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DSNY > SEC Filings for DSNY > Form 10-Q on 10-Apr-2014All Recent SEC Filings

Show all filings for DESTINY MEDIA TECHNOLOGIES INC

Form 10-Q for DESTINY MEDIA TECHNOLOGIES INC


10-Apr-2014

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 (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. We carry out our business operations through our wholly owned subsidiary, 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 in 2012. The "Company", "Destiny Media", "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 OTCQX U.S. ("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.

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. The financial model is transaction based, where the price per delivery varies with the number of songs and videos in the package.

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

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2014 AND 2013

Revenue

Total revenue for the six months ended February 28, 2014 decreased by 11% over the six months ended February 28, 2013 to $1,733,223 (February 28, 2013 - $1,944,189) This decline is the result of eliminating inefficiencies inherent in our previous agreement with Universal Music Group, which became effective in the third quarter of the prior year. Play MPEŽ continues to grow in use and the Company saw significant growth in several areas including both major record label and independent labels in northern Europe, and independent labels in the United States. The Company recently announced an exclusive distribution agreement with Sony Music Entertainment Australia which became effective after the quarter and, as a result, has not yet impacted the results.

Total revenue for the three months ended February 28, 2014 decreased by 8% over the three months ended February 28, 2013 to $810,682 (February 28, 2013 - $880,322). This decline is due in part to eliminating inefficiencies inherent in our previous agreement with Universal Music Group, which became effective in the third quarter of the prior year. The decrease is partially offset by the increase within independent labels in the United States.

Approximately 60% of our Play MPEŽ revenue is denominated in Euros for the six months ended February 28, 2014. European revenue is currently concentrated in the United Kingdom and the Scandinavian countries. Approximately 36% of Play MPEŽ revenue is denominated in US Dollars and 4% of Play MPEŽ revenue is denominated in Australia Dollars for the six months ended February 28, 2014.

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; office space, supplies and benefits. Our operations are primarily conducted in Canada. The majority of our costs are incurred in Canadian dollars while the majority of our revenue is 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 Canadian dollar to these currencies.

Total operating expenditures for the six months ended February 28, 2014 has increased by 20% over the same period in the prior year to $2,093,310 (February 28, 2013 - $1,746,675). The increase is almost entirely attributed to the repurchase of options charged to general and administration expense.

Operating expenditures for the three months ended February 28, 2014 has increased by 38% over the same period in the prior year to $1,222,339 (February 28, 2013 - $887,192). The increase is due to the additional expenses related to repurchase of options. Excluding the costs related to the repurchase of options, our operating expenditures for the three months ended February 28, 2014 has remained consistent with the same period in the comparable prior period.


General and administrative        28-Feb         28-Feb          $           %
                                   2014           2013        Change      Change
                                (6 months)     (6 months)
                                    $              $
     Wages and benefits            512,569        196,680     315,889      160.6%
     Rent                           19,853         14,581       5,272       36.2%
     Telecommunications              8,043          8,899        (856 )     (9.6% )
     Bad debt                       (6,110 )        3,934     (10,044 )   (255.3% )
     Office and miscellaneous      109,054         83,756      25,298       30.2%
     Professional fees             126,256         81,747      44,509       54.4%
                                   769,665        389,597     380,068       97.6%

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

The increase in professional fees is primarily related to non-recurring legal advice surrounding a NASDAQ listing application and addressing various associated United States securities issues. The increase in office and miscellaneous is due to the costs related to shareholder relations consulting services received in current period, which is partially offset by the foreign exchange gains during the current period as a result of fluctuations in the value of the Euro impacting cash and accounts receivable balances denominated in that currency. The increase in wages and benefits is due to the costs related to repurchase of options described above.

Sales and marketing                28-Feb         28-Feb          $          %
                                    2014           2013        Change      Change
                                 (6 months)     (6 months)
                                     $              $
     Wages and benefits             524,037        291,742     232,295      79.6%
     Rent                            58,437         21,628      36,809     170.2%
     Telecommunications              23,673         13,200      10,473      79.3%
     Meals and entertainment          8,336          6,194       2,142      34.6%
     Travel                          35,627         20,353      15,274      75.0%
     Advertising and marketing       76,281         90,483     (14,202 )   (15.7% )
                                    726,391        443,600     282,791      63.7%

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 the Company's focus on marketing and promotional activities from our existing development staff. Rent expense has increased as a result of a rent abatement received during the comparative period.

Research and development          28-Feb         28-Feb          $           %
                                   2014           2013         Change      Change
                                (6 months)     (6 months)
                                    $              $
     Wages and benefits            460,514        765,413     (304,899 )   (39.8% )
     Rent                           51,353         56,743       (5,390 )    (9.5% )
     Telecommunications             20,804         34,631      (13,827 )   (39.9% )
     Research and development          175            645         (470 )   (72.6% )
                                   532,846        857,432     (324,586 )   (37.9% )


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 primarily due to a shift of Company's Play MPEŽ staff from the development of a new version of the recipient software to business development related activities including customer visits and promotion.

Amortization

Amortization expense arises from property and equipment, and from patents and trademarks. Amortization increased to $64,408 for the six months ended February 28, 2014 from $56,046 for the six months ended February 28, 2013, an increase of $8,362 or 15% as a result of additional servers purchased for our Play MPEŽ operations.

Other earnings and expenses

Interest income decreased to $32,647 for the six months ended February 28, 2014 from $40,734 for the six months ended February 28, 2013, a decrease of $8,087. The interest income is derived from the amount receivable pursuant to our previous litigation settlement. The decrease in interest income is the result of a lower settlement receivable balance from the settlement receivable being paid down during the year.

Net income

During the six months ended February 28, 2014 we have net loss of $330,440 (February 28, 2013 - net income of $173,248). The reduction in net income is primarily due to the costs related to repurchase of options and the result of a reduction in revenue associated with the elimination of contractual inefficiencies to our largest customer.

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:

                2012 Q3  2012 Q4  2013 Q1  2013 Q2  2013 Q3  2013 Q4  2014 Q1   2014 Q2
                   $        $        $        $        $        $        $         $

Net Income       651,138  185,560  160,050   13,198   26,595   26,171   44,393 (374,833)
(Loss)
Amortization
and stock
based             24,513   34,220   27,656   28,390   30,692   57,217   54,166    42,877
compensation

Interest income (22,642) (20,434) (20,666) (20,068) (18,907) (18,494) (16,823) (15,824)

Income tax 190,000 18,000 65,000 - 8,000 15,000 24,000 (21,000) Adjusted EBITDA 843,009 217,346 232,040 21,520 46,380 79,894 105,736 (368,780)

During the three months ended February 28, 2014, we have adjusted negative EBITDA of $368,780 as results of additional expenses related to repurchase of options, a slow season during the Christmas period and a reduction in revenue associated with our largest customer described above.


LIQUIDITY AND FINANCIAL CONDITION

We had cash of $870,939 as at February 28, 2014 (August 31, 2013 - $1,521,552). We had working capital of $1,378,004 as at February 28, 2014 compared to working capital of $1,878,149 as at August 31, 2013. The decrease in our working capital was mainly due to a decrease in our cash balance.

CASHFLOWS

Net cash used by operating activities was $183,951 for the six months ended February 28, 2014, compared to net cash provided of $13,861 for the six months ended February 28, 2013. The main reason for the increase in net cash flows used in the operating activities was primarily due to decreased receipts in accounts receivable as a result of reduction of revenue during the six months ended February 28, 2014.

Net cash used in investing activities was $106,971 for the six months ended February 28, 2014, compared to net cash used of $39,945 for the six months ended February 28, 2013. The increase in net cash used in investing activities is largely attributable to servers purchased for our operation of Play MPEŽ product in current period.

Net cash used in financing activities was $267,750 for the six months ended February 28, 2014 compared to net cash used of $99,762 for the six months ended February 28, 2013. The change is mainly the result of stock options repurchased by the Company during the six months ended February 28, 2014.

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 Company's adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

Accounting Standards Not Yet Effective

In July 2013, the FASB issued Accounting Standards Update 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". The current practice Topic 740, "Income Taxes" does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The objective of this Update is to eliminate the diversity in practice in the presentation of unrecognized tax benefits. This accounting standard update is effective for fiscal years, and interim within those years, beginning after December 15, 2014, early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In April 2013, the FASB issued Accounting Standards Update 2013-07, "Presentation of Financial Statements (Topic 205), Liquidation Basis of Accounting". The amendments of this Update are being issued to clarify when an entity should apply the liquidation basis of accounting. The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis so accounting. The amendments apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP except investment companies that are regulated under the Investment Company Act of 1940. The amendments are effective for entities that determine liquidation imminent during annual reporting periods beginning after December 15, 2013. The Company does not expect the adoption of this Update will have material impact on the consolidated financial statements.


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 . . .

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