ITEM
7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our results of operations and
financial condition should be read together with the consolidated financial
statements and related notes that are included in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of various factors.
RESULTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, 2016
AND 2015
Revenue
Total revenue for the year ended August 31, 2016 increased by
0.5% over the same period in the prior year to $3,337,813 (2014 – $3,323,537).
The increase was due to an increase in Clipstream® revenue while Play MPE®
revenue remained consistent with the prior year. Play MPE® experienced growth in
United States independent label revenue throughout the year, while growth in
European independent label revenue occurred in the last quarter with the
addition of recipient lists in Norway and Sweden and the addition of resellers
in northern Europe. Growth in Play MPE® revenue was offset by a decline in major
label revenue in the US and unfavorable exchange rates.
Approximately 50% of our Play MPE® revenue is denominated in
Euros, 42% is denominated in US Dollars and 8% is denominated in Australia
Dollars for the year ended August 31, 2016.
Approximately 2% of our revenues are derived from sales of our
Clipstream® software. Our management is focused on increasing sales, marketing
and support resources on our new Clipstream® generation to increase revenue.
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. The majority of our
costs are incurred in Canadian dollars while the majority of our revenue is in
Euros and US dollars. Thus, operating expenses and the results of operations are
impacted, to the extent they are not hedged, by the rise and fall of the
relative values of the Canadian dollar to these currencies.
15
During the year ended August 31, 2016, while exchange rates
resulted in adverse impacts to overall revenue, the strengthening of the US
dollar relative to the Canadian dollar resulted in a favorable impact on costs.
The Company maintains most of its financial reserves in Canadian dollars to
mitigate the downside risk of adverse exchange rates.
Overall costs dropped by 13.9% to $3,547,196 (2015 –
$4,120,550) during the year ended August 31, 2016. The 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
105% increase in marketing costs, an 83% increase in technology related costs
with our continued transition to outsourcing infrastructure costs, and an
increase in development operating costs associated with subcontracting our
infrastructure.
|
General and administrative
|
|
31-Aug
|
|
|
31-Aug
|
|
|
$
|
|
|
%
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
|
|
|
(12 months)
|
|
|
(12 months)
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Wages and benefits
|
|
358,424
|
|
|
611,373
|
|
|
(252,949
|
)
|
|
(41.4%
|
)
|
|
Rent
|
|
34,751
|
|
|
47,052
|
|
|
(12,301
|
)
|
|
(26.1%
|
)
|
|
Telecommunications
|
|
43,883
|
|
|
26,237
|
|
|
17,646
|
|
|
67.3%
|
|
|
Bad debt
|
|
3,052
|
|
|
1,659
|
|
|
1,393
|
|
|
84.0%
|
|
|
Office and
miscellaneous
|
|
243,160
|
|
|
296,225
|
|
|
(53,065
|
)
|
|
(17.9%
|
)
|
|
Professional fees
|
|
119,163
|
|
|
136,922
|
|
|
(17,759
|
)
|
|
(13.0%
|
)
|
|
|
|
802,433
|
|
|
1,119,468
|
|
|
(317,035
|
)
|
|
(28.3%
|
)
|
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-Aug
|
|
|
31-Aug
|
|
|
$
|
|
|
%
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
|
|
|
(12 months)
|
|
|
(12 months)
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Wages and benefits
|
|
862,611
|
|
|
1,067,831
|
|
|
(205,220
|
)
|
|
(19.2%
|
)
|
|
Rent
|
|
89,225
|
|
|
110,100
|
|
|
(20,875
|
)
|
|
(19.0%
|
)
|
|
Telecommunications
|
|
112,669
|
|
|
61,395
|
|
|
51,274
|
|
|
83.5%
|
|
|
Travel
|
|
32,967
|
|
|
51,080
|
|
|
(18,113
|
)
|
|
(35.5%
|
)
|
|
Advertising and
marketing
|
|
162,912
|
|
|
151,427
|
|
|
11,485
|
|
|
7.6%
|
|
|
|
|
1,260,384
|
|
|
1,441,833
|
|
|
(181,449
|
)
|
|
(12.6%
|
)
|
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 during the year. 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® during the first half of the year, to
gain increased online exposure internationally.
16
|
Research and development
|
|
31-Aug
|
|
|
31-Aug
|
|
|
$
|
|
|
%
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
|
|
|
(12 months)
|
|
|
(12 months)
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Wages and benefits
|
|
940,982
|
|
|
1,158,311
|
|
|
(217,329
|
)
|
|
(18.8%
|
)
|
|
Rent
|
|
98,311
|
|
|
132,765
|
|
|
(34,454
|
)
|
|
(26.0%
|
)
|
|
Telecommunications
|
|
124,144
|
|
|
74,033
|
|
|
50,111
|
|
|
6.7%
|
|
|
Research and development
|
|
129,559
|
|
|
11,277
|
|
|
118,282
|
|
|
1,048.9%
|
|
|
|
|
1,292,996
|
|
|
1,376,386
|
|
|
(83,390
|
)
|
|
(6.1%
|
)
|
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 during the year. 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. The increase in research and development costs is
attributable to testing and consultation associated with testing the quality and
functionality of new Clipstream® applications and Play MPE®.
Depreciation and Amortization
Depreciation and amortization expense arose from fixed assets
and other assets. Depreciation and amortization increased to $191,383 for the
fiscal year ended August 31, 2016 from $182,863 for the fiscal year ended August
31, 2015, an increase of $8,520 or 4.7% .
Other earnings and expenses
Interest income decreased to $21,132 for the year ended August
31, 2016 from $42,787 for the year ended August 31, 2015, a decrease of $21,655.
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 during the year, as well as foreign currency exchange fluctuations.
Income Taxes
During the year ended August 31, 2016 the Company recorded
income tax expense of $Nil (August 31, 2015 - $842,000) to reduce our deferred
tax assets. The decrease in deferred income tax expense is associated with the
derecognition of deferred tax assets during the year ended August 31, 2015, as a
result of the Company’s net losses. The Company currently pays no current income
tax as a result of realizing no taxable income.
Net Loss
During the year ended August 31, 2016, loss from operations
decreased by 74% to $209,383 (August 31, 2015 - $797,013). Net loss decreased by
88% to $188,251 (August 31, 2015 - $1,596,646). The decrease in net loss is
primarily due to decreased operating costs related to a reduction in staffing
costs, a reduction in spending on public company expenditures and a decrease in
deferred income tax expense as a result of recognizing a valuation allowance
against deferred tax assets in the comparative period.
17
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, these stock-based
compensation expenses do not result in cash payments by the Company. Adjusted
EBITDA has limitations as a profitability measure in that it does not include
interest expense on our debt, our provisions for income taxes and amortization,
the effect of deferred leasehold inducement, the effect of non-cash stock-based
compensation expense and the effect of asset impairment.
The following is a reconciliation of net income from operations
to Adjusted EBITDA:
|
|
|
31-Aug
|
|
|
31-Aug
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net loss
|
$
|
(188,251
|
)
|
$
|
(1,596,646
|
)
|
|
Interest income and expenses
|
|
(21,132
|
)
|
|
(42,787
|
)
|
|
Deferred income tax expense
|
|
-
|
|
|
842,000
|
|
|
Depreciation and amortization
|
|
191,383
|
|
|
182,863
|
|
|
Stock based compensation
|
|
49,608
|
|
|
60,807
|
|
|
Deferred leasehold inducement
|
|
(34,255
|
)
|
|
69,244
|
|
|
Adjusted EBITDA
|
$
|
(2,647
|
)
|
$
|
(484,519
|
)
|
LIQUIDITY AND FINANCIAL CONDITION
We had cash of $662,743 as at August 31, 2016 compared to cash
of $387,316 as at August 31, 2015. We had working capital of $1,125,289 as at
August 31, 2016 compared to $513,472 as at August 31, 2015. The increase in our
working capital was due to a decrease in our net loss, offset by an increase in
accounts receivable and a decrease in accounts payable, and from proceeds from a
private placement completed in October, 2015.
We had $640,456 in cash held outside of the United States, and
there is no intent to repatriate this cash at this time. Should we decide to
repatriate in the future, taxes may need to be accrued and paid.
Cash Flows
Net cash used in operating activities was $162,819 for the year
ended August 31, 2016, compared to net cash used of $69,562 for the year ended
August 31, 2015. As of the date of this report, we have collected approximately
93% of the accounts receivable balance at August 31, 2016.
The cash used in investing activities was $73,097 for the year
ended August 31, 2016, compared to $338,091 for the year ended August 31, 2015.
The decrease in net cash used in investing activities was largely attributable
to the leasehold improvements for our new office in the comparative period.
The cash provided by financing activities was $489,943 for the
year ended August 31, 2016 compared to net cash used of $2,240 for the year
ended August 31, 2015. The change was the result of a private placement in the
current period.
CAPITAL RESOURCES
The Company does not have any material commitments for capital
expenditures and the Company is able to meet current and expected growth and
increase in growth in revenue with current capital investments.
18
MATERIAL OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING ESTIMATES
We prepare our 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 Board’s (“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 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 option’s 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.
19
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 Note 6 of our consolidated financial statements.
If management’s estimates of the cash flows or operating results do not materialize due to errors in estimates or unforeseen changes to the economic conditions affecting the Company, it could result in an impairment adjustment in future
periods.
Contingencies
As discussed under “Item 3. Legal Proceedings” and in Note 9 “Contingencies” in Notes to Consolidated Financial Statements, the Company is subject 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 management’s 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.
20
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”,
and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The FASB issued
ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”) in August 2015. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09. Public business
entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”) in March 2016, ASU No. 2016-10, “Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) in April 2016, and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”), respectively. The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or
service before it is transferred to the customers. ASU 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The updates in ASU 2016-10
include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in practice potentially could arise, as well
as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. ASU 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and
completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes
collected from customers. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as ASU 2014-09. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09, ASU
2016-08, ASU 2016-10 and ASU 2016-12 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 November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred income tax
liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability
for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of
deferred income taxes, the amendments in ASU 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update
are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We do not expect the adoption of ASU 2015-17 to have a
material impact on our consolidated financial statements.
21
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842,
Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842
specifies the accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report useful information
to users of financial statements about the amount, timing, and uncertainty of
cash flows arising from a lease. The main difference between Topic 842 and Topic
840 is the recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a distinction
between finance leases and operating leases. The classification criteria for
distinguishing between finance leases and operating leases are substantially
similar to the classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The result of retaining a
distinction between finance leases and operating leases is that under the lessee
accounting model in Topic 842, the effect of leases in the statement of
comprehensive income and the statement of cash flows is largely unchanged from
previous GAAP. The amendments in ASU 2016-02 are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal
years for public business entities. Early application of the amendments in ASU
2016-02 is permitted. We are currently in the process of evaluating the impact
of the adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326)
amends guideline on reporting credit losses for assets held at amortized cost
basis and available-for-sale debt securities. For assets held at amortized cost
basis, Topic 326 eliminates the probable initial recognition threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of
all expected credit losses. The allowance for credit losses is a valuation
account that is deducted from the amortized cost basis of the financial assets
to present the net amount expected to be collected. For available-for-sale debt
securities, credit losses should be measured in a manner similar to current
GAAP, however Topic 326 will require that credit losses be presented as an
allowance rather than as a write-down. ASU 2016-13 affects entities holding
financial assets and net investment in leases that are not accounted for at fair
value through net income. The amendments affect loans, debt securities, trade
receivables, net investments in leases, off balance sheet credit exposures,
reinsurance receivables, and any other financial assets not excluded from the
scope that have the contractual right to receive cash. The amendments in this
ASU will be effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of ASU 2016-13 on our consolidated financial
statements.
ITEM
8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.
Index to Audited Consolidated Financial Statements for the
Years Ended August 31, 2016 and 2015:
|
1.
|
Report of Independent Registered Public Accounting Firm –
BDO Canada LLP;
|
|
2.
|
Consolidated Balance Sheets as at August 31, 2016 and
2015;
|
|
3.
|
Consolidated Statement of Comprehensive Income for the
Years Ended August 31, 2016 and 2015;
|
|
4.
|
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended August 31, 2016 and 2015;
|
|
5.
|
Consolidated Statement of Cash Flows for the Years Ended
August 31, 2016 and 2015;
|
|
6.
|
Notes to Consolidated Financial
Statements.
|
22
Consolidated Financial Statements
Destiny Media Technologies Inc.
August 31, 2016 and 2015
(Expressed in United States dollars)
23
|
Tel: 604 688 5421
Fax: 604 688 5132
www.bdo.ca
|
BDO Canada LLP
600 Cathedral Place
925 West Georgia Street
Vancouver BC V6C 3L2 Canada
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Destiny Media Technologies Inc.
Vancouver, Canada
We have audited the accompanying consolidated balance sheets of Destiny Media Technologies Inc. as of August 31, 2016 and 2015 and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Destiny Media Technologies at August 31, 2016 and 2015, and the consolidated results of its operations and its consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO CANADA LLP
Chartered Professional Accountants
Vancouver, Canada
November 28, 2016
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
24
|
Destiny Media Technologies Inc.
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
As at August 31,
|
(Expressed in United States dollars)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
662,743
|
|
|
387,316
|
|
Accounts receivable, net of allowance for
doubtful accounts
of $4,049 [2015 – $6,058]
[note 10]
|
|
628,135
|
|
|
399,148
|
|
|
Other receivables
|
|
15,051
|
|
|
15,471
|
|
|
Current portion of long term receivable
[note 3]
|
|
113,834
|
|
|
98,180
|
|
|
Prepaid expenses
|
|
61,525
|
|
|
36,042
|
|
|
Total current assets
|
|
1,481,288
|
|
|
936,157
|
|
|
Deposits
|
|
22,978
|
|
|
32,222
|
|
|
Long term receivable
[note 3]
|
|
61,642
|
|
|
167,350
|
|
|
Property and equipment, net
[note 4]
|
|
284,968
|
|
|
401,461
|
|
|
Total assets
|
|
1,850,876
|
|
|
1,537,190
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Accounts payable
|
|
108,157
|
|
|
139,879
|
|
|
Accrued liabilities
|
|
190,077
|
|
|
189,672
|
|
|
Deferred leasehold inducement
|
|
28,962
|
|
|
63,217
|
|
|
Deferred revenue
|
|
23,563
|
|
|
24,712
|
|
|
Obligation under
capital lease – current portion [
note 7
]
|
|
5,240
|
|
|
5,205
|
|
|
Total current liabilities
|
|
355,999
|
|
|
422,685
|
|
|
Obligation under
capital lease – long term portion [
note 7
]
|
|
6,472
|
|
|
12,071
|
|
|
Total liabilities
|
|
362,471
|
|
|
434,756
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
[notes 7
and 9]
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
Common stock, par value $0.001
[note 5]
|
|
|
|
|
|
|
Authorized: 100,000,000 shares
Issued and outstanding: 55,013,874 shares
[2015 – issued and outstanding
52,993,874 shares]
|
|
55,014
|
|
|
52,994
|
|
|
Additional paid-in capital
|
|
9,666,080
|
|
|
9,122,132
|
|
|
Accumulated deficit
|
|
(7,896,312
|
)
|
|
(7,708,061
|
)
|
|
Accumulated other comprehensive (loss)
|
|
(336,377
|
)
|
|
(364,631
|
)
|
|
Total
stockholders’ equity
|
|
1,488,405
|
|
|
1,102,434
|
|
|
Total liabilities and stockholders’ equity
|
|
1,850,876
|
|
|
1,537,190
|
|
See accompanying notes
25
|
Destiny Media Technologies Inc.
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE (LOSS)
|
|
|
|
Years ended August 31,
|
(Expressed in United States dollars)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Service revenue
[note 10]
|
|
3,337,813
|
|
|
3,323,537
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
General and administrative
|
|
802,433
|
|
|
1,119,468
|
|
|
Sales and marketing
|
|
1,260,384
|
|
|
1,441,833
|
|
|
Research and development
|
|
1,292,996
|
|
|
1,376,386
|
|
|
Depreciation and amortization
|
|
191,383
|
|
|
182,863
|
|
|
|
|
3,547,196
|
|
|
4,120,550
|
|
|
Loss from operations
|
|
(209,383
|
)
|
|
(797,013
|
)
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest income
|
|
21,132
|
|
|
42,787
|
|
|
Other income
(expenses)
|
|
—
|
|
|
(420
|
)
|
|
Loss before provision for income taxes
|
|
(188,251
|
)
|
|
(754,646
|
)
|
|
Income tax expense
- deferred
[note 6]
|
|
—
|
|
|
(842,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(188,251
|
)
|
|
(1,596,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
28,254
|
|
|
(364,374
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
(159,997
|
)
|
|
(1,961,020
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
(0.00
|
)
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
54,737,918
|
|
|
52,993,874
|
|
|
Diluted
|
|
54,737,918
|
|
|
52,993,874
|
|
See accompanying notes
26
|
Destiny Media Technologies Inc.
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF
CHANGES IN
STOCKHOLDERS’ EQUITY
|
|
|
|
Years ended August 31,
|
(Expressed in United States dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
stockholders’
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Income (loss)
|
|
|
|
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Balance, August 31, 2014
|
|
52,993,874
|
|
|
52,994
|
|
|
9,061,325
|
|
|
(6,111,415
|
)
|
|
(257
|
)
|
|
3,002,647
|
|
|
Total comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,596,646
|
)
|
|
(364,374
|
)
|
|
(1,961,020
|
)
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
60,807
|
|
|
—
|
|
|
—
|
|
|
60,807
|
|
|
Balance, August
31, 2015
|
|
52,993,874
|
|
|
52,994
|
|
|
9,122,132
|
|
|
(7,708,061
|
)
|
|
(364,631
|
)
|
|
1,102,434
|
|
|
Total comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(188,251
|
)
|
|
28,254
|
|
|
(159,997
|
)
|
|
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 5
|
|
—
|
|
|
—
|
|
|
49,608
|
|
|
—
|
|
|
—
|
|
|
49,608
|
|
|
Balance, August 31, 2016
|
|
55,013,874
|
|
|
55,014
|
|
|
9,666,080
|
|
|
(7,896,312
|
)
|
|
(336,377
|
)
|
|
1,488,405
|
|
See
accompanying
notes
27
|
Destiny Media Technologies Inc.
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
Years ended August 31,
|
(Expressed in United States dollars)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net loss
|
|
(188,251
|
)
|
|
(1,596,646
|
)
|
|
Items not involving cash:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
191,383
|
|
|
182,863
|
|
|
Stock-based compensation
|
|
49,608
|
|
|
60,807
|
|
|
Deferred leasehold inducement
|
|
(34,354
|
)
|
|
69,244
|
|
|
Deferred income taxes
|
|
—
|
|
|
842,000
|
|
|
Unrealized foreign exchange
|
|
(9,182
|
)
|
|
26,247
|
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(223,238
|
)
|
|
54,412
|
|
|
Other receivables
|
|
537
|
|
|
53,500
|
|
|
Prepaid expenses and deposits
|
|
(15,517
|
)
|
|
89,339
|
|
|
Accounts payable
|
|
(31,251
|
)
|
|
18,497
|
|
|
Accrued liabilities
|
|
(1,496
|
)
|
|
24,185
|
|
|
Deferred revenue
|
|
(1,328
|
)
|
|
6,676
|
|
|
Long
term receivable
|
|
100,270
|
|
|
99,314
|
|
|
Net cash used in operating activities
|
|
(162,819
|
)
|
|
(69,562
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITY
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(73,097
|
)
|
|
(338,091
|
)
|
|
Net cash used in investing activity
|
|
(73,097
|
)
|
|
(338,091
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Common stock issued on private placement, net
|
|
496,360
|
|
|
—
|
|
|
Payments under capital lease obligations
|
|
(6,417
|
)
|
|
(2,240
|
)
|
|
Net cash
provided by (used in) financing activities
|
|
489,943
|
|
|
(2,240
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash
|
|
21,400
|
|
|
(192,798
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash
equivalents during the year
|
|
275,427
|
|
|
(602,691
|
)
|
|
Cash and cash equivalents, beginning of year
|
|
387,316
|
|
|
990,007
|
|
|
Cash and cash
equivalents, end of year
|
|
662,743
|
|
|
387,316
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure
|
|
|
|
|
|
|
|
Interest paid
|
|
—
|
|
|
—
|
|
|
Income taxes paid
|
|
—
|
|
|
—
|
|
|
Equipment acquired through capital lease obligations
|
|
—
|
|
|
21,150
|
|
See accompanying notes
28
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 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 Company’s 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting
policies used in the preparation of these consolidated financial statements:
Basis of presentation and fiscal year
These consolidated financial statements and related notes are
presented in accordance with accounting principles generally accepted in the
United States, and are expressed in US dollars. The Company’s fiscal year-end is
August 31.
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of the Company, and its wholly-owned subsidiaries, Destiny Software
Productions Inc., MPE Distribution Inc., and Sonox Digital Inc. All
inter-company balances and transactions have been eliminated on consolidation.
Use of estimates
The preparation of financial statements in accordance with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the financial statements and the reported amounts of
net revenue and expenses in the reporting periods. We regularly evaluate
estimates and assumptions related to revenue recognition, estimated useful lives
for property and equipment, allowances for doubtful accounts, stock-based
compensation expense, deferred income tax asset valuation allowances, uncertain
tax positions, litigation and other loss contingencies. These estimates and
assumptions are based on current facts, historical experience and various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities and the
recording of revenue, costs and expenses that are not readily apparent from
other sources. The actual results we experience may differ materially and
adversely from our original estimates. To the extent there are material
differences between the estimates and actual results, our future results of
operations will be affected.
29
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
Cash and cash equivalents
We consider all highly liquid investments that are readily
convertible into cash and have an original maturity of three months or less at
the time of purchase to be cash equivalents.
Revenue recognition
The Company recognizes revenue in accordance with Financial
Accounting Standards Board’s (“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 the Company’s 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
payments from customers become due.
Cash received in advance of meeting the revenue recognition
criteria is recorded as deferred revenue.
30
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
Long-lived assets
Long-lived assets held for use are evaluated for impairment
when events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. Impairment is measured by a
two-step process: Step 1) the carrying amount of the asset is compared with its
estimated undiscounted future cash flows expected to result from the use of the
assets and its eventual disposition. If the carrying amount is lower than the
undiscounted future cash-flows, no impairment loss is recognized. Step 2) if the
carrying amount is higher than the undiscounted future cash-flows then an
impairment loss is measured as the difference between the carrying amount and
fair value which may be based on internally developed discounted cash flow
estimates, quoted market prices, when available, or independent appraisals. The
determination of whether or not long-lived assets have become impaired involves
a significant level of judgment in the assumptions underlying the approach used
to determine the estimated future cash flows expected to result from the use of
those assets. Changes in the Company’s strategy, assumptions and/or market
conditions could significantly impact these judgments and require adjustments to
recorded amounts of long-lived assets. As of August 31, 2016, there were no
impairment indicators present.
Litigation and settlement costs
From time to time, we may be involved in disputes, litigation
and other legal actions. In accordance with ASC 450, Contingencies, we record a
charge equal to at least the minimum estimated liability for a loss contingency
when both of the following conditions are met: (i) information available prior
to issuance of the financial statements indicates that it is probable that an
asset has been impaired or a liability had been incurred at the date of the
financial statements and (ii) the range of loss can be reasonably estimated.
During the year ended August 31, 2016, the Company incurred
approximately $Nil (2015: $8,000) in professional legal fees in connection with
legal actions against the Company and legal actions initiated by the Company.
These costs are expensed as incurred and are recorded as a component of general
and administrative expenses.
31
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts
through review of open accounts, and historical collection and allowance
amounts. The allowance for doubtful accounts is intended to reduce trade
accounts receivable to the amount that reasonably approximates their fair value
due to their short-term nature. The amount ultimately realized from trade
accounts receivable may differ from the amount estimated in the consolidated
financial statements based on collection experience.
Research and development costs
Research costs are expensed as incurred. Development costs are
subject to capitalization beginning when a product’s technological feasibility
has been established and ending when a product is available for general release
to customers. The Company’s products are generally released soon after
technological feasibility has been established and therefore costs incurred
subsequent to achievement of technological feasibility are not significant and
have been expensed as incurred.
Property and equipment
Property and equipment are stated at cost. Depreciation and
amortization is taken over the estimated useful lives of the assets and is
calculated using the following rates, and methods, commencing upon utilization
of the assets:
|
Furniture and fixtures
|
20%
|
|
Computer hardware
|
30%
|
|
Computer software
|
50%
|
|
Leasehold improvements
|
Straight-line over lease term
|
|
Patents, trademarks and lists
|
Straight-line over 3 years
|
32
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
Translation of foreign currencies
The Company’s functional currency is the U.S. 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 consolidated financial
statements 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
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 operations.
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.
Advertising
Advertising costs are expensed as incurred and totaled $769 and
$94,346 during the years ended August 31, 2016 and 2015, respectively.
Income taxes
The Company utilizes the liability method of accounting for
income taxes as set forth in ASC 740,
Income Taxes
(formerly SFAS No.
109,
Accounting for 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.
33
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
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 financial statements.
The Company has concluded that there are no significant
uncertain tax positions requiring recognition in the Company’s financial
statements. The Company’s evaluation was performed for the tax years ended
August 31, 1999 through August 31, 2016, 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 financial statements as
selling, general and administrative expense.
Investment tax credits
The Company uses the flow through method to account for
investment tax credits earned on eligible scientific research and development
expenditures. Under this method, the investment tax credits are recognized as a
reduction to income tax expense.
Stock based compensation
The Company accounts for stock-based compensation arrangements
in accordance with ASC 718, Stock Compensation. Under the fair value recognition
provisions of ASC 718 stock based compensation cost is estimated at the grant
date based on the fair value of the awards expected to vest and recognized as
expense ratably over the requisite service period of the award. The Company has
used the Black-Scholes option pricing model to estimate fair value of its
stock-based awards which requires various judgmental assumptions including
estimating stock price volatility and expected life. Compensation expense for
unvested options to non-employees is revalued at each balance sheet date and is
being amortized over the vesting period of the options. The Company’s
computation of expected volatility is based on historical volatility. In
addition, the Company considers many factors when estimating expected life,
including types of awards and historical experience. If any of the assumptions
used in the Black-Scholes valuation model change significantly, stock-based
compensation expense may differ materially in the future from that recorded in
the current period.
As required under ASC 718-50 Employee Share Purchase Plans,
compensation expense is recorded for shares committed to be released to
employees based on the fair market value of those shares in the period in which
they are purchased by the Company and committed to be released to the employee.
34
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
Earnings per share
Net income (loss) per 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 share (diluted) is calculated by dividing net
income for the period by the weighted average number of common shares
outstanding during the period, plus the dilutive effect of outstanding common
share equivalents. This method requires that the dilutive effect of outstanding
options and warrants issued be calculated using the treasury stock method. Under
the treasury stock method, all common share equivalents have been exercised at
the beginning of the period (or at the time of issuance, if later), and that the
funds obtained thereby were used to purchase common shares of the Company at the
average trading price of common shares during the period, but only if dilutive.
|
|
|
Year Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Net income (loss)
|
|
(188,251
|
)
|
|
(1,596,646
|
)
|
|
Weighted average common shares outstanding
|
|
54,737,918
|
|
|
52,993,874
|
|
|
Diluted weighted average
common shares outstanding
|
|
54,737,918
|
|
|
52,993,874
|
|
At August 31, 2016, the Company had 950,000 outstanding options
exercisable at $0.40 and 1,010,000 outstanding warrants exercisable at $0.30.
Those outstanding options and warrants were not included in the computation of
diluted EPS because to do so would have been anti-dilutive due to a loss from
operations.
Shares repurchased for cancellation are excluded in the
calculation of earnings per share from the date they are repurchased.
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.
35
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
Fair value measurement
The book value of cash and cash equivalents, accounts
receivable, other receivables, accounts payable and accrued liabilities
approximate their fair values due to the short term maturity of those
instruments. The book value of the long term receivable approximates its fair
value as the interest rate is comparable to the market rate. The fair value
hierarchy under GAAP is based on three levels of inputs, of which the first two
are considered observable and the last unobservable, that may be used to measure
fair value which are the following:
Level 1 – quoted prices (unadjusted) in active markets for
identical assets and liabilities;
Level 2 – observable inputs other than
Level 1, quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that
are not active, and model-derived prices whose inputs are observable or whose
significant value drivers are observable; and
Level 3 – assets and
liabilities whose significant value drivers are unobservable by little or no
market activity and that are significant to the fair value of the assets or
liabilities.
The Company’s long term receivable is based on level 2 inputs
in the ASC 820 fair value hierarchy.
Accounting Standards Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes
the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and
requires entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods or services. The
FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date” (“ASU 2015-14”) in August 2015. The amendments
in ASU 2015-14 defer the effective date of ASU 2014-09. Public business
entities, certain not-for-profit entities, and certain employee benefit plans
should apply the guidance in ASU 2014-09 to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within that
reporting period. Earlier adoption is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. Further to ASU 2014-09 and ASU 2015-14, the FASB
issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”
(“ASU 2016-08”) in March 2016, ASU No. 2016-10, “Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU
2016-10”) in April 2016, and ASU No. 2016-12, “Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU
2016-12”), respectively. The amendments in ASU 2016-08 clarify the
implementation guidance on principal versus agent considerations, including
indicators to assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers. ASU 2016-10 clarifies
guideline related to identifying performance obligations and licensing
implementation guidance contained in the new revenue recognition standard. The
updates in ASU 2016-10 include targeted improvements based on
input the FASB received from the Transition Resource Group for Revenue
Recognition and other stakeholders. It seeks to proactively address areas in
which diversity in practice potentially could arise, as well as to reduce the
cost and complexity of applying certain aspects of the guidance both at
implementation and on an ongoing basis. ASU 2016-12 addresses narrow-scope
improvements to the guidance on collectability, non-cash consideration, and
completed contracts at transition. Additionally, the amendments in this ASU
provide a practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales taxes and other
similar taxes collected from customers. The effective date and transition
requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as ASU
2014-09. We are currently in the process of evaluating the impact of the
adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 on our
consolidated financial statements.
36
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
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 November 2015, the FASB issued ASU No. 2015-17, “Income
Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU
2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred
income tax liabilities and assets into current and noncurrent amounts in a
classified statement of financial position. Deferred tax liabilities and assets
are classified as current or noncurrent based on the classification of the
related asset or liability for financial reporting. Deferred tax liabilities and
assets that are not related to an asset or liability for financial reporting are
classified according to the expected reversal date of the temporary difference.
To simplify the presentation of deferred income taxes, the amendments in ASU
2015-17 require that deferred income tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. For public business
entities, the amendments in this update are effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. We do not expect the adoption of ASU 2015-17 to
have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842,
Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842
specifies the accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report useful information
to users of financial statements about the amount, timing, and uncertainty of
cash flows arising from a lease. The main difference between Topic 842 and Topic
840 is the recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a distinction
between finance leases and operating leases. The classification criteria for
distinguishing between finance leases and operating leases are substantially
similar to the classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating
leases is that under the lessee accounting model in Topic 842, the effect of
leases in the statement of comprehensive income and the statement of cash flows
is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are
effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years for public business entities. Early
application of the amendments in ASU 2016-02 is permitted. We are currently in
the process of evaluating the impact of the adoption of ASU 2016-02 on our
consolidated financial statements.
37
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d.)
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326)
amends guideline on reporting credit losses for assets held at amortized cost
basis and available-for-sale debt securities. For assets held at amortized cost
basis, Topic 326 eliminates the probable initial recognition threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of
all expected credit losses. The allowance for credit losses is a valuation
account that is deducted from the amortized cost basis of the financial assets
to present the net amount expected to be collected. For available-for-sale debt
securities, credit losses should be measured in a manner similar to current
GAAP, however Topic 326 will require that credit losses be presented as an
allowance rather than as a write-down. ASU 2016-13 affects entities holding
financial assets and net investment in leases that are not accounted for at fair
value through net income. The amendments affect loans, debt securities, trade
receivables, net investments in leases, off balance sheet credit exposures,
reinsurance receivables, and any other financial assets not excluded from the
scope that have the contractual right to receive cash. The amendments in this
ASU will be effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of ASU 2016-13 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.
38
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
3. LONG TERM RECEIVABLE
In a prior year, 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 August 31, 2016, installments of
US$744,266, including interest of US$218,659, have been received ($830,600AUD
and $239,036AUD, respectively).
The following table summarizes the changes regarding the
carrying value of the remaining receivable balance during the year ended August
31, 2016 and covering the period of September 1, 2015 to August 31, 2016:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Beginning balance
|
|
265,530
|
|
|
461,294
|
|
|
Gross installments received
|
|
(123,442
|
)
|
|
(135,403
|
)
|
|
Interest included in above
|
|
23,172
|
|
|
36,089
|
|
|
Foreign exchange
impact
|
|
9,946
|
|
|
(96,450
|
)
|
|
Ending balance
|
|
175,206
|
|
|
265,530
|
|
The foreign exchange impact in the 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 two fiscal years are as
follows:
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
113,834
|
|
|
12,709
|
|
|
126,543
|
|
|
2018
|
|
61,372
|
|
|
1,847
|
|
|
63,219
|
|
|
|
|
175,206
|
|
|
14,556
|
|
|
189,762
|
|
39
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
4. PROPERTY AND EQUIPMENT
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
Cost
|
|
|
amortization
|
|
|
value
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
160,766
|
|
|
110,261
|
|
|
50,505
|
|
|
Computer hardware
|
|
224,278
|
|
|
165,133
|
|
|
59,145
|
|
|
Computer software
|
|
212,896
|
|
|
171,993
|
|
|
40,903
|
|
|
Patents, trademarks and lists
|
|
344,322
|
|
|
234,306
|
|
|
110,016
|
|
|
Leasehold
improvement
|
|
68,316
|
|
|
43,917
|
|
|
24,399
|
|
|
|
|
1,010,578
|
|
|
725,610
|
|
|
284,968
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
159,507
|
|
|
96,870
|
|
|
62,637
|
|
|
Computer hardware
|
|
449,547
|
|
|
369,826
|
|
|
79,721
|
|
|
Computer software
|
|
211,229
|
|
|
130,063
|
|
|
81,166
|
|
|
Patents and trademarks
|
|
279,415
|
|
|
154,737
|
|
|
124,678
|
|
|
Leasehold improvement
|
|
67,781
|
|
|
14,522
|
|
|
53,259
|
|
|
|
|
1,167,479
|
|
|
766,018
|
|
|
401,461
|
|
Depreciation and amortization for the year ended August 31,
2016 was $191,383 (2015: $182,863)
5. 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.
2016
During the year ended August 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 with issuance costs of $8,640.
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 Company’s 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.
40
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
5. STOCKHOLDERS’ EQUITY (cont’d.)
2015
During the year ended August 31, 2015, no shares were issued.
[b] Stock option plans
The Company has two existing stock option plans (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.
Stock-Based Payment Award Activity
A summary of option activity under the Plans as of August 31,
2016 and 2015, and changes during the years ended are presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Value
|
|
|
Options
|
|
Shares
|
|
|
$
|
|
|
Term
|
|
|
$
|
|
|
Outstanding at September 1, 2014
|
|
545,000
|
|
|
0.95
|
|
|
2.55
|
|
|
67,500
|
|
|
Granted
|
|
1,100,000
|
|
|
0.40
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
(425,000
|
)
|
|
0.74
|
|
|
—
|
|
|
—
|
|
|
Outstanding at
August 31, 2015
|
|
1,220,000
|
|
|
0.53
|
|
|
2.38
|
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(270,000
|
)
|
|
0.98
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding at
August 31, 2016
|
|
950,000
|
|
|
0.40
|
|
|
1.58
|
|
|
—
|
|
|
Exercisable at August 31, 2016
|
|
668,750
|
|
|
0.40
|
|
|
0.96
|
|
|
—
|
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying awards and the quoted price of the
Company’s common stock for the options that were in-the-money at August 31,
2016.
The following table summarizes information regarding the
non-vested stock purchase options outstanding as of August 31, 2016:
41
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
5. STOCKHOLDERS’ EQUITY (cont’d.)
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
Number of Options
|
|
|
Fair Value
|
|
|
|
|
|
|
|
$
|
|
|
Non-vested options at August 31, 2014
|
|
320,000
|
|
|
0.23
|
|
|
Granted
|
|
1,100,000
|
|
|
0.08
|
|
|
Forfeited
|
|
(200,000
|
)
|
|
0.22
|
|
|
Vested
|
|
(483,750
|
)
|
|
0.08
|
|
|
Non-vested options at August 31, 2015
|
|
736,250
|
|
|
0.09
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
Forfeited
|
|
(80,000
|
)
|
|
0.17
|
|
|
Vested
|
|
(375,000
|
)
|
|
0.08
|
|
|
Non-vested options at August 31, 2016
|
|
281,250
|
|
|
0.08
|
|
As of August 31, 2016, there was $37,206 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 0.73 years.
Subsequent to August 31, 2016, 100,000 stock purchase options
exercisable at $0.40 were forfeited.
During the year ended August 31, 2016, the total stock-based
compensation expense of $49,608 is reported in the statement of comprehensive
loss as follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
General and administrative
|
|
28,608
|
|
|
45,387
|
|
|
Sales and marketing
|
|
13,063
|
|
|
12,849
|
|
|
Research and development
|
|
7,937
|
|
|
2,571
|
|
|
Total stock-based compensation
|
|
49,608
|
|
|
60,807
|
|
42
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
5. STOCKHOLDERS’ EQUITY (cont’d.)
Valuation Assumptions
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model based on the following
assumptions:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Expected term of stock options (years)
|
|
—
|
|
|
1.0-1.96
|
|
|
Expected volatility
|
|
—
|
|
|
88-97%
|
|
|
Risk-free interest rate
|
|
—
|
|
|
0.29%-0.66%
|
|
|
Dividend yields
|
|
—
|
|
|
—
|
|
|
Weighted average grant date fair value
|
|
—
|
|
$
|
0.08
|
|
Expected volatilities are based on historical volatility of the
Company’s stock. The Company uses historical data to estimate option exercise
and employee termination within the valuation model. The expected term of
options granted represents the period of time that options granted are expected
to be outstanding. The risk-free rate for periods within the contractual life of
the options is based on US Treasury bill rates in effect at the time of grant.
[c] Employee Stock Purchase Plan
The Company’s 2011 Employee Stock Purchase Plan (the “Plan”)
became effective on February 22, 2011. Under the Plan, employees of 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 year ended August 31, 2016, the Company recognized
compensation expense of $37,304 (2015: $93,569) in salaries and wages on the
statement of operations in respect of the Plan, representing the Company’s
employee matching of cash contributions to the plan. The shares were purchased
on the open market at an average price of $0.23 (2015: $0.37) . The shares are
held in trust by the Company for a period of one year from the date of purchase.
43
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
5. STOCKHOLDERS’ EQUITY (cont’d.)
[d] Warrants
As at August 31, 2016, the Company has the following common
stock warrants outstanding:
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
Common
|
|
|
Exercise
|
|
|
Date
|
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
of
|
|
|
Value
|
|
|
|
|
Issuable
|
|
|
$
|
|
|
Expiry
|
|
|
$
|
|
|
$0.30 Warrants
|
|
1,010,000
|
|
|
0.30
|
|
|
October 20,2017
|
|
|
—
|
|
|
|
|
1,010,000
|
|
|
|
|
|
|
|
|
—
|
|
The Company will have the right to accelerate the expiry date
of all of the warrants if, at any time, the average closing price of the
Company’s 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.
All of the common stock warrants were issued in connection with
the private placement transaction described in Note 5[a].
The warrants were classified as equity at the date of issuance.
They contained no provision that would require liability classification.
Accordingly, they were classified as equity at the date of issuance and included
in additional paid in capital. The proceeds were not bifurcated between the
value of the share and the warrant as the amount is contained within additional
paid in capital. The Company applied its best judgment to estimate key
assumptions in determining the fair value of the warrants on the date of
issuance. The Company used historical data to estimate stock volatilities. The
risk-free rates are consistent with the terms of the warrants and are based on
the United States Treasury yield curve in effect at the time of issuance.
44
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
6. INCOME TAXES
The Company is subject to United States federal and state
income taxes at an approximate rate of 34.0% and to Canadian federal and British
Columbia provincial taxes in Canada at an approximate rate of 26%. The
reconciliation of the provision (recovery) for income taxes at the United States
federal statutory rate compared to the Company’s income tax expense is as
follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rates
|
|
(64,000
|
)
|
|
(257,000
|
)
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
2,000
|
|
|
2,000
|
|
|
Stock option compensation
|
|
17,000
|
|
|
21,000
|
|
|
Effect of lower foreign tax in Canada
|
|
18,000
|
|
|
46,000
|
|
|
Effect of research tax credits claims filed in respect of
prior years
|
|
(36,000
|
)
|
|
(175,000
|
)
|
|
Foreign exchange and other adjustments
|
|
25,000
|
|
|
365,000
|
|
|
Change in
valuation allowance
|
|
38,000
|
|
|
840,000
|
|
|
Provision for deferred income taxes
|
|
—
|
|
|
842,000
|
|
Included in other adjustments and change in valuation allowance
for the year ended August 31, 2016 is $(15,000) (2015: $341,000) for the effect
of changes in foreign exchange rates and $40,000 (2015: $24,000) in respect of a
change in estimates and provisions.
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 more likely than not to occur.
45
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
6. INCOME TAXES (cont’d.)
Significant components of the Company’s deferred tax assets as
of August 31 are as follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
1,324,000
|
|
|
1,251,000
|
|
|
Excess of book over tax depreciation
|
|
501,000
|
|
|
437,000
|
|
|
Tax Credit
Carryforwards
|
|
1,220,000
|
|
|
1,319,000
|
|
|
Total deferred tax asset
|
|
3,045,000
|
|
|
3,007,000
|
|
|
Valuation
allowance
|
|
(3,045,000
|
)
|
|
(3,007,000
|
)
|
|
Net deferred tax asset
|
|
—
|
|
|
—
|
|
Net income (loss) before income tax by geographic region is as
follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
86,193
|
|
|
(143,538
|
)
|
|
Canada
|
|
(274,444
|
)
|
|
(611,108
|
)
|
|
|
|
(188,251
|
)
|
|
(754,646
|
)
|
If not utilized to reduce future taxable income, the Company’s
net operating loss carryforwards will expire as follows:
|
|
|
Canada
|
|
|
United States
|
|
|
|
|
$
|
|
|
$
|
|
|
2021 and thereafter
|
|
557,000
|
|
|
3,469,000
|
|
|
|
|
557,000
|
|
|
3,469,000
|
|
If not utilized to reduce future taxable payable, the Company’s
investment tax credit carryforwards will expire as follows:
|
|
|
Canada
|
|
|
United States
|
|
|
|
|
$
|
|
|
$
|
|
|
2028 and thereafter
|
|
1,220,000
|
|
|
—
|
|
|
|
|
1,220,000
|
|
|
—
|
|
46
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
7. 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 February 2015 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:
During the year ended August 31, 2016 the Company incurred rent
expense of $222,287 (2015 - $289,917) 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 year ended August 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 4 year terms
of the leases as follows:
|
|
|
$
|
|
|
2015
|
|
2,705
|
|
|
2016
|
|
7,032
|
|
|
2017
|
|
5,950
|
|
|
2018
|
|
6,708
|
|
|
Total lease payments
|
|
22,395
|
|
|
Less: Amounts paid
|
|
9,737
|
|
|
Total lease payable
|
|
12,658
|
|
|
Less: Amounts
representing interest
|
|
(946
|
)
|
|
Balance of obligation
|
|
11,712
|
|
|
Less: Current
portion
|
|
(5,240
|
)
|
|
Long term portion
|
|
6,472
|
|
8. RELATED PARTY TRANSACTIONS
The Company entered into a consulting agreement with a family
member of a Director to provide project management service effective March 1,
2014. During the year ended August 31, 2016, the Company paid consulting fees of
$Nil (2015 - $68,011) under this agreement. The family member's service
terminated at the end of May 2015.
47
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
9. 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.
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:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Play MPE®
|
|
|
|
|
|
|
|
United States
|
|
1,379,240
|
|
|
1,314,553
|
|
|
Europe
|
|
1,628,897
|
|
|
1,695,042
|
|
|
Australia
|
|
274,501
|
|
|
285,230
|
|
|
Total Play MPE® Revenue
|
|
3,282,638
|
|
|
3,294,825
|
|
|
|
|
|
|
|
|
|
|
Clipstream ®
|
|
|
|
|
|
|
|
United States
|
|
55,175
|
|
|
28,712
|
|
|
Total Clipstream ® Revenue
|
|
55,175
|
|
|
28,712
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
3,337,813
|
|
|
3,323,537
|
|
Revenue in the above table is based on location of the
customer’s billing address. Some of these customers have distribution centers
located around the globe and distribute around the world. During the year ended
August 31, 2016, the Company generated 42% of total revenue from one customer
[2015 - one customer represented 45%].
It is in management’s opinion that the Company is not exposed
to significant credit risk.
As at August 31, 2016, one customer represented $354,459 (63%)
of the trade receivables balance [2015 – one customer represented $237,037
(59%)].
48
|
Destiny Media Technologies Inc.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
August 31, 2016 and 2015
|
10. CONCENTRATIONS AND ECONOMIC DEPENDENCE
(cont’d.)
The Company has substantially all its assets in Canada and its
current and planned future operations are, and will be, located in Canada.
11. SUBSEQUENT EVENTS
In accordance with ASC 855 “Subsequent Events”, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued,
we have evaluated all events or transactions that occurred after August 31, 2016
up through the date we issued the consolidated financial statements and has
determined that there was no other material event that occurred after the date
of the balance sheets included in this report.
49