DESTINY MEDIA TECHNOLOGIES INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DESTINY MEDIA TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 731 ) 20 Consolidated Balance Sheets as of August 31, 2025 and 2024 22 Consolidated Statements of Comprehensive Income (Loss) for the years ended August 31, 2025 and 2024 23 Consolidated Statements of Stockholders' Equity for the years ended August 31, 2025 and 2024 24 Consolidated Statements of Cash Flows for the years ended August 31, 2025 and 2024 25 Notes to Consolidated Financial Statements for the years ended August 31, 2025 and 2024 26 19 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 sheet of Destiny Media Technologies Inc. (the "Company"), as of August 31, 2025, and the related consolidated statements of comprehensive income (loss), stockholders' equity, and cash flows for the year ended August 31, 2025, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2025, and the results of its operations and its cash flows for the year ended August 31, 2025 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. 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 audit 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 consolidated 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 audit 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 Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters Capitalization of Payroll Expenses to Intangible Assets As described in Note 2 to the consolidated financial statements, the Company capitalizes direct costs related to application development activities that are probable to result in additional functionality. Capitalization is limited to costs that are directly attributable to the specific software application development stage. As more fully described in Note 4 to the consolidated financial statements, payroll expenses of $306,052 were capitalized to software under development in intangible assets. The principal considerations for our determination that capitalization of payroll expenses to intangible assets is a critical audit matter are that there were judgments made by management when assessing whether the payroll expenses incurred for software application activities were eligible for capitalization. This in turn led to a high degree of auditor judgement, subjectivity, and effort in performing procedures to evaluate management's judgements in assessing the accounting for the capitalization of payroll expenses to intangible assets. 20 Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statement. Our audit procedures included, among others: Discussed, reviewed and obtained support on how management allocates payroll expenses to software under development. Discussed with management regarding the plans and intent for the software under development and computer software. Reviewed, discussed and obtained support for the reallocation of software under development to computer software. Recalculated amortization of the computer software to ensure amounts recorded were appropriate and in line with the accounting policy. Assessed impairment indicators of intangible assets and computer software. We have served as the Company's auditor since 2025. /s/ DAVIDSON & COMPANY LLP Chartered Professional Accountants Vancouver, Canada November 24, 2025 21 DESTINY MEDIA TECHNOLOGIES, INC. Consolidated Balance Sheets Notes August 31, 2025 August 31, 2024 ASSETS Cash and cash equivalents $ 1,117,889 $ 1,481,582 Accounts receivable, net of allowance for doubtful accounts of $ 82,184 (2024 - $ 30,624 ) 863,422 681,146 Other receivables 127,698 82,585 Prepaid expenses 38,252 87,345 Deposits 31,581 32,347 Total current assets 2,178,842 2,365,005 Property and equipment, net 3 752,719 1,174,370 Intangible assets, net 4 35,282 148,977 Total assets $ 2,966,843 $ 3,688,352 LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable $ 70,255 $ 151,734 Accrued liabilities 432,959 328,801 Deferred revenue 41,041 42,399 Total current liabilities 544,255 522,934 Total liabilities 544,255 522,934 Commitments and contingencies 7 - - Stockholders' equity Common stock, par value $ 0.001 , authorized 20,000,000 shares. Issued and outstanding - 9,637,410 shares (2024 - 9,637,410 shares) 5 9,637 9,637 Additional paid-in capital 5 8,851,513 8,819,785 Accumulated deficit ( 5,830,486 ) ( 5,192,609 ) Accumulated other comprehensive loss ( 608,076 ) ( 471,395 ) Total stockholders' equity 2,422,588 3,165,418 Total liabilities and stockholders' equity $ 2,966,843 $ 3,688,352 Note 9 - Subsequent Events The accompanying notes are an integral part of these consolidated financial statements . 22 DESTINY MEDIA TECHNOLOGIES, INC. Consolidated Statements of Comprehensive Income (Loss) For the years ended August 31, Notes 2025 2024 Service revenue 8 $ 4,524,448 $ 4,420,768 Cost of revenue Hosting costs 203,068 148,949 Internal engineering support 62,020 57,644 Customer support 351,448 326,647 Third-party and transactions costs 70,017 77,287 686,553 610,527 Gross margin 3,837,895 3,810,241 84.8 % 86.2 % Operating expenses General and administrative 988,642 697,996 Sales and marketing 910,101 1,063,476 Product development 1,768,604 1,518,411 Depreciation and amortization 3, 4 833,614 469,801 4,500,961 3,749,684 Income (loss) from operations ( 663,066 ) 60,557 Other income Interest and other income 25,189 51,201 Net income (loss) before income tax ( 637,877 ) 111,758 Current income tax expense 6 - - Net income (loss) $ ( 637,877 ) $ 111,758 Foreign currency translation adjustments ( 136,681 ) 3,364 Total comprehensive income (loss) $ ( 774,558 ) $ 115,122 Net income (loss) per common share Basic and diluted 5(d) $ ( 0.07 ) $ 0.01 Weighted average common shares outstanding: Basic and Diluted 5(d) 9,637,410 10,030,569 The accompanying notes are an integral part of these consolidated financial statements . 23 DESTINY MEDIA TECHNOLOGIES, INC. Consolidated Statements of Stockholders' Equity Common stock Notes Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Balance, August 31, 2023 10,096,610 10,096 9,242,671 ( 5,304,367 ) ( 474,759 ) 3,473,641 Total comprehensive income - - - 111,758 3,364 115,122 Stock-based compensation 5 - - 46,926 - - 46,926 Common shares retired 5 ( 459,200 ) ( 459 ) ( 469,812 ) - - ( 470,271 ) Balance, August 31, 2024 9,637,410 9,637 8,819,785 ( 5,192,609 ) ( 471,395 ) 3,165,418 Balance, August 31, 2024 9,637,410 9,637 8,819,785 ( 5,192,609 ) ( 471,395 ) 3,165,418 Total comprehensive loss - - - ( 637,877 ) ( 136,681 ) ( 774,558 ) Stock-based compensation 5 - - 31,728 - - 31,728 Balance, August 31, 2025 9,637,410 9,637 8,851,513 ( 5,830,486 ) ( 608,076 ) 2,422,588 The accompanying notes are an integral part of these consolidated financial statements . 24 DESTINY MEDIA TECHNOLOGIES, INC. Consolidated Statements of Cash Flows For the years ended August 31, Notes 2025 2024 Operating Activities Net income (loss) $ ( 637,877 ) $ 111,758 Adjustments to reconcile net income to net cash provided (used) in operations: Depreciation and amortization 3, 4 833,614 469,801 Stock-based compensation 6(b) 31,728 46,926 Allowance for doubtful accounts 51,055 ( 2,700 ) Unrealized foreign exchange gain (loss) 1,979 ( 21,758 ) Changes in non-cash working capital: Accounts receivable ( 247,398 ) ( 247,544 ) Other receivables ( 46,436 ) ( 23,645 ) Prepaid expenses and deposits 47,178 ( 14,951 ) Accounts payable ( 79,026 ) 43,495 Accrued liabilities 110,690 60,323 Deferred revenue ( 351 ) 7,483 Net cash provided by operating activities 65,156 429,188 Investing Activities Development of software 3, 4 ( 306,052 ) ( 476,258 ) Purchase of property, equipment, and intangibles 3, 4 ( 29,132 ) ( 8,161 ) Net cash used in investing activities ( 335,184 ) ( 484,419 ) Financing Activities Common stock repurchased for cancellation 5(a) - ( 470,271 ) Net cash used in financing activities - ( 470,271 ) Effect of foreign exchange rate changes on cash and cash equivalents ( 93,665 ) 4,315 Net decrease in cash and cash equivalents ( 363,693 ) ( 521,187 ) Cash and cash equivalents, beginning of year 1,481,582 2,002,769 Cash and cash equivalents, end of year $ 1,117,889 $ 1,481,582 Supplementary disclosure: Interest paid $ - $ - Income taxes paid 6 $ - $ - The accompanying notes are an integral part of these consolidated financial statements . 25 DESTINY MEDIA TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2025 1. ORGANIZATION AND BASIS OF PRESENTATION 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 (the "TSXV") and under the symbol "DME1" on the Berlin, Frankfurt, Xetra and Stuttgart exchanges in Germany. Basis of Presentation and Principles of Consolidation The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The accompanying consolidated financial statements include the consolidated accounts of the Company and its wholly owned subsidiaries: Destiny Software Productions, Inc. ("DSNY"), MPE Distribution, Inc. ("MPE"), Tonality, Inc. ("Tonality"), and Sonox Digital Inc. ("Sonox"). All intercompany transactions and balances have been eliminated on consolidation. Use of Estimates The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Significant estimates are related to the labor capitalized to software under development and computer software, the recoverability of long-term assets including property and equipment, intangible assets, amortization expense, recoverability of accounts receivable and valuation of stock-based compensation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and cash equivalents The Company's cash includes cash in readily available checking accounts. The Company's cash equivalents consist of investments in mutual funds with a major Canadian financial institution that earn interest at variable interest rates ranging from 2.3 % - 2.9 %. Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Accounts receivable Trade receivables are amounts due from customers for services rendered in the ordinary course of business. Accounts receivable are non-interest bearing and are due for settlement in full within 30-60 days, depending on a contract. Trade receivables are shown net of allowance for bad or doubtful accounts. 26 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D Allowance for doubtful accounts The Company establishes an allowance for doubtful accounts to ensure trade and other receivables are not overstated due to non-collectability. The Company's allowance is based on a variety of factors, including age of the receivable, significant one-time events, historical experience, and other risk considerations. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience. The Company had $ 82,184 and $ 30,624 in allowance at August 31, 2025 and 2024, respectively. The Company recorded a bad debt of $ 51,055 and recovery of $ 2,700 for the years ended August 31, 2025 and 2024, respectively. Property and equipment, net Property and equipment are recorded at cost, less accumulated depreciation . Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the asset and is calculated using the following rates, commencing upon utilization of the assets: Furniture and fixtures 20 % Computer hardware 30 % Computer software 50 % Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in net income (loss). Intangible assets, net 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 . 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. Capitalization is limited to costs that are directly attributable to the specific software application and incurred during the application development stage. These costs may include but are not limited to: D irect costs of materials and services consumed in developing or obtaining internal-use software. Costs of employees directly associated with the development project, including employee compensation and benefits. Costs of third-party services utilized in the development process. Costs associated with maintenance, training, and general and administrative activities are expensed as incurred. The Company assesses the probability of completing the software development and the intended use of the software application to determine the eligibility of costs for capitalization. Once a project reaches the stage where it is probable that the software will provide additional functionality, capitalization begins, and costs are capitalized until the project is substantially complete and ready for its intended use. The capitalized costs are amortized on a straight-line basis over the estimated useful life of the software, typically not exceeding two years. Patents, trademarks and lists are stated at cost. Depreciation and amortization of patents, trademarks and lists are taken over the estimated useful lives of the assets and is calculated using the straight-line method over 3 years, commencing upon utilization of the assets. 27 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D Impairment of long-lived assets The Company reviews long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Intangible assets that are not subject to amortization are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. No impairment losses have been recorded for the years ended August 31, 202 5 and 2024. Revenue recognition The Company's revenue is derived from software as a service (SaaS) arrangement. The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers . 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: (1) 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 executed, 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. (2) 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. 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. 28 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D 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. (3) 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 ASC 606. A significant financing component generally does not exist under the Company's standard contracting and billing practices. (4) 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 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, specified enhancements and upgrades are estimated using a cost-plus reasonable margin approach, as there is no observable SSP. (5) 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 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. 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. 29 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D Contract Costs Contract costs consist 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. 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. Translation of foreign currencies The Company's reporting and functional currency is the U.S. dollar, except for its subsidiary, Destiny Software Productions, Inc., whose functional currency is the Canadian 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 financial statements into the reporting currency 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 into the reporting currency 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 (loss). 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. 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. 30 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D 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 consolidated financial statements. The Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated 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 consolidated financial statements as general and administrative expense. Stock-based compensation Stock-based compensation expense for employees and directors is recognized in the consolidated statements of comprehensive income (loss) based on estimated amounts, including the grant date fair value and the expected service period. For stock options, we estimate the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. We estimate the expected future volatility based on the Company's historical price volatility. The stock's future volatility may differ from the estimated volatility at the grant date. Our estimate of the forfeiture rate is based primarily on our historical experience. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. When awards are forfeited because non-market based vesting conditions are not satisfied, the expense previously recognized is proportionately reversed. We recognize the value of the awards over the awards' requisite service or performance periods. The requisite service period is generally the time over which our stock-based awards vest. Segment reporting Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment. 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. Earnings per share Net income (loss) per common share (basic) is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Net income (loss) per common share (diluted) is calculated by dividing net income (loss) 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. 31 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D Fair value measurements The Company uses the fair value hierarchy to measure the value of its financial instruments. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The basis for fair value measurements for each level within the hierarchy is described below: Level 1 - Quoted prices for identical assets or liabilities in active markets. Level 2 - Quoted prices for identical or similar assets and liabilities in markets that are not active; or other model-derived valuations whose inputs are directly or indirectly observable or whose significant value drivers are observable. Level 3 - Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable and for which assumptions are used based on management estimates. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Trade receivables are presented net of an allowance for expected credit losses, which management believes represents the best estimate of the lifetime expected losses on these assets. Accordingly, the net carrying amount of trade receivables approximates their fair value. The book value of cash and cash equivalents, accounts receivable, other receivables, deposits, accounts payable and accrued liabilities, and deferred revenue liabilities approximate their fair values due to the short-term maturity of those instruments. Recently Issued Accounting Pronouncements The Company assesses the adoption impacts of recently issued accounting standards by the FASB or other standard setting bodies on the Company's consolidated financial statements as well as material updates to previous assessments. There were no new material accounting standards issued in years of 2024 and 2025 that impacted the Company. Management has also evaluated accounting standards issued but not yet effective and does not expect their adoption to have a material effect. 32 3. PROPERTY AND EQUIPMENT, NET August 31, 2025 Property and Equipment Cost Accumulated Amortization Net Book Value Furniture and fixtures $ 129,302 $ ( 122,461 ) $ 6,841 Computer hardware 337,838 ( 295,198 ) 42,640 Computer software 2,168,156 ( 1,464,918 ) 703,238 Total property and equipment $ 2,635,296 $ ( 1,882,577 ) $ 752,719 August 31, 2024 Property and Equipment Cost Accumulated Amortization Net Book Value Furniture and fixtures $ 132,444 $ ( 123,687 ) $ 8,757 Computer hardware 325,845 ( 285,808 ) 40,037 Computer software 1,796,786 ( 671,210 ) 1,125,576 Total property and equipment $ 2,255,075 $ ( 1,080,705 ) $ 1,174,370 During the year ended August 31, 2025, the Company capitalized a total of $ 410,268 in salaries and wages related to computer software development (2024 - $ 982,602 ) upon completion of the development work. Depreciation on property and equipment for the year ended August 31, 2025 was $ 819,647 (2024 - $ 456,471 ). 4. INTANGIBLE ASSETS, NET August 31, 2025 Intangible Assets Cost Accumulated Amortization Net Book Value Software under development $ 16,717 $ - $ 16,717 Patents, trademarks, and lists 484,764 ( 466,199 ) 18,565 Total intangible assets $ 501,481 $ ( 466,199 ) $ 35,282 August 31, 2024 Intangible Assets Cost Accumulated Amortization Net Book Value Software under development $ 124,678 $ - $ 124,678 Patents, trademarks, and lists 486,579 ( 462,280 ) 24,299 Total intangible assets $ 611,257 $ ( 462,280 ) $ 148,977 During the year ended August 31, 2025, the Company capitalized a total of $ 306,052 in salaries and wages related to software under development (2024 - $ 476,258 ). $ 410,268 (2024 - $ 982,602 ) of the software under development was reclassified to computer software assets as the projects were completed (Note 3). Amortization on intangible assets for the year ended August 31, 2025 was $ 13,967 (2024 - $ 13,330 ). 33 5. 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. During the year ended August 31, 2025, the Company did not issue any common stock (2024 - nil). During the year ended August 31, 2025, the Company did not repurchase or cancel any common shares (2024 - 459,200 common shares for $ 470,271 ). [b] Stock option plans Pursuant to the Company's 2015 Stock Option Plan (the "2015 Plan"), 530,000 shares of common stock have been reserved for issuance. A total of 481,870 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") (together with the 2015 Plan, the "Plans"), whereby 1,000,000 common shares are reserved for issuance. As of August 31, 2025, 371,500 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 vest over 24 months. Any options that do not vest as the result of a grantee leaving the Company are forfeited and the underlying common shares are returned to the reserve. The options generally have a contractual term of five years. Stock-Based Payment Award Activity During the year ended August 31, 2025, the Company did not grant any share purchase options to directors, officers, employees, and consultants of the Company (2024 - 20,000 share purchase options ) . The weighted-average assumptions used to estimate the fair value of stock options granted in 2024 using the Black-Scholes option valuation model were as follows: 2024 Risk-free interest rate 5.00 % Volatility 85.31 % Exercise price $ 1.15 Dividend yield 0 % Forfeiture rate 0 % Expected life (years) 2.13 The summary of option activity for the years ended August 31, 2025 and 2024 were as follows: Number of Options Weighted Average Exercise Price Weighted Average Contractual Term (Years) Outstanding at August 31, 2023 749,000 $ 1.30 3.37 Granted 20,000 $ 1.15 4.61 Forfeited ( 46,122 ) $ 1.14 3.14 Expired ( 7,168 ) $ 1.01 3.47 Outstanding at August 31, 2024 715,710 $ 1.31 2.37 Forfeited ( 15,207 ) $ 0.85 2.90 Granted - - - Expired ( 154,503 ) $ 1.33 0.70 Outstanding at August 31, 2025 546,000 $ 1.32 1.71 Exercisable at August 31, 2025 539,750 $ 1.32 1.68 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. As of August 31, 2025, no options were in-the-money and the aggregate intrinsic value was $nil (2024 - $nil). There were no stock options repurchased during the years ended August 31, 2025 and 2024. 34 5. STOCKHOLDERS' EQUITY CONT'D The following table summarizes information regarding the non-vested options outstanding as of August 31, 2025 and changes during the period: Number of Options Weighted Average Exercise Price Non-vested options at August 31, 2023 268,983 $ 1.01 Granted 20,000 $ 1.15 Forfeited ( 24,454 ) $ 0.86 Vested ( 170,416 ) $ 1.11 Non-vested options at August 31, 2024 94,113 $ 0.90 Granted - - Forfeited ( 15,207 ) $ 0.85 Vested ( 72,656 ) $ 0.89 Non-vested options at August 31, 2025 6,250 $ 1.15 As of August 31, 2025, there was $ 3,527 (2024 - $ 42,661 ) 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 0.6 years (2024 - 0.8 years). During the years ended August 31, 2025 and 2024, the total stock-based compensation expense was reported in the consolidated statement of comprehensive income (loss) as follows: Stock-based compensation 2025 2024 General and administrative $ 16,068 $ 36,918 Sales and marketing 4,127 622 Product development 11,533 9,386 Total stock-based compensation $ 31,728 $ 46,926 [c] Employee Stock Purchase Plan The Company's 2011 Employee Stock Purchase Plan (the "ESPP") became effective on February 22, 2011. Under the ESPP, employees of the Company can contribute up to 5% of their annual salary into a pool which is matched equally by the Company in order to purchase the Company's common shares under certain terms. Directors can 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 TSXV by a third-party plan agent. The third-party plan agent is also responsible for the administration of the ESPP on behalf of the Company and the participants. During the year ended August 31, 2025, the Company recognized compensation expense of $ 68,203 (2024 - $ 67,989 ) in salaries and wages on the consolidated statement of comprehensive income (loss) in respect of the ESPP, representing the Company's employee matching of cash contributions to the ESPP. The shares were purchased on the open market at an average price of $ 0.63 (2024 - $ 1.00 ). The shares are held in trust by the Company for a period of one year from the date of purchase. As of August 31, 2025, 108,964 (2024 - 79,963 ) shares were held in trust by the Company. [d] Earnings Per Share The following table shows the computation of basic and diluted earnings per share for the years ended August 31, 2025, and 2024: 2025 2024 Numerator: Net income (loss) $ ( 637,877 ) $ 111,758 Denominator: Weighted-average basic shares outstanding 9,637,410 9,794,273 Effect of dilutive stock-based awards - 236,296 Weighted-average diluted shares 9,637,410 10,030,569 Basic and diluted earnings (loss) per share $ ( 0.07 ) $ 0.01 35 5. STOCKHOLDERS' EQUITY CONT'D 539,750 stock options were excluded from the computation of diluted earnings per share for 2025, because their effect would have been antidilutive. 6. 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 for income taxes at the United States federal statutory rate compared to the Company's income tax expense is as follows: 2025 2024 Tax (recovery) at U.S. statutory rates $ ( 134,000 ) $ 23,000 Permanent differences 5,000 13,000 Effect of higher foreign tax rates in Canada ( 66,000 ) 48,000 Foreign exchange and other adjustments 110,000 ( 11,000 ) Change in valuation allowance 85,000 ( 73,000 ) Provision for 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, 2025 and 2024 are as follows: 2025 2024 Deferred tax assets Net operating loss carry forwards $ 585,000 $ 978,000 Excess of book over tax depreciation 719,000 1,096,000 Tax credit carry forwards 540,000 615,000 Total deferred tax assets 1,844,000 2,689,000 Valuation allowance ( 1,844,000 ) ( 2,689,000 ) Net deferred tax assets $ - $ - Net income (loss) before income tax by geographic region is as follows: 2025 2024 United States $ 461,096 $ ( 647,462 ) Canada ( 1,098,973 ) 759,220 Total $ ( 637,877 ) $ 111,758 If not utilized to reduce future taxable income, the Company's net operating loss carry forwards will expire as follows: 2025 and thereafter United States $ 2,486,715 Canada 232,522 Total $ 2,719,237 If not utilized to reduce future taxes payable, the Company's investment and other tax credit carry forwards will expire as follows: 2032 and thereafter United States $ - Canada 740,293 Total $ 2,080,758 36 7. COMMITMENTS AND 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 claims were heard in B.C. Supreme Court in December 2024. On October 24, 2025, the Supreme Court of British Columbia issued judgment dismissing all claims against the Company, its directors, and officers, and awarding the Company its costs. Refer to note 9 "Subsequent events". 8. CONCENTRATIONS, ECONOMIC DEPENDENCE AND SEGMENTS The Company operates solely in the digital media software segment and all revenue from its products and services are made in this segment. Management evaluates the Company's operations and allocates resources on a consolidated basis. Accordingly, the Company operates as one operating and reportable segment. Revenue from external customers earned during the years ended August 31, 2025 and 2024, by product and location of customer, was as follows: 2025 2024 Play MPE® North America $ 2,139,051 $ 2,221,439 Europe 2,206,685 1,988,127 Australasia 159,771 190,515 Africa 18,942 20,688 Total Play MPE® $ 4,524,448 $ 4,420,768 Revenue presented above 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, 2025, the Company generated 46.9 % of total revenue from one customer (2024 - 42.7 %). The Company has substantially all its assets in Canada and its current and planned future operations are, and will be, located in Canada. 9. SUBSEQUENT EVENTS Legal proceedings On October 24, 2025, the Supreme Court of British Columbia issued judgment dismissing all claims brought by the Company's former President and Chief Executive Officer against the Company, its subsidiaries, directors, and officers, and awarded costs to the Company. The judgment was in the Company's favor. The Company has not yet recognized any gains related to this outcome. 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.