ITEM
7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion of our results of operations and
financial condition should be read together with the consolidated financial
statements and related notes that are included in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of various factors.
RESULTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, 2019
AND 2018
Revenue
Total revenue for the year ended August 31, 2019 increased by
5.6% over the same period in the prior year to $3,809,092 (2018 $3,606,471).
Play MPE® revenue increased by 6.1% year over year to $3,752,715 (2018:
$3,538,564). The increase in Play MPE® revenue was seen from all geographic
regions in which the we operate.
The Companys revenues are denominated predominantly in US
Dollars, Euros and Australian Dollars. During fiscal 2019, 44% (2018: 43%) of
the Companys revenue was denominated in US Dollars, 47% (2018: 49%) of the
Companys revenue was denominated in Euros and 8% (2018: 8%) of the Companys
revenue was denominated in Australian Dollars. During fiscal 2019, the Companys
revenues were negatively affected by the fluctuations in the Euro and Australian
Dollar relative to the US Dollar in the amount of 3% year over year.
Removing these negative foreign exchange fluctuations, the
Companys Play MPE revenue increased by 9.1% year over year. The largest
increases were seen by one of our Major Label customers, whose global revenue
increased by 33.9% on a currency adjusted basis, and from Australian Independent
labels, for which revenue increased by 33.5% on a currency adjusted basis, year
over year.
Gross Margin
Gross margin for the year ended August 31, 2019 was 92%, which
is comparable to the year ended August 31, 2018. The Companys cost of revenue
consists of data hosting and processing charges, third party transaction related
costs, and engineering, technical and customer support costs. These costs are
driven by the size and volume of customer transactions processed, as well as the relative proportion of full service
versus self-service revenue. Our self-service sales are derived from customers
who have been provided with a customer account to access our encoder to
independently upload and publish releases. Our full-service revenue is derived
from customers who are fully serviced by our internal staff, who prepare and
publish releases on their behalf. During the year ended August 31, 2019, our
gross margin remained consistent over the prior year, as we saw service revenue
grow from both customer types.
14
Operating Expenses
Overview
As our technologies and products are developed and maintained
in-house, the majority of our expenditures are on salaries and wages and other
associated expenses such as office space, office supplies and employee benefits.
Our operations are primarily conducted in Canada and our costs are primarily
incurred in Canadian dollars while our revenues are primarily denominated in
Euros and US Dollars. Thus, operating expenses and the results of operations are
impacted, to the extent they are not hedged, by the rise and fall of the
relative values of the Canadian dollar to these currencies. The Company
maintains a large portion of its financial reserves in Canadian dollars to
mitigate the downside risk of adverse exchange rates.
Overall operating costs increased by 9.8% to $2,917,935 (2018
$2,658,657) during the year ended August 31, 2019, largely driven by an increase
in staffing costs, and an increase in marketing, business development and
promotional expenses. Overall staffing costs increased by 13.3% as a result of
the addition of sales and marketing staff and product development staff.
Advertising and marketing expenses increased by 52.2% as a result of increased
marketing and public relations efforts, as more fully described below.
|
General and administrative
|
|
31-Aug
|
|
|
31-Aug
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(12 months)
|
|
|
(12 months)
|
|
|
Change
|
|
|
Change
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
Bad debt
|
|
4,719
|
|
|
2,206
|
|
|
2,513
|
|
|
113.9%
|
|
|
Office and
miscellaneous
|
|
161,610
|
|
|
95,632
|
|
|
65,978
|
|
|
69.0%
|
|
|
Professional fees
|
|
164,562
|
|
|
205,733
|
|
|
(41,171
|
)
|
|
-20.0%
|
|
|
Rent
|
|
29,339
|
|
|
34,905
|
|
|
(5,566
|
)
|
|
-15.9%
|
|
|
Telecommunications
|
|
2,651
|
|
|
3,327
|
|
|
(676
|
)
|
|
-20.3%
|
|
|
Travel
|
|
5,702
|
|
|
10,600
|
|
|
(4,898
|
)
|
|
-46.2%
|
|
|
Wages and benefits
|
|
402,175
|
|
|
449,463
|
|
|
(47,288
|
)
|
|
-10.5%
|
|
|
|
|
770,758
|
|
|
801,866
|
|
|
(31,108
|
)
|
|
-3.9%
|
|
Our general and administrative expenses consist of salaries and
related personnel costs including overhead, office rent, and general office
supplies. General and administrative costs also include professional fees and
general and administrative travel expenditures. The increase in office and
miscellaneous expense relates to transitionary expenses associated with changes
in office services and an increase in realized foreign exchange losses as a
result of fluctuating foreign currency exchange rates.
|
Sales and marketing
|
|
31-Aug
|
|
|
31-Aug
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(12 months)
|
|
|
(12 months)
|
|
|
Change
|
|
|
Change
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
Advertising and marketing
|
|
142,412
|
|
|
93,582
|
|
|
48,830
|
|
|
52.2%
|
|
|
Rent
|
|
97,264
|
|
|
104,437
|
|
|
(7,173
|
)
|
|
-6.9%
|
|
|
Telecommunications
|
|
9,887
|
|
|
11,947
|
|
|
(2,060
|
)
|
|
-17.2%
|
|
|
Wages and benefits
|
|
659,388
|
|
|
447,508
|
|
|
211,880
|
|
|
47.3%
|
|
|
|
|
908,951
|
|
|
657,474
|
|
|
251,477
|
|
|
38.2%
|
|
Sales and marketing expenses consist of salaries and related
personnel costs including overhead, office rent, and telecommunications costs.
Sales and marketing also includes advertising and marketing expenses, which
consists of promotional materials, online or print advertising, business
development tools, and marketing or business development related travel costs
including attendance at conferences and trade shows, and label visits. The
increase in advertising and marketing expenses relates to additional expenses
incurred in respect of public relations initiatives, and increased marketing and
business development related travel. The increase in wages and benefits is
associated with an increase in staffing in this department. We hired a marketing
manager, and additional inside and outside business development associates and
consultants.
15
|
Product Development
|
|
31-Aug
|
|
|
31-Aug
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(12 months)
|
|
|
(12 months)
|
|
|
Change
|
|
|
Change
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
Rent
|
|
118,389
|
|
|
117,705
|
|
|
684
|
|
|
0.6%
|
|
|
Software services
|
|
70,581
|
|
|
78,050
|
|
|
(7,469
|
)
|
|
-9.6%
|
|
|
Telecommunications
|
|
80,860
|
|
|
87,851
|
|
|
(6,991
|
)
|
|
-8.0%
|
|
|
Wages and benefits
|
|
871,550
|
|
|
809,842
|
|
|
61,708
|
|
|
7.6%
|
|
|
|
|
1,141,380
|
|
|
1,093,448
|
|
|
47,932
|
|
|
4.4%
|
|
Product Development costs consist of product and software
development related salaries and personnel costs including overhead, office rent
and telecommunications. Product development also includes consulting fees with
respect to product development and deployment. The increase in wages and
benefits is attributable to overall increased staffing with respect to product
development and software development. The decrease in telecommunications and
software services is associated with the characterization of certain costs to
operations and savings resulting from changes in services and providers.
Depreciation and amortization
Depreciation and amortization expense arises from property and
equipment, and from patents and trademarks. Amortization decreased to $96,846
for the year ended August 31, 2019 from $105,869 for the year ended August 31,
2018, a decrease of $9,023 or 8.5% from a combination of an overall reduction in
the capital asset balances subject to amortization, including reduced spending
on redundant patent and trademark fees.
Other earnings and expenses
Interest income increased to $27,188 for the year ended August
31, 2019 from $10,597 for the year ended August 31, 2018, an increase of
$16,591. The increase is related to the investment of excess cash in one year
guaranteed investment certificates.
Net income
During the year ended August 31, 2019 we reported net income of
$610,778 (2018 $656,270). The decrease in net income is attributable to a
combination of (1) negative foreign exchange fluctuations on our reported
revenues and (2) an increase in certain operating expenses such as salaries and
wages and marketing, as more fully described above.
Adjusted EBITDA is not defined under generally accepted
accounting principles (GAAP) and it may not be comparable to similarly titled
measures reported by other companies. We used Adjusted EBITDA, along with other
GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to
compare our performance on a consistent basis by removing from our operating
results the impact of our capital structure, the effect of operating in
different tax jurisdictions, the impact of our asset base, which can differ
depending on the book value of assets, the accounting methods used to compute
depreciation and amortization, the existence or timing of asset impairments and
the effect of non-cash stock-based compensation expense. We believe Adjusted
EBITDA is useful to investors as it is a widely used measure of performance and
the adjustments we make to Adjusted EBITDA provide further clarity on our
profitability. We remove the effect of noncash stock-based compensation from our
earnings, which can vary based on share price, share price volatility and
expected life of the equity instruments we grant. In addition, these stock-based
compensation expenses do not result in cash payments by the Company. Adjusted
EBITDA has limitations as a profitability measure in that it does not include
interest expense on our debt, our provisions for income taxes and amortization,
the effect of deferred leasehold inducement, the effect of noncash stock-based
compensation expense and the effect of asset impairment.
16
The following is a reconciliation of net income from operations
to Adjusted EBITDA:
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Net income (loss)
|
$
|
610,778
|
|
$
|
656,270
|
|
$
|
288,781
|
|
|
Interest income (net)
|
|
(27,188
|
)
|
|
(10,597
|
)
|
|
(14,314
|
)
|
|
Depreciation and amortization
|
|
96,846
|
|
|
105,869
|
|
|
153,385
|
|
|
Stock based compensation
|
|
41,675
|
|
|
54,452
|
|
|
46,133
|
|
|
Deferred leasehold inducement
|
|
(4,150
|
)
|
|
5,606
|
|
|
(26,754
|
)
|
|
Adjusted EBITDA
|
$
|
717,961
|
|
$
|
811,600
|
|
$
|
447,231
|
|
LIQUIDITY AND FINANCIAL CONDITION
Our cash and cash equivalents and short-term investments
balance increased by $642,808 during the year ended August 31, 2019 to
$2,892,194 (2018 $2,249,386). At August 31, 2019, we held $2,512,138 (August
31, 2018 - $1,097,434) in cash and cash equivalents and $380,056 (2018 -
$1,151,952) in short term investments consisting of one-year Guaranteed
Investment Certificates held through a major Canadian financial institution.
At August 31, 2019, we had working capital of $2,809,689
compared to $2,280,695 as at August 31, 2018. The increase in our working
capital was primarily due net income during the year.
At August 31, 2019, $2,552,539 in cash and short-term
investments were held outside of the United States. At this time, we have no
intention to repatriate this cash, however should we decide to repatriate in the
future, taxes may need to be accrued and paid.
Cash Flows
Net cash provided in operating activities was $840,534 for the
year ended August 31, 2019, compared to $1,094,248 for the year ended August 31,
2018. The decrease was mainly the result of a deferred leasehold inducements
received in the comparative year, as well as the receipt of a short-term
receivable in the comparative period which was fully repaid in that period.
The cash used provided by investing activities was $591,621 for
the year ended August 31, 2019, compared to cash utilized in investing
activities of $1,294,058 for the year ended August 31, 2018. The increase in
cash provided by investing activities is a result of the maturity of short-term
investments, consisting of one-year Guaranteed Investment Certificates, at
August 31, 2019, offset by an investment in new internally developed software.
Cash used in financing activities was $2,005 for the year ended
August 31, 2019, consisting of the repurchase of common stock of the company for
retirement. There was no cash used in or provided by financing activities during
each of the fiscal year ended August 31, 2018.
CAPITAL RESOURCES
The Company does not have any material commitments for capital
expenditures and the Company is able to meet current and expected growth and
increase in growth in revenue with current capital investments.
MATERIAL OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America,
and make estimates and assumptions that affect our reported amounts of assets,
liabilities, revenue and expenses, and the related disclosures of contingent
liabilities. We base our estimates on historical experience and other
assumptions that we believe are reasonable in the circumstances. Actual results
may differ from these estimates.
17
The following critical accounting policies affect our more
significant estimates and assumptions used in preparing our consolidated
financial statements.
Revenue Recognition
The Companys revenue is derived from software as a service
(SaaS) arrangements. The Company accounts for revenue in accordance with ASC
606, which the Company adopted on September 1, 2018 using the modified
retrospective method.
The core principle of ASC 606 is to recognize revenue upon the
transfer of products or services to customers in an amount that reflects the
consideration the Company expects to be entitled to in exchange for those
products or services. ASC 606 prescribes a five-step model for recognizing
revenue from contracts with customers: (1) identify the contract(s) with
customers; (2) identify the separate performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to the
separate performance obligations in the contract; and (5) recognize revenue when
(or as) the performance obligations are satisfied.
The majority of our revenue is generated from digital media
distribution service. The service is billed either based on usage or on a fixed
fee which is based on the volume and size of distributions provided. All
revenues are recognized on a monthly basis as the services are delivered to
customers.
Significant management judgments and estimates must be made in
connection with determination of the revenue to be recognized in any accounting
period. If we made different judgments or utilized different estimates for any
period material differences in the amount and timing of revenue recognized could
result.
Stock-Based Compensation
We recognize the costs of employee services received in
share-based payment transactions according to the fair value provisions of the
current share-based payment guidance. The fair value of employee services
received in stock-based payment transactions is estimated at the grant date and
recognized over the requisite service period. Determining the appropriate fair
value model and calculating the fair value of stock-based awards requires
judgment, including estimating stock price volatility, forfeiture rates and
expected life.
We selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value of our share-based
awards. The Black-Scholes model requires the use of highly subjective and
complex assumptions which determine the fair value of share-based awards,
including the options expected term and the price volatility of the underlying
stock. Our current estimate of volatility is based on historical and
market-based implied volatilities of our stock price. To the extent volatility
of our stock price increases in the future, our estimates of the fair value of
options granted in the future could increase, thereby increasing stock-based
compensation cost recognized in future periods. We derive the expected term
assumption primarily based on our historical settlement experience, while giving
consideration to options that have not yet completed a full life cycle.
Stock-based compensation cost is recognized only for awards ultimately expected
to vest. Our estimate of the forfeiture rate is based primarily on our
historical experience. To the extent we revise this estimate in the future, our
share-based compensation cost could be materially impacted in the quarter of
revision, as well as in the following quarters. In the future, as empirical
evidence regarding these input estimates is available to provide more
directionally predictive results, we may change or refine our approach of
deriving these input estimates.
Research and Development Expense for Software Products
Research and development expense includes costs incurred to
develop intellectual property. The costs for the development of new software and
substantial enhancements to existing software within the scope of ASC 985-20
Software Costs of Software to be Sold, Leased or Marketed are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized. We have determined that technological
feasibility is established at the time a working model of software is completed.
Because we believe our current process for developing software will be
essentially completed concurrently with the establishment of technological
feasibility, no costs have been capitalized to date.
Significant management judgments and estimates must be made in
connection with determination of any amounts identified for capitalization as
software development costs in any accounting period. If we made different
judgments or utilized different estimates for any period material differences in
the amount and timing of capitalized development costs could occur.
18
Accounts Receivable and Allowance for Doubtful Accounts
We extend credit to our customers based on evaluation of an
individual customer's financial condition and collateral is generally not
required. Accounts outstanding beyond the contractual payment terms are
considered past due. We determine our allowance for doubtful accounts by
considering a number of factors, including the length of time accounts
receivable are beyond the contractual payment terms, our previous loss history,
and a customer's current ability to pay its obligation to us. We write-off
accounts receivable when they are identified as uncollectible. All outstanding
accounts receivable accounts are periodically reviewed for collectability on an
individual basis.
Income Taxes
Deferred income tax assets and liabilities are computed based
on differences between the carrying amount of assets and liabilities on the
balance sheet and their corresponding tax values using the enacted income tax
rates by tax jurisdiction at each balance sheet date. Deferred income tax assets
also result from unused loss carryforwards and other deductions. The valuation
of deferred income tax assets is reviewed annually and adjusted, if necessary,
by use of a valuation allowance to reflect the estimated realizable amount.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We evaluate all
available evidence, such as recent and expected future operating results by tax
jurisdiction, and current and enacted tax legislation and other temporary
differences between book and tax accounting to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized. There is a risk that management estimates for operating results
could vary significantly from actual results, which could materially affect the
valuation of the future income tax asset. Although the Company has tax loss
carry-forwards and other deferred income tax assets, management has determined
certain of these deferred tax assets do not meet the more likely than not
criteria, and accordingly, these deferred income tax asset amounts have been
completely offset by a valuation allowance as disclosed in Note 6 of our
consolidated financial statements.
If managements estimates of the cash flows or operating
results do not materialize due to errors in estimates or unforeseen changes to
the economic conditions affecting the Company, it could result in an impairment
adjustment in future periods.
Contingencies
As discussed under Item 3. Legal Proceedings and in Note 9
Contingencies in Notes to Consolidated Financial Statements, the Company is
subject to various legal proceedings and claims that arise in the ordinary
course of business. In accordance with US GAAP, the Company records a liability
when it is probable that a loss has been incurred and the amount is reasonably
estimable. There is significant judgment required in both the probability
determination and as to whether an exposure can be reasonably estimated. In
managements opinion, the Company does not have a potential liability related to
any current legal proceedings and claims that would individually or in the
aggregate materially adversely affect its financial condition or operating
results. However, the outcomes of legal proceedings and claims brought against
the Company are subject to significant uncertainty. Should the Company fail to
prevail in any of these legal matters or should several of these legal matters
be resolved against the Company in the same reporting period, the operating
results of a particular reporting period could be materially adversely affected.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets
including tangible assets in accordance with authoritative guidance. When events
or changes in circumstances indicate that the carrying amount of long-lived
assets may not be recoverable, we recognize such impairment in the event the
carrying amount of such assets exceeds the future undiscounted cash flows
attributable to such assets. We have not recorded any impairment losses to
date.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements and their
possible effect on our financial statements, please see Note 2 to our
Consolidated Financial Statements found elsewhere in this Annual Report.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Audited Consolidated Financial Statements for the
Years Ended August 31, 2019 and 2018:
1.
|
Report of Independent Registered Public Accounting Firm
Davidson & Company LLP;
|
2.
|
Report of Independent Registered Public Accounting Firm
BDO Canada LLP;
|
2.
|
Consolidated Balance Sheets as at August 31, 2019 and
2018;
|
3.
|
Consolidated Statement of Comprehensive Income for the
Years Ended August 31, 2019 and 2018;
|
4.
|
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended August 31, 2019 and 2018;
|
5.
|
Consolidated Statement of Cash Flows for the Years Ended
August 31, 2019 and 2018;
|
6.
|
Notes to Consolidated Financial
Statements.
|
20
Consolidated Financial Statements
Destiny Media Technologies Inc.
August 31, 2019 and 2018
(Expressed in United States
dollars)
Report of Independent Registered Public Accounting Firm
To the Shareholders and Directors of
Destiny Media Technologies Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Destiny Media Technologies Inc. (the “Company”), as of August 31, 2019, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for the year ended August 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Destiny Media Technologies Inc. as of August 31, 2019, and the results of its operations and its cash flows for the year ended August 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2019.
|
“DAVIDSON & COMPANY LLP”
|
|
|
Vancouver, Canada
|
Chartered Professional Accountants
|
November 15, 2019
|
Tel: 604 688 5421
|
BDO Canada LLP
|
Fax: 604 688 5132
|
600 Cathedral Place
|
vancouver@bdo.ca
|
925 West Georgia Street
|
www.bdo.ca
|
Vancouver BC V6C 3L2 Canada
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
To the Board of Directors and Stockholders of
Destiny Media Technologies Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Destiny Media Technologies Inc. (the “Company”) and subsidiaries as of August 31, 2018, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended August 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at August 31, 2018, and the results of their operations and their cash flows for the year ended August 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We served as the Company's auditor since 2010.
Chartered Professional Accountants
Vancouver, Canada
November 27, 2018
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
Destiny Media Technologies Inc.
|
CONSOLIDATED BALANCE
SHEETS
|
As at August 31,
|
(Expressed in United States dollars)
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
2,512,138
|
|
|
1,097,434
|
|
Short-term investments [note 3]
|
|
380,056
|
|
|
1,151,952
|
|
Accounts receivable, net of allowance for
|
|
|
|
|
|
|
doubtful accounts of $10,106 [2018 $6,031]
[note 9]
|
|
332,271
|
|
|
403,801
|
|
Other receivables
|
|
14,240
|
|
|
15,902
|
|
Prepaid expenses
|
|
77,067
|
|
|
57,252
|
|
Total current assets
|
|
3,315,772
|
|
|
2,726,341
|
|
Deposits
|
|
33,716
|
|
|
34,336
|
|
Property and equipment, net [note 4]
|
|
260,907
|
|
|
160,273
|
|
Intangible assets,
net [note 4]
|
|
24,695
|
|
|
41,472
|
|
Total assets
|
|
3,635,090
|
|
|
2,962,422
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts payable
|
|
132,451
|
|
|
141,273
|
|
Accrued liabilities
|
|
303,470
|
|
|
226,876
|
|
Deferred leasehold inducement [note
7]
|
|
46,774
|
|
|
51,848
|
|
Deferred revenue
|
|
23,388
|
|
|
23,286
|
|
Obligation under capital lease
|
|
|
|
|
2,363
|
|
Total
liabilities
|
|
506,083
|
|
|
445,646
|
|
|
|
|
|
|
|
|
Commitments and contingencies [notes 7 and 8]
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
Common stock, par value $0.001 [note 5]
Authorized: 20,000,000 shares
Issued and outstanding: 11,000,786 shares
[2018 issued and outstanding 11,002,786 shares]
|
|
11,001
|
|
|
11,003
|
|
Additional paid-in capital [note 5]
|
|
9,850,348
|
|
|
9,810,676
|
|
Accumulated deficit
|
|
(6,340,483
|
)
|
|
(6,951,261
|
)
|
Accumulated other comprehensive loss
|
|
(391,859
|
)
|
|
(353,642
|
)
|
Total
stockholders equity
|
|
3,129,007
|
|
|
2,516,776
|
|
Total liabilities and stockholders equity
|
|
3,635,090
|
|
|
2,962,422
|
|
Subsequent Events [note 11]
See accompanying notes
Destiny Media Technologies Inc.
|
|
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
|
Years ended August 31,
|
(Expressed in United States dollars)
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Service revenue [note 9]
|
|
3,809,092
|
|
|
3,606,471
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
Hosting costs
|
|
107,434
|
|
|
125,631
|
|
Internal engineering support
|
|
28,441
|
|
|
24,437
|
|
Customer support
|
|
126,317
|
|
|
111,301
|
|
Third party and transaction costs
|
|
47,840
|
|
|
37,039
|
|
|
|
310,032
|
|
|
298,408
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
3,499,060
|
|
|
3,308,063
|
|
|
|
92%
|
|
|
92%
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
General and administrative
|
|
770,758
|
|
|
801,866
|
|
Sales and marketing
|
|
908,951
|
|
|
657,474
|
|
Product development
|
|
1,141,380
|
|
|
1,093,448
|
|
Depreciation and amortization [note 4]
|
|
96,846
|
|
|
105,869
|
|
|
|
2,917,935
|
|
|
2,658,657
|
|
Income from operations
|
|
581,125
|
|
|
649,406
|
|
Other income
|
|
|
|
|
|
|
Interest income
|
|
27,188
|
|
|
10,597
|
|
Other income
(expense)
|
|
2,465
|
|
|
(3,733
|
)
|
Income before provision for income taxes
|
|
610,778
|
|
|
656,270
|
|
Income tax expense
- deferred [note 6]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
610,778
|
|
|
656,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(38,217
|
)
|
|
(86,751
|
)
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
572,561
|
|
|
569,519
|
|
|
|
|
|
|
|
|
Net income per common share, basic and diluted
|
|
0.06
|
|
|
0.06
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
Basic
|
|
11,002,589
|
|
|
11,002,786
|
|
Diluted
|
|
11,002,589
|
|
|
11,002,786
|
|
See accompanying notes
Destiny Media Technologies Inc.
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY
|
Years ended August 31,
|
(Expressed in United States dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
stockholders
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
loss
|
|
|
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, September 1, 2017
|
|
11,002,786
|
|
|
11,003
|
|
|
9,756,224
|
|
|
(7,607,531
|
)
|
|
(266,891
|
)
|
|
1,892,805
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
656,270
|
|
|
(86,751
|
)
|
|
569,519
|
|
Stock based compensation Note 5
|
|
|
|
|
|
|
|
54,452
|
|
|
|
|
|
|
|
|
54,452
|
|
Balance, August 31, 2018
|
|
11,002,786
|
|
|
11,003
|
|
|
9,810,676
|
|
|
(6,951,261
|
)
|
|
(353,642
|
)
|
|
2,516,776
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
610,778
|
|
|
(38,217
|
)
|
|
572,561
|
|
Shares repurchased for cancellation
|
|
(2,000
|
)
|
|
(2
|
)
|
|
(2,003
|
)
|
|
|
|
|
|
|
|
(2,005
|
)
|
Stock based compensation Note 5
|
|
|
|
|
|
|
|
41,675
|
|
|
|
|
|
|
|
|
41,675
|
|
Balance, August 31, 2019
|
|
11,000,786
|
|
|
11,001
|
|
|
9,850,348
|
|
|
(6,340,483
|
)
|
|
(391,859
|
)
|
|
3,129,007
|
|
See accompanying notes
Destiny Media Technologies Inc.
|
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
Years ended August 31,
|
(Expressed in United States dollars)
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
610,778
|
|
|
656,270
|
|
Items not involving cash:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
96,846
|
|
|
105,869
|
|
Stock-based compensation
|
|
41,675
|
|
|
54,452
|
|
Deferred leasehold inducement
|
|
(4,151
|
)
|
|
5,606
|
|
Unrealized foreign exchange
|
|
(1,078
|
)
|
|
(417
|
)
|
Loss on disposal of property and equipment
|
|
|
|
|
3,734
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
Accounts receivable
|
|
63,202
|
|
|
108,367
|
|
Other receivables
|
|
2,657
|
|
|
3,308
|
|
Prepaid expenses and deposits
|
|
(20,416
|
)
|
|
(11,499
|
)
|
Accounts payable
|
|
49,570
|
|
|
14,165
|
|
Accrued liabilities
|
|
927
|
|
|
44,469
|
|
Deferred revenue
|
|
524
|
|
|
557
|
|
Deferred leasehold inducement
|
|
|
|
|
45,341
|
|
Short term receivable
|
|
|
|
|
64,026
|
|
Net cash
provided by operating activities
|
|
840,534
|
|
|
1,094,248
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase of property, equipment and
intangibles
|
|
(162,979
|
)
|
|
(116,540
|
)
|
Sales (Purchase)
of short-term investments
|
|
754,600
|
|
|
(1,177,518
|
)
|
Net cash provided by (used in) investing activities
|
|
591,621
|
|
|
(1,294,058
|
)
|
|
|
|
|
|
|
|
FINANCING ACTIVITY
|
|
|
|
|
|
|
Common stock
repurchased for cancellation
|
|
(2,005
|
)
|
|
|
|
Net cash used in financing activity
|
|
(2,005
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes
on cash
|
|
(15,446
|
)
|
|
(45,712
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents during the year
|
|
1,414,704
|
|
|
(245,522
|
)
|
Cash and cash
equivalents, beginning of year
|
|
1,097,434
|
|
|
1,342,956
|
|
Cash and cash equivalents, end of year
|
|
2,512,138
|
|
|
1,097,434
|
|
|
|
|
|
|
|
|
Supplementary disclosure
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
|
Income taxes paid
|
|
|
|
|
|
|
See accompanying notes
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
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.
Effective September 13, 2019, the Company effected a reverse
stock split on the basis of 5:1. As such, the Companys authorized capital was
decreased from 100,000,000 shares of common stock, par value $0.001 to
20,000,000 shares of common stock, par value $0.001 and all shares of common
stock issued and outstanding were decreased on the basis of one new share for
each five old shares. These consolidated financial statements give retroactive
effect to such reverse stock split and all share and per share amounts have been
adjusted accordingly.
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.
1
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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.
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.
2
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Revenue recognition
The Companys revenue is derived from software as a service
(SaaS) arrangements. The Company accounts for revenue in accordance with ASC
606, which the Company adopted on September 1, 2018 using the modified
retrospective method.
The core principle of ASC 606 is to recognize revenue upon the
transfer of products or services to customers in an amount that reflects the
consideration the Company expects to be entitled to in exchange for those
products or services. ASC 606 prescribes a five-step model for recognizing
revenue from contracts with customers: (1) identify the contract(s) with
customers; (2) identify the separate performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to the
separate performance obligations in the contract; and (5) recognize revenue when
(or as) the performance obligations are satisfied.
The Company applies the five-step model to recognize revenue as
follows:
Identification of the contract, or contracts, with the
customer
The Company considers the terms and conditions of written
contracts and its customary business practices in identifying its contracts
under ASC 606. The Company determines that it has a contract with a customer
when the contract is approved, the Company can identify each partys rights
regarding the services to be transferred, the Company can identify the payment
terms for the services, the Company has determined that the customer has the
ability and intent to pay, and the contract has commercial substance. In
general, contract terms will be reflected in a written document that is signed
by both parties.
Identification of the performance obligation in the
contract
Performance obligations are promises in a contract to transfer
distinct products or services to a customer, and is the unit of account under
ASC 606. A contracts transaction price is allocated to each distinct
performance obligation and revenue is recognized when the performance obligation
is satisfied. A product or service is a distinct performance obligation if the
customer can both benefit from the product or service either on its own or
together with other resources that are readily available to the customer, and it
is separately identifiable from other items within the context of the contract.
Performance obligations are satisfied by transferring control of the product or
service to the customer. Control of the product or service is transferred either
at a point in time or over time depending on the performance obligation.
To the extent a contract includes multiple promised services or
products, the Company applies judgment to determine whether promised services or
products are capable of being distinct and distinct in the context of the
contract. If these criteria are not met, the promised services are accounted for
as a combined performance obligation.
3
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Revenue recognition (contd.)
The Company generates revenue primarily from usage fees for the
Companys digital media distribution service. Usage fees are generally
recognized as they are billed based on volume and size of distribution services
provided in a given month. The Companys other performance obligations include
maintenance services, email and phone support, and unspecified software updates
released when, and if, available. Under the guidance of ASC 606, the Company has
concluded that maintenance services and unspecified software upgrades are not
distinct in the context of the Companys contracts because the Companys service
is considered a multi-tenant software environment, and these activities
represent a single combined performance obligation in connection with the
Companys digital media distribution service, recognized at a point in time when
the service is delivered to the customer.
Support activities are considered a separate performance
obligation which is satisfied over time; however, such activities are performed
substantially concurrently with the satisfaction of digital media distribution
services.
From time to time, certain of the Companys contracts contain
additional separate performance obligations, including specific enhancements and
upgrades.
Determination of the transaction price
The transaction price is determined based on the consideration
to which the Company expects to be entitled in exchange for providing services
to the customer.
Digital media distribution services may be subject to either
fixed or variable pricing. Variable consideration is allocated entirely to
distinct service periods when it can be tied to a single performance obligation.
Variable consideration is estimated and included in the transaction price if, in
the Companys judgment, it is probable that there will not be a significant
future reversal of cumulative revenue under the contract. When variable
consideration is contingent and cannot be tied to a single performance
obligation performed in a particular billing period, the Company estimates
contingent variable consideration using the most likely method and recognizes
consideration to the extent that the estimate for variable consideration is not
constrained pursuant to the guidance provided in ASU 606.
A significant financing component generally does not exist
under the Companys standard contracting and billing practices.
4
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Revenue recognition (contd.)
Allocation of the transaction price to the performance
obligations in the contract
If the contract contains a single combined performance
obligation, the entire transaction price is allocated to the single combined
performance obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance obligation
based on its standalone selling price (SSP) in relation to the total fair
value of all performance obligations in the arrangement. The majority of the
Companys contracts contain two separate performance obligations that are
performed concurrently. The Company allocates consideration to each performance
obligation under the guidance of ASC 606 on a relative standalone selling price
(SSP) basis. Where SSP is not directly observable, the Company determines the
SSP using information that may include market conditions and other observable
inputs.
Consideration associated with support activities is estimated
using a cost-plus reasonable margin approach, as there is no observable SSP.
Consideration associated with specified enhancements and
upgrades is estimated using a cost-plus reasonable margin approach, as there is
no observable SSP.
Recognition of revenue when, or as, the Company satisfies a
performance obligation
The Company recognizes revenue when the services are delivered
to its customers, in an amount that reflects the consideration the Company
expects to be entitled to in exchange for those services. The Company is
principally responsible for the satisfaction of its distinct performance
obligations, which are satisfied either at a point in time or over a period of
time.
Performance obligations satisfied at a point in
time
Media distribution services
Media distribution services comprise the majority of distinct
performance obligations that are satisfied at a point in time, and revenue is
recognized at the point in which the distribution service has been completed.
Consideration for these services is typically billed in the same period that the
service has been delivered to the customer.
Performance obligations satisfied over a period of
time
Customer support activities comprise the majority of distinct
performance obligations that are satisfied over a period of time.
5
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Revenue recognition (contd.)
Revenue from support activities is recognized over an estimated
support period since this activity is considered a stand-ready obligation.
This support period is substantially concurrent with the performance of media
distribution services, as these services are performed substantially in
conjunction with the related distribution. Any support activities provided
outside of this billing period are not considered material.
Revenue from specified enhancements and upgrades is recognized
over an estimated performance period.
Contract Costs
Contract costs consists of two components, customer acquisition
costs and costs to fulfill a contract. Customer acquisition costs are
capitalized only if the costs are incrementally incurred to obtain a customer
contract and may consist of sales commissions paid to sales personnel or
third-party resellers. Generally, the Company does not incur any contract costs
outside of the period that the related revenue is recognized.
Contract Modifications
Contract modifications may create new, or change existing,
enforceable rights and obligations of the parties to the contract. We generally
modify an existing contract using an addendum or signed change order. A contract
modification is accounted for as a new contract if it reflects an increase in
scope that is regarded as distinct from the original contract and is priced
in-line with the standalone selling price for the related product or services
obligated. If a contract modification is not considered a new contract, the
modification is combined with the original contract and the impact on the
revenue recognition profile depends on whether the remaining products and
services are distinct from the original contract. If the remaining goods or
services are distinct from those in the original contract, all remaining
performance obligations will be accounted for on a prospective basis with
unrecognized consideration allocated to the remaining performance obligations.
If the remaining goods or services are not distinct, the modification will be
treated as if it were a part of the existing contract, and the effect that the
contract modification has on the transaction price, and on our measure of
progress toward satisfaction of the performance obligations, is recognized as an
adjustment to revenue (either as an increase in or a reduction of revenue) at
the date of the contract modification on a cumulative catch-up basis.
6
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Cost of revenue
Cost of revenue primarily consists of personnel costs for our
operations service and technical support employees and engineering support
staff, cloud infrastructure costs, incremental transaction costs such as
merchant and processing fees, and costs of external customer support software
and services. In each case, personnel costs include salaries, benefits and any
other compensation paid to such staff.
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, 2019, 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, 2019, the Company incurred
approximately $59,310 (2018: $82,354) 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.
7
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
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
|
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).
8
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Translation of foreign currencies (contd)
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 comprehensive income.
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 $12,017
and $3,333 during the years ended August 31, 2019 and 2018, 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.
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.
9
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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 follows the provisions of Financial Accounting
Standards Board (FASB) Accounting Standards Codification Section 718
Compensation - Stock Compensation, which establishes accounting for equity
based compensation awards to be accounted for using the fair value method.
Equity-settled share based payment arrangements are initially measured at fair
value at the date of grant and recorded within shareholders equity. The fair
value at grant date of all share-based payments is recognized as compensation
expense over the period for which benefits of services are expected to be
derived, with a corresponding credit to shareholders equity. The Company
estimates the fair value of stock options granted using the Black-Scholes option
pricing model and estimate the expected forfeiture rate at the date of grant.
When awards are forfeited because non-market based vesting conditions are not
satisfied, the expense previously recognized is proportionately reversed.
10
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Net income
|
$
|
610,778
|
|
$
|
656,270
|
|
Weighted average common shares outstanding
|
|
11,002,589
|
|
|
11,002,786
|
|
Diluted weighted average common shares
outstanding
|
|
11,002,589
|
|
|
11,002,786
|
|
At August 31, 2019, the Company had an aggregate of 290,000
(2018: 326,250) stock options outstanding. 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.
11
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
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, and 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers (ASU 2014-09). ASU 2014-09 provides a five-step
analysis of transactions to determine when and how revenue is recognized. The
premise of ASU 2014-09 is that a company should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services. The Company adopted this standard on September 1, 2018
using the modified retrospective method applied to open contracts at the date of
transition. Under this approach, the Company is not required to restate the
prior financial statements presented. The provisions under this ASU were applied
to all contracts at the date of initial adoption.
In order to comply with the guidance, beginning on September 1,
2018, the Company amended its revenue recognition policy and performed estimates
as outlined below. The adoption of ASU 2014-09 did not result in any adjustment
to the Companys consolidated balance sheet on the date of adoption. Refer to
the Companys Annual Report on Form 10-K for the fiscal year ended August 31,
2018 for a description of the Companys revenue recognition policy prior to
September 1, 2018.
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 was effective for the Company beginning on September 1,
2018. The adoption of ASU 2016-15 and ASU 2016-18 did not have any material
effect on the Companys consolidated financial statements.
12
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
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. This
standard was effective for the Company beginning on September 1, 2018. The new
guidance is required to be applied retrospectively with the cumulative effect
recognized at the date of initial application. The adoption of this guidance did
not have any material impact on the Companys consolidated financial statements.
Accounting Standards Not Yet Effective
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. The FASB has also issued ASU No. 2018-11 Leases (Topic
842): Targeted Improvements and ASU 2019-01 Leases Codification Improvements
Codification improvements to Topic 842 (leases), which provides narrow
amendments to clarify how to apply certain aspects of the new lease standard.
ASU 2016-02 will be effective for the Company beginning on September 1, 2019.
The new standard will require the Company to recognize a lease asset and an
offsetting lease liability of approximately $660,000 in respect of the Companys
office premises lease.
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 guidance on reporting credit losses for assets held on an amortized cost
basis and available-for-sale debt securities. For assets held on an 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 the Company on September 1, 2020. The Company is in
the process of determining the effect the adoption of this standard will have on
its consolidated financial statements.
13
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(contd.)
Accounting Standards Not Yet Effective
(contd)
In February 2018, the FASB issued ASU No. 2018-02, Income
StatementReporting 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 will be effective for the
Company on September 1, 2019. 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 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 amendments in this
ASU will be effective for the Company on September 1, 2020. 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.
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 2.35% 2.36% (2018:
2.15 2.50%) .
14
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
4. PROPERTY AND EQUIPMENT AND INTANGIBLES
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
Cost
|
|
|
amortization
|
|
|
value
|
|
August 31, 2019
|
|
$
|
|
|
$
|
|
|
$
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
134,432
|
|
|
107,304
|
|
|
27,128
|
|
Computer hardware
|
|
242,736
|
|
|
198,990
|
|
|
43,746
|
|
Computer software
|
|
354,090
|
|
|
223,387
|
|
|
130,703
|
|
Leasehold improvements
|
|
159,815
|
|
|
100,485
|
|
|
59,330
|
|
|
|
891,073
|
|
|
630,166
|
|
|
260,907
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and lists
|
|
421,520
|
|
|
396,825
|
|
|
24,695
|
|
|
|
|
|
|
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
|
|
Depreciation and amortization for the year ended August 31,
2019 was $96,846 (2018: $105,869)
15
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
5. STOCKHOLDERS EQUITY
Effective September 13, 2019, the Company effected a reverse
stock split on the basis of 5:1. As such, the Companys authorized capital was
decreased from 100,000,000 shares of common stock, par value $0.001 to
20,000,000 shares of common stock, par value $0.001 and all shares of common
stock issued and outstanding were decreased on the basis of one new share for
each five old shares. These consolidated financial statements give retroactive
effect to such reverse stock split and all share and per share amounts have been
adjusted accordingly.
[a] Common stock issued and authorized
The Company is authorized to issue up to 20,000,000 shares of
common stock, par value $0.001 per share.
[b] Stock option plans
The Company has a stock option plan, namely the 2015 Stock
Option Plan (the Plan), under which up to 530,000 shares of common stock, has
been reserved for issuance. A total of 240,000 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.
16
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
5. STOCKHOLDERS EQUITY (contd.)
[b] Stock option plans (contd.)
Stock-Based Payment Award Activity
A summary of option activity under the Plan as of August 31,
2019 and 2018, 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, 2017
|
|
361,250
|
|
|
1.95
|
|
|
4.07
|
|
|
|
|
Granted
|
|
30,000
|
|
|
2.00
|
|
|
4.28
|
|
|
|
|
Forfeited
|
|
(30,000
|
)
|
|
2.00
|
|
|
4.27
|
|
|
|
|
Expired
|
|
(35,000
|
)
|
|
2.00
|
|
|
|
|
|
|
|
Outstanding at August 31, 2018
|
|
326,250
|
|
|
1.95
|
|
|
3.49
|
|
|
|
|
Granted
|
|
30,000
|
|
|
1.52
|
|
|
4.82
|
|
|
|
|
Forfeited
|
|
(40,000
|
)
|
|
2.00
|
|
|
3.06
|
|
|
|
|
Expired
|
|
(26,250
|
)
|
|
2.00
|
|
|
|
|
|
|
|
Outstanding at August 31, 2019
|
|
290,000
|
|
|
1.94
|
|
|
2.96
|
|
|
|
|
Exercisable at August 31, 2019
|
|
260,000
|
|
|
1.94
|
|
|
2.77
|
|
|
|
|
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,
2019.
The following table summarizes information regarding the
non-vested stock purchase options outstanding as of August 31, 2019:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of Options
|
|
|
Fair Value
|
|
|
|
|
|
|
$
|
|
Non-vested options at September 1, 2017
|
|
273,333
|
|
|
0.35
|
|
Granted
|
|
30,000
|
|
|
0.40
|
|
Forfeited
|
|
(20,000
|
)
|
|
0.35
|
|
Vested
|
|
(160,416
|
)
|
|
0.35
|
|
Non-vested options at August 31, 2018
|
|
122,917
|
|
|
0.35
|
|
Granted
|
|
30,000
|
|
|
0.35
|
|
Forfeited
|
|
(6,663
|
)
|
|
0.34
|
|
Vested
|
|
(116,254
|
)
|
|
0.42
|
|
Non-vested options at August 31, 2019
|
|
30,000
|
|
|
0.38
|
|
17
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
5. STOCKHOLDERS EQUITY (contd.)
[b] Stock option plans (contd.)
As of August 31, 2019, 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, 2019, the total stock-based
compensation expense of $41,675 (2018: $54,452) is reported in the statement of
comprehensive income as follows:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Stock-based compensation
|
|
|
|
|
|
|
General and administrative
|
|
25,847
|
|
|
32,954
|
|
Sales and marketing
|
|
7,535
|
|
|
7,930
|
|
Research and development
|
|
8,293
|
|
|
13,568
|
|
Total stock-based compensation
|
|
41,675
|
|
|
54,452
|
|
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:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Expected term of stock options (years)
|
|
3.02
|
|
|
3.02
|
|
Expected volatility
|
|
75.3%
|
|
|
93.3%
|
|
Risk-free interest rate
|
|
1.7%
|
|
|
1.9%
|
|
Dividend yields
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$0.40
|
|
|
$0.40
|
|
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.
18
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
5. STOCKHOLDERS EQUITY (contd.)
[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 the Company
are able to contribute up to 5% of their annual salary into a pool which is
matched equally by the Company. 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 the Company and the participants.
During the year ended August 31, 2019, the Company recognized
compensation expense of $61,629 (2018: $58,102) 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 $1.16 (2018:
$1.15) . 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,
2019, 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,
2017
|
202,000
|
1.50
|
October 20, 2017
|
|
Expired
|
(202,000)
|
1.50
|
|
|
Outstanding at August 31, 2018 and August 31,
2019
|
|
|
|
|
19
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
6. INCOME TAXES
The Company is subject to United States federal and state
income taxes at an approximate rate of 21.0% and to Canadian federal and British
Columbia provincial taxes in Canada at an approximate rate of 27.0% . The
reconciliation of the provision (recovery) for income taxes at the United States
federal statutory rate compared to the Companys income tax expense is as
follows:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rates
|
|
128,000
|
|
|
138,000
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
2,000
|
|
|
1,000
|
|
Stock option compensation
|
|
11,000
|
|
|
11,000
|
|
Effect of higher foreign tax rates in
Canada
|
|
47,000
|
|
|
52,000
|
|
Effect of research tax credits claims filed in respect of
prior years
|
|
(361,000
|
)
|
|
29,000
|
|
Effect of a change in statutory tax rates
|
|
|
|
|
443,000
|
|
Foreign exchange and other adjustments
|
|
(73,000
|
)
|
|
190,000
|
|
Recovery of previously unrecognized tax
assets
|
|
|
|
|
(233,000
|
)
|
Change in
valuation allowance
|
|
246,000
|
|
|
(631,000
|
)
|
Provision for deferred income taxes
|
|
|
|
|
|
|
Included in other adjustments and change in valuation allowance
for the year ended August 31, 2019 is $33,000 (2018: $(74,000)) for the effect
of changes in foreign exchange rates and $(74,000) (2018: $115,000) 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 likely to occur.
Significant components of the Companys deferred tax assets as
of August 31 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
886,000
|
|
|
789,000
|
|
Excess of book over tax depreciation
|
|
884,000
|
|
|
729,000
|
|
Tax Credit
Carryforwards
|
|
1,013,000
|
|
|
1,019,000
|
|
Total deferred tax asset
|
|
2,783,000
|
|
|
2,537,000
|
|
Valuation
allowance
|
|
(2,783,000
|
)
|
|
(2,537,000
|
)
|
Net deferred tax asset
|
|
|
|
|
|
|
20
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
6. INCOME TAXES (Contd)
Net income (loss) before income tax by geographic region is as
follows:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
United States
|
|
(118,503
|
)
|
|
(166,037
|
)
|
Canada
|
|
729,281
|
|
|
822,307
|
|
|
|
610,778
|
|
|
656,270
|
|
If not utilized to reduce future taxable income, the Companys
net operating loss carryforwards will expire as follows:
|
|
Canada
|
|
|
United States
|
|
|
|
$
|
|
|
$
|
|
2021 and thereafter
|
|
|
|
|
4,217,000
|
|
|
|
|
|
|
4,217,000
|
|
If not utilized to reduce future taxable payable, the Companys
investment tax credit carryforwards will expire as follows:
|
|
Canada
|
|
|
United States
|
|
|
|
$
|
|
|
$
|
|
2029 and thereafter
|
|
1,233,000
|
|
|
|
|
|
|
1,233,000
|
|
|
|
|
21
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
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 6,600 square feet. The Company has fiscal year payments committed
as follows:
|
|
$
|
|
|
|
|
|
2020
|
|
256,225
|
|
2021
|
|
261,618
|
|
2022
|
|
223,200
|
|
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, 2019 the Company recorded rent
expense of $244,992 (2018 - $256,058) 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.
8. 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.
22
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
9. 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:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Play MPE®
|
|
|
|
|
|
|
United States
|
|
1,658,603
|
|
|
1,527,868
|
|
Europe
|
|
1,784,821
|
|
|
1,721,654
|
|
Australia
|
|
309,291
|
|
|
289,042
|
|
Total Play MPE® Revenue
|
|
3,752,715
|
|
|
3,538,564
|
|
|
|
|
|
|
|
|
Clipstream ®
|
|
|
|
|
|
|
United States
|
|
56,377
|
|
|
67,907
|
|
Total Clipstream ® Revenue
|
|
56,377
|
|
|
67,907
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
3,809,092
|
|
|
3,606,471
|
|
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, 2019, the Company generated 41% of total revenue from one customer
[2018 - 42%].
It is in managements opinion that the Company is not exposed
to significant credit risk.
As at August 31, 2019, two customers represented $233,549 (70%)
of the trade receivables balance [2018 one customer represented $102,313
(25%)].
The Company has substantially all its assets in Canada and its
current and planned future operations are, and will be, located in Canada.
10. 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.
23
Destiny Media Technologies Inc.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
August 31, 2019 and 2018
|
11. SUBSEQUENT EVENTS
On September 13, 2019, the Company commenced a Normal Course
Issuer Bid (NCIB), pursuant to which the Company may purchase up to a maximum
of 550,140 shares of common stock in the capital of the Company, representing
approximately 5% of the then-outstanding common stock. Purchases pursuant to the
NCIB will be made from time to time by RBC Dominion Securities Inc. on behalf of
the Company through the facilities of the TSX Venture Exchange at the market
price at the time of purchase, subject to daily limits and compliance with the
applicable rules of the TSX Venture Exchange and Canadian securities laws.
Shares purchased will be paid for with cash available from the Company's working
capital.
Subsequent to August 31, 2019, an aggregate of 97,100
repurchased shares were returned to the Companys treasury and retired.
24