DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 1. Financial Statements. Condensed Consolidated Interim Financial Statements Destiny Media Technologies Inc. (Unaudited) May 31, 2021 (Expressed in United States dollars) Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (Expressed in United States Dollars) Unaudited As at, May 31, August 31, 2021 2020 $ $ ASSETS Current Cash and cash equivalents 2,934,575 1,841,340 Short-term investments [note 3] - 781,490 Accounts receivable, net of allowance for doubtful accounts of $20,618, [August 31, 2020 - $23,412] 403,196 426,832 Other receivables 46,869 26,083 Prepaid expenses 69,444 78,562 Total current assets 3,454,084 3,154,307 Deposits 37,131 34,316 Property and equipment, net [note 4] 166,913 194,277 Intangible assets, net [note 4] 86,376 22,952 Right of use asset [note 5] 258,286 403,961 Total assets 4,002,790 3,809,813 LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable 140,989 119,399 Accrued liabilities 355,766 353,235 Deferred revenue 18,210 19,638 Current portion of operating lease liability [note 5] 280,028 238,261 Total current liabilities 794,993 730,533 Operating lease liability, net of current portion [note 5] 24,418 219,063 Total liabilities 819,411 949,596 Contingencies [note 7] Stockholders' equity Common stock, par value $0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,294,961 shares [August 31, 2020 - issued and outstanding 10,450,646 shares] 10,295 10,451 Additional paid-in capital [note 6] 9,186,881 9,366,290 Accumulated deficit (5,880,238 ) (6,171,068 ) Accumulated other comprehensive loss (133,559 ) (345,456 ) Total stockholders' equity 3,183,379 2,860,217 Total liabilities and stockholders' equity 4,002,790 3,809,813 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (Expressed in United States dollars) Unaudited Three Months Three Months Nine months Nine months Ended Ended Ended Ended May 31, May 31, May 31, May 31, 2021 2020 2021 2020 $ $ $ $ Service revenue [note 10] 1,083,987 939,873 3,138,663 2,792,458 Cost of revenue Hosting costs 32,582 30,905 92,291 73,361 Internal engineering support 7,375 5,915 20,998 19,278 Customer support 41,794 33,523 118,989 109,245 Third Party and transactions costs 16,053 16,641 47,738 39,502 97,804 86,984 280,016 241,386 Gross Margin 986,183 852,889 2,858,647 2,551,072 Operating expenses General and administrative 202,878 273,070 526,822 708,667 Sales and marketing 361,411 140,690 1,004,839 786,846 Product development 326,450 355,625 961,930 963,351 Depreciation and amortization 26,673 33,194 77,388 100,744 917,412 802,579 2,570,979 2,559,608 Income (loss) from operations 68,771 50,310 287,668 (8,536 ) Other income Interest income 823 5,266 3,162 19,743 Other income (loss) - (677 ) - 19 Net income 69,594 54,899 290,830 11,226 Net income per common share, Basic 0.01 0.01 0.03 0.00 Diluted 0.01 0.01 0.03 0.00 Weighted average common shares outstanding: Basic 10,426,961 10,450,646 10,428,809 10,623,432 Diluted [note 6] 10,531,708 10,450,646 10,543,442 10,623,432 See accompanying notes CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Expressed in United States dollars) Unaudited Three Months Three Months Nine months Nine months Ended Ended Ended Ended May 31, May 31, May 31, May 31, 2021 2020 2021 2020 $ $ $ $ Net income for the period 69,594 54,899 290,830 11,226 Other comprehensive income (loss) Foreign currency translation adjustments 149,774 (66,657 ) 211,897 (80,213 ) Comprehensive income (loss) 219,368 (11,758 ) 502,727 ( 68,987 ) 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 May 31, 2021 and 2020 Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares # Amount Capital Deficit Loss $ $ $ $ $ Balance, February 28, 2021 10,409,361 10,409 9,347,311 (5,949,832 ) (283,333 ) 3,124,555 Net income - - - 69,594 - 69,594 Total comprehensive income (loss) - - - - 149,774 149,774 Stock based compensation [note 6] - 13,134 - - 13,134 Common shares retired (114,400 ) (114 ) (173,564 ) - - (173,678 ) Balance, May 31, 2021 10,294,961 10,295 9,186,881 (5,880,238 ) (133,559 ) 3,183,379 Balance, February 29, 2020 10,450,646 10,451 9,338,308 (6,384,156 ) (405,415 ) 2,559,188 Net income - - - 54,899 - 54,899 Total comprehensive loss - - - - (66,657 ) (66,657 ) Stock based compensation [note 6] - - 15,276 - - 15,276 Balance, May 31, 2020 10,450,656 10,451 9,353,584 (6,329,257 ) (472,072 ) 2,562,706 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Expressed in United States dollars) Unaudited Nine months ended May 31, 2021 and 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 Net income - - - 290,830 - 290,830 Total comprehensive income - - - - 211,897 211,897 Stock based compensation [note 6] - - 39,117 - - 39,117 Common shares retired (155,685 ) (156 ) (218,526 ) - - (218,682 ) Balance, May 31, 2021 10,294,961 10,295 9,186,881 (5,880,238 ) (133,559 ) 3,183,379 Balance, August 31, 2019 11,000,796 11,001 9,850,348 (6,340,483 ) (391,859 ) 3,129,007 Net income - - - 11,226 - 11,226 Total comprehensive loss - - - - (80,213 ) (80,213 ) Stock based compensation [note 6] - - 35,909 - - 35,909 Common shares retired (550,140 ) (550 ) (532,673 ) - - (533,223 ) Balance, May 31, 2020 10,450,656 10,451 9,353,584 (6,329,257 ) (472,072 ) 2,562,706 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS Nine months ended May 31, 2021 and 2020 (Expressed in United States dollars) 2021 2020 $ $ OPERATING ACTIVITIES Net income 290,830 11,226 Items not involving cash: Depreciation and amortization [note 4] 77,388 100,744 Stock-based compensation 39,117 35,909 Allowance for doubtful accounts (4,459 ) 13,672 Unrealized foreign exchange (gain) loss 18,465 (5,321 ) Changes in non-cash working capital: Accounts receivable 44,048 (451,575 ) Other receivables (18,001 ) (5,354 ) Prepaid expenses and deposits 12,920 (18,098 ) Accounts payable 26,646 16,686 Accrued liabilities (35,591 ) 82,416 Deferred revenue (2,873 ) (21,057 ) Operating lease liability (10,952 ) 6,409 Net cash provided by (used in) operating activities 437,538 (234,343 ) INVESTING ACTIVITIES Sale (Purchase) of short-term investments, net 800,624 (743,002 ) Purchase of property, equipment and intangibles (34,658 ) (54,610 ) Development of software (63,554 ) - Net cash provided by (used in) investing activities 702,412 (797,612 ) FINANCING ACTIVITY Repurchase of common stock for retirement (218,682 ) (533,223 ) Net cash used in financing activity (218,682 ) (533,223 ) Effect of foreign exchange rate changes on cash 171,967 (33,611 ) Net increase (decrease) in cash and cash equivalents 1,093,235 (1,598,789 ) Cash and cash equivalents, beginning of period 1,841,340 2,512,138 Cash and cash equivalents, end of period 2,934,575 913,349 Supplementary disclosure Interest paid - - Income taxes paid - - See accompanying notes Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS May 31, 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 nine months ended May 31, 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 May 31, 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 May 31, 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 $ $ $ May 31, 2021 Property and equipment Furniture and fixtures 136,411 116,095 20,316 Computer hardware 294,573 230,136 64,437 Computer software 387,604 330,427 57,177 Leasehold improvements 162,243 137,260 24,983 980,831 813,918 166,913 Intangibles Software under development 63,554 - 63,554 Patents, trademarks and lists 448,669 425,847 22,822 512,223 425,847 86,376 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 and nine month periods ended May 31, 2021 was $26,673 and $77,388 (2020: $33,194 and $100,744 respectively). 2 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS May 31, 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 May 31, 2021 August 31, 2020 $ $ Balance, September 1 403,961 671,911 Lease Inducement - (47,607 ) 403,961 624,304 Depreciation (167,468 ) (213,935 ) Foreign Currency Translation Adjustment 21,793 (6,408 ) Balance, End of Period 258,286 403,961 The Company has operating lease payments committed as follows: $ 2021 294,289 2022 24,581 Total lease payments payable 318,870 Less amounts representing interest (14,424 ) Total Operating Lease Liability 304,446 Less current portion of operating lease liability (280,028 ) Long term portion of operating lease liability 24,418 Operating Lease Liability Continuity May 31, 2021 August 31, 2020 $ $ Balance, September 1 457,324 671,911 Less Lease Payments (201,417 ) (253,040 ) Interest 23,366 44,692 Foreign Currency Translation Adjustment 25,173 (6,239 ) Balance, End of Period 304,446 457,324 During the three and nine month periods ended May 31, 2021 the Company recorded depreciation expense of $56,376 and $167,468 respectively (May 31, 2020: $52,930 and $160,387 respectively) which has been allocated between general and administrative expenses, research and development and sales and marketing on the consolidated statement of 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 May 31, 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 month periods ended May 31, 2021, the Company repurchased and cancelled 114,400 common shares for $173,678. For the nine month period ended May 31, 2021 155,685 common shares for $218,682 were repurchased (May 31, 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 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 Plans as of May 31, 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 4,600 Outstanding at May 31, 2021 410,000 1.34 2.52 124,200 Exercisable at May 31, 2021 302,500 1.38 2.33 86,250 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 May 31, 2021. For the three and nine month period ended May 31, 2021, the dilutive impact of in the money stock options was 104,474 and 114,633 respectively (2020: none). 4 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS May 31, 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 May 31, 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 (106,250 ) 0.48 Non-vested options at May 31, 2021 107,500 0.48 As of May 31, 2021, there was $29,574 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 0.85 years. During the nine months ended May 31, 2021, the total stock-based compensation expense of $39,117 (May 31, 2020: $35,909) is reported in the statement of income as follows: 2021 2020 $ $ Stock-based compensation General and administrative 13,594 15,319 Sales and marketing 14,502 10,664 Product development 11,021 9,926 Total stock-based compensation 39,117 35,909 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% 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 May 31, 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 nine months ended May 31, 2021, the Company recognized compensation expense of $71,938 (May 31, 2020 - $53,369) in salaries and wages on the consolidated statement of 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 $0.99 (May 31, 2020: $0.78). 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 May 31, 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. 7 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS May 31, 2021 9. FAIR VALUE MEASUREMENTS The following table presents the classification of financial assets that are measured at fair value on a recurring basis as of May 31, 2021 and August 31, 2020. May 31, 2021 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents 2,934,575 - - 2,934,575 Total financial assets 2,934,575 - - 2,934,575 August 31, 2020 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents 1,841,340 - - 1,841,340 Short-term investments 781,490 - - 781,490 Total financial assets 2,622,830 - - 2,622,830 The company has no financial liabilities subject to level 1, 2 or 3 fair value measurements. 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: Three Months Ended Nine months Ended May 31 May 31 May 31 May 31 2021 2020 2021 2020 $ $ $ $ Play MPE® North America 504,319 422,550 1,416,953 1,211,728 Europe 497,225 448,098 1,489,578 1,359,786 Australasia 79,275 69,225 218,035 200,522 Africa 1,626 - 6,092 - Total Play MPE® 1,082,445 939,873 3,130,658 2,772,036 Clipstream ® North America 1,542 - 8,005 20,422 Total revenue 1,083,987 939,873 3,138,663 2,792,458 8 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS May 31, 2021 10. CONCENTRATIONS AND ECONOMIC DEPENDENCE (cont'd.) 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 nine months ended May 31, 2021, the Company generated 42% of total revenue from one customer (May 31, 2020 - 43%). It is in management's opinion that the Company is not exposed to significant credit risk. As at May 31, 2021, one customer represented $147,872 (or 37%) 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 June 30, 2021, a further 15,000 shares of common stock were repurchased under the NCIB and cancelled. 9