Item 1.
|
Financial Statements.
|
Condensed Consolidated Financial Statements
Destiny Media Technologies Inc.
(Unaudited)
Nine
months ended May 31, 2016
(Expressed in United States dollars)
Destiny Media Technologies Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in
United States dollars)
Unaudited
As at
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
756,402
|
|
|
387,316
|
|
Accounts receivable, net of allowance for
doubtful accounts of $9,304
[Aug 31, 2015 $6,129]
[note 10]
|
|
438,430
|
|
|
399,148
|
|
Other receivables
|
|
7,734
|
|
|
15,471
|
|
Current portion of long term receivable
[note 3]
|
|
106,899
|
|
|
98,180
|
|
Prepaid expenses
|
|
32,395
|
|
|
36,042
|
|
Total current assets
|
|
1,341,860
|
|
|
936,157
|
|
Deposits
|
|
23,055
|
|
|
32,222
|
|
Long term receivable
[note 3]
|
|
87,597
|
|
|
167,350
|
|
Property and equipment, net
|
|
399,153
|
|
|
401,461
|
|
Total assets
|
|
1,851,665
|
|
|
1,537,190
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts payable
|
|
87,876
|
|
|
139,879
|
|
Accrued liabilities
|
|
199,360
|
|
|
189,672
|
|
Deferred leasehold inducement
|
|
37,777
|
|
|
63,217
|
|
Deferred revenue
|
|
24,887
|
|
|
24,712
|
|
Obligation under capital lease current portion [
note
5
]
|
|
5,151
|
|
|
5,205
|
|
Total current liabilities
|
|
355,051
|
|
|
422,685
|
|
Obligation under capital lease long term portion [
note
5
]
|
|
7,967
|
|
|
12,071
|
|
Total liabilities
|
|
363,018
|
|
|
434,756
|
|
|
|
|
|
|
|
|
Commitments and contingencies
[notes 5 and 8]
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
Common stock, par value
$0.001
[note 4]
Authorized:
100,000,000 shares
Issued and
outstanding: 55,013,874 shares
[Aug 31, 2015
issued and outstanding 52,993,874 shares]
|
|
55,014
|
|
|
52,994
|
|
Additional paid-in capital
|
|
9,653,678
|
|
|
9,122,132
|
|
Accumulated deficit
|
|
(7,887,264
|
)
|
|
(7,708,061
|
)
|
Accumulated other comprehensive (loss)
|
|
(332,781
|
)
|
|
(364,631
|
)
|
Total stockholders equity
|
|
1,488,647
|
|
|
1,102,434
|
|
Total liabilities and stockholders equity
|
|
1,851,665
|
|
|
1,537,190
|
|
See accompanying notes
Destiny Media Technologies Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
(Expressed in United States dollars)
Unaudited
|
|
Three Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Nine months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
[note 10]
|
|
875,502
|
|
|
803,409
|
|
|
2,487,120
|
|
|
2,501,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
[note 4]
|
|
202,016
|
|
|
267,967
|
|
|
595,605
|
|
|
808,547
|
|
Sales and marketing
[note
4]
|
|
257,536
|
|
|
360,925
|
|
|
910,322
|
|
|
1,114,431
|
|
Research and development
[note 4]
|
|
362,920
|
|
|
348,680
|
|
|
1,013,682
|
|
|
1,123,931
|
|
Amortization
|
|
60,746
|
|
|
53,595
|
|
|
163,771
|
|
|
128,378
|
|
|
|
883,218
|
|
|
1,031,167
|
|
|
2,683,380
|
|
|
3,175,287
|
|
(Loss) from operations
|
|
(7,716
|
)
|
|
(227,758
|
)
|
|
(196,260
|
)
|
|
(673,615
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
-
|
|
|
289
|
|
|
-
|
|
|
289
|
|
Interest income
|
|
4,903
|
|
|
9,040
|
|
|
17,057
|
|
|
34,131
|
|
Net (loss)
|
|
(2,813
|
)
|
|
(218,429
|
)
|
|
(179,203
|
)
|
|
(639,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
68,915
|
|
|
(1,824
|
)
|
|
31,850
|
|
|
(267,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
66,102
|
|
|
(220,253
|
)
|
|
(147,353
|
)
|
|
(906,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share,
basic and diluted
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(
0.00
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
55,013,874
|
|
|
52,993,874
|
|
|
54,645,261
|
|
|
52,993,874
|
|
Diluted
|
|
55,013,874
|
|
|
52,993,874
|
|
|
54,645,261
|
|
|
52,993,874
|
|
See accompanying notes
Destiny Media
Technologies
Inc.
CONDENSED
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
STOCKHOLDERS
EQUITY
(Expressed in United States dollars)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
stockholders
|
|
|
|
Common stock
|
|
|
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Income (loss)
|
|
|
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, August 31, 2015
|
|
52,993,874
|
|
|
52,994
|
|
|
9,122,132
|
|
|
(7,708,061
|
)
|
|
(364,631
|
)
|
|
1,102,434
|
|
Total comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
(179,203
|
)
|
|
31,850
|
|
|
(147,353
|
)
|
Common stock issued pursuant
to private placement
|
|
2,020,000
|
|
|
2,020
|
|
|
502,980
|
|
|
|
|
|
|
|
|
505,000
|
|
Less: share issuance costs
|
|
|
|
|
|
|
|
(8,640
|
)
|
|
|
|
|
|
|
|
(8,640
|
)
|
Stock based compensation Note 4
|
|
|
|
|
|
|
|
37,206
|
|
|
|
|
|
|
|
|
37,206
|
|
Balance, May 31, 2016
|
|
55,013,874
|
|
|
55,014
|
|
|
9,653,678
|
|
|
(7,887,264
|
)
|
|
(332,781
|
)
|
|
1,488,647
|
|
See
accompanying
notes
Destiny Media Technologies Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in
United States dollars)
Unaudited
Nine months ended May 31,
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
(179,203
|
)
|
|
(639,195
|
)
|
Items not involving cash:
|
|
|
|
|
|
|
Amortization
|
|
163,771
|
|
|
128,378
|
|
Stock-based compensation
|
|
37,206
|
|
|
19,147
|
|
Deferred
leasehold inducement
|
|
(25,557
|
)
|
|
80,167
|
|
Unrealized foreign exchange
|
|
(3,590
|
)
|
|
25,987
|
|
Changes in non-cash working
capital:
|
|
|
|
|
|
|
Accounts receivable
|
|
(33,979
|
)
|
|
(40,972
|
)
|
Other
receivables
|
|
7,733
|
|
|
60,989
|
|
Prepaid expenses and deposits
|
|
13,283
|
|
|
71,807
|
|
Accounts payable
|
|
(57,454
|
)
|
|
49,160
|
|
Accrued liabilities
|
|
8,233
|
|
|
35,330
|
|
Deferred revenue
|
|
(101
|
)
|
|
(16,128
|
)
|
Long term receivable
|
|
75,932
|
|
|
74,753
|
|
Net cash provided by (used in) operating activities
|
|
6,274
|
|
|
(150,577
|
)
|
|
|
|
|
|
|
|
INVESTING ACTIVITY
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(157,083
|
)
|
|
(282,461
|
)
|
Net cash used in investing activity
|
|
(157,083
|
)
|
|
(282,461
|
)
|
|
|
|
|
|
|
|
FINANCING ACTIVITY
|
|
|
|
|
|
|
Common stock issued in private placements, net
|
|
496,360
|
|
|
|
|
Net cash provided by financing activity
|
|
496,360
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange
rate changes on cash
|
|
23,535
|
|
|
(137,578
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in
cash during the period
|
|
369,086
|
|
|
(570,616
|
)
|
Cash, beginning of the period
|
|
387,316
|
|
|
990,007
|
|
Cash, end of the period
|
|
756,402
|
|
|
419,391
|
|
|
|
|
|
|
|
|
Supplementary
disclosure
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
442
|
|
Income taxes paid
|
|
|
|
|
|
|
See accompanying notes
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
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 Companys stock is listed for trading under the symbol
DSNY on the OTCQX 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 interim condensed consolidated
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
nine months ended May 31, 2016 are not necessarily indicative of the results
that may be expected for the year ended August 31, 2016.
The consolidated balance sheet at August 31, 2015 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles in the United States 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, 2015.
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
3. LONG TERM RECEIVABLE
The Company agreed to settle litigation with an unrelated
party. Pursuant to a Settlement Deed dated March 5, 2012, the Company became
entitled to a settlement sum of $825,000 Australian dollars (AUD) (US
$858,194), receivable in monthly installments over the course of 72 months,
beginning on March 31, 2012 and ending on February 28, 2018. The balance is due
to be paid in equal monthly installments of $14,050AUD until the end of the
obligation. The unpaid balance accrues interest of 10.25% per annum compounded
monthly. The receivable is secured by a registered charge against real estate
located in Australia. As of May 31, 2016, aggregate installments of $788,450AUD
including interest of $232,445AUD have been received.
The following table summarizes the changes regarding the
carrying value of the remaining receivable balance during the nine-month period
ended May 31, 2016 and for the year ended August 31, 2015:
|
|
May 31, 2016
|
|
|
August 31, 2015
|
|
|
|
$
|
|
|
$
|
|
Beginning balance
|
|
265,530
|
|
|
461,294
|
|
Gross installments received
|
|
(91,718
|
)
|
|
(135,403
|
)
|
Interest included in above
|
|
18,176
|
|
|
36,089
|
|
Foreign exchange
impact
|
|
2,508
|
|
|
(96,450
|
)
|
Ending balance
|
|
194,496
|
|
|
265,530
|
|
The foreign exchange impact in above table is partially
allocated into other comprehensive income (loss) and partially allocated into
exchange gain (loss) on income statement.
Payments to be received over the next three fiscal years as
follows:
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
25,711
|
|
|
4,766
|
|
|
30,477
|
|
2017
|
|
109,662
|
|
|
12,244
|
|
|
121,906
|
|
2018
|
|
59,123
|
|
|
1,779
|
|
|
60,902
|
|
|
|
194,496
|
|
|
18,789
|
|
|
213,285
|
|
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
4. STOCKHOLDERS EQUITY
[a] Common stock issued and authorized
The Company is authorized to issue up to 100,000,000 shares of
common stock, par value $0.001 per share.
During the nine months ended May 31, 2016, the Company issued
2,020,000 Units at a price of $0.25 per Unit for gross proceeds of $505,000
pursuant to a private placement.
Each Unit was comprised of one common share of the Company and
one-half of one common share purchase warrant ("Warrant"), with each whole
Warrant entitling the holder to purchase one additional common share at $0.30
per share for a period of two years from the date of the issuance. The Company
will have the right to accelerate the expiry date of the Warrants if, at any
time, the average closing price of the Companys common shares is equal to or
greater than $1.25 for 20 consecutive trading days. In the event of
acceleration, the expiry date will be accelerated to a date that is 30 days
after the Company issues a news release announcing that it has elected to
exercise this acceleration right.
[b] Stock option plans
The Company has two existing stock option plan (the Plan),
namely the 2006 Stock Option Plan and the 2015 Stock Option Plan, under which up
to 7,750,000 shares of the common stock, has been reserved for issuance. A total
of 2,053,181 common shares remain eligible for issuance under the Plan. The
options generally vest over a range of periods from the date of grant, some are
immediate, and others are 12 or 24 months. Any options that do not vest as the
result of a grantee leaving the Company are forfeited and the common shares
underlying them are returned to the reserve. The options generally have a
contractual term of five years.
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
4. STOCKHOLDERS EQUITY (contd.)
Stock-Based Payment Award Activity
A summary of option activity under the Plans as of May 31,
2016, and changes during the period ended are presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Value
|
|
Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
$
|
|
Outstanding at September 1, 2015
|
|
1,220,000
|
|
|
0.53
|
|
|
2.38
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(270,000
|
)
|
|
0.98
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2016
|
|
950,000
|
|
|
0.40
|
|
|
1.83
|
|
|
|
|
Exercisable at
May 31, 2016
|
|
575,000
|
|
|
0.40
|
|
|
1.37
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying awards and the quoted price of the
Companys common stock for the options that were in-the-money at May 31, 2016.
The following table summarizes information regarding the
non-vested stock purchase options outstanding as of May 31, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Number of Options
|
|
|
Price
|
|
Non-vested options at September 1, 2015
|
|
736,250
|
|
|
0.90
|
|
Granted
|
|
|
|
|
|
|
Forfeited
|
|
(80,000
|
)
|
|
1.70
|
|
Vested
|
|
(281,250
|
)
|
|
0.40
|
|
Non-vested options at May 31, 2016
|
|
375,000
|
|
|
0.40
|
|
As of May 31, 2016, there was $49,607 of total unrecognized
compensation cost related to non-vested share-based compensation awards. The
unrecognized compensation cost is expected to be recognized over a weighted
average period of 0.98 years.
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
4. STOCKHOLDERS EQUITY (contd.)
During the three and nine months ended May 31, 2016 and 2015,
stock-based compensation expense has been reported in the condensed consolidated
statement of operations and comprehensive income as follows:
|
|
Three Months Ended
|
|
|
Nine months Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
7,152
|
|
|
5,249
|
|
|
21,455
|
|
|
13,171
|
|
Sales and marketing
|
|
3,266
|
|
|
587
|
|
|
9,798
|
|
|
5,389
|
|
Research and development
|
|
1,984
|
|
|
-
|
|
|
5,953
|
|
|
587
|
|
Total
stock-based compensation
|
|
12,402
|
|
|
5,836
|
|
|
37,206
|
|
|
19,147
|
|
[c] Employee Stock Purchase Plan
The Companys 2011 Employee Stock Purchase Plan (the Plan)
became effective on February 22, 2011. Under the Plan, employees of Destiny are
able to contribute up to 5% of their annual salary into a pool which is matched
equally by Destiny. Independent directors are able to contribute a maximum of
$12,500 each for a combined maximum annual purchase of $25,000.
The maximum annual combined contributions will be $400,000. All
purchases are made through the Toronto Stock Exchange by a third party plan
agent. The third party plan agent will also be responsible for the
administration of the Plan on behalf of Destiny and the participants.
During the nine months ended May 31, 2016, the Company
recognized compensation expense of $25,896 (2015 - $81,949) in salaries and
wages on the condensed consolidated statement of operations and comprehensive
income in respect of the Plan, representing the Companys employee matching of
cash contributions to the plan. The shares were purchased on the open market at
an average price of $0.2237 (2015 - $0.3937). The shares are held in trust by
the Company for a period of one year from the date of purchase.
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
5. COMMITMENTS
In December 2014, the Company entered into a sublease agreement
commencing May 1, 2015 and expiring June 29, 2017 for a new premise with free
occupation from December 2014 to April 2015. In February 2015 the sublease
agreement was amended to include one extra month free occupation for May 2015
with rent payment starting June 1, 2015. The Company has fiscal year payments
committed as follows:
|
|
$
|
|
|
|
|
|
2016
|
|
67,463
|
|
2017
|
|
224,878
|
|
During the three and nine months ended May 31, 2016, the
Company incurred rent expense of $73,021 and $193,908, respectively (2015 -
$63,989 and $230,038, respectively) which has been allocated between general and
administrative expenses, research and development and sales and marketing on the
consolidated statement of operations and comprehensive income (loss). The rent
expense during the nine months ended May 31, 2016 has included the allocation of
rental payments on a straight-line basis.
In February 2015, the Company entered into a capital lease. The
Company is committed to make payments under its capital leases for the remaining
terms of the leases as follows:
|
|
$
|
|
2016
|
|
1,086
|
|
2017
|
|
6,513
|
|
2018
|
|
6,730
|
|
Total lease payments
|
|
14,329
|
|
Less: Amounts representing interest
|
|
(1,211
|
)
|
Balance of obligation
|
|
13,118
|
|
Less: Current Less: Current portion
|
|
(5,151
|
)
|
Long term portion
|
|
7,967
|
|
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
6. RELATED PARTY TRANSACTIONS
The Company entered into a consulting agreement with a family
member of a former Director to provide project management service effective
March 1, 2014. During the nine months ended May 31, 2016, the Company paid
consulting fees of $Nil (2015 - $69,290) under this agreement. The family
members service terminated at the end of May, 2015.
7. INCOME TAX
The Company has adopted the provisions of ASC 740, Income
taxes. This standard clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
standard also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company
and its subsidiaries are subject to U.S. federal income tax, Canadian income
tax, as well as income tax of multiple state and local jurisdictions. Based on
the Companys evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in the Companys
financial statements. The Companys evaluation was performed for the tax years
ended August 31, 1999 through August 31, 2015, the tax years which remain
subject to examination by major tax jurisdictions as of May 31, 2016. 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 Companys financial results. In the event the Company has
received an assessment for interest and/or penalties, it has been classified in
the financial statements as selling, general and administrative expense.
8. CONTINGENCIES
On November 8, 2011, the Company was served with a Notice of
Civil Claim in the Supreme Court of British Columbia from Noramco Capital
Corporation for $100,000. The claim asserts that the Company has repudiated a
subscription agreement entered into in August 2000. Management believes the
claim is without merit and that the likelihood that the outcome of this matter
will have a material adverse impact on its result of operations, cash flows and
financial condition of the Company is remote. The Company has filed a
counterclaim against Noramco and the alleged major beneficial shareholder of
Noramco, R. A. Bruce McDonald, for damages arising from a proposed private
placement in 2000 which did not close.
7
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
9. NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Not Yet Effective
In May 2014, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from
Contracts with Customers
, (ASU 2014-09) which outlines a single
comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. ASU 2014-09 requires an entity
to recognize revenue depicting the transfer of goods or services to customers in
an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. ASU 2014-09 will also result
in enhanced revenue related disclosures. On August 12, 2015, ASU 2015-14 was
released to defer the effective date of ASU 2014-09 to be effective for fiscal
years, and interim reporting periods within those years, beginning after
December 15, 2017. The Company is currently evaluating the impact of the
adoption of this new standard.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure
of Uncertainties about an Entitys Ability to Continue as a Going Concern
(ASU 2014-15). ASU 2014-15 will explicitly require management to assess an
entitys ability to continue as a going concern, and to provide related footnote
disclosure in certain circumstances. The new standard will be effective for all
entities in the first annual period ending after December 15, 2016. The Company
is currently evaluating the impact of the adoption of this new standard.
In February 2016, FASB issued ASU 2016-02,
Leases
. The
guidance would require lessees to recognize most leases on their balance sheets
as lease liabilities with corresponding right of-use assets. The guidance is
effective for annual and interim reporting periods beginning on or after
December 15, 2018. The Company is currently evaluating the impact of its pending
adoption of ASU 2016-02 on its consolidated financial statements.
Destiny Media Technologies Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
Unaudited
Nine months ended May 31, 2016 and 2015
10. CONCENTRATIONS AND ECONOMIC DEPENDENCE
The Company operates solely in the digital media software
segment and all revenue from its products and services are made in this segment.
Revenue from external customers, by product and location of
customer, is as follows:
|
|
Three Months Ended
|
|
|
Nine months Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Play
MPE®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
368,449
|
|
|
319,130
|
|
|
1,020,476
|
|
|
967,447
|
|
Europe
|
|
422,699
|
|
|
398,490
|
|
|
1,224,132
|
|
|
1,295,423
|
|
Australasia
|
|
69,345
|
|
|
78,295
|
|
|
201,388
|
|
|
216,148
|
|
Total Play MPE®
|
|
860,493
|
|
|
795,915
|
|
|
2,445,996
|
|
|
2,479,018
|
|
Clipstream ®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
15,009
|
|
|
7,494
|
|
|
41,124
|
|
|
22,654
|
|
Outside of North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Clipstream ®
|
|
15,009
|
|
|
7,494
|
|
|
41,124
|
|
|
22,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
875,502
|
|
|
803,409
|
|
|
2,487,120
|
|
|
2,501,672
|
|
Revenue in the above table is based on location of the
customer. Some of these customers have distribution centers located around the
globe and distribute around the world. During the nine months ended May 31,
2016, the Company generated 42% of total revenue from one customer [2015 45%].
It is in managements opinion that the Company is not exposed
to significant credit risk.
As at May 31, 2016, one customer represented $236,189 (50%) of
the trade receivables balance [August 31, 2015 one customer represented 59%].
The Company has substantially all its assets in Canada and its
current and planned future operations are, and will be, located in Canada.
Item 2.
|
Managements 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 Companys 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 Companys 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 or we 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 OTCQX U.S. (OTCQX) 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 services that enable the secure
distribution of digital media content over the Internet. Destiny services are
based around proprietary security, watermarking and instant play streaming media
technologies.
The Play MPE® digital distribution service is used commercially
by the recording industry to distribute new pre-release music and music videos
to trusted recipients such as radio and press before that content is generally
available for sale to the public.
Clipstream® is a suite of products and services under
development, which are based around the Company's new cross platform Javascript
and HTML 5 canvas tag rendering engine. Video is encoded into a proprietary
streaming media technology which has been under development since 2010.
Provisional patent priority is claimed to August 2011. The Company had another
streaming media product with the same brand that launched in 2000 which is only
loosely related to this new generation technology.
The unique patented approach in the rendering engine has a
large number of advantages over the more typical reliance on video plug-ins, the
HTML 5 video tag and dedicated playback applications for mobile.
Play MPE®
Play MPE® is a digital delivery service for securely moving
broadcast quality audio, video, images, promotional information and other
digital content securely 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, VIPs, DJs, film and TV personnel, sports stadiums and
retailers. The system replaces the physical distribution (mail, courier or hand
delivery) of CDs. The financial model is transaction based, where the price per
delivery varies with the number of songs and videos delivered.
Record labels around the world, including all three major
labels (Universal Music Group, Warner Music Group and Sony Music Entertainment),
are regularly using Play MPE® to deliver their content to radio.
Clipstream®
Clipstream® products are based on a technology that provides
streaming video through the Internet directly on to most computers, smart
phones, tablets and other devices. Clipstream®s encode once, play anywhere
vision addresses the breadth and complexity in todays multi-format video
environment, reducing the cost and complexity of delivering streaming video.
This single format solution can be sold into any industry vertical requiring
streaming video.
We are developing several products under the Clipstream® brand,
including the core engine technology, a cloud encoding and hosting service, an
enhanced security plug-in and variants of these solutions for market research
and advertising industry applications. We have realized some initial revenue
from market research companies conducting video questionnaire services.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 31, 2016
AND MAY 31, 2015
Revenue
Total revenue for the nine months ended May 31, 2016 was
$2,487,120, as compared to $2,501,672 for the nine months ended May 31, 2015.
Play MPE® revenue currently accounts for 98% of the Companys revenue. Adverse
foreign exchange effects were offset by growth in Play MPE® revenue, resulting
in a net 1.4% decline in Play MPE® revenue. Prior to negative impacts caused by
the Australian Dollar and Euro falling relative to the US dollar, Play MPE
revenue grew by approximately 5% in Australia, 1% in Europe and 5% in the United
States. The growth in revenue in the United States is from the growth in
Independent Label revenue, which grew by approximately 21%. During the nine
months ended May 31, 2016, 50% of our Play MPE revenues were denominated in
Euros and 8% were denominated in Australian Dollars (2015: 52% and 8%,
respectively). Removing the effect of foreign exchange fluctuations, total Play
MPE revenue during the nine months ended May 31, 2016 grew by 2.8%.
While Clipstream® revenue remains a small portion of the
Companys overall revenue, this segment grew by approximately 85%.
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; office space, supplies and benefits. Our operations are
primarily conducted in Canada.
Overall costs dropped by 15.5% to $2,683,380 (2015
$3,175,287) during the nine months ended May 31, 2016. The majority of this
decline is result of favorable exchange rates, reduced staffing costs with a
reduction in executive salaries and wages, recruiting and retrenchment costs,
and a reduction in spending on public company expenditures. These savings are
partially offset by a 124% increase in marketing costs and 113% increase in
technology operating costs associated with subcontracting our
infrastructure.
The Company maintains most of its financial reserves in
Canadian dollars to mitigate the downside risk of adverse exchange rates.
General and administrative
|
|
31-May
|
|
|
31-May
|
|
|
$
|
|
|
%
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
|
|
(9 months)
|
|
|
(9 months)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
Wages and benefits
|
|
247,997
|
|
|
362,793
|
|
|
(114,796
|
)
|
|
(31.6%
|
)
|
Rent
|
|
22,892
|
|
|
38,151
|
|
|
(15,259
|
)
|
|
(40.0%
|
)
|
Telecommunications
|
|
30,008
|
|
|
17,539
|
|
|
12,469
|
|
|
71.1%
|
|
Bad debt
|
|
4,211
|
|
|
3,380
|
|
|
831
|
|
|
24.6%
|
|
Office and
miscellaneous
|
|
191,777
|
|
|
282,340
|
|
|
(90,563
|
)
|
|
(32.1%
|
)
|
Professional fees
|
|
98,720
|
|
|
104,344
|
|
|
(5,624
|
)
|
|
(5.4%
|
)
|
|
|
595,605
|
|
|
808,547
|
|
|
(212,942
|
)
|
|
(26.3%
|
)
|
Our general and administrative expenses consist primarily of
salaries and related personnel costs including overhead, professional fees, and
other general office expenditures.
The decrease in wages and benefits is attributable to a
reduction in director and officer compensation and a reduction caused by the
devaluation of the Canadian dollar relative to the US dollar. The decrease in
office and miscellaneous expenses is due to the termination of shareholder
relations consulting agreements and related expenditures. The decrease in rent
is due a reduction of one-time costs associated with the change in office lease
in the comparative period.
Sales and marketing
|
|
31-May
|
|
|
31-May
|
|
|
$
|
|
|
%
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
|
|
(9 months)
|
|
|
(9 months)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
Wages and benefits
|
|
594,475
|
|
|
892,522
|
|
|
(298,047
|
)
|
|
(33.4%
|
)
|
Rent
|
|
58,892
|
|
|
86,666
|
|
|
(27,774
|
)
|
|
(32.0%
|
)
|
Telecommunications
|
|
77,199
|
|
|
39,842
|
|
|
37,357
|
|
|
93.8%
|
|
Travel
|
|
25,471
|
|
|
38,377
|
|
|
(12,906
|
)
|
|
(33.6%
|
)
|
Advertising and
marketing
|
|
154,285
|
|
|
57,024
|
|
|
97,261
|
|
|
170.6%
|
|
|
|
910,322
|
|
|
1,114,431
|
|
|
(204,109
|
)
|
|
(18.3%
|
)
|
Sales and marketing expenses consist primarily of salaries and
related personnel costs including overhead, sales commissions, advertising and
promotional fees, and travel costs. The decrease in wages and benefits is mostly
attributable to exchange rate fluctuations, a reduction in termination costs,
as well as a small decrease in personnel. The increase in telecommunications
expense is attributable to increased costs related to Amazon Web Services
incurred to build a strong IT infrastructure platform. The increase in
advertising and marketing expenses is related to an increased focus on online
advertising of Clipstream® and Play MPE® to gain increased online exposure
internationally.
Research and development
|
|
31-May
|
|
|
31-May
|
|
|
$
|
|
|
%
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
|
|
(9 months)
|
|
|
(9 months)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
Wages and benefits
|
|
810,464
|
|
|
965,431
|
|
|
(154,967
|
)
|
|
(16.1%
|
)
|
Rent
|
|
81,295
|
|
|
105,221
|
|
|
(23,926
|
)
|
|
(22.7%
|
)
|
Telecommunications
|
|
106,567
|
|
|
48,372
|
|
|
58,195
|
|
|
120.3%
|
|
Research and development
|
|
15,356
|
|
|
4,907
|
|
|
10,449
|
|
|
212.9%
|
|
|
|
1,013,682
|
|
|
1,123,931
|
|
|
(110,249
|
)
|
|
(9.8%
|
)
|
Research and development costs consist primarily of salaries
and related personnel costs including overhead and consulting fees with respect
to product development and deployment. The decrease in wages and benefits is
attributable to exchange rate fluctuations, a reduction in termination costs, as
well as a small decrease in personnel. The increase in telecommunications
expense is attributable to increased costs related to Amazon Web Services
incurred to build a stronger IT infrastructure platform.
The decrease in
rent is due to decrease rent expenses in the current period as a result of on
time costs associated with the change in office lease in the comparative period.
Amortization
Amortization expense arises from property and equipment, and
from patents and trademarks. Amortization increased to $163,771 for the nine
months ended May 31, 2016 from $128,378 for the nine months ended May 31, 2015,
an increase of $35,393 or 28% as a result of capitalized leasehold improvements
for our new office and software testing services purchased to improve product
quality.
Other earnings and expenses
Interest income decreased to $17,057 for the nine months ended
May 31, 2016 from $34,131 for the nine months ended May 31, 2015, a decrease of
$17,074. The interest income is derived from the amount receivable pursuant to
our previous litigation settlement. The decrease in interest income is the
result of a lower settlement receivable balance from the settlement receivable
being paid down over its term.
Net income (loss)
During the nine months ended May 31, 2016 we have net loss of
$179,203 (2015 $639,195) a reduction of approximately 72% compared to the
prior year. The reduction in net loss is the result of a reduction in overall
spending on rent, salaries and wages, and public company expenditures and
favorable exchange rate fluctuations on expenses denominated in Canadian
dollars, partially offset by increases in marketing and technology
expenditures.
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 from operations to Adjusted EBITDA over the eight most recently
completed fiscal quarters:
|
|
2014 Q4
|
|
|
2015 Q1
|
|
|
2015 Q2
|
|
|
2015 Q3
|
|
|
2015 Q4
|
|
|
2016 Q1
|
|
|
2016 Q2
|
|
|
2016 Q3
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Net Income (Loss)
|
|
(74,059
|
)
|
|
(56,309
|
)
|
|
(364,457
|
)
|
|
(218,429
|
)
|
|
(957,451
|
)
|
|
(101,007
|
)
|
|
(75,383
|
)
|
|
(2,813
|
)
|
Amortization, stock
based compensation
and deferred leasehold
inducement
|
|
44,102
|
|
|
42,982
|
|
|
60,799
|
|
|
123,911
|
|
|
85,222
|
|
|
53,608
|
|
|
57,404
|
|
|
64,630
|
|
Interest income
|
|
(13,961
|
)
|
|
(13,046
|
)
|
|
(12,045
|
)
|
|
(9,482
|
)
|
|
(8,214
|
)
|
|
(6,122
|
)
|
|
(6,033
|
)
|
|
(4,902
|
)
|
Income tax
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
842,000
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
(26,918
|
)
|
|
(26,373
|
)
|
|
(315,703
|
)
|
|
(104,000
|
)
|
|
(38,443
|
)
|
|
(53,521
|
)
|
|
(24,012
|
)
|
|
56,915
|
|
LIQUIDITY AND FINANCIAL CONDITION
We had cash of $756,402 as at May 31, 2016 (August 31, 2015
$387,316). We had working capital of $986,809 as at May 31, 2016 compared to
working capital of $513,472 as at August 31, 2015. The increase in our working
capital was mainly due to an increase in our cash balance as a result of a
private placement during the first quarter, which generated gross cash proceeds
of $505,000.
CASHFLOWS
Net cash provided by operating activities was $6,274 for the nine months ended May 31, 2016, compared to net cash used of $150,577 for the nine months ended May 31, 2015. The main reason for the decrease in net cash flows used in the
operating activities was primarily due to a decrease in the net loss reported for the period, as a result of reduced operating expenses, partially due to favorable exchange rate fluctuations between the Canadian and US dollar, as most of our
operating expenses are incurred in Canadian dollars, as well as other factors described above.
Net cash used in investing activities was $157,083 for the nine months ended May 31, 2016, compared to net cash used of $282,461 for the nine months ended May 31, 2015. Investing activities in the current period are largely attributable to
software testing services and other software purchases aimed at improving product quality, as well as ongoing expenditures for patent applications.
The cash provided by financing activities was $496,360 for the nine months ended May 31, 2016, compared to $Nil for the nine months ended May 31, 2015. The change was the result of a private placement in the current period.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Not Yet Effective
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which outlines a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. ASU 2014-09 is effective
for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. We are currently evaluating the impact of the adoption of this new standard on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an
entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. We are
currently evaluating the impact of the adoption of this new standard on our consolidated financial statements.
In February 2016, FASB issued ASU 2016-02,
Leases
. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right –of-use assets. The guidance is effective for annual
and interim reporting periods beginning on or after December 15, 2018. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.
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.
The following critical accounting policies affect our more significant estimates and assumptions used in preparing our consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with Financial Accounting
Standards Boards (FASB) Accounting Standards Codification (ASC) 985-605,
Revenue Recognition. Accordingly, revenue is recognized when there is persuasive
evidence of an arrangement, delivery to the customer has occurred, the fee is
fixed and determinable, and collectability is considered probable.
The majority of our revenue is generated from digital media
distribution service. The service is billed on usage which is based on the
volume and size of distributions provided on a monthly basis. All revenues are
recognized on a monthly basis as the services are delivered to customers, except
where extended payment terms exist. Such revenues are only recognized when the
extended payment term expires.
At present, the Company does not have yet have a standard
business practice for contracts that contain extended payment terms, and
therefore recognizes revenue from such contracts when the payment terms lapse
and all other revenue criteria have been met.
Significant management judgments and estimates must be made in
connection with determination of the revenue to be recognized in any accounting
period. If we made different judgments or utilized different estimates for any
period material differences in the amount and timing of revenue recognized could
result.
Stock-Based Compensation
We recognize the costs of employee services received in
share-based payment transactions according to the fair value provisions of the
current share-based payment guidance. The fair value of employee services
received in stock-based payment transactions is estimated at the grant date and
recognized over the requisite service period. Determining the appropriate fair
value model and calculating the fair value of stock-based awards requires
judgment, including estimating stock price volatility, forfeiture rates and
expected life.
We selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value of our share-based
awards. The Black-Scholes model requires the use of highly subjective and
complex assumptions which determine the fair value of share-based awards,
including the options expected term and the price volatility of the underlying
stock. Our current estimate of volatility is based on historical and
market-based implied volatilities of our stock price. To the extent volatility
of our stock price increases in the future, our estimates of the fair value of
options granted in the future could increase, thereby increasing stock-based
compensation cost recognized in future periods. We derive the expected term
assumption primarily based on our historical settlement experience, while giving
consideration to options that have not yet completed a full life cycle.
Stock-based compensation cost is recognized only for awards ultimately expected
to vest. Our estimate of the forfeiture rate is based primarily on our
historical experience. To the extent we revise this estimate in the future, our
share-based compensation cost could be materially impacted in the quarter of
revision, as well as in the following quarters. In the future, as empirical
evidence regarding these input estimates is available to provide more
directionally predictive results, we may change or refine our approach of
deriving these input estimates.
Research and Development Expense for Software
Products
Research and development expense includes costs incurred to
develop intellectual property. The costs for the development of new software and
substantial enhancements to existing software are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. We have determined that technological feasibility is
established at the time a working model of software is completed. Because we
believe our current process for developing software will be essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
Significant management judgments and estimates must be made in
connection with determination of any amounts identified for capitalization as
software development costs in any accounting period. If we made different
judgments or utilized different estimates for any period material differences in
the amount and timing of capitalized development costs could occur.
Accounts Receivable and Allowance for Doubtful
Accounts
We extend credit to our customers based on evaluation of an
individual customer's financial condition and collateral is generally not
required. Accounts outstanding beyond the contractual payment terms are
considered past due. We determine our allowance for doubtful accounts by
considering a number of factors, including the length of time accounts
receivable are beyond the contractual payment terms, our previous loss history,
and a customer's current ability to pay its obligation to us. We write-off
accounts receivable when they are identified as uncollectible. All outstanding
accounts receivable accounts are periodically reviewed for collectability on an
individual basis.
Income Taxes
Deferred income tax assets and liabilities are computed based
on differences between the carrying amount of assets and liabilities on the
balance sheet and their corresponding tax values using the enacted income tax
rates by tax jurisdiction at each balance sheet date. Deferred income tax assets
also result from unused loss carry-forwards and other deductions. The valuation
of deferred income tax assets is reviewed annually and adjusted, if necessary,
by use of a valuation allowance to reflect the estimated realizable amount.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We evaluate all
available evidence, such as recent and expected future operating results by tax
jurisdiction, and current and enacted tax legislation and other temporary
differences between book and tax accounting to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized. There is a risk that management estimates for operating results
could vary significantly from actual results, which could materially affect the
valuation of the future income tax asset. Although the Company has tax loss
carry-forwards and other deferred income tax assets, management has determined
certain of these deferred tax assets do not meet the more likely than not
criteria, and accordingly, these deferred income tax asset amounts have been
completely offset by a valuation allowance as disclosed in our annual
consolidated financial statements for the year ended August 31, 2015.
Contingencies
As discussed under Item 1. Legal Proceedings in Part II and
in Note 8 Contingencies in Notes to Interim Condensed Consolidated Financial
Statements, the Company is subject from time to time to various legal
proceedings and claims that arise in the ordinary course of business. In
accordance with US GAAP, the Company records a liability when it is probable
that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to
whether an exposure can be reasonably estimated. In managements opinion, the
Company does not have a potential liability related to any current legal
proceedings and claims that would individually or in the aggregate materially
adversely affect its financial condition or operating results. However, the
outcomes of legal proceedings and claims brought against the Company are subject
to significant uncertainty. Should the Company fail to prevail in any of these
legal matters or should several of these legal matters be resolved against the
Company in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets
including tangible assets in accordance with authoritative guidance. When events
or changes in circumstances indicate that the carrying amount of long-lived
assets may not be recoverable, we recognize such impairment in the event the
carrying amount of such assets exceeds the future undiscounted cash flows
attributable to such assets. We have not recorded any impairment losses to date.