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

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Form 10-Q for DESTINY MEDIA TECHNOLOGIES INC


15-Jul-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 four 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.

The Company has a core business distributing secure pre-release music and music videos to trusted recipients on behalf of the major record labels and has completed R&D on a new player-less streaming video product, ClipstreamŽ. A number of products are being built around this streaming video engine, with the first expected to launch in the first quarter of 2014. Expenses associated with this initiative have been expensed, while patent expenses have been capitalized.

ClipstreamŽ is a disruptive technology that delivers streaming video in a manner that solves a number of industry challenges and has a number of significant advantages over other video technologies. Videos in the new ClipstreamŽ format will play on most browsers, reducing or eliminating the need to transcode or host multiple formats and will reach more users and more devices. Because it is served by a web server rather than a proprietary streaming server, it will cache, substantially reducing costs associated with bandwidth and infrastructure costs. With no players to download or install and native support from all modern browsers, ClipstreamŽ encoded content will have the highest play rate (35% higher than H.264, the next most common format across computers and devices). Unlike other HTML 5 solutions, ClipstreamŽ content can easily be secured from unauthorized viewing or duplication to unauthorized domains. Finally, videos encoded in our format are expected to have the greatest longevity as future browser standards will ensure play back in browsers.


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.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 31, 2013

Revenue

Total revenue for the nine months ended May 31, 2013 declined 7.4% over the same period in the prior year to $2,818,055 (May 31, 2012 - $3,042,363).

Revenue from the Play MPEŽ system, which represents approximately 96% of our total revenues, fell by 7.6% for the nine months ended May 31, 2013 compared with the same period in the prior year to $2,695,102 (May 31, 2012 - $2,916,868). The decrease for the nine-month period is attributable to various terms reached in a renewed agreement with Universal Music Group (UMG). Amongst other things, the two-year renewal was restructured to reduce the amount that is considered chargeable usage and provides a global monthly committed usage rather than individual territory commitments. Further, revenue associated with UMG distributions of EMI content is now included under this agreement and also contributes the reduction. This restructuring was necessary to facilitate the expansion of UMG's usage into new territories and facilitates a broader coverage in existing territories. Revenue associated with this agreement is currently at the monthly committed usage and should only increase in future periods.

There were a number of positive impacts for Play MPEŽ revenue which partially offset this decline. In Scandinavia, Play MPEŽ has shown strong growth with other major labels (46% growth over the prior period) and independent labels (75% growth over the prior period) in spite of decline in the relative value of the Euro. In the United States, Play MPEŽ continues to see growth in independent label revenue (2%), and non-UMG major labels (3%).

Approximately 48% of our Play MPEŽ revenue is denominated in Euros for the nine months ended May 31, 2013. European revenue is currently concentrated in the United Kingdom and the Scandinavian countries. Approximately 48% of Play MPEŽ revenue is denominated in US Dollars and 3% of Play MPEŽ revenue is denominated in Australia Dollars for the nine months ended May 31, 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 in the prior year were significantly impacted by litigation through both the legal fees incurred and the settlement that it applied to reduce total legal fees. Comparing the two periods without describing this impact is less meaningful. Ignoring the impact of all litigation total operating costs were $2,577,453 for the nine-month period ending May 31, 2013 and $2,757,412 for the same period in fiscal 2012. Therefore, ignoring the impact of various legal disputes that have been substantially resolved, operating costs have fallen by 6.5%.

These cost reductions are primarily the result of a reduction in foreign exchange gains, and a reduction in contract expenditures and salaries and wages. These reductions were achieved through more efficient staffing, and a reduction in non-cash option expenditures.

Including all operating costs, total operating expenditures for the nine months ended May 31, 2013 have increased by 4.0% over the same period in the prior year to $2,604,853 (May 31, 2012 - $2,505,812).

General and administrative        31-May         31-May         $            %
                                   2013           2012        Change      Change
                                (9 months)     (9 months)
                                    $              $
     Wages and benefits            290,067        293,310      (3,243 )     (1.1% )
     Rent                           24,156         27,033      (2,877 )    (10.6% )
     Telecommunications             13,262         13,758        (496 )     (3.6% )
     Bad debt                        5,893         (4,958 )    10,851     (218.9% )
     Office and miscellaneous      204,476        292,224     (87,748 )    (30.0% )
     Professional fees             137,600       (181,793 )   319,393     (175.7% )
                                   675,454        439,574     235,880       53.7%

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 increase in professional fees is the result of the recovery of litigation costs in 2012 that resulted in a negative net expenditure for the comparative period.

Sales and marketing                31-May         31-May         $           %
                                    2013           2012        Change      Change
                                 (9 months)     (9 months)
                                     $              $
     Wages and benefits             440,487        323,179     117,308      36.3%
     Rent                            36,682         28,723       7,959      27.7%
     Telecommunications              20,140         14,618       5,522      37.8%
     Meals and entertainment          9,058          9,671        (613 )    (6.3% )
     Travel                          35,108         56,037     (20,929 )   (37.3% )
     Advertising and marketing      109,617        122,588     (12,971 )   (10.6% )
                                    651,092        554,816      96,276      17.4%


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          31-May         31-May          $           %
                                   2013           2012         Change      Change
                                (9 months)     (9 months)
                                    $              $
     Wages and benefits          1,055,430      1,264,904     (209,474 )   (16.6% )
     Rent                           87,892        116,580      (28,688 )   (24.6% )
     Telecommunications             49,329         59,333      (10,004 )   (16.9% )
     Research and development          864         15,618      (14,754 )   (94.5% )
                                 1,193,515      1,456,435     (262,920 )   (18.1% )

Research and development costs consist primarily of salaries and related personnel costs including overhead and consulting fees with respect to product development and deployment. The decrease in wages and benefits is mainly due to the Company's focus on marketing and promotional activities from our existing development staff as described above. Rent expense has decreased as a result of a rent abatement received during the second fiscal quarter of this year. 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 $84,792 for the nine months ended May 31, 2013 from $54,987 for the nine months ended May 31, 2012, an increase of $29,805 or 54.2% 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 $59,641 for the nine months ended May 31, 2013 from $27,619 for the nine months ended May 31, 2012, an increase of $32,022. 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 nine months ended May 31, 2013 from $1,186 for the nine months ended May 31, 2012, a decrease of $1,186.


Net income

During the nine months ended May 31, 2013 we have net income of $199,843 (May 31, 2012 - net income of $377,446). The decrease in net income during the period is the recovery of litigation costs in the comparative period and decreased revenue resulting from less usage, partially offset by decreased salaries and wages costs due to lower stock compensation cost and foreign exchange gains mostly as a result of fluctuations in the value of the Euro.

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 Q4     2012 Q1     2012 Q2      2012 Q3     2012 Q4     2013 Q1     2013 Q2     2013 Q3
                 $            $           $            $          $           $            $          $

Net Income     377,952      12,555     (286,250 )   651,138     185,560     160,050      13,198      26,595
Amortization    18,625      15,785       57,485      24,513      34,220      27,656      28,390      30,692
and stock
compensation
Deduct          (4,918 )    (2,178 )     (1,613 )   (22,642 )   (20,434 )   (20,666 )   (20,068 )   (18,907 )
interest
income
Income tax      67,000       5,000       (5,000 )   190,000      18,000      65,000           -       8,000
Adjusted       458,659      31,162     (235,378 )   843,009     217,346     232,040      21,520      46,380


EBITDA

LIQUIDITY AND FINANCIAL CONDITION

We had cash of $1,225,754 as at May 31, 2013 (August 31, 2012 - $1,275,423). We had working capital of $1,886,692 as at May 31, 2013 compared to working capital of $1,641,032 as at August 31, 2012. The increase in our working capital was mainly due to a decrease in our accounts payable.

CASHFLOWS

Net cash provided by operating activities was $147,146 for the nine months ended May 31, 2013, compared to net cash used of $162,978 for the nine months ended May 31, 2012. The main reason for the increase in net cash flows provided in the operating activities was primarily due to the decrease in total operating cost without the impact of the litigation settlement in comparative period.

The cash used in investing activities was $50,403 for the nine months ended May 31, 2013. The net cash used in investing activities was $145,576 for the nine months ended May 31, 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 nine months ended May 31, 2013 compared to net cash provided of $255,757 for the nine months ended May 31, 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.

Accounting Standards Not Yet Effective

In March 2013, the FASB issued Accounting Standards Update 2013-05, "Foreign Currency Matters (Topic 830)". The objective of this Update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, Foreign Currency Matters-Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. This accounting standard update is effective prospectively for annual and interim periods beginning after December 31, 2013. The Company is currently evaluating the impact of this update on the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable in the circumstances. Actual results may differ from these estimates.

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 . . .

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