DESTINY MEDIA TECHNOLOGIES INC. 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 theSecurities 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 inAugust 1998 under the laws of theState of Colorado and the corporate jurisdiction was changed toNevada effectiveOctober 8, 2014 . We carry out our business operations through our wholly owned subsidiaries:Destiny Software Productions Inc. , aBritish Columbia company that was incorporated in 1992,MPE Distribution, Inc. , aNevada company that was incorporated in 2007,Tonality, Inc. , aNevada company that was incorporated in 2021, andSonox Digital Inc. , incorporated under theCanada Business Corporations Act in 2012. The "Company", "Destiny Media", "Destiny", "we" or "us" refers to the consolidated activities of all five companies.
Our principal executive office is located at 428 - 1575 West Georgia Street
Our common stock trades on
Our corporate website is located at http://www.dsny.com.
OUR PRODUCTS AND SERVICES
Destiny develops and markets software as a service (SaaS) solution that solves
critical digital distribution and promotion problems for businesses in the music
industry. The core of our business is Play MPE®. 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. Music is protected by Play MPE®'s patented
proprietary watermarking system which provides watermarks unique to each
recipient.
Destiny is currently developing additional functionality and services that are
expected to increase the services to existing platform users and therefore
expand Play MPE®'s addressable market, or act as catalysts to the Company's
sales activities. As well, the Company is investing into research and
development on incremental product offerings expected to add addressable market
opportunities.
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Play MPE®
The Company's core business is the Play MPE® platform. Play MPE® is a two-sided
B2B marketplace that enables music labels and artists to distribute promotional
content and musical assets on the one side, and for music broadcasting
professionals, music curators and music reviewers to discover, download,
broadcast and review the music, on the other. Play MPE® provides a
software-based tool to assist record labels and artists in marketing their
music. Record labels and artists are Play MPE®'s customers and pay for
submission into the system. Recipients are provided no charge access to review
music. When adding music to the Play MPE® system, record labels are targeting
specific industry recipients who review and broadcast their music. With this
marketing effort, record labels are targeting an increase in their revenue
directly 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 (for example concert ticket
sales etc.).
Customers range from small independent artists to the world's largest record
labels (the "Major Record Labels"), such as Universal Music Group ("Universal"),
Warner Music Group ("Warner") and Sony Music Entertainment ("Sony"). Customers
choose Play MPE® for its powerful set of tools, ease of use and its
effectiveness in achieving the record label's promotional objectives. Recipients
enjoy easy access to desirable music in high quality audio files.
Play MPE® CASTER (Distribution software)
Play MPE®'s Caster is a full-service distribution management system that includes a complete set of operational functions that provide all necessary software tools to enable labels to manage global marketing campaigns. Broadly, these components include administration functions and distribution functions. Administration functions allow management of labels and sub-labels, management of the assets (audio files, video files, and associated cover art, artist information) that are distributed, and management of client-side users and user permissions (roles with selectable capabilities). Distribution management functions offer powerful contacts management capabilities, release creation, distribution announcements and distribution scheduling, digital rights management by release and by recipient, and release replication and its associated scheduling and digital rights management components. This full suite of tools within Play MPE® was developed for the music industry and in close collaboration with Universal to cater the functions to its global marketing workflow. Many clients do not use the full suite of tools. However, this full set of tools is critical to Universal's global promotional campaign workflow and the core reason Play MPE® distributes internationally for Universal.
Caster is available in English, Spanish, German, Japanese and French.
Play MPE® is a permissions-only access system such that only recipients
designated or targeted to receive content obtain access to that content. Record
labels can use Play MPE®'s contacts management system to administer recipient
lists. Contacts management offers several 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 leads to inaccuracies. The functionality within the
contacts management system is critically important to both distribution hubs at
Universal and the Play MPE® operations team to efficiently maintain accurate and
active recipient lists.
Within Play MPE®'s contacts management platform, the Company's operations team
offers for sale carefully curated and actively maintained recipient lists with
more than 14,000 music curators around the world. These lists include complete
lists in 12 countries and lists under construction in an additional 38. These
selectable lists eliminate the need for our clients to maintain current
recipient contact information. These lists offer significant value to all
customers and are critical for smaller independent labels and artists who do not
have the resources to maintain current contacts. Without these curators lists,
many sales would not be possible. As active lists in new territories are
completed, Play MPE® will grow revenue.
In addition to the contacts management functionality, the Play MPE® product and
engineering staff are developing new technical processes to facilitate list
development and maintenance. With these technical solutions, it is expected that
Play MPE® will expand saleable lists and thereby increase revenue.
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Play MPE® Player
Music curators enjoy free access to review and download content through an easy-to-use web-based player or 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.
In developing Play MPE®'s recipient interfaces, the Company's product and engineering teams focus on providing a very positive user experience. 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
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.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
Revenue
Total revenue for the nine months endedMay 31, 2022 decreased by approximately 3.5% to$3,029,853 compared to the revenue of$3,138,663 for the nine months endedMay 31, 2021 ; however, adjusted for impacts of foreign currency translation Play MPE® revenue increased 0.3% period over period. The negative impact of the foreign currency translation can be attributed to the decline in the value of the Euro and the Australian dollar relative to the US dollar period over period. Play MPE® revenue earned inNorth America andAfrica during the nine months endedMay 31, 2022 , has grown period over period. Notwithstanding the negative impact of foreign currency translation, Play MPE® revenue earned in the European segment has also grown period over period. Foreign currency fluctuations impacted the most recent quarter more strongly. Total revenue for the three months endedMay 31, 2022 showed a nominal decrease of 2.3% after adjusting for foreign exchange but decreased by 7.8% over the comparable quarter in fiscal 2021 to$999,282 (May 31, 2021 -$1,083,987 ) with no adjustment for foreign currency changes.
Gross Margin
Gross margin for the nine months endedMay 31, 2022 was 84.2% of revenue, which represents a decrease of 6.9% from the nine months endedMay 31, 2021 . The Company's cost of revenue consists of data hosting and processing charges, third party transaction related costs, and engineering, technical and customer support costs. These costs are driven by the size and volume of customer transactions processed, as well as the relative proportion of 'full service' versus 'self-service' revenue. Our self-service sales are derived from customers who have been provided with a customer account to access our encoder to independently upload and publish releases. Our full-service revenue is derived from customers who are fully serviced by our internal staff, who prepare and publish releases on their behalf. During the period endedMay 31, 2022 , our gross margin decreased over the comparative period predominately due to increase in costs associated with the hosting services and increased staffing in technical and customer support departments. 13
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Operating Expenses
Our technologies and products are developed and maintained in-house, the majority of our expenditures are contributed towards salaries, wages and benefits. Our operations are primarily conducted inCanada 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 nine months endedMay 31, 2022 increased by 1.4% to$2,607,336 (May 31, 2021 -$2,570,979 ). The increase in costs was primarily the result of increased staffing and higher non-cash stock-based compensation recorded in the period due to share-based awards granted during the nine months endedMay 31, 2022 . This additional staffing was brought on board to support expanded development of the Play MPE® platform and additional operational staff to support expanded technical support and distribution list development. The additional staff is focused on items designed to accelerate revenue growth of Play MPE® and expand the addressable market. The increase in costs were slightly offset by a decrease in value of the Canadian dollar relative to the US dollar. Nine Months Ended May 31, General and administrative expenses 2022 2021 $ Change % Change Wages and benefits$ 423,266 $ 209,442 213,824 102.1% Professional fees 98,290 169,291 (71,001 ) -41.9% Office and miscellaneous 83,674 55,550 28,124 50.6% Shareholder relations 52,940 47,640 5,300 11.1% Rent 39,187 15,391 23,796 154.6% Foreign exchange loss 34,779 21,838 12,941 59.3% Telecommunications 26,109 2,045 24,064 1176.7% Bad debt 18,772 (4,444 ) 23,216 -522.4% Other 23,156 10,069 13,087 130.0% Total general and administrative expenses$ 800,173 $ 526,822 273,351 51.9% Our general and administrative expenses consist of salaries and related personnel costs including overhead, office rent, professional fees, shareholder relations, and general office expenses. The increase in salaries and wages can be explained by increased non-cash stock-based compensation due to the number of share-based awards granted during the nine months endedMay 31, 2022 and one-time staff recruitment fees. The significant decrease in professional fees was due to the timing of litigation proceedings in the comparative period endedMay 31, 2021 . Nine Months Ended May 31, Sales and marketing expenses 2022 2021 $ Change % Change Wages and benefits$ 644,358 $ 863,595 (219,237 ) -25.4% Advertising and marketing 89,338 36,498 52,840 144.8% Rent 36,064 91,016 (54,952 ) -60.4% Telecommunications 2,403 13,730
(11,327 ) -82.5%
Total sales and marketing expenses
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 decrease in wages and benefits and rent relates to restructuring changes to the team incurred in the comparative period endedMay 31, 2021 . The increase in advertising and marketing expenses is related to increased sponsorship, advertising, and attendance at industry events in the first three quarters of the fiscal year. 14 -------------------------------------------------------------------------------- Nine Months Ended May 31, Product development expenses 2022 2021 $ Change % Change Wages and benefits$ 775,142 $ 786,786 (11,644 ) -1.5% Software services 54,829 53,732 1,097 2.0% Rent 73,159 69,016 4,143 6.0% Telecommunications 41,813 52,396 (10,583
) -20.2%
Product development expenses
Product development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. During the period endedMay 31, 2022 , the Company increased development staffing to accelerate new additions to the product roadmap designed to increase the addressable market and facilitate faster market acquisition. The decrease in wages and benefits reflects the capitalization of a portion of these costs. During the nine months endedMay 31, 2022 ,$331,601 in wages and benefits paid to product development staff were capitalized to software under development intangible assets and$259,801 of the capitalized wages and benefits was subsequently reclassified to computer software fixed assets as the products were completed.
Depreciation and Amortization
Depreciation and amortization expense increased to$90,059 for the nine months endedMay 31, 2022 from$77,388 for the nine months endedMay 31, 2021 , an increase of 16.4% due to depreciation of additionally capitalized software development costs associated with Play MPE® recipient player applications during the period. Other Income
Interest income earned on the Company's Guaranteed Investment Certificates was
Net Income (Loss)
During the three and nine months endedMay 31, 2022 we had net loss of$3,242 and$40,251 , respectively (May 31, 2021 - net income of$69,594 and$290,830 , respectively). For the three months endedMay 31, 2022 , adjusted EBITDA was$106,548 (May 2021 -$108,577 ). Adjusted EBITDA is not defined underU.S. GAAP and it may not be comparable to similarly titled measures reported by other companies. We used Adjusted EBITDA, along with other GAAP measures, as a measure of our profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe Adjusted EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to Adjusted EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by the Company. Adjusted EBITDA has limitations as a profitability measure in that it does not include provisions for income taxes, the effect of our expenditures on capital assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of net income (loss) from operations to Adjusted EBITDA over the eight most recently completed fiscal quarters: Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Net Income (Loss)$ (3,242 ) $ (202,610 ) $ 165,601 $ 91,699 $ 69,594 $ (29,466 ) $ 250,702 $ 158,187 Stock-based compensation 75,163 68,789 25,905 12,620 13,133 26,400 12,848 17,936 Depreciation, amortization, and deferred leasehold inducements 36,313 26,574 27,172 27,969
26,673 13,133 24,315 34,641 Interest income (1,686 ) (1,964 ) (1,043 ) (869 ) (823 ) (875 ) (1,464 ) (4,672 ) Adjusted EBITDA$ 106,548 $ (109,211 ) $ 217,635 $ 131,419 $ 108,577 $ 9,192 $ 286,401 $ 206,092 15
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LIQUIDITY AND FINANCIAL CONDITION
As atMay 31, 2022 , we held$1,953,454 (August 31, 2021 -$2,752,662 ) in cash and cash equivalents. Our cash equivalents consisted of one-year Guaranteed Investment Certificates held through a major Canadian financial institution and had reached their maturity.
At
Cash Flows
The following table sets forth a summary of the net cash flow activity for each of the periods indicated:
Nine Months Ended May 31,
Net cash and cash equivalents
provided by (used in) 2022 2021 $ Change % Change
Operating activities $ (217,515 ) $ 437,538 (655,053 ) -149.7%
Investing activities (383,015 ) 702,412 (1,085,427 ) -154.5%
Financing activities (190,676 ) (218,682 ) 28,006 -12.8%
Effect of foreign exchange rate
changes on cash (8,002 ) 171,967 (179,969 ) -104.7%
Net increase (decrease) in cash
and cash equivalents $ (799,208 ) $ 1,093,235 (1,892,443 ) -173.1%
Net cash used in operating activities during the nine months period endedMay 31, 2022 was$217,515 (May 31, 2021 - cash provided was$437,538 ). The primary reason for the decrease in cash flows from operating activities is related to the timing of receipts from our customers. Net cash used in investing activities for the nine months endedMay 31, 2022 was$383,015 , compared to cash provided by investing activities of$702,412 for the nine months period endedMay 31, 2021 . During the nine months period endedMay 31, 2021 ,$800,624 was received on the maturity of our GICs. During the nine months endedMay 31, 2022 , the contributions made towards investing activities was cash spent on new capital assets and internally developed software. Net cash used in financing activities during the nine months period endedMay 31, 2022 was$190,676 (May 31, 2021 -$218,682 ), related to cash used to repurchase and retire 143,100 shares of common stock (May 31, 2021 - 114,400 shares of common stock) of the Company under the NCIB and to repurchase stock options.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGEMENTS AND ESTIMATES
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States , or GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a description of our critical accounting policies, see the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" and "Financial Statements and Supplementary Data - Note 2, Summary of Significant Accounting Policies" contained in our 2021 Form 10-K. There have not been any material changes to the critical accounting policies discussed therein during the nine months endedMay 31, 2022 .
OFF-BALANCE SHEET ARRANGEMENTS
As of
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