ITEM 1. BUSINESS.
OVERVIEW AND CORPORATE BACKGROUND
Destiny Media Technologies Inc. was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. We carry out our business operations through our wholly owned subsidiaries: Destiny Software Productions Inc., a British Columbia company incorporated in 1992, MPE Distribution, Inc., a Nevada company that was incorporated in 2007, Tonality Inc., a Nevada company that was incorporated in 2021, and Sonox Digital Inc. incorporated under the Canada Business Corporations Act in 2012.
Our principal executive office is located at Suite 428, 1575 West Georgia Street, Vancouver, British Columbia V6G 2V3. Our telephone number is (604) 609-7736 and our facsimile number is (604) 609-0611.
Our common stock trades on TSX Venture Exchange in Canada under the symbol "DSY", on the OTCQB U.S. ("OTCQB") under the symbol "DSNY", and on various German exchanges (Frankfurt, Berlin, Stuttgart and Xetra) under the symbol DME, WKN 935 410.
Our corporate website is located at http://www.dsny.com.
OUR PRODUCTS AND SERVICES
Destiny develops and markets software as a service (SaaS) solutions that solve critical digital distribution and promotion problems for businesses in the music industry.
Play MPE®
Currently, the Company's core business is the Play MPE® online platform. Play MPE® distributes promotional content (broadcast quality audio, video, images, promotional information and other digital content) from music labels and artists to broadcasting professionals, music curators and music reviewers to discover, download, broadcast and review the content. Curators include radio programmers, digital streaming broadcasters, media reviewers, VIP's, DJ's, film and TV personnel, sports stadiums, retailers etc. In providing the distribution, Play MPE® provides several capabilities developed and designed to address the unique needs of music promoters. Play MPE® was first to market, and is the largest provider of this service and provides the most feature rich platform in the world.
Record labels and artists are Play MPE®'s customers. When adding music to the Play MPE® system, clients are targeting specific industry recipients who review and broadcast their music. Play MPE®'s primary value proposition in this marketing effort is a direct increase to record label and artist revenue through on-air broadcast royalties, streaming royalties and synchronization revenue (revenue when the reproduction of a song is coordinated with video advertisements, television, or film), and indirect increases in revenue through growing song and artists' popularity.
Also, Play MPE® provides numerous capabilities that dramatically reduce record label costs and provide controls necessary for certain strategic marketing plans and controls to secure record label content. In doing so, Play MPE® satisfies a broad range of stakeholders representing diverse interests at record labels. Music is protected by Play MPE®'s patented proprietary watermarking system which provides watermarks unique to each recipient.
Described more fully below, features within Play MPE® are grouped into four main categories: local distribution software, global distribution architecture, targeted recipient list curation and recipient players.
Customers range from small independent artists to the world's largest record labels (the "Major Record Labels"). The Major Record Labels are Universal Music Group ("Universal"), Warner Music Group ("Warner") and Sony Music Entertainment ("Sony"). These record labels directly own numerous sub-labels that include; Capitol Music Group, Def Jam Recordings, Interscope Records, Island Records, Republic Records, Polydor, Deutsche Grammophon, Motown, Verve Label Group, Virgin Music Label and Artists Services, EMI, RCA Records, Epic Records, Columbia Records, Arista Records, Legacy Recordings, Provident Entertainment, Warner Records, Warner Bros, Atlantic Records Group, 300 Elektra Entertainment, to name only a few. Play MPE® welcomes all of these labels into its customer base.
Customers choose Play MPE® for its powerful set of tools, ease of use and its effectiveness in achieving the record label's promotional objectives.
Play MPE® CASTER (local distribution software)
Play MPE®'s Caster software includes local distribution functions that provide capabilities for a client to create and schedule release announcements and select its targeted audience. Play MPE® is designed uniquely to suit music marketing plans and significant components include:
- Release Creator includes drag and drop functionality to quickly embed images, social media links, add promotional files etc. to quickly create effective announcements.
- Release Scheduling allows numerous scheduling functions for initial announcements, repeated announcements, changes in DRM (a recipient's ability to download or only stream the content) etc.. These schedules can be uniquely edited by recipient or recipient list. Several features here are also available to facilitate release scheduling at scale.
- Templates facilitate consistent label branding and presentation while reducing release preparation time. Each release announcement can be saved as a template and reused or edited for future announcements. Clients can design and save unlimited templates to provide unique design and branding for artists or record labels.
- Contacts Management provides features that allow record labels to upload and manage their own targeted audience. There are many features within this platform that provide efficiencies in destination management for all customers of Play MPE®. However, this section of the platform provides numerous functions that are critical for efficient contacts management at scale and is described in Caster's global distribution functionality. Within Contacts Management, users can easily select curated lists of engaged recipients provided by Play MPE® (see description below) or by selecting their managed recipient lists.
- Reporting of release results shows recipient interactions including downloads, streams, clicks and opens.
Intuitive designs and functionality across all areas of this portion of the platform simplify the distribution process, reduce customer time required to distribute, and facilitate the inclusion of information to improve engagement which ultimately increases record label and artist revenue.
Caster is currently available in English, Spanish, German, Japanese and French.
When competing with an established service within a local market, it is these features balanced against changing consumer behaviors that determine Play MPE®'s ability to increase and acquire market share. Competing services offer the basic distribution requirements inherent in the service but do so while missing many features that provide efficient delivery, engaged recipients and accurate and complete distribution lists.
Caster consistently receives high reviews on the platform's ease of use and capabilities and on its ultimate effectiveness. Public reviews can be found at https://www.plaympe.com/testimonials/
Play MPE® CASTER (global architecture)
Play MPE®'s global distribution architecture was developed in close collaboration with Universal to address the needs of its global approach to release distribution. This architecture provides functionality required for Universal to conduct their unique approach to music distribution and provides numerous significant competitive advantages for Universal. These features improve marketing coordination and revenue generation while reducing overall label costs.
Significant components include:
- Staff role management: Customers can grant varying capabilities or permissions for different staff positions. For example, one staff member can create a release while another can approve the release of this content. In a larger organization, this control ensures accurate and professional distributions are conducted, but allows for segregation of duties to maximize efficiency.
- Label management: With label management, administrative staff can determine which users have access to which labels and which content. Each label has a unique account environment allowing for its own unique setup, list curation, favorites, staff roles, templates etc.
- Global release sharing (replication): With global release sharing, distribution centers can share a release to a territory. That territory then can reuse the release while localizing it to suit the particular needs of that jurisdiction (editing language, artist information, local concert dates, local contacts etc). This eliminates duplication of upload and data entry while reducing errors. In the context of global distribution, across multiple territories, multiple labels, and thousands of unique releases, savings of staff time is significant. Metadata completeness and accuracy are also increased. When complete metadata is conveyed, recipient engagement is higher. Higher recipient engagement, increases record label revenue. Within the included metadata are ISRC codes which are unique codes used to remit track royalties. When ISRC codes are communicated, royalty remittances are complete and timely. These aspects provide significant competitive advantages to Universal.
- Release embargos: When marketing and promotion departments create global campaigns for highly anticipated music releases, staff restrict access to this content until the public release time. Here, record labels can permit early access to the relevant content so local offices can edit, localize and schedule releases but controls are added to restrict certain permissions and prevent premature release. Universal enjoys competitive advantages with these capabilities derived through cost savings and improved marketing campaigns. Absent these functions, global release coordination is more costly and less coordinated.
- Archive integration: With archive integration, Play MPE® automatically captures music, art, and associated metadata vastly reducing errors in release creation and data entry. This further expands the competitive advantages enjoyed in global release sharing.
- Release management: There are numerous capabilities within release management that are necessary for efficient global release management. Content owners can change DRM and quickly remove content globally if necessary etc.
- Asset management: Assets include music tracks, album art, metadata etc. Within the assets management portion, several features allow assets to be used, recomposed, combined, recombined etc. Features here allow efficient and quick delivery of new releases.
- Release scheduling: While release scheduling is available for local distribution, many additional features are designed to facilitate actions that reduce staff time in a global environment.
- Contacts management: Critically important to all promotions is the distribution of content to an interested and engaged audience. As introduced in the local distribution discussion, Caster provides a contacts management system with numerous features that facilitate efficient updates and maintenance actions that are critically important where users maintain a large recipient database, across multiple users, and multiple recipient lists. Absent these features, list maintenance becomes overly cumbersome, inefficient and ultimately inaccurate.
Collectively, functions in global release management provide numerous competitive advantages that reduce overall costs, and improve marketing collaboration while increasing record label revenue and cash flow. We are unaware of any other service that provides these global distribution functions.
Play MPE® CASTER (targeted list management services)
Recipient lists are bundles of active and engaged recipients with an interest in specific music types. Lists are sold as a fixed price per list (or list bundle). As recipient lists are adjusted in real time, changes in gross recipient numbers or active recipients does not directly or immediately impact revenue.
Fundamental to our customers' success in music marketing is reaching music curators capable of, and actively engaged in, remarketing the promoted content to a wider consumer audience. To limit unwanted access to new music and to increase recipient engagement, targeted and limited distribution is a vital component in music promotion. Thus, Play MPE® is a permissions-only access system and only recipients designated or targeted to receive content obtain access to that content. Current and correct identification of engaged recipients is therefore critical to our customers' success. While targeted distribution limits access to new content, this aspect also improves recipient side engagement by eliminating unwanted content.
Play MPE® actively manages curated and targeted distribution lists. List creation and list maintenance involve several proprietary processes that are designed to create complete, active, accurate, and targeted lists to facilitate efficient marketing campaigns. Play MPE® provides more than 300 unique targeted lists comprising of more than 17,000 unique and active recipients over 30 countries. To facilitate targeted music marketing campaigns, these lists are grouped by territory (typically by country), by genre of music, and by recipient type (see recipient player discussion). Relying on proprietary technical innovations and processes, these recipient lists are updated in real time. With an annual churn averaging between 27-34%, these recipient lists would quickly become inaccurate absent Play MPE®'s active curation. Play MPE® regularly monitors activity levels and recipients through proprietary analytics. Play MPE® provides the widest and most accurate distribution channels available in the industry.
For smaller record labels and independent artists, the provision of a list of destinations is a requirement for sale as these customers do not know who to contact. For larger record labels, promotions staff can upload their own contact lists. However, proprietary processes ensure Play MPE® lists are more accurate, complete and engaged. The majority of releases distributed through Play MPE®, include a targeted distribution list, curated by Play MPE®.
Play MPE® Player
Music curators review and download content through a web-based player and mobile player apps (iOS and Android). Web players are currently available in 15 different languages: English, Spanish, Swedish, Finnish, Italian, Dutch, Portuguese, French, Japanese, German, Norwegian, Latvian, Lithuanian, Estonian, and Danish.
Recipients on the Play MPE® platform have a wide variety of personas and include programming directors for internet streaming, satellite or terrestrial radio, retail store curators, sports stadium DJs, clubs, events, music reviews in newspapers or magazines, on-air personalities, music supervisors who program TV, movies, commercials or video games, or "A&R" representatives at larger record labels. Each recipient within the Play MPE® platform has a unique library of music catered to, and appropriate for, that recipient.
Recipients enjoy many features that make it easy to access, collaborate, review, and search for content. Play MPE®'s mobile apps offer off-line listening capabilities, the ability to utilize Google Chromecast and Apple Airplay streaming capabilities, creation of playlists, sorting, flagging and archiving features, and easier access to release metadata. Recipient side satisfaction directly increases activity which directly improves the effectiveness of promotional efforts of record label customers.
Products under development
Destiny is currently developing additional functionality and complimentary services that are expected to expand the Company's addressable market, or act as catalysts to the Company's sales activities for Play MPE®. These are described more fully in business development.
Clipstream®
The Company also developed Clipstream® for the online video industry for which it is pursuing strategic alternatives. The Clipstream® Online Video Platform (OVP) is a self-service system, for encoding, hosting and reporting on video playback which can be embedded in third party websites or emails. Playback is currently through the Company's proprietary JavaScript codec engine, which is only available on the internet through the Company. The unique software-based approach to rendering video, has patents claiming initial priority to 2011. This product has incidental revenues and is not supported or marketed.
BUSINESS DEVELOPMENT
Play MPE®
The Company's immediate term objective is to expand its global market share of the promotional distribution of music by expanding the use of the Play MPE® platform in new market segments and well-established markets. Management believes that its current competitive advantages and market dynamics will lead to an increased market share for Play MPE® worldwide.
Targeted list management services
For the majority of revenue, the provision of a curated and targeted list of recipients is a fundamental component of the sale of Play MPE® services. Play MPE® lists are carefully curated, targeted and current. Where provided, Play MPE® curated lists also generate significantly greater activity than seen on lists maintained solely by our clients and provide significant value to all customers of the platform.
When developing a new territory, distribution lists are seeded with content free of charge to our eventual customers. At this stage, Play MPE® is focused on growing content and growing active recipient engagement. When sufficient active users are engaging within a new segment, commercial use of the relevant list begins. Initial charges can take the form of pilot agreements with nominal fees to larger customers or by introductory list pricing for customers that do not yet have frequent and predictable use.
In our third quarter, we commenced introductory commercial charges for our Canadian lists with full commercial charges commencing after year-end. These lists have been under development since Play MPE®'s entry into the market. With growing use in our Latin market, we split the provision of lists into three segments: USA Latin, Mexico and Central and South America. USA Latin is now fully commercially chargeable. In May 2022, Mexico, Central, and South America lists were compiled and collectively sold as an introductory package. These lists will be packaged together until recipient activity for specific lists grows to the point of being chargeable independently.
Overall active users on Play MPE®'s curated lists grew by approximately 10.1%. This increase comes from growth in lists in fully commercial, well-established markets and lists in developing markets. In FY2022, Play MPE ®'s managed lists were selected on 73.3% of releases.
As Play MPE® provides distribution lists in several territories, the Company saw a customer driven demand for international lists by genre. During the fourth quarter, list management staff began curation of genre specific lists with cross border destinations of existing users within Play MPE®. The Company now provides international genre lists in Alternative, Dance/EDM/Rhythmic, Jazz & Classical, Country, Christian, Rock, Urban, Metal and Classic Hits. These new lists did not become commercially available until following the year end. The Company is unaware of any competing system with this service. As this is a new product, the Company will begin the development of certain processes and product related updates to encourage adoption.
Also in the fourth quarter, the Company began developing processes to attract new recipients for inclusion to Play MPE® lists. Broadly, when music is distributed more widely, Play MPE® provides greater value and earns higher fees. Thus, where Play MPE® can provide greater distribution options, Play MPE® should be able to increase revenue. The Company is targeting accelerated commercial recipient lists package expansion to grow sales to existing customers.
With recipient activity, Play MPE® list management staff review proprietary analytics to assess list value. Play MPE® announced price increases for well-established lists that became effective immediately following the year.
Developed markets
Play MPE® has long standing and well-established use in several genres of music within the United States, and all music genres in Australia, New Zealand, Sweden, Finland, Norway, and Denmark.
In core markets, Play MPE® revenue increases as the number of songs made available to recipients receiving this content increases. Sending a song to one recipient is referred to as a "Distribution" in the Company's tracked metrics and is a key performance indicator.
Within the United States, Play MPE® has a very long history and strong user base within the Christian, Country, Non - Commercial/NPR, College, Adult Album Alternative (aka Triple A), and Americana music genres. Within these established genres Play MPE® enjoys almost exclusive use by Major Independent and Independent clients alike. Releases to these specific genres grew by 6% in FY2022
A recent strategy for the Company has been to enter into renewable, exclusive two year agreements with fixed commitments for our larger clients with reasonably predictable usage. These agreements are designed to remove cost uncertainty for our clients, grow revenue and capture additional value for our clients. Over the course of fiscal 2021 and 2022, these multi-year agreements include Major Labels and major independent labels including; Secretly Group, Beggars Group, Curb Records, Epitaph Records. Warner Music Nashville, Warner Records Elektra Records and Atlantic Records etc. The focus in this area has been to build relationships and grow usage while leveraging relationships to expand into new genres and different departments at these same record labels. Play MPE® grew revenue across Warner Music Group as a whole by nearly 50%.
Australasia has become a more fragmented market over the prior two years where the majority of revenue in Australia is captured by long standing relationships with independent record labels are artists. This is in contrast to New Zealand where Play MPE® has a dominant market position with all three Major Labels and minimal independent artist use. Play MPE® has developed internal analytics that demonstrate objective advantages of the Company’s recipient list curation that the Company will leverage in growth attempts with independent artists across the segment and with Major Labels in Australia.
In Northern Europe Play MPE® has an agreement with Warner Music that has driven European revenue through expanding territories and recipient activity has grown. During 2022, our active user base in Northern Europe grew 2.2%. In order to grow independent usage in these Nordic countries the Company has employed a local reseller familiar with the industry landscape.
In all of these markets, management has developed strategies for Play MPE® to increase and improve marketing efforts in order to attract and educate new customers, expand distribution opportunities to new types of recipients and to expand distributions from those within those markets to Play MPE®'s growing global distribution channels.
During 2022, Play MPE®'s marketing team continued a series of initiatives that include partnerships with music related associations and awards, sponsored social media posts, relevant blog posts designed to drive site traffic and position Play MPE ® as a thought leader, and digital and print advertising. Our marketing team began creating benchmarks to measure various campaigns.
In addition to this traditional marketing, coming out of the COVID pandemic has resulted in many annual conferences and conventions returning to a live setting. In 2022 our business development team attended the relevant events in these dominant genres to strengthen the Company's connection to our clients and engage in discussions about the evolution of radio and how Play MPE ® can continue to innovate. In addition to crucial North American events (South by Southwest, Country Radio Seminar, etc) the business development team continues to investigate opportunities abroad.
Global
During the year, Play MPE® renewed its global distribution agreement with Universal. The agreement includes a 10% increase in fees commencing midway through the second quarter. Play MPE® has been providing distribution to Universal since 2004 and has had a global distribution agreement since 2009. Universal’s distributions have grown dramatically since 2018, increasing by 94% by the end of fiscal 2022. This growth comes from expanded use in new territories and growing use of the online version of the platform.
Universal regularly uses Play MPE® for distribution in over 40 countries around the globe. Universal has access to a PC application and the online Caster platform. Caster’s local distribution tools were launched in 2018, while the global architecture platform was launched in January 2022.
As described above, Play MPE® has several global distribution features that provide competitive advantages that enhance label revenue and provide substantial efficiencies in the process. However, while Play MPE® has Major Record Label and international independent commercial use in several territories, Play MPE® does not currently have other global agreements in place. During fiscal 2022, the Company restructured its approach to internal analytics which has developed internal statistics that may assist in providing more objective data to support a compelling narrative for a global approach in music promotion to other large record labels.
Developing markets
Developing markets include nineteen Latin American countries, additional genres of music within the USA, Canada, South Africa, the Baltics (Latvia, Lithuania, Estonia), and a global Jazz presence.
Management's strategy in new developing markets starts with providing access to the system without commercial arrangements at the initial stage to seed the platform with desirable content. This content is required to directly engage recipient activity. Content that normally facilitates recipient activity comes from the Major Record Labels or larger multi-national independent record labels ("Major Independent Labels"). To establish initial use in a new market, our business development and marketing staff collaborate to expand brand awareness, educate customers and establish trial use. Establishing a foothold in a new market therefore requires substantial face to face direct interaction with knowledgeable business development staff. To facilitate this growth, starting in 2021 and continuing through 2022, the Company has recruited key business development professionals with substantial industry experience.
As recipient activity builds, our business development and operations teams adds saleable distribution lists in these new territories.
Latin
The Company's Latin initiative refers to music curators of Latin music and all territories where Spanish is predominant. This includes the United States, Spain, the Caribbean, Central America, and South America. This segment is currently highly fragmented and does not benefit from any one well established system for distribution and review. As a result, the Company believes its focussed business development effort and market leading advantages will result in considerable growth in this segment. In fiscal 2022, Warner Music Latina, and several Major Independent record labels all commenced seeding content throughout our Latin markets distributing more than 400 releases to all territories. These territories include active Play MPE® users in the United States (and Puerto Rico), Mexico, Colombia, Dominican Republic, Cuba, Guatemala, Honduras, Nicaragua, Costa Rica, Panama, Ecuador, Peru, Brazil, Bolivia, Chile, Uruguay, Argentina, and Spain. This new usage built on longer standing use by Universal in Spain, Argentina, and Chile. During fiscal 2022, Play MPE® leveraged these active users to move label clients to a paid model which began with an exclusive pilot agreement with major independent label J&N Records. Having established use from reputable labels allowed the Play MPE® business development and marketing teams to target independent usage directly from artists and smaller management companies. Total active users in these territories grew by 64% during fiscal 2022. These lists now contain over 1,800 active recipients.
The Company's Caster and Player software, product website, and supporting video library are all available in Spanish.
United States
While Play MPE® enjoys a market dominate position in the aforementioned genres of music within the United States, the Company has stronger competition in various Rock genres, Urban, Rhythmic and Pop/Top 40 formats. While we were first to the market, we did not expand to these genres and competitors filled this space.
In 2022, the Company worked towards growing usage in these genres by leveraging our existing relationships with Major Labels and Major Independents. The Company is leveraging strong relationships with promotional teams in established genres, to grow usage with different promotional teams within the same record labels. With our focus on this segment, The Company has since had new or increased usage in nearly all formats from major labels such as Sony sub labels: Arista, Columbia, Epic and RCA. Warner sub labels: Warner Records, Elektra Records and Atlantic Records, Universal sub labels: Republic, Def Jam, and Concord.
Canada
In 2019, the Company saw an opportunity to expand into Canada due to the relative strengths of Play MPE® over an established system which operates within Canada. While the competing system in Canada has numerous competitive weaknesses, it benefits from brand awareness and process inertia. In order to attract users to the Play MPE® platform, the Company initially focused its business development efforts on garnering Major Label and Major Independent content.
In late January 2020, Universal Music Canada commenced distribution of all releases within Canada including a portion of releases exclusive to Play MPE®. In fiscal 2022, Canadian releases (unique pieces of content like singles or albums) were up 10% over the previous year.
Play MPE®'s growth throughout fiscal 2021 came from persistent brand awareness campaigns and customer education. Play MPE® has been very well reviewed within the market. Play MPE® provides significantly greater functionality and an improved user experience. As well, stronger Play MPE® recipient list management processes and a superior recipient experience helped Play MPE® make inroads in active use. At beginning of fiscal 2022, Play MPE® recruited a dedicated Canadian market representative with significant experience in both radio and record label promotion in Canada. Throughout 2021 and 2022, the Company has observed growing activities, growing active users and growing Major Label content.
Initial revenue within Canada was derived from record labels sending content outside of Canada. This customer led desire in part influenced the Company's international list creation discussed above. With growing success and adoption at Canadian radio, the Company launched introductory pricing in May of 2022 with commercial pricing starting following the year end. The growing recipient engagement has helped the Company secure several exclusive agreements with independent record labels within the territory.
The Company’s marketing team continued developing brand awareness with Play MPE®’s sponsorship at song writing competitions and artist organizations that put an emphasis on diverse and underserved artists.
In fiscal 2022, distributions from these independent labels and artists grew by 38% and now account for over half of all distributions within Canada.
Revenue from Canadian customers grew by nearly 25% from fiscal 2021 to fiscal 2022.
South Africa
Play MPE® has been in active use by Universal Music South Africa within South Africa since 2016. Play MPE® has now developed an established user base and brand recognition. Warner Music South Africa entered into an exclusive two-year renewable agreement with Play MPE® at the beginning of fiscal 2022 and in its first year has helped raise South African revenue by over 200%. This consistent content being delivered to the territory helped to grow active users by 15% in fiscal 2022.
Near the end of fiscal 2020 Stamp Communications ("Stamp") began representing Play MPE® to local independent labels and artists resulting in Play MPE®'s first independent record label sales. Sales to independent record labels within South Africa were relatively small in fiscal 2021 however grew in fiscal 2022. Independent distributions in South Africa saw a 107% increase in fiscal 2022. The Company expects this revenue is the start of a long and persistent growth pattern analogous to independent record labels sales in the United States. The charting success of distributions made through the Play MPE® platform by our independent record labels serves as an impressive market influencer.
Perhaps most importantly, the Company believes that the South African market will act as an influential strategic steppingstone to the African market generally and the Company has commenced small distributions and training beyond South African borders.
General
At the conclusion of fiscal 2022, the Company installed price increases for many of our most active lists and adjusted international pricing to account for current exchange rates. The price adjustments are in addition to the new international genre lists mentioned previously.
Fiscal 2022 saw more in-person events following restrictions during the COVID pandemic. It is expected that growing face to face contact with the Company's business development team will facilitate the establishment of new markets for Play MPE®.
During the year, the Company's business development and marketing teams were combined. As well, the Company adjusted its approach to business analytics. These changes are expected to lead to greater revenue growth. With improved lead tracking and analysis the marketing team is able to better identify successful campaigns and translate those successes into other target markets. Automated reporting from the Play MPE® platform is communicating information that is designed to drive value communication and perception, expand sales to existing customers, increase the average sale for each release, and provide critical analytics to facilitate global agreement initiatives.
During fiscal 2022, the marketing team redesigned its product website that would better inform customers, channel leads, increase lead conversion, expand value communication and track information designed to improve marketing efficiency. This site was launched following the fiscal year. As 2022 saw the highest number of new leads for Play MPE®, the Company automated portions of our lead onboarding process. It is expected that this automation will lead to more efficient lead processing and greater conversion. This automation was launched immediately following the fiscal year.
New products and services
Concurrent with broad efforts to grow the core of our existing Play MPE® business, the Company's continues to evaluate and explore complementary business opportunities. As the music industry is evolving, these opportunities are plentiful. We evaluate these opportunities based on risk reward where reward is direct new business revenue and complementary impact on the Play MPE® business.
While the majority of engineering staff time has been on completing the global distribution functionality for Universal within the online platform (Caster), during fiscal 2022 the Company began developing a new distribution method within Play MPE® designed to attract new distribution types within the platform. This new distribution method is designed to function within the Play MPE® platform but to attract new users with a different use case. This feature was designed to reinforce core Play MPE® use as well as to provide incremental revenue.
The Company continued its development of a complementary digital monitoring technology. Following technical advancements, the Company expanded product development and marketing staff in the latter half of the year with the goal of building out this business.
Clipstream®
In fiscal 2018, after completing a detailed review of the resources required to progress Clipstream further, the Company stopped development. Business development efforts are focused on identifying strategic alternatives for this product, business, and intellectual property outside the Company.
Significant Customers
During the year ended August 31, 2022, we generated 41.3% of total revenue from one customer (2021 - 41.7%).
OUR BUSINESS OPERATIONS
In 2017, the Company entered into a lease agreement commencing July 1, 2017, and expiring June 30, 2022 consisting of approximately 6,600 square feet of office space. The Company terminated the lease agreement on January 31, 2022 and entered into a short-term one-year lease agreement for office space in downtown Vancouver, British Columbia, expiring in April of 2023.
As of November 14, 2022, the Company had 33 full-time and 2 part-time employees and 6 full-time consultants.
COMPETITION
Play MPE®
Where a specific platform or method of distribution dominates a particular market segment, there are significant barriers to entry. This aspect applies where Play MPE® dominates a market segment or where a competitive platform dominates a segment in which Play MPE® is attempting to expand. Customers are reluctant to move to a new method and abandoning the status quo. This creates a resistance to change at both the recipient and sender level.
Play MPE® has numerous regional competitors that are typically isolated to a specific segment. Competitive alternatives include physical delivery, one-time digital deliveries providers or digital archives. Digital archives are libraries of browsable music content that keep music in an organized database that can be accessed over a period of time. Play MPE® is a digital archive.
As digital delivery services do not provide organized content, if that first send is not successful, the effectiveness falls precipitously. As a digital archive, Play MPE® offers significant advantages over these services. In many cases, these options are not designed for the industry, do not provide integrations, do not provide reporting, and artist information and metadata are unavailable or less accessible. While these options are typically less expensive, they also provide significantly lower value. Sony’s internal E-Card system is an example of a digital delivery service. This method of delivery for Sony has numerous disadvantages relative to Play MPE®. However, distributed territories can utilize this system with no costs.
Play MPE®'s advantages over competing archival platforms can be grouped into functionality that is either necessary to efficiently manage global marketing processes, or functionality that is isolated to local promotions campaigns or a more intuitive, improved user experience.
No other competing system provides the breadth of international distribution recipient lists or active recipients. The Company is also unaware of any system that provides the unique global distribution functionality that provides significant competitive advantages in a cross market, cross label, global music marketing environment. Play MPE®'s features that facilitate global marketing campaigns are critical to the Company's global agreement with Universal and a significant barrier to entry for a competitive offering. This agreement facilitates use by Universal in numerous territories globally but does not guarantee it.
Play MPE® provides a superior user experience with its local distribution platform and on its players. The superior user experience and accurate and engaged recipient lists that Play MPE® possesses over competitors serves to increase activity on both sides of the platform. With increased activity, a marketing campaign's effectiveness increases, and this is the key value proposition with Play MPE®. In established markets, this positive experience serves to increase the barriers to entry that a dominant system naturally possesses.
Play MPE® is used commercially by all three Major Record Labels in twenty-two (22) territories and by at least two Major Labels in twenty-eight (28) territories, and in numerous additional territories at the seeding stage of network development. This network of use provides desirable content which drives activity and is a significant barrier to entry by competitors in these territories. The Company expects that the combination of this activity and the functionality of the platform (release replication features, contacts management, security and administrative functions, language translations, list management services and content security) will ultimately lead to market domination in several new market segments.
When targeting a specific and incremental territory, the Company either has a dominant competitor or the market is fragmented. In both cases, it is critical that Play MPE® establish a network of activity on both sides of the platform by gathering content and obtaining recipient activity.
Where Play MPE® has an established competitive platform, Play MPE®'s success will depend on whether its ease of use and added functionality will outweigh the brand awareness and process inertia associated with the competing platform.
In these cases, Play MPE® advantages include more powerful notification creation, notification templates and savable templates, greater flexibility in release scheduling and its associated digital rights management, managed recipient lists or more accurate recipient lists, greater international recipient usage, more intuitive user interface, timely notifications, more robust server infrastructure and a more positive recipient user experience. Even with all these advantages, to displace an existing network of use takes time, persistence, and a strong business development team.
SEASONALITY AND CYCLICALITY
Our operating results and operating cash flows have been subject to significant seasonal variations where holidays around late December typically result in lower than average sales. The Company has recently begun promoting archival distributions to take advantage of staff capacity and to provide greater value to both clients and recipients and to increase revenue around this time.
GOVERNMENT REGULATION
We are not currently subject to direct regulation by any governmental agency other than laws and regulations generally applicable to businesses. It is possible that a number of laws and regulations may be adopted in both the United States and Canada with particular applicability to the Internet. Governments have and may continue to enact legislation applicable to us in areas such as content distribution, performance and copying, other copyright issues, network security, encryption, the use of key escrow data, privacy protection, caching of content by server products, electronic authentication or "digital" signatures, illegal or obscene content, access charges and retransmission activities. The applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation, and personal privacy is also uncertain. Export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase our costs of doing business or increase its legal exposure.
The Company owns proprietary algorithms, source code, web domain addresses, patents, trademarks and other intellectual property.
Patents
1. Digital Locking "Digital Media Distribution Method and System" (US Patent No. 7466823)
This patent provides a method of locking digital content which prevents play back on unauthorized machines and devices. Claims include separating security from the content, so that content files can be shared securely over peer-to-peer networks. This is one of the earliest patents for securing peer-to-peer distributed content.
One of the more important claims in this patent is the ability to uniquely recognize a particular computer. Uniquely identifying a person's computer is a common issue which is usually approached by saving cookies or beacons to the user's computer or by tracking IP addresses. These are not reliable solutions as cookies are easily deleted and IP addresses easily changed. The Company's proprietary hash code process creates a serial number that can be used to recognize the user on subsequent visits without ever saving anything to that user's computer.
2. Watermarking "Methods for Watermarking Media Data"
i. US Patents No. 7983441,8300885, 9165560, 9679574
ii. US pending application No. 15/358834
We have developed a watermarking technology which can uniquely identify the individual who originally accessed a particular song. Our watermark is unique as it can be embedded and identified rapidly, it is inaudible, it survives on air broadcast, compression and conversion to other formats and is virtually impossible to remove. Our watermarking technology is used in the Play MPE® distribution system when songs are exported or when streaming a track. Other watermarking technologies are slow and provide a trade-off between a destruction of audio quality and the ease that they can be filtered out. When the original patent claims were granted in the US, the Company filed a set of new additional, broader claims in a continuation application in Canada and the US to further protect the technology.
3. Cross Platform Streaming Video "Script Based Video Rendering"
a. US Patents No. 9143826, 9137567, 9215499, 9571886, 9380338, 9432726 and 9432727
b. China Patent No. 201280050754.7
c. Pending India Application No. 1961/DELNO/2014
This solution enables publishers to serve streaming video from their web site without the need for a separate streaming server. The solution will play instantly in all recent browsers, including mobile devices, without the need for a separate video player.
Registered Trademarks
Play MPE®
Granted: USA, Canada, Japan, European Union, China and Australia
MPE®
Granted: Canada, Japan,
Sonox Digital®
Granted: China, Canada
Clipstream®
Granted: USA, Canada, Japan, Israel, European Union, China and Australia
Domain Names
We own a large number of domain names, including many valuable four-letter domain names (dice.net, dsny.com) and URL's featuring common words (radio-play.com, streamingaudio.com, pirateradio.com and many others).
ITEM 1A. RISK FACTORS.
You should carefully consider the following risk factors, together with the other information contained in this annual report on Form 10-K, including our financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," before making a decision to purchase or sell shares of our common stock. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition and growth prospects. If that were to happen, the trading price of our common stock could decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations or financial condition. In this section, we first provide a summary of the more significant risks and uncertainties we face and then provide a full set of risk factors and discuss them in greater detail.
If revenues decline, then our financial condition and results of operations will be adversely affected.
99% of our revenue is generated from our Play MPE® distribution service. Competitors may arise and/or customers may not renew distribution contracts. This factor could cause our revenue to decrease with the result that our financial condition and operating results would be adversely affected. Competitors have been small, regionally based, have limited resources, and have yet to capture a material share of the market. If a competitor were to develop a comparable or superior product, our market share could be reduced.
If we are not able to control our operating expenses, then our financial condition may be adversely affected.
Our ability to maintain profitability is conditional upon our ability to control our operating expenses. There is a risk that we will have to increase our operating expenses in the future. Factors that could cause our operating expenses to increase include: our determination to spend more on sales, marketing, and business development to increase product sales, our determination that more research and development expenditures are required to keep our current software products competitive, or to develop new products for the market. To the extent that our operating expenses increase without a corresponding increase in revenue, our financial condition would be adversely impacted.
If we are not successful in legal proceedings against us, then our business and financial condition could be adversely affected.
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 Company's 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, however if we are not successful in these legal proceeding and are forced to make payments of damages to the plaintiffs, then our business and our financial condition would be adversely affected.
Our financial results may be adversely impacted by currency fluctuations.
Our revenues are primarily in United States dollars and Euros while our operating expenses are primarily in Canadian dollars. An increase in the value of the Canadian dollar in relation to the United States dollar and/or Euro could have the effect of decreasing our income from operations. We do not currently hedge our foreign currency exposures.
If our products are defective or contain errors, we may become subject to product liability claims.
As a result of their complexity, our software products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing we undertake and testing and use by current and potential customers, errors will not be found in new products after commencement of commercial use. The occurrence of such errors could result in loss of or delay in market acceptance of our products, which could have a material adverse effect on our business, financial condition, and results of operations. Our products also may be vulnerable to break-ins and similar disruptive problems caused by Internet or other users.
Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the computer systems of our customers, which may result in significant liability to us and deter potential customers. The sale and support of our products may entail the risk of liability claims. A product liability claim brought against us could have a material adverse effect on our business, financial condition, and results of operations.
Successful expansion of our business will depend on our ability to manage growth.
Should we be successful in the sales, marketing, and business development efforts of our software products, we will experience significant growth in operations. If this occurs, management anticipates that additional expansion will be required to continue our product development. Any expansion of our business would place further demands on our management, operational capacity, and financial resources. We anticipate that we may need to recruit qualified personnel in all areas of operations, including management, sales, marketing, delivery, and software development. There can be no assurance that we will be effective in attracting and retaining additional qualified personnel, expanding operational capacity or otherwise managing growth. In addition, there can be no assurance that our current systems, procedures, or controls will be adequate to support any expansion of our operations. The failure to manage growth effectively could have a material adverse effect on our business, financial condition, and results of operations.
Our network infrastructure could be vulnerable to system failure and/or security risks.
Despite the implementation of security measures, our network infrastructure could be vulnerable to unforeseen computer problems. Although we believe we have taken steps to mitigate much of the risk, we may in the future experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Unknown security risks may result in liability to us and may also deter new customers from purchasing our software and services, and individuals from utilizing it. Although we intend to continue to implement and establish security measures, there can be no assurance that measures implemented by us will not be circumvented in the future, which could have a material adverse effect on our business, financial condition, or results of operations.
Our business depends on continued development of the internet and intranets as mediums of commerce and communications, and our ability to evolve along with these mediums.
The market for our streaming media products and services is new and evolving rapidly. It depends on increased use of the Internet and intranets. If the Internet and intranets are not adopted as methods for commerce and communications, or if the adoption rate slows, the market for our products and services may not grow or may develop more slowly than expected.
Sales of our products depend in large part on the continued development of the Internet as a viable commercial marketplace. There are now substantially more users and much more "traffic" over the Internet than ever before, use of the Internet is growing faster than anticipated, and the technological infrastructure of the Internet may be unable to support the demands placed on it by continued growth. Delays in development or adoption of new technological standards and protocols, or increased government regulation, could also affect Internet use. In addition, issues related to use of the Internet and intranets, such as security, reliability, cost, ease of use and quality of service, remain unresolved and may affect the amount of business that is conducted over the Internet and intranets.
We could experience product delays and errors, which could affect our ability to adapt to technological changes and evolving industry standards.
We have experienced development delays and cost overruns associated with our product development efforts. We may encounter such problems in the future. Delays and cost overruns could affect our ability to respond to technological changes, evolving industry standards, competitive developments, or customer requirements. Our products also may contain undetected errors that could cause adverse publicity, reduced market acceptance of the products, or lawsuits by customers.
Our business could be adversely affected by online commerce security failures.
Online commerce and communications depend on the ability to transmit confidential information securely over public networks. Any compromise of our ability to transmit confidential information securely, and costs associated with the prevention or elimination of such problems, could have a material adverse effect on our business.
Our business is international and could be affected by unexpected changes in international regulatory standards and laws.
We market and sell our products in the United States, Canada, Europe, Asia, South America, Africa and Australia. As such, we are subject to the normal risks of doing business abroad. Risks include unexpected changes in regulatory requirements, export and import restrictions, tariffs and trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, potential adverse tax consequences, exchange rate fluctuations, increased risks of piracy, limits on the our ability to enforce our intellectual property rights, discontinuity of our infrastructures, limitations on fund transfers and other legal and political risks. Such limitations and interruptions could have a material adverse effect on our business.
Customer Concentration
During the year ended August 31, 2022, 41.3% of the Company's revenue is derived from one customer with operations in numerous countries. This customer is currently of key importance to our operations and any adverse change to the revenue from this customer would have a material adverse effect on our results of operations.