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Item 7. Management’s Discussion and Analysis

2021-11-23 compared with 2020-11-18 · 41 added, 39 removed, 132 unchanged (38% of the section changed)

4 unchanged sentences

RESULTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, 2021 AND 2020

Total revenue for the year ended August 31, 2020 increased by 0.4% over the same period in the prior year to $3,824,565 (2019 - $3,809,092) or by 1.8% adjusted for negative impacts of foreign currency fluctuations.

Total revenue for the year ended August 31, 2021 increased by 9.1% over the same period in the prior year to $4,172,473 (2020 - $3,824,565) or by 5.4% adjusted for impacts of foreign currency fluctuations.

Representing virtually all of our 2021 revenue, Play MPE® revenue increased by 9.3% year over year to $4,152,881 (2020:

$3,752,715) or 2.7% adjusted for unfavorable foreign currency fluctuations.

The increase in Play MPE® revenue was seen from all geographic regions in which the we operate.

The relative strength of the US dollar observed earlier in the fiscal year and in the prior year reversed as the US dollar declined in Q4.

Play MPE® revenue grew by 7.1% in Q4 or 5.1% when adjusted for the favorable foreign currency fluctuations observed in Q4.

$3,798,317) or 5.6% adjusted for foreign currency fluctuations.

The increase in Play MPE® revenue was seen from all geographic regions in which the we operate, other than Australasia.

The Company's revenues are denominated predominantly in US Dollars, Euros and Australian Dollars.

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Total Revenue

Revenue growth has been modest as the Company has undergone significant restructuring of its management team and business development group, refocused on its core Play MPE® business and has commenced seeding network use to expand territories.

2020 represents the Company's fourth year of revenue growth as it makes investments for larger revenue growth.

Negative impacts on pricing and use with one of our Major Label customers were offset by large increases in independent record label revenue.

Through the first three quarters of the year, independent record label grew by 7.8%.

In Q4, that segment grew by 42.5% for a total increase for the year of 16.3% for the year.

Fiscal 2021 revenue growth has been a result of significant restructuring of the company's management team and business development group in 2020, refocusing on its core Play MPE® business and the commencement of seeding network use to expand territories.

Independent record label revenue grew by 23.1% for the year.

The majority of growth in this segment came from an increase in leads, lead conversion and average revenue per sale within existing territories where Play MPE® has well established use.

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These new territories include the UK, Jazz globally, South Africa, newer genres of music in the US, and Canada.

Gross margin for the year ended August 31, 2020 was 92%, which is comparable to the year ended August 31, 2019.

Gross margin for the year ended August 31, 2021 was 91% of revenue, which is comparable to the year ended August 31, 2020.

The Company's cost of revenue consists of data hosting and processing charges, third party transaction related costs, and engineering, technical and customer support costs.

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The Company maintains a large portion of its financial reserves in Canadian dollars to mitigate the downside risk of adverse exchange rates.

Overall operating costs increased by 15.2% to $3,360,953 (2019 - $2,917,935) during the year ended August 31, 2020, largely driven by an increase in staffing costs, and an increase in marketing, business development and promotional expenses.

Overall staffing costs increased by 17.1% as a result of the addition of sales and marketing staff and product development staff.

Overall operating costs remained flat at $3,400,050 during the year ended August 31, 2021 (2020 - $3,360,953).

Cost reductions in rent, marketing and various administrative costs were offset by an increase in costs generally as the Canadian rose relative to the US dollar.

The Company also increased spending on business development, marketing and product development staff but this increased cost was offset by software product development costs were capitalized as the Company began significant investments into a new product designed to expand the Company's addressable market.

Advertising and marketing expenses decreased by 42% as a result of decreased public relations efforts as a result of the covid-19 pandemic, as more fully described below.

Included in overall operating expenditures is approximately $272,000 in costs associated with one-time restructuring.

The Company made significant efforts to improve its business development and software engineering teams.

Also included in overall operating costs are expenses invested in improvements in the Play MPE® platform and business relationships designed to result in longer term sustained revenue growth.

Neither of these costs have an immediate impact on revenue but are designed to have a long lasting and sustained improvement in revenue as the Company expands, adds territories and expands its addressable market.

Included in overall operating expenditures is approximately $155,000 in one-time restructuring costs.

The Company made significant efforts to improve its business development team and add to its product design and development team.

Improvements made to the business development team may have shorter term benefits to revenue but are designed to have significant improvements over the longer term as we expand to new markets.

General and administrative

Office and miscellaneous

Foreign exchange

Professional fees

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General and administrative costs also include professional fees and general and administrative travel expenditures.

The increase in office and miscellaneous expense relates to transitionary expenses associated with changes in office services and an increase in realized foreign exchange losses as a result of fluctuating foreign currency exchange rates.

The decrease in wages and benefits relates to restructuring charges incurred in the year ended August 31, 2020.

Sales and marketing

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Sales and marketing also includes advertising and marketing expenses, which consists of promotional materials, online or print advertising, business development tools, and marketing or business development related travel costs including attendance at conferences and trade shows, and label visits.

The increase in advertising and marketing expenses relates to additional expenses incurred in respect of public relations initiatives, and increased marketing and business development related travel.

The decrease in advertising and marketing expenses relates to reduced expenses incurred in respect of public relations initiatives, and reduced marketing and business development related travel due to the impacts of COVID-19.

The increase in wages and benefits is associated with an increase in staffing in this department.

We hired a marketing manager, and additional inside and outside business development associates and consultants.

We hired additional account executives and product development associates and consultants.

Product Development

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Product development also includes consulting fees with respect to product development and deployment.

The increase in wages and benefits is attributable to overall increased staffing with respect to product development and software development.

The decrease in telecommunications and software services is associated with the characterization of certain costs to operations and savings resulting from changes in services and providers.

The decrease in wages and benefits is related to an increase in staffing in product development, offset by $167,069 capitalized as software under development in fiscal 2021, resulting in an overall increase in expenditure for the year ended August 31, 2021.

Depreciation and amortization

Depreciation and amortization arise from property and equipment and from patents and trademarks.

Depreciation and amortization increased to $135,385 for the year ended August 31, 2020 from $96,846 for the year ended August 31, 2019, an increase of $38,539 or 39.8% from a combination of an overall increase in the capital asset balances subject to amortization.

Depreciation and amortization decreased to $105,357 for the year ended August 31, 2021 from $135,385 for the year ended August 31, 2020, a decrease of $30,028 or 22.2%.

Other earnings and expenses

Interest income decreased to $4,031 for the year ended August 31, 2021 from $24,415 for the year ended August 31, 2020, a decrease of $20,384.

The decrease is related to the maturity of certain one-year guaranteed investment certificates during the year.

The decrease is related to the maturity of our one-year guaranteed investment certificates during the year.

During the year ended August 31, 2021 we reported net income of $382,529 (2020 - $169,415).

The decrease in net income is attributable to a combination of (1) negative foreign exchange fluctuations on our reported revenues and (2) an increase in certain operating expenses such as salaries and wages and marketing, as more fully described above.

The increase in net income is attributable to a combination of (1) increased reported revenues and (2) an increase in certain operating expenses such as salaries and wages and marketing, as more fully described above.

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.

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LIQUIDITY AND FINANCIAL CONDITION

Our cash and cash equivalents and short-term investments balance decreased by $269,364 during the year ended August 31, 2020 to $2,622,830 (2019 - $2,892,194).

At August 31, 2020, we held $1,841,340 (August 31, 2019 - $2,512,138) in cash and cash equivalents and $781,490 (2019 - $380,056) in short term investments consisting of one-year Guaranteed Investment Certificates held through a major Canadian financial institution.

Our cash and cash equivalents and short-term investments balance increased by $129,832 during the year ended August 31, 2021 to $2,752,662 (2020 - $2,622,830).

At August 31, 2021, we held $2,752,662 (August 31, 2020 - $1,841,340) in cash and cash equivalents and $nil (2020 - $781,490) in short term investments consisting of one-year Guaranteed Investment Certificates held through a major Canadian financial institution.

At August 31, 2021, we had working capital of $2,561,480 compared to $2,423,774 as at August 31, 2020.

The decrease in our working capital was primarily due the adoption of ASU 842 - Leases on September 1, 2019.

The increase in our working capital was primarily due our increased cash and cash equivalents at August 31, 2021.

At August 31, 2021, $2,367,337 in cash and short-term investments were held outside of the United States.

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Net cash provided in operating activities was $528,922 for the year ended August 31, 2021, compared to $272,213 for the year ended August 31, 2020.

The decrease is mainly attributable to the timing of receipts from our customers.

The cash used by investing activities was $433,859 for the year ended August 31, 2020, compared to cash utilized in investing activities of $591,621 for the year ended August 31, 2019.

The increase in cash provided by investing activities is a result of the purchase of short-term investments, consisting of one-year Guaranteed Investment Certificates, at August 31, 2020, offset by an investment in new capital assets and internally developed software.

Cash used in financing activities was $533,223 for the year ended August 31, 2020, consisting of the repurchase of common stock of the company for retirement under the normal course issuer bid announced in September 2019.

Cash used in or provided by financing activities during each of the fiscal year ended August 31, 2019, was $2,005.

The increase is mainly attributable to the timing of receipts from our customers.

The cash provided by investing activities was $590,885 for the year ended August 31, 2021, compared to cash used in investing activities of $433,859 for the year ended August 31, 2020.

The increase in cash provided by investing activities is a result of the maturity of short-term investments, consisting of one-year Guaranteed Investment Certificates, prior to August 31, 2021, offset by an investment in new capital assets and internally developed software.

Cash used in financing activities was $260,405 for the year ended August 31, 2021, consisting of the repurchase of common stock of the company for retirement under the normal course issuer bid announced in January 2021.

Cash used in financing activities during each of the fiscal year ended August 31, 2020, was $533,223.

CAPITAL RESOURCES

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Research and Development Expense for Software Products

Research and development expense includes costs incurred to develop intellectual property.

The costs for the development of new software and substantial enhancements to existing software within the scope of ASC 985-20 Software - Costs of Software to be Sold, Leased or Marketed are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized.

We have determined that technological feasibility is established at the time a working model of software is completed.

Because we believe our current process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

Significant management judgments and estimates must be made in connection with determination of any amounts identified for capitalization as software development costs in any accounting period.

If we made different judgments or utilized different estimates for any period material differences in the amount and timing of capitalized development costs could occur.

Our software solutions are offered to our customers through software as a service delivery models.

Development costs associated with the certain solutions offered exclusively through a software as a service model are accounted for in accordance with ASC 350-40.

Internal-Use Software.

All other client solution development costs, which represent a significant majority of development costs, are accounted for in accordance with ASC 985-20.

Costs of Software to be Sold, Leased or Marketed.

Under ASC 985-20, software development costs incurred in creating computer software solutions are expensed until technological feasibility has been established upon completion of a detailed program design.

Thereafter, all software development costs incurred through the -software's general release date are capitalized and subsequently recorded at the lower of amortized cost or net realizable value.

Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution.

We amortize capitalized costs over five years.

Under ASC 350-40, software development costs related to preliminary project activities and post-implementation and maintenance activities are expensed as incurred.

We capitalize direct costs related to application development activities that are probable to result in additional functionality.

Capitalized costs are amortized on a straight-line basis over five years.

We test for impairment whenever events or changes in circumstances that could impact recoverability occur.

Accounts Receivable and Allowance for Doubtful Accounts

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis