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EX-23.2 - CONSENT - DESTINY MEDIA TECHNOLOGIES INCexhibit23-2.htm
EX-32.2 - CERTIFICATION - DESTINY MEDIA TECHNOLOGIES INCexhibit32-2.htm
EX-31.1 - CERTIFICATION - DESTINY MEDIA TECHNOLOGIES INCexhibit31-1.htm
EX-31.2 - CERTIFICATION - DESTINY MEDIA TECHNOLOGIES INCexhibit31-2.htm
EX-32.1 - CERTIFICATION - DESTINY MEDIA TECHNOLOGIES INCexhibit32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] Annual Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of 1934

For the fiscal year ended August 31, 2011

[   ] Transition Report Under Section 13 Or 15(D) Of The Securities Exchange Act Of 1934

For the transition period from _____ to _____

Commission File Number 000-28259

DESTINY MEDIA TECHNOLOGIES INC.
(Name of small business issuer in its charter)

COLORADO 84-1516745
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
Suite 750, PO Box 11527, 650 West Georgia Street,  
Vancouver, British Columbia, Canada V6B 4N7
(Address of principal executive offices) (Zip Code)
   
604-609-7736  
Issuer's telephone number  

Securities registered under Section 12(b) of the Exchange Act: NOT APPLICABLE
   
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[   ] Yes    [X] No

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
[   ] Yes    [X] No

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]    No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[   ] Yes    [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[   ] Yes    [X] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ]   Accelerated filer [   ]
Non-accelerated filer   [   ] (Do not check if a smaller reporting Smaller reporting company [X]
  company)  


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

50,434,097 common shares @ $0.33(1) = $16,643,252
(1) Closing price as quoted on the OTC Bulletin Board on February 28, 2011.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

50,487,577 Shares of $0.001 par value common stock outstanding as of November 25, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

None


DESTINY MEDIA TECHNOLOGIES INC.
FORM 10-K

INDEX

    PAGE
     
PART I   4
     
Item 1. Business. 5
     
Item 1A. Risk Factors. 12
     
Item 1B. Unresolved Staff Comments. 14
     
Item 2. Properties. 14
     
Item 3. Legal Proceedings 16
     
Item 4. Removed and Reserved 16
     
PART II   17
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities 17
     
Item 6. Selected Financial Data 19
     
Item 7. Management's Discussion And Analysis Of Financial Condition and Results Of Operations 19
     
Item 7A. Quantitative And Qualitative Disclosures About Market Risk 26
     
Item 8. Financial Statements And Supplementary Data. 27
     
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. 28
     
Item 9A Controls and Procedures 28
     
Item 9B Other Information 28
     
PART III   29
     
Item 10. Directors, Executive Officers And Corporate Governance. 29
     
Item 11. Executive Compensation 31
     
Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters. 33
     
Item 13. Certain Relationships And Related Transactions, And Director Independence. 35
     
Item 14. Principal Accountant Fees and Services 35
     
PART IV   36
     
Item 15. Exhibits, Financial Statement Schedules 36
     
Signatures   38


PART I

FORWARD LOOKING STATEMENTS

The information in this Annual Report on Form 10-K 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 Destiny Media'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, including the risks outlined below, and, from time to time, in other reports Destiny Media files with the SEC. These factors may cause Destiny Media's actual results to differ materially from any forward-looking statements. Destiny Media 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.

CURRENCY

All dollar amounts in this Annual Report on Form 10-K are presented in United States dollars unless otherwise indicated.


ITEM 1.               BUSINESS

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, and MPE Distribution, Inc. a Nevada company that was incorporated in 2007. 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.

The current offerings include the Play MPE® secure distribution network, which the recording industry uses to distribute new pre-release music, and the Clipstream® instant play streaming media solutions.

Currently, more than 95% of the Company’s revenues come from the Play MPE® digital distribution service. The remaining revenue is derived from recurring revenues for secure Clipstream® powered market research video questionnaires.

Play MPE®

Play MPE® 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 MPE® to deliver their content to radio.

Each distribution is initiated by our customers, which “encode” the content and enter the appropriate data. Our software has a tiered permissions based access allowing our clients to assign varying rights, capabilities and responsibilities to different members of their staff. For example, some customer staff may manage assets (album cover imagery, music videos, the raw music, promotional information and other meta data), while others manage hierarchical permission based lists of recipients. Larger labels are normally structured into label groups, each with their own labels with varying access (permissions) to various subsets of the master recipient lists.

The release dates for music can be dependent on the territory and, where administrative settings permit, local promotions staff will generate a localized distribution of the song with modified marketing information in the local language. Local staff will select pre-existing assets from the system and combine them together with local recipient lists to form a “send”. Our customers also choose the level of access for the recipients assigned to the release by designating whether the release can be streamed, downloaded, exported into an unlocked digital format or burned to a CD.

While many clients are set up to manage and upload recipient lists, most rely on the proprietary Play MPE® network, which is quickly becoming a valuable asset to the industry. The Play MPE® system provides Play MPE® staff with the feedback and resources necessary to manage and maintain this network of recipients which is not available with physical distribution or smaller competitors.


Staff who "encode" each release choose the access rights, whether the system should automatically generate a template driven marketing email alert, whether the song should be locked to the recipient computer and which partner sites should have access to the content.

On the impact date, the "send" appears in the "available tracks" section of the user's account. Recipients can access through proprietary iPhone, Mac and Windows based players, through a Direct to Web browser interface supporting playerless streaming and download or through partner sites, including integration into reporting systems such as Mediabase, radio automation systems such as Nexgen or Selector or through custom direct integration into the backend server systems at the radio chains. Destiny's proprietary applications offer popular features, such as the ability to drag and drop to build and burn playlists to CD's for music meetings, the ability to convert and export into a wide variety of formats from the iTunes AAC format to the popular MP3 format and to export meta data automatically into third party applications.

The system generates an unbranded Clipstream® format playerless streaming audio clip for previewing and two broadcast quality versions of the downloadable audio. The recipient can choose to receive a lossless compressed exact copy of the original file at up to four times regular download speed or a variable bitrate compressed version, indistinguishable to the human ear, at up to fifteen times regular download speed. Recipients receive a custom library of available tracks and are able to repeat the download if music is lost.

All exported songs are marked in real time with Destiny's patent pending watermark technology. Songs on the internet are scanned through Destiny's integration into the International Federation of the Phonographic Industry's ("IFPI") internet web crawler. Headquartered in London, UK, the IFPI is the organization that represents the interests of the recording industry worldwide and one of its missions is to safeguard the rights of record producers. IFPI web crawlers visit torrents, peer to peer networks and websites searching for unauthorized content. When problem files are identified, the IFPI software looks for Destiny's watermark in the content to identify the originating source. If a mark is found, Destiny's server and the originating label are automatically contacted so that recipient can be disabled from the system and appropriate action can be taken against the individual to hold that recipient accountable for the unauthorized distribution.

After the content is released, all activity by the recipient is logged in real time, providing record labels and promotions staff real time detail on which songs are accessed, streamed, downloaded and exported. This contrast directly with physical distribution where they are unsure whether the courier package went to the correct individual or whether it was opened. This information provides invaluable feedback in real time to marketing and promotions staff who can cater their programs appropriately.

Finally, details of the transaction are fed to the billing servers for generation of automated monthly billing summaries for invoicing.

Real time usage statistics for Play MPE® are available at: http://tinyurl.com/2dyb7ao

Clipstream®

Clipstream® 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 Clipstream® 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 Clipstream®, content owners simply encode the content into the Clipstream® format, then upload to an existing website.

Clipstream® 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.

According to Comscore's May 2011 US Online Video rankings, 176 million U.S. Internet users watched online video content in May for an average of 15.9 hours per viewer. The total U.S. Internet audience engaged in more than 5.6 billion viewing sessions during the course of the month. Most of these streams are served by only four competitive technologies to Clipstream® and none of them can offer as high a playrate, secure streams and instant play. Because competing solutions are player based, they require users to maintain the installed playback software. This exposes the computer to viruses, high resource use and instability. Clipstream® relies on features found in most browsers on most operating systems to provide the easiest user experience and the highest cross platform, secure playback rate.


A quality comparison between Clipstream® and the most common alternate video formats is available at http://tinyurl.com/2fqacwc with Clipstream® in the bottom right. An empty panel in the comparison reflects that the corresponding player is not installed on the viewing computer. This common situation is one reason Clipstream® content has a much higher play rate than other solutions.

The return on investment for selling direct licensing is low as the competing streaming solutions are inexpensive and there is a long pre-sale and post-sale support cycle. For that reason, the Company has focused on marketing into niche opportunities such as the market research industry where the higher playrate and security are required, while investing into research and development for new high margin recurring revenue service based offerings built around the Clipstream® feature set.

Clipstream® Powered Survey Clip

Market research professionals often use videos and imagery to describe a product or to preview a potential movie trailer or advertisement that may or may not air. Often, the content of the video is sensitive or confidential. Destiny offers a solution that secures the content so that it will only play from an authorized domain, blocks screenscraper programs (programs which are able copy screen displays) and watermarks the content to protect it from being recorded by video camera or other means. Destiny's clips are incorporated into online surveys where the high penetration and playrate ensure the minimum number of high value survey participants "drop out".

The Clipstream® survey solution (http://www.surveyclip.com/ ) is well suited to the market research vertical. Market research companies have embraced the technology for internet based video surveys and Destiny has become a long time member and sponsor of CASRO (http://www.casro.org/).

There is a high acquisition cost to survey participants who are often paid to participate. It is important that everyone gets the exact same viewing experience so that results are not skewed and that play rates are reliable, so participants do not drop out because they do not have the correct CODEC or the latest video player installed correctly.

New Clipstream® Products

The following products are under development and not yet commercially available.

Licensing of Next Generation Clipstream®

The Company has filed a provisional patent application for a solution to the transcoding problem faced by video publishers. With other streaming solutions, the publisher has to transcode the video into different versions for different devices and operating systems. These multiple copies of the same file use up valuable server storage space and there is commonly quality degradation from one version to the next. Transcoding takes time and uses up CPU. The Company is building out the next generation of Clipstream® which will work on all browsers, even without the publishers permission and which can be served up from any standard web browser. We expect that this solution can be licensed widely.

IPTV

The Company has developed technology (http://tv.clipstream.com) that enables users to remotely access their own video or TV signal through any web browser without installing player software. The Company is not offering this product directly to consumers and may pursue direct OEM licensing opportunities where the broadcast software can be pre-installed on internet enabled TV's, IP security cameras and computers.

HD Internet Radio

Destiny is developing a new internet radio service, which enables radio stations to embed their own on air signal into their corporate website without hiring new media consultants and installing high speed connections and streaming servers into their own offices. Instead our software forwards a single stream to our servers where it is replicated. Users who click on the play button on the station's website receive the stream from Destiny's servers in the playerless Clipstream® format. We expect that higher play rates will mean lower user support requirements for staff at the station.


This application can extend to derivative business opportunities where the station's signal can be archived on our servers to meet regulatory and advertiser requirements and where the stream can be analyzed to automate reporting of which songs were played on air by that station.

Cloud Offering

This new asset management system is being built out in direct response to customer requests for a hosting system that allows users to easily organize and reuse content. Members will be able to upload a wide variety of assets (video, documents, software, audio, pictures, etc.), which they can lock down to be accessed by certain users. Reporting on access is available on an asset by asset basis. Streamed versions of audio and video content are created automatically by a farm of stream encoding servers. Users can create audio content by dialing in through a telephone, so meetings and other audio content can easily be automatically converted into streaming media. Users can choose templates to organize assets into web pages or emails or they can simply embed assets to appear to be served from their own corporate websites even though the content is originating on Destiny's servers. The system has a wide variety of features including sophisticated email list management for staying in contact with customers.

BUSINESS DEVELOPMENT

In June, the US Patent and Trademark Office approved our patent claims for a proprietary watermarking solution 11/874839 "Methods for Watermarking Media Data". This technology enables content owners to trace back the source of pirated content. Also, the Company began developing a solution to the significant costs associated internet video "transcoding" and filed a provisional patent application in August.

In October 2010, the Company received approval for its shares to trade on the TSX Venture Exchange in Canada under the symbol "DSY". In August 2011, the Company received approval for its shares to trade on the OTC market's OTCQX tier.

MPE®

In 2011, annual revenue increased 6% to $4,007,230 with over 95% of our revenue from Play MPE®.

A major focus in fiscal 2011 was to complete a new revision of our encoder and various players for the international market and recipient types other than radio and to integrate our solution with Clear Channels RCS subsidiary's scheduling and radio automation software. Both of these solutions are expected to launch over Christmas 2011, when the music industry slows down. In anticipation of this roll out, staff have spent time with potential customers in Japan and major western European markets, such as France and Germany, so they can begin trials in conjunction with the launch. Most sends in these markets to date have originated in the UK and to ensure volume, it is important that local sub-labels are able to send directly from the local markets.

We have customized the way the system works to be compatible with German privacy and spam laws and we have modernized the player interface to appeal to journalists and other recipients who prefer a quicker "one click" experience over the extensive features in a player application. Non-radio markets are much larger than radio and will be a focus for future growth. The new system will also integrate more closely with back end solutions, such as with the labels' video repositories.

In April 2011, we became aware that our exclusive reseller in Australia and New Zealand had breached our agreement and had been representing a product from a regional competitor in negotiating with our clients. As a result, staff have begun supporting Play MPE® directly and building relationships with our clients. The Company is currently reviewing different methods of maintaining the Australian business. With an automated system, twenty- four hour technical support, advanced feature set, and an ability for labels to share releases globally, we have had positive feedback from recipients and customers alike.

In May, we entered into an agreement with All Access Today Japan, a subsidiary of Dentsu in Tokyo, which handles concert promotion, licensing, fan sites and tours for big name artists. They will be representing both our Play MPE® and new Clipstream® solutions in the Asian market. They have begun demonstrating the system to the majors and other industry participants and we plan to launch trials there with our new player software.

Some highlights for the year include:



  September 9-10, 2010: Canadian Country Music Association Industry Awards, Edmonton, Alberta
     
  September 8-11, 2010: Christian Music Broadcasters Momentum Conference in Orlando, Fla.
     
  October 27-28, 2010: Billboard Film and TV Music Conference, Los Angeles, California
     
  March 2-4, 2011: Country Radio Seminars in Nashville, Tennessee
     
  March 9-12, 2011: Canadian Music Week in Toronto, Canada
     
  March 15-19, 2011: South by Southwest Music and Media Conference in Austin, Texas.
     
  April 28-30, 2011: A&R Worldwide/All Access Convention in Los Angeles, California.
     
  April 29-30, 2011: Worldwide Radio Summit, Los Angeles, California
     
  August 10-13, 2011: FMQB Triple A Convention, Boulder Colorado

Clipstream®

The sales focus for Clipstream® was to manage legacy license sales and to focus on expanding usage in the market research niche where the product has become a standard for secure video questionnaires. Because of the cost of acquisition of a survey participant and the sensitivity of the content, the high play rate and security of the Clipstream® solution is critical.

The Company continues to invest only minimally into sales and marketing until the new high margin Clipstream® services are ready for launch.

Some highlights for the year include:

  October, 11-14, 2010 (in San Diego, California) and June 2-3, 2011 (New York, New York): Council of American Survey Research Organizations Technology Conference

Significant Customers

During the year ended August 31, 2011, revenue earned from three customers represented 64% of our gross revenue. During the year ended August 31, 2010, revenue earned from three customers represented 61% of our gross revenue.

OUR BUSINESS OPERATIONS

We lease approximately 5,792 square feet of office space, with the lease expiring in October of 2013, and we currently have twenty-five full time employees and one part time employee. Our employees include our President and Chief Executive Officer, Chief Financial Officer, twelve sales and technical support personnel, and nine software developers. We also employ contractors as needed.

We manage our own server infrastructure and use the services of an external hosting facility. We have racks of server and storage hardware at four physical locations (three in Vancouver, Canada and one in London, England). Servers are highly redundant with RAIDs, custom switches, redundant power supplies and multiple connections to the internet backbone. Access to the network is load balanced across the server locations, providing total bandwidth of 2.2 gigabits per second and continued access to users if a facility ever failed.

Research and Development

Total research and development expenditures for the year ended August 31, 2011 were $1,563,690 (2010: $1,193,618).

COMPETITION

MPE®

The nature of the pre-release digital distribution of promotional music ultimately lends itself to one dominant system where labels and recipients participate. Play MPE® has the largest market share of a relatively new market and a network effect entrenches the system as it is difficult for any one user to switch to an alternative without the entire industry switching.


Play MPE® has several advantages over physical distribution (mail, courier or hand delivery) of manufactured CD’s. Digital distribution through Play MPE® is faster, less expensive, more reliable, more secure, provides additional real time and more accurate reporting of usage, provides a great deal of added functionality and provides the error free and automatic transmission of “meta data”. Meta data includes International Standard Recording Codes (ISRC) – which is a standard code for uniquely identifying sound recordings and music video recordings - song and artist names, beats per minute, release and impact dates, etc. The automatic transmission of this meta data reduces the time required for manual data entry into radio automation software on the receiving side and eliminates inaccuracies in royalty reporting.

Play MPE® provides extensive functionality, security and audio quality and while significant savings are realized over physical delivery, lower cost digital options exist. No digital delivery competitors have as extensive a recipient network or global presence as Play MPE®. The Company expects that competition will be strongest where audio quality, security, recipient network, and reporting are not as important as cost.

The Company has entered into strategic alliances to ensure that Play MPE® is an integrated part of the music industry. With an agreement with RCS (http://www.rcsworks.com), we are launching a Play MPE® powered site branded as Musicpoint, which will provide instant access to over 9,000 customers across its product lines, RCS is the leading supplier of radio automation and scheduling software, marketed under the brands Selector, GSelector and NexGen Digital.

Play MPE® integrates with Wide Orbit Automation for Radio, various product offerings from OMT and supports Broadcast Electronic’s Audio Vault.

Also, the Company exports directly into a wide variety of back end systems such as Clear Channel's Prophet system, the BBC's internal distribution system and Sirius XM's servers. Mediabase, the dominant supplier of reporting information to the recording industry exclusively links download links wherever a new song appears and these links direct their users to register into our system to access this content.

A tabular comparison is set out below which outlines some of the more significant competitive advantages relative to competing digital solutions or to physical delivery. Competing digital solutions generally show a low investment in technology resulting in less secure and lower quality sound distributions. Direct competitors are often regional, with little global presence.

  Play MPE® Competing alternatives Physical Distribution
Speed Proprietary lossless compression at 4 times download speed or 15 times download speed with inaudible compression loss. Trade off between slower download speeds or lower quality file. Dependent on mail courier.
Security User and machine authentication. Digital locking and Watermark available Watermarking, password and other access control methods.
Typically no security.
Watermarking • Patent pending proprietary watermark "Methods for Watermarking Media Data"
• Embeds in real time
• Uniquely identifies the recipient account,
• Survives on air broadcast and compression,
• Inaudible
• Integrated with the IFPI
• Not available or Licensed 3rd party watermarks
• Range available offers trade off between audio quality and reliability
• Longer implementation required
• Does not survive on air broadcast, conversion to new formats, compression or
filtering
• None known to be integrated with the IFPI
Unique individual watermarking not available.
Cost Estimated to be approximately 80% savings over physical Unknown range Costs generally include:
• mail or courier charges
• manufacture of CD
• address label, packaging,
• list maintenance



Streaming Instant, Clipstream® powered 3rd party players and codecs. Not applicable
Reporting Real time None to real time None
Player Versions and capabilities • PC
• Mac and,
• iPhone player versions including the following proprietary software features:
• encrypted audio playback,
• drag and drop play lists,
• integrated CD burning,
• export to other formats
Required 3rd party players which require correct version and association information. Labor intensive process to encode into a digital format at radio to integrate into radio automation and reporting software systems
Portability No Player required “Play MPE Direct to Web” supports playerless streaming and download from any web browser Websites require installation of a third party media player and authentication agents Portable.
Meta Data Fingerprinting, photos, video, PDF’s, Data (ISRC codes, intro times, beats per minute, etc.) exported into radio automation system/software. Exclusive integration with RCS Sound Software – the world’s leading radio scheduling software provider. Artist name, title, label, compatible with only one automation system. Radio must manually input “meta data” requiring more labor and leading to errors causing errors in royalty reporting.
Formats CD, WAV, MP2, MP3, AAC, WMA MP3, WMA, WAV CD

Clipstream®

Our principal competitor for Clipstream® is Adobe Flash and to a lesser extent, the player solutions provided by Apple, Real Networks and Microsoft. Flash is recognized as the dominant player in the space, with a near monopoly over instant play streaming video. Clipstream® has a number of economic and usability advantages that make it extremely compelling in certain circumstances, but the margins on streaming licenses are low. The corporate strategy is to license Clipstream® to niches where its cost, security and performance advantages are extremely beneficial, while creating new service offerings that embrace competing technologies while extending them with the benefits of Clipstream®.

The current version of Clipstream relies on Java Technology owned by Oracle Corporation be pre-installed on the browser or if it isn't, for the consumer to install it. On some browsers, particularly on mobile, this isn't always the case. We have filed a patent for a new solution that we are building out that will work on all browsers, providing a near 100% play rate, including on mobile and devices such as the iPad and iPhone that currently block Flash. Because this solution allows the publisher to use just one version of the video, rather than multiple versions to support different devices, we expect that this solution will be popular. Site owners will save the cost and quality loss of transcoding and will need much less storage than with multiple video versions. We are not aware of a competitor with a similar feature set.

Clipstream® Advantages

  • A Clipstream® powered website does not require that its visitors download and install player software. Clipstream® just plays. Other solutions require intrusive codecs and new versions of their player in the background.

  • As Clipstream® is playerless, management estimates that at least 10% more visitors see the rich media content

  • Clipstream® playback takes minimal CPU and memory resources, so the viewer's computer is free for other tasks. This means that many Clipstream® objects can appear on the same page. Other solutions often restrict to one piece of content per page.


  • The Clipstream® solution is less intrusive and, as a result, safer for users. Alternative solutions control a user’s device and can be used by malicious sites to install malware. Because it is restricted to the safe Java sandbox, Clipstream® content will never crash or compromise your machine.

  • Clipstream® content is uploaded to any brand of web server and just works. Alternative solutions require that you purchase, install and configure streaming server systems, running on dedicated hardware.

  • Clipstream® plays on any Java enabled device, so playback is not restricted to computers. This cross platform approach means the same object will work for any browser on any brand of computer or device at any bitrate. (An autodetect procedure automatically delivers the highest possible stream quality).

  • Because there is no player, Clipstream® encoded media never becomes obsolete and never has to be re- encoded. Content encoded in Clipstream® ten years ago still plays today. Other solutions launch new player software without backwards compatibility.

  • Clipstream® media will automatically cache because it is an ordinary web component, just like a graphic or a block of text. This means that Clipstream will save up to 90% on bandwidth cost (over 90% for ads), while providing much more reliable playback This standards based approach means that there is no limit to simultaneous streams.

  • Clipstream® components can be uploaded to the cloud for third party hosting. Player solutions require complicated server farms to handle more than a few thousand simultaneous visitors.

  • Clipstream® objects can be embedded into databases for long terms storage and easy context sensitive retrieval. Every aspect of the Clipstream® engine can be accessed by web authoring tools to create a customized look and feel

  • Dozens of parameters provide functionality not available from any other streaming solution. For example, Clipstream® provides the only technology available to link every pixel or group of pixels in a banner to a different audio stream. This technology can be used for audio navigation of a website or to provide ads that do not require the visitor to leave the host site to listen to an ad.

GOVERNMENT REGULATION

We are not currently subject to direct regulation by any governmental agency other than laws and regulations generally applicable to businesses. It is possible that a number of laws and regulations may be adopted in both the United States and Canada with particular applicability to the Internet. Governments have and may continue to enact legislation applicable to us in areas such as content distribution, performance and copying, other copyright issues, network security, encryption, the use of key escrow data, privacy protection, caching of content by server products, electronic authentication or “digital” signatures, illegal or obscene content, access charges and retransmission activities. The applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation and personal privacy is also uncertain. Export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase our costs of doing business or increase its legal exposure.

ITEM 1A. RISK FACTORS

We face risks in executing our business plan and achieving revenues. The following risks are material risks that we face. We also face the risks identified elsewhere in this Annual Report, including those risks identified under Item 1 – Description of Business, including Competition and Government Regulation, and Item 6 – Management Discussion and Analysis or Plan of Operations. If any of these risks occur, our business and our operating results and financial condition could be seriously harmed.

If revenues decline, then our financial condition and results of operations will be adversely affected.

Over 95% of our revenue is generated from our Play MPE® distribution service. Competitors may arise and/or customers may not renew distribution contracts. This factor could cause our revenue to decrease with the result that our financial condition and operating results would be adversely affected. Competitors have been small, regionally based, have limited resources, and have yet to capture a material share of the market. If a competitor were to develop a comparable or superior product, our market share could be reduced.


If we are not able to control our operating expenses, then our financial condition may be adversely affected.

Operating expenses increased to $3,209,630 for the year ended August 31, 2011 from $3,082,320 for the year ended August 31, 2010 while our revenue increased to $4,007,230 for the year ended August 31, 2010 from $3,771,382 for the year ended August 31, 2010. Our ability to maintain profitability is conditional upon our ability to control our operating expenses. While we have been successful in containing our operating expenses, there is a risk that we will have to increase our operating expenses in the future. Factors that could cause our operating expenses to increase include our determination to spend more on sales and marketing in order to increase product sales or our determination that more research and development expenditures are required in order to keep our current software products competitive or in order to develop new products for the market. To the extent that our operating expenses increase without a corresponding increase in revenue, our financial condition would be adversely impacted.

If we are not successful in legal proceedings against us, then our business and financial condition could be adversely affected.

We are currently party to two counterclaims and one claim against the Company, as described in Item 3 of Part I under the heading "Legal Proceedings". If we are not successful in these legal proceedings and are forced to make payments of damages to the plaintiffs, then our business and our financial condition would be adversely affected.

Our success is dependent, to a large degree, upon the efforts of Mr. Steve Vestergaard, our current executive officer.

Mr. Vestergaard was the founder of Destiny Software and has been involved in our business operations since our inception. The loss or unavailability of Mr. Vestergaard could have an adverse effect on our business operations and financial condition. We do not maintain key man life insurance policies for Mr. Vestergaard or for any of our other employees. In addition, our continued success is dependent upon our ability to attract and retain qualified personnel in all areas of our business, especially management positions. In the event that we are unable to attract and retain qualified personnel, our business would be adversely affected.

Our financial results may be adversely impacted by currency fluctuations.

Our revenues are primarily in United States dollars and Euros while our operating expenses are primarily in Canadian dollars. An increase in the value of the Canadian dollar in relation to the United States dollar and/or Euro could have the effect of increasing our loss from operations. We do not currently hedge our foreign currency exposures.

If our products are defective or contain errors, we may become subject to product liability claims.

As a result of their complexity, our software products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing we undertake and testing and use by current and potential customers, errors will not be found in new products after commencement of commercial shipments. The occurrence of such errors could result in loss of or delay in market acceptance of our products, which could have a material adverse effect on our business, financial condition and results of operations. Our products also may be vulnerable to break-ins and similar disruptive problems caused by Internet or other users.

Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the computer systems of our customers, which may result in significant liability to us and deter potential customers. The sale and support of our products may entail the risk of liability claims. A product liability claim brought against us could have a material adverse effect on our business, financial condition and results of operations.

Our ability to manage growth.

Should we be successful in the sales and marketing efforts of our software products, we will experience significant growth in operations. If this occurs, management anticipates that additional expansion will be required in order to continue our product development. Any expansion of our business would place further demands on our management, operational capacity and financial resources. We anticipate that we will need to recruit qualified personnel in all areas of its operations, including management, sales, marketing, delivery, and software development. There can be no assurance that we will be effective in attracting and retaining additional qualified personnel, expanding its operational capacity or otherwise managing growth. In addition, there can be no assurance that our current systems, procedures or controls will be adequate to support any expansion of our operations. The failure to manage growth effectively could have a material adverse effect on our business, financial condition and results of operations.


Risk of system failure and/or security risks.

Despite the implementation of security measures, our network infrastructure could be vulnerable to unforeseen computer problems. Although we believe we have taken steps to mitigate much of the risk, we may in the future experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unknown security risks may result in liability to us and also may deter new customers from purchasing our software and services, and individuals from utilizing it. Although we intend to continue to implement and establish security measures, there can be no assurance that measures implemented by us will not be circumvented in the future, which could have a material adverse effect on our business, financial condition or results of operations.

Lack of established market for products and services; dependence on internet and intranets as mediums of commerce and communications.

The market for our streaming media products and services is new and evolving rapidly. It depends on increased use of the Internet and intranets. If the Internet and intranets are not adopted as methods for commerce and communications, or if the adoption rate slows, the market for our products and services may not grow, or may develop more slowly than expected.

The electronic commerce market is relatively new and evolving. Sales of our products depend in large part on the development of the Internet as a viable commercial marketplace. There are now substantially more users and much more “traffic” over the Internet than ever before, use of the Internet is growing faster than anticipated, and the technological infrastructure of the Internet may be unable to support the demands placed on it by continued growth. Delays in development or adoption of new technological standards and protocols, or increased government regulation, could also affect Internet use. In addition, issues related to use of the Internet and intranets, such as security, reliability, cost, ease of use and quality of service, remain unresolved and may affect the amount of business that is conducted over the Internet and intranets.

Product delays and errors.

We have experienced development delays and cost overruns associated with its product development. We may encounter such problems in the future. Delays and cost overruns could affect our ability to respond to technological changes, evolving industry standards, competitive developments or customer requirements. Our products also may contain undetected errors that could cause adverse publicity, reduced market acceptance of the products, or lawsuits by customers.

Online commerce security risks.

Online commerce and communications depend on the ability to transmit confidential information securely over public networks. Any compromise of our ability to transmit confidential information securely, and costs associated with the prevention or elimination of such problems, could have a material adverse effect on our business.

International operations.

We market and sell our products in the United States, Canada, Europe, Asia, South America, Africa and Australia. As such, we are subject to the normal risks of doing business abroad. Risks include unexpected changes in regulatory requirements, export and import restrictions, tariffs and trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, potential adverse tax consequences, exchange rate fluctuations, increased risks of piracy, limits on the our ability to enforce our intellectual property rights, discontinuity of our infrastructures, limitations on fund transfers and other legal and political risks. Such limitations and interruptions could have a material adverse effect on our business.

ITEM 1B.            UNRESOLVED STAFF COMMENTS

None

ITEM 2.               PROPERTIES

Our head office is located in leased premises at Suite 750, 650 Georgia Street, Vancouver, British Columbia, Canada V6B 4N7. Our principal business operations are carried out from head office. Our leased premises consist of approximately 5,792 square feet. We pay rent of approximately $19,000 Canadian (equal to approximately $19,000 US) per month. The lease expires October 30, 2013. We consider our leased premises adequate for our current business purposes.


The Company owns proprietary algorithms, source code, web domain addresses, patents, trademarks and other intellectual property.

Patents

1. Digital Locking "Digital Media Distribution Method and System" (Granted US 20020146122)

This patent provides a method of locking digital content which prevents play back on unauthorized machines and devices. Claims include separating security from the content, so that content files can be shared securely over peer to peer networks. This is one of the earliest patents for securing peer to peer distributed content.

http://www.dsny.com/v7/pdfs/Digital_media_distribution_method_and_sy.pdf

One of the more important claims in this patent is the ability to uniquely recognize a particular computer. Uniquely identifying a person’s computer is a common issue which is usually approached by saving cookies or beacons to the user’s computer or by tracking IP addresses. These are not reliable solutions as cookies are easily deleted and IP addresses easily changed. Destiny’s propriety hash code process creates a serial number that can be used to recognize the user on subsequent visits without ever saving anything to that user’s computer.

2. Watermarking "Methods for Watermarking Media Data" (US 20080098022) (pending Japan, Europe, Canada, USA)

Destiny has a developed a watermarking technology which can uniquely identify the individual who originally accessed a particular song. Our watermark is unique as it can be embedded and identified rapidly, it is inaudible, it survives on air broadcast, compression and conversion to other formats and is virtually impossible to remove. Patents are pending in the US, Canada, Europe, Japan and China.

Our watermarking technology is used in the Play MPE® distribution system when songs are exported or when streaming a track.

Other watermarking technologies are slow and provide a trade off between a destruction of audio quality and the ease that they can be filtered out.

http://www.dsny.com/v7/pdfs/METHODS_FOR_WATERMARKING_MEDIA_DATA.pdf

3. Cross Platform Streaming Video (provisional)

This solution enables publishers to serve streaming video from their web site without the need for a separate streaming server. The solution will play instantly in all recent browsers, including mobile devices, without the need for a separate video player.

Registered Trademarks

Clipstream®
Granted: USA, Canada, Japan, Israel, European Community, China

Play MPE®
Granted: Japan, USA, Canada, European Community, China

MPE®
Granted: Japan, USA, Canada, European Community
Pending: China

Sonox Digital®
Granted: Japan, China
Pending: Canada, USA


Domain Names

Destiny owns a large number of domain names, including many valuable four letter (dice.net, dsny.com) and URL’s featuring common words (radio-play.com, streamingaudio.com, pirateradio.com and many others.)

Trade Secrets

As an innovative software development company, the Company has a wide range of proprietary algorithms and software libraries which form the core of its offerings.

ITEM 3.

LEGAL PROCEEDINGS


  (1)

Destiny had commenced two outstanding Canadian lawsuits (Federal Court of Canada Court File No. T- 413-06 and Ontario Superior Court Ontario Court File No. 07-CV-38068 as a result of certain activities undertaken by Yangaroo Inc., a Canadian competitor (“Yangaroo”). Destiny was a defendant by counterclaim. A third lawsuit was launched in the United States (US District Court for the Eastern District of Wisconsin Green Bay Division Case No. 1:09-CV-00462), in which Destiny was defendant. The US District Court lawsuit had previously dismissed Yangaroo’s claim in its entirety with the dismissal upheld on appeal during the year.

     
 

On June 17, 2011 Destiny entered into a settlement agreement (the “Settlement Agreement”) with Yangaroo to settle all outstanding litigation.

     
 

Pursuant to the Settlement Agreement, Yangaroo paid Destiny a lump sum amount totaling $600,000 (Canadian Funds). The settlement payment was received and recorded in the fourth quarter of fiscal 2011.

     
 

As part of the settlement Destiny also acquired a cost and royalty free, non-exclusive, worldwide, irrevocable, license to two patents held by Yangaroo (US Patent No. 7,529,712 and Canadian Patent No. 2,407,774). No value was assigned or recorded to the licenses to Yangaroo’s patents.

     
 

Each party has agreed not to make any claim for costs against the other party.

     
  (2)

On August 12, 2009 the Company received a statement of claim for wrongful dismissal. The claim is for approximately $184,000 ($180,000 CDN) plus an award of stock options and unspecified damages. The Company believes the claim is without merit. The matter was heard at trial subsequent to year-end and management expects a decision shortly. Management believes it is unlikely that the outcome of this matter will have an adverse impact on its result of operations, cash flows and financial condition.

     
  (3)

On June 10, 2011, the Company commenced proceedings in the Federal Court of Australia against Shooting Star Picture Company Pty Ltd, Peter Skillman and D-Star Music Delivery Pty Ltd. (collectively the “respondents”). The Company alleges various claims against the respondents including, amongst other things, breach of contract, misleading and deceptive conduct, breach of fiduciary duties, breach of confidence and the tort of deceit. The respondents have cross-claimed for approximately $155,000 (AU$145,000) plus a percentage of unspecified revenue the Company received from the Australian market in during a portion of the year ended August 31, 2011. Management believes, both, that the counterclaim is without merit and the damages claim significantly exceeds this counterclaim such that it is unlikely that the outcome of this matter will have a material adverse impact on its result of operations, cash flows and financial condition.

     
  (4)

On November 10, 2011, the Company was served with a Notice of Civil Claim in the Supreme Court of British Columbia from Noramco Capital Corporation for $100,000 plus interest. The claim asserts that the Company has repudiated a subscription agreement entered into in, or around, August 2000. Management believes the claim is without merit and that it is unlikely that the outcome of this matter will have a material adverse impact on its result of operations, cash flows and financial condition.


ITEM 4.

(REMOVED AND RESERVED)



PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our shares are currently trading on the OTC Bulletin Board under the stock symbol DSNY. The first day on which the Company’s shares were traded under the stock symbol DSNY was June 26, 2000. On August 18, 2011, Destiny Media began trading on the OTC market’s tier OTCQX. The high and the low trading prices for our shares for each quarter of the last two fiscal years were:

QUARTER
HIGH ($)
LOW ($)
1st Quarter 2010 $0.55 $0.28
2nd Quarter 2010 $0.54 $0.36
3rd Quarter 2010 $0.53 $0.36
4th Quarter 2010 $0.48 $0.30
1st Quarter 2011 $0.47 $0.32
2nd Quarter 2011 $0.45 $0.30
3rd Quarter 2011 $0.42 $0.30
4th Quarter 2011 $0.47 $0.30

The trades reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.

Our shares have traded on the TSX Venture Exchange under the symbol “DSY” since October 12, 2010.

Holders of Common Stock

As of November 28, 2011 we had 50,487,577 shares of our common stock outstanding and there were 1,071 individual shareholders of our common stock including beneficial shareholders where their ownership is registered to the Depository Trust's nominee.

Dividends

We have neither declared nor paid any cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. Our current policy is to retain any earnings in order to finance the expansion of our operations. Our Board of Directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law.

Recent Sales of Unregistered Securities

During the year ended August 31, 2011, 50,625 shares were issued in a cashless exercise of 135,000 options with an exercise price of $0.25. 400,000 shares were issued in an exercise of 400,000 options with cash proceeds of $100,000.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On November 20, 2009 Destiny's board of directors began to authorize a program to repurchase up to 1 million shares of the Company's common stock at a maximum share purchase price of $0.80 per share. As of May 28, 2010 The Company repurchased one million shares, representing approximately 2% of the shares outstanding at an average price of $.446 for a total approximate cost of $446,000. On July 6, 2010, The board of directors authorized a second tranche to repurchase up to 1.5 million shares of the Company's common stock at a maximum share purchase price of $0.80 per share running through June 30th, 2011. As of June 30th, 2011, the Company had purchased 998,465 shares at an average price of $0.43.

On June 28, 2011, the board of directors authorized a new tranche to repurchase up to 2,500,000 shares of the Company’s common stock at a maximum share purchase price of $0.80 per share. As of the three months ended August 31, 2011, the Company has purchased 397,145 shares at an average price of $0.38. Future repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions. All repurchases will be made in compliance with the Securities and Exchange Commission's Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The board approved stock repurchase program runs through June 30th, 2011. In addition to the applicable securities laws, the Company will not make any purchases during a time at which its insiders are subject to a blackout from trading in the Company's common shares. The following table sets forth information about our stock repurchases for the three months ended August 31, 2011.










Period (1)



Total
Number of
Shares
(or Units)
Purchased (2)



Average
Price
Paid
per Share
(or Unit)

Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced
Plans or
Programs (3)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May
Yet Be Purchased
Under the Plans or
Programs (3)
June 1, 2011 to June 30, 2011 239,715 $               0.36 239,715 -
July 1, 2011 to July 31, 2011 42,500 $               0.40 42,500 2,457,500
August 1, 2011 to August 31, 2011 114,930 $               0.40 114,930 2,342,570
Total 397,145 $               0.38 397,145  

(1) Based on trade date.
(2) All of these shares were repurchased pursuant to publicly announced share repurchase programs.
(3) During the year ended August 31, 2011, the Company repurchased a total of 1,106,895 shares pursuant to publicly announced share repurchase programs. Of which, 949,465 shares were pursuant to the second tranche announced on July 6, 2010 and all of 949,465 shares had been cancelled. 157,430 shares were pursuant to the new tranche announced on June 28, 2011 and 32,500 shares had been cancelled as of the year ended August 31, 2011. The rest of 124,930 shares were cancelled in September 2011.

OTHER INFORMATION

None.


ITEM 6.               SELECTED FINANCIAL DATA

                Fiscal Year              
    2011     2010     2009     2008     2007  
    (Expressed in US dollars, except per share amounts)  
Continuing Operations:                              
Service revenue $  4,007,230   $  3,771,382   $  2,560,447   $  1,578,888   $  875,544  
Income (loss) from continuing operations   797,600     689,062     44,781     (2,404,933 )   (2,119,068 )
Net income (loss)   638,508     1,686,073     610,831     (2,293,178 )   (2,096,974 )
Net income (loss) per common share, basic and diluted $  0.01   $  0.03   $  0.01   $  (0.05 ) $  (0.04 )
                               
Balance Sheet:                              
Working capital $  1,354,115   $  976,139   $  658,673   $  (192,772 ) $  1,229,357  
Total assets   3,058,137     2,578,817     1,425,944     661,437     1,787,055  
Long-term liabilities   -     3,745     13,987     100,000     100,000  
Stockholders’ equity (deficit)   2,405,865     2,059,369     790,934     (132,609 )   1,351,629  


The selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our results of operations and financial condition should be read together with the consolidated financial statements and related notes that are included later in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors.

RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2011

Revenue

Total revenue for the year grew to $4,007,230 (2009 - $3,771,382), an increase of approximately 6% over the fiscal 2010 year. Fourth quarter revenue increased to $933,047 (fourth quarter fiscal 2010 - $901,607).

The growth in revenue is driven by the growth in our Play MPE® system, where access fees for the year have grown by more than 9% over the previous year. Play MPE® continues to see substantial revenue growth that it has seen over the previous four years.

  2007 2008 2009 2010 2011
Play MPE® Revenue $446,594 $1,154,845 $2,256,871 $3,501,743 $3,831,025
Growth over prior year 138% 159% 95% 55% 9%

Play MPE® is the world leader in an evolving business which is transforming the way record labels distribute pre-release music. We have seen the transition from traditional distribution methods to Play MPE® begin gradually and the growth seen in prior years has continued into 2011. The growth in revenue over the previous year has been realized across formats, through existing clients, and through new clients in new geographic areas and includes; a 14% increase in North American independent record label revenue, an 18% growth in European. Australasian revenue increased by 14% through expanded independent record label use.


While the digital distribution of pre-release music is still at an early stage, the value propositions of the Play MPE® system are both compelling and numerous and we have found we compete well against traditional and alternative methods of distribution in the market. Our product provides significant advantages such as reducing the costs and lead times, providing feedback on usage to the record labels, and enhanced global security, with the added appeal of reducing the impact on the environment. Play MPE® provides many significant advantages over competing solutions such superior sound quality, superior security, advantageous partner relationships, a network of regular users and countless added functions of the player software and total service offering.

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 (“sends”) A “send” is a song, bundle of songs, album, box set, or video, authorized to be sent to a particular recipient. The revenue associated with each “send” will be on a sliding scale depending on the size of the particular send (song length for example). The system provides each label under contract to manage their own lists of recipients and directly encode and distribute their songs. This added ability provided to our clients substantially eliminates the strain on our own internal resources that can be seen in competing solutions and allows for high growth potential. All such 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.

For customers where it is not appropriate to enter into a formal contract we provide access to the Play MPE® system through www.myplaympe.com or through our staff quoting system.

Real time usage statistics for Play MPE® are available at: http://www.plaympe.com/v4/company/plaympestats.php

Approximately 4% of our revenues are derived from sales of our Clipstream® software which declined from the previous year by 32%. This reflects a management strategy of focusing sales, marketing and support resources on MPE® until the new automated system for Clipstream® is available. We hope to increase sales of Clipstream® licenses through our hosted solution, and other license opportunities.

Radio Destiny sales represent 0.1% of our total revenue.

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. 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. During the year, the rise in the value of the Canadian dollar relative to the US dollar had an adverse impact on the Company.

Our total operating expenses for the year increased by 4% to $3,209,630 from $3,082,320. The majority of this increase was due to higher salaries and wages, which is due in part to unfavorable exchange fluctuations, additional staff for research and development, technical support, and salary adjustments. We had additional one time costs associated with our listing on the TSX Venture Exchange and the OTC QX.



General and administrative   31-Aug     31-Aug     $     %  
    2011     2010     Change     Change  
    (12 months)   (12 months)            
     Wages and benefits $  365,960   $  331,749     34,211     10.3%  
     Rent   40,601     63,438     (22,837 )   (36.0% )
     Telecommunications   18,757     22,834     (4,077 )   (17.9% )
     Bad debt   8,381     (10,696 )   19,077     (178.4% )
     Office and miscellaneous   221,578     227,894     (6,316 )   (2.8% )
     Professional fees   108,595     414,149     (305,554 )   (73.8% )
$ 763,872   $  1,049,368     (285,496 )   (27.2% )

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

An increase in professional fees of $300,986 associated with litigation with a Canadian competitor, and with litigation in Australia with a former marketing representative, were offset by a lump sum settlement of $606,540 ($600,000 Canadian Dollars) paid by the Canadian competitor. Costs associated with litigation are expected to decline significantly after our third quarter of fiscal 2012.

Sales and marketing   31-Aug     31-Aug     $     %  
    2011     2010     Change     Change  
    (12 months)     (12 months)              
     Wages and benefits $  404,971   $  365,182     39,789     10.9%  
     Rent   43,139     66,001     (22,862 )   (34.6% )
     Telecommunications   19,929     23,757     (3,828 )   (16.1% )
     Meals and entertainment   11,619     10,775     844     7.8%  
     Travel   59,035     58,497     538     0.9%  
     Advertising and marketing   285,036     262,016     23,020     8.8%  
  $  823,729   $  786,228     37,501     4.8%  

Sales and marketing expenses consist primarily of salaries and related personnel costs including overhead, sales commissions, advertising and promotional fees, and travel costs. During the year ended August 31, 2011, Play MPE® has received significant support from the world’s largest record labels and achieved symbiotic relationships with partners within the music industry resulting in cost effective and organic marketing efforts and the need for higher cost marketing efforts has decreased. We expect that the business relationships we have developed will provide catalysts to global expansion and barriers to entry with potential competitors should they arise.

Research and development   31-Aug     31-Aug     $     %  
    2011     2010     Change     Change  
    (12 months)     (12 months)              
     Wages and benefits $  1,340,956   $  933,307     407,649     43.7%  
     Rent   148,772     178,469     (29,697 )   (16.6% )
     Telecommunications   68,730     64,656     4,074     6.3%  
     Research and development   5,232     17,186     (11,954 )   (69.6% )
  $  1,563,690   $  1,193,618     370,072     31.0%  

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 increase is mainly due to increased staffing, increased salaries and wage costs, consulting requirements due to an increased ongoing investment in building out the functionality of our Play MPE® (which accounts for over 95% of our revenue) and the development of three new Clipstream® service offerings, which have yet to launch.

Costs associated with the above in connection to Play MPE® did not meet the criteria for capitalization and, thus, were charged to expense as incurred.

Depreciation and Amortization

Depreciation and amortization expense arose from fixed assets and other assets. Depreciation and amortization increased to $58,339 for the fiscal year ended August 31, 2011 from $53,106 for the fiscal year ended August 31, 2010, an increase of $5,233 or 10%. The increase was due to more computer hardware purchased arising from more volume of deliveries.


Other earnings and expenses

Other income decreased to $3,091 for the year ended August 31, 2011 from $118,129 for the year ended August 31, 2010 due to the ending of a sublease agreement, a decrease of $115,038.

Interest income increased to $11,508 for the year ended August 31, 2011 from $3,359 for the year ended August 31, 2010, an increase of $8,149.

Interest expense decreased to $691 for the year ended August 31, 2011 from $2,477 for the year ended August 31, 2010, a decrease of $1,786.

Income Taxes

Our provision for income tax expense for the year ended August 31, 2011 is $173,000 compared to a recovery of $878,000 in 2010. In 2010, the Company recognized a recovery for income tax purposes to record the tax benefit associated with various tax deductions available to the Company. The Company recognized this benefit as a result of an assessment that it is more likely than not that the Company will realize the benefits of those deductions against future taxable income. In 2011, as the Company continues to be profitable, the Company began utilizing these various tax deductions to offset taxable income. The Company pays no current income tax.

During the year ended August 31, 2011 the Company recorded income tax expense of $173,000 to recognize the utilization of these various tax deductions during the year to reduce taxable income. The Company realized a net increase to tax assets of $381,000 in 2011 mostly relating amendments to prior years' tax return filings to capitalize software development costs incurred during those fiscal years ended August 31, 2001 to 2004 and eliminate the expiration of losses.

The Company is subject to United States federal and state income taxes at an approximate rate of 34% (2010 - 34%) and to Canadian federal and British Columbia provincial taxes in Canada at an approximate rate of 27.3% (2010- 29.3%) . The effective tax rate of 21.3% in 2011 is lower than our expected blended tax rate of 29% due to an increase in the estimated value of Canadian tax deductions available to offset Canadian income tax. The increase in the value these benefits is due to an increase in the value of the Canadian dollar. Our effective tax rate could fluctuate due to the valuation of our deferred tax assets, or by changes in tax laws, regulations, and accounting principles.

As at August 31, 2011 the Company had deferred tax assets of $1,155,000 (August 31, 2010 - $1,328,000) which includes the value of benefits from deductions associated with non-capital losses, depreciable assets, and investment tax credits. The Company will continue to evaluate the realizability of deferred tax assets yearly by assessing the need for and amount of a valuation allowance.

Income

During the year ended August 31, 2011, operating income increased by 16% to $797,600 (August 31, 2010 –$689,062). Revenue continues to grow faster than overall expenses. Net income was $638,508 (August 31, 2010 –$1,686,073). Our revenue increased in all geographic areas including a 14% increase in North American independent record label revenue, an 18% growth in European and an 14% growth through expanded independent record label use. Earnings before interest income and expenses, taxes, depreciation and amortization and stock based compensation (Adjusted EBITDA) was $868,013 for the year ended August 31, 2011 (August 31, 2010 -$908,267).

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:



    31-Aug     31-Aug  
    2011     2010  
Net income $  638,508   $  1,686,073  
Interest income and expenses   (10,817 )   (882 )
Deferred income tax expense (recovery)   173,000     (878,000 )
Depreciation and amortization   58,339     53,106  
Stock based compensation   8,983     47,970  
Adjusted EBITDA $  868,013   $  908,267  

LIQUIDITY AND FINANCIAL CONDITION

We had cash of $1,238,173 as at August 31, 2011 compared to cash of $491,012 as at August 31, 2010. We had a working capital surplus of $1,354,115 as at August 31, 2011 compared to $976,139 as at August 31, 2010.The . increase in our working capital was mainly due to increased cash balance.

Cash Flows

Net cash generated in operating activities was $1,139,070 for the year ended August 31, 2011, compared to $841,844 for the year ended August 31, 2010. The increase is mainly due to the continued increase in our sales and the gain in the settlement of litigation of $606,540 ($600,000 Canadian) offset by a $300,986 increase in professional fees in connection with litigation.

The cash used in investing activities was $63,289 for the year ended August 31, 2011, compared to $54,250 for the year ended August 31, 2010. The Company invested in new computer equipment to strengthen our service quality.

Net cash used in financing activities was $362,305 for the year ended August 31, 2011 compared to $572,397 for the year ended August 31, 2010. The Company continued the share buyback program during the fiscal year 2011. The Company repurchased 1,106,895 shares with a cost of $450,855 during the fiscal year 2011. The proceeds from exercise of stock options increased to $100,000 for the year ended August 31, 2011 compared to $6,250 for year ended August 31, 2010.

Our cash from operations was able to provide sufficient funds during the fiscal year end of August 31, 2011. We are encouraged by our revenue growth in fiscal 2011 especially in Europe as our record label clients incorporate Play MPE® into their work flow.

MATERIAL OFF-BALANCE SHEET ARRANGEMENTS

None.

CRITICAL ACCOUNTING ESTIMATES

We prepare our 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 management estimates for operating results could vary significantly from actual results, which could materially affect the valuation of the future income tax asset. Although the Company has tax loss carry-forwards and other deferred income tax assets, management has determined certain of these deferred tax assets do not meet the more likely than not criteria, and accordingly, these deferred income tax asset amounts have been partially offset by a valuation allowance as disclosed in Note 5 of our consolidated financial statements.

If management's estimates of the cash flows or operating results do not materialize due to errors in estimates or unforeseen changes to the economic conditions affecting the Company, it could result in an impairment adjustment in future periods up to the carrying value of the deferred income tax balance of $1,155,000.

Contingencies

As discussed in Part I, Item 3 of this Form 10−K under the heading "Legal Proceedings" and in Note 8 "Contingencies" in Notes to Consolidated Financial Statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In accordance with US GAAP, the Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In management's opinion, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate materially adversely affect its financial condition or operating results. However, the outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

Impairment of Long-Lived Assets

We evaluate the recoverability of our long-lived assets including tangible assets in accordance with authoritative guidance. When events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, we recognize such impairment in the event the carrying amount of such assets exceeds the future undiscounted cash flows attributable to such assets. We have not recorded any impairment losses to date.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The Company's adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update 2009-14, "Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force." This Update removes tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality from the scope of the software revenue guidance in Subtopic 985-605 of the Codification. Additionally, ASU 2009-14 provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software that is not essential to the product’s functionality. ASU 2009-14 requires the same expanded disclosures that are included within ASU 2009-13. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. A company is required to adopt the amendments in both ASU 2009-13 and 2009-14 in the same period using the same transition method. 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 April 2010, the FASB issued Accounting Standards Update 2010-13, “Compensation – Stock Compensation (Topic 718)”. The objective of this Update is to address the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. The Update provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment award that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update 2011-14, “Fair Value Measurement (Topic 820)”. This Update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with US GAAP and International Financial Reporting Standards (“IFRS”). The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and they explain how to measure fair value and they do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive income (Topic 220)”. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of this update on the consolidated financial statements

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Exchange Risk

Our revenues are primarily in United States dollars and Euros while our operating expenses are primarily in Canadian 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. During the year, the rise in the value of the Canadian dollar relative to the US dollar had an adverse impact on the Company. The effect of the stronger Canadian dollar in 2011 contributed approximately $83,000 to the increase in operating expenses during 2011 compared to 2010.



ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Index to Audited Consolidated Financial Statements for the Year Ended August 31, 2011:

1.

Report of Independent Registered Public Accounting Firm – BDO Canada LLP

   
2.

Consolidated Balance Sheets as at August 31, 2011 and 2010;

   
3.

Consolidated Statement of Operations for the Years Ended August 31, 2011 and 2010;

   
4.

Consolidated Statement of Changes in Stockholders' Equity for the Years Ended August 31, 2011 and 2010;

   
5.

Consolidated Statement of Cash Flows for the Years Ended August 31, 2011 and 2010;

   
6.

Notes to Consolidated Financial Statements.



Consolidated Financial Statements

Destiny Media Technologies Inc.
August 31, 2011 and 2010
(Expressed in United States dollars)


 
Tel: 604 688 5421 BDO Canada LLP
Fax: 604 688 5132 600 Cathedral Place
www.bdo.ca 925 West Georgia Street
  Vancouver BC V6C 3L2 Canada

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Stockholders
Destiny Media Technologies Inc.
Vancouver, Canada

We have audited the accompanying consolidated balance sheets of Destiny Media Technologies Inc. (the “Company”) as of August 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Destiny Media Technologies Inc. at August 31, 2011 and 2010, and the results of its operations and its cash flows for the years ended August 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO Canada LLP
Chartered Accountants

Vancouver, Canada
November 25, 2011



Destiny Media Technologies Inc.
 
CONSOLIDATED BALANCE SHEETS
As at August 31 (Expressed in United States dollars)

    2011     2010  
    $     $     
             
ASSETS            
Current            
Cash and cash equivalents   1,238,173     491,012  
Accounts receivable, net of allowance for doubtful accounts of $23,513 [2010 – $17,093]   385,629     542,932  
Other receivables   62,779     45,616  
Prepaid expenses   23,583     32,282  
Deposits   10,223      
Deferred tax assets – current portion [note 5]   286,000     380,000  
Total current assets   2,006,387     1,491,842  
Deposits   38,349     9,496  
Property and equipment, net [note 3]   144,401     129,479  
Deferred tax assets – long term portion [note 5]   869,000     948,000  
Total assets   3,058,137     2,578,817  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current            
Accounts payable   293,552     220,538  
Accrued liabilities   311,797     259,388  
Deferred leasehold inducement   4,934      
Deferred revenue   37,954     25,018  
Obligation under capital leases – current portion [note 6]   4,035     10,759  
Total current liabilities   652,272     515,703  
Obligation under capital leases – long term portion [note 6]       3,745  
Total liabilities   652,272     519,448  
             
Commitments and contingencies [notes 6 and 8]            
Stockholders’ equity            
Common stock, par value $0.001 [note 4]            
     Authorized: 100,000,000 shares
     Issued: 50,612,507 Outstanding: 50,487,577 shares
          [August 31, 2010 – issued and outstanding 51,143,847 shares]
  50,613     51,145  
Additional paid-in capital   8,758,044     9,049,308  
Shares held for cancellation   (50,076 )    
Accumulated Deficit   (6,576,033 )   (7,214,541 )
Accumulated other comprehensive income   223,317     173,457  
Total stockholders’ equity   2,405,865     2,059,369  
Total liabilities and stockholders’ equity   3,058,137     2,578,817  

See accompanying notes



Destiny Media Technologies Inc.  
   
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Years ended August 31 (Expressed in United States dollars)

    2011     2010  
    $     $  
             
Service revenue [note 9]   4,007,230     3,771,382  
             
Operating expenses            
General and administrative [note 8a]   763,872     1,049,368  
Sales and marketing   823,729     786,228  
Research and development   1,563,690     1,193,618  
Depreciation and amortization   58,339     53,106  
    3,209,630     3,082,320  
Income from operations   797,600     689,062  
Other income (expenses)            
Interest income   11,508     3,359  
Other income   3,091     118,129  
Interest and other expense   (691 )   (2,477 )
Income before provision for income taxes   811,508     808,073  
Deferred income tax recovery (expense) [note 5]   (173,000 )   878,000  
             
Net income   638,508     1,686,073  
             
Net income per common share, basic and diluted   0.01     0.03  
             
Weighted average common shares outstanding:            
   Basic   50,552,886     51,637,922  
   Diluted   50,931,848     52,274,419  

See accompanying notes



Destiny Media Technologies Inc.  
   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
Years ended August 31                      (Expressed in United States dollars)

                                  Accumulated     Total  
                Additional     Shares           other     stockholders’  
    Common stock           paid-in     held for     Accumulated     comprehensive     equity  
    Shares     Amount     capital     cancellation     Deficit     income        
    #     $     $       $     $     $     $  
Balance, August 31, 2009   51,723,647     51,725     9,492,168         (8,900,614 )   147,655     790,934  
Net income for the year                   1,686,073         1,686,073  
Foreign currency translation gain                       25,802     25,802  
       Comprehensive income                           1,711,875  
Common stock issued on options exercised   133,200     133     6,117                 6,250  
Common stock issued on warrants exercised   336,000     336     (336 )                
Common stock repurchased and cancelled   (1,049,000 )   (1,049 )   (466,611 )               (467,660 )
Stock options repurchased and cancelled           (30,000 )               (30,000 )
Stock based compensation           47,970                 47,970  
Balance, August 31, 2010   51,143,847     51,145     9,049,308         (7,214,541 )   173,457     2,059,369  
      Net income for the year                   638,508         638,508  
Foreign currency translation gain                       49,860     49,860  
Comprehensive income                           688,368  
Common stock issued on options exercised   450,625     451     99,549                 100,000  
Common stock repurchased and cancelled   (981,965 )   (983 )   (399,796 )               (400,779 )
Common stock repurchased and held for
      cancellation
  (124,930 )           (50,076 )           (50,076 )
Stock compensation - employees           8,983                 8,983  
Balance, August 31, 2011   50,487,577     50,613     8,758,044     (50,076 )   (6,576,033 )   223,317     2,405,865  

See accompanying notes



Destiny Media Technologies Inc.  
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Years ended August 31 (Expressed in United States dollars)

    2011     2010  
     $     $  
             
OPERATING ACTIVITIES            
Net income   638,508     1,686,073  
Items not involving cash:            
   Depreciation and amortization   58,339     53,106  
   Stock-based compensation   8,983     47,970  
   Deferred leasehold inducement   4,880      
   Deferred commission costs       13,908  
   Deferred income taxes   173,000     (878,000 )
Changes in non-cash working capital:            
   Accounts receivable   196,666     (22,340 )
   Other receivables   (13,518 )   (30,062 )
   Prepaid expenses and deposits   (26,875 )   29,308  
   Accounts payable   55,772     (146,431 )
   Accrued liabilities   32,417     81,076  
   Deferred revenue   10,898     7,236  
Net cash provided by operating activities   1,139,070     841,844  
             
INVESTING ACTIVITIES            
Purchase of equipment   (63,289 )   (54,250 )
Net cash used in investing activities   (63,289 )   (54,250 )
             
FINANCING ACTIVITIES            
Repayments on capital lease obligations   (11,450 )   (9,769 )
Repayments of shareholder loans       (71,218 )
Proceeds from exercise of stock options   100,000     6,250  
Repurchase of stock and options   (450,855 )   (497,660 )
Net cash used in financing activities   (362,305 )   (572,397 )
             
Effect of foreign exchange rate changes on cash   33,685     22,715  
             
Net increase in cash during the year   747,161     237,912  
Cash, beginning of year   491,012     253,100  
Cash, end of year   1,238,173     491,012  
             
Supplementary disclosure            
Interest paid   691     2,477  
Income taxes paid        

See accompanying notes



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

1. ORGANIZATION

Destiny Media Technologies Inc. (the “Company”) was incorporated in August 1998 under the laws of the State of Colorado. The Company develops technologies that allow for the distribution over the Internet of digital media files in either a streaming or digital download format. The technologies are proprietary. The Company operates out of Vancouver, BC, Canada and serves customers predominantly located in the United States, Europe and Australia.

The Company’s stock is listed for trading under the symbol “DSNY” on the OTC Bulletin Board in the United States, under the symbol “DSY” on the TSX Venture Exchange and under the symbol “DME” on the Berlin, Frankfurt, Xetra and Stuttgart exchanges in Germany.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting policies used in the preparation of these consolidated financial statements:

Basis of presentation and fiscal year

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The Company’s fiscal year-end is August 31.

Certain comparative figures have been reclassified to conform to the current year’s presentation.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Destiny Software Productions Inc. and MPE Distribution Inc. All inter-company balances and transactions have been eliminated on consolidation.

Use of estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to revenue recognition, estimated useful lives for property and equipment, allowances for doubtful accounts, sales returns and allowances, stock-based compensation expense, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources.

1



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and actual results, our future results of operations will be affected.

Cash and cash equivalents

We consider all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.

Revenue recognition

The Company recognizes 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 the Company’s 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.

Cash received in advance of meeting the revenue recognition criteria is recorded as deferred revenue.

2



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

Long-lived assets

Long-lived assets held for use are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Impairment is measured by a two step process: Step 1) the carrying amount of the asset is compared with its estimated undiscounted future cash flows expected to result from the use of the assets and its eventual disposition. If the carrying amount is lower than the undiscounted future cash-flows, no impairment loss is recognized. Step 2) If the carrying amount is higher than the undiscounted future cash-flows then an impairment loss is measured as the difference between the carrying amount and fair value which may be based on internally developed discounted cash flow estimates, quoted market prices, when available, or independent appraisals. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. As of August 31, 2011, there were no impairment indicators present.

Litigation and settlement costs

We are involved in disputes, litigation and other legal actions. In accordance with ASC 450, Contingencies, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.

During the year ended August 31, 2011, the Company incurred approximately $528,000 (2010: $286,000) in professional legal fees in connection with legal actions against the Company and legal actions initiated by the Company. These costs are expensed as incurred and are recorded as a component of general and administrative expenses. During the year ended August 31, 2011, the Company recorded a gain on settlement of litigation of $606,540 (2010: $Nil) which offset the professional fees incurred.

3



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

Allowance for doubtful accounts

The Company establishes an allowance for doubtful accounts through review of open accounts, and historical collection and allowance amounts. The allowance for doubtful accounts is intended to reduce trade accounts receivable to the amount that reasonably approximates their fair value due to their short-term nature. The Company’s exposure to credit risk has increased as a result of global market conditions and increased revenue. The amount ultimately realized from trade accounts receivable may differ from the amount estimated in the consolidated financial statements based on collection experience.

Research and development costs

Research costs are expensed as incurred. Development costs are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. The Company’s products are generally released soon after technological feasibility has been established and therefore costs incurred subsequent to achievement of technological feasibility are not significant and have been expensed as incurred.

Property and equipment

Property and equipment are stated at cost. Depreciation and amortization is taken over the estimated useful lives of the assets and is calculated using the declining balance method at the following annual rates, commencing upon utilization of the assets:

Furniture and fixtures 20%
Computer hardware 30%
Computer software 50%
Leasehold improvements Straight-line over lease term

4



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

Translation of foreign currencies

The Company’s functional currency is the U.S. dollar. Financial statements of foreign operations for which the functional currency is the local currency are translated into U.S. dollars with assets and liabilities translated at the rate of exchange in effect at the balance sheet date and revenue and expense items translated at the average rates for the period. Unrealized gains and losses resulting from the translation of the consolidated financial statements are deferred and accumulated in a separate component of stockholders’ equity as a foreign currency translation gain (loss) in accumulated other comprehensive income. Transactions denominated in foreign currencies are translated at the exchange rate in effect on the transaction date. Foreign currency gains and losses are included as a component of general and administrative expenses in the consolidated statements of operations.

The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations. The Company has not entered into contracts for foreign exchange hedges.

Advertising

Advertising costs are expensed as incurred and totaled $154,258 and $116,177 during the years ended August 31, 2011 and 2010, respectively.

Income taxes

The Company utilizes the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes (formerly SFAS No. 109, Accounting for Income Taxes). Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis that give rise to the differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.

5



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

The Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company’s evaluation was performed for the tax years ended August 31, 1999 through August 31, 2011, the tax years which remain subject to examination by major tax jurisdictions. The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.

Investment tax credits

The Company uses the flow through method to account for investment tax credits earned on eligible scientific research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense.

Stock based compensation

The Company accounts for stock-based compensation arrangements in accordance with ASC 718, Stock Compensation. Under the fair value recognition provisions of ASC 718 stock based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. The Company has used the Black-Scholes option pricing model to estimate fair value of its stock-based awards which requires various judgmental assumptions including estimating stock price volatility and expected life. The Company’s computation of expected volatility is based on a combination of historical and market-based implied volatility. In addition, the Company considers many factors when estimating expected life, including types of awards and historical experience. If any of the assumptions used in the Black-Scholes valuation model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

6



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

As required under ASC 718-50 Employee Share Purchase Plans, compensation expense is recorded for shares committed to be released to employees based on the fair market value of those shares in the period in which they are purchased by the Company and committed to be released to the employee.

Earnings per share

Net income per share basic is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Net income per share (diluted) is calculated by dividing net income for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding common share equivalents. This method requires that the dilutive effect of outstanding options and warrants issued be calculated using the treasury stock method. Under the treasury stock method, all common share equivalents have been exercised at the beginning of the period (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the period, but only if dilutive.

    Year Ended  
             
  August 31,     August 31,  
    2011     2010  
    $     $  
Net income   638,508     1,686,073  
Weighted average common shares outstanding   50,552,886     51,637,922  
Effect of dilutive securities – warrants   136,260     210,053  
Effect of dilutive securities – options   242,703     426,444  
             
Diluted weighted average common shares outstanding   50,931,848     52,274,419  

Weighted average potentially dilutive securities of 2,216,027 and 6,475,954 shares arising from stock options and share purchase warrants, respectively, were not included as their effect would be anti-dilutive for the year ended August 31, 2011 (2010 – 2,469,794 and 6,531,831 shares arising from stock options and share purchase warrants, respectively).

7



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

Shares repurchased for cancellation are excluded in the calculation of earnings per share from the date they are repurchased.

Comprehensive income

Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income consists only of accumulated foreign currency translation adjustments for all years presented.

Recent adopted accounting pronouncements

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update 2009-14, “Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force.” This Update removes tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality from the scope of the software revenue guidance in Subtopic 985-605 of the Codification. Additionally, ASU 2009-14 provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software that is not essential to the product’s functionality. ASU 2009-14 requires the same expanded disclosures that are included within ASU 2009-13. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. A company is required to adopt the amendments in both ASU 2009-13 and 2009-14 in the same period using the same transition method. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

8



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

Accounting Standards Not Yet Effective

In April 2010, the FASB issued Accounting Standards Update 2010-13, “Compensation – Stock Compensation (Topic 718)”. The objective of this Update is to address the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Specifically, an employee share-based payment award denominated in a currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition and therefore would not classify the award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of this update on the consolidated financial statements. This standard will be effective for the Company on September 1, 2011. The Company does not expect the adoption of this new guidance will have a material impact on its financial statements.

In May 2011, the FASB issued Accounting Standards Update 2011-14, “Fair Value Measurement (Topic 820)”. This Update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with US GAAP and International Financial Reporting Standards (“IFRS”). The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and they explain how to measure fair value and they do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

9



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income (Topic 220)”. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of this update on the consolidated financial statements.

3. PROPERTY AND EQUIPMENT

          Accumulated     Net book  
    Cost     amortization     value  
    $     $     $  
                   
2011                  
Furniture and fixtures   134,828     103,650     31,178  
Computer hardware   432,570     321,720     110,850  
Computer software   66,630     64,257     2,373  
    634,028     489,627     144,401  
                   
2010                  
Furniture and fixtures   122,119     89,037     33,082  
Computer hardware   347,984     257,757     90,227  
Computer software   59,372     53,202     6,170  
    529,475     399,996     129,479  

10



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

3. PROPERTY AND EQUIPMENT (cont’d.)

The gross amount of assets related to property and equipment under capital lease was $33,136 and $30,779 for years ended August 31, 2011 and 2010, respectively. The accumulated depreciation and amortization related to property and equipment under capital lease was $17,438 and $11,659 for the years ended August 31, 2011 and 2010, respectively.

4. STOCKHOLDERS’ EQUITY

[a] Common stock issued and authorized

The Company is authorized to issue up to 100,000,000 shares of common stock, par value $0.001 per share.

2011

During the year ended August 31, 2011, 50,625 shares were issued in a cashless exercise of 135,000 options with an exercise price of $0.25. 400,000 shares were issued in an exercise of 400,000 options with cash proceeds of $100,000.

2010

During the year ended August 31, 2010, 336,000 shares were issued in a cashless exercise of 600,000 warrants with an exercise price of $0.22. 108,200 shares were issued in a cashless exercise of 289,000 options with an exercise price of $0.25. 25,000 shares were issued in an exercise of 25,000 options with cash proceeds of $6,250.

[b] Common stock cancelled

During the year ended August 31, 2011, the Company repurchased 1,106,895 shares at an open market, of which it paid $400,779 for 981,965 shares and $50,076 for 124,930 shares. As of August 31, 2011, the 981,965 shares have been cancelled and the 124,930 shares are being held for cancellation.

11



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

4. STOCKHOLDERS’ EQUITY (cont’d.)

[c] Stock option plans

The Company has two existing stock option plans (the “Plans”), namely the Amended 1999 Stock Option Plan and the 2006 Stock Option Plan, under which up to 3,750,000 and 5,100,000 shares of the common stock, respectively, have been reserved for issuance. A total of 1,466,334 common shares remain eligible for issuance under the plans. The options generally vest over a range of periods from the date of grant, some are immediate, and others are 12 or 24 months. Any options that do not vest as the result of a grantee leaving the Company are forfeited and the common shares underlying them are returned to the reserve. The options generally have a contractual term of five years.

Stock-Based Payment Award Activity

A summary of option activity under the Plans as of August 31, 2011 and 2010, and changes during the years ended are presented below:

                Weighted        
                Average     Aggregate  
          Weighted     Remaining     Intrinsic  
          Average     Contractual     Value  
Options   Shares     Exercise Price     Term     $  
Outstanding at September 1, 2009   3,939,000     0.44     2.07     80,940  
Granted   100,000     0.50              
Exercised   (314,000 )   0.25           47,350  
Repurchased and cancelled   (150,000 )   0.25              
Expired or forfeited   (350,000 )   0.39              
Outstanding at August 31, 2010   3,225,000     0.47     1.68     117,600  
Granted   -     -              
Exercised   (535,000 )   0.25           79,250  
Expired or forfeited   (400,000 )   0.63              
Outstanding at August 31, 2011   2,290,000     0.50     0.99     25,500  
Vested and exercisable at August 31, 2011   2,275,417     0.50     0.97     25,500  

12



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

4. STOCKHOLDERS’ EQUITY (cont’d.)

The following table summarizes information regarding the non-vested stock purchase options outstanding as of August 31, 2011:

  Number of Options  
Non-vested options at August 31, 2010 42,708  
Vested (28,125)  
Non-vested options at August 31, 2011 14,583  

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the options that were in-the-money at August 31, 2011.

During the year ended August 31, 2011, total stock-based compensation expense related to employees of $8,983 are reported in the statement of operations as follows:

  2011 2010
  $ $
Stock-based compensation    
   General and administrative 3,276 14,238
   Sales and marketing 1,969 17,536
   Research and development 3,738 16,196
Total stock-based compensation 8,983 47,970

Valuation Assumptions

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:

    2011     2010  
    $     $  
Expected term of stock options (years)   0.55     0.55-2.5  
Expected volatility   52%     76%-86%  
Risk-free interest rate   0.06%     0.2%-1%  
Dividend yields        

Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model.

13



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

4. STOCKHOLDERS’ EQUITY (cont’d.)

The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the options is based on US Treasury bill rates in effect at the time of grant.

During the year ended August 31, 2011, there were no options granted. 110,000 options were extended for one more year. The weighted-average grant-date fair value of options granted and extended during the year ended August 31, 2011 were $Nil and $0.029, respectively (August 31, 2010 - $0.21 and $0.19) . As a result of the extension of the life of the 110,000 options, the Company recorded an incremental value of $3,189 as part of the total stock-based compensation of $8,983 on the statements of operations during the year ended August 31, 2011.

During the year ended August 31, 2010, 150,000 options at an exercise price of $0.25 were repurchased by the Company for a consideration of $30,000. The consideration paid was charged to equity with no additional compensation recorded.

As of August 31, 2011 there was $3,086 of unrecognized stock-based compensation cost related to employee stock options granted under the plans, which is expected to be fully recognized over the next 7 months.

[d] Employee Stock Purchase Plan

The Company’s 2011 Employee Stock Purchase Plan (the “Plan”) became effective on February 22, 2011. Under the Plan, employees of Destiny are able to contribute up to 5% of their annual salary into a pool which is matched equally by Destiny. Independent directors are able to contribute a maximum of $12,500 each for a combined maximum annual purchase of $25,000. The maximum annual combined contributions will be $400,000. All purchases are made through the Toronto Stock Exchange by a third party plan agent. The third party plan agent will also be responsible for the administration of the Plan on behalf of Destiny and the participants.

During the year ended August 31, 2011, the Company recognized compensation expense of $61,141 (2010: $Nil) in salaries and wages on the statement of operations in respect of the Plan, representing the Company’s employee matching of cash contributions to the plan. The shares were purchased on the open market at an average price of $0.36. The shares are held in trust by the Company for a period of one year from the date of purchase.

14


4. STOCKHOLDERS’ EQUITY (cont’d.)

[e] Warrants

As at August 31, 2011, the Company has the following common stock warrants outstanding:

  Number of Common Exercise Price  
  Shares Issuable $ Date of Expiry
       
$0.22 Warrants 350,000 0.22 August 25, 2012
$0.40 Warrants 361,000 0.40 February 28, 2012
$0.50 Warrants 5,800,000* 0.50 February 28, 2012
$0.70 Warrants 500,000 0.70 April 9, 2012
  7,011,000       

*5,400,000 of the $0.50 warrants have a forced conversion feature by which the Company can demand exercise of the share purchase warrants if the common shares trades at a price equal to or greater than $1.25 if certain conditions are met. The warrant agreements also provide for a weighted average down round provision whereby the exercise price will be reduced in the event the Company issues options or warrants, excluding employee options, at a price per shares less than the fair market value of the Company’s shares at the date of issuance.

The intrinsic value for these warrants is $77,220 as at August 31, 2011.

During the year ended August 31, 2011, 235,250 (2010:5,886) warrants expired unexercised.

15



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

5. INCOME TAXES

The Company is subject to United States federal and state income taxes at an approximate rate of 34.0% and to Canadian federal and British Columbia provincial taxes in Canada at an approximate rate of 27.3% . The reconciliation of the provision (recovery) for income taxes at the United States federal statutory rate compared to the Company’s income tax expense is as follows:

    2011     2010  
    $     $  
             
Tax at U.S. statutory rates   276,000     275,000  
             
Permanent differences   6,000     18,000  
Effect of lower foreign tax in Canada   (41,000 )   (32,000 )
Effect of research tax credits claims filed in respect of prior years   (248,000 )   (271,000 )
Other adjustments and change to valuation allowance   180,000     (868,000 )
Provision (recovery) for deferred income taxes   173,000     (878,000 )

Included in other adjustments and change in valuation allowance for the year ended August 31, 2011 is $35,000 (2010: ($19,000)) relating to the effect of changes in statutory tax rates, ($82,000) (2010: ($25,000)) for the effect of changes in foreign exchange rates, and $227,000 (2010: $(824,000)) in respect of the change in valuation allowance, which includes the items noted below.

During the year ended August 31, 2011, the Company recorded an adjustment to future income tax assets of $486,000 in respect of amendments to prior years’ tax return filings, as approved by Canada Revenue Agency, to capitalize software development costs and eliminate the expiration of losses. As a result, the cumulative tax benefit has increased. The Company has also increased the valuation allowance against these benefits and the investment tax credits approved.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance for those deferred tax assets for which realization is not more likely than not to occur.

During the year ended August 31, 2011, the Company decreased future income tax assets by $159,000 in respect of a provision for cross border tax issues.

16



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

5. INCOME TAXES (cont’d.)

Significant components of the Company’s deferred tax assets as of August 31 are as follows:

    2011     2010  
    $     $  
             
Deferred tax assets:            
Net operating loss carryforwards   1,001,000     1,218,000  
Excess of book over tax depreciation   985,000     687,000  
Tax Credits carry forward   571,000     271,000  
Total deferred tax asset   2,557,000     2,176,000  
Valuation allowance   (1,402,000 )   (848,000 )
Net deferred tax asset   1,155,000     1,328,000  
Less: current portion   286,000     380,000  
Non-current   869,000     948,000  

Net income (loss) before income tax by geographic region is as follows:

    2011     2010  
    $     $  
             
United States   208,945     179,091  
Canada   602,563     628,982  
    811,508     808,073  

If not utilized to reduce future taxable income, the Company’s net operating loss carryforwards will expire as follows:

    Canada     United States  
    $     $  
2020 and thereafter   96,005     2,880,332*  
    96,005     2,880,332  

*In addition to the loss carryforward balance, there exists a taxed dividend pool in the United States of approximately $467,000.

17



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

6. COMMITMENTS

The Company is committed to make payments under its capital leases for the remaining terms of the leases as follows:

    $  
2012   4,143  
Total lease payments   4,143  
Less: Amounts representing interest   (108 )
Current obligation   4,035  

The Company entered into a sub-lease agreement for its premises on September 15, 2010. It commenced on October 22, 2010 and will expire on October 30, 2013. The Company is committed to payments as followed:

    $  
       
2012   235,031  
2013   240,952  
2014   40,323  

During the year ended August 31, 2011 the Company incurred rent expense of $232,512 (2010: $307,907) which has been allocated between general and administrative expenses, research and development and sales and marketing on the statement of operations.

By a credit facilities agreement dated April 8, 2010 and amended June 17, 2011, the Company arranged for credit facilities with the Royal Bank of Canada which allows the Company to draw up to $450,000. These credit facilities consist of a revolving facility of $400,000 bearing interest at prime plus 3.5% and a commercial credit card facility to $50,000. Borrowings under the facilities are repayable on demand. As of August 31, 2011, the Company has received a letter of guarantee of $53,325 ($50,000 AUD) (2010: $Nil) on the revolving demand facility and has available credit of $396,675 (2010: $450,000). The letter of guarantee expires July 6, 2012. No amount had been drawn on these facilities as at August 31, 2011 and 2010.

7. RELATED PARTY TRANSACTIONS

The Company entered into a consulting agreement with a Director effective October 1, 2010. The Company will pay $2,000 per month, plus authorized expenses. The Director will receive a 10% commission if related new businesses are successfully closed. During the year ended August 31, 2011, the Company paid $22,000 consulting fees.

18



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

8. CONTINGENCIES

  a)

Destiny had commenced two outstanding Canadian lawsuits (Federal Court of Canada Court File No. T-413-06 and Ontario Superior Court Ontario Court File No. 07-CV-38068 as a result of certain activities undertaken by Yangaroo Inc., a Canadian competitor (“Yangaroo”). Destiny was a defendant by counterclaim. A third lawsuit was launched in the United States (US District Court for the Eastern District of Wisconsin Green Bay Division Case No. 1:09-CV-00462), in which Destiny was defendant. The US District Court lawsuit had previously dismissed Yangaroo’s claim in its entirety with the dismissal upheld on appeal during the year.

     
 

On June 17, 2011 Destiny entered into a settlement agreement (the “Settlement Agreement”) with Yangaroo to settle all outstanding litigation. Pursuant to the Settlement Agreement, Yangaroo paid Destiny a lump sum amount totaling $606,540 ($600,000 Canadian Funds). The settlement payment was received and recorded during the year and has been credited against legal fees included in general and administrative expenses on the statements of operations for the year ended August 31, 2011.

     
 

As part of the settlement Destiny also acquired a cost and royalty free, non- exclusive, worldwide, irrevocable, license to two patents held by Yangaroo (US Patent No. 7,529,712 and Canadian Patent No. 2,407,774). No value was assigned or recorded to the licenses to Yangaroo’s patents. Each party has agreed not to make any claim for costs against the other party.

     
  b)

On August 12, 2009 the Company received a statement of claim for wrongful dismissal. The claim is for approximately $184,000 ($180,000 CDN) plus an award of stock options and unspecified damages. The Company believes the claim is without merit. The matter was heard at trial subsequent to year-end and management expects a decision shortly. Management believes it is unlikely that the outcome of this matter will have an adverse impact on its result of operations, cash flows and financial condition.

19



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

8. CONTINGENCIES (cont’d)

  c)

On June 10, 2011, the Company commenced proceedings in the Federal Court of Australia against Shooting Star Picture Company Pty Ltd, Peter Skillman and D-Star Music Delivery Pty Ltd. (collectively the “respondents”). The Company alleges various claims against the respondents including, amongst other things, breach of contract, misleading and deceptive conduct, breach of fiduciary duties, and breach of confidence. The company is presently seeking damages of AU$1.7 million, although this is subject to expert evidence which is currently being prepared.

     
 

The respondents have cross-claimed for approximately $155,000 (AU$145,000) plus a percentage of unspecified revenue the Company received from the Australian market in during a portion of the year ended August 31, 2011. Management believes it is unlikely that the outcome of this matter will have an adverse impact on its result of operations, cash flows and financial condition.

     
  d)

Subsequent to August 31, 2011, the Company was served with a Notice of Civil Claim in the Supreme Court of British Columbia from Noramco Capital Corporation for $100,000 plus interest. The claim asserts that the Company has repudiated a subscription agreement entered into in, or around, August 2000. Management believes the claim is without merit and that it is unlikely that the outcome of this matter will have a material adverse impact on its result of operations, cash flows and financial condition

20



Destiny Media Technologies Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2011 and 2010

9. CONCENTRATIONS AND ECONOMIC DEPENDENCE

The Company operates solely in the digital media software segment and all revenue from its products and services are made in this segment.

Revenue from external customers, by product and location of customer, is as follows:

    2011     2010  
    $     $  
             
MPE®            
             
United States   2,200,306     2,117,650  
Europe   1,415,797     1,204,920  
Australia   214,922     187,733  
Total MPE® Revenue   3,831,025     3,510,303  
             
Clipstream ® and Radio Destiny            
             
United States   176,205     261,079  
Total Clipstream ® & Radio Destiny Revenue   176,205     261,079  
             
Total Revenue   4,007,230     3,771,382  

During the year ended August 31, 2011, three customers represented 64% of the total revenue balance [2010 - three customers represented 61%].

As at August 31, 2011, two customers represented $215,747 (56%) of the trade receivables balance [2010 – three customers represented 61%].

The Company has substantially all its assets in Canada and its current and planned future operations are, and will be, located in Canada.

21



ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company are responsible for evaluating the effectiveness of the Company’s disclosure controls and procedures as at August 31, 2011.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our management, with the participation of our principal executive officer and our principal financial officer concluded that as of the end of the period covered by this annual report, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to material weaknesses described below.

Internal Controls Over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer of the Company are responsible for designing internal controls over financial reporting, or causing them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Using the framework provided by the Committee of Sponsoring Organizations (“COSO”), the Company conducted an evaluation of the effectiveness of the internal controls over financial reporting as at August 31, 2011 and concluded that there are material weaknesses in internal controls over financial reporting, which are discussed below. A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

  • Due to the limited number of staff resources, the Company believes there are instances where a lack of segregation of duties exist to provide effective controls;
  • Our audit committee does not have a financial expert and is not independent; and
  • Due to the limited number of staff resources, the Company may not have the necessary in- house knowledge to address complex accounting and tax issues that may arise.

As a result of these weaknesses, the Company’s internal controls over financial reporting are not effective. The weaknesses and their related risks are not uncommon in a company the size of Destiny Media because of limitations in size and number of staff. The Company believes it has taken initial steps to mitigate these risks by consulting outside advisors and involving the Audit Committee and Board of Directors in reviews and consultations where necessary.The Company believes that it must take additional steps to further mitigate these risks by consulting outside advisors on a more regular and timely basis.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

During the period covered by this annual report, there have been no changes in the Company’s internal controls over financial reporting that occurred that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.


PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following table sets forth the names, positions and ages of our executive officers and directors. All our directors serve until the next annual meeting of shareholders or until their successors are elected and qualify. The Board of Directors elects officers and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board of Directors.

Name Position Held with the Company Age Date First Elected or Appointed
Steven Vestergaard(1) Chief Executive Officer and Director 45 January 1999
Frederick Vandenberg Chief Financial Officer and Corporate Secretary 43 July 2007
Edward Kolic(1) Director 50 February 1999
Lawrence J. Langs Director 50 November 2000
Yoshitaro Kumagai Director 65 August 2001

(1) Members of our Audit Committee

Set forth below is a brief description of the background and business experience of each of our executive officers and directors for the past five years:

Steven Vestergaard. Mr. Vestergaard has been our President, Chief Executive Officer, Chairman and a Director since 1999. Mr. Vestergaard's responsibilities include strategic planning and coordinating strategic planning, marketing and product development. Mr. Vestergaard obtained a B.Sc. from the University of British Columbia in 1989. He founded Tronic Software in 1981 and Destiny Software in 1991, both as video game development companies. In 1995, Destiny changed its focus to internet technologies, going public in 1999 with streaming video and media security technology.

Fred Vandenberg, B. Comm. MBA, CA. Mr. Vandenberg has been our Chief Financial Officer and Corporate Secretary since July 2007. Mr. Vandenberg's core responsibilities include leading the accounting, treasury, strategic planning, financial controls and financial reporting functions of the Company. Mr. Vandenberg has over 17 years of public accounting experience in tax advisory services, mergers and acquisitions, and financial reporting. Mr. Vandenberg completed the Canadian Institute of Chartered Accountant's "In-depth" taxation program while with Ernst & Young in 1998. Mr. Vandenberg obtained a Bachelor of Commerce from McMaster University in 1991 and a Master of Business Administration (Finance) from McMaster University in 1993. In 1996, Mr. Vandenberg was designated as a Chartered Accountant in Ontario.

Edward Kolic. Mr. Kolic has been a director of the Company since February 1999. Previously, Mr. Kolic acted as our Chief Operating Officer from February 1999 to October 2001 during which time he was responsible for the Company’s overall product strategy and development of its core technologies. Mr. Kolic was the president of WonderFall Productions Inc., a computer game development company founded by Mr. Kolic, which Destiny purchased in June 1999. Prior to founding Wonderfall Productions, he was as a principal partner and vice-president of marketing for Jacqueline Conoir Designs. From 1988 until 1995, Mr. Kolic was partner and president of Target Canada Production Ltd., a company engaged in the production of documentary television, educational and information programming for the Canadian Educational Television Networks, large screen interactive presentation media and a range of communication programs for corporate, government and institutional clients. Mr. Kolic is currently the founder of Eighth Avenue Development group, which undertakes development projects in the luxury home market, multi-family residential and land development.

Lawrence J. Langs. Mr. Langs has been a director of the Company since August 2000. Currently, Mr. Langs is an attorney at Feldman LLP and practices in the areas of intellectual property, entertainment and corporate law. Since January 1991, Mr. Langs has also served as managing director of iBusiness Partners, a private company primarily engaged in providing venture capital advice for small to mid sized digital companies. Previously, Mr. Langs served EVP of Sale & Business Development at ACD Systems International Inc., a company formerly listed on the TSX, from July 2004 to April 2005. Mr. Langs has also served as an officer of a number of private entities, including as EVP at Musician.com for Guitar Center, SVP of business development at MP3.com, VP of business development for Sybase New Media, Investment Banker for JPMorgan/Chase/Chemical Bank in New York, and Senior Consultant for Arthur D. Little in Boston. Mr. Langs obtained a Master of Science from MIT in 1986 and a Juris Doctorate of Law from Boston University in 1986. Mr. Langs has been a member of the New York bar since 1989.


Yoshitaro Kumagai. Since 1981, Mr. Kumagai has held positions with Singer, the Imaging Division of Mead Corporation, and IDEC Corporation, where he was responsible for Japanese and US sales and operations. Subsequently, he served as President of DPA Technology and as Chairman and CEO of Vivitar Corporation, a major distributor of various camera and computer peripheral devices. Mr. Kumagai currently serves as SVP/Business Development for GestureTek, a company proving camera-enabled gesture-recognition software for presentation and entertainment systems. Mr. Kumagai holds a BS in Mechanical Engineering from Hosei University and a BS in Information Systems and Mathematics from Georgia State University.

ELECTION OF DIRECTORS AND OFFICERS

Our directors are elected by our shareholders at our annual general meetings. Each director holds office until our next annual general meeting or until the director resigns or is removed in accordance with our bylaws. We do not have a classified Board of Directors.

Our officers serve at the discretion of our Board of Directors.

AUDIT COMMITTEE

Our audit committee consists of Mr. Steven Vestergaard, our Chief Executive Officer, Mr. Edward Kolic, one of which are independent. Our board of directors has determined that it does not have an audit committee member that qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that the audit committee members are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly and burdensome and is not warranted in our circumstances.

FAMILY RELATIONSHIPS

There are no family relationships among our officers and directors.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based on its review of the copies of such forms received by us, we believe that during the fiscal year ended August 31, 2011 all such filing requirements applicable to our officers and directors were complied with.


CODE OF ETHICS

The Company’s code of ethics is available on our website at http://www.dsny.com/investor/

ITEM 11.             EXECUTIVE COMPENSATION

The particulars of compensation paid to the following persons:

(a) our principal executive officer;

(b) each of our two most highly compensated executive officers who were serving as executive officers at the end of the year ended August 31, 2011; and

(c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the year ended August 31, 2011,

who we will collectively refer to as our “named executive officers”, of our company for the years ended August 31, 2011 and 2010, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation does not exceed $100,000 for the respective fiscal year:




Name and Principal
Position




Year



Salary
($)



Bonus
($)


Stock
Awards
($)


Option
Awards
($)(1)
Other
Annual
Compen-
sation
($)(2)



Total
($)
Steven Vestergaard (3)
President, Chief
Executive Officer
and Director
2011
2010

265,798
148,211

Nil
Nil

Nil
Nil

Nil
Nil

13,290
Nil

279,088
148,211

Frederick Vandenberg (4)
Chief Financial
Officer, Treasurer
and Secretary
2011
2010

214,683
119,525

Nil
Nil

Nil
Nil

Nil
Nil

10,734
Nil

225,417
119,525


(1)

For a description of the methodology and assumptions used in valuing the option awards granted to our named executive officers and directors during the year ended August 31, 2011, please review Note 4 to the financial statements included herein.

(2)

The value of perquisites and other personal benefits, securities and property for the individuals included in the summary compensation table that does not exceed $10,000 is not reported herein. Other compensation for Mr. Vestergaard and Mr. Vandenberg includes participation in the employee share purchase plan described below under long term incentive plans.

(3)

All salaries paid to Mr. Vestergaard are paid in Canadian dollars.

(4)

All salaries paid to Mr. Vandenberg are paid in Canadian dollars.

(5)

Compensation is stated in United States dollars and is based on an exchange rate of $1.0223 US dollars for each $1.00 Canadian dollar during the fiscal year of 2011. Compensation is stated in United States dollars and is based on an exchange rate of $0.9562 US dollars for each $1.00 Canadian dollar during the fiscal year of 2010.

EMPLOYMENT AGREEMENT WITH OUR NAMED EXECUTIVE OFFICERS

We are not party to any written employment agreement or change in control arrangements with Mr. Vestergaard. We do not have any agreements with Mr. Vestergaard regarding the payments of bonus or other performance incentives. Mr. Vestergaard is eligible to receive stock options as and when approved by our Board of Directors.

We are not party to any written employment agreement or change in control arrangements with Mr. Vandenberg. We do not have any agreements with Mr. Vandenberg regarding the payments of bonus or other performance incentives. Mr. Vandenberg is eligible to receive stock options as and when approved by our Board of Directors.


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table summarizes equity awards granted to our named executive officers that were outstanding as of August 31, 2011.

Option Awards Stock Awards




Name




Number of
Securities
Underlying
Exercisable
Options
(#)




Number of
Securities
Underlying
Unexercisable
Options
(#)



Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)





Option
Exercise
Price
($)




Option
Expiration
Date


Number
of
Shares
of
Units of
Stock
that have
not
Vested
(#)




Market
Value of
Shares or
Units of
Stock that
have not
Vested
($)
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
that have
not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights that
have not
Vested
($)
Steven
Vestergaard
300,000
0
N/A
0.50
Jan 29/2012
N/A
N/A
N/A
N/A
Frederick
Vandenberg
150,000
150,000
150,000
0
0
0
N/A

0.50
0.50
0.25
Jan 31/2015
Jan 29/2012
Jun 02/2014
N/A

N/A

N/A

N/A

LONG-TERM INCENTIVE PLANS

Employees of the Company are able to contribute up to 5% of their annual salary into a pool which is matched equally by Destiny. Independent directors are able to contribute a maximum of $12,500 each for a combined maximum annual purchase of $25,000. The maximum annual combined contributions will be $400,000. Money in the pool will be used to purchase shares out of the market on a biweekly basis. All purchases will be made through the Exchange by a third party plan agent and no purchases will be made on the OTC or German exchanges. The third party plan agent will also be responsible for the administration of the Plan on behalf of Destiny and the participants. Additionally, we have registered stock option plans.

COMPENSATION OF DIRECTORS

Our directors are reimbursed for reasonable out-of-pocket expenses in connection with attendance at Board of Director and committee meetings. In addition, our directors are eligible for grants of options to purchase shares of our common stock at the discretion of our Board of Directors.

The following table summarizes compensation paid to all of our directors:


Name
Fees Earned or
Paid in Cash
($)
Stock
Awards
($)
Option
Awards
($)
Other Annual
Compensation
($)(1)

Total
($)
Yoshitaro Kumagai 22,000 Nil Nil 521 22,521
Larry Langs Nil Nil Nil 10,938 10,938
Ed Kolic Nil Nil Nil Nil Nil

(1)

Other annual compensation for Mr. Kumagai and Mr. Langs includes participation in the employee share purchase plan described above under long term incentive plans.




ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of November 25, 2011 by: (i) each person (including any group) known to us to own more than five percent (5%) of any class of our voting securities, (ii) each of our directors and each of our named executive officers, and (iii) officers and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown.


Title of class
Name and address
of beneficial owner
Number of Shares of
Common Stock
Percentage of Common
Stock(1)

DIRECTORS AND OFFICERS:
Common Stock


Steven Vestergaard
President, Chief Executive Officer
c/o 800-570 Granville St.
Vancouver, BC, V6C 3P1
11,588,422(6)


22.82%


Common Stock




Frederick Vandenberg
Chief Financial Officer and
Corporate Secretary
c/o 800-570 Granville St.
Vancouver, BC, V6C 3P1
955,700(2)




1.87%




Common Stock


Edward Kolic
Director
c/o 800-570 Granville St.
Vancouver, BC, V6C 3P1
411,300 (3)


0.81%


Common Stock


Lawrence J. Langs
Director
c/o 800-570 Granville St.
Vancouver, BC, V6C 3P1
365,242 (4)


0.72%


Common Stock



Yoshitaro Kumagai
Director
c/o 800-570 Granville St.
Vancouver, BC, V6C 3P1
553,173 (5)



1.09%



Common Stock
All Officers and Directors as a
Group (5 persons)
13,873,837
27.31%

  (1)

Under Rule 13d-3 of the Securities Exchange Act of 1934, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on November 25, 2011. As of November 25, 2011, there were 50,487,577 shares of our common stock issued and outstanding.




  (2)

Consists of 468,200 shares held by Mr. Vandenberg and 450,000 shares that are immediately acquirable upon the exercise of stock options held by Mr. Vandenberg within 60 days of November 25, 2011 and 37,500 shares that are immediately acquirable upon the exercise of warrants held by Mr. Vandenberg within 60 days of November 25, 2011.

     
  (3)

Consists of 261,300 shares held by Mr. Kolic and 150,000 shares that are immediately acquirable upon the exercise of stock options held by Mr. Kolic within within 60 days of November 25, 2011.

     
  (4)

Consists of 215,242 shares held by Mr. Langs and 150,000 shares that are immediately acquirable upon the exercise of stock options held by Mr. Langs within 60 days of November 25, 2011.

     
  (5)

Consists of 403,173 shares held by Mr. Kumagai and 150,000 shares that are immediately acquirable upon the exercise of stock options held by Mr. Kumagai within 60 days of November 25, 2011.

     
  (6)

Consists of 11,288,422 shares held by Mr. Vestergaard and 300,000 shares that are immediately acquirable upon the exercise of stock options held by Mr. Vestergaard within 60 days of November 25, 2011.

     

EQUITY COMPENSATION PLAN INFORMATION

We have two equity compensation plans, namely our Amended 1999 Stock Option Plan and our Amended 2006 Stock Option Plan, under which up to 3,750,000 and 5,100,000 shares of our common stock, respectively, have been authorized for issuance to our officers, directors, employees and consultants. Our plans have been approved by the Company’s stockholders. The following summary information is presented for our plans on an aggregate basis as of August 31, 2011.











Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights



Weighted-Average Exercise
Price of Outstanding
Options, Warrants and
Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in column (a))
Plan Category
(a)
(b)
(c)
Equity Compensation Plans
Approved By Security
Holders
2,290,000 Shares
of Common Stock
$0.50 per Share
1,466,334 Shares of
Common Stock
Equity Compensation Plans
Not Approved By Security
Holders
Not Applicable
Not Applicable
Not Applicable


ITEM 13.             CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Except as described under Item 12 and under the title of executive compensation, and under note 5 of the financial statements, none of the following persons has any direct or indirect material interest in any transaction to which we were or are a party during the past two years, or in any proposed transaction to which the Company proposes to be a party:

(A)

any director or officer;

   
(B)

any proposed nominee for election as a director;

   
(C)

any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our common stock; or

   
(D)

any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary.

SHARE ISSUANCES

None

ITEM 14.             PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

Our current sole principle independent registered public accountant BDO Canada LLP, provided audit and other services during the year ended August 31, 2011 and the year ended August 31, 2010 as follows:

BDO Canada LLP

    2011     2010  
Audit Fees $ 96,389   $ 87,794  
Audit Related Fees   -     -  
Tax Fees   4,617     2,773  
All Other Fees   -     -  
Total Fees $ 101,006   $ 90,567  

Audit Fees. This category includes the fees for the audit of our consolidated financial statements and the quarterly reviews of interim financial statements. This category also includes advice on audit and accounting matters that arose during or as a result of the audit or the review of interim financial statements and services in connection with SEC filings.

Audit Related Fees. There were no audited related fees paid to BDO Canada LLP.

Tax Fees. This category includes the fees for professional services rendered for tax compliance, tax advice and tax planning.

All Other Fees. There were no other fees paid to BDO Canada LLP.

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before BDO Canada LLP is engaged by the Company or its subsidiaries to render any auditing or permitted non-audit related service, the engagement be:


- approved by the Company's audit committee; or
- entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

The audit committee requires advance approval of all audit, audit-related, tax, and other services performed by the independent auditor. Unless the specific service has been previously pre-approved with respect to that year, the audit committee must approve the permitted service before the independent auditor is engaged to perform it. The audit committee has delegated to the chair of the audit committee authority to approve permitted services provided that the chair reports any decisions to the committee at its next scheduled meeting.

The audit committee has considered the nature and amount of the fees billed by BDO Canada LLP, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining BDO Canada LLP's independence.

PART IV

ITEM 15.             EXHIBITS, FINANCIAL STATEMENT SCHEDULES

LIST OF DOCUMENTS FILED AS PART OF THE REPORT

The following documents are filed as part of this report:

(a)(1) Financial Statements:

  1. Report of Independent Registered Public Accounting Firm – BDO Canada LLP;
     
  2. Consolidated Balance Sheets;
     
  3. Consolidated Statements of Operations and Comprehensive Loss;
     
  4. Consolidated Statements of Cash Flows;
     
  5. Consolidated Statement of Changes in Stockholders’ Equity; and
     
  6. Notes to the Consolidated Financial Statements.

 (a)(2) Financial Statement Schedules:

None.

(a)(3) Exhibits:

3.1

Amended Articles Of Incorporation (incorporated by reference from our Registration statement on Form 10SB12G filed on November 23, 1999).

   
3.2

Bylaws (incorporated by reference from our Registration Statement on Form 10SB12G filed on November 23, 1999)

   
4.1

1999 Stock Option Plan (Incorporated by reference from our Registration Statement on Form S-8 filed on November 17, 2000).

   
4.2

Amended 1999 Stock Option Plan (Incorporated by reference from our Registration Statement on Form S-8 filed on April 27, 2004).

   
4.3

2006 Stock Option Plan (Incorporated by reference from our Registration Statement on Form S-8 filed on April 26, 2006)




4.4

2006 Amended And Restated Stock Option Plan (Incorporated by reference from our Registration Statement on Form S-8 filed on May 18, 2007)

   
10.1

Stock Purchase Agreement among Steve Vestergaard And Euro Industries Ltd. And Destiny Software Productions Inc. dated on June 15, 1999(incorporated by reference from our Registration Statement on Form 10SB12G filed on November 23, 1999).

   
10.2

Consulting Agreement dated August 26, 2002 between Destiny Media Technologies Inc. and Charles Van Musscher (Incorporated by reference from our Registration Statement on Form S-8 filed on September 27, 2002).

   
10.3

Rule 506 Subscription Agreement dated February 24, 2006 between Destiny Media Technologies Inc. and Global Equity Trading & Finance Ltd. (Incorporated by reference from our Current Report on Form 8-K filed on March 3, 2006

   
10.4

Rule 506 Subscription Agreement dated February 3, 2006 between Destiny Media Technologies Inc. and Global Equity Trading & Finance Ltd. (Incorporated by reference from our Current Report on Form 8-K filed on March 3, 2006)

   
10.5

Unregistered Sales of Equity Securities with various investors dated on February 26, 2007 (Incorporated by reference from our Current Report on Form 8-K filed on March 1, 2007)

   
14.1

Code of Ethics (Incorporated by reference from our Annual Report on Form 10-KSB filed on November 30, 2006)

   
21.1

Subsidiaries of Destiny Media Technologies Inc.

Destiny Software Productions Inc. (incorporated in the Province of British Columbia, Canada)
MPE Distribution, Inc. (incorporated in Nevada, United States)

   
23.2

Consent of Independent Registered Public Accounting Firm - BDO CANADA LLP (filed herewith)

   
31.1

Section 302 Certification of Chief Executive Officer (filed herewith)

   
31.2

Section 302 Certification of Chief Financial Officer (filed herewith)

   
32.1

Section 906 Certification of Chief Executive Officer (filed herewith)

   
32.2

Section 906 Certification of Chief Financial Officer (filed herewith)



SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DESTINY MEDIA TECHNOLOGIES, INC.

By: /s/Steven Vestergaard  
  Steven Vestergaard, President  
  Chief Executive Officer  
  Director  
  Date: November 29, 2011  
     
     
  /s/Frederick Vandenberg  
  Frederick Vandenberg, Chief Financial Officer  
  Date: November 29, 2011  

In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By: /s/Steven Vestergaard  
  Steven Vestergaard, President  
  Chief Executive Officer  
  (Principal Executive Officer)  
  Director  
  Date: November 29, 2011  
     
     
By: /s/Frederick Vandenberg  
  Frederick Vandenberg, Chief Financial Officer  
  (Principal Financial Officer and Principal Accounting Officer)  
  Date: November 29, 2011  
     
     
By: /s/Edward Kolic  
  Edward Kolic  
  Director  
  Date: November 29, 2011  
 
     
By: /s/Yoshi Kumagai  
  Yoshi Kumagai  
  Director  
  Date: November 29, 2011