DESTINY MEDIA TECHNOLOGIES INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Audited Consolidated Financial Statements for the Years Ended August 31, 2021 and 2020: 1. Report of Independent Registered Public Accounting Firm - Davidson & Company LLP; 2. Consolidated Balance Sheets as at August 31, 2021 and 2020; 3. Consolidated Statement of Comprehensive Income for the Years Ended August 31, 2021 and 2020; 4. Consolidated Statement of Changes in Stockholders' Equity for the Years Ended August 31, 2021 and 2020; 5. Consolidated Statement of Cash Flows for the Years Ended August 31, 2021 and 2020; 6. Notes to Consolidated Financial Statements. 24 Consolidated Financial Statements Destiny Media Technologies Inc. August 31, 2021 and 2020 (Expressed in United States dollars) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of Destiny Media Technologies Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Destiny Media Technologies Inc. (the "Company") as of August 31, 2021 and 2020, and the related consolidated statements of comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the two year period ended August 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended August 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. We have determined that there are no critical audit matters to communicate in our auditor's report. We have served as the Company's auditor since 2019. /s/ DAVIDSON & COMPANY LLP Vancouver, Canada Chartered Professional Accountants November 23, 2021 F-2 Destiny Media Technologies Inc. CONSOLIDATED BALANCE SHEETS As at August 31, (Expressed in United States dollars) 2021 2020 $ $ ASSETS Current Cash and cash equivalents 2,752,662 1,841,340 Short-term investments [note 3] - 781,490 Accounts receivable, net of allowance for doubtful accounts of $19,743 [2020 - $23,412] [note 10] 400,233 426,832 Other receivables 53,172 26,083 Prepaid expenses 103,463 78,562 Total current assets 3,309,530 3,154,307 Deposits 35,556 34,316 Property and equipment, net [note 4] 143,487 194,277 Intangible assets, net [note 4] 187,622 22,952 Right of use assets [note 5] 190,253 403,961 Total assets 3,866,448 3,809,813 LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable 202,722 119,399 Accrued liabilities 309,839 353,235 Deferred revenue 8,511 19,638 Operating lease liability [note 5] 226,978 238,261 Total current liabilities 748,050 730,533 Operating lease liability, net of current portion [note 5] - 219,063 Total liabilities 748,050 949,596 Commitments and contingencies [note 5, 8 and 9] Stockholders' equity Common stock, par value $0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,265,361 shares [2020 - issued and outstanding 10,450,646 shares] 10,266 10,451 Additional paid-in capital [ note 6 ] 9,157,804 9,366,290 Accumulated deficit (5,788,539 ) (6,171,068 ) Accumulated other comprehensive loss (261,133 ) (345,456 ) Total stockholders' equity 3,118,398 2,860,217 Total liabilities and stockholders' equity 3,866,448 3,809,813 Subsequent Events [note 12] See accompanying notes F-3 Destiny Media Technologies Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended August 31, (Expressed in United States dollars) 2021 2020 $ $ Service revenue [note 10] 4,172,473 3,824,565 Cost of revenue Hosting costs 131,325 106,804 Internal engineering support 29,723 24,303 Customer support 168,428 137,720 Third party and transaction costs 64,449 49,806 393,925 318,633 Gross Margin 3,778,548 3,505,932 91% 92% Operating expenses General and administrative 666,485 798,120 Sales and marketing 1,433,232 1,084,364 Product development 1,194,976 1,343,084 Depreciation and amortization [note 4] 105,357 135,385 3,400,050 3,360,953 Income from operations 378,498 144,979 Other income Interest income 4,031 24,415 Other income - 21 Income before provision for income taxes 382,529 169,415 Income tax expense - deferred [note 7] - - Net income 382,529 169,415 Foreign currency translation adjustment 84,323 46,403 Total comprehensive income 466,852 215,818 Net income per common share, basic 0.04 0.02 Net income per common share, diluted 0.04 0.02 Weighted average common shares outstanding: Basic 10,415,105 10,602,346 Diluted 10,491,849 10,602,346 See accompanying notes F-4 Destiny Media Technologies Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended August 31, (Expressed in United States dollars) Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital Deficit loss equity # $ $ $ $ $ Balance, August 31, 2019 11,000,786 11,001 9,850,348 (6,340,483 ) (391,859 ) 3,129,007 Total comprehensive income - - - 169,415 46,403 215,818 Shares repurchased for cancellation (550,140 ) (550 ) (532,673 ) - - (533,223 ) Stock based compensation - Note 6 - - 48,615 - - 48,615 Balance, August 31, 2020 10,450,646 10,451 9,366,290 (6,171,068 ) (345,456 ) 2,860,217 Total comprehensive income - - - 382,529 84,323 466,852 Shares repurchased for cancellation (185,285 ) (185 ) (260,220 ) - - (260,405 ) Stock based compensation - Note 6 - - 51,734 - - 51,734 Balance, August 31, 2021 10,265,361 10,266 9,157,804 (5,788,539 ) (261,133 ) 3,118,398 See accompanying notes F-5 Destiny Media Technologies Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended August 31, (Expressed in United States dollars) 2021 2020 $ $ OPERATING ACTIVITIES Net income 382,529 169,415 Items not involving cash: Depreciation and amortization 105,357 135,385 Stock-based compensation 51,734 48,615 Deferred leasehold inducement - - Unrealized foreign exchange (15,840 ) (13,395 ) Allowance for doubtful accounts (4,483 ) 22,731 Changes in non-cash working capital: Accounts receivable 46,200 (108,795 ) Other receivables (26,144 ) (11,334 ) Prepaid expenses and deposits (23,062 ) (669 ) Accounts payable 90,792 (81,904 ) Accrued liabilities (66,408 ) 110,622 Deferred revenue (11,753 ) (4,046 ) Right of use Liability - 5,588 Net cash provided by operating activities 528,922 272,213 INVESTING ACTIVITIES Purchase of property, equipment and intangibles (44,768 ) (64,065 ) Development of software (169,364 ) - Sales (Purchase) of short-term investments 805,017 (369,794 ) Net cash provided by (used in) investing activities 590,885 (433,859 ) FINANCING ACTIVITY Common stock repurchased for cancellation (260,405 ) (533,223 ) Net cash used in financing activity (260,405 ) (533,223 ) Effect of foreign exchange rate changes on cash 51,920 24,071 Net increase (decrease) in cash and cash equivalents during the year 911,322 (670,798 ) Cash and cash equivalents, beginning of year 1,841,340 2,512,138 Cash and cash equivalents, end of year 2,752,662 1,841,340 Supplementary disclosure Interest paid - - Income taxes paid - - See accompanying notes F-6 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 1. ORGANIZATION Destiny Media Technologies Inc. (the "Company") was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. The Company develops technologies that allow for the distribution over the internet of digital media files in either a streaming or digital download format. The technologies are proprietary. The Company operates out of Vancouver, BC, Canada and serves customers predominantly located in the United States, Europe and Australia. The Company's stock is listed for trading under the symbol "DSNY" on the OTCQB U.S. in the United States, under the symbol "DSY" on the TSX Venture Exchange and under the symbol "DME" on the Berlin, Frankfurt, Xetra and Stuttgart exchanges in Germany. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies used in the preparation of these consolidated financial statements: Basis of presentation and fiscal year These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The Company's fiscal year-end is August 31. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Destiny Software Productions Inc., MPE Distribution Inc., and Sonox Digital Inc. All inter-company balances and transactions have been eliminated on consolidation. F-7 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Use of estimates The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to revenue recognition, estimated useful lives for property and equipment, allowances for doubtful accounts, stock-based compensation expense, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and actual results, our future results of operations will be affected. Cash and cash equivalents We consider all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. Short-term investments We classify our short-term investments as held-for-maturity. Our investments classified as held-for-maturity are recorded at amortized cost, which their carrying values approximate fair value. Interest earned on the short-term investments are included in interest income. F-8 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition The Company's revenue is derived from software as a service (SaaS) arrangements. The Company accounts for revenue in accordance with ASC 606. The core principle of ASC 606 is to recognize revenue upon the transfer of products or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services. ASC 606 prescribes a five-step model for recognizing revenue from contracts with customers: (1) identify the contract(s) with customers; (2) identify the separate performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the separate performance obligations in the contract; and (5) recognize revenue when (or as) the performance obligations are satisfied. The Company applies the five-step model to recognize revenue as follows: Identification of the contract, or contracts, with the customer The Company considers the terms and conditions of written contracts and its customary business practices in identifying its contracts under ASC 606. The Company determines that it has a contract with a customer when the contract is approved, the Company can identify each party's rights regarding the services to be transferred, the Company can identify the payment terms for the services, the Company has determined that the customer has the ability and intent to pay, and the contract has commercial substance. In general, contract terms will be reflected in a written document that is signed by both parties. Identification of the performance obligation in the contract Performance obligations are promises in a contract to transfer distinct products or services to a customer, and is the unit of account under ASC 606. A contract's transaction price is allocated to each distinct performance obligation and revenue is recognized when the performance obligation is satisfied. A product or service is a distinct performance obligation if the customer can both benefit from the product or service either on its own or together with other resources that are readily available to the customer, and it is separately identifiable from other items within the context of the contract. Performance obligations are satisfied by transferring control of the product or service to the customer. Control of the product or service is transferred either at a point in time or over time depending on the performance obligation. To the extent a contract includes multiple promised services or products, the Company applies judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services are accounted for as a combined performance obligation. F-9 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition (cont'd.) The Company generates revenue primarily from usage fees for the Company's digital media distribution service. Usage fees are generally recognized as they are billed based on volume and size of distribution services provided in a given month. The Company's other performance obligations include maintenance services, email and phone support, and unspecified software updates released when, and if, available. Under the guidance of ASC 606, the Company has concluded that maintenance services and unspecified software upgrades are not distinct in the context of the Company's contracts because the Company's service is considered a multi-tenant software environment, and these activities represent a single combined performance obligation in connection with the Company's digital media distribution service, recognized at a point in time when the service is delivered to the customer. Support activities are considered a separate performance obligation which is satisfied over time; however, such activities are performed substantially concurrently with the satisfaction of digital media distribution services. From time to time, certain of the Company's contracts contain additional separate performance obligations, including specific enhancements and upgrades. Determination of the transaction price The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for providing services to the customer. Digital media distribution services may be subject to either fixed or variable pricing. Variable consideration is allocated entirely to distinct service periods when it can be tied to a single performance obligation. Variable consideration is estimated and included in the transaction price if, in the Company's judgment, it is probable that there will not be a significant future reversal of cumulative revenue under the contract. When variable consideration is contingent and cannot be tied to a single performance obligation performed in a particular billing period, the Company estimates contingent variable consideration using the most likely method and recognizes consideration to the extent that the estimate for variable consideration is not constrained pursuant to the guidance provided in ASU 606. A significant financing component generally does not exist under the Company's standard contracting and billing practices. F-10 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition (cont'd.) Allocation of the transaction price to the performance obligations in the contract If the contract contains a single combined performance obligation, the entire transaction price is allocated to the single combined performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on its standalone selling price ("SSP") in relation to the total fair value of all performance obligations in the arrangement. The majority of the Company's contracts contain two separate performance obligations that are performed concurrently. The Company allocates consideration to each performance obligation under the guidance of ASC 606 on a relative standalone selling price (SSP) basis. Where SSP is not directly observable, the Company determines the SSP using information that may include market conditions and other observable inputs. Consideration associated with support activities is estimated using a cost-plus reasonable margin approach, as there is no observable SSP. Consideration associated with specified enhancements and upgrades is estimated using a cost-plus reasonable margin approach, as there is no observable SSP. Recognition of revenue when, or as, the Company satisfies a performance obligation The Company recognizes revenue when the services are delivered to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The Company is principally responsible for the satisfaction of its distinct performance obligations, which are satisfied either at a point in time or over a period of time. Performance obligations satisfied at a point in time Media distribution services Media distribution services comprise the majority of distinct performance obligations that are satisfied at a point in time, and revenue is recognized at the point in which the distribution service has been completed. Consideration for these services is typically billed in the same period that the service has been delivered to the customer. Performance obligations satisfied over a period of time Customer support activities comprise the majority of distinct performance obligations that are satisfied over a period of time. F-11 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Revenue recognition (cont'd.) Revenue from support activities is recognized over an estimated support period since this activity is considered a 'stand-ready obligation'. This support period is substantially concurrent with the performance of media distribution services, as these services are performed substantially in conjunction with the related distribution. Any support activities provided outside of this billing period are not considered material. Revenue from specified enhancements and upgrades is recognized over an estimated performance period. Contract Costs Contract costs consists of two components, customer acquisition costs and costs to fulfill a contract. Customer acquisition costs are capitalized only if the costs are incrementally incurred to obtain a customer contract and may consist of sales commissions paid to sales personnel or third-party resellers. Generally, the Company does not incur any contract costs outside of the period that the related revenue is recognized. Contract Modifications Contract modifications may create new, or change existing, enforceable rights and obligations of the parties to the contract. We generally modify an existing contract using an addendum or signed change order. A contract modification is accounted for as a new contract if it reflects an increase in scope that is regarded as distinct from the original contract and is priced in-line with the standalone selling price for the related product or services obligated. If a contract modification is not considered a new contract, the modification is combined with the original contract and the impact on the revenue recognition profile depends on whether the remaining products and services are distinct from the original contract. If the remaining goods or services are distinct from those in the original contract, all remaining performance obligations will be accounted for on a prospective basis with unrecognized consideration allocated to the remaining performance obligations. If the remaining goods or services are not distinct, the modification will be treated as if it were a part of the existing contract, and the effect that the contract modification has on the transaction price, and on our measure of progress toward satisfaction of the performance obligations, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification on a cumulative catch-up basis. F-12 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Cost of revenue Cost of revenue primarily consists of personnel costs for our operations service and technical support employees and engineering support staff, cloud infrastructure costs, incremental transaction costs such as merchant and processing fees, and costs of external customer support software and services. In each case, personnel costs include salaries, benefits and any other compensation paid to such staff. Long-lived assets Long-lived assets held for use are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of property, equipment and intangible assets may not be fully recoverable. Impairment is measured by a two-step process: Step 1) the carrying amount of the asset is compared with its estimated undiscounted future cash flows expected to result from the use of the assets and its eventual disposition. If the carrying amount is lower than the undiscounted future cash-flows, no impairment loss is recognized. Step 2) if the carrying amount is higher than the undiscounted future cash-flows then an impairment loss is measured as the difference between the carrying amount and fair value which may be based on internally developed discounted cash flow estimates, quoted market prices, when available, or independent appraisals. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company's strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. As of August 31, 2021, there were no impairment indicators present. Litigation and settlement costs From time to time, we may be involved in disputes, litigation and other legal actions. In accordance with ASC 450, Contingencies, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. During the year ended August 31, 2021, the Company incurred approximately $92,116 (2020: $103,073) in professional legal fees in connection with legal actions against the Company and legal actions initiated by the Company. These costs are expensed as incurred and are recorded as a component of general and administrative expenses. F-13 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Allowance for doubtful accounts The Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowance amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their fair value due to their short-term nature. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience. Intangible Assets 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. Patents, trademarks and lists are stated at cost. Amortization is taken over the estimated useful lives of the assets and is calculated using the following rates and methods: Patents, trademarks and lists Straight-line over 3 years F-14 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 Property and equipment Property and equipment are stated at cost. Depreciation and amortization is taken over the estimated useful lives of the assets and is calculated using the following rates, and methods, commencing upon utilization of the assets: Furniture and fixtures 20% Computer hardware 30% Computer software 50% Leasehold improvements Straight-line over lease term Translation of foreign currencies The Company's functional currency is the U.S. dollar. Financial statements of foreign operations for which the functional currency is the local currency are translated into U.S. dollars with assets and liabilities translated at the rate of exchange in effect at the balance sheet date and revenue and expense items translated at the average rates for the period. Unrealized gains and losses resulting from the translation of the consolidated financial statements are deferred and accumulated in a separate component of stockholders' equity as a foreign currency translation gain (loss) in accumulated other comprehensive income (loss). Transactions denominated in foreign currencies are translated at the exchange rate in effect on the transaction date. These foreign currency gains and losses are included as a component of general and administrative expenses in the consolidated statements of comprehensive income. The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations. The Company has not entered into contracts for foreign exchange hedges. Advertising Advertising costs are expensed as incurred and totaled $25,921 and $20,260 during the years ended August 31, 2021 and 2020, respectively. F-15 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Income taxes The Company utilizes the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes . Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis that give rise to the differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements. The Company's evaluation was performed for the tax years which remain subject to examination by major tax jurisdictions. The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company's financial results. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense. F-16 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Investment tax credits The Company uses the flow through method to account for investment tax credits earned on eligible scientific research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense. Stock based compensation The Company follows the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Section 718 "Compensation - Stock Compensation", which establishes accounting for equity based compensation awards to be accounted for using the fair value method. Equity-settled share based payment arrangements are initially measured at fair value at the date of grant and recorded within shareholders' equity. The fair value at grant date of all share-based payments is recognized as compensation expense over the period for which benefits of services are expected to be derived, with a corresponding credit to shareholders' equity. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model and estimate the expected forfeiture rate at the date of grant. When awards are forfeited because non-market based vesting conditions are not satisfied, the expense previously recognized is proportionately reversed. Lease accounting In February 2016, the FASB issued ASU 2016-02, Leases , as amended by subsequent standards updates, which requires lessees to recognize right-of-use (ROU) assets and lease liabilities for all leases, with the exception of short-term leases, at the commencement date of each lease. The Company has elected to apply the practical expedient package to not reassess initial direct costs related to leases, whether any expired or existing contracts contained leases and to carry forward historical lease classification. As a result, all leases identified by the Company will continue to be classified as operating leases. In addition, the Company elected to not record short-term leases with an initial term of 12 months or less on its consolidated balance sheets. See Note 5 - Leases for more information. F-17 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Lease accounting (cont'd.) The Company determines if an arrangement is a lease at contract inception by evaluating if the contract conveys the right to control the use of an identified asset during the period of use. A ROU asset represents the Company's right to use an identified asset for the lease term and lease liability represents the Company's obligation to make payments as set forth in the lease arrangement. ROU assets and lease liabilities are included on the Company's consolidated balance sheets beginning September 1, 2019 and are recognized based on the present value of the future minimum lease payments at lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's estimated incremental borrowing rate, because the interest rate implicit in the lease is generally not readily determinable. A ROU asset initially equals the lease liability, adjusted for any lease payments made prior to lease commencement and any lease incentives. All leases are recorded on the consolidated balance sheets except for leases with an initial term of less than 12 months. All of the Company's leases are operating leases. The Company has lease agreements with lease and non-lease components. The lease component is comprised of minimum lease payments which includes base rent and estimated property taxes and insurance. Non-lease components primarily include payments for maintenance and are expensed as incurred. Comprehensive income (loss) Comprehensive income (loss) includes all changes in equity except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income (deficit) consists only of accumulated foreign currency translation adjustments for all years presented. F-18 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Earnings per share Net income per common share (basic) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Net income per common share (diluted) is calculated by dividing net income for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding common share equivalents. This method requires that the dilutive effect of outstanding options and warrants issued be calculated using the treasury stock method. Under the treasury stock method, all common share equivalents have been exercised at the beginning of the period (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the period, but only if dilutive. Year Ended August 31, August 31, 2021 2020 Net income $382,529 $169,415 Weighted average common shares outstanding 10,415,105 10,602,346 Dilutive impact of outstanding stock options 76,744 - Diluted weighted average common shares outstanding 10,491,849 10,602,346 At August 31, 2021, the Company had an aggregate of 410,000 (2020: 400,000) stock options outstanding. F-19 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Fair value measurement The book value of cash and cash equivalents, short-term investments, accounts receivable, other receivables, and accounts payable and accrued liabilities approximate their fair values due to the short-term maturity of those instruments. The fair value hierarchy under GAAP is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2 - observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and Level 3 - assets and liabilities whose significant value drivers are unobservable by little or no market activity and that are significant to the fair value of the assets or liabilities. 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 was 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. F-20 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Recently Adopted Accounting Standards (cont'd.) In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU will be effective for the Company on September 1, 2019. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this guidance did not have a material impact on its 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 will be effective for the Company on September 1, 2020. Early adoption is permitted for any removed or modified disclosures. The adoption of this guidance did not have a material impact on its consolidated financial statements. F-21 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 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 rate of 0.25% (2020: variable rates ranging between 2.15% - 2.17%). 4. PROPERTY AND EQUIPMENT AND INTANGIBLES Accumulated Net book Cost amortization value August 31, 2021 $ $ $ Property and equipment Furniture and fixtures 133,049 114,740 18,309 Computer hardware 293,930 231,180 62,750 Computer software 377,777 333,751 44,026 Leasehold improvements 157,934 139,532 18,402 962,690 819,203 143,487 Intangibles Software under development 167,069 - 167,069 Patents, trademarks, and lists 441,178 420,625 20,553 608,247 420,625 187,622 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 year ended August 31, 2021 was $105,357 (2020: $135,385) F-22 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 5. LEASES The Company entered into an office lease agreement commencing July 1, 2017 and expiring June 30, 2022 consisting of approximately 6,600 square feet. On adoption of ASC 842, Lease Accounting, the Company recognized right-of-use assets and a corresponding increase in lease liabilities, in the amount of $671,911 which represented the present value of future lease payments using a discount rate of 8% per year. Property tax and insurance payments paid to the lessor are included in the calculation of future lease payments. Right of Use Asset Continuity 2021 2020 $ $ Balance, September 1 403,961 671,911 Lease Inducement - (47,607 ) 403,961 624,304 Depreciation (224,154 ) (213,935 ) Foreign Currency Translation Adjustment 10,446 (6,408 ) Balance, August 31 190,253 403,961 The Company has operating lease payments committed as follows: $ 2022 235,388 Total lease payments payable 235,388 Less amounts representing interest (8,410 ) Total Operating Lease Liability 226,978 Less current portion of operating lease liability (226,978 ) Long term portion of operating lease liability - Operating Lease Liability Continuity 2021 2020 $ $ Balance, September 1 457,324 671,911 Less Lease Payments (270,898 ) (253,040 ) Interest 28,714 44,692 Foreign Currency Translation Adjustment 11,838 (6,239 ) Balance, August 31 226,978 457,324 During the year ended August 31, 2021 the Company recorded depreciation expense of $224,154 (2020 - $213,935) which has been allocated between general and administrative expenses, research and development and sales and marketing on the consolidated statement of comprehensive income. The total rent commitment, net of the leasehold improvement allowance, is being amortized to rent expense on a straight-line basis over the term of the lease. F-23 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 6. STOCKHOLDERS' EQUITY 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 year ended August 31, 2021, the Company repurchased and cancelled 185,285 common shares for $260,405. During the year ended August 31, 2020 the Company completed a NCIB, pursuant to which the Company purchased 550,140 shares of common stock in the capital of the Company. Purchases pursuant to the NCIB were made from time to time by RBC Dominion Securities Inc. on behalf of the Company through the facilities of the TSX Venture Exchange at the market price at the time of purchase, subject to daily limits and compliance with the applicable rules of the TSX Venture Exchange and Canadian securities laws. [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. [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. F-24 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) Stock-Based Payment Award Activity A summary of option activity under the Plan as of August 31, 2021 and 2020, and changes during the years ended are presented below: Weighted Weighted Average Aggregate Average Remaining Intrinsic Exercise Price Contractual Value Options Shares $ Term $ Outstanding at August 31, 2019 290,000 1.94 2.96 - Granted 210,000 1.24 5.00 - Forfeited (100,000 ) 1.46 0.80 - Outstanding at August 31, 2020 400,000 1.35 3.24 - Granted 10,000 1.00 4.16 - Forfeited - - - - Outstanding at August 31, 2021 410,000 1.34 2.26 - Exercisable at August 31, 2021 311,250 1.37 2.12 - 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 August 31, 2021. The following table summarizes information regarding the non-vested stock purchase options outstanding as of August 31, 2021: Weighted Average Grant Date Number of Options Fair Value $ Non-vested options at August 31, 2019 30,000 0.38 Granted 210,000 0.49 Forfeited (13,750 ) 0.49 Vested (22,500 ) 0.40 Non-vested options at August 31, 2020 203,750 0.48 Granted 10,000 0.34 Forfeited - - Vested (115,000 ) 0.47 Non-vested options at August 31, 2021 98,750 0.48 F-25 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) As of August 31, 2021, there was $16,472 (2020: $67,203) of total unrecognized compensation cost related to non-vested share-based compensation awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 0.78 (2020: 1.41) years. During the year ended August 31, 2021, the total stock-based compensation expense of $51,734 (2020: $48,615) is reported in the statement of comprehensive income as follows: 2021 2020 $ $ Stock-based compensation General and administrative 18,128 19,850 Sales and marketing 19,299 15,166 Research and development 14,307 13,599 Total stock-based compensation 51,734 48,615 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 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. F-26 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 6. STOCKHOLDERS' EQUITY (cont'd.) [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. Independent 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 will also be responsible for the administration of the Plan on behalf of the Company and the participants. During the year ended August 31, 2021, the Company recognized compensation expense of $93,759 (2020: $64,480) 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 $1.06 (2020: $0.74). As at August 31, 2021 364,757 shares are held in trust by the Company. F-27 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 7. INCOME TAXES The Company is subject to United States federal and state income taxes at an approximate rate of 21.0% and to Canadian federal and British Columbia provincial taxes in Canada at an approximate rate of 27.0%. The reconciliation of the provision (recovery) for income taxes at the United States federal statutory rate compared to the Company's income tax expense is as follows: 2021 2020 $ $ Tax at U.S. statutory rates 80,000 36,000 Permanent differences 13,000 19,000 Effect of higher foreign tax rates in Canada 52,000 31,000 Foreign exchange and other adjustments 376,000 (250,000 ) Change in valuation allowance (521,000 ) 164,000 Provision for deferred income taxes - - Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance for those deferred tax assets for which realization is not likely to occur. Significant components of the Company's deferred tax assets as of August 31 are as follows: 2021 2020 $ $ Deferred tax assets: Net operating loss carryforwards 789,000 1,132,000 Excess of book over tax depreciation 829,000 915,000 Tax Credit Carryforwards 808,000 900,000 Total deferred tax asset 2,426,000 2,947,000 Valuation allowance (2,426,000 ) (2,947,000 ) Net deferred tax asset - - F-28 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 7. INCOME TAXES (Cont'd) Net income (loss) before income tax by geographic region is as follows: 2021 2020 $ $ United States (483,537 ) (369,579 ) Canada 866,066 538,994 382,529 169,415 If not utilized to reduce future taxable income, the Company's net operating loss carryforwards will expire as follows: Canada United States $ $ 2022 and thereafter - 3,758,000 - 3,758,000 If not utilized to reduce future taxable payable, the Company's investment tax credit carryforwards will expire as follows: Canada United States $ $ 2030 and thereafter 994,000 - 994,000 - F-29 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 8. COMMITMENTS The Company's property lease agreement commenced on July 1, 2017 and expiring June 30, 2022. Details of the lease agreement are included in Note 5. 9. 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 will defend 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. F-30 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 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: 2021 2020 $ $ Play MPE® North America 1,893,288 1,696,654 Europe 1,978,516 1,826,582 Australasia 272,485 273,737 Other 8,592 1,344 Total Play MPE® Revenue 4,152,881 3,798,317 Clipstream ® United States 19,592 26,248 Total Clipstream ® Revenue 19,592 26,248 Total Revenue 4,172,473 3,824,565 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 year ended August 31, 2021, the Company generated 41% of total revenue from one customer [2020 - 42%]. It is in management's opinion that the Company is not exposed to significant credit risk. As at August 31, 2021, one customer represented $142,758 (36%) of the trade receivables balance [2020 - two customers represented $275,620 (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. F-31 Destiny Media Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2021 and 2020 12. SUBSEQUENT EVENTS None. F-32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.