DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 1. Financial Statements. Condensed Consolidated Interim Financial Statements Destiny Media Technologies Inc. (Unaudited) February 28, 2021 (Expressed in United States dollars) Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (Expressed in United States Dollars) Unaudited As at, February 28, August 31, 2021 2020 $ $ ASSETS Current Cash and cash equivalents 3,011,715 1,841,340 Short-term investments [note 3] — 781,490 Accounts receivable, net of allowance for doubtful accounts of $19,537, [August 31, 2020 – $23,412] 328,131 426,832 Other receivables 41,844 26,083 Prepaid expenses 96,764 78,562 Total current assets 3,478,454 3,154,307 Deposits 35,185 34,316 Property and equipment, net [note 4] 169,809 194,277 Intangible assets, net [note 4] 15,736 22,952 Right of use asset [note 5] 301,228 403,961 Total assets 4,000,412 3,809,813 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Accounts payable 138,062 119,399 Accrued liabilities 369,697 353,235 Deferred revenue 18,269 19,638 Current portion of operating lease liability [note 5] 235,659 238,261 Total current liabilities 761,687 730,533 Operating lease liability, net of current portion [note 5] 114,170 219,063 Total liabilities 875,857 949,596 Contingencies [note 7] Stockholders’ equity Common stock, par value $0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,409,361 shares [August 31, 2020 – issued and outstanding 10,450,646 shares] 10,409 10,451 Additional paid-in capital [note 6] 9,347,311 9,366,290 Accumulated deficit (5,949,832 ) (6,171,068 ) Accumulated other comprehensive loss (283,333 ) (345,456 ) Total stockholders’ equity 3,124,555 2,860,217 Total liabilities and stockholders’ equity 4,000,412 3,809,813 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Expressed in United States dollars) Unaudited Three Months Three Months Six Months Six Months Ended Ended Ended Ended February 28, February 29, February 28, February 29, 2021 2020 2021 2020 $ $ $ $ Service revenue [note 10] 930,699 806,729 2,054,676 1,852,585 Cost of revenue Hosting costs 29,667 15,839 59,709 42,456 Internal engineering support 7,296 6,516 13,623 13,363 Customer support 41,343 36,351 77,195 75,722 Third Party and transactions costs 13,593 10,414 31,685 22,861 91,899 69,120 182,212 154,402 Gross Margin 838,800 737,609 1,872,464 1,698,183 Operating expenses General and administrative 164,395 216,094 323,943 435,597 Sales and marketing 340,954 362,400 643,428 646,156 Product development 337,392 287,752 635,480 607,726 Depreciation and amortization 26,400 35,478 50,715 67,550 869,141 901,724 1,653,566 1,757,029 Income (loss) from operations (30,341 ) (164,115 ) 218,898 (58,846 ) Other income Interest income 875 8,110 2,338 14,477 Other income - 674 - 696 Net income (loss) (29,466 ) (155,331 ) 221,236 (43,673 ) Other comprehensive income (loss) Foreign currency translation adjustments 34,081 (15,108 ) 62,123 (13,556 ) Total comprehensive income (loss) 4,615 (170,439 ) 283,359 (57,229 ) Net income (loss) per common share, basic and diluted (0.00 ) (0.01 ) 0.02 (0.00 ) Weighted average common shares outstanding: Basic and diluted 10,442,752 10,629,438 10,446,726 10,665,834 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 February 28, 2021 and February 29, 2020 Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares # Amount Capital Deficit Loss $ $ $ $ $ Balance, November 30, 2020 10,450,646 10,451 9,379,139 (5,920,366 ) (317,414 ) 3,151,810 Total comprehensive income (loss) - - - (29,466 ) 34,081 4,615 Stock based compensation [note 6] - 13,134 - - 13,134 Common shares retired (41,285 ) (42 ) (44,962 ) - - (45,004 ) Balance, February 28, 2021 10,409,361 10,409 9,347,311 (5,949,832 ) (283,333 ) 3,124,555 Balance, November 30, 2019 10,702,041 10,702 9,576,694 (6,228,825 ) (390,307 ) 2,968,264 Total comprehensive loss - - - (155,331 ) (15,108 ) (170,439 ) Stock based compensation [note 6] - 2,697 - - 2,697 Common shares retired (251,385 ) (251 ) (241,083 ) - - (241,334 ) Balance, February 29, 2020 10,450,656 10,451 9,338,308 (6,384,156 ) (405,415 ) 2,559,188 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Expressed in United States dollars) Unaudited Six months ended February 28, 2021 and February 29, 2020 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 - - - 221,236 62,123 283,359 Stock based compensation [note 6] - - 25,983 - - 25,983 Common shares retired (41,285 ) (42 ) (44,962 ) - - (45,004 ) Balance, February 28, 2021 10,409,361 10,409 9,347,311 (5,949,832 ) (283,333 ) 3,124,555 Balance, August 31, 2019 11,000,796 11,001 9,850,348 (6,340,483 ) (391,859 ) 3,129,007 Total comprehensive loss - - - (43,673 ) (13,556 ) (57,229 ) Stock based compensation [note 6] - - 20,633 - - 20,633 Common shares retired (550,140 ) (550 ) (532,673 ) - - (533,223 ) Balance, February 29, 2020 10,450,656 10,451 9,338,308 (6,384,156 ) (405,415 ) 2,559,188 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS Six months ended February 28, 2021 and February 29, 2020 (Expressed in United States dollars) 2021 2020 $ $ OPERATING ACTIVITIES Net income (loss) 221,236 (43,673 ) Items not involving cash: Depreciation and amortization [note 4] 50,715 67,550 Stock-based compensation 25,983 20,633 Allowance for doubtful accounts (4,465 ) — Unrealized foreign exchange (gain) loss 315 (7,927 ) Changes in non-cash working capital: Accounts receivable 113,910 (240,907 ) Other receivables (15,222 ) 4,386 Prepaid expenses and deposits (16,966 ) 6,646 Accounts payable 24,925 57,321 Accrued liabilities (618 ) 13,350 Deferred revenue (1,863 ) (16,399 ) Operating lease liability (6,110 ) 5,447 Net cash provided by (used in) operating activities 391,840 (133,573 ) INVESTING ACTIVITIES Sale (Purchase) of short-term investments, net 800,624 (753,185 ) Purchase of property, equipment and intangibles (13,557 ) (43,666 ) Net cash provided by (used in) investing activities 787,067 (796,851 ) FINANCING ACTIVITY Repurchase of common stock for retirement (45,004 ) (533,223 ) Net cash used in financing activity (45,004 ) (533,223 ) Effect of foreign exchange rate changes on cash 36,472 1,686 Net increase (decrease) in cash and cash equivalents 1,170,375 (1,461,961 ) Cash and cash equivalents, beginning of period 1,841,340 2,512,138 Cash and cash equivalents, end of period 3,011,715 1,050,177 Supplementary disclosure Interest paid — — Income taxes paid — — See accompanying notes Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS February 28, 2021 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 six months ended February 28, 2021 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 February 28, 2021 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 0.10% - 2.36%. As at February 28, 2021, 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 $ $ $ February 28, 2021 Property and equipment Furniture and fixtures 135,298 114,914 20,384 Computer hardware 279,677 224,268 55,409 Computer software 384,626 319,746 64,880 Leasehold improvement 161,048 131,912 29,136 960,649 790,840 169,809 Intangibles Patents, trademarks and lists 437,607 421,871 15,736 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 six months ended February 28, 2021 was $50,715 (2020: $67,550) 2 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS February 28, 2021 5. RIGHT OF USE ASSET The Company entered into a lease agreement commencing July 1, 2017 and expiring June 30, 2022 consisting of approximately 6,600 square feet of office space. 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 February 28, 2021 August 31, 2020 $ $ Balance, September 1 403,961 671,911 Lease Inducement - (47,607 ) 403,961 624,304 Depreciation (111,091 ) (213,935 ) Foreign Currency Translation Adjustment 8,358 (6,408 ) Balance, End of Period 301,228 403,961 The Company has operating lease payments committed as follows: $ 2021 276,915 2022 93,171 Total lease payments payable 370,086 Less amounts representing interest (20,257 ) Total Operating Lease Liability 349,829 Less current portion of operating lease liability (235,659 ) Long term portion of operating lease liability 114,170 Operating Lease Liability Continuity February 28, 2021 August 31, 2020 $ $ Balance, September 1 457,324 671,911 Less Lease Payments (133,612 ) (253,040 ) Interest 16,780 44,692 Foreign Currency Translation Adjustment 9,337 (6,239 ) Balance, End of Period 349,829 457,324 During the three and six month periods ended February 28, 2021 the Company recorded depreciation expense of $56,455 and $111,091 respectively (February 29, 2020: $52,821 and $107,457 respectively) which has been allocated between general and administrative expenses, research and development and sales and marketing on the consolidated statement of comprehensive income (loss). 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 February 28, 2021 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 January 15, 2021, the Company commenced a Normal Course Issuer Bid (NCIB), pursuant to which the Company may purchase up to a maximum of 522,532 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 three and six month periods ended February 28, 2021, the Company repurchased and cancelled 41,285 common shares for $45,004 (February 29, 2020: 550,140 common shares for $533,223 under a NCIB Effective September 16, 2019). [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 180,000 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 Plans as of February 28, 2021, and changes during the period then ended is presented below: Weighted Weighted Average Aggregate Average Remaining Intrinsic Exercise Price Contractual Value Options Shares $ Term $ Outstanding at August 31, 2020 400,000 1.35 3.24 — Granted 10,000 1.00 5.00 500 Outstanding at February 28, 2021 410,000 1.34 2.77 16,000 Exercisable at February 28, 2021 285,000 1.40 2.28 9,750 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 February 28, 2021. 4 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS February 28, 2021 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) The following table summarizes information regarding the non-vested options outstanding as of February 28, 2021 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 (88,750 ) 0.48 Non-vested options at February 28, 2021 125,000 0.47 As of February 28, 2021, there was $43,192 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 0.74 years. During the six months ended February 28, 2021, the total stock-based compensation expense of $25,983 (February 29, 2020: $20,633) is reported in the statement of comprehensive income (loss) as follows: 2021 2020 $ $ Stock-based compensation General and administrative 9,063 6,336 Sales and marketing 9,573 8,045 Product development 7,347 6,252 Total stock-based compensation 25,983 20,633 Valuation Assumptions The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions: 2021 2020 Expected term of stock options (years) 3.25 3.25 Expected volatility 105.4% 116.2% Risk-free interest rate 0.35% 1.3% Dividend yields — — Weighted average grant date fair value $ 0.34 $ 0.49 5 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS February 28, 2021 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (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 six months ended February 28, 2021, the Company recognized compensation expense of $52,857 (February 29, 2020 - $32,422) 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 $0.81 (February 29, 2020: $1.00). The shares are held in trust by the Company 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 February 28, 2021 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 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. 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: 7 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS February 28, 2021 Three Months Ended Six Months Ended February 28 February 29 February 28 February 29 2021 2020 2021 2020 $ $ $ $ Play MPE® North America 379,034 305,697 912,494 790,929 Europe 484,159 447,967 992,476 910,397 Australasia 62,999 48,259 138,778 130,837 Africa 938 — 4,466 — Total Play MPE® 927,130 801,923 2,048,214 1,832,163 Clipstream ® North America 3,569 4,806 6,462 20,422 Total revenue 930,699 806,729 2,054,676 1,852,585 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 six months ended February 28, 2021, the Company generated 42% of total revenue from one customer (February 29, 2020 - 44%). It is in management's opinion that the Company is not exposed to significant credit risk. As at February 28, 2021, one customer represented $145,541 (or 44%) 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. 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 On March 31, 2020, a further 23,800 shares of common stock were repurchased under the NCIB and cancelled. 8