DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 1. Financial Statements. Condensed Consolidated Interim Financial Statements Destiny Media Technologies Inc. (Unaudited) November 30, 2020 (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, 2020 2020 $ $ ASSETS Current Cash and cash equivalents 3,076,862 1,841,340 Short-term investments [note 3] — 781,490 Accounts receivable, net of allowance for doubtful accounts of $23,562, [August 31, 2020 – $23,412] 329,573 426,832 Other receivables 31,066 26,083 Prepaid expenses 62,290 78,562 Total current assets 3,499,791 3,154,307 Deposits 34,538 34,316 Property and equipment, net [note 4] 179,850 194,277 Intangible assets, net [note 4] 19,369 22,952 Right of use asset [note 5] 351,130 403,961 Total assets 4,084,678 3,809,813 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Accounts payable 186,426 119,399 Accrued liabilities 325,182 353,235 Deferred revenue 18,841 19,638 Current portion of operating lease liability [note 5] 239,800 238,261 Total current liabilities 770,249 730,533 Operating lease liability, net of current portion [note 5] 162,619 219,063 Total liabilities 932,868 949,596 Commitments and contingencies [note 7] Stockholders’ equity Common stock, par value $0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,450,656 shares [August 31, 2020 – issued and outstanding 10,450,656 shares] 10,451 10,451 Additional paid-in capital [note 6] 9,379,139 9,366,290 Accumulated deficit (5,920,366 ) (6,171,068 ) Accumulated other comprehensive loss (317,414 ) (345,456 ) Total stockholders’ equity 3,151,810 2,860,217 Total liabilities and stockholders’ equity 4,084,678 3,809,813 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (Expressed in United States dollars) Unaudited Three months ended November 30, 2020 2019 $ $ Service revenue [note 9] 1,123,977 1,045,856 Cost of revenue Hosting costs 30,042 26,617 Internal engineering support 6,327 6,847 Customer support 35,852 39,371 Third party and transaction costs 18,092 12,447 90,313 85,282 Gross Margin 1,033,664 960,574 Operating expenses General and administrative 159,549 219,503 Sales and marketing 302,474 283,756 Product development 298,088 319,974 Depreciation and amortization 24,315 32,072 784,426 855,305 Income from operations 249,238 105,269 Other income Interest income 1,464 6,389 Net income 250,702 111,658 Foreign currency translation adjustments 28,042 1,552 Total comprehensive income 278,744 113,210 Net income per common share, basic and diluted 0.02 0.01 Weighted average common shares outstanding: Basic 10,450,656 11,954,603 Diluted 10,450,656 11,954,603 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, 2020 and 2019 Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares Amount capital Deficit loss # $ $ $ $ $ Balance, August 31, 2020 10,450,646 10,451 9,366,290 (6,171,068 ) (345,456 ) 2,860,217 Total comprehensive income - - - 250,702 28,042 278,744 Stock based compensation [note 6] - - 12,849 - - 12,849 Balance, November 30, 2020 10,450,646 10,451 9,379,139 (5,920,366 ) (317,414 ) 3,151,810 Balance, August 31, 2019 11,000,786 11,001 9,850,348 (6,340,483 ) (391,859 ) 3,129,007 Shares issued for rounding purposes in connection with reverse split 10 - - - - - Repurchase of common stock (298,755 ) (299 ) (291,590 ) - - (291,889 ) Total comprehensive income - - - 111,658 1,552 113,210 Stock based compensation [note 6] - - 17,936 - - 17,936 Balance, November 30, 2019 10,702,041 10,702 9,576,694 (6,228,825 ) (390,307 ) 2,968,264 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS Three months ended November 30, (Expressed in United States dollars) 2020 2019 $ $ OPERATING ACTIVITIES Net income 250,702 111,658 Items not involving cash: Depreciation and amortization [note 4] 24,315 32,072 Stock-based compensation 12,849 17,936 Deferred leasehold inducement — 3,325 Unrealized foreign exchange (gain) loss 11,372 (5,417 ) Changes in non-cash working capital: Accounts receivable 98,548 (84,789 ) Other receivables (4,763 ) 2,840 Prepaid expenses and deposits 16,497 7,203 Accounts payable 102,318 5,126 Accrued liabilities (66,893 ) 4,461 Deferred revenue (909 ) (8,170 ) Operating lease liability (2,382 ) — Net cash provided by operating activities 441,654 86,245 INVESTING ACTIVITIES Redemption (purchase) of short-term investments, net 763,749 (756,372 ) Purchase of property, equipment and intangibles (5,188 ) (10,231 ) Net cash provided by (used in) investing activities 758,561 (766,603 ) FINANCING ACTIVITY Repurchase of common stock for retirement — (291,889 ) Net cash used in financing activity — (291,889 ) Effect of foreign exchange rate changes on cash 35,307 5,189 Net increase (decrease) in cash and cash equivalents 1,235,522 (967,058 ) Cash and cash equivalents, beginning of period 1,841,340 2,512,138 Cash and cash equivalents, end of period 3,076,862 1,545,080 Supplementary disclosure Interest paid — — Income taxes paid — — Non-cash investing and financing activities Right of use asset — (671,911 ) Operating lease liability — 671,911 See accompanying notes Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 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, 2020 are not necessarily indicative of the results that may be expected for the year ended August 31, 2021. The balance sheet at August 31, 2020 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, 2020. 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, 2020 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 0.10% - 2.36%. As at November 30, 2020, the Company's short-term investments had reached maturity, and are included in cash and cash equivalents. 4. PROPERTY AND EQUIPMENT AND INTANGIBLES Accumulated Net book Cost amortization value November 30, 2020 $ $ $ Property and equipment Furniture and fixtures 134,769 113,649 21,120 Computer hardware 270,226 219,724 50,502 Computer software 383,198 308,933 74,265 Leasehold improvement 160,440 126,477 33,963 948,633 768,783 179,850 Intangibles Patents, trademarks and lists 436,929 417,560 19,369 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 Depreciation and amortization for the three month period ended November 30, 2020 was $24,315 (2019: $32,072) 2 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 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. 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 November 30, 2020 August 31, 2020 $ $ Balance, September 1 403,961 671,911 Lease Inducement - (47,607 ) 403,961 624,304 Depreciation (54,636 ) (213,935 ) Foreign Currency Translation Adjustment 1,805 (6,408 ) Balance, End of Period 351,130 403,961 The Company has operating lease payments committed as follows: $ 2021 269,910 2022 160,050 Total lease payments payable 429,960 Less amounts representing interest (27,541 ) Total Operating Lease Liability 402,419 Less current portion of operating lease liability (239,800 ) Long term portion of operating lease liability 162,619 Operating Lease Liability Continuity November 30, 2020 August 31, 2020 $ $ Balance, September 1 457,324 671,911 Less Lease Payments (65,712 ) (253,040 ) Interest 8,693 44,692 Foreign Currency Translation Adjustment 1,844 (6,239 ) Balance, End of Period 402,419 457,324 During the three month period ended November 30, 2020 the Company recorded depreciation expense of $54,636 (2019 : $54,158) 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. 3 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 6. STOCKHOLDERS' EQUITY [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. Effective September 16, 2019, the Company commenced a Normal Course Issuer Bid, pursuant to which the Company may purchase up to a maximum of 550,140 common shares, through the TSX Venture Exchange (the "TSX") at the market price at the time of purchase, subject to daily limits and compliance with the applicable rules of the TSX and Canadian securities laws. During the year ended August 31, 2020, the Company repurchased and cancelled 550,140 common shares for $533,223. [b] Stock option plan 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 120,000 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. Stock-Based Payment Award Activity A summary of stock option activity under the Plan as of November 30, 2020, 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, 2020 400,000 1.35 3.24 — Granted 10,000 1.00 5.00 — Outstanding at November 30, 2020 410,000 1.34 3.02 — Exercisable at November 30, 2020 272,500 1.42 2.70 — 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, 2020. 4 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plan (cont'd.) The following table summarizes information regarding the non-vested options outstanding as of November 30, 2020 and changes during the period then ended: Weighted Average Grant Date Number of Options Fair Value $ Non-vested options at August 31, 2020 203,750 0.48 Granted 10,000 0.34 Vested (76,250 ) 0.49 Non-vested options at November 30, 2020 137,500 0.47 As of November 30, 2020, there was $56,810 of total unrecognized compensation cost related to non-vested stock-based compensation awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 0.99 years. Total stock-based compensation expense of $12,849 was recognized during the three month period ended November 30, 2020, (2019: $17,936) is reported in the statement of comprehensive income as follows: 2020 2019 $ $ Stock-based compensation General and administrative 4,531 9,258 Sales and marketing 4,644 6,100 Product development 3,674 2,578 Total stock-based compensation 12,849 17,936 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 3.25 Expected volatility 105.4% 118.6% Risk-free interest rate 0.35% 1.0% Dividend yields — — Weighted average grant date fair value $0.34 $0.49 5 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plan (cont'd.) 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. [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 $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 is also responsible for the administration of the Plan on behalf of the Company and the participants. During the three month period ended November 30, 2020, the Company recognized compensation expense of $15,186 (2019 : $13,132) 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. During the three month period ended November 30, 2020, the shares were purchased on the open market at an average price of $0.67 (2019 : $0.98). The shares are held in trust for a period of one year from the date of purchase. 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. 6 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 8. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Standards 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 did 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 did not have a material impact on the Company's 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 was effective for the Company on September 1, 2020.. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. 7 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 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: 2020 2019 $ $ Play MPE® United States 533,460 485,212 Europe 508,317 462,441 Australia 75,779 82,586 Africa 3,528 — Total Play MPE® Revenue 1,121,084 1,030,239 Clipstream ® United States 2,893 15,617 Total Clipstream ® Revenue 2,893 15,617 Total Revenue 1,123,977 1,045,856 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, 2020, the Company generated 38% of total revenue from one customer respectively (2019 : 38%). It is in management's opinion that the Company is not exposed to significant credit risk. As at November 30, 2020, one customer represented $144,407 (or 46%) of the trade receivables balance (August 31, 2020, two customers represented $275,620 (or 65%)). 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. 8 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2020 11. SUBSEQUENT EVENTS On January 4, 2021, the Company commenced a Normal Course Issuer Bid ("NCIB"), pursuant to which the Company may purchase up to a maximum of 522,532 shares of common stock in the capital of the Company, representing approximately 5% of the then-outstanding common stock. Purchases pursuant to the NCIB will be 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. Shares purchased will be paid for with cash available from the Company's working capital. 9