Index to Audited Consolidated Financial Statements for the
Years Ended August 31, 2017 and 2016:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
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 OTCQB U.S. in the United States, under the symbol DSY on the TSX
Venture Exchange and under the symbol DME on the Berlin, Frankfurt, Xetra and
Stuttgart exchanges in Germany.
2. 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 Companys 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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(contd.)
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 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 the Companys 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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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 Companys 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, 2017, 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, 2017, the Company incurred
approximately $2,655 (2016: $ Nil) 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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(contd.)
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
expensed as incurred, unless such costs are within the scope of ASC 985-20
Software Costs of Software to be Sold, Leased or Marketed (ASC 985-20), in
which case such costs are subject to capitalization beginning when a products
technological feasibility has been established and ending when a product is
available for general release to customers. The Companys 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 and intangibles
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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Translation of foreign currencies
The Companys 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 $9,593
and $769 during the years ended August 31, 2017 and 2016, respectively.
Income taxes
The Company utilizes the liability method of accounting for
income taxes as set forth in ASC 740,
Income Taxes
(. Under the liability
method, deferred taxes are determined based on the temporary differences between
the financial statement and tax basis of assets and liabilities using tax rates
expected to be in effect during the years in which the basis that give rise to
the differences reverse. A valuation allowance is recorded when it is more
likely than not that some of the deferred tax assets will not be realized. In
determining the need for valuation allowances we consider projected future
taxable income and the availability of tax planning strategies. If in the future
we determine that we would not be able to realize our recorded deferred tax
assets, an increase in the valuation allowance would be recorded, decreasing
earnings in the period in which such determination is made.
33
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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 Companys financial
statements. The Companys evaluation was performed for the tax years ended
August 31, 1999 through August 31, 2017, 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 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.
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 Companys
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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(contd.)
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Net income (loss)
|
|
288,781
|
|
|
(188,251
|
)
|
Weighted average common shares outstanding
|
|
55,013,874
|
|
|
54,737,918
|
|
Diluted weighted average common shares
outstanding
|
|
55,013,874
|
|
|
54,737,918
|
|
At August 31, 2017, the Company had 1,706,250 outstanding
options exercisable at $0.40, 100,000 outstanding options exercisable at $0.26,
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.
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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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 Companys 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.
36
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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 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, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
In June 2016, the FASB issued ASU No. 2016-13, Financial
InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (ASU 2016-13). Financial InstrumentsCredit 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 May 2017, the FASB issued ASU No. 2017-09,
CompensationStock Compensation (Topic 718): Scope of Modification Accounting
(ASU 2017-09), which provides guidance on determining which changes to the
terms and conditions of share-based payment awards require an entity to apply
modification accounting under Topic 718. The amendments in this ASU are
effective for all entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. Early adoption is permitted,
including adoption in any interim period, for (1) public business entities for
reporting periods for which financial statements have not yet been issued and
(2) all other entities for reporting periods for which financial statements have
not yet been made available for issuance. The amendments in this ASU should be
applied prospectively to an award modified on or after the adoption date. We do
not expect the adoption of ASU 2017-09 to have a material impact on our
consolidated financial statements.
38
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(contd.)
In November 2016, the FASB issued ASU No. 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that
a statement of cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The amendments in this ASU
do not provide a definition of restricted cash or restricted cash equivalents.
The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted, including adoption in an interim period. We
do not expect the adoption of ASU 2016-18 to have a material impact on our
consolidated financial statements.
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, 2017, installments of
US$872,111, including interest of US$231,499, have been received ($999,200AUD
and $255,969AUD, respectively).
The following table summarizes the changes regarding the
carrying value of the remaining receivable balance during the year ended August
31, 2017 and covering the period of September 1, 2016 to August 31, 2017:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Beginning balance
|
|
175,206
|
|
|
265,530
|
|
Gross installments received
|
|
(127,845
|
)
|
|
(123,442
|
)
|
Interest
|
|
12,840
|
|
|
23,172
|
|
Foreign exchange
impact
|
|
4,610
|
|
|
10,216
|
|
Ending balance
|
|
64,811
|
|
|
175,476
|
|
39
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
3. LONG TERM RECEIVABLE
(contd.)
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 fiscal year are as
follows:
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
64,811
|
|
|
1,950
|
|
|
66,761
|
|
|
|
64,811
|
|
|
1,950
|
|
|
66,761
|
|
4. PROPERTY AND EQUIPMENT AND INTANGIBLES
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
Cost
|
|
|
amortization
|
|
|
value
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
2017
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
171,724
|
|
|
126,005
|
|
|
45,719
|
|
Computer hardware
|
|
241,705
|
|
|
192,596
|
|
|
49,109
|
|
Computer software
|
|
222,554
|
|
|
201,174
|
|
|
21,380
|
|
Leasehold
improvement
|
|
71,415
|
|
|
71,415
|
|
|
|
|
|
|
707,398
|
|
|
591,190
|
|
|
116,208
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and lists
|
|
415,752
|
|
|
328,928
|
|
|
86,824
|
|
|
|
415,752
|
|
|
328,928
|
|
|
86,824
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
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
|
|
Leasehold improvement
|
|
68,316
|
|
|
43,918
|
|
|
24,398
|
|
|
|
666,256
|
|
|
491,305
|
|
|
174,951
|
|
Intangibles
|
|
|
|
|
|
|
|
|
|
Patents and trademarks
|
|
344,322
|
|
|
234,306
|
|
|
110,016
|
|
|
|
344,322
|
|
|
234,306
|
|
|
110,016
|
|
Depreciation and amortization for the year ended August 31,
2017 was $153,385 (2016: $191,383)
40
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
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.
2017
During the year ended August 31, 2017, no shares were issued.
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 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 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 1,196,931 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.
41
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
5. STOCKHOLDERS EQUITY (contd.)
Stock-Based Payment Award Activity
A summary of option activity under the Plans as of August 31,
2017 and 2016, 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, 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
|
|
|
|
|
Granted
|
|
1,500,000
|
|
|
0.39
|
|
|
|
|
|
|
|
Forfeited
|
|
(600,000
|
)
|
|
0.40
|
|
|
|
|
|
|
|
Expired
|
|
(43,750
|
)
|
|
0.40
|
|
|
|
|
|
|
|
Outstanding at August 31, 2017
|
|
1,806,250
|
|
|
0.39
|
|
|
4.07
|
|
|
|
|
Exercisable at
August 31, 2017
|
|
439,583
|
|
|
0.39
|
|
|
2.02
|
|
|
|
|
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 August 31,
2017.
The following table summarizes information regarding the
non-vested stock purchase options outstanding as of August 31, 2017:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of Options
|
|
|
Fair Value
|
|
|
|
|
|
|
$
|
|
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
|
|
Granted
|
|
1,500,000
|
|
|
0.07
|
|
Forfeited
|
|
|
|
|
|
|
Vested
|
|
(414,583
|
)
|
|
0.11
|
|
Non-vested options at August 31, 2017
|
|
1,366,667
|
|
|
0.07
|
|
42
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
5. STOCKHOLDERS EQUITY (contd.)
As of August 31, 2017, there was $91,967 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 1.8 years.
During the year ended August 31, 2017, the total stock-based
compensation expense of $46,133 is reported in the statement of comprehensive
loss as follows:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Stock-based compensation
|
|
|
|
|
|
|
General and administrative
|
|
31,641
|
|
|
28,608
|
|
Sales and marketing
|
|
4,665
|
|
|
13,063
|
|
Research and development
|
|
9,827
|
|
|
7,937
|
|
Total stock-based compensation
|
|
46,133
|
|
|
49,608
|
|
43
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
5. STOCKHOLDERS EQUITY (contd.)
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:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Expected term of stock options (years)
|
|
1.8-3.0
|
|
|
|
|
Expected volatility
|
|
86.4%-87.7%
|
|
|
|
|
Risk-free interest rate
|
|
1.4-1.6%
|
|
|
|
|
Dividend yields
|
|
|
|
|
|
|
Weighted average grant date fair value
|
$
|
0.07
|
|
|
|
|
Expected volatilities are based on historical volatility of the
Companys 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 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 year ended August 31, 2017, the Company recognized
compensation expense of $45,212 (2016: $37,304) in salaries and wages on the
consolidated statement of comprehensive income (loss) 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 $0.21 (2016:
$0.23) . The shares are held in trust by the Company for a period of one year
from the date of purchase.
45
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
5. STOCKHOLDERS EQUITY (contd.)
[d] Warrants
As at August 31, 2017, 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
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. Subsequent to August
31, 2017, these warrants expired unexercised.
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.
46
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
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 Companys income tax expense is as
follows:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rates
|
|
98,000
|
|
|
(64,000
|
)
|
|
|
|
|
|
|
|
Permanent differences
|
|
2,000
|
|
|
2,000
|
|
Stock option compensation
|
|
16,000
|
|
|
17,000
|
|
Effect of lower foreign tax in Canada
|
|
(21,000
|
)
|
|
18,000
|
|
Effect of research tax credits claims filed in respect of
prior years
|
|
(128,000
|
)
|
|
(36,000
|
)
|
Foreign exchange and other adjustments
|
|
(89,000
|
)
|
|
25,000
|
|
Change in
valuation allowance
|
|
122,000
|
|
|
38,000
|
|
Provision for deferred income taxes
|
|
|
|
|
|
|
Included in other adjustments and change in valuation allowance
for the year ended August 31, 2017 is $87,000 (2016: ($15,000)) for the effect
of changes in foreign exchange rates and $2,000 (2016: $40,000) 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.
47
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
6. INCOME TAXES (contd.)
Significant components of the Companys deferred tax assets as
of August 31 are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
1,196,000
|
|
|
1,324,000
|
|
Excess of book over tax depreciation
|
|
561,000
|
|
|
501,000
|
|
Tax Credit Carryforwards
|
|
1,411,000
|
|
|
1,220,000
|
|
Total deferred tax asset
|
|
3,168,000
|
|
|
3,045,000
|
|
Valuation allowance
|
|
(3,168,000
|
)
|
|
(3,045,000
|
)
|
Net deferred
tax asset
|
|
|
|
|
|
|
Net income (loss) before income tax by geographic region is as
follows:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
United States
|
|
64,866
|
|
|
86,193
|
|
Canada
|
|
223,915
|
|
|
(274,444
|
)
|
|
|
288,781
|
|
|
(188,251
|
)
|
If not utilized to reduce future taxable income, the Companys
net operating loss carryforwards will expire as follows:
|
|
Canada
|
|
|
United States
|
|
|
|
$
|
|
|
$
|
|
2021 and thereafter
|
|
34,000
|
|
|
3,499,000
|
|
|
|
34,000
|
|
|
3,499,000
|
|
If not utilized to reduce future taxable payable, the Companys
investment tax credit carryforwards will expire as follows:
|
|
$
|
|
|
$
|
|
2028 and thereafter
|
|
1,349,000
|
|
|
|
|
|
|
1,349,000
|
|
|
|
|
48
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
7. COMMITMENTS
The Company entered into a new lease agreement commencing July
1, 2017 and expiring June 30, 2022 for the same premise consisting of
approximately 6,550 square feet. The Company has fiscal year payments committed
as follows:
|
|
$
|
|
|
|
|
|
2018
|
|
252,088
|
|
2019
|
|
257,749
|
|
2020
|
|
265,152
|
|
2021
|
|
270,813
|
|
2022
|
|
231,121
|
|
During the year ended August 31, 2017 the Company incurred rent
expense of $234,533 (2016 - $222,287) which has been allocated between general
and administrative expenses, research and development and sales and marketing on
the consolidated statement of comprehensive income (loss). The rent expense
during the year ended August 31, 2017 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 until March 2018 as follows:
|
|
$
|
|
2015
|
|
2,705
|
|
2016
|
|
7,032
|
|
2017
|
|
5,950
|
|
2018
|
|
7,012
|
|
Total lease payments
|
|
22,699
|
|
Less: Amounts paid
|
|
16,253
|
|
Total lease payable
|
|
6,446
|
|
Less: Amounts
representing interest
|
|
(200
|
)
|
Balance of obligation
|
|
6,246
|
|
8. RELATED PARTY TRANSACTIONS
None.
49
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
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:
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Play MPE®
|
|
|
|
|
|
|
United States
|
|
1,428,802
|
|
|
1,379,240
|
|
Europe
|
|
1,687,724
|
|
|
1,628,897
|
|
Australia
|
|
289,910
|
|
|
274,501
|
|
Total Play MPE® Revenue
|
|
3,406,436
|
|
|
3,282,638
|
|
|
|
|
|
|
|
|
Clipstream ®
|
|
|
|
|
|
|
United States
|
|
38,578
|
|
|
55,175
|
|
Total
Clipstream ® Revenue
|
|
38,578
|
|
|
55,175
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
3,445,014
|
|
|
3,337,813
|
|
Revenue in the above table is based on location of the
customers billing address. Some of these customers have distribution centers
located around the globe and distribute around the world. During the year ended
August 31, 2017, the Company generated 41% of total revenue from one customer
[2016 - one customer represented 42%].
It is in managements opinion that the Company is not exposed
to significant credit risk.
As at August 31, 2017, one customer represented $377,672 (71%)
of the trade receivables balance [2016 one customer represented $354,459
(63%)].
50
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017 and 2016
10. CONCENTRATIONS AND ECONOMIC DEPENDENCE (contd.)
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
On September 5, 2017, Steve Vestergaard, former President and Chief Executive Officer of Destiny Media Technologies Inc. (the “Company”) has filed a Notice of Civil Claim in the Supreme Court of British Columbia against the Company, its subsidiaries, independent directors and current Chief Executive Officer, claiming damages for conspiracy, breach of contract, wrongful dismissal, defamation and aggravated and punitive damages. The Company believes the claims are without merit and will defend itself against the claims. The quantum of loss, if any, is not determinable at this time and management believes it is unlikely that the outcome of this matter will have an adverse impact on its results of operations, cash flows and financial condition.
51