three-month period ended November 30, 2021 was $80,287 (2020: cash provided from investing activities of $758,561). During the three-month period ended November 30, 2021, $72,290 was used in software under development.
Net cash used in financing activities during the three-month period ended November 30, 2021 was $44,166 (2020: $nil), related to cash used to repurchase and retire 30,300 shares of common stock (2020: Nil) of the Company under the NCIB.
CRITICAL ACCOUNTING POLICIES
We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable in the circumstances. Actual results may differ from these estimates.
There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended August 31, 2021 as filed with the SEC on November 23, 2021 except for those described in Note 8, "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
NEW ACCOUNTING PRONOUNCEMENTS
Please refer to Note 8 "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Exchange Risk
Our revenues are primarily in United States dollars and Euros while our operating expenses are primarily in Canadian dollars. Thus, operating expenses and the results of operations are impacted to the extent they are not hedged by the rise and fall of the relative values of Canadian dollar to these currencies. During the three month periods ended November 30, 2021, as a result of fluctuations in the Euro, and the Australian, Canadian, and US dollars, the Company recognized a positive impact on reported revenues and a negative impact on reported operating expenditures, for an overall marginal positive impact on reported net income.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with this quarterly report, as required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company's management, including our company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that as of November 30, 2021, our disclosure controls and procedures were effective as at the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes that would impact our internal controls for the period from September 1, 2021 to November 30, 2021.
| 31.1* | Section 302 Certification of Chief Executive Officer |
| 31.2* | Section 302 Certification of Chief Financial Officer |
| 32.1* | Section 906 Certification of Chief Executive Officer and Chief Financial Officer |
| 101.INS* | XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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