DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD LOOKING STATEMENTS The following discussion should be read in conjunction with the accompanying financial statements and notes thereto included within this Quarterly Report on Form 10-Q. In addition to historical information, the information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements involve risks and uncertainties, including statements regarding the Company's capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors described in this Quarterly Report, including the risk factors under "Item 1A. Risk Factors." of part II, and, from time to time, in other reports the Company files with the Securities and Exchange Commission. These factors may cause the Company's actual results to differ materially from any forward-looking statement. The Company disclaims any obligation to publicly update these statements or disclose any difference between its actual results and those reflected in these statements. Such information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. OVERVIEW AND CORPORATE BACKGROUND Destiny Media Technologies Inc. was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. We carry out our business operations through our wholly owned subsidiary, Destiny Software Productions Inc., a British Columbia company that was incorporated in 1992, MPE Distribution, Inc. a Nevada company that was incorporated in 2007 and Sonox Digital Inc. incorporated under the Canada Business Corporations Act in 2012. The "Company", "Destiny Media", "Destiny", "we" or "us" refers to the consolidated activities of all four companies. Our principal executive office is located at Suite 1110, 885 West Georgia Street, Vancouver, British Columbia V6C 3E8. Our telephone number is (604) 609-7736 and our facsimile number is (604) 609-0611. Our common stock trades on TSX Venture Exchange in Canada under the symbol "DSY", on the OTCQB U.S. ("OTCQB") under the symbol "DSNY", and on various German exchanges (Frankfurt, Berlin, Stuttgart and Xetra) under the symbol DME, WKN 935 410. Our corporate website is located at http://www.dsny.com . OUR PRODUCTS AND SERVICES Destiny develops and markets software as a service (SaaS) solutions that solve critical problems in digital distribution and promotion for businesses in the music industry. The core of our business is Play MPE®, a promotional music marketing and digital distribution service. Play MPE® is a service for promoting and securely distributing broadcast quality audio, video, images, promotional information and other digital content through the internet. The system is currently used by the recording industry for transferring pre-release broadcast quality music, radio shows, and music videos to trusted recipients such as radio stations, media reviewers, VIP's, DJ's, film and TV personnel, sports stadiums and retailers. Play MPE® The Company's core business is the Play MPE® platform. Play MPE® is a two-sided B2B marketplace that enables music labels and artists to create and distribute promotional content and musical assets on the one side, and for music broadcasting professionals, music curators and music reviewers to be able to discover, download, broadcast and review the music, on the other. Our customers range from small independent artists, to the world's largest record label; Universal Music Group "Universal". We have thousands of clients spread over numerous countries that also include large independent record labels ("Indies" or "Independent Record Labels"), promoters or pluggers, and the world's largest record labels (the "Major Record Labels") (who, along with Universal, include Warner Music Group "Warner" and Sony Music Entertainment "Sony"). Our Major Record Label clients have offices around the world and typically represent the world's largest recording artists. When uploading to the Play MPE® platform, the goal of our customers is to increase demand for their music and artists by distributing that content to 'music influencers' who can, in turn, expose the music or artist to a wider consumer audience. This exposure can have a direct increase to record label revenue through performance royalties or indirect impacts to revenue as the music and artists gain popularity. Recipients on the Play MPE® platform have a wide variety of personas and include programming directors for internet streaming, satellite or terrestrial radio, retail store broadcasters, sports stadium DJs, clubs, events, music reviews in newspapers or magazines, on-air personalities, music supervisors who program TV, movies, commercials or video games, or "A&R" representatives at larger record labels. A submission into the Play MPE® platform is targeted to appropriate recipients. Each recipient within the Play MPE® platform has a unique library of music catered and appropriate for that recipient. Currently the Play MPE® platform has over 47,000 active recipients around the globe in excess of 100 countries. The majority of recipients are determined by our customers who maintain their own private contact lists and input recipient information into the Play MPE® platform. When our customers do not have sufficient resources to maintain contacts for music influencers, or wish to supplement their own distribution channels, the Play MPE® list management team maintains recipient distribution channels. These channels are presented for sale and are separated by numerous factors including the recipient type, genre of music, geographic location etc. Currently, Play MPE® maintains selectable distribution lists in 12 countries across 4 continents (North America, Europe, Australasia, and Africa). Play MPE® also provides 4 distribution lists that have a more global presence with several countries being represented. We are unaware of any other system with such a broad offering of lists. These lists offer significant value to all customers, but are particularly valuable in the sales process to smaller independent labels. Currently, the Play MPE® product and engineering staff are developing new technical processes to facilitate list development and maintenance. With these technical solutions, it is expected that existing Play MPE® list management staff will increase the capacity to develop and maintain available lists and thereby increase saleable lists. This will be especially advantageous as Play MPE® expands into new territories. Recipients benefit from an easy-to-use player and player apps (iOS and Android) with many features that promote use, review, search and collaboration. Players are currently available in English, Spanish, Swedish, Finnish, Italian, Dutch, Portuguese, French, Japanese, German, Norwegian, Latvian, Lithuanian, Estonian, and Danish. During the year, the Company added features to the player side of the platform that include advanced recipient authentication, advanced search and content sorting features. These features improve the ease-of-use and utility of the platform to its recipients. These features were added to the mobile player apps released just following fiscal 2020 year-end. Also added to the mobile apps were an off-line listening capability, the ability to utilize Google Chromecast and Apple Airplay streaming capabilities for greater recipient collaboration, additional playlists, sorting, flagging and archiving features, and easier to access release metadata. All of these features greatly enhance the recipient side of the platform. Recipient side satisfaction directly increases activity and lead generation for record label customers. Customers are generally either enterprise customers with full access to Caster (the distribution side of the Play MPE® platform), or full-service customers. Full-service customers use a simplified version of Caster (the "uploader") which gives these customers limited capabilities. Play MPE® staff then complete the release, quote the distribution and collect payment. Caster is the world's largest and most sophisticated distribution platform and has a broad range of features essential to our customers. Caster can be grouped into several components that include administrative modules (label, staff, asset and list management), release creator/replication/management modules, a reporting module, and security features. Not all features are used by all customers. For example, the security, administration and release replication features are critical to our global agreement with Universal, while the provision of distribution lists are more important to smaller "indies". The richness of the offering within Play MPE® caters to a wide assortment of stakeholders, increases content flow, promotes activity and improves the success of the marketing investment made by our customers. Play MPE® has direct and indirect positive impacts to record label revenue. The release creator module of Caster underwent a major restructure and upgrade in fiscal 2020 which launched in Q1 of 2021. This new release creator is easier to use, more intuitive, has more powerful notification creation features and notification template saving. The Company expects that this module will result in increased use by our enterprise customers. This is also the first step to allow non-enterprise customers to fully self-serve. The Company will build out a "checkout" feature that will not require Play MPE® staff to be involved in the release distribution and sale. The Company expects that this will allow greater scalability of the platform as it expands globally. During fiscal 2020, the Company added the "localization" capabilities of Caster. This feature supports easy translation of the platform and allowed the addition of Spanish, German, Japanese and French, in addition to English, languages to Caster during the year. The expansion of languages was undertaken to facilitate the expansion of Play MPE® in non-English speaking countries. During Q2 2021, Caster's release creator tool was updated to provide additional template management functionality which provides flexibility in creating and sharing email templates. This streamlines release creation for our enterprise customers. During the third quarter the Company's software engineering group continued to focus on, and develop, enhancements to global release management features which are designed to expand global use by international labels. The engineering group is also investigating various technologies to expand the Company's addressable market. These features primarily improve the salability of the platform as the Company targets significant global expansion. The Company's new market development initiatives include the Canadian, Latin, South African, and USA markets. Activity levels within the platform increased over the same quarter in the prior year. Releases (a unique piece of music content with accompanying metadata uploaded into the platform) increased by 2.3%, and sends (the number of destinations selected) grew by 26.5%. Further, the number of tracks within each release grew by 20.3%. The Latin initiative continued to make progress with the commencement of distributions by Warner Music Latina and Sony in Central America at the beginning of the third quarter, along with additional trial usage by several independent Latin labels. The Company continued to make improvements to its business development team during the quarter in an effort to strengthen customer relationships. These improvements have provided immediate benefits with growing usage with major label use in the United States. This growing use has been seen with major labels with new use in new departments. In May, the Company entered added a two year agreement with a large subdivision of a major record label in the United States. The Company sees tremendous potential to grow market share with investments in product development and business development staff. The Company is targeting growth in its core Play MPE® business by expanding the use of Play MPE® into new market segments and by expanding our addressable market through the addition of new saleable products and services by adding technologies within the Play MPE® platform. In the third quarter, the Company's marketing team focused on increasing brand awareness both globally and specifically in the Latin, Canadian and US markets. Advertising campaigns were completed in each market, and included display, newsletter, and editorial content. Play MPE® sponsored the global International Songwriting Competition. In Canada, the Company partnered with the Toyota Searchlight music competition and partnered with the Country Music Association of Ontario. In the Latin market, the Company sponsored the Latin Alternative Music Conference. During the quarter the Company added to our software engineering, and product design teams. The Company continues to recruit primarily for software engineering capacity. Clipstream® The Company also has a legacy business, Clipstream®, in the online video industry for which it is pursuing strategic alternatives. The Clipstream® Online Video Platform (OVP) is a self-service system, for encoding, hosting and reporting on video playback which can be embedded in third party websites or emails. Playback is currently through the Company's proprietary JavaScript codec engine, which is only available on the internet through the Company. The unique software-based approach to rendering video, has patents claiming initial priority to 2011. This product has incidental revenues and is not supported or marketed. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED MAY 31, 2021 AND 2020 Revenue Total revenue for the nine months ending May 31, 2021 increased by approximately 12% ($3,138,663 in 2021 - $2,792,458 in 2020). Play MPE® represents virtually all the Company's revenue. Play MPE®'s year to date revenue grew by 13% (or 8% after adjusting for favorable foreign exchange). Play MPE® continued to experience high growth in the independent labels in the United States, Europe, and Australia with an average revenue growth of 32% in this segment. Total revenue for the three-month period ended May 31, 2021 increased by 15% over the comparable quarter in fiscal 2020, to $1,083,987 (2020 - $939,873) (10% after adjustment for favorable foreign exchange). Play MPE® had high growth in the independent labels in the United States, Europe, and Australia with an average revenue growth of 30% in the quarter. Operating Expenses Overview As our technologies and products are developed and maintained in-house, the majority of our expenditures are on salaries and wages and associated expenses such as office space, supplies and benefits. Our operations are primarily conducted in Canada and therefore, our costs are primarily incurred in Canadian dollars while our revenues are primarily denominated in Euros and US dollars. Thus, operating expenses and the results of operations are impacted, to the extent they are not hedged, by the rise and fall of the relative values of the Canadian dollar to these currencies. The Company maintains a large portion of its financial reserves in Canadian dollars to mitigate the downside risk of adverse exchange rates on its operating expenditures. Operating costs during the nine-month period ended May 31, 2021 increased by 0.4% to $2,570,979 (2020 - $2,559,608). Operating costs, in both the current nine-month period and the comparative period, include one-time, non-recuring costs associated with corporate restructuring. For ease of comparison, the following table has removed these costs. Total overall costs, adjusted for the one-time costs associated with staff restructuring, increased by 8.5%. This increase in costs is caused by increased investments in business development, marketing, and product design and development staffing designed to accelerate product development and revenue growth. Also increasing overall costs are impacts from foreign exchange losses caused by the weakening of the US dollar. Foreign exchange gains and losses are generally temporary in nature and normally substantially reverse over time. The total increase for the nine-month period has been partially offset by the abovementioned reduction in business development related travel costs caused by COVID-19 pandemic travel restrictions. May 31 May 31 2021 2020 (9 months) (9 months) Change Change $ $ $ % Total operating expenditures 2,570,979 2,559,608 11,371 0.4% Non-recurring (one-time) costs (123,102 ) (302,880 ) 179,778 (59.4%) Adjusted total expenditures 2,447,877 2,256,728 191,149 8.5% General and administrative May 31 May 31 2021 2020 (9 months) (9 months) Change Change $ $ $ % Bad debt (4,444 ) 13,672 (18,116 ) (132.5%) Office and miscellaneous 110,022 117,043 (7,021 ) (6.0%) Foreign exchange (gain)/loss 21,838 (23,364 ) 45,202 (193.5%) Professional fees 169,291 227,552 (58,261 ) (25.6%) Rent 15,391 17,169 (1,778 ) (10.4%) Telecommunications 2,045 2,205 (160 ) (7.3%) Travel 3,237 5,541 (2,304 ) (41.6%) Wages and benefits 209,442 348,849 (139,407 ) (40.0%) 526,822 708,667 (181,845 ) (25.7%) Our general and administrative expenses consist of salaries and related personnel costs including overhead, office rent, and general office supplies. General and administrative costs also include professional fees and general travel expenditures. The decrease in professional fees and wages and benefits is the result of staff restructuring and related professional fees, and professional fees share consolidation activities in 2020. Sales and marketing May 31 May 31 2021 2020 (9 months) (9 months) Change Change $ $ $ % Advertising and marketing 36,498 93,206 (56,708 ) (60.8%) Rent 91,017 93,163 (2,146 ) (2.3%) Telecommunications 13,729 12,942 787 6.1% Wages and benefits 863,595 587,535 276,060 47.0% 1,004,839 786,846 217,993 27.7% Sales and marketing expenses consist of salaries and related personnel costs including overhead, office rent, and telecommunications costs. Sales and marketing expenses also include advertising and marketing expenditures, which consist of promotional materials, online or print advertising, business development tools, and marketing or business development related travel costs including attendance at conference or trade shows, and record label and client visits. The increase in staffing costs primarily relates to the employment of additional staff designed to grow and enhance business development activities. The decrease in advertising and marketing expenses is related to decreased travel expenditures for our staff to attend label visits and industry events. Product Development May 31 May 31 2021 2020 (9 months) (9 months) Change Change $ $ $ % Rent 69,015 82,081 (13,066 ) (15.9%) Software services 53,733 57,490 (3,757 ) (6.5%) Telecommunications 52,396 52,641 (245 ) (0.5%) Wages and benefits 786,786 771,139 15,647 2.0% 961,930 963,351 (1,421 ) (0.1%) Product development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. The increase in wages and benefits is related to an increase in staffing in product development, offset by $63,554 capitalized as internal use software in the quarter. Depreciation and Amortization Depreciation and amortization expense decreased to $77,388 for the nine-month period ended May 31, 2021 from $100,744 for the period ended May 31, 2020, a decrease of 23.2% due to a decrease in computer software costs associated with externally developed Play MPE® recipient player applications. Other earnings and expenses Interest income was $3,162 for the nine-month period ended May 31, 2021 (2020: $19,743) and is derived from one-year Guaranteed Investment Certificates. Net income During the nine-month period ended May 31, 2021 we had net income of $290,830 (2020 - $11,226). Overall, an increase in revenue was accompanied by budgeted spending on staffing and marketing, advertising costs, and internal use software development, as discussed above. For the three-month period ended May 31, 2021, adjusted EBITDA was $108,577 (2020 - EBITDA $98,103). Adjusted EBITDA is not defined under generally accepted accounting principles ("GAAP") and it may not be comparable to similarly titled measures reported by other companies. We used Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe Adjusted EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to Adjusted EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of net income (loss) from operations to Adjusted EBITDA over the eight most recently completed fiscal quarters: 2021 Q3 2021 Q2 2021 Q1 2020 Q4 2020 Q3 2020 Q2 2020 Q1 2019 Q4 $ $ $ $ $ $ $ $ Net Income (loss) 69,594 (29,466 ) 250,702 158,187 54,899 (155,331 ) 111,658 114,157 Amortization, stock-based compensation and deferred leasehold inducements 39,806 39,533 37,164 49,085 48,470 37,307 49,140 34,983 Interest income (823 ) (875 ) (1,464 ) (4,672 ) (5,266 ) (8,110 ) (6,367 ) (5,999 ) Adjusted EBITDA 108,577 9,192 286,402 202,600 98,103 (126,134 ) 154,431 143,141 LIQUIDITY AND FINANCIAL CONDITION As at May 31, 2021, we held $2,934,575 (August 31, 2020 - $2,622,830) in cash and cash equivalents and short-term investments. Our short-term investments consisted of one-year Guaranteed Investment Certificates (GICs) held through a major Canadian financial institution, and had reached maturity prior to May 31, 2021 (August 31, 2020: $781,490). At May 31, 2021, we had working capital of $2,659,091 compared to $2,423,774 as at August 31, 2020. During the three-month period ended May 31, 2021, the Company completed NCIB purchases totaling $173,678. Total NCIB purchases for the nine-month period ended May 31, 2021 totaled $218,682. Net cash provided by operating activities for the nine-month period ended May 31, 2021 was $437,538 (2020: net cash used in operating activities of $234,343). The primary reason for the increase in cash flows from operating activities is due to an increase in operating revenues, and software under development, as described above. Net cash provided by investing activities for the nine-month period ended May 31, 2021 was $702,412 (2020: cash used in investing activities of $797,612). During the nine-month period ended May 31, 2021, $800,624 was received on the maturity of our GICs, and $63,554 used in software under development. Net cash used in financing activities during the nine-month period ended May 31, 2021 was $218,682 (2020: $533,223), related to cash used to repurchase and retire 155,685 shares of common stock (2020: 550,140 shares of common stock) of the Company under the NCIB. CRITICAL ACCOUNTING POLICIES We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable in the circumstances. Actual results may differ from these estimates. There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended August 31, 2020 as filed with the SEC on November 18, 2020 except for those described in Note 8, "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q. NEW ACCOUNTING PRONOUNCEMENTS Please refer to Note 8 "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.