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 subsidiary,Destiny Software Productions Inc. , aBritish Columbia company that was incorporated in 1992,MPE Distribution, Inc. aNevada company that was incorporated in 2007 andSonox 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,
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) 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).
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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.
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-------------------------------------------------------------------------------- InMay 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
Revenue
Total revenue for the three months ended
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 endedNovember 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, includingthe United States ,Europe , andAustralia , 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 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 three months endedNovember 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. 18
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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 endedNovember 30, 2019 from$20,624 for the three months endedNovember 30, 2018 , an increase of 55.5% due to an increase in computer software costs associated with externally developed Play MPE® recipient player applications. 19
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Other earnings and expenses
Interest income was
Net income
During the three months endedNovember 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 endedNovember 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 endedNovember 30, 2019 . AtNovember 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 ). AtNovember 30, 2019 , we had working capital of$2,476,991 , compared to$2,809,689 as atAugust 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 theTSX Venture Exchange , which commenced inSeptember 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 endedNovember 30, 2019 was$86,245 , compared to$264,266 for the three months endedNovember 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. 20 -------------------------------------------------------------------------------- Net cash used in investing activities for the three months endedNovember 30, 2019 was$766,603 , compared to$7,215 for the three months endedNovember 30, 2018 . During the three months endedNovember 30, 2019 , approximately$756,000 was spent on the investment of cash in GICs during the period. Investing activities during the three months endedNovember 30, 2018 were largely attributable solely to expenditures on property, equipment and intangibles. Net cash used in financing activities during the three months endedNovember 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 endedNovember 30, 2018 .
CRITICAL ACCOUNTING POLICIES
We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted inthe 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 endedAugust 31, 2019 as filed with theSEC onNovember 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.
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