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 subsidiaries: Destiny Software Productions Inc., a British Columbia company that was incorporated in 1992, MPE Distribution, Inc., a Nevada company that was incorporated in 2007, Tonality, Inc., a Nevada company that was incorporated in 2021, and Sonox Digital Inc., incorporated under the Canada Business Corporations Act in 2012. 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 Vancouver, British Columbia, V6G 2V3, Canada. 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".
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.
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.
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 Google Chromecast and Apple Airplay streaming capabilities, creation of playlists, sorting, flagging and archiving features, and easier to access release metadata. Recipient side satisfaction directly increases activity which directly improves the effectiveness of promotional efforts of record label customers.
Recipients on the Play MPE® platform have a wide variety of personas and include programming directors for internet streaming, satellite or terrestrial radio, retail store broadcasters, sports stadium DJs, clubs, events, music reviews in newspapers or magazines, on-air personalities, music supervisors who program TV, movies, commercials or video games, or "A&R" representatives at larger record labels. Each recipient within the Play MPE® platform has a unique library of music catered and appropriate for that recipient.
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 MAY 31, 2022 AND 2021
Revenue
Total revenue for the nine months ended May 31, 2022 decreased by approximately 3.5% to $3,029,853 compared to the revenue of $3,138,663 for the nine months ended May 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 in North America and Africa during the nine months ended May 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 ended May 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 ended May 31, 2022 was 84.2% of revenue, which represents a decrease of 6.9% from the nine months ended May 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 ended May 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.
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 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 nine months ended May 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 ended May 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 ended May 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 ended May 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 |
$ |
772,163 |
|
$ |
1,004,839 |
|
|
(232,676 |
) |
|
-23.2% |
|
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 ended May 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.
| |
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 |
$ |
944,943 |
|
$ |
961,930 |
|
|
(16,987 |
) |
|
-1.8% |
|
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 ended May 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 ended May 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 ended May 31, 2022 from $77,388 for the nine months ended May 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 $4,693 for the nine months ended May 31, 2022 (May 31, 2021 - $3,162).
Net Income (Loss)
During the three and nine months ended May 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 ended May 31, 2022, adjusted EBITDA was $106,548 (May 2021 - $108,577). Adjusted EBITDA is not defined under U.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 |
|
LIQUIDITY AND FINANCIAL CONDITION
As at May 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 May 31, 2022, we had working capital of $2,434,710 compared to $2,561,480 as at August 31, 2021. During the nine months period ended May 31, 2022, the Company completed NCIB purchases totaling $179,401 (May 31, 2021 - $ 218,682).
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 ended May 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 ended May 31, 2022 was $383,015, compared to cash provided by investing activities of $702,412 for the nine months period ended May 31, 2021. During the nine months period ended May 31, 2021, $800,624 was received on the maturity of our GICs. During the nine months ended May 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 ended May 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 in the 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 ended May 31, 2022.
OFF-BALANCE SHEET ARRANGEMENTS
As of May 31, 2022, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.