DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD LOOKING STATEMENTS The following discussion should be read in conjunction with the accompanying financial statements and notes thereto included within this Quarterly Report on Form 10-Q. In addition to historical information, the information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements involve risks and uncertainties, including statements regarding the Company's capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors described in this Quarterly Report, including the risk factors under "Item 1A. Risk Factors." of part II, and, from time to time, in other reports the Company files with the Securities and Exchange Commission. These factors may cause the Company's actual results to differ materially from any forward-looking statement. The Company disclaims any obligation to publicly update these statements or disclose any difference between its actual results and those reflected in these statements. Such information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. OVERVIEW AND CORPORATE BACKGROUND Destiny Media Technologies Inc. was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. We carry out our business operations through our wholly owned subsidiary, Destiny Software Productions Inc., a British Columbia company that was incorporated in 1992, MPE Distribution, Inc. a Nevada company that was incorporated in 2007 and Sonox Digital Inc. incorporated under the Canada Business Corporations Act in 2012. The "Company", "Destiny Media", "Destiny", "we" or "us" refers to the consolidated activities of all four companies. Our principal executive office is located at Suite 1110, 885 West Georgia Street, Vancouver, British Columbia V6C 3E8. Our telephone number is (604) 609-7736 and our facsimile number is (604) 609-0611. Our common stock trades on TSX Venture Exchange in Canada under the symbol "DSY", on the OTCQB U.S. ("OTCQB") under the symbol "DSNY", and on various German exchanges (Frankfurt, Berlin, Stuttgart and Xetra) under the symbol DME, WKN 935 410. Our corporate website is located at http://www.dsny.com . OUR PRODUCTS AND SERVICES Destiny develops and markets software as a service (SaaS) solutions that solve critical digital distribution and promotion problems for businesses in the music industry. The core of our business is Play MPE®. Play MPE® is a service for promoting and securely distributing broadcast quality audio, video, images, promotional information and other digital content through the internet. The system is currently used by the recording industry for transferring pre-release broadcast quality music, radio shows, and music videos to trusted recipients such as radio stations, media reviewers, VIP's, DJ's, film and TV personnel, sports stadiums and retailers. Music is protected by Play MPE®'s patented proprietary watermarking system which provides watermarks unique to each recipient. Destiny is currently developing additional functionality and services that are expected to increase the services to existing platform users and therefore expand Play MPE®'s addressable market, or act as catalysts to the Company's sales activities. As well, the Company is investing into research and development on incremental product offerings expected to add addressable market opportunities. Play MPE® The Company's core business is the Play MPE® platform. Play MPE® is a two-sided B2B marketplace that enables music labels and artists to distribute promotional content and musical assets on the one side, and for music broadcasting professionals, music curators and music reviewers to discover, download, broadcast and review the music, on the other. Play MPE® provides a software-based tool to assist record labels and artists in marketing their music. Record labels and artists are Play MPE®'s customers and pay for submission into the system. Recipients are provided no charge access to review music. When adding music to the Play MPE® system, record labels are targeting specific industry recipients who review and broadcast their music. With this marketing effort, record labels are targeting an increase in their revenue directly through on-air broadcast royalties, streaming royalties and synchronization revenue (revenue when the reproduction of a song is coordinated with video advertisements, television, or film), and indirect increases in revenue through growing song and artists' popularity (for example concert ticket sales etc.). Customers range from small independent artists, to the world's largest record labels; (the "Major Record Labels") (Universal Music Group ("Universal"), Warner Music Group "Warner" and Sony Music Entertainment "Sony"). Customers choose Play MPE® for its powerful set of tools, ease of use and its effectiveness in achieving the record label's promotional objectives. Recipients enjoy easy access to desirable music in high quality audio files. Play MPE® CASTER (Distribution software) Play MPE®'s Caster is a full-service distribution management system that includes a complete set of operational functions that provide all necessary software tools to enable labels to manage global marketing campaigns. Broadly, these components include administration functions and distribution functions. Administration functions allow management of labels and sub-labels, management of the assets (audio files, video files, and associated cover art, artist information) that are distributed, and management of client-side users and user permissions (roles with selectable capabilities). Distribution management functions offer powerful contacts management capabilities, release creation, distribution announcements and distribution scheduling, digital rights management by release and by recipient, and release replication and its associated scheduling and digital rights management components. This full suite of tools within Play MPE® was developed for the music industry and in close collaboration with Universal to cater the functions to its global marketing workflow. Many clients do not use the full suite of tools. However, this full set of tools is critical to Universal's global promotional campaign workflow and the core reason Play MPE® distributes internationally for Universal. Caster is available in English, Spanish, German, Japanese and French. Play MPE® is a permissions-only access system such that only recipients designated or targeted to receive content obtain access to that content. Record labels can use Play MPE®'s contacts management system to administer recipient lists. Contacts management offers several features that facilitate efficient updates and maintenance actions that are critically important where users maintain a large recipient database, across multiple users, and multiple recipient lists. Absent these features, list maintenance becomes overly cumbersome, inefficient and leads to inaccuracies. The functionality within the contacts management system is critically important to both distribution hubs at Universal and the Play MPE® operations team to efficiently maintain accurate and active recipient lists. Within Play MPE®'s contacts management platform, the Company's operations team offers for sale carefully curated and actively maintained recipient lists with more than 14,000 music curators around the world. These lists include complete lists in 12 countries, and lists under construction in an additional 38. These selectable lists eliminate the need for our clients to maintain current recipient contact information. These lists offer significant value to all customers, but are necessary for smaller independent labels and artists who do not have the resources to maintain current contacts. Without these curators lists, many sales would not be possible. As active lists in new territories are completed, Play MPE® will grow revenue. In addition to the contacts management functionality, the Play MPE® product and engineering staff are developing new technical processes to facilitate list development and maintenance. With these technical solutions, it is expected that Play MPE® will expand saleable lists and thereby increase revenue. Play MPE® Player Music curators enjoy free access to review and download content through an easy-to-use web-based player or mobile player apps (iOS and Android). Web-players are currently available in 15 different languages; English, Spanish, Swedish, Finnish, Italian, Dutch, Portuguese, French, Japanese, German, Norwegian, Latvian, Lithuanian, Estonian, and Danish. In developing Play MPE®'s recipient interfaces, the Company's product and engineering teams focus on providing a very positive user experience. Recipients enjoy many features that make it easy to access, collaborate, review, and search for content. Play MPE®'s mobile apps offer off-line listening capabilities, the ability to utilize Google Chromecast and Apple Airplay streaming capabilities, creation of playlists, sorting, flagging and archiving features, and easier to access release metadata. Recipient side satisfaction directly increases activity which directly improves the effectiveness of promotional efforts of record label customers. Recipients on the Play MPE® platform have a wide variety of personas and include programming directors for internet streaming, satellite or terrestrial radio, retail store broadcasters, sports stadium DJs, clubs, events, music reviews in newspapers or magazines, on-air personalities, music supervisors who program TV, movies, commercials or video games, or "A&R" representatives at larger record labels. Each recipient within the Play MPE® platform has a unique library of music catered and appropriate for that recipient. Clipstream® The Company also developed Clipstream® for the online video industry for which it is pursuing strategic alternatives. The Clipstream® Online Video Platform (OVP) is a self-service system, for encoding, hosting and reporting on video playback which can be embedded in third party websites or emails. Playback is currently through the Company's proprietary JavaScript codec engine, which is only available on the internet through the Company. The unique software-based approach to rendering video, has patents claiming initial priority to 2011. This product has incidental revenues and is not supported or marketed. RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED NOVEMBER 30, 2021 AND 2020 Revenue Total revenue for the three-month period ending November 30, 2021 increased by approximately 1% ($1,134,151 in 2021 - $1,123,977 in 2020). Play MPE® represents virtually all the Company's revenue. Play MPE®'s year to date revenue grew by 1% (or 1.7% after adjusting for favorable foreign exchange). Play MPE® continued to experience growth in the independent labels in the United States, Europe, and Australia with an average revenue growth of 3% in this segment. Operating Expenses Overview As our technologies and products are developed and maintained in-house, the majority of our expenditures are on salaries and wages and associated expenses such as office space, supplies and benefits. Our operations are primarily conducted in Canada and therefore, our costs are primarily incurred in Canadian dollars while our revenues are primarily denominated in Euros and US dollars. Thus, operating expenses and the results of operations are impacted, to the extent they are not hedged, by the rise and fall of the relative values of the Canadian dollar to these currencies. The Company maintains a large portion of its financial reserves in Canadian dollars to mitigate the downside risk of adverse exchange rates on its operating expenditures. Total operating costs during the three-month period ended November 30, 2021 increased by 8.6% to $852,029 (2020 - $784,426). Operating Costs in the comparative period, include one-time, non-recuring costs associated with staff restructuring. Adjusting for these one-time costs associated with staff restructuring, overall costs increased by 11.8%. The increase in costs is primarily the result of expanded business development staffing costs designed to expand Play MPE ®‘ s global market share. The Company also increased staffing costs to more quickly expand the company's product offering. A portion of these costs were capitalized. Also increasing overall costs are impacts a weakening of the US Dollar. Foreign exchange impacts are generally temporarily in nature and generally reverse over time. General and administrative November 30 November 30 2021 2020 (3 months) (3 months) Change Change $ $ $ % Bad debt 4,316 - 4,316 0.0% Office and miscellaneous 50,478 40,241 10,237 25.4% Professional fees 18,295 46,825 (28,530 ) (60.9% ) Rent 5,744 6,715 (971 ) (14.5% ) Telecommunications 821 776 45 5.8% Travel 1,395 1,112 283 25.4% Wages and benefits 69,575 63,880 5,695 8.9% 150,624 159,549 (8,925 ) (5.6% ) Our general and administrative expenses consist of salaries and related personnel costs including overhead, office rent, and general office supplies. General and administrative costs also include professional fees and general travel expenditures. The decrease in professional fees is due to a reduction of corporate administration costs and a reduction of litigation costs. Sales and marketing November 30 November 30 2021 2020 (3 months) (3 months) Change Change $ $ $ % Advertising and marketing 33,011 9,020 23,991 266.0% Rent 33,062 31,536 1,526 4.8% Telecommunications 5,322 4,053 1,269 31.3% Wages and benefits 344,415 257,865 86,550 33.6% 415,810 302,474 113,336 37.5% Sales and marketing expenses consist of salaries and related personnel costs including overhead, office rent, and telecommunications costs. Sales and marketing expenses also include advertising and marketing expenditures, which consist of promotional materials, online or print advertising, business development tools, and marketing or business development related travel costs including attendance at conference or trade shows, and record label and client visits. The increase in staffing costs primarily relates to the employment of additional staff designed to grow Play MPE ®‘ s market share. The increase in advertising and marketing expenses is related to increased advertising, sponsorship, and attendance at industry events in the first quarter. Product Development November 30 November 30 2021 2020 (3 months) (3 months) Change Change $ $ $ % Rent 22,591 25,079 (2,488 ) (9.9% ) Software services 18,177 17,576 601 3.4% Telecommunications 16,318 16,805 (487 ) (2.9% ) Wages and benefits 201,338 238,628 (37,290 ) (15.6% ) 258,424 298,088 39,664 (13.3% ) Product development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. The increase in wages and benefits is related to an increase in staffing in product development, offset by $72,290 capitalized as internal use software in the quarter (November 30, 2020: $Nil). Depreciation and Amortization Depreciation and amortization expense increased to $27,172 for the three-month period ended November 30, 2021 from $24,315 for the period ended November 30, 2020, an increase of 11.7% due to a amortization of software development costs associated with Play MPE® recipient player applications. Other earnings and expenses Interest income was $1,043 for the three-month period ended November 30, 2021 (2020: $1,464) and is derived from one-year Guaranteed Investment Certificates. Net income During the three-month period ended November 30, 2021 we had net income of $165,601 (2020 - $250,702). For the three-month period ended November 30, 2021, adjusted EBITDA was $217,635 (2020 - EBITDA $286,402). Adjusted EBITDA is not defined under generally accepted accounting principles ("GAAP") and it may not be comparable to similarly titled measures reported by other companies. We used Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe Adjusted EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to Adjusted EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of net income (loss) from operations to Adjusted EBITDA over the eight most recently completed fiscal quarters: 2022 Q1 2021 Q4 2021 Q3 2021 Q2 2021 Q1 2020 Q4 2020 Q3 2020 Q2 $ $ $ $ $ $ Net Income (loss) 165,601 91,699 69,594 (29,466 ) 250,702 158,187 54,899 (155,331 ) Amortization, stock-based compensation and deferred leasehold inducements 53,077 40,589 39,806 39,533 37,164 49,085 48,470 37,307 Interest income (1,043 ) (869 ) (823 ) (875 ) (1,464 ) (4,672 ) (5,266 ) (8,110 ) Adjusted EBITDA 217,635 131,419 108,577 9,192 286,402 202,600 98,103 (126,134 ) LIQUIDITY AND FINANCIAL CONDITION As at November 30, 2021, we held $2,536,426 (August 31, 2021 - $2,752,662) in cash and cash equivalents and short-term investments. Our short-term investments consisted of one-year Guaranteed Investment Certificates (GICs) held through a major Canadian financial institution, and had reached maturity prior to November 30, 2021. At November 30, 2021, we had working capital of $2,682,199 compared to $2,561,480 as at August 31, 2021. During the three-month period ended November 30, 2021, the Company completed NCIB purchases totaling $44,166. Net cash used in operating activities for the three-month period ended November 30, 2021 was $52,626 (2020: net cash provided by operating activities of $441,654). The primary reason for the decrease in cash flows from operating activities is related to changes in working capital which are expected to reverse over time. Net cash used in investing activities for the three-month period ended November 30, 2021 was $80,287 (2020: cash provided from investing activities of $758,561). During the three-month period ended November 30, 2021, $72,290 was used in software under development. Net cash used in financing activities during the three-month period ended November 30, 2021 was $44,166 (2020: $nil), related to cash used to repurchase and retire 30,300 shares of common stock (2020: Nil) of the Company under the NCIB. CRITICAL ACCOUNTING POLICIES We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable in the circumstances. Actual results may differ from these estimates. There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended August 31, 2021 as filed with the SEC on November 23, 2021 except for those described in Note 8, "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q. NEW ACCOUNTING PRONOUNCEMENTS Please refer to Note 8 "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.