Index to Audited Consolidated Financial Statements for the
Years Ended August 31, 2018 and 2017:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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.
1
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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.
Short-term investments
We classify our short-term investments as available-for-sale.
Our investments classified as available-for-sale are recorded at fair value
based upon third party pricing at period end. Unrealized gains and losses that
are deemed temporary in nature are recorded in accumulated other comprehensive
income a separate component of stockholders equity.
A decline in the fair value of any security below cost that is
deemed other than temporary results in a charge to earnings and the
corresponding establishment of a new cost basis for the security. Premiums and
discounts are amortized (accreted) over the life of the related security as an
adjustment to its yield. Dividend and interest income are recognized when
earned. Realized gains and losses are included in earnings and are derived using
the specific identification method for determining the cost of investments sold.
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.
2
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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 property, equipment and intangible 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, 2018, 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, 2018, the Company incurred
approximately $82,354 (2017: $2,655) 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.
3
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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
|
4
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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 $3,333
and $9,593 during the years ended August 31, 2018 and 2017, 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.
5
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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 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.
6
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Earnings per share
Net income per common share (basic) is calculated by dividing
net income by the weighted average number of common shares outstanding during
the period. Net income per common share (diluted) is calculated by dividing net
income for the period by the weighted average number of common shares
outstanding during the period, plus the dilutive effect of outstanding common
share equivalents. This method requires that the dilutive effect of outstanding
options and warrants issued be calculated using the treasury stock method. Under
the treasury stock method, all common share equivalents have been exercised at
the beginning of the period (or at the time of issuance, if later), and that the
funds obtained thereby were used to purchase common shares of the Company at the
average trading price of common shares during the period, but only if dilutive.
|
|
Year Ended
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net income
|
$
|
656,270
|
|
$
|
288,781
|
|
Weighted average common shares outstanding
|
|
55,013,874
|
|
|
55,013,874
|
|
Diluted weighted average common shares
outstanding
|
|
55,013,874
|
|
|
55,013,874
|
|
At August 31, 2018, the Company had 1,531,250 outstanding
options exercisable at $0.40, 100,000 outstanding options exercisable at $0.26.
Those outstanding options were not included in the computation of diluted EPS
because the effect 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.
7
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Fair value measurement
The book value of cash and cash equivalents, short-term
investments, accounts receivable, other receivables, accounts payable and
accrued liabilities approximate their fair values due to the short-term maturity
of those instruments. 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.
Recently Adopted Accounting Standards
In November 2015, the FASB issued ASU No. 2015-17, Income
Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU
2015-17). ASU 2015-17 requires deferred tax assets and liabilities to be
classified as non-current in the consolidated balance sheet. Previously,
accounting principles required an entity to separate deferred income tax assets
and liabilities between current and noncurrent amounts in a classified statement
of financial position. The Company adopted this standard on September 1, 2017.
The adoption of ASU 2015-17 did not have any impact on the Companys
consolidated financial statements.
The SEC staff issued Staff Accounting Bulletin (SAB) 118,
which provides guidance on accounting for the tax effects of the U.S. tax reform
announced on December 22, 2017 by the U.S. Government commonly referred to as
the Tax Cuts and Jobs Act. SAB 118 provides a measurement period that should not
extend beyond one year from the U.S. tax reform enactment date for companies to
complete the accounting under Accounting Standards Codification (ASC) 740. In
accordance with SAB 118, a company must reflect the income tax effects of those
aspects of the U.S. tax reform for which the accounting under ASC 740 is
complete.
Specifically, the Company was required to revalue its U.S.
deferred tax assets and liabilities due to the federal income tax rate reduction
from 35 percent to 21 percent. Since the Company has provided a full valuation
allowance against its deferred tax assets, the revaluation of the deferred tax
assets did not have a material impact on any period presented.
8
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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 should be
applied prospectively to an award modified on or after the adoption date. The
Company adopted this standard on September 1, 2017. The adoption of ASU 2015-17
did not have any impact on the Companys consolidated financial statements.
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). This new accounting
guidance on revenue recognition provides for a single five-step model to be
applied to all revenue contracts with customers. The new standard also requires
additional financial statement disclosures that will enable users to understand
the nature, amount, timing and uncertainty of revenue and cash flows relating to
customer contracts. ASU 2014-09 is effective for the Company beginning on
September 1, 2018.
The new guidance permits two methods of adoption, full
retrospective or modified retrospective, and the Company has elected to use the
modified retrospective method of adoption in which the cumulative effect of
applying the ASU will be recognized at September 1, 2018, the date of initial
application. Management has implemented a plan of adoption and is continuing to
evaluate the impact that adoption of this guidance will have on the Companys
financial statements.
The Companys implementation plan includes the following:
-
Analyzing the Companys different revenue contracts and arrangements;
-
Selecting representative contracts within each group for evaluation under
ASU 2014-09;
-
Identifying the impact from the standard on current business processes;
-
Evaluating additional disclosure requirements and monitoring changes to
the Companys internal controls and accounting practices.
Management has commenced its plan for adoption of ASU 2014-09
by reviewing various types of revenue contracts and disaggregated the revenue
into contract groups. Thus far, from its contract reviews, the Company does not
anticipate a material impact to its results of operations as the pattern of
revenue recognition is expected to be consistent under the new standard.
However, the Companys initial assessment of the impact could change as the
adoption plan is implemented. The Company expects that there will be an impact
to financial reporting due to the enhanced revenue disclosures of ASC 606. The
Company will adopt the requirements of the new standard effective September 1,
2018, in the Company's Form 10-Q for the three months ended November 30, 2018.
9
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842) (ASU 2016-02). The amendments in this Update increase
transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. ASU 2016-02 will be effective for the Company beginning on
September 1, 2019. The Company is currently evaluating the impact of the new
guidance on its consolidated financial statements.
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. The Company is in the
process of determining the effect the adoption of this standard will have on its
consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash
Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"). ASU 2016-15 reduces the existing diversity in practice in
financial reporting across all industries by clarifying certain existing
principles in ASC 230, Statement of Cash Flows, ("ASC 230") including providing
additional guidance on how and what an entity should consider in determining the
classification of certain cash flows. In addition, in November 2016, the FASB
issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU
2016-18"). ASU 2016-18 clarifies certain existing principles in ASC 230,
including providing additional guidance related to transfers between cash and
restricted cash and how entities present, in their statement of cash flows, the
cash receipts and cash payments that directly affect the restricted cash
accounts. This amendment is effective for the Company beginning on September 1,
2018. Early adoption is permitted. The adoption of ASU 2016-15 and ASU 2016-18
will modify the Companys current disclosures and reclassifications within the
consolidated statement of cash flows, but they are not expected to have a
material effect on the Companys consolidated financial statements.
10
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock
Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (ASU
2018-07). This ASU expands the scope of Topic 718 to include share-based
payment transactions for acquiring goods and services from nonemployees. The
effective date for the standard is for interim periods in fiscal years beginning
after December 15, 2018, with early adoption permitted, but no earlier than the
Companys adoption date of Topic 606. The new guidance is required to be applied
retrospectively with the cumulative effect recognized at the date of initial
application. The Company is currently evaluating the effect ASU 2018-07 will
have on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement - Disclosure Framework (Topic 820). The updated guidance improves
the disclosure requirements on fair value measurements. The updated guidance if
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted for any removed
or modified disclosures. The Company is currently assessing the timing and
impact of adopting the updated provisions to its consolidated financial
statements.
11
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
3. SHORT TERM INVESTMENTS
The Companys short-term investments consists of one-year
Guaranteed Investment Certificates with a major Canadian financial institution
that earn interest at variable interest rates ranging from 2.15 2.50%.
4. SHORT 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
was due to be paid in equal monthly installments of AUD$14,050 until the end of
the obligation and was accruing interest at a rate of 10.25% per annum
compounded monthly. The receivable was secured by a registered charge against
real estate located in Australia.
As of August 31, 2018, all installments due under the terms of
the settlement had been received.
The following table summarizes the changes in the carrying
value of the receivable balance during the years ended August 31, 2018 and 2017:
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
Beginning balance
|
|
64,811
|
|
|
175,206
|
|
Gross installments received
|
|
(65,766
|
)
|
|
(127,845
|
)
|
Interest
|
|
1,921
|
|
|
12,840
|
|
Foreign exchange
impact
|
|
(966
|
)
|
|
4,610
|
|
Ending balance
|
|
|
|
|
64,811
|
|
The foreign exchange impact in the above table is partially
allocated into other comprehensive income (loss) and partially allocated into
exchange gain (loss) on the income statement.
12
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
5. PROPERTY AND EQUIPMENT AND INTANGIBLES
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
Cost
|
|
|
amortization
|
|
|
value
|
|
August 31,
2018
|
|
$
|
|
|
$
|
|
|
$
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
134,130
|
|
|
102,822
|
|
|
31,308
|
|
Computer hardware
|
|
226,679
|
|
|
189,724
|
|
|
36,955
|
|
Computer software
|
|
213,684
|
|
|
203,420
|
|
|
10,264
|
|
Leasehold improvements
|
|
162,754
|
|
|
81,008
|
|
|
81,746
|
|
|
|
737,247
|
|
|
576,974
|
|
|
160,273
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and lists
|
|
412,072
|
|
|
370,600
|
|
|
41,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
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 improvements
|
|
71,415
|
|
|
71,415
|
|
|
|
|
|
|
707,398
|
|
|
591,190
|
|
|
116,208
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and lists
|
|
415,752
|
|
|
328,928
|
|
|
86,824
|
|
Depreciation and amortization for the year ended August 31,
2018 was $105,869 (2017: $153,385)
13
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
6. 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.
[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 1,371,931 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.
Stock-Based Payment Award Activity
A summary of option activity under the Plans as of August 31,
2018 and 2017, 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, 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
|
|
|
|
|
Granted
|
|
150,000
|
|
|
0.40
|
|
|
4.28
|
|
|
|
|
Forfeited
|
|
(150,000
|
)
|
|
0.40
|
|
|
4.27
|
|
|
|
|
Expired
|
|
(175,000
|
)
|
|
0.40
|
|
|
|
|
|
|
|
Outstanding at August 31, 2018
|
|
1,631,250
|
|
|
0.39
|
|
|
3.49
|
|
|
|
|
Exercisable at
August 31, 2018
|
|
1,016,666
|
|
|
0.39
|
|
|
3.23
|
|
|
|
|
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,
2018.
14
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
6. STOCKHOLDERS EQUITY (contd.)
The following table summarizes information regarding the
non-vested stock purchase options outstanding as of August 31, 2018:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of Options
|
|
|
Fair Value
|
|
|
|
|
|
|
$
|
|
Non-vested options at September 1, 2016
|
|
281,250
|
|
|
0.08
|
|
Granted
|
|
1,500,000
|
|
|
0.07
|
|
Vested
|
|
(414,583
|
)
|
|
0.11
|
|
Non-vested
options at August 31, 2017
|
|
1,366,667
|
|
|
0.07
|
|
Granted
|
|
150,000
|
|
|
0.08
|
|
Forfeited
|
|
(100,000
|
)
|
|
0.07
|
|
Vested
|
|
(802,083
|
)
|
|
0.07
|
|
Non-vested
options at August 31, 2018
|
|
614,584
|
|
|
0.07
|
|
As of August 31, 2018, there was $42,658 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 1.1 years.
During the year ended August 31, 2018, the total stock-based
compensation expense of $54,452 is reported in the statement of comprehensive
income as follows:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
Stock-based compensation
|
|
|
|
|
|
|
General and administrative
|
|
32,954
|
|
|
31,641
|
|
Sales and marketing
|
|
7,930
|
|
|
4,665
|
|
Research and development
|
|
13,568
|
|
|
9,827
|
|
Total stock-based compensation
|
|
54,452
|
|
|
46,133
|
|
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:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
Expected term of stock options (years)
|
|
3.02
|
|
|
1.8-3.0
|
|
Expected volatility
|
|
93.3%
|
|
|
86.4%-87.7%
|
|
Risk-free interest rate
|
|
1.9%
|
|
|
1.4-1.6%
|
|
Dividend yields
|
|
|
|
|
|
|
Weighted average grant date fair value
|
$
|
0.08
|
|
$
|
0.07
|
|
15
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
6. STOCKHOLDERS EQUITY (contd.)
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, 2018, the Company recognized
compensation expense of $58,102 (2017: $45,212) in salaries and wages on the
consolidated statement of comprehensive income in respect of the Plan,
representing the Companys employee matching of cash contributions to the plan.
The shares were purchased on the open market at an average price of $0.23 (2017:
$0.21). The shares are held in trust by the Company for a period of one year
from the date of purchase.
[d] Warrants
A summary of common stock warrants outstanding as of August 31,
2018, and changes during the year then ended is presented below:
|
|
Number of
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Common
|
|
|
Exercise
|
|
|
Date
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
of
|
|
|
Value
|
|
|
|
Issuable
|
|
|
$
|
|
|
Expiry
|
|
|
$
|
|
Outstanding at August 31, 2016
and August 31, 2017
|
|
1,010,000
|
|
|
0.30
|
|
|
October 20, 2017
|
|
|
|
|
Expired
|
|
(1,010,000
|
)
|
|
0.30
|
|
|
|
|
|
|
|
Outstanding at August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
7. INCOME TAXES
The Company is subject to United States federal and state
income taxes at an approximate rate of 21.0% and to Canadian federal and British
Columbia provincial taxes in Canada at an approximate rate of 27.0%. The
reconciliation of the provision (recovery) for income taxes at the United States
federal statutory rate compared to the Companys income tax expense is as
follows:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rates
|
|
138,000
|
|
|
98,000
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
1,000
|
|
|
2,000
|
|
Stock option compensation
|
|
11,000
|
|
|
16,000
|
|
Effect of lower foreign tax in Canada
|
|
52,000
|
|
|
(21,000
|
)
|
Effect of research tax credits claims filed in respect of
prior years
|
|
29,000
|
|
|
(128,000
|
)
|
Effect of a change in statutory tax rates
|
|
443,000
|
|
|
|
|
Foreign exchange and other adjustments
|
|
190,000
|
|
|
(89,000
|
)
|
Recovery of previously unrecognized tax
assets
|
|
(233,000
|
)
|
|
|
|
Change in
valuation allowance
|
|
(631,000
|
)
|
|
122,000
|
|
Provision for deferred income taxes
|
|
|
|
|
|
|
Included in other adjustments and change in valuation allowance for the year ended August 31, 2018 is $(74,000) (2017: $87,000) for the effect of changes in foreign exchange rates and $115,000 (2017: $2,000) 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.
17
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
7. INCOME TAXES (contd.)
Significant components of the Companys deferred tax assets as
of August 31 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
789,000
|
|
|
1,196,000
|
|
Excess of book over tax depreciation
|
|
729,000
|
|
|
561,000
|
|
Tax Credit
Carryforwards
|
|
1,019,000
|
|
|
1,411,000
|
|
Total deferred tax asset
|
|
2,537,000
|
|
|
3,168,000
|
|
Valuation
allowance
|
|
(2,537,000
|
)
|
|
(3,168,000
|
)
|
Net deferred tax asset
|
|
|
|
|
|
|
Net income (loss) before income tax by geographic region is as
follows:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
United States
|
|
(166,037
|
)
|
|
64,866
|
|
Canada
|
|
822,307
|
|
|
223,915
|
|
|
|
656,270
|
|
|
288,781
|
|
If not utilized to reduce future taxable income, the Companys
net operating loss carryforwards will expire as follows:
|
|
Canada
|
|
|
United States
|
|
|
|
$
|
|
|
$
|
|
2021 and thereafter
|
|
|
|
|
3,755,000
|
|
|
|
|
|
|
3,755,000
|
|
If not utilized to reduce future taxable payable, the Companys
investment tax credit carryforwards will expire as follows:
|
|
Canada
|
|
|
United States
|
|
|
|
$
|
|
|
$
|
|
2028 and thereafter
|
|
1,238,000
|
|
|
|
|
|
|
1,238,000
|
|
|
|
|
18
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
8. 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 6,600 square feet. The Company has fiscal year payments committed
as follows:
|
|
$
|
|
|
|
|
|
2019
|
|
250,174
|
|
2020
|
|
257,356
|
|
2021
|
|
262,848
|
|
2022
|
|
224,320
|
|
During the year ended August 31, 2018, the Company became
entitled to a leasehold improvement allowance from its landlord in the amount of
$45,341, in connection with certain office leasehold improvements completed.
This amount was recorded as a deferred leasehold inducement and is being
amortized against rent expense over the remaining term of the lease.
During the year ended August 31, 2018 the Company recorded rent
expense of $256,058 (2017 - $234,533) which has been allocated between general
and administrative expenses, research and development and sales and marketing on
the consolidated statement of comprehensive income. The total rent commitment,
net of the leasehold improvement allowance, is being amortized to rent expense
on a straight-line basis over the term of the lease.
9. CONTINGENCIES
The Company is subject to claims and legal proceedings that
arise in the ordinary course of business. Such matters are inherently uncertain,
and there can be no guarantee that the outcome of any such matter will be
decided favorably to the Company or that the resolution of any such matter will
not have a material adverse effect upon the Companys financial statements. The
Company does not believe that any of such pending claims and legal proceedings
will have a material adverse effect on its consolidated financial statements.
On September 5, 2017, the Companys former President and Chief
Executive Officer filed a Notice of Civil Claim in the Supreme Court of British
Columbia against the Company, its subsidiaries, independent directors and
current Chief Executive Officer, claiming damages for conspiracy, breach of
contract, wrongful dismissal, defamation and aggravated and punitive damages.
The Company believes the claims are without merit and 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.
19
Destiny Media Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
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:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Play MPE®
|
|
|
|
|
|
|
United States
|
|
1,527,868
|
|
|
1,428,802
|
|
Europe
|
|
1,721,654
|
|
|
1,687,724
|
|
Australia
|
|
289,042
|
|
|
289,910
|
|
Total Play MPE® Revenue
|
|
3,538,564
|
|
|
3,406,436
|
|
|
|
|
|
|
|
|
Clipstream ®
|
|
|
|
|
|
|
United States
|
|
67,907
|
|
|
38,578
|
|
Total Clipstream ® Revenue
|
|
67,907
|
|
|
38,578
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
3,606,471
|
|
|
3,445,014
|
|
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, 2018, the Company generated 42% of total revenue from one customer
[2017 - 41%].
It is in managements opinion that the Company is not exposed
to significant credit risk.
As at August 31, 2018, one customer represented $102,313 (25%)
of the trade receivables balance [2017 one customer represented $377,672
(71%)].
The Company has substantially all its assets in Canada and its
current and planned future operations are, and will be, located in Canada.
11. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform
to the current period's presentation. These reclassifications did not affect
prior periods' net earnings.
20