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DSNY > SEC Filings for DSNY > Form 10-Q on 15-Apr-2013All Recent SEC Filings

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Form 10-Q for DESTINY MEDIA TECHNOLOGIES INC


15-Apr-2013

Quarterly Report


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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 accompanying this Quarterly Report, 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. The 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. 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 and Sonox Digital Inc., incorporated under the Canada Business Corporations Act on June 28, 2012. The "Company", "Destiny" or "we" refers to the consolidated activities of all three companies.

Our principal executive office is located at Suite 750, PO Box 11527, 650 West Georgia Street, Vancouver, British Columbia V6B 4N7. 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 OTCBB and OTCQX 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 services that enable the secure distribution of digital media content over the internet. Destiny services are based around proprietary security, watermarking and playerless streaming media technologies.

Currently, more than 95% of the Company's revenues come from the Play MPEŽ digital distribution service, which the recording industry uses to distribute new pre-release music and music videos to trusted recipients before that content is generally available for sale to the public.

The remaining 5% of revenue is generated from legacy sales of ClipstreamŽ, a playerless streaming video solution first launched in 1999. The bulk of these revenues are generated by services provided to the market research industry, which has adopted our solution because of the higher "play rates" and the higher level of security in our offering. ClipstreamŽ powered videos are integrated into video questionnaires for use in market research surveys. The market research industry prefers our solution because the successful view rates are higher and because the security is more mature than other solutions. Videos can be secured to play only from authorized URL's and they actively block "screenscraping" programs that might try to download the video locally. In addition, videos are watermarked, so the source of unauthorized content can be identified.


This legacy technology relies on a plugin from Oracle to be bundled into the browser and the install rate of this plugin has declined significantly since launch thirteen years ago. This first generation of ClipstreamŽ generally does not work at all on smart phones and other devices.

The introduction of new browsers supporting HTML 5 has created a new opportunity. The Company is actively developing a second generation version of ClipstreamŽ, which works natively on almost all modern browsers. We believe this new technology is disruptive to existing paradigms as streaming video encoded in this format can be hosted from any brand of web page server and it will play directly across desktops, laptops, smart phones, tablets, e-book readers, internet enabled TV's and other devices, including future devices still under development. As the streams are served by HTTP progressive download, they can be reused potentially reducing the bandwidth and hardware infrastructure required at the source. ClipstreamŽ G2 is cross platform which results in savings from the elimination of costs associated with re-encoding videos into multiple formats (transcoding) and costs of the extra storage, power, air conditioning, staff and facility space required by competitive offerings. The solution is playerless and does not rely on third party plug-ins.

Play MPEŽ

Play MPEŽ is a digital delivery service for securely moving broadcast quality audio, video, images, promotional information and other digital content securely 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. The system replaces the physical distribution (mail, courier or hand delivery) of CD's. As with traditional physical delivery, our fees are based on the size of the content and number of recipients.

More than 1,000 record labels, including all four major labels (Universal Music Group, Warner Music Group, EMI and Sony), are regularly using Play MPEŽ to deliver their content to radio.

ClipstreamŽ Legacy

ClipstreamŽ is an innovative "instant play" solution for playback of streaming audio and streaming video. Unlike Windows Media Player or Quicktime, there is no player that has to launch for the content to playback. The ClipstreamŽ software suite enables audio or video content to be "streamed" so that the media plays instantly and automatically when the user initiates playback. Creating streaming video content with other technologies can be a complicated process and in most cases, users are required to purchase and maintain streaming servers. With ClipstreamŽ, content owners simply encode the content into the ClipstreamŽ format, then upload to an existing website.

ClipstreamŽ encoded content plays instantly in most cases, without requiring the user to download CODECS or player software. This results in a much higher play rate for site owners and because there is no player executable, users are not exposed to viruses, trojan horses or unstable code that could crash their computer or spy on them.

ClipstreamŽ Generation 2

The Company has released a working prototype of a new disruptive second generation streaming video technology. The Company is continuing development with a goal of launching this product commercially sometime in the current fiscal year.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2013

Revenue


Total revenue for the six months ended February 28, 2013 declined slightly over the same period in the prior year to $1,944,189 (February 29, 2012 - $2,019,442).

Revenue from the Play MPEŽ system, which represents over 95% of our total revenues, fell by 4.2% for the six months ended February 28, 2013 compared with the same period in the prior year to $1,849,663 (February 29, 2012 - $1,931,471). This decrease was attributable to unfavorable foreign exchange rate fluctuations between the US dollar and the Euro and a reduction in releases across various markets.

Approximately 41% of our Play MPEŽ revenue is denominated in Euros for the six months ended February 28, 2013. Play MPEŽ revenue from Europe for the six months ended February 28, 2013 was $799,014 (February 29, 2012 - $851,936) representing a decrease of 6.2%. European revenue is currently concentrated in the United Kingdom and the Scandinavian countries. Approximately 53% of Play MPEŽ revenue is denominated in US Dollars and 3% of Play MPEŽ revenue is denominated in Australia Dollars for the six months ended February 28, 2013.

Operating Expenses

Overview

As our technologies and products are developed and maintained in-house, the majority of our expenditures is on salaries and wages and associated expenses; office space, supplies and benefits. Our operations are primarily conducted in Canada and the majority of our costs are incurred in Canadian dollars while the majority of our revenue is in US dollars and Euros. As a result, our results of operations are impacted by fluctuations in the relevant exchange rates.

Total operating expenditures for the six months ended February 28, 2013 have decreased by 24.0% over the same period in the prior year to $1,746,675 (February 29, 2012 - $2,296,928). The decrease is mainly attributed to decreased professional fees as a result of the settlement of litigation reached during the third quarter of 2012.

General and administrative        28-Feb         29-Feb          $            %
                                   2013           2012         Change      Change
                                (6 months)     (6 months)
                                    $              $
     Wages and benefits            196,680        195,960          720        0.4%
     Rent                           14,581         18,059       (3,478 )    (19.3% )
     Telecommunications              8,899          9,311         (412 )     (4.4% )
     Bad debt                        3,934         (1,973 )      5,907     (299.4% )
     Office and miscellaneous       83,756        184,222     (100,466 )    (54.5% )
     Professional fees              81,747        503,546     (421,799 )    (83.8% )
                                   389,597        909,125     (519,528 )    (57.1% )

Our general and administrative expenses consist primarily of salaries and related personnel costs including overhead, professional fees, and other general office expenditures.

The decrease in office and miscellaneous is related to foreign exchange gains during the current period, mostly as a result of fluctuations in the value of the Euro, which impacts an cash and accounts receivable balances denominated in that currency.

The decrease in professional fees is primarily the result of the settlement of litigation described above, and the resolution of a wrongful dismissal claim from a former employee in the fourth quarter of 2012. Significant costs were incurred to effect these settlements in the comparative period.


Sales and marketing                28-Feb         29-Feb         $           %
                                    2013           2012        Change      Change
                                 (6 months)     (6 months)
                                     $              $
     Wages and benefits             291,742        224,344      67,398      30.0%
     Rent                            21,628         19,187       2,441      12.7%
     Telecommunications              13,200          9,893       3,307      33.4%
     Meals and entertainment          6,194          5,865         329       5.6%
     Travel                          20,353         38,535     (18,182 )   (47.2% )
     Advertising and marketing       90,483         94,846      (4,363 )    (4.6% )
                                    443,600        392,670      50,930      13.0%

Sales and marketing expenses consist primarily of salaries and related personnel costs including overhead, sales commissions, advertising and promotional fees, and travel costs. The increase in wages and benefits is mainly due to an increased focus from our existing staff on marketing and promotional activities in the current period. The lower travel expenses were due to various sales related trips to Japan and Europe in the comparative period.

Research and development          28-Feb         29-Feb          $           %
                                   2013           2012         Change      Change
                                (6 months)     (6 months)
                                    $              $
     Wages and benefits            765,413        832,823      (67,410 )    (8.1% )
     Rent                           56,743         76,749      (20,006 )   (26.1% )
     Telecommunications             34,631         39,573       (4,942 )   (12.5% )
     Research and development          645         15,249      (14,604 )   (95.8% )
                                   857,432        964,394     (106,962 )   (11.1% )

Research and development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. Rent expense has decreased as a result of a rent abatement received during the current quarter. Third party research and development costs decreased due to costs related to building out the functionality of the Play MPEŽ player in the comparative period.

Amortization

Amortization expense arises from property and equipment, and from patents and trademarks. Amortization increased to $56,046 for the six months ended February 28, 2013 from $30,739 for the six months ended February 29, 2012, an increase of $25,307 or 82.3% as a result of the development of new ClipstreamŽ applications and resulting applications made for various patents and trademarks to protect these products.

Other earnings and expenses

Interest income increased to $40,734 for the six months ended February 28, 2013 from $4,971 for the six months ended February 29, 2012, an increase of $35,763. This is a result of interest income earned on the amount receivable pursuant to the litigation settlement described above.

Interest expense decreased to $Nil for the six months ended February 28, 2013 from $1,180 for the six months ended February 29, 2012, a decrease of $1,180.


Net income

During the six months ended February 28, 2013 we have net income of $173,248 (February 29, 2012 - net loss of $273,695). The increase in net income during the period is the result of a large decrease in professional fees, partially offset by increased salaries and wages costs due to additional staff.

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:

               2011 Q3     2011 Q4     2012 Q1     2012 Q2      2012 Q3     2012 Q4     2013 Q1     2013 Q2
                 $           $           $            $           $            $           $          $
Net Income     230,720     377,952      12,555     (286,250 )   651,141     185,557     160,050      13,198
Amortization    14,943      18,625      15,785       57,485      24,514      34,219      27,656      28,390
and stock
compensation
Deduct          (1,302 )    (4,918 )    (2,178 )     (1,613 )   (22,642 )   (20,434 )   (20,666 )   (20,068 )
interest
income
Income tax      94,000      67,000       5,000       (5,000 )   190,000      18,000      65,000           -
Adjusted       338,361     458,659      31,162     (235,378 )   843,013     217,342     232,040      21,520


EBITDA

LIQUIDITY AND FINANCIAL CONDITION

We had cash of $1,111,490 as at February 28, 2013 (August 31, 2012 - $1,275,423). The decrease in our cash was mainly due to a decrease in accounts payable. We had working capital of $1,785,451 as at February 28, 2013 compared to working capital of $1,641,032 as at August 31, 2012.

CASHFLOWS

Net cash provided by operating activities was $13,861 for the six months ended February 28, 2013, compared to net cash used of $449,481 for the six months ended February 29, 2012. The main reason for the decrease in net cash flows used in the operating activities was primarily due to cash receipts from a long term receivable arising from a legal settlement in the third quarter of 2012, as well as an increase in receivables balances in the comparative period.

The cash used in investing activities was $39,945 for the six months ended February 28, 2013. The net cash used in investing activities was $62,114 for the six months ended February 29, 2012. Cash used in investing activities are largely attributable to the development of new ClipstreamŽ applications and the resulting applications made for various patents and trademarks to protect these products.

Net cash used in financing activities was $99,762 for the six months ended February 28, 2013 compared to net cash provided of $274,856 for the six months ended February 29, 2012. The change is mainly the result of share purchase warrants exercised during the second quarter of fiscal 2012 and the reimplementation of the share buyback program during the second fiscal quarter of 2013 and the subsequent repurchase of shares for return to the treasury.


RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

In February 2013, the FASB issued Accounting Standards Update 2013-02, "Other Comprehensive Income (Topic 220)". The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This accounting standard update is effective prospectively for annual and interim periods beginning after December 15, 2012. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

We prepare our interim 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.

The following critical accounting policies affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 985-605, Revenue Recognition. Accordingly, revenue is recognized when there is persuasive evidence of an arrangement, delivery to the customer has occurred, the fee is fixed and determinable, and collectability is considered probable.

The majority of our revenue is generated from digital media distribution service. The service is billed on usage which is based on the volume and size of distributions provided on a monthly basis. All revenues are recognized on a monthly basis as the services are delivered to customers, except where extended payment terms exist. Such revenues are only recognized when the extended payment term expires.

At present, the Company does not have yet have a standard business practice for contracts that contain extended payment terms, and therefore recognizes revenue from such contracts when the payment terms lapse and all other revenue criteria have been met.

Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period material differences in the amount and timing of revenue recognized could result.

Stock-Based Compensation

We recognize the costs of employee services received in share-based payment transactions according to the fair value provisions of the current share-based payment guidance. The fair value of employee services received in stock-based payment transactions is estimated at the grant date and recognized over the requisite service period. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life.


We selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value of our share-based awards. The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the option's expected term and the price volatility of the underlying stock. Our current estimate of volatility is based on historical and market-based implied volatilities of our stock price. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing stock-based compensation cost recognized in future periods. We derive the expected term assumption primarily based on our historical settlement experience, while giving consideration to options that have not yet completed a full life cycle. Stock-based compensation cost is recognized only for awards ultimately expected to vest. Our estimate of the forfeiture rate is based primarily on our historical experience. To the extent we revise this estimate in the future, our share-based compensation cost could be materially impacted in the quarter of revision, as well as in the following quarters. In the future, as empirical evidence regarding these input estimates is available to provide more directionally predictive results, we may change or refine our approach of deriving these input estimates.

Research and Development Expense for Software Products

Research and development expense includes costs incurred to develop intellectual property. The costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. We have determined that technological feasibility is established at the time a working model of software is completed. Because we believe our current process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

Significant management judgments and estimates must be made in connection with determination of any amounts identified for capitalization as software development costs in any accounting period. If we made different judgments or utilized different estimates for any period material differences in the amount and timing of capitalized development costs could occur.

Accounts Receivable and Allowance for Doubtful Accounts

We extend credit to our customers based on evaluation of an individual customer's financial condition and collateral is generally not required. Accounts outstanding beyond the contractual payment terms are considered past due. We determine our allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are beyond the contractual payment terms, our previous loss history, and a customer's current ability to pay its obligation to us. We write-off accounts receivable when they are identified as uncollectible. All outstanding accounts receivable accounts are periodically reviewed for collectability on an individual basis.

Income Taxes

Deferred income tax assets and liabilities are computed based on differences between the carrying amount of assets and liabilities on the balance sheet and their corresponding tax values using the enacted income tax rates by tax jurisdiction at each balance sheet date. Deferred income tax assets also result from unused loss carry-forwards and other deductions. The valuation of deferred income tax assets is reviewed annually and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable amount. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate all available evidence, such as recent and expected future operating results by tax jurisdiction, and current and enacted tax legislation and other temporary differences between book and tax accounting to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. There is a risk that . . .

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