10-Q 1 form10q.htm FORM 10-Q Destiny Media Technologies, Inc.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

(Mark One)


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2019

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _____ to _____


Commission File Number    0-28259             

DESTINY MEDIA TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

NEVADA

84-1516745

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1110 - 885 West Georgia Street,

 

Vancouver, British Columbia, Canada

V6C 3E8

(Address of principal executive offices)

(Zip Code)

 

604-609-7736
(Registrant's telephone number, including area code)

________________________________________________________________________________________
(Former name, former address and former fiscal year, if changes since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                           
[X]Yes [   ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
[X]Yes [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer                                   [   ]

        Accelerated filer                         [   ]         

Non-accelerated filer                                     [   ]

Smaller reporting company        [X]

Emerging growth company                           [   ]

 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act 
[    ] Yes  [   ] No

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) 
[   ] Yes  [X] No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:

The number of shares outstanding of the registrant's common stock, par value $0.001, as of January 8, 2020 was 10,567,241.


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Condensed Consolidated Financial Statements

Destiny Media Technologies Inc.

(Unaudited) November 30, 2019

(Expressed in United States dollars)



Destiny Media Technologies Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States Dollars)
Unaudited

As at,            
    November 30,     August 31,  
    2019     2019  
    $     $  
             
ASSETS            
Current            
Cash and cash equivalents   1,545,080     2,512,138  
Short-term investments [note 3]   1,138,375     380,056  
Accounts receivable, net of allowance for doubtful accounts of $10,113 [August 31, 2019 – $10,106] [note 9]   416,870     332,271  
Other receivables   11,411     14,240  
Prepaid expenses   69,882     77,067  
Total current assets   3,181,618     3,315,772  
Deposits   33,739     33,716  
Property and equipment, net [note 4]   270,424     260,907  
Intangible assets, net [note 4]   20,579     24,695  
Right of use asset [note 5]   559,635      
Total assets   4,065,995     3,635,090  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current            
Accounts payable   203,335     132,451  
Accrued liabilities   269,373     303,470  
Deferred leasehold inducement       46,774  
Deferred revenue   15,274     23,388  
Current portion of operating lease liability [note 7]   216,645      
Total current liabilities   704,627     506,083  
Operating lease liability, net of current portion [note 7]   393,104      
Total liabilities   1,097,731     506,083  
             
Commitments and contingencies [notes 7 and 8]            
             
Stockholders’ equity            
Common stock, par value $0.001 [note 6]            
Authorized: 20,000,000 shares            
Issued and outstanding: 10,702,041 shares            
[August 31, 2019 – issued and outstanding 11,000,786 shares]   10,702     11,001  
Additional paid-in capital [note 6]   9,576,694     9,850,348  
Accumulated deficit   (6,228,825 )   (6,340,483 )
Accumulated other comprehensive loss   (390,307 )   (391,859 )
Total stockholders’ equity   2,968,264     3,129,007  
Total liabilities and stockholders’ equity   4,065,995     3,635,090  

See accompanying notes



Destiny Media Technologies Inc.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Expressed in United States dollars)

Unaudited

Three months ended November 30,            
    2019     2018  
    $     $  
             
Service revenue [note 10]   1,045,856     984,019  
             
Cost of revenue            
Hosting costs   26,617     29,957  
Internal engineering support   6,847     7,371  
Customer support   39,371     28,247  
Third party and transaction costs   12,447     10,595  
             
    85,282     76,170  
             
Gross Margin   960,574     907,849  
             
Operating expenses            
General and administrative   219,503     171,675  
Sales and marketing   283,756     211,153  
Product development   319,974     290,641  
Depreciation and amortization   32,072     20,624  
    855,305     694,093  
Income from operations   105,269     213,756  
Other income            
Interest income   6,389     6,434  
             
Net income   111,658     220,190  
             
Foreign currency translation adjustments   1,552     (49,085 )
             
Total comprehensive income   113,210     171,105  
             
Net income per common share, basic and diluted   0.01     0.02  
             
Weighted average common shares outstanding:            
Basic   10,954,603     11,002,786  
Diluted   10,954,603     11,002,786  

See accompanying notes



Destiny Media Technologies Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Expressed in United States dollars)

Unaudited

                            Accumulated     Total  
                Additional           other     stockholders’  
    Common stock     paid-in     Accumulated     comprehensive     equity  
    Shares     Amount     capital     Deficit     loss        
    #     $     $     $     $     $  
Balance, August 31, 2018   11,002,786     11,003     9,810,676     (6,951,261 )   (353,642 )   2,516,776  
Total comprehensive income               220,190     (49,085 )   171,105  
Stock based compensation [note 6]           12,053             12,053  
Balance, November 30, 2018   11,002,786     11,003     9,822,729     (6,731,071 )   (402,727 )   2,699,934  
                                     
Balance, August 31, 2019   11,000,786     11,001     9,850,348     (6,340,483 )   (391,859 )   3,129,007  
Shares issued for rounding purposes in connection with reverse split   10                      
Shares repurchased for retirement   (298,755 )   (299 )   (291,590 )           (291,889 )
Total comprehensive income               111,658     1,552     113,210  
Stock based compensation [note 6]           17,936             17,936  
Balance, November 30, 2019   10,702,041     10,702     9,576,694     (6,228,825 )   (390,307 )   2,968,264  

See accompanying notes



Destiny Media Technologies Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended November 30,   (Expressed in United States dollars)  
    2019     2018  
    $     $  
             
OPERATING ACTIVITIES            
Net income   111,658     220,190  
Items not involving cash:            
Depreciation and amortization   32,072     20,624  
Stock-based compensation   17,936     12,053  
Amortization of right of use assets   3,325      
Deferred leasehold inducement       (735 )
Unrealized foreign exchange   (5,417 )   (6,385 )
Changes in non-cash working capital:            
Accounts receivable   (84,789 )   56,985  
Other receivables   2,840     (6,158 )
Prepaid expenses and deposits   7,203     16,035  
Accounts payable   5,126     40,614  
Accrued liabilities   4,461     (80,884 )
Deferred revenue   (8,170 )   (8,073 )
Net cash provided by operating activities   86,245     264,266  
             
INVESTING ACTIVITIES            
Acquisition of short-term investments   (756,372 )    
Purchase of property, equipment and intangibles   (10,231 )   (7,215 )
Net cash used in investing activities   (766,603 )   (7,215 )
             
FINANCING ACTIVITY            
Repurchase of common stock for retirement   (291,889 )    
Net cash used in financing activity   (291,889 )    
             
Effect of foreign exchange rate changes on cash   5,189     (23,420 )
             
Net decrease in cash and cash equivalents during the period   (967,058 )   233,631  
Cash and cash equivalents, beginning of period   2,512,138     1,097,434  
Cash and cash equivalents, end of period   1,545,080     1,331,065  
             
Supplementary disclosure            
Interest paid        
Income taxes paid        

See accompanying notes


 

1. ORGANIZATION

Destiny Media Technologies Inc. (the “Company”) was incorporated in August 1998 under the laws of the State of Colorado and the corporate jurisdiction was changed to Nevada effective October 8, 2014. The Company develops technologies that allow for the distribution over the internet of digital media files in either a streaming or digital download format. The technologies are proprietary. The Company operates out of Vancouver, BC, Canada and serves customers predominantly located in the United States, Europe and Australia.

The Company’s stock is listed for trading under the symbol “DSNY” on the 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 Company’s 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. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended November 30, 2019 are not necessarily indicative of the results that may be expected for the year ended August 31, 2020.

The balance sheet at August 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended August 31, 2019.

 


3. SHORT TERM INVESTMENTS

The Company’s 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%.

4. PROPERTY AND EQUIPMENT AND INTANGIBLES

          Accumulated     Net book  
    Cost     amortization     value  
    $     $     $  
November 30, 2019                  
Property and equipment                  
Furniture and fixtures   134,523     108,733     25,790  
Computer hardware   251,885     202,767     49,118  
Computer software   381,272     239,887     141,385  
Leasehold improvement   159,922     105,791     54,131  
    927,602     657,178     270,424  
Intangibles                  
Patents, trademarks and lists   422,753     402,174     20,579  

          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  

Depreciation and amortization for the three months ended November 30, 2019 was $32,072 (2018: $20,624)

 

5. RIGHT OF USE

On adoption of ASC 842, Lease Accounting, the Company recognized right-of-use assets, and a corresponding increase in lease liabilities (note 7), in the amount of $660,185 which represented the present value of future lease payments using a discount rate of 8% per annum. The Company adopted the modified retrospective approach on adopting the ASC 842 and accordingly the adoption was made effective September 1, 2019, with no restatement of the prior year comparatives.

During the three months ended November 30, 2019, the Company recorded a lease expense of $54,158 related the depreciation of right-of-use assets.

Supplemental cash flow information related to lease was as follows:

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 63,725  
Right-of-use assets obtained in exchange for lease obligations:      
Operating lease $ 559,635  
Weighted-average discount rate – operating leases   8%  

6. STOCKHOLDERS’ EQUITY

[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.

Effective September 16, 2019, the Company commenced a Normal Course Issuer Bid, pursuant to which the Company may purchase up to a maximum of 550,140 common shares, through the TSX Venture Exchange (the “TSX”) at the market price at the time of purchase, subject to daily limits and compliance with the applicable rules of the TSX and Canadian securities laws. During the three months ended November 30, 2019, the Company repurchased and cancelled 298,755 common shares for $291,889.

[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 83,750 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.

 


6. STOCKHOLDERS’ EQUITY (cont’d.)
[b] Stock option plans (cont’d.)

Stock-Based Payment Award Activity

A summary of option activity under the Plans as of November 30, 2019, and changes during the period then ended is presented below:

                Weighted        
          Weighted     Average     Aggregate  
          Average     Remaining     Intrinsic  
          Exercise Price     Contractual     Value  
Options   Shares     $     Term     $  
Outstanding at August 31, 2019   290,000     1.94     2.96      
Granted   140,000     1.36     5.00      
Forfeited   (50,000 )   1.86     2.20      
Outstanding at November 30, 2019   380,000     1.38     3.57      
Exercisable at November 30, 2019   217,500     1.43     2.64      

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the options that were in-the-money at November 30, 2019.

The following table summarizes information regarding the non-vested stock purchase options outstanding as of November 30, 2019 and changes during the period then ended:

          Weighted  
          Average  
          Grant Date  
    Number of Options     Fair Value  
          $  
Non-vested options at August 31, 2019   30,000      0.38  
Granted   140,000     0.49  
Vested   (7,500 )   0.33  
Non-vested options at November 30, 2019   162,500     0.48  

As of November 30, 2019, there was $66,504 of total unrecognized compensation cost related to non-vested stock-based compensation awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.83 years.

 

6. STOCKHOLDERS’ EQUITY (cont’d.)
[b] Stock option plans (cont’d.)

During the three months ended November 30, 2019, the total stock-based compensation expense of $17,936 (2018: $12,053) is reported in the statement of comprehensive income as follows:

    2019     2018  
    $     $  
Stock-based compensation            
General and administrative   9,258     7,151  
Sales and marketing   6,100     2,451  
Product development   2,578     2,451  
Total stock-based compensation   17,936     12,053  

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)   3.25      
Expected volatility   116.2%      
Risk-free interest rate   1.3%      
Dividend yields        
Weighted average grant date fair value   $0.49      

Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the options is based on US Treasury bill rates in effect at the time of grant.

[c] Employee Stock Purchase Plan

The Company’s 2011 Employee Stock Purchase Plan (the “Plan”) became effective on February 22, 2011. Under the Plan, employees of the Company are able to contribute up to 5% of their annual salary into a pool which is matched equally by the Company in order to purchase Company shares under certain terms. 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 is also responsible for the administration of the Plan on behalf of Destiny and the participants.

 


6. STOCKHOLDERS’ EQUITY (cont’d.)
[c] Stock option plans (cont’d.)

During the three months ended November 30, 2019, the Company recognized compensation expense of $13,132 (2018: $10,683) in salaries and wages on the consolidated statement of comprehensive income in respect of the Plan, representing the Company’s employee matching of cash contributions to the Plan. The shares were purchased on the open market at an average price of $0.98 (2018: $0.95). The shares are held in trust by the Company for a period of one year from the date of purchase.

7. COMMITMENTS

The Company has entered into a lease agreement expiring June 30, 2022 for office premise consisting of approximately 6,550 square feet. The Company is committed to lease payments as follows:

Fiscal year ending August 31,   $  
2020   192,506  
2021   261,795  
2022   223,351  
Total lease payments payable   677,652  
Less; amounts representing interest   (67,903 )
Total operating lease liability   609,749  
Less; current portion of operating lease liability   (216,645 )
Long term portion of operating lease liability   393,104  

During the three months ended November 30, 2019 the Company incurred depreciation expense of $54,158 (2018 - $61,583) in connection with its office premises lease, which has been allocated between general and administrative expenses, research and development and sales and marketing on the consolidated statement of comprehensive income.

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 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.

On September 5, 2017, the Company’s 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 is defending 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.

 

9. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Standards

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.

The Company adopted ASU No. 2016-02 as of September 1, 2019 using the modified retrospective approach wherein entities are permitted to apply the new lease standard at adoption date with no effect to the opening balance of retained earnings in the period of adoption. Accordingly, all periods prior to September 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, with no retrospective adjustments to the comparative periods presented.

In accordance with ASC Topic 842, Leases, the Company determines, at the inception of a contract, if the arrangement is a lease and whether it meets the classification criteria for a finance or operating lease. Right of use (ROU) assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. ROU assets also include any advance lease payments and are net of lease incentives. Where the operating leases do not provide an implicit rate, the Company estimates its incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Operating fixed lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.

Further, as permitted by the standard, the Company made an accounting policy election to not record right of use assets or lease liabilities with a term of 12 months or less. Instead, consistent with legacy accounting guidance, the Company will recognize payments for such leases in the consolidated statement of operations on a straight-line basis over the lease term.

The adoption of this standard on September 1, 2019, resulted in the recognition of additional assets of $613,408 and liabilities of $660,185 upon adoption on its accompanying condensed consolidated balance sheet. The new standard did not have a material impact on the Company’s results of operations or cash flows.

7


10. CONCENTRATIONS AND ECONOMIC DEPENDENCE

The Company operates solely in the digital media software segment and all revenue from its products and services are made in this segment.

Revenue from external customers, by product and location of customer, is as follows:

    2019     2018  
    $     $  
             
Play MPE®            
United States   485,212     455,225  
Europe   462,441     429,996  
Australia   82,586     84,207  
Total Play MPE® Revenue   1,030,239     969,428  
             
Clipstream ®            
United States   15,617     14,591  
Total Clipstream ® Revenue   15,617     14,591  
             
Total Revenue   1,045,856     984,019  

Revenue in the above table is based on location of the customer’s billing address. Some of these customers have distribution centers located around the globe and distribute around the world. During the three months ended November 30, 2019, the Company generated 38% of total revenue from one customer [2018 - 37%].

It is in management’s opinion that the Company is not exposed to significant credit risk.

As at November 30, 2019, two customers represented $238,011 (57%) of the trade receivables balance [August 31, 2019 – two customers represented $233,549 (70%)].

The Company has substantially all its assets in Canada and its current and planned future operations are, and will be, located in Canada.

11. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the current period's presentation. These reclassifications did not affect prior periods' net earnings.

8


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the accompanying financial statements and notes thereto included within this Quarterly Report on Form 10-Q.  In addition to historical information, the information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements involve risks and uncertainties, including statements regarding the Company's capital needs, business strategy and expectations.  Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. 

In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology.  Actual events or results may differ materially.  In evaluating these statements, you should consider various factors described in this Quarterly Report, including the risk factors under "Item 1A. Risk Factors." of part II, and, from time to time, in other reports the Company files with the Securities and Exchange Commission. These factors may cause the Company's actual results to differ materially from any forward-looking statement. The Company disclaims any obligation to publicly update these statements or disclose any difference between its actual results and those reflected in these statements. Such information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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 subsidiary, Destiny Software Productions Inc., a British Columbia company that was incorporated in 1992, MPE Distribution, Inc. a Nevada company that was incorporated in 2007 and Sonox Digital Inc. incorporated under the Canada Business Corporations Act in 2012. The "Company", "Destiny Media", "Destiny", "we" or "us" refers to the consolidated activities of all four companies.

Our principal executive office is located at Suite 1110, 885 West Georgia Street, Vancouver, British Columbia V6C 3E8. 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 problems in digital distribution and promotion for businesses in the music industry.  The core of our business is Play MPE®, a promotional music marketing and digital distribution service. Play MPE® is a service for promoting and securely distributing broadcast quality audio, video, images, promotional information and other digital content through the internet. The system is currently used by the recording industry for transferring pre-release broadcast quality music, radio shows, and music videos to trusted recipients such as radio stations, media reviewers, VIP's, DJ's, film and TV personnel, sports stadiums and retailers.

Play MPE®

Play MPE® is a two sided marketplace platform that enables music labels and artists to create and distribute promotional content and musical assets on the one side, and music broadcasting professionals, music curators and music reviewers to discover, listen to, download and consume, on the other.  Play MPE® is a cloud-based enterprise SaaS product.

Typically, record labels and artists promote new music through the presentation of broadcast quality audio, video, images, promotional information, industry required meta data, and other digital content.  The presentation of this promotional material is catered to music curators who can expose that music to a larger consumer audience through broadcasts (examples include radio, internet radio, streaming services, DJs etc.) or publicity and media destinations. The system is also used to promote music and artists to label A&R teams, and music supervisors (who work with TV/movie producers to recommend musical content to accompany video productions).


Broadcast play of music provides revenue directly to record labels and artists through royalties and indirectly through sales, concerts / live performances, merchandise sales etc. as the profile and popularity of the musical work and artist increase. Effective marketing is critical in growing the popularity of a song or an artist and thereby revenue for a particular artist. Play MPE® is a critical step in this process. Easy-to-use and collaborative tools on the player side (music curator side) improves activity which improves the likelihood that a particular track obtains broadcast play. Feedback of recipient activity provides valuable information to record labels improving data centric marketing decision making.

Our customers range from small independent artists, small to large independent record labels ("Indies"), to promoters, and to the world's largest record labels (the "Major Record Labels") (Universal Music Group, Warner Music Group and Sony Music Entertainment).  Our Major Record Label clients have offices around the world and typically represent the world's largest recording artists.  All three Major Record Labels, and thousands of Indies use Play MPE® for promotional distribution.

Play MPE® provides a wide array of features which provide efficient access to a promotional hub of activity.  Client characteristics determine which features are of greater interest with the active promotional recipients being of common interest to all clients. Major Labels can take advantage of the platform's more powerful and efficiency producing features including tiered rights, permissions-based user profiles, integration with database archives, release sharing with foreign territories etc.  For example, some customer staff may manage assets (album cover imagery, music videos, the raw music, promotional information and other metadata), while others manage hierarchical permission-based lists of recipients.  These more powerful features are unique to the Play MPE® platform. 

The release dates for music can be dependent on the territory and, where administrative settings permit, local promotions staff may generate a localized distribution of the song with modified marketing information in the local language. Local staff may select pre-existing assets from the system and combine them together with a local recipient lists to form a "send". Our customers also choose the level of access for the recipients assigned to the release by designating whether the release can be streamed, downloaded, exported into an unlocked digital format or burned to a CD. 

While many clients are set up to manage and upload recipient lists, many rely on the proprietary lists provided within the service.  Our staff manages lists of recipients in various formats and geographies and those lists are made available to our customers using the Play MPE® system. The Play MPE® system provides Play MPE® staff with the feedback and resources necessary to manage and maintain this network of recipients, which is not available with physical distribution or by smaller competitors.  Customers select lists of recipients within the proprietary network based on music format and geography. 

All exported songs are marked in real time with Destiny's watermark technology, which has received three US patents and a number of analogous patents globally. From information provided by Play MPE®, songs appearing on the internet can be scanned by the International Federation of the Phonographic Industry's ("IFPI"). Headquartered in London, UK, the IFPI is the organization that represents the interests of the recording industry worldwide and one of its missions is to safeguard the rights of record producers. IFPI web crawlers visit torrents, peer to peer networks and websites searching for unauthorized content. When problem files are identified, the IFPI can run proprietary software to identify Play MPE®'s unique watermark to identify the originating source.

After the content is released, all activity by the recipient is logged in real time, providing record labels and promotions staff real time detail on which songs are accessed, streamed, downloaded and exported. This information provides valuable feedback in real time to marketing and promotions staff who can cater their programs appropriately. Recipients receive a custom library of available tracks and are able to repeat the download if music is lost. 

Play MPE® browser-based tools are accessible on any computer without installation, access to both Mac and PC users. The tool provides release sharing capabilities, to facilitate faster more user-friendly sharing of assets by our global label customers. Finally, it also allows for easy translation into multiple languages to accelerate international expansion.

We continue to invest in additional development of Play MPE® Version 8 and related tools and applications. In July 2018, we integrated with Aspen, an archival system used by one of our key customers, Universal Music Group (UMG).  This integration provided improved efficiencies in UMG's daily workflow. In March 2019, we announced a new integration of Play MPE® with Nielsen's BDSradio, which provides Nielsen Music users with an instant gateway into Play MPE®'s extensive release catalog and high-quality content directly from the BDSradio platform. 


In May 2019, we released new iOS and Android apps of our Play MPE® recipient player.  The new apps feature added capabilities from previous versions, including Google Chromecast and Airplay streaming capabilities for greater recipient collaboration, additional playlists, sorting, flagging and archiving features, improved search capabilities, and easier to access release metadata.  In addition, we are developing a new entirely browser-based Play MPE® recipient player, which should lead to higher usage by our customers and recipients.

Given the current music promotion and discovery landscapes, we plan to expand Play MPE®'s reach more broadly from its current service offerings. We believe there is great business value in integrating our Play MPE® service into additional workflows which are already a part of our customers' daily routine, so that we eventually are the entire software ecosystem for our customers.

Clipstream®

The Company also has a legacy business, Clipstream®, in 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, is protected by over two dozen patents claiming initial priority to 2011.  This product is marketed in a limited way and has incidental revenues.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2019 AND NOVEMBER 30, 2018

Revenue

Total revenue for the three months ended November 30, 2019 increased by 6.3% over the comparable quarter in fiscal 2019, to $1,045,856 (2018 - $984,019).

Play MPE® revenue, which accounted for 99% of the Company's revenue (2018 - 99%) and increased by 6.3% over the comparable quarter in fiscal 2018. Removing the effect of foreign exchange fluctuations from revenue derived in foreign currencies, our Play MPE® revenue growth was 8.5% for the three months ended November 30, 2019 compared to the same quarter in fiscal 2019. 

The increase in revenue for the three-month period was derived from all territories in which the Company operates, including the United States, Europe, and Australia, and was largely driven by an increase in revenue from our Indie labels of 10.9% on a global basis over the comparative three-month period. 

Operating Expenses

Overview

As our technologies and products are developed and maintained in-house, the majority of our expenditures are on salaries and wages and associated expenses such as office space, supplies and benefits. Our operations are primarily conducted in Canada and therefore, 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 on its operating expenditures.

Operating costs during the three months ended November 30, 2019 increased by 23.2% to $855,305 (2018 - $694,093). This increase is primarily the result of an increase in staffing costs.  Salaries and wages increased by 20.2 % over the comparative quarter, as a result of additions to our marketing and business development staff, and product development staff. 


General and Administrative   30-Nov     30-Nov              
    2019     20018              
    (3 months)     (3 months)     Change     Change  
    $     $     $     $  
Bad Debt   -     2,651     (2,651 )   -100.0%  
Office and miscellaneous   45,512     30,269     15,243     50.4%  
Foreign exchange (gain) loss   2,944     (11,695 )   14,639     -125.2%  
Professional fees   59,599     54,009     5,590     10.4%  
Rent   6,304     8,543     (2,239 )   -26.2%  
Telecommunications   560     817     (257 )   -31.5%  
Travel   3,056     1,041     2,015     193.6%  
Wages and benefits   101,528     86,040     15,488     18.0%  
    219,503     171,675     47,828     27.9%  

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 travel expenditures. The increase in wages and benefits is attributable to one-time stock option compensation charges. 

Sales and marketing   30-Nov     30-Nov              
    2019     20018              
    (3 months)     (3 months)     Change     Change  
    $     $     $     $  
Advertising and marketing   48,256     26,588     21,688     81.5%  
Rent   31,721     23,744     7,977     33.6%  
Telecommunications   3,135     4,257     (1,122 )   -26.4%  
Wages and benefits   200,644     156,564     44,080     28.2%  
    283,756     211,153     72,603     34.4  

 Sales and marketing expenses consist of salaries and related personnel costs including overhead, office rent, and telecommunications costs.  Sales and marketing expenses also include advertising and marketing expenditures, which consist of promotional materials, online or print advertising, business development tools, and marketing or business development related travel costs including attendance at conference or trade shows, and record label and client visits. The increase in staffing costs relates to the addition of marketing and business development staff.  The increase in advertising and marketing expenses is related to increase travel expenditures for our staff to attend label visits and industry events.

 Product Development   30-Nov     30-Nov              
    2019     20018              
    (3 months)     (3 months)     Change     Change  
    $     $     $     $  
 Rent   29,339     29,296     21,668     81.5%  
 Software services   17,420     23,744     7,977     33.6%  
 Telecommunications   19,203     4,257     (1,122 )   -26.4%  
 Wages and Benefits   254,012     156,564     44,080     28.2%  
    319,974     211,153     72,603     34.4%  

 Product development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. The increase in wages and benefits is related to an increase in staffing in product development during the quarter. 

Depreciation and Amortization

Depreciation and amortization expense increased to $32,072 for the three months ended November 30, 2019 from $20,624 for the three months ended November 30, 2018, an increase of 55.5% due to an increase in computer software costs associated with externally developed Play MPE® recipient player applications.


Other earnings and expenses

Interest income was $6,389 for the three months ended November 30, 2019 and $6,434 for the three months ended November 30, 2018 and is derived from one-year Guaranteed Investment Certificates.

Net income

During the three months ended November 30, 2019 we had net income of $111,658 (2018 - $220,190). Overall, a modest increase in revenue was accompanied by increased spending on staffing and marketing and advertising costs, as discussed in detail above.

For the three months period ended November 30, 2019, adjusted EBITDA was $154,431 (2018 - $245,698).  Adjusted EBITDA is not defined under generally accepted accounting principles ("GAAP") and it may not be comparable to similarly titled measures reported by other companies. We used Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe Adjusted EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to Adjusted EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of net income from operations to Adjusted EBITDA over the eight most recently completed fiscal quarters:

    2020 Q1     2019 Q4     2019 Q3     2019 Q2     2019 Q1     2018 Q4     2018 Q3     2018 Q2  
    $     $     $     $     $     $     $     $  
Net Income   111,658     114,157     195,712     80,719     220,190     171,775     183,629     67,376  
Amortization, stock-based compensation and deferred leasehold inducements   49,140     34,983     36,404     31,042     31,942     38,108     42,103     43,496  
Interest income   (6,367 )   (5,999 )   (8,233 )   (6,522 )   (6,434 )   (4,940 )   (1,628 )   (1,704 )
Adjusted EBITDA   154,431     143,141     223,883     105,239     245,698     204,943     224,104     109,168  

LIQUIDITY AND FINANCIAL CONDITION

Our cash and cash equivalents balance decreased by $208,739 during the three months ended November 30, 2019. At November 30, 2019, we held $1,545,080 (August 31, 2019 - $2,512,138) in cash and cash equivalents and our short-term investments, consisting of one-year Guaranteed Investment Certificates (GICs) held through a major Canadian financial institution increased by $758,319 to $1,138,375 (2018 - $380,056).

At November 30, 2019, we had working capital of $2,476,991, compared to $2,809,689 as at August 31, 2019. The decrease in our working capital was primarily due to the repurchase of common stock under a common stock repurchase program, pursuant to a Normal Course Issuer Bid ("NCIB") facilitated through the TSX Venture Exchange, which commenced in September 2019.  During the fiscal quarter, the Company completed open market purchases of 298,755 common shares for a total cost of $291,889.

CASH FLOWS

Net cash provided by operating activities for the three months ended November 30, 2019 was $86,245, compared to $264,266 for the three months ended November 30, 2018.  The primary reason for the decrease in cash flows from operating activities is due to an increase in operating expenses, as described above, as well as an increase in accounts receivable during the quarter.


Net cash used in investing activities for the three months ended November 30, 2019 was $766,603, compared to $7,215 for the three months ended November 30, 2018. During the three months ended November 30, 2019, approximately $756,000 was spent on the investment of cash in GICs during the period. Investing activities during the three months ended November 30, 2018 were largely attributable solely to expenditures on property, equipment and intangibles.

Net cash used in financing activities during the three months ended November 30, 2019 was $291,889, related to cash used to repurchase and retire 298,755 shares of common stock of the Company under the NCIB. There were no cash flows from financing activities during the three months ended November 30, 2018.

CRITICAL ACCOUNTING POLICIES

We prepare our interim condensed 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.

There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended August 31, 2019 as filed with the SEC on November 18, 2019 except for those described in Note 8, "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

NEW ACCOUNTING PRONOUNCEMENTS

Please refer to Note 8 "New Accounting Pronouncements" in the notes to our Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Foreign Exchange Risk

Our revenues are primarily in United States dollars and Euros while our operating expenses are primarily in Canadian 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 Canadian dollar to these currencies. During the three months ended November 30, 2019, as a result of fluctuations in the Euro, and the Australian, Canadian, and US dollars, the Company recognized a negative impact on reported revenues and a positive impact on reported operating expenditures, for an overall marginal positive impact on reported net income.

Item 4.  Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with this quarterly report, as required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company's management, including our company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that as of November 30, 2019, our disclosure controls and procedures were effective as at the end of the period covered by this report.


Changes in Internal Control over Financial Reporting

Effective November 30, 2019, our Chief Financial Officer resigned.  Where internal controls rely on a separation of duties between the CEO and the CFO, our internal controls may be temporarily affected in that respect subsequent to November 30, 2019. 

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

On September 5, 2017, the Company's former President and Chief Executive Officer, Mr. Steve Vestergaard, 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.

Item 1A. Risk Factors.

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in "Item 1 - Risk Factors" in our Form 10-K for the fiscal year ended August 31, 2019 filed with the SEC. These risks could materially and adversely affect our business, financial condition and results of operations. The risks described in our Form 10-K have not changed materially, however, they are not the only risks we face. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1* Section 302 Certification of Chief Executive Officer 
   
31.2* Section 302 Certification of Chief Financial Officer 
   
32.1* Section 906 Certification of Chief Executive Officer and Chief Financial Officer 
   
101*   Interactive Data File 

*    Filed herewith


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DESTINY MEDIA TECHNOLOGIES, INC.

By: /s/Frederick Vandenberg______________________

 Frederick Vandenberg

              Chief Executive Officer, President

 (Principal Executive Officer)

 Date: January 15, 2020

By: /s/Frederick Vandenberg______________________

 Frederick Vandenberg

              Chief Financial Officer, Treasurer

 (Principal Financing and Accounting Officer)

 Date: January 15, 2020