DESTINY MEDIA TECHNOLOGIES INC 10-Q

Item 1. Financial Statements. Condensed Consolidated Interim Financial Statements Destiny Media Technologies Inc. (Unaudited) February 28, 2022 (Expressed in United States dollars) Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (Expressed in United States Dollars) Unaudited As at, February 28, August 31, 2022 2021 $ $ ASSETS Current Cash and cash equivalents 2,433,506 2,752,662 Accounts receivable, net of allowance for doubtful accounts of $ 30,895 , [August 31, 2021 - $ 19,743 ] 414,720 400,233 Other receivables 28,181 53,172 Prepaid expenses 83,959 103,463 Total current assets 2,960,366 3,309,530 Deposits 10,730 35,556 Property and equipment, net [note 4] 113,129 143,487 Intangible assets, net [note 4] 318,854 187,622 Right of use asset [note 5] - 190,253 Total assets 3,403,079 3,866,448 LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable 72,342 202,722 Accrued liabilities 379,638 309,839 Deferred revenue - 8,511 Current portion of operating lease liability [note 5] - 226,978 Total current liabilities 451,980 748,050 Total liabilities 451,980 748,050 Contingencies [note 7] Stockholders' equity Common stock, par value $ 0.001 [note 6] Authorized: 20,000,000 shares Issued and outstanding: 10,122,271 shares [August 31, 2021 - issued and outstanding 10,265,371 shares] 10,122 10,266 Additional paid-in capital [note 6] 9,064,465 9,157,804 Accumulated deficit ( 5,825,548 ) ( 5,788,539 ) Accumulated other comprehensive loss ( 297,940 ) ( 261,133 ) Total stockholders' equity 2,951,099 3,118,398 Total liabilities and stockholders' equity 3,403,079 3,866,448 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (LOSS) (Expressed in United States dollars) Unaudited Three Months Three Months Six Months Six Months Ended Ended Ended Ended February 28, February 28, February 28, February 28, 2022 2021 2022 2021 $ $ $ $ Service revenue [note 10] 896,420 930,699 2,030,571 2,054,676 Cost of revenue Hosting costs 45,611 29,667 87,795 59,709 Internal engineering support 13,812 7,296 22,212 13,623 Customer support 78,266 41,343 125,869 77,195 Third Party and transactions costs 13,622 13,593 32,998 31,685 151,311 91,899 268,874 182,212 Gross Margin 745,109 838,800 1,761,697 1,872,464 Operating expenses General and administrative 314,941 164,395 465,566 323,943 Sales and marketing 251,875 340,954 667,685 643,428 Product development 367,311 337,392 625,734 635,480 Depreciation and amortization 26,574 26,400 53,746 50,715 960,701 869,141 1,812,731 1,653,566 Income (loss) from operations ( 215,592 ) ( 30,341 ) ( 51,034 ) 218,898 Other income Interest income 1,964 875 3,007 2,338 Gain on disposal of assets [notes 4 and 5] 11,018 - 11,018 - Net income (loss) ( 202,610 ) ( 29,466 ) ( 37,009 ) 221,236 Net income (loss) per common share, basic and diluted ( 0.02 ) ( 0.00 ) ( 0.00 ) 0.02 Weighted average common shares outstanding: Basic and diluted 10,208,956 10,629,438 10,259,374 10,665,834 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Expressed in United States dollars) Unaudited Three Months Three Months Six Months Six Months Ended Ended Ended Ended February 28, February 28, February 28, February 28, 2022 2021 2022 2021 $ $ $ $ Net income (loss) for the period ( 202,610 ) ( 29,466 ) ( 37,009 ) 221,236 Other comprehensive income (loss) Foreign currency translation adjustments 1,961 34,081 ( 36,807 ) 62,123 Comprehensive income (loss) ( 200,649 ) 4,615 ( 73,816 ) 283,359 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Expressed in United States dollars) Unaudited Three month periods ended February 28, 2022 and February 28, 2021 Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares # Amount Capital Deficit Loss $ $ $ $ $ Balance, November 30, 2021 10,235,071 10,235 9,139,575 ( 5,622,938 ) ( 299,901 ) 3,226,971 Total comprehensive income (loss) - - - ( 202,610 ) 1,961 ( 200,649 ) Stock based compensation [note 6] - - 68,788 - - 68,788 Stock options repurchased and retired - - ( 8,776 ) ( 8,776 ) Common shares retired ( 112,800 ) ( 113 ) ( 135,122 ) - - ( 135,235 ) Balance, February 28, 2022 10,122,271 10,122 9,064,465 ( 5,825,548 ) ( 297,940 ) 2,951,099 Balance, November 30, 2020 10,450,646 10,451 9,379,139 ( 5,920,366 ) ( 317,414 ) 3,151,810 Total comprehensive income (loss) - - - ( 29,466 ) 34,081 4,615 Stock based compensation [note 6] - 13,134 - - 13,134 Common shares retired ( 41,285 ) ( 42 ) ( 44,962 ) - - ( 45,004 ) Balance, February 28, 2021 10,409,361 10,409 9,347,311 ( 5,949,832 ) ( 283,333 ) 3,124,555 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Expressed in United States dollars) Unaudited Six month periods ended February 28, 2022 and 2021 Accumulated Total Additional other stockholders' Common stock paid-in Accumulated comprehensive equity Shares Amount Capital Deficit Loss # $ $ $ $ $ Balance, August 31, 2021 10,265,371 10,266 9,157,804 ( 5,788,539 ) ( 261,133 ) 3,118,398 Total comprehensive income (loss) - - - ( 37,009 ) ( 36,807 ) ( 73,816 ) Stock based compensation [note 6] - - 94,694 - - 94,694 Stock options repurchased and retired - - ( 8,776 ) ( 8,776 ) Common shares retired ( 143,100 ) ( 144 ) ( 179,257 ) - - ( 179,401 ) Balance, February 28, 2022 10,122,271 10,122 9,064,465 ( 5,825,548 ) ( 297,940 ) 2,951,099 Balance, August 31, 2020 10,450,646 10,451 9,366,290 ( 6,171,068 ) ( 345,456 ) 2,860,217 Total comprehensive income (loss) - - - 221,236 62,123 283,359 Stock based compensation [note 6] - - 25,983 - - 25,983 Common shares retired ( 41,285 ) ( 42 ) ( 44,962 ) - - ( 45,004 ) Balance, February 28, 2021 10,409,361 10,409 9,347,311 ( 5,949,832 ) ( 283,333 ) 3,124,555 See accompanying notes Destiny Media Technologies Inc. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS Six month periods ended February 28, 2022 and 2021 (Expressed in United States dollars) 2022 2021 $ $ OPERATING ACTIVITIES Net income (loss) ( 37,009 ) 221,236 Items not involving cash: Depreciation and amortization [note 4] 53,746 50,715 Stock-based compensation 94,694 25,983 Allowance for doubtful accounts 11,442 ( 4,465 ) Gain on disposal of assets ( 11,018 ) - Unrealized foreign exchange (gain) loss ( 531 ) 315 Changes in non-cash working capital: Accounts receivable 158,341 113,910 Other receivables ( 153,282 ) ( 15,222 ) Prepaid expenses and deposits 43,474 ( 16,966 ) Accounts payable ( 95,821 ) 24,925 Accrued liabilities 39,559 ( 618 ) Deferred revenue ( 24,969 ) ( 1,863 ) Operating lease liability ( 9,498 ) ( 6,110 ) Net cash provided by operating activities 69,128 391,840 INVESTING ACTIVITIES Sale of short-term investments, net - 800,624 Development of software ( 155,988 ) - Purchase of property, equipment, and intangibles ( 13,692 ) ( 13,557 ) Net cash provided by (used in) investing activities ( 169,680 ) 787,067 FINANCING ACTIVITY Repurchase of common stock for retirement ( 179,400 ) ( 45,004 ) Repurchase of stock options for retirement ( 8,776 ) - Net cash used in financing activity ( 188,176 ) ( 45,004 ) Effect of foreign exchange rate changes on cash ( 30,428 ) 36,472 Net increase (decrease) in cash and cash equivalents ( 319,156 ) 1,170,375 Cash and cash equivalents, beginning of period 2,752,662 1,841,340 Cash and cash equivalents, end of period 2,433,506 3,011,715 Supplementary disclosure Interest paid - - Income taxes paid - - See accompanying notes Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 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 six months ended February 28, 2022 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 As at February 28, 2022 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 rates ranging from 0.10 % - 2.36 %. As at February 28, 2022, the Company's short-term investments had reached maturity, and are included in cash and cash equivalents. 4. PROPERTY AND EQUIPMENT AND INTANGIBLES Accumulated Net book Cost amortization value $ $ $ February 28, 2022 Property and equipment Furniture and fixtures 134,096 117,786 16,310 Computer hardware 306,066 242,240 63,826 Computer software 381,013 348,020 32,993 Leasehold improvement - - - 821,175 708,046 113,129 Intangibles Software under development 319,387 14,310 305,077 Patents, trademarks, and lists 445,627 431,850 13,777 765,014 446,160 318,854 2 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 4. PROPERTY AND EQUIPMENT AND INTANGIBLES (cont'd) 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 Depreciation and amortization for the three and six-month periods ended February 28, 2022 was $ 26,574 and $ 53,746 respectively (2021: $ 26,400 and $ 50,715 ). On January 31, 2022, the Company exited the lease of office space (Note 5). Accordingly, leasehold fixtures and fittings were disposed of and a loss of $ 9,035 was recognized in the statement of comprehensive income (loss). 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 of office space. The Company mutually ended the lease agreement early 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 February 28, 2022 August 31, 2021 $ $ Balance, September 1 190,253 403,961 Depreciation ( 95,010 ) ( 224,154 ) Exit of Operating Lease ( 94,210 ) - Foreign Currency Translation Adjustment ( 1,033 ) 10,446 Balance, End of Period - 190,253 3 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 5. RIGHT OF USE ASSET (cont'd) The Company has operating lease payments committed as follows: $ 2022 - Total lease payments payable - Less amounts representing interest - Total Operating Lease Liability - Less current portion of operating lease liability - Long term portion of operating lease liability - Operating Lease Liability Continuity February 28, 2022 August 31, 2021 $ $ Balance, September 1 226,978 457,324 Less Lease Payments ( 117,548 ) ( 270,898 ) Interest 6,036 28,714 Exit of Operating Lease ( 114,263 ) - Foreign Currency Translation Adjustment ( 1,203 ) 11,838 Balance, End of Period - 226,978 During the three and six-month periods ended February 28, 2022 the Company recorded depreciation expense of $ 37,726 and $ 95,010 respectively (2021: $ 56,455 and $ 111,091 ) which has been allocated between general and administrative expenses, research and development and sales and marketing on the consolidated statement of comprehensive income (loss). The total rent commitment, net of the leasehold improvement allowance, was amortized to rent expense on a straight-line basis over the term of the lease. On January 31, 2022, upon exit of the lease a gain of $ 20,053 was recognized in the statement of comprehensive income (loss). 4 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 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. On 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 six-month period ended February 28, 2022, the Company repurchased and cancelled 143,100 common shares for $ 179,401 . At January 15, 2022, the Company had repurchased 328,385 common shares for $ 437,180 . [b] Stock option plans The Company has a stock option plan, namely the 2015 Stock Option Plan (the "2015 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 2015 Plan. On February 18, 2022 the Company received shareholder approval for the 2022 Stock Option Plan (the "2022 Plan), whereby 1,000,000 common shares would be reserved for issuance. As at February 28, 2022, 634,000 common shares remain eligible for issuance under the 2022 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. 5 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) Stock-Based Payment Award Activity A summary of stock option activity under the Plans as of February 28, 2022, 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, 2020 410,000 1.34 2.26 - Granted 521,000 1.50 5.00 - Forfeited ( 30,000 ) 1.33 2.81 - Exercised ( 30,000 ) 1.00 2.50 - Outstanding at February 28, 2022 871,000 1.45 3.41 20,700 Exercisable at February 28, 2022 418,500 1.41 1.98 19,688 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 February 28, 2022. The following table summarizes information regarding the non-vested options outstanding as of February 28, 2022 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 ( 142,250 ) 0.75 Forfeited ( 25,000 ) ( 0.98 ) Non-vested options at February 28, 2022 452,500 1.09 As of February 28, 2022, there was $ 478,476 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 1.91 years. 6 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 6. STOCKHOLDERS' EQUITY (cont'd.) [b] Stock option plans (cont'd.) During the six months ended February 28, 2022, the total stock-based compensation expense is reported in the statement of comprehensive income (loss) as follows: 2022 2021 $ $ Stock-based compensation General and administrative 28,408 9,063 Sales and marketing 37,878 9,573 Product development 28,408 7,347 Total stock-based compensation 94,694 25,983 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: 2022 2021 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 As at February 28, 2022 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 six month period ended February 28, 2022, the Company recognized compensation expense of $ 77,527 (2021: $ 52,857 ) in salaries and wages on the consolidated statement of comprehensive income (loss) 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 $ 1.29 (2021: $ 0.81 ). The shares are held in trust by the Company for a period of one year from the date of purchase. [d] Earnings Per Share Net income (loss) 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. For the three and six-month periods ended February 28, 2022 and 2021 the outstanding options, in the amount of 871,000 (August 31, 2021: 410,000 ), were anti-dilutive and have been excluded from the calculation of diluted income (loss) per share. 8 Destiny Media Technologies Inc. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at February 28, 2022 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 As at February 28, 2022 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: Three Months Ended Six Months Ended February 28 February 28 February 28 February 28 2022 2021 2022 2021 $ $ $ $ Play MPE® North America 384,406 379,034 961,555 912,494 Europe 468,226 484,159 952,562 992,476 Australasia 37,663 62,999 101,695 138,778 Africa 6,125 938 13,079 4,466 Total Play MPE® 896,420 927,130 2,028,891 2,048,214 Clipstream ® North America - 3,569 1,680 6,462 Total revenue 896,420 930,699 2,030,571 2,054,676 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 six months ended February 28, 2022, the Company generated 41 % of total revenue from one customer (2021 - 42 %). It is in management's opinion that the Company is not exposed to significant credit risk. As at February 28, 2022, one customer represented $ 148,663 (or 25.5 %) 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. SUBSEQUENT EVENTS On March 24, 2022, the Company entered into a twelve month office license agreement effective April 1, 2022 for $ 21,450 CDN.