DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 1. Financial Statements. Condensed Consolidated Interim Financial Statements Destiny Media Technologies Inc. (Unaudited) November 30, 2021 (Expressed in United States dollars) Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (Expressed in United States Dollars) Unaudited As at, November 30, August 31, 2021 2021 $ $ ASSETS Current Cash and cash equivalents 2,536,426 2,752,662 Short-term investments [note 3] - - Accounts receivable, net of allowance for doubtful accounts of $ 23,718 , [August 31, 2021 - $ 19,743 ] 564,677 400,233 Other receivables 60,168 53,172 Prepaid expenses 107,253 103,463 Total current assets 3,268,524 3,309,530 Deposits 35,077 35,556 Property and equipment, net [note 4] 130,863 143,487 Intangible assets, net [note 4] 247,448 187,622 Right of use asset [note 5] 131,384 190,253 Total assets 3,813,296 3,866,448 LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable 101,749 202,722 Accrued liabilities 322,331 309,839 Deferred revenue 3,944 8,511 Current portion of operating lease liability [note 5] 158,301 226,978 Total current liabilities 586,325 748,050 Operating lease liability, net of current portion [note 5] - - Total liabilities 586,325 748,050 Commitments and contingencies [note 7] Stockholders' equity Common stock, par value $ 0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,235,061 shares [August 31, 2021 - issued and outstanding 10,265,361 shares] 10,235 10,266 Additional paid-in capital [note 6] 9,139,575 9,157,804 Accumulated deficit ( 5,622,938 ) ( 5,788,539 ) Accumulated other comprehensive loss ( 299,901 ) ( 261,133 ) Total stockholders' equity 3,226,971 3,118,398 Total liabilities and stockholders' equity 3,813,296 3,866,448 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (Expressed in United States dollars) Unaudited Three months ended November 30, 2021 2020 $ $ Service revenue [note 9] 1,134,151 1,123,977 Cost of revenue Hosting costs 42,184 30,042 Internal engineering support 8,400 6,327 Customer support 47,603 35,852 Third party and transaction costs 19,376 18,092 117,563 90,313 Gross Margin 1,016,588 1,033,664 Operating expenses General and administrative 150,624 159,549 Sales and marketing 415,810 302,474 Product development 258,424 298,088 Depreciation and amortization 27,172 24,315 852,030 784,426 Income from operations 164,558 249,238 Other income Interest income 1,043 1,464 Net income 165,601 250,702 Net income per common share, basic and diluted 0.02 0.02 Weighted average common shares outstanding: Basic 10,257,964 10,450,656 Diluted 10,337,338 10,450,656 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Expressed in United States dollars) Unaudited Three months ended November 30, 2021 2020 $ $ Net income 165,601 250,702 Foreign currency translation adjustments ( 38,768 ) 28,042 Total comprehensive income 126,833 278,744 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Expressed in United States dollars) Unaudited Three months ended November 30, 2021 and 2020 Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares Amount capital Deficit loss # $ $ $ $ $ Balance, August 31, 2021 10,265,361 10,266 9,157,804 ( 5,788,539 ) ( 261,133 ) 3,118,398 Total comprehensive income - - - 165,601 ( 38,768 ) 126,833 Shares repurchased for cancellation ( 30,300 ) ( 31 ) ( 44,135 ) ( 44,166 ) Stock based compensation [note 6] - - 25,906 - - 25,906 Balance, November 30, 2021 10,235,061 10,235 9,139,575 ( 5,622,938 ) ( 299,901 ) 3,226,971 Balance, August 31, 2020 10,450,646 10,451 9,366,290 ( 6,171,068 ) ( 345,456 ) 2,860,217 Total comprehensive income - - - 250,702 28,042 278,744 Stock based compensation [note 6] - - 12,849 - - 12,849 Balance, November 30, 2020 10,450,646 10,451 9,379,139 ( 5,920,366 ) ( 317,414 ) 3,151,810 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS Three months ended November 30, (Expressed in United States dollars) 2021 2020 $ $ OPERATING ACTIVITIES Net income 165,601 250,702 Items not involving cash: Depreciation and amortization [note 4] 27,172 24,315 Stock-based compensation 25,906 12,849 Deferred leasehold inducement - - Unrealized foreign exchange (gain) loss 3,436 11,372 Changes in non-cash working capital: Accounts receivable ( 177,303 ) 98,548 Other receivables ( 6,212 ) ( 4,763 ) Prepaid expenses and deposits ( 4,971 ) 16,497 Accounts payable ( 94,434 ) 102,318 Accrued liabilities 12,709 ( 66,893 ) Deferred revenue ( 4,530 ) ( 909 ) Operating lease liability - ( 2,382 ) Net cash (used in) provided by operating activities ( 52,626 ) 441,654 INVESTING ACTIVITIES Redemption (purchase) of short-term investments, net - 763,749 Development of software ( 72,290 ) - Purchase of property, equipment and intangibles ( 7,997 ) ( 5,188 ) Net cash provided by (used in) investing activities ( 80,287 ) 758,561 FINANCING ACTIVITY Repurchase of common stock for retirement ( 44,166 ) - Net cash used in financing activity ( 44,166 ) - Effect of foreign exchange rate changes on cash ( 39,157 ) 35,307 Net increase (decrease) in cash and cash equivalents ( 216,236 ) 1,235,522 Cash and cash equivalents, beginning of period 2,752,662 1,841,340 Cash and cash equivalents, end of period 2,536,426 3,076,862 Supplementary disclosure Interest paid - - Income taxes paid - - Non-cash investing and financing activities Right of use asset - - Operating lease liability - - See accompanying notes Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 1. ORGANIZATION Destiny Media Technologies Inc. (the "Company") was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. The Company develops technologies that allow for the distribution over the internet of digital media files in either a streaming or digital download format. The technologies are proprietary. The Company operates out of Vancouver, BC, Canada and serves customers predominantly located in the United States, Europe and Australia. The Company's stock is listed for trading under the symbol "DSNY" on the OTCQB U.S. in the United States, under the symbol "DSY" on the TSX Venture Exchange and under the symbol "DME" on the Berlin, Frankfurt, Xetra and Stuttgart exchanges in Germany. 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended November 30, 2021 are not necessarily indicative of the results that may be expected for the year ended August 31, 2022. The balance sheet at August 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended August 31, 2021. COVID-19 Pandemic In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses, including the Company's. This outbreak could decrease spending, adversely affect demand for the Company's product and harm the Company's business and results of operations. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company's business or results of operations at this time. 1 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 3. SHORT TERM INVESTMENTS The Company's short-term investments consisted of one-year Guaranteed Investment Certificates with a major Canadian financial institution that earn interest at variable interest rates ranging from 0.10 % - 2.36 %. As at November 30, 2021, the Company's short-term investments had reached maturity, and are included in cash and cash equivalents. 4. PROPERTY AND EQUIPMENT AND INTANGIBLES Cost Accumulated amortization Net book value November 30, 2021 $ $ $ Property and equipment Furniture and fixtures 132,814 115,655 17,159 Computer hardware 297,888 235,062 62,826 Computer software 377,245 339,074 38,171 Leasehold improvement 157,449 144,742 12,707 965,396 834,533 130,863 Intangibles Software under development 236,724 6,189 230,535 Patents, trademarks and lists 443,333 426,420 16,913 680,057 432,609 247,448 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 2 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 Depreciation and amortization for the three-month period ended November 30, 2021 was $ 27,172 (2020: $ 24,315 ) 3 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 5. RIGHT OF USE ASSET The Company entered into a lease agreement commencing July 1, 2017 and expiring June 30, 2022 consisting of approximately 6,600 square feet. Subsequent to November 30, 2021, the Company entered into an agreement to terminate the office lease effective January 31, 2022. 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 November 30, 2021 August 31, 2021 $ $ Balance, September 1 190,253 403,961 Depreciation ( 57,284 ) ( 224,154 ) Foreign Currency Translation Adjustment ( 1,585 ) 10,446 Balance, End of Period 131,384 190,253 The Company has operating lease payments committed as follows: $ 2022 162,414 Total lease payments payable 162,414 Less amounts representing interest ( 4,113 ) Total Operating Lease Liability 158,301 Less current portion of operating lease liability ( 158,301 ) Long term portion of operating lease liability - Operating Lease Liability Continuity November 30, 2021 August 31, 2021 $ $ Balance, September 1 226,978 457,324 Less Lease Payments ( 70,873 ) ( 270,898 ) Interest 4,113 28,714 Foreign Currency Translation Adjustment ( 1,917 ) 11,838 Balance, End of Period 158,301 226,978 During the three-month period ended November 30, 2021 the Company recorded depreciation expense of $ 57,284 (2020: $ 54,636 ) 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. On December 17, 2021, the Company entered into an agreement to terminate the property lease effective January 31, 2022. 4 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 6. STOCKHOLDERS' EQUITY [a] Common stock issued and authorized The Company is authorized to issue up to 20,000,000 shares of common stock, par value $ 0.001 per share. Effective January 15, 2021, the Company commenced a Normal Course Issuer Bid ("NCIB"), pursuant to which the Company may purchase up to a maximum of 522,532 common shares, through the TSX Venture Exchange (the "TSX") at the market price at the time of purchase, subject to daily limits and compliance with the applicable rules of the TSX and Canadian securities laws. During the three-month period ended November 30, 2021, the Company repurchased and cancelled 30,300 common shares for $ 44,166 . As at November 30, 2021 a total of 215,585 shares had been repurchased for $ 304,570 under the NCIB. [b] Stock option plan 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 Nil common shares remain eligible for issuance under the Plan. Subsequent to November 30, 2021, the Company approved, subject to shareholder approval, a 2022 Stock Option plan, whereby 1,000,000 common shares would be reserved for issuance. 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. 5 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plan (cont'd.) Stock-Based Payment Award Activity A summary of stock option activity under the Plan as of November 30, 2021, and changes during the period then ended is presented below: Weighted Weighted Average Aggregate Average Remaining Intrinsic Exercise Price Contractual Value Options Shares $ Term $ Outstanding at August 31, 2021 410,000 1.34 2.26 - Granted 521,000 1.50 5.00 - Forfeited ( 10,000 ) 1.00 3.41 - Outstanding at November 30, 2021 921,000 1.43 2.76 28,700 Exercisable at November 30, 2021 380,000 1.37 1.80 15,200 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 November 30, 2021. The following table summarizes information regarding the non-vested options outstanding as of November 30, 2021 and changes during the period then ended: Weighted Average Grant Date Number of Options Fair Value $ Non-vested options at August 31, 2021 98,750 0.48 Granted 521,000 1.11 Vested ( 73,750 ) 0.49 Forfeited ( 5,000 ) 0.49 Non-vested options at November 30, 2021 541,000 1.08 As of November 30, 2021, there was $ 534,838 of total unrecognized compensation cost related to non-vested stock-based compensation awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.21 years. 6 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plan (cont'd.) Stock-Based Payment Award Activity (cont'd.) Total stock-based compensation expense of $ 25,906 was recognized during the three month period ended November 30, 2021, (2020: $ 12,849 ) is reported in the statement of comprehensive income as follows: 2021 2020 $ $ Stock-based compensation General and administrative 2,424 4,531 Sales and marketing 13,950 4,644 Product development 9,532 3,674 Total stock-based compensation 25,906 12,849 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 122.7 % 105.4 % Risk-free interest rate 0.35 % 0.35 % Dividend yields - - Weighted average grant date fair value $ 0.40 $ 0.34 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. 7 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 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 in order to purchase Company shares under certain terms. Directors are able to contribute a maximum of $ 12,500 each for a combined maximum annual purchase of $ 25,000 . The maximum annual combined contributions will be $ 400,000 . All purchases are made through the Toronto Stock Exchange by a third-party plan agent. The third-party plan agent is also responsible for the administration of the Plan on behalf of the Company and the participants. During the three month period ended November 30, 2021, the Company recognized compensation expense of $ 17,227 (2020: $ 15,186 ) 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. During the three month period ended November 30, 2021, the shares were purchased on the open market at an average price of $ 1.48 (2020 : $ 0.67 ). The shares are held in trust for a period of one year from the date of purchase. [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. 2021 2020 $ $ Net Income 165,601 250,702 Weighted average shares outstanding 10,257,964 10,450,656 Dilutive impact of outstanding stock options 79,374 - Diluted weighted average common shares outstanding 10,337,338 10,450,656 At November 30, 2021, the Company had an aggregate of 921,000 (August 31, 2021: 410,000 ) stock options outstanding. 8 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 7. CONTINGENCIES The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company's financial statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its consolidated financial statements. On September 5, 2017, the Company's former President and Chief Executive Officer filed a Notice of Civil Claim in the Supreme Court of British Columbia against the Company, its subsidiaries, independent directors and current Chief Executive Officer, claiming damages for conspiracy, breach of contract, wrongful dismissal, defamation and aggravated and punitive damages. The Company believes the claims are without merit and is defending itself against the claims. The quantum of loss, if any, is not determinable at this time and management believes it is unlikely that the outcome of this matter will have an adverse impact on its results of operations, cash flows and financial condition. 8. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Standards None 9 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 9. 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® United States 577,149 533,460 Europe 484,336 508,317 Australia 64,032 75,779 Africa 6,954 3,528 Total Play MPE® Revenue 1,132,471 1,121,084 Clipstream ® United States 1,680 2,893 Total Clipstream ® Revenue 1,680 2,893 Total Revenue 1,134,151 1,123,977 Revenue in the above table is based on location of the customer's billing address. Some of these customers have distribution centres located around the globe and distribute around the world. During the three month period ended November 30, 2021, the Company generated 37 % of total revenue from one customer respectively (2020 : 38 %). It is in management's opinion that the Company is not exposed to significant credit risk. As at November 30, 2021, one customer represented $ 272,449 (or 48 %) of the trade receivables balance (August 31, 2021, one customer represented $ 142,758 (or 36 %). The Company has substantially all its assets in Canada and its current and planned future operations are, and will be, located in Canada. 10. 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. 10 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS November 30, 2021 11. SUBSEQUENT EVENTS On December 17, 2021 the Company entered into an agreement to terminate the office lease effective January 31, 2022. The Company's lease was previously expected to terminate June 30, 2022. 11