DESTINY MEDIA TECHNOLOGIES INC 10-Q

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 the 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 problems in digital distribution and promotion for businesses in the music industry. The core of our business is Play MPE®, a promotional music marketing and digital distribution service. 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. Play MPE® Play MPE® is a two-sided marketplace platform that enables music labels and artists to create and distribute promotional content and musical assets on the one side, and music broadcasting professionals, music curators and music reviewers to discover, listen to, download and consume, on the other. Play MPE® is a cloud-based enterprise SaaS product. Typically, record labels and artists promote new music through the presentation of broadcast quality audio, video, images, promotional information, industry required meta data, and other digital content. The presentation of this promotional material is catered to music curators who can expose that music to a larger consumer audience through broadcasts (examples include radio, internet radio, streaming services, DJs etc.) or publicity and media destinations. The system is also used to promote music and artists to label A&R teams, and music supervisors (who work with TV/movie producers to recommend musical content to accompany video productions). 20 Broadcast play of music provides revenue directly to record labels and artists through royalties and indirectly through sales, concerts / live performances, merchandise sales etc. as the profile and popularity of the musical work and artist increase. Effective marketing is critical in growing the popularity of a song or an artist and thereby revenue for a particular artist. Play MPE® is a critical step in this process. Easy-to-use and collaborative tools on the player side (music curator side) improves activity which improves the likelihood that a particular track obtains broadcast play. Feedback of recipient activity provides valuable information to record labels improving data centric marketing decision making. Our customers range from small independent artists, small to large independent record labels ("Indies"), to promoters, and to the world's largest record labels (the "Major Record Labels") (Universal Music Group, Warner Music Group and Sony Music Entertainment). Our Major Record Label clients have offices around the world and typically represent the world's largest recording artists. All three Major Record Labels, and thousands of Indies use Play MPE® for promotional distribution. Play MPE® provides a wide array of features which provide efficient access to a promotional hub of activity. Client characteristics determine which features are of greater interest with the active promotional recipients being of common interest to all clients. Major Labels can take advantage of the platform's more powerful and efficiency producing features including tiered rights, permissions-based user profiles, integration with database archives, release sharing with foreign territories etc. For example, some customer staff may manage assets (album cover imagery, music videos, the raw music, promotional information and other metadata), while others manage hierarchical permission-based lists of recipients. These more powerful features are unique to the Play MPE® platform. The release dates for music can be dependent on the territory and, where administrative settings permit, local promotions staff may generate a localized distribution of the song with modified marketing information in the local language. Local staff may select pre-existing assets from the system and combine them together with a local recipient lists to form a "send". Our customers also choose the level of access for the recipients assigned to the release by designating whether the release can be streamed, downloaded, exported into an unlocked digital format or burned to a CD. While many clients are set up to manage and upload recipient lists, many rely on the proprietary lists provided within the service. Our staff manages lists of recipients in various formats and geographies and those lists are made available to our customers using the Play MPE® system. The Play MPE® system provides Play MPE® staff with the feedback and resources necessary to manage and maintain this network of recipients, which is not available with physical distribution or by smaller competitors. Customers select lists of recipients within the proprietary network based on music format and geography. All exported songs are marked in real time with Destiny's watermark technology, which has received three US patents and a number of analogous patents globally. From information provided by Play MPE®, songs appearing on the internet can be scanned by the International Federation of the Phonographic Industry's ("IFPI"). Headquartered in London, UK, the IFPI is the organization that represents the interests of the recording industry worldwide and one of its missions is to safeguard the rights of record producers. IFPI web crawlers visit torrents, peer to peer networks and websites searching for unauthorized content. When problem files are identified, the IFPI can run proprietary software to identify Play MPE®'s unique watermark to identify the originating source. After the content is released, all activity by the recipient is logged in real time, providing record labels and promotions staff real time detail on which songs are accessed, streamed, downloaded and exported. This information provides valuable feedback in real time to marketing and promotions staff who can cater their programs appropriately. Recipients receive a custom library of available tracks and are able to repeat the download if music is lost. Play MPE® browser-based tools are accessible on any computer without installation, access to both Mac and PC users. The tool provides release sharing capabilities, to facilitate faster more user-friendly sharing of assets by our global label customers. Finally, it also allows for easy translation into multiple languages to accelerate international expansion. Throughout 2020, the Company has continued to invest in its technology stack. These investments in the Play MPE® technology stack intended to increase the speed and efficiency of new feature implementation and expand the efficient use of software resources. The Company concurrently is continuing to add functionality and improvements to the user experience. Improvements in user experience will facilitate greater success in global expansion while added functionality is designed to both improve business development success and to provide added saleable services. 21 In December 2019, the Company announced the new "localization" capability of the sending side of the Play MPE® platform. This feature supports easy translation of the platform. Play MPE® then added Spanish, German, Japanese and French to the sending side software. In January 2020, Play MPE® added several updates to the recipient side of the platform including advanced recipient authentication, improved song search capabilities, and various content management features. These updates are designed to increase recipient side functionality, ease of use, increased song discovery and increased activity within the Play MPE® platform. In late January 2020, Universal Music Canada commenced distribution of all releases within Canada through the Play MPE® platform. In March, this incremental use of the Play MPE® platform in Canada extended to all new music from Sony Music Canada. Play MPE® continues to grow new use within Canada with newly added distribution for several major independent record labels towards the end of the third quarter. This new use is "seeding" the Canadian segment for the Play MPE® platform with associated revenue expected to commence near the end of calendar 2020. Concurrently, Play MPE® list management completed a review of the Canadian recipient lists to update and include all relevant radio personnel including major conglomerates Bell Media, Corus, Pattison, Stingray and others. Play MPE®'s list management department maintains the most accurate and complete recipient lists in the industry. In February 2020 Play MPE® completed the reconstruction of the US Latin Radio lists, updating categories and segmentation, and updated represented stations and recipients. Concurrently, the Play MPE® platform has commenced seeding the network with content from Universal Music Latin Entertainment and major independent record labels. By the end of the third quarter, Play MPE® had also completed the construction of Mexican distribution lists, and has commenced seeding the platform with suitable content. In March, the Company appointed Glenn Mattern as Director of Business Development for Play MPE®. Mr. Mattern brings 25 years of business development experience into this newly created position. In April, the Company commenced its collaborative thought leadership program with initiation of the Play MPE® panel, webinar and Instagram Live series. These panels and live interviews showcase success stories, share opinions and impressions, and convey industry insights. These programs are designed to grow collaborative customer interactions, align Play MPE® and record label activities and expand Play MPE® platform interactions. In May 2020, the Company commenced its Beta testing program with trials on a new release creator. This program immediately followed the Alpha release the distribution software, now branded as "Caster". The Beta program actively seeks feedback into the user interface, feature improvements, and new features. Participants in the Beta program will be recognized as champions and earn certificates of participation and involvement. This program is expected to improve brand loyalty and customer engagement. The Company expects that this process will greatly enhance the ability of the Company to ensure that global label customers, with diverse requirements, can easily develop, upload, and distribute customized content to recipients through the Play MPE® platform. By the end of the third quarter, Play MPE® completed an update to the web player interface to include the left navigation bar. This alteration will allow additional feature sets and functionality to be added and accessed easily by customers. Immediately following the quarter, the Play MPE® announced the translation of our Play MPE® website into Spanish. Clipstream® The Company also has a legacy business, Clipstream®, in 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 Company's 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. 22 RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED MAY 31. 2020 AND 2019 Revenue Total revenue for the nine-month period ended May 31, 2020 declined by 1.5% ($2,792,458 in 2020 - $2,833,818 in 2019) due to the decline in Clipstream related revenue which now represents approximately 1% of the Company's revenue. Play MPE® revenue, which represents all other revenue of the Company (approximately 99%) decreased by less than 1%. Total revenue for the three-month period ended May 31, 2020 declined by $30,562 over the comparable quarter in fiscal 2019, to $939,873 (2019 - $970,435). Foreign exchange did not significantly impact revenue in the three and nine month periods ended May 31, 2020. 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. Operating costs during the nine-month period ended May 31. 2020 increased by 19.7% to $2,559,608 (2019 - $2,137,604). The increase in costs was primarily the result of non-recurring (one-time) costs associated with staff restructuring, professional fees associated with the Company's Normal Course Issuer Bid (NCIB) repurchase of the 5% of the Company's shares, professional fees associated with the share consolidation. Additionally, the Company added staffing designed to increase the speed and quality of product enhancements and added to business development staffing to increase the speed of revenue growth. General and administrative 31-May 31-May 2020 2019 (9 months) (9 months) Change Change $ $ $ % Bad debt 13,672 3,558 10,114 284.3% Office and miscellaneous 117,043 111,677 5,366 4.8% Foreign exchange (gain)/loss (23,364 ) (14,946 ) (8,418 ) 56.3% Professional fees 227,552 131,827 95,725 72.6% Rent 17,169 24,860 (7,691 ) -30.9% Telecommunications 2,205 2,263 (58 ) -2.6% Travel 5,541 4,552 989 21.7% Wages and benefits 348,849 292,479 56,370 19.3% 708,667 556,270 152,396 27.4% 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 increase in professional fees is the result of professional fees associated with staff restructuring, share consolidation and share repurchase activities. This increase is non-recurring. 23 Sales and marketing 31-May 31-May 2020 2019 (9 months) (9 months) Change Change $ $ $ % Advertising and marketing 93,206 94,674 (1,468 ) -1.6% Rent 93,163 77,226 15,937 20.6% Telecommunications 12,942 13,026 (84 ) -0.6% Wages and benefits 587,535 522,547 64,988 12.4% 786,846 707,473 79,373 11.2% 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 one-time charges associated with staff restructuring. Wages also increased over the prior year through additional staff designed to grow and enhance business development activities. The increase in advertising and marketing expenses is related to increase travel expenditures for our staff to attend label visits and industry events. Product Development 31-May 31-May 2020 2019 (9 months) (9 months) Change Change $ $ $ % Rent 82,081 81,554 527 0.6% Software services 57,490 53,288 4,202 7.9% Telecommunications 52,641 61,582 (8,941 ) -14.5% Wages and benefits 771,139 610,337 160,802 26.3% 963,351 806,761 156,590 19.4% 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 during the quarter. The Company has also restructured the use of external hosting services resulting in a permanent decline in costs with no reduction in system reliability or capabilities. Depreciation and Amortization Depreciation and amortization expense increased to $100,744 for the nine-month period ended May 31, 2020 from $67,099 for the period ended May 31, 2019, an increase of 50.1% due to an increase in computer software costs associated with externally developed Play MPE® recipient player applications. Other earnings and expenses Interest income was $19,743 for the nine-month period ended May 31, 2020 (2019: $21,154) and is derived from one-year Guaranteed Investment Certificates. Net income During the nine-month period ended May 31, 2020 we had net income of $11,226 (2019: $496,621). Overall, a modest decline in revenue was accompanied by increased spending on staffing and marketing and advertising costs, as discussed above. 24 For the three-month period ended May 31, 2020, adjusted EBITDA was $98,103 (2019: EBITDA $223,883). 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: 2020 Q3 2020 Q2 2020 Q1 2019 Q4 2019 Q3 2019 Q2 2019 Q1 2018 Q4 $ $ $ $ $ $ $ $ Net Income (loss) 54,899 (155,331 ) 111,658 114,157 195,712 80,719 220,190 171,775 Amortization, stock-based compensation and deferred leasehold inducements 48,470 37,307 49,140 34,983 36,404 31,042 31,942 38,108 Interest income (5,266 ) (8,110 ) (6,367 ) (5,999 ) (8,233 ) (6,522 ) (6,434 ) (4,940 ) Adjusted EBITDA 98,103 (126,134 ) 154,431 143,141 223,883 105,239 245,698 204,943 LIQUIDITY AND FINANCIAL CONDITION As at May 31, 2020, we held $913,349 (August 31, 2019 - $2,512,138) in cash and cash equivalents. Our short-term investments consist of one-year Guaranteed Investment Certificates (GICs) held through a major Canadian financial institution increased by $717,750 to $1,097,806 (August 31, 2019 - $380,056). At May 31, 2020, we had working capital of $2,131,144 compared to $2,809,689 as at August 31, 2019. The decrease in our working capital was primarily due to the repurchase of common stock under a common stock repurchase program, pursuant to a Normal Course Issuer Bid ("NCIB") facilitated through the TSX Venture Exchange, which commenced in September 2019. During the three-month period ended May 31, 2020, the Company did not complete any NCIB purchases. During the nine-month period ended May 31, 2020, the Company completed open market purchases of 550,140 common shares for a total cost of $533,223. Working capital also declined following the recognition of an operating lease liability following adoption of ASU 2016-02, at May 31, 2020 the current portion of the operating lease liability was $219,864 (August 31, 2019 - $nil). CASH FLOWS Net cash used in operating activities for the nine-month period ended May 31, 2020 was $234,343, compared to net cash provided by of $635,568 for the nine-month period ended May 31, 2020. The primary reason for the decrease in cash flows from operating activities is due to an increase in operating expenses, as described above, as well as an increase in accounts receivable during the quarter. Net cash used in investing activities for the nine-month period ended May 31, 2020 was $797,612, compared to $458,300 for the nine-month period ended May 31, 2019. During the nine-month period ended May 31 2020, approximately $743,002 was spent on the investment of cash in GICs during the period. Investing activities during the nine-month period ended May 31, 2019 were attributable largely to expenditures on property, equipment and intangibles. Net cash used in financing activities during the nine-month period ended May 31, 2020 was $533,223, related to cash used to repurchase and retire 550,140 shares of common stock of the Company under the NCIB. There were no cash flows from financing activities during the nine-month period ended May 31, 2019. 25 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, 2019 as filed with the SEC on November 18, 2019 except for those described in Note 9, "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 9 "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.