DESTINY MEDIA TECHNOLOGIES INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Audited Consolidated Financial Statements for the Years Ended August 31, 2020 and 2019: 1. Report of Independent Registered Public Accounting Firm - Davidson & Company LLP; 2. Consolidated Balance Sheets as at August 31, 2020 and 2019; 3. Consolidated Statement of Comprehensive Income for the Years Ended August 31, 2020 and 2019; 4. Consolidated Statement of Changes in Stockholders' Equity for the Years Ended August 31, 2020 and 2019; 5. Consolidated Statement of Cash Flows for the Years Ended August 31, 2020 and 2019; 6. Notes to Consolidated Financial Statements. 23 Consolidated Financial Statements Destiny Media Technologies Inc. August 31, 2020 and 2019 (Expressed in United States dollars) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of Destiny Media Technologies Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Destiny Media Technologies Inc. (the “Company”), as of August 31, 2020 and 2019, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for the years ended August 31, 2020 and 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Destiny Media Technologies Inc. as of August 31, 2020 and 2019, and the results of its operations and its cash flows for the years ended August 31, 2020 and 2019 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2019. "DAVIDSON & COMPANY LLP" Vancouver, Canada Chartered Professional Accountants November 18, 2020 F-2 Destiny Media Technologies Inc. CONSOLIDATED BALANCE SHEETS As at August 31, (Expressed in United States dollars) 2020 2019 $ $ ASSETS Current Cash and cash equivalents 1,841,340 2,512,138 Short-term investments [note 3] 781,490 380,056 Accounts receivable, net of allowance for doubtful accounts of $23,412 [2019 – $10,106] [note 10] 426,832 332,271 Other receivables 26,083 14,240 Prepaid expenses 78,562 77,067 Total current assets 3,154,307 3,315,772 Deposits 34,316 33,716 Property and equipment, net [note 4] 194,277 260,907 Intangible assets, net [note 4] 22,952 24,695 Right of use assets [note 5] 403,961 — Total assets 3,809,813 3,635,090 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Accounts payable 119,399 132,451 Accrued liabilities 353,235 303,470 Deferred leasehold inducement [note 5] — 46,774 Deferred revenue 19,638 23,388 Obligation under capital lease [note 5] 238,261 — Total current liabilities 730,533 506,083 Operating lease liability, net of current portion [note 7] 219,063 — Total liabilities 949,596 506,083 Commitments and contingencies [notes 5, 8 and 9] Stockholders’ equity Common stock, par value $0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,450,646 shares [2019 – issued and outstanding 11,000,786 shares] 10,451 11,001 Additional paid-in capital [ note 6 ] 9,366,290 9,850,348 Accumulated deficit (6,171,068 ) (6,340,483 ) Accumulated other comprehensive loss (345,456 ) (391,859 ) Total stockholders’ equity 2,860,217 3,129,007 Total liabilities and stockholders’ equity 3,809,813 3,635,090 Subsequent Events [note 12] See accompanying notes F-3 Destiny Media Technologies Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended August 31, (Expressed in United States dollars) 2020 2019 $ $ Service revenue [note 10] 3,824,565 3,809,092 Cost of revenue Hosting costs 106,804 107,434 Internal engineering support 24,303 28,441 Customer support 137,720 126,317 Third party and transaction costs 49,806 47,840 318,633 310,032 Gross Margin 3,505,932 3,499,060 92% 92% Operating expenses General and administrative 798,120 770,758 Sales and marketing 1,084,364 908,951 Product development 1,343,084 1,141,380 Depreciation and amortization [note 4] 135,385 96,846 3,360,953 2,917,935 Income from operations 144,979 581,125 Other income Interest income 24,415 27,188 Other income (expense) 21 2,465 Income before provision for income taxes 169,415 610,778 Income tax expense - deferred [note 7] — — Net income 169,415 610,778 Foreign currency translation adjustments 46,403 (38,217 ) Total comprehensive income 215,818 572,561 Net income per common share, basic and diluted 0.02 0.06 Weighted average common shares outstanding: Basic 10,602,346 11,002,589 Diluted 10,602,346 11,002,589 See accompanying notes F-4 Destiny Media Technologies Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY As at August 31, (Expressed in United States dollars) Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares Amount capital Deficit loss # $ $ $ $ $ Balance, August 31, 2018 11,002,786 11,003 9,810,676 (6,951,261 ) (353,642 ) 2,516,776 Total comprehensive income - - - 610,778 (38,217 ) 572,561 Shares repurchased for cancellation (2,000 ) (2 ) (2,003 ) - - (2,005 ) Stock based compensation - Note 6 - - 41,675 - - 41,675 Balance, August 31, 2019 11,000,786 11,001 9,850,348 (6,340,483 ) (391,859 ) 3,129,007 Total comprehensive income - - - 169,415 46,403 215,818 Shares repurchased for cancellation (550,140 ) (550 ) (532,673 ) - - (533,223 ) Stock based compensation - Note 6 - - 48,615 - - 48,615 Balance, August 31, 2020 10,450,646 10,451 9,366,290 (6,171,068 ) (345,456 ) 2,860,217 See accompanying notes F-5 Destiny Media Technologies Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS As at August 31, (Expressed in United States dollars) 2020 2019 $ $ OPERATING ACTIVITIES Net income 169,415 610,778 Items not involving cash: Depreciation and amortization 135,385 96,846 Stock-based compensation 48,615 41,675 Deferred leasehold inducement — (4,151 ) Unrealized foreign exchange (13,395 ) (1,078 ) Allowance for doubtful accounts 22,731 — Changes in non-cash working capital: Accounts receivable (108,795 ) 63,202 Other receivables (11,334 ) 2,657 Prepaid expenses and deposits (669 ) (20,416 ) Accounts payable (81,904 ) 49,570 Accrued liabilities 110,622 927 Deferred revenue (4,046 ) 524 Right of use Liability 5,588 — Net cash provided by operating activities 272,213 804,534 INVESTING ACTIVITIES Purchase of property, equipment and intangibles (64,065 ) (162,979 ) Sales (Purchase) of short-term investments (369,794 ) 754,600 Net cash provided by (used in) investing activities (433,859 ) 591,621 FINANCING ACTIVITY Common stock repurchased for cancellation (533,223 ) (2,005 ) Net cash used in financing activity (533,223 ) (2,005 ) Effect of foreign exchange rate changes on cash 24,071 (15,446 ) Net increase (decrease) in cash and cash equivalents during the year (670,798 ) 1,414,704 Cash and cash equivalents, beginning of year 2,512,138 1,097,434 Cash and cash equivalents, end of year 1,841,340 2,512,138 Supplementary disclosure Interest paid — — Income taxes paid — — See accompanying notes F-6 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies used in the preparation of these consolidated financial statements: Basis of presentation and fiscal year These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The Company's fiscal year-end is August 31. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Destiny Software Productions Inc., MPE Distribution Inc., and Sonox Digital Inc. All inter-company balances and transactions have been eliminated on consolidation. F-7 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Use of estimates The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to revenue recognition, estimated useful lives for property and equipment, allowances for doubtful accounts, stock-based compensation expense, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and actual results, our future results of operations will be affected. Cash and cash equivalents We consider all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. Short-term investments We classify our short-term investments as held to maturity. Our investments classified as held-to-maturity are recorded at amortized cost, which their carrying values approximate fair value. Interest earned on the short-term investments are included in interest income. F-8 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition The Company's revenue is derived from software as a service (SaaS) arrangements. The Company accounts for revenue in accordance with ASC 606, which the Company adopted on September 1, 2018 using the modified retrospective method. The core principle of ASC 606 is to recognize revenue upon the transfer of products or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services. ASC 606 prescribes a five-step model for recognizing revenue from contracts with customers: (1) identify the contract(s) with customers; (2) identify the separate performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the separate performance obligations in the contract; and (5) recognize revenue when (or as) the performance obligations are satisfied. The Company applies the five-step model to recognize revenue as follows: Identification of the contract, or contracts, with the customer The Company considers the terms and conditions of written contracts and its customary business practices in identifying its contracts under ASC 606. The Company determines that it has a contract with a customer when the contract is approved, the Company can identify each party's rights regarding the services to be transferred, the Company can identify the payment terms for the services, the Company has determined that the customer has the ability and intent to pay, and the contract has commercial substance. In general, contract terms will be reflected in a written document that is signed by both parties. Identification of the performance obligation in the contract Performance obligations are promises in a contract to transfer distinct products or services to a customer, and is the unit of account under ASC 606. A contract's transaction price is allocated to each distinct performance obligation and revenue is recognized when the performance obligation is satisfied. A product or service is a distinct performance obligation if the customer can both benefit from the product or service either on its own or together with other resources that are readily available to the customer, and it is separately identifiable from other items within the context of the contract. Performance obligations are satisfied by transferring control of the product or service to the customer. Control of the product or service is transferred either at a point in time or over time depending on the performance obligation. To the extent a contract includes multiple promised services or products, the Company applies judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services are accounted for as a combined performance obligation. F-9 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition (cont'd.) The Company generates revenue primarily from usage fees for the Company's digital media distribution service. Usage fees are generally recognized as they are billed based on volume and size of distribution services provided in a given month. The Company's other performance obligations include maintenance services, email and phone support, and unspecified software updates released when, and if, available. Under the guidance of ASC 606, the Company has concluded that maintenance services and unspecified software upgrades are not distinct in the context of the Company's contracts because the Company's service is considered a multi-tenant software environment, and these activities represent a single combined performance obligation in connection with the Company's digital media distribution service, recognized at a point in time when the service is delivered to the customer. Support activities are considered a separate performance obligation which is satisfied over time; however, such activities are performed substantially concurrently with the satisfaction of digital media distribution services. From time to time, certain of the Company's contracts contain additional separate performance obligations, including specific enhancements and upgrades. Determination of the transaction price The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for providing services to the customer. Digital media distribution services may be subject to either fixed or variable pricing. Variable consideration is allocated entirely to distinct service periods when it can be tied to a single performance obligation. Variable consideration is estimated and included in the transaction price if, in the Company's judgment, it is probable that there will not be a significant future reversal of cumulative revenue under the contract. When variable consideration is contingent and cannot be tied to a single performance obligation performed in a particular billing period, the Company estimates contingent variable consideration using the most likely method and recognizes consideration to the extent that the estimate for variable consideration is not constrained pursuant to the guidance provided in ASU 606. A significant financing component generally does not exist under the Company's standard contracting and billing practices. F-10 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition (cont'd.) Allocation of the transaction price to the performance obligations in the contract If the contract contains a single combined performance obligation, the entire transaction price is allocated to the single combined performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on its standalone selling price ("SSP") in relation to the total fair value of all performance obligations in the arrangement. The majority of the Company's contracts contain two separate performance obligations that are performed concurrently. The Company allocates consideration to each performance obligation under the guidance of ASC 606 on a relative standalone selling price (SSP) basis. Where SSP is not directly observable, the Company determines the SSP using information that may include market conditions and other observable inputs. Consideration associated with support activities is estimated using a cost-plus reasonable margin approach, as there is no observable SSP. Consideration associated with specified enhancements and upgrades is estimated using a cost-plus reasonable margin approach, as there is no observable SSP. Recognition of revenue when, or as, the Company satisfies a performance obligation The Company recognizes revenue when the services are delivered to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The Company is principally responsible for the satisfaction of its distinct performance obligations, which are satisfied either at a point in time or over a period of time. Performance obligations satisfied at a point in time Media distribution services Media distribution services comprise the majority of distinct performance obligations that are satisfied at a point in time, and revenue is recognized at the point in which the distribution service has been completed. Consideration for these services is typically billed in the same period that the service has been delivered to the customer. Performance obligations satisfied over a period of time Customer support activities comprise the majority of distinct performance obligations that are satisfied over a period of time. F-11 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition (cont'd.) Revenue from support activities is recognized over an estimated support period since this activity is considered a 'stand-ready obligation'. This support period is substantially concurrent with the performance of media distribution services, as these services are performed substantially in conjunction with the related distribution. Any support activities provided outside of this billing period are not considered material. Revenue from specified enhancements and upgrades is recognized over an estimated performance period. Contract Costs Contract costs consists of two components, customer acquisition costs and costs to fulfill a contract. Customer acquisition costs are capitalized only if the costs are incrementally incurred to obtain a customer contract and may consist of sales commissions paid to sales personnel or third-party resellers. Generally, the Company does not incur any contract costs outside of the period that the related revenue is recognized. Contract Modifications Contract modifications may create new, or change existing, enforceable rights and obligations of the parties to the contract. We generally modify an existing contract using an addendum or signed change order. A contract modification is accounted for as a new contract if it reflects an increase in scope that is regarded as distinct from the original contract and is priced in-line with the standalone selling price for the related product or services obligated. If a contract modification is not considered a new contract, the modification is combined with the original contract and the impact on the revenue recognition profile depends on whether the remaining products and services are distinct from the original contract. If the remaining goods or services are distinct from those in the original contract, all remaining performance obligations will be accounted for on a prospective basis with unrecognized consideration allocated to the remaining performance obligations. If the remaining goods or services are not distinct, the modification will be treated as if it were a part of the existing contract, and the effect that the contract modification has on the transaction price, and on our measure of progress toward satisfaction of the performance obligations, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification on a cumulative catch-up basis. F-12 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Cost of revenue Cost of revenue primarily consists of personnel costs for our operations service and technical support employees and engineering support staff, cloud infrastructure costs, incremental transaction costs such as merchant and processing fees, and costs of external customer support software and services. In each case, personnel costs include salaries, benefits and any other compensation paid to such staff. Long-lived assets Long-lived assets held for use are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of property, equipment and intangible assets may not be fully recoverable. Impairment is measured by a two-step process: Step 1) the carrying amount of the asset is compared with its estimated undiscounted future cash flows expected to result from the use of the assets and its eventual disposition. If the carrying amount is lower than the undiscounted future cash-flows, no impairment loss is recognized. Step 2) if the carrying amount is higher than the undiscounted future cash-flows then an impairment loss is measured as the difference between the carrying amount and fair value which may be based on internally developed discounted cash flow estimates, quoted market prices, when available, or independent appraisals. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company's strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. As of August 31, 2020, there were no impairment indicators present. Litigation and settlement costs From time to time, we may be involved in disputes, litigation and other legal actions. In accordance with ASC 450, Contingencies, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. During the year ended August 31, 2020, the Company incurred approximately $103,073 (2019: $59,310) in professional legal fees in connection with legal actions against the Company and legal actions initiated by the Company. These costs are expensed as incurred and are recorded as a component of general and administrative expenses. F-13 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Allowance for doubtful accounts The Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowance amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their fair value due to their short-term nature. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience. Research and development costs Research costs are expensed as incurred. Development costs are expensed as incurred, unless such costs are within the scope of ASC 985-20 Software - Costs of Software to be Sold, Leased or Marketed ("ASC 985-20"), in which case such costs are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. The Company's products are generally released soon after technological feasibility has been established and therefore costs incurred subsequent to achievement of technological feasibility are not significant and have been expensed as incurred. Property and equipment and intangibles Property and equipment are stated at cost. Depreciation and amortization is taken over the estimated useful lives of the assets and is calculated using the following rates, and methods, commencing upon utilization of the assets: Furniture and fixtures 20% Computer hardware 30% Computer software 50% Leasehold improvements Straight-line over lease term Patents, trademarks and lists Straight-line over 3 years Translation of foreign currencies The Company's functional currency is the U.S. dollar. Financial statements of foreign operations for which the functional currency is the local currency are translated into U.S. dollars with assets and liabilities translated at the rate of exchange in effect at the balance sheet date and revenue and expense items translated at the average rates for the period. Unrealized gains and losses resulting from the translation of the consolidated financial statements are deferred and accumulated in a separate component of stockholders' equity as a foreign currency translation gain (loss) in accumulated other comprehensive income (loss). F-14 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Translation of foreign currencies (cont'd) Transactions denominated in foreign currencies are translated at the exchange rate in effect on the transaction date. These foreign currency gains and losses are included as a component of general and administrative expenses in the consolidated statements of comprehensive income. The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations. The Company has not entered into contracts for foreign exchange hedges. Advertising Advertising costs are expensed as incurred and totaled $20,260 and $12,017 during the years ended August 31, 2020 and 2019, respectively. Income taxes The Company utilizes the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes . Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis that give rise to the differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements. The Company's evaluation was performed for the tax years which remain subject to examination by major tax jurisdictions. The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company's financial results. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense. F-15 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Investment tax credits The Company uses the flow through method to account for investment tax credits earned on eligible scientific research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense. Stock based compensation The Company follows the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Section 718 "Compensation - Stock Compensation", which establishes accounting for equity based compensation awards to be accounted for using the fair value method. Equity-settled share based payment arrangements are initially measured at fair value at the date of grant and recorded within shareholders' equity. The fair value at grant date of all share-based payments is recognized as compensation expense over the period for which benefits of services are expected to be derived, with a corresponding credit to shareholders' equity. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model and estimate the expected forfeiture rate at the date of grant. When awards are forfeited because non-market based vesting conditions are not satisfied, the expense previously recognized is proportionately reversed. Lease accounting In February 2016, the FASB issued ASU 2016-02, Leases , as amended by subsequent standards updates, which requires lessees to recognize right-of-use (ROU) assets and lease liabilities for all leases, with the exception of short-term leases, at the commencement date of each lease. The Company adopted the new standard effective September 1, 2019 using a modified retrospective approach and did not restate comparative periods. As a result, the Company recorded $671,911 of ROU assets and operating lease liabilities on September 1, 2019. There was no cumulative-effect adjustment for the adoption and the adoption did not have a significant impact on the Company's consolidated statements of comprehensive income. The Company has elected to apply the practical expedient package to not reassess initial direct costs related to leases, whether any expired or existing contracts contained leases and to carry forward historical lease classification. As a result, all leases identified by the Company will continue to be classified as operating leases. In addition, the Company elected to not record short-term leases with an initial term of 12 months or less on its consolidated balance sheets. See Note 5 - Leases for more information. F-16 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Lease accounting (cont'd.) The Company determines if an arrangement is a lease at contract inception by evaluating if the contract conveys the right to control the use of an identified asset during the period of use. A ROU asset represents the Company's right to use an identified asset for the lease term and lease liability represents the Company's obligation to make payments as set forth in the lease arrangement. ROU assets and lease liabilities are included on the Company's consolidated balance sheets beginning September 1, 2019 and are recognized based on the present value of the future minimum lease payments at lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's estimated incremental borrowing rate, because the interest rate implicit in the lease is generally not readily determinable. A ROU asset initially equals the lease liability, adjusted for any lease payments made prior to lease commencement and any lease incentives. All leases are recorded on the consolidated balance sheets except for leases with an initial term of less than 12 months. All of the Company's leases are operating leases. The Company has lease agreements with lease and non-lease components. The lease component is comprised of minimum lease payments which includes base rent and estimated property taxes and insurance. Non-lease components primarily include payments for maintenance and are expensed as incurred. Comprehensive income (loss) Comprehensive income (loss) includes all changes in equity except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income (deficit) consists only of accumulated foreign currency translation adjustments for all years presented. F-17 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'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. Year Ended August 31, August 31, 2020 2019 Net income $ 169,415 $ 610,778 Weighted average common shares outstanding 10,602,346 11,002,589 Diluted weighted average common shares outstanding 10,602,346 11,002,589 At August 31, 2020, the Company had an aggregate of 400,000 (2019: 290,000) stock options outstanding. Those outstanding options were not included in the computation of diluted EPS because the effect would have been anti-dilutive. F-18 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Fair value measurement The book value of cash and cash equivalents, short-term investments, accounts receivable, other receivables, and accounts payable and accrued liabilities approximate their fair values due to the short-term maturity of those instruments. The fair value hierarchy under GAAP is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2 - observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and Level 3 - assets and liabilities whose significant value drivers are unobservable by little or no market activity and that are significant to the fair value of the assets or liabilities. Recently Adopted Accounting Standards In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The amendments in this Update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The FASB also issued ASU No. 2018-11 "Leases (Topic 842): Targeted Improvements and ASU 2019-01 "Leases Codification Improvements Codification improvements to Topic 842 (leases)", which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. ASU 2016-02 was effective for the Company on September 1, 2019. The Company adopted the modified retrospective approach, effective September 1, 2019, with no restatement of prior year comparatives, which resulted in the recognition of a right of use asset and an offsetting lease liability of $671,911 in respect of the Company's office premises lease. See note 5 - leases for further details. F-19 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Accounting Standards Not Yet Effective In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). Financial Instruments-Credit Losses (Topic 326) amends guidance on reporting credit losses for assets held on an amortized cost basis and available-for-sale debt securities. For assets held on an amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for the Company on September 1, 2020. The adoption of this standard will not have a material impact on the Company's consolidated financial statements. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU will be effective for the Company on September 1, 2019. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this guidance will not have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The amendments in this ASU will be effective for the Company on September 1, 2020. Early adoption is permitted for any removed or modified disclosures. The adoption of this guidance will not have a material impact on its consolidated financial statements. F-20 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 3. SHORT TERM INVESTMENTS The Company's short-term investments consists of one-year Guaranteed Investment Certificates with a major Canadian financial institution that earn interest at variable interest rates ranging from 2.15% - 2.17% (2019: 2.35% - 2.36%). 4. PROPERTY AND EQUIPMENT AND INTANGIBLES Accumulated Net book Cost amortization value August 31, 2020 $ $ $ Property and equipment Furniture and fixtures 134,629 112,540 22,089 Computer hardware 264,701 215,916 48,785 Computer software 382,852 298,523 84,329 Leasehold improvements 160,295 121,221 39,074 942,477 748,200 194,277 Intangibles Patents, trademarks and lists 436,780 413,828 22,952 Accumulated Net book Cost amortization value August 31, 2019 $ $ $ Property and equipment Furniture and fixtures 134,432 107,304 27,128 Computer hardware 242,736 198,990 43,746 Computer software 354,090 223,387 130,703 Leasehold improvements 159,815 100,485 59,330 891,073 630,166 260,907 Intangibles Patents, trademarks and lists 421,520 396,825 24,695 Depreciation and amortization for the year ended August 31, 2020 was $135,385 (2019: 96,846) F-21 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 5. LEASES The Company entered into a lease agreement commencing July 1, 2017 and expiring June 30, 2022 consisting of approximately 6,600 square feet. 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 $671,911 which represented the present value of future lease payments using a discount rate of 8% per year. Property tax and insurance payments paid to the lessor are included in the calculation of future lease payments. Right of Use Asset Continuity 2020 2019 $ $ Balance, September 1 671,911 — Lease Inducement (47,607 ) — 624,304 — Depreciation (213,935 ) — Foreign Currency Translation Adjustment (6,408 ) — Balance, August 31 403,961 — The Company has operating lease payments committed as follows: $ 2021 266,278 2022 227,176 Total lease payments payable 493,454 Less amounts representing interest (36,130 ) Total Operating Lease Liability 457,324 Less current portion of operating lease liability (238,261 ) Long term portion of operating lease liability 219,063 Operating Lease Liability Continuity 2020 2019 $ $ Balance, September 1 671,911 — Less Lease Payments (253,040 ) — Interest 44,692 — Foreign Currency Translation Adjustment (6,239 ) — Balance, August 31 457,324 — During the year ended August 31, 2020 the Company recorded depreciation expense of $213,935 (2019 - $244,992 rent expense) which has been allocated between general and administrative expenses, research and development and sales and marketing on the consolidated statement of comprehensive income. The total rent commitment, net of the leasehold improvement allowance, is being amortized to rent expense on a straight-line basis over the term of the lease. F-22 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 6. STOCKHOLDERS' EQUITY On September 13, 2019, the Company effected a reverse stock split on the basis of 5:1. As such, the Company's authorized capital was decreased from 100,000,000 shares of common stock, par value $0.001 to 20,000,000 shares of common stock, par value $0.001 and all shares of common stock issued and outstanding were decreased on the basis of one new share for each five old shares. These consolidated financial statements give retroactive effect to such reverse stock split and all share and per share amounts have been adjusted accordingly. During the year ended August 31, 2020 the Company completed a Normal Course Issuer Bid ("NCIB"), pursuant to which the Company purchased 550,140 shares of common stock in the capital of the Company. Purchases pursuant to the NCIB were made from time to time by RBC Dominion Securities Inc. on behalf of the Company through the facilities of the TSX Venture Exchange at the market price at the time of purchase, subject to daily limits and compliance with the applicable rules of the TSX Venture Exchange and Canadian securities laws. [a] Common stock issued and authorized The Company is authorized to issue up to 20,000,000 shares of common stock, par value $0.001 per share. [b] Stock option plans The Company has a stock option plan, namely the 2015 Stock Option Plan (the "Plan"), under which up to 530,000 shares of common stock, has been reserved for issuance. A total of 130,000 common shares remain eligible for issuance under the Plan. 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. F-23 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) Stock-Based Payment Award Activity A summary of option activity under the Plan as of August 31, 2020 and 2019, and changes during the years ended are presented below: Weighted Weighted Average Aggregate Average Remaining Intrinsic Exercise Price Contractual Value Options Shares $ Term $ Outstanding at August 31, 2018 326,250 1.95 3.49 — Granted 30,000 1.52 4.82 — Forfeited (40,000 ) 2.00 3.06 — Expired (26,250 ) 2.00 — — Outstanding at August 31, 2019 290,000 1.94 2.96 — Granted 210,000 1.24 5.00 — Forfeited (100,000 ) 1.46 0.80 — Outstanding at August 31, 2020 400,000 1.35 3.24 — Exercisable at August 31, 2020 196,250 1.45 2.14 — 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 August 31, 2020. The following table summarizes information regarding the non-vested stock purchase options outstanding as of August 31, 2020: Weighted Average Grant Date Number of Options Fair Value $ Non-vested options at August 31, 2018 122,917 0.35 Granted 30,000 0.35 Forfeited (6,663 ) 0.34 Vested (116,254 ) 0.42 Non-vested options at August 31, 2019 30,000 0.38 Granted 210,000 0.49 Forfeited (13,750 ) 0.49 Vested (22,500 ) 0.40 Non-vested options at August 31, 2020 203,750 0.48 F-24 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) As of August 31, 2020, there was $67,203 (2019: $42,658) of total unrecognized compensation cost related to non-vested share-based compensation awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.41 (2019: 1.1) years. During the year ended August 31, 2019, the total stock-based compensation expense of $48,615 (2019: $41,675) is reported in the statement of comprehensive income as follows: 2020 2019 $ $ Stock-based compensation General and administrative 19,850 25,847 Sales and marketing 15,166 7,535 Research and development 13,599 8,293 Total stock-based compensation 48,615 41,675 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: 2020 2019 $ $ Expected term of stock options (years) 3.25 3.02 Expected volatility 118.6% 75.3% Risk-free interest rate 1.0% 1.7% Dividend yields — — Weighted average grant date fair value $ 0.49 $ 0.40 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. F-25 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 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. Independent directors are able to contribute a maximum of $12,500 each for a combined maximum annual purchase of $25,000. The maximum annual combined contributions will be $400,000. All purchases are made through the Toronto Stock Exchange by a third-party plan agent. The third-party plan agent will also be responsible for the administration of the Plan on behalf of the Company and the participants. During the year ended August 31, 2020, the Company recognized compensation expense of $64,480 (2019: $61,629) in salaries and wages on the consolidated statement of comprehensive income in respect of the Plan, representing the Company's employee matching of cash contributions to the plan. The shares were purchased on the open market at an average price of $0.74 (2019: $1.16). As at August 31, 2020 355,022 shares are held in trust by the Company. [d] Warrants A summary of common stock warrants outstanding, and changes during the year then ended is presented below: Number of Aggregate Common Exercise Intrinsic Shares Price Value Issuable $ $ Outstanding at August 31, 2018, 2019, and 2020 — — — F-26 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 7. INCOME TAXES The Company is subject to United States federal and state income taxes at an approximate rate of 21.0% and to Canadian federal and British Columbia provincial taxes in Canada at an approximate rate of 27.0%. The reconciliation of the provision (recovery) for income taxes at the United States federal statutory rate compared to the Company's income tax expense is as follows: 2020 2019 $ $ Tax at U.S. statutory rates 36,000 128,000 Permanent differences 2,000 2,000 Stock option compensation 17,000 11,000 Effect of higher foreign tax rates in Canada 31,000 47,000 Effect of research tax credits claims filed in respect of prior years — (361,000 ) Effect of a change in statutory tax rates — — Foreign exchange and other adjustments (250,000) (73,000 ) Recovery of previously unrecognized tax assets — — Change in valuation allowance 164,000 246,000 Provision for deferred income taxes — — Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance for those deferred tax assets for which realization is not likely to occur. Significant components of the Company's deferred tax assets as of August 31 are as follows: 2020 2019 $ $ Deferred tax assets: Net operating loss carryforwards 1,132,000 886,000 Excess of book over tax depreciation 915,000 884,000 Tax Credit Carryforwards 900,000 1,013,000 Total deferred tax asset 2,947,000 2,783,000 Valuation allowance (2,947,000 ) (2,783,000 ) Net deferred tax asset — — F-27 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 7. INCOME TAXES (Cont'd) Net income (loss) before income tax by geographic region is as follows: 2019 2019 $ $ United States (369,579 ) (118,503 ) Canada 538,994 729,281 169,415 610,778 If not utilized to reduce future taxable income, the Company’s net operating loss carryforwards will expire as follows: Canada United States $ $ 2021 and thereafter — 5,392,000 — 5,392,000 If not utilized to reduce future taxable payable, the Company’s investment tax credit carryforwards will expire as follows: Canada United States $ $ 2029 and thereafter 1,100,000 — 1,100,000 — F-28 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 8. COMMITMENTS The Company's property lease agreement commenced on July 1, 2017 and expiring June 30, 2022. Details of the lease agreement are included in Note 5. 9. 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 will defend 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. F-29 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 10. 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: 2020 2019 $ $ Play MPE® North America 1,696,654 1,658,603 Europe 1,826,582 1,784,821 Australasia 273,737 309,291 Other 1,344 — Total Play MPE® Revenue 3,798,317 3,752,715 Clipstream ® United States 26,248 56,377 Total Clipstream ® Revenue 26,248 56,377 Total Revenue 3,824,565 3,809,092 Revenue in the above table is based on location of the customer's billing address. Some of these customers have distribution centers located around the globe and distribute around the world. During the year ended August 31, 2020, the Company generated 42% of total revenue from one customer [2019 - 41%]. It is in management's opinion that the Company is not exposed to significant credit risk. As at August 31, 2020, 2 customers represented $275,620 (65%) of the trade receivables balance [2019 - two customers represented $233,549 (70%)]. The Company has substantially all its assets in Canada and its current and planned future operations are, and will be, located in Canada. 11. 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. 12. SUBSEQUENT EVENTS None. F-30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.