Destiny Media Technologies Inc

FINAL TRANSCRIPT

Destiny Media Technologies Inc.

Third Quarter Results

Event Date/Time: July 17, 2012 – 1:00 p.m. E.T.

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July 17, 2012 – 1:00 p.m. E.T.

Destiny Media Technologies Inc. Third Quarter Results

CORPORATE PARTICIPANTS

Steve Vestergaard Destiny Media Technologies Inc. – Founder and Chief Executive Officer

Fred Vanderberg Destiny Media Technologies Inc. – Chief Financial Officer

CONFERENCE CALL PARTICIPANTS

Roger Hartman Hartman Company Phillip Mitchell Contra Mundum Capital – Analyst Andy Taylor Private Investor Jon Hickman Ladenburg Thalmann – Analyst Jurgen Popp Private Investor Patrick Tenney Emrose Capital – Analyst Sean Peasgood Clarus Securities – Analyst Dana Kreiss Stern School of Business John Bach Whitmore Advisory Group – Analyst

July 17, 2012 – 1:00 p.m. E.T.

PRESENTATION

Operator

Good morning. My name is Sarah (phon), and I'll be your conference Operator today. At

this time, I would like to welcome everyone to the Destiny Media Technologies Inc. Third Quarter

Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers'

remarks, there will be a question-and-answer session. If you would like to ask a question during this

time simply press *, then the number 1 on your telephone keypad. If you would like to withdraw

your question press the # key.

I would now like to turn the call over to Mr. Steve Vestergaard. You may begin.

Steve Vestergaard – Founder and Chief Executive Officer, Destiny Media Technologies Inc.

Thanks, Sarah. I'm Steve Vestergaard. I'm Founder and CEO of Destiny. I'd like to introduce

our CFO, Fred Vanderberg, who will be discussing our financial results.

Fred Vanderberg – Chief Financial Officer, Destiny Media Technologies Inc.

Thanks, Steve, and thank you to everyone who’s joined the call. I'm going to take you

through—briefly through a nine-month income statement and highlight some items from our

results.

July 17, 2012 – 1:00 p.m. E.T.

For the nine-month period ending May 31, 2012, revenue decreased by 1 percent from

prior year. Revenue from our largest offering, Play MPE, was down by 0.5 percent. There are a few

items that contribute to this result.

Firstly in the comparative period in the prior year, we recognized a lump sum revenue

amount in the third quarter from a two-year agreement, and due to the revenue recognition rules

we were able to recognize that revenue only in that third quarter. On the renewal of that

agreement, that revenue is more evenly spread throughout the year.

We also saw a reduction in revenue in Australia associated with the departure of a

marketing partner. And lastly, the devaluation of the euro relative the US dollar adversely impacted

our results.

However, these items hide some very positive signs with Play MPE. Firstly, US independent

revenue grew by 20 percent over the prior year on a nine-month basis. Indeed when comparing like

quarters, as quarter one to quarter one and so forth from year to year, revenue from US

independent labels has never declined in the five years since inception. Indeed, over the past three

years revenue has grown by an average of 24 percent per quarter. That's on a quarterly basis. Also,

European revenue from Play MPE grew by 20 percent compared to the prior nine-month period or

11 percent on a quarterly basis.

July 17, 2012 – 1:00 p.m. E.T.

Moving onto our expenses. While there are fluctuations in spending on a number of items,

they are generally consistent from period to period. There are a couple of items, one in particular

worth discussing in a bit more detail.

You may have seen that we recorded a negative expense associated with the settlement of

the Australian litigation. We recorded the net present value of the settlement, and that is

approximately US $859,000. This settlement impacts income in a few different ways: firstly, the

actual amount that was recorded as a benefit, the 859,000; then there are exchange gains and

losses on that amount; and there's an interest component as we amortize that amount over the life

of its payment schedule; and lastly, there's income tax expense associated with the income on this.

I won't put a precise figure on it, but I will mention that had we not undertaken the

litigation and there was therefore no expenditure on the professional fees or the recovery from the

settlement, the company would have been profitable in both the quarter and the nine-month

period.

Also during the fiscal 2012, we added four employees and combined with some salary

adjustments there was a 19 percent increase in total spending.

I think that's the major highlights, so I'll leave it there, but I will be available to answer

more questions later on at the end of the call, and I'll turn it over to Steve Vestergaard, who will

discuss some developments over the year.

Steve Vestergaard

July 17, 2012 – 1:00 p.m. E.T.

Okay. Thanks, Fred. So the company is debt free and we're profitable even after our

investments in R&D for new products.

Our core Play MPE music distribution business is generating reliable recurring revenue that

is enabling us to invest in new technology. We believe our new cross platform Clipstream video is

extremely disruptive to the current way streams are created and hosted, and we think it's going to

take the company to the next level when it launches. I'm not going to comment too much more on

the financials Fred presented, other than to just talk through some of our one-time legal expenses in

the last nine months.

During the period, we won a wrongful dismissal suit after a five-day trial. We settled a

large case on the courtroom steps in Australia, and we won a permanent injunction against a

company that was using our Clipstream trademark without our permission. But besides all the

litigation there were also other professional fees that should be non-recurring going forward.

We've been investing fairly heavily in protecting our existing and future intellectual

property in anticipation of growth. For example, we currently have patents for locking and

watermarking technology, but during the period we received a second patent over a watermarking

solution, and we filed for seven patents for our new Clipstream technology, which again we think is

very disruptive to the existing paradigm.

We want to get this right and to make sure our claims are solid, so we actually hired two

firms, an IP lawyer in Vancouver to draft the claims and an IP litigator in New York to try and get

July 17, 2012 – 1:00 p.m. E.T.

around our own claims. So it was quite a back and forth. It took a bit of time and it surely wasn't the

least expensive approach, but we think we've probably got it right and we think the lawyers have

done a good job of protecting our intellectual property.

We also protect our brands with registered trademarks in North America, Europe, and

Asia. During the period we expanded that. We filed new trademarks to expand the industries and

product types that our trademarks covered, and we expanded registered protection of all our marks

to include Australia/New Zealand. But I think as Fred alluded to, we anticipate that many of these

professional fees will decrease substantially going forward.

But we actually came out with streaming back in 1995, and then launched the first version

of Clipstream in 1999. So that's 13 years ago, yet Clipstream generation one is still generating about

5 percent of our revenues mostly through video questionnaires we are doing for market research

companies. The market research companies like the Clipstream content is watermarked and it can

be locked to prevent piracy, and it has an extremely high play rate, much higher than other

solutions.

Still though, 95 percent of our revenue still comes from Play MPE. We charge the record

labels transaction fees to send their content digitally through the Internet to radio stations and

other trusted recipients.

This business is a bit seasonal, but highly predictable and one reason our nine-month

figures aren't much different than the prior year. Fixed costs are high. We have four server facilities,

July 17, 2012 – 1:00 p.m. E.T.

a 24-hour call centre, and teams of developers, list management, support, and radio relations

people. But again, those costs are fixed. The variable costs are low. There's a lot of opportunity for

us to quickly grow earnings from this business unit as the margins are higher on that last

transaction.

So in trying to get that last transaction—or those last transactions to be a little bit higher,

we've been waiting to launch a new suite of player software. This is a major initiative. It started a

few years ago, and that was kind of needed for us to roll out into new markets.

So we started a soft launch in May, mid May of this year, and we're actually still in the

process of rolling out and upgrading recipients and we're still updating that software. So we've

launched a brand new website and new players in 27 languages. The new browser Mac and PC

versions are now live, but new standalone applications for the iPhone, iPad, Android, tablet, and

Blackberry will still be launching shortly, probably over the next couple of months.

As part of this rollout process, some of the majors have begun introducing the solution

into new territories. If you want to watch this in real-time, you can come to the front page of our

dsny.com site and in the bottom right you can click and see the stats yourself. Click that link and it

goes to a page that automatically updates recipients or transactions as they occur. The number of

recipients is often blanked out at the request of the labels who want privacy, but the aggregate

stats at the top are always available and accurate.

July 17, 2012 – 1:00 p.m. E.T.

So something we're really excited about is the coming soft launch of our second

generation version of Clipstream. Clipstreams are playerless streaming video solution, which we call

this second generation G2. This is something we believe there’s going to be extremely strong

demand for because it's a lot simpler and less inexpensive than the solutions people are using

today.

Historically, streams were provided into Windows Media, QuickTime, or Flash format with

Flash being a dominant provider. Typically you'd need streaming servers in behind the web server,

and consumers would need to install and maintain player software, and the solutions weren't cross

platform and weren't widely supported on phones.

Earlier this year, Adobe actually announced that they would be discontinuing support for

Flash on smart phones. The whole video, streaming video industry is a bit of a mess right now as

there's no cross platform video standard. With the introduction of the new web page format HTML

Version 5, new video formats such as H.264, OGG Theora, and VP8 have been added to the mix. But

different browsers have standardized on different formats, so to reach everybody you would need

—with HTML 5, you'd need to use those three different formats all at once.

So the bottom line is that the industry has to do more than one format with more than

one streaming server to reach their entire audience, and the industry’s currently spending about $3

billion on content delivery networks, and by 2014, it's anticipated to spend 1.6 billion on

transcoding. Because our streams are re-used, each viewer doesn't need their own dedicated

July 17, 2012 – 1:00 p.m. E.T.

stream, and the server bandwidth infrastructure can literally reach 10 times the audience. Or

another way to say it is that we can reduce an individual publisher’s demand for content delivery

networks for 90 percent and their demand for transcoding by 100 percent.

Our solution is completely cross platform. We reach all computer operating systems, most

smart phones as long as the resources are there and the phone is compliant, and we even reach

some e-book readers without, again, without any transcoding at all. Whereas other solutions need

multiple streaming servers, we don't even need one streaming server. Content in our format will

stream directly from the web page server.

Another nice thing about Clipstream G2 is there's no player for the viewer. They don't have

to download or configure any software. They don't have to update anything. The content just plays.

It is being directly rendered by the browser. This protects the viewer from spyware or being hacked,

and the same content can reach a much larger audience because the installed base—because you

don't need to install it, the installed base is literally 100 percent.

Our anticipated rollout is to initially put a public demo on our site for initial feedback and

that's going to happen shortly—I know that's something people are waiting for—and then to start

rolling it out to initial partners in the ad industry. We'll start with free trials and begin charging as

soon as we meet the needs of the advertisers.

In parallel, we're building out our self-serve encoder software so that web developers can

create their own clips, the enterprise batch encoder system, so that large enterprises can automate

July 17, 2012 – 1:00 p.m. E.T.

the creation of clips on our format. So in other words, they put the batch encoder on their server to

automatically create clips in high volume.

So those products or those support technologies are still in development. We'll be building

out our marketing materials and new website to launch in parallel with these tools, and that would

be the timing when we'd expect to make a larger PR initiative to the bigger customer audience with

a more formal launch. So we anticipate that this soft launch period's going to probably be at least a

few months, and then we're going to make a lot of noise.

Anyway, thanks. With that, I'd like to turn this call back to questions.

Operator

At this time, I would like to remind everyone in order to ask a question, please press *,

then the number 1 on your telephone keypad. And we'll pause for just a moment to compile the

Q&A roster.

And your first question comes from the line of Roger Hartman from London, England. Your

line is open.

July 17, 2012 – 1:00 p.m. E.T.

Roger Hartman

Thank you. Steve, can you be more specific on when we’re going to see a first version of

Clipstream playing on your website? I mean soon doesn't sound like—I mean it could mean a whole

pile of things. Are we talking, what? Two weeks? Two months? What?

Steve Vestergaard

So in answer to that, it could be as early as early next week and as late as a few weeks

from now. We're really in the final stages. There's a couple of messaging glitches that we're ironing

out, but otherwise it's almost ready to go.

Roger Hartman

Right. Have you had any technical problems on this, Steve?

Steve Vestergaard

We have historically, but believe it or not most of the technical problems were solved by

February of this year. Since then it's mainly been trying to work around limitations in certain phones

where the hardware is limited in some way or that the phone is noncompliant. And just a lot of the

usability things like in terms of improving the user interface and improving the messaging and all

those things that you need to do to take a technology from its raw form into more of a product.

Roger Hartman

July 17, 2012 – 1:00 p.m. E.T.

Right. Okay. That's fine. One other question for you, Steve, MPE revenue in North America

in this latest quarter appears to have dipped quite heavily compared to the similar quarter in 2011.

Is this all due to that one large contract you had? Or is there more to it than that?

Steve Vestergaard

I'll let Fred follow up, but initially I believe most of the difference is just revenue

recognition. This year things were spread out more evenly through the year, but because of the way

the contract read a lot of revenue had to be recognized in that particular quarter last year.

Fred, do you want to add to that?

Fred Vandenberg

Yeah. Roger, it was a significant enough drop that it was a one-time revenue recognition

item that had we not had that in the prior quarter we would have seen an increase both in the

United States and in Europe. There would have been a small decrease in Australia, but overall a

fairly substantial increase in revenue.

Roger Hartman

All right. Okay. Thanks.

Operator

Your next question comes from the line of Phillip Mitchell from Chicago. Your line is open.

Phillip Mitchell

July 17, 2012 – 1:00 p.m. E.T.

Yeah. Hi, guys. Congratulations on the continued progress with MPE and then this new

product. I have a couple of questions. The first is about a year ago you guys announced an Asian

distribution agreement I think with All Access of Japan, and I wondered if you could give an update

on that because I don't think I've heard anything since. And the second question is on your

watermarking technology. Is that something that would ever be a standalone product that you

could generate revenue from? Or do you always see it as something that is going to go along with

your MPE or your other products?

Steve Vestergaard

Great questions. Yeah. So we actually went into a reseller agreement with a subsidiary of

Dentsu in Japan. And you're right. It's been a while now. The company is called All Access Today.

And yeah, we're working very closely with them.

They've actually been waiting for our products to be available. It's been a bit frustrating for

them because the majors didn't want to launch the—they didn't want to launch in Japan until the

new player software was ready. And like I said, that just started soft launching, soft rolling out in

about May 15th of this year. And that roll out's still happening.

But they're training the majors in Japan as we speak, and we're anxious to put out some

follow-up news and let you guys know how it's coming. But I alluded to some international markets

that we're starting to do trials in. Big ones include Indonesia, Germany, and Japan is actually fairly

significant and that's happening through our partner.

July 17, 2012 – 1:00 p.m. E.T.

But Dentsu, like I said, they're the second biggest ad agency in the world. They have offices

all over the world, and we're hopeful that they can also assist us with Clipstream. So they're just—

just as our investors are anxious to see the new demo, so are they. They're seeing a lot of

opportunity and we're still in the early days there. What was your second question again?

Phillip Mitchell

Oh, just…

Steve Vestergaard

About the watermarking. Yeah.

Phillip Mitchell

Watermarking ever be stand alone or just primarily a…

Steve Vestergaard

Yeah. Yeah. I think investors may not fully appreciate the value of the watermarking. What

watermarking is is imbedding secret information into music. In our case we typically imbed the

identity of the person that downloaded the song. So if they turn around and upload that song to like

a Torrent site or a pirate site, every copy of that song is going to—and I say song; it could be a song

or a video, but every copy of that content is going to contain their identifying mark so we can trace

back and the content owner can hold them legally responsible.

Now a lot of people have tried to do watermarking, but they typically do it by adding

frequencies into the music and that perturbs the audio quality. A lot of people's ears can actually

July 17, 2012 – 1:00 p.m. E.T.

hear that distortion, whereas ours is completely inaudible. It's instant to imbed, instant to—or near

instant to detect. It's literally almost impossible to get rid of, whereas everybody else you can filter

this stuff out because it’s digital. And our stuff survives non-digital technologies, like for example, an

on-air broadcast.

So I'm being a little long-winded in the answer but, yeah. It definitely could be a

standalone product. One of our challenges is not to spread ourselves too thin. We have a lot of

products out there, products we haven't even talked about, like our Internet radio, which is close to

launch as well.

But, yeah, we're exploring opportunities especially to try and partner with somebody to

license that outside of our core products.

Phillip Mitchell

Great. Thanks.

Steve Vestergaard

Thanks you.

Operator

Your next question comes from the line of Andy Taylor from Winnipeg. Your line is open.

Andy Taylor

July 17, 2012 – 1:00 p.m. E.T.

Hi, gentlemen. Congratulations on the quarter. I have just a couple questions I'd like to

ask. Currently Destiny has global contracts with two majors, being Universal and Warner. Universal

is currently going through I guess some sort of acquisition of EMI, and that leaves Sony as being the

other major. Is there any anticipation or development along those lines of whether or not we can

have those majors as well under our umbrella?

Steve Vestergaard

Yeah. So the Universal—just to back up, there's four majors. So there's a lot of record label

brands out there, but they all fall under four parent labels. The four parents are Universal, EMI,

Warner, and Sony. And, Andy, you're right. We have global contracts with both Universal and

Warner.

In the case of EMI, EMI is being potentially acquired by Universal. They have to go through

some antitrust issues. Hopefully they're successful. The labels are thinking that that could happen

by October, November of this year, in which case we'd expect those majors to—or we expect EMI to

fall under our existing contract with Universal.

In the case of Sony, Sony was formed by the merger of Bertelsmann and Sony a few years

ago, and it's run a little bit differently in that there isn't really the same concept of a global parent.

It's a lot more regional and the sub labels under Sony have a lot more say. So for example in the US,

some of the sub labels would be like Columbia, RCA, Provident. And what we're doing is we're

contracting with those regional sub labels directly.

July 17, 2012 – 1:00 p.m. E.T.

Fred, maybe you could—I can't quite remember what territories we're active in, but where

are we active with Sony outside of North America?

Fred Vandenberg

Outside of North America it would be primarily Northern Europe, sort of Scandinavia. But

just to highlight what Steve says is that in negotiating these agreements, the internal structure of

the label varies considerably. So it's—you have to negotiate with each individual sub label with a

company like Sony more than you would with Universal, for example.

Andy Taylor

Okay. My next question is just as the company continues to grow and it's grown

substantially the last few years, is there any possibility of maybe getting off of the OTC and looking

at another exchange, such as a NASDAQ, global, or an AMEX listing at all?

Steve Vestergaard

Yeah. Absolutely. That’s something that we would really like to do. Currently we don't

meet the listing standards, but we're hopeful that in the not too distant future that we will.

Andy Taylor

Okay. That's great. Thank you for your time.

Operator

And again, if you would like to ask a question, please press *, then the number 1 on your

telephone keypad.

July 17, 2012 – 1:00 p.m. E.T.

And your next question comes from the line of Jon Hickman from San Francisco. Your line

is open.

Jon Hickman

Hey, Steve, this is—thanks for taking my call. I was wondering if you could maybe look into

your crystal ball and give us some sense of what you think the next growth—you did 14 percent

sequentially. Can we look to see that ramp up in the future? Is there some level at which you would

be happy with or disappointed in?

Steve Vestergaard

Yeah. So we avoid giving forward-looking…

Jon Hickman

Steve Vestergaard

Projections, but in the case of Play MPE, what's held that growth is waiting for the new

software. The new software, for example, comes out in 27 languages. There's 27 versions of the

website to reach all the different territories.

There are a large number of things that labels wanted us to do before they were willing to

expand. Besides geography, we're looking to expand into other recipient types.

For example, journalists; for every one radio station there's 10 journalists and we had to

upgrade the software to be more appropriate for journalists. The existing software was pretty radio-

July 17, 2012 – 1:00 p.m. E.T.

centric. But we're expecting that going forward that we're no longer held back. As I indicated, we

are moving into new territories.

But on the other side, with the Clipstream G2, we're looking at opportunities where a

single opportunity on an annual basis could be more than what we're currently doing in revenue for

the company as a whole. The blue sky on Clipstream G2 is phenomenally large. It's a very large

opportunity. Streaming video data is currently more than 50 percent of the traffic on the Internet,

and it's been growing at about 52 percent annually compounded.

So we see tremendous opportunity, but our crystal ball’s not going to be any clearer than

yours. Until we get out there and start selling it and start closing the deals, I would be just

speculating. I'd just be pulling numbers out of the sky to give you any projections.

Jon Hickman

So have you have been—have you started to be able to sell to or send music to journalists

and other media personalities?

Steve Vestergaard

Yeah, we have. And you can see that in the stats if you see sends where the numbers are

bigger, so instead of hitting a few hundred stations you'd be hitting possibly as many as 1,000 or

more with journalists. But we're still in the pretty early stages. We're still, as I mentioned, we're still

rolling out that software that we started rolling out in mid-May.

Jon Hickman

July 17, 2012 – 1:00 p.m. E.T.

So if we were to give you another quarter or so to get the full rollout happening, perhaps

by the end of the year we should start seeing some ramp in revenues from these new things?

Steve Vestergaard

Yeah. I would expect you're going to see like a positive increase in revenue. I just don't

want to be tied down to the quanta. These are really big opportunities, both Play MPE and

Clipstream, and we're focused on doing it right than being rushed into a market.

In both cases there's a lot of things that we've got to figure out to grow revenue, but that

said, Q1 is historically our best quarter. That's when all the record companies are sending increased

volumes getting ready for Christmas, and we're targeting to try and expand as much as possible

before Q1 starts. So Q1 for us is September, October, November.

Jon Hickman

Okay. And…

Operator

Your next question comes from the line of Jurgen Popp from Switzerland. Your line is open.

Jurgen Popp

Hello. I would like to know, you're talking about Clipstream as a disruptive technology.

What do I have to understand, what it is disrupting? Is it Akamai Technologies with their worldwide

content network delivery networks? Or is it Brightcove service provider, also a couple of hundred

July 17, 2012 – 1:00 p.m. E.T.

million company, doing all these encoding, encrypting. So what is it really disrupting so that we get a

feeling about the size of the market we are targeting in?

Steve Vestergaard

It's literally both. So the first example you gave is an example of a content delivery

network. A content delivery network is where you have servers in cities all over the world to try and

spread out the server load. Again, that's a $3 billion annual spend currently, and we can reduce that

by 90 percent just because our technology re-uses streams. And companies will—they’ll have the

opportunity to either continue outsourcing or they can potentially do it in-house on their own in-

house servers.

In terms of the all the transcoding companies, we make that go away completely and the

projections are that by 2014 that could be a, I think it's a $1.6 billion spend. I can't quite remember,

but the reason for that is our single video format once you convert it into our format, you can just

drop that video in any old website. You don't need any streaming servers whatsoever. You don't

need any streaming infrastructure. You just use your existing web server.

On the recipient side the viewer doesn't have to install any web software or plug-in player

software. The browser just directly renders it, and if you look at the reduction in infrastructure cost,

to reach 10 times as many people means that you have one-tenth the hard drives and one-tenth the

electricity and one-tenth the support staff to manage the machines.

July 17, 2012 – 1:00 p.m. E.T.

And the best thing is it's actually quicker. Because our streams are getting re-used the

streams will tend to be close to the end user. So if you were in Vancouver we'll be re-using a stream

that somebody else in Vancouver previously watched, and that gets rid of a lot of the latency on the

Internet and the video’s a lot more reliable.

Operator

Your next question comes from the line of Patrick Tenney from California. Your line is

Patrick Tenney

Hey, Steve, maybe you could walk us through sort of the business model for Clipstream

and how we can think about the metrics for that opportunity? I understand that it's large and you're

excited about it, but maybe talk a little bit about customer indications and feedback and then what

the business model looks like?

Steve Vestergaard

Sure. Yeah. We have tremendous interest from some of the biggest companies right now.

We actually haven't shown any demos publically outside of face-to-face demos in our office, but the

early indications are that the opportunity is very large for us. But the market kind of breaks out into

about four categories.

First category is oddballs. That's everything from licensing to hardware manufacturers to

integrating into third party software and that sort of thing. Those are all going to be custom priced.

July 17, 2012 – 1:00 p.m. E.T.

The second opportunity would be going to the big ad agencies. So imagine on McDonald's I

want to put a TV commercial on a website. I can go through an ad agency that’s using Clipstream G2

and I can just drop that ad into a web server, just a standard web server, and I reach across all the

computers, but I also reach smartphones.

And with player-based solutions it's common to have penetrations as low as 85 percent, so

15 percent of the people actually don't see the ad. Whereas with our stuff it'll just—it'll always play.

So the people that are hosting the ads are going to make more money because 100 percent are

going to view it, and it's going to be a better experience for the advertiser because it's going to be

instant and cross platform and everybody's going to get the same experience.

The third opportunity would be going to the web developers. Adobe's got an army of

about 150,000 web developers signed up that regularly buy their encoder software for a few

hundred bucks. We'd like to harness that army ourselves. We're still trying to price out exactly how

the technology's going to work. Some of those decisions are still being made.

We're doing a lot of market research right now, but basically the web developer would use

our encoder software, convert the video into our format, and then just upload it to any old web

server or possibly more than one web server to put the content out there. Once they've converted it

they don't really need to talk to us anymore, and that's going to be a credit-based system.

So the web developers will come to our website. They'll put in their credit card number,

buy credit, and just build the credits into—or use the credits to create clips. As you notice, that’s an

July 17, 2012 – 1:00 p.m. E.T.

automated system. It doesn't take a lot of staff on our side and it scales really well. We can reach an

awful lot of web developers automatically just through the website.

And then the fourth and last opportunity would be enterprise-type clients that do a lot of

video. So that could be anything from like a CNN or a YouTube type company that’s just processing a

ton of video. We would give them our batch encoder and we'd negotiate a monthly site licence and

we'd tie the videos to only play on their particular website. So unlike the web developer videos,

which would be free to go on more than one website, these would be locked down and they'd be

enterprised just to that particular URL.

But the oddball category, the first one potentially is our biggest because some of the

inquiries that are coming in are telling me that there's all kinds of opportunity there. But we're still

thinking it out, we're still building out the models and by the time the encoder software's ready

we're going to have a pretty good business set-up I think.

Operator

And your next question comes from the line of Phillip Mitchell from Chicago. Your line is

now open.

Phillip Mitchell

Hi. A final question for me, and I think that last question and answer was very useful to

sort of understand exactly who you would sell this to and how it would work, so I appreciate that.

Regarding the technology behind this, I don't remotely understand it. I barely know what a server is,

July 17, 2012 – 1:00 p.m. E.T.

although I do use the term, but one reads all the new articles about new HTML5 replacing native

apps, a new video compression, codecs coming out, and things like that. It doesn't sound like, but

just I assume that none of those things threaten or would affect the need for the new Clipstream

G2. Am I correct in that?

Steve Vestergaard

Yeah. So what happened is there was a really big problem and the big problem is that

there's no standard for video on the Internet. So just like in the old days when you go to a video

store to rent a movie, things were coming out in VHS and Beta. It's the same—and the poor store

owner had to double up on shelf space and have two copies of every movie. It's the same thing on

the Internet, except worse. You have to have multiple copies. There's probably a dozen formats out

there, but you need at least three to reach most people.

And so the industry kind of realized there was a problem. HTML5 is just the definition of

what a web page is, so it's the fifth version of what constitutes a web page and it's not about video,

it's just in general what are all the tags and features that can be in a web page, and so the new

browsers are HTML5 compliant.

So one of the things in HTML5 is they wanted to come out with a new video tag. And

initially they were extremely hopeful that they could just settle on one video format, just come up

with one standard video format that played everywhere. And so the original idea and the original

July 17, 2012 – 1:00 p.m. E.T.

marketing hype was that HTML5 video will be cross platform and play everywhere and it'll be our

great solution.

But what ended up happening is they couldn't settle on a single standard. So instead what

the video tag does is provides a list, so there's a list of different video files that are available and

then the web browser will go through that list, it'll pick one that it understands, and it'll play back

that particular video.

In that case the users don't need to install software, so it is better for the viewer, but for

the publisher, the publisher's still got to convert the video into a bunch of different formats. The

publisher still has to use streaming servers, and they're not re-using streams and so they still take 10

times our infrastructure.

So in terms of HTML5, some of the features in HTML5 are features that our new

Clipstream G2 is taking advantage of, but HTML5 definitely is not cross platform without the need

for transcoding and content distribution networks.

Phillip Mitchell

Great. Yeah. I hadn't understood that because the supporters talk about there's no need

for players anymore and it sounded like that could be an option, but…

Steve Vestergaard

July 17, 2012 – 1:00 p.m. E.T.

And that's a huge advantage. Getting rid of the players means that the audience is going to

be bigger. So there is definitely an improvement with HTML5 video, but it's all on the viewer side

and not on the publisher side.

Phillip Mitchell

Great. And it's great to hear that also some people have been knocking on your door

wanting to look at this, so both large and small. So thanks for the conference call.

Steve Vestergaard

Yeah. Thank you.

Operator

Your next question comes from the line of Sean Peasgood from Toronto. Your line is open.

Sean Peasgood

Good afternoon, everyone; just had a quick question on the penetration rate of the Play

MPE. It sounds like you've got most of the majors signed up and a big part of Sony as well, but I'm

just wondering what the penetration rate is of your customers currently and where you expect that

to go with the upgrade that's coming out?

Steve Vestergaard

So we're—like our install base with radio in North America is extremely high. Almost every

radio station is installed. With some of the majors, occasionally songs go out through non-protected

July 17, 2012 – 1:00 p.m. E.T.

formats. If it's not a big release for them they might not worry about security, and there are a

couple of other systems out there.

But by and large, most of the US market is pretty heavily using us, and that also goes for

the UK and Northern Europe, so that'd be Sweden, Finland, Demark, and Norway. And also markets

like Australia/New Zealand. But in all the markets I think we could do a better job with

independents. There's a lot of room for growth there.

There's also a lot of room for growth for us to hit more recipients. Right now the labels are

very careful to cherry pick who they send to just because the way our pricing model works. There

are new recipient types, for example, journalists and DJs and VIPs, the music buyers and sports

stadiums, and a lot of other lists that they could be hitting.

Then we've got the geographic expansion. Most of the world is wide open to us. Some of

the majors have been experimenting pretty aggressively in territories all over the world. We've had

sends on every continent.

But to answer your question a different way, I would say that we're less than 10 percent

into what the opportunity is. So where we get to we'll have to see, but these are still pretty early

days for Play MPE and we're as excited about Play MPE as we are about Clipstream G2.

Sean Peasgood

July 17, 2012 – 1:00 p.m. E.T.

Okay. Okay. That's good. And then so you're 10 percent penetrated, so I guess the other

question then is the Clipstream opportunity sounds very interesting. When do you think that that

business or do you think that business will overtake the Play MPE business?

Steve Vestergaard

Again, that's kind of similar to an earlier question about speculating as to what future

revenues are going to be. We'd be pulling numbers out of the air if I started giving you projections

before we started actually selling to customers. We've done market research and we have a pretty

good idea of what the price points are and what the potential volumes are and who are customers

are going to be, but we're not prepared to put that out publically yet.

Sean Peasgood

Okay. And then just a couple financial questions. As far as your operating expense level, I

know there was the one-time items in the quarter and it looks a little bit funny this quarter. But can

you just talk about an operating expense level that you're comfortable with over the next several

quarters? And then how that may need to ramp as far as adding new people as these new products

get deployed?

Steve Vestergaard

Yeah. So in terms of how it's going to ramp, there's going to be a lag time obviously. And

we need to build up fairly aggressively in terms of sales, marketing, and support for G2. But as much

July 17, 2012 – 1:00 p.m. E.T.

as possible, call it a one-quarter lag, we're going to try and make that business unit profitable as

quickly as possible and not cannibalize earnings from the Play MPE business unit.

But in answer to the first part of your question, I'm going to let Fred run with that one.

Fred Vandenberg

Sean, could you repeat that for me?

Sean Peasgood

Yeah. I'm just trying to figure out what the operating expense level is on a normalized

basis, so what you're expecting it to be? I mean I know a lot of the costs are fixed, so maybe over

the next few quarters what you think that's going to be? And then I'm trying to get a sense of where

you may need to add people as the new products get rolled out.

Fred Vandenberg

Right. Okay. Well, I guess the first part of that is that if you extract the most significant

item in the nine-month period would be the professional fees that we incurred, and then the

resulting gain on that. I alluded to it earlier, but I won't put a precise figure on it, but it's…

Sean Peasgood

Maybe another way to do it would be if you guys have a target model of what you're

expecting as a percentage basis of sales?

Fred Vandenberg

July 17, 2012 – 1:00 p.m. E.T.

I think it also depends on the development of the business model for Clipstream G2, so it

depends on precisely who we're selling to and what the sales force that we would need for that.

Steve Vestergaard

I think the answer is some of these things that we're still figuring out, we're still building

out our business plan and pricing and marketing plan for the G2 product.

Sean Peasgood

Yeah. Okay. Fair enough. And then just one last one then on the balance sheet, maybe just

the cash that you had at the end of the quarter and then any capital expenditures that you see in

the very near term. And that’s it for me. Thanks a lot.

Fred Vandenberg

Well, okay. I mean the cash was just a little bit more than $1.1 million at the end of the

quarter, AR of about $500,000, and then we have a long-term receivable that totals approximately

$700,000. That 700,000 is going to be received over a period of almost six years now. The accounts

receivable we've received mostly, so everything’s healthy in terms of a cash basis.

Steve Vestergaard

Yeah. We also have access to credit if we needed to expand.

Fred Vandenberg

July 17, 2012 – 1:00 p.m. E.T.

As far as capital expenditures, we do invest fairly heavily in patents and trademarks and

translations in terms our software we translate into various language, but our capital requirements

aren't significant enough to be a concern, given our cash basis.

Steve Vestergaard

Yeah. We assume that servers and stuff are somewhat disposable, and we just replace

them on a regular basis so they're just replaced and expensed as needed.

Sean Peasgood

Okay. That's great. Thanks a lot.

Operator

And again, if you would like to ask a question, please press *, then the number 1 on your

telephone keypad.

And your next question comes from the line of Roger Hartman from London, England. Your

line is open.

Roger Hartman

Hi. Fred, can I go back to your G&A costs in the last quarter? You had 607,000 on litigation

and we all know why that is. You appear to have pretty much wrapped up all your litigation now.

What will your litigation spend be going forward?

Fred Vandenberg

July 17, 2012 – 1:00 p.m. E.T.

Well, most of the litigation, just to summarize I guess, we had some patent litigation

associated with a competitor in Canada in the prior year that had been—that was finalized in Q4 of

2011. In the current year we had litigation associated with an Australian reseller and a wrongful

dismissal suit. There was also dispute on the trademark of Clipstream, and there's some minor other

litigation. But it's almost impossible to predict what could happen, but as far as what's ongoing

there's not a great commitment.

We settled the Australian litigations, which was by far and away the largest part of that

600,000. The wrongful dismissal was the second largest one and we got a favourable ruling on that.

That has been appealed, but we were awarded costs on that case. So going forward I don't—I would

actually expect a negative expense, but probably not significant.

Steve Vestergaard

Yeah. Unless we fall into something new. We're trying not to be litigious, but unless

something new comes up, litigation spending’s going to be fairly minor.

Roger Hartman

Right. Well, 100,000 a quarter or something like that.

Steve Vestergaard

Or less.

Roger Hartman

July 17, 2012 – 1:00 p.m. E.T.

Or less. Right. Well, I'll take 100. That's great. And one final question, Internet radio and

video rental. Internet radio is getting to be quite big here over in the UK. We just love listening to

Chicago stations in the middle of the night and things, and of course the video rental business has

gone from posting DVDs now to streaming on demand. Any thoughts on how this could impact your

business? And what's happening with that over in North America?

Steve Vestergaard

Yeah. So in terms of anything about going to—going through retail to consumers, we're

very interested in that. We have a toolkit of technologies. Everything from the locking to the

watermarking to all the distribution stuff we've built out to our ability to stream completely

playerlessly. But anything we were to do like that we would rather be the supplier. We'd rather be

the pipe than the plumbing, so we would want to work with a large retailer to go to those places.

We'd rather be the people behind the scenes.

In terms of Internet radio, we have built out a broadcast-quality Internet radio system,

which we will be offering to radio stations. It's mostly ready to go. The user interface needs to be

updated, but we're not ready to market it yet. We've still got to build out our marketing materials

and websites and we just as a small company, we've only got 28 employees. We just weren't able to

launch a third product at the same time.

So we're launching Play MPE. We're going to be launching G2. So we've actually put

Internet radio on hold just for the short term, but it is ready to go and it will launch. I'm not going to

July 17, 2012 – 1:00 p.m. E.T.

put a date to that, but it's a bit of a sleeper technology because the radio stations will be paying us a

monthly fee for it, and the system is largely automated and there's a lot of stations out there. And

they trust us. They’re currently using our Play MPE product, and we think it's something that could

generate a lot of business.

But it's something for tomorrow and probably not something we should spend a lot of

time on in the call today.

Roger Hartman

Thank you.

Operator

Your next question comes from the line of Dana Kreiss from New York. Your line is open.

Dana Kreiss

Hey, guys. Thanks. On July 11th, an e-mail was sent by All Access promoting All Access

downloads, which was a music distribution service to radio broadcasters. I know they're a strategic

partner of yours. Was this a joint venture? And if not, do you believe this'll put pressure on Play

MPE revenue or your relationship with All Access?

Steve Vestergaard

Yeah. All Access, we were a partner with them. Our partnership expired last fall. At the

time they did indicate that they wanted to launch a service and that's why we kind of went our

separate ways, but there's different classes of service. There's—well, at the highest I would say

July 17, 2012 – 1:00 p.m. E.T.

we're the highest, but there's a perception in the industry that sometimes it's still a good idea to

send out a CD, and occasionally they still do send out physical CDs.

And then another premium level of service is to use us. Everything’s protected. You get

real-time reporting. It's instant. The recipient's got a wide variety of ways to access the content.

We're integrated with all of the third party systems that matter.

Then there's a bunch of kind of third-tier systems where there's very limited security.

There's no compression. Like for us if you have a broadcast-quality song it downloads really quickly

because we've got—we've built out technologies to squish the song or to compress the song, but at

the other side to actually literally get the exact same original back these third tiers don’t offer that.

They don’t offer the reporting. They don't offer the same level of security.

Besides All Access, other examples of that would be in the States there's a new music

server is a big competitor like on that third tier. Serato I think is another one. There's a few of them

out there. And at the bottom tier we still have some labels sending out mp3 files, so just sending out

an mp3 file as an e-mail attachment. In that case, mp3 is a very low quality format. A lot of the

frequency information's been removed from the song. It's not really appropriate for broadcast. And

the majors, all four of the majors have banned it, but it still happens.

As a company, we've decided that we only want to at least under the Play MPE brand we

only want to compete in that top tier where we get a premium price for a premium service. We

think to go to the bottom tier is going to be a race to the bottom and not in our best interest.

July 17, 2012 – 1:00 p.m. E.T.

Dana Kreiss

Okay. Thanks very much.

Operator

Your next question comes from the line of John Bach from Garden City, New York. Your

line is open.

John Bach

Yes. Steven, I have a question regarding direct competition for the G2 platform coming

out. Can you articulate what other platforms are out there that might be in competition as far as the

robustness of G2?

Steve Vestergaard

Yeah. So there's huge demand to be cross platform. So if you search for let's say a play

anywhere video on Google or any search engine, you'll see lots of examples of that. But what's

happening behind the scenes is these software products are actually converting into a bunch of

different formats, so behind the scenes there's still different formats for the different devices.

We see these companies as not competitors, but potential partners because we can come

in and we can get them to switch over to our technology. They can still keep reaching their own

customers, but do it far, far less or far more inexpensively because they don't need the same

storage, they don't need the same transcoding, and they don't need third party streaming servers.

They can just do it off a web server.

July 17, 2012 – 1:00 p.m. E.T.

But in terms of direct competition, to my knowledge there isn't any, and the reason is

because the technique that we're using is fairly novel. We're using some of the things in the browser

in ways that they probably weren't intended to be used. And that's why we've spent so much time

on the patents is because there's a bit of a eureka moment to come up with the G2 solution, but

we're worried about copycats and people reverse engineering what we've built and trying to come

out with their own solutions.

And so we're hopeful that the seven patents will protect us from that and will keep out

direct competition. I can't think of another way you could be cross platform other than the patent-

pending techniques that we're using.

John Bach

Yeah. I was thinking of Senacor and their acquisition of Carbin (phon), which was

essentially a Canadian startup and if you were to read what Carbin software was, it sounds

extremely similar to DSNY's G2, and I was wondering if you're familiar with that and whether or not

they perhaps might even be infringing on your patents?

Steve Vestergaard

My expectation is that that they probably are doing transcoding. I'm not familiar with

them in particular, but anytime I've looked at somebody that's made that claim in behind the scenes

they have been doing transcoding. If you want, you can reach out to me directly after the call and I

can have our engineers take a look at that solution and find out exactly what they're doing.

July 17, 2012 – 1:00 p.m. E.T.

But most of those companies that are in that video everywhere space I view as potential

customers. They're not competitive to us.

John Bach

Yeah. They allege that they're a cloud-based platform similar to yours, but I don't know if

it's just…

Steve Vestergaard

Well, a cloud-based platform is where you host things up on servers in the sky.

John Bach

Mm-hmm.

Steve Vestergaard

We plan to offer that service in the future. That's another product I haven't talked about

where in the future we're planning on coming out with a Clipstream cloud product, but with our

main Clipstream G2, it's just a straight technology. So you just convert into our file format and then

you upload it anywhere. We're not offering any cloud service or anything. We're letting people just

put in on their own websites.

John Bach

Okay. Thank you.

Steve Vestergaard

Thanks.

July 17, 2012 – 1:00 p.m. E.T.

Operator

There are no further questions in queue.

Steve Vestergaard

Well, thank you, everybody. I appreciate you taking the time to come and listen to Fred

and I.

We welcome questions. If you didn’t get a chance to ask a question in the conference call,

we're both very approachable. You can reach out to us either by phone or e-mail. Fred’s at

extension 236; I'm at 222, phone number 604-609-7736. I'm [email protected] and Fred's

[email protected].

Thank you for attending and look forward to talking to you on the next conference call.

Fred Vandenberg

Thanks, everyone.

Operator

And this concludes today's conference call. You may now disconnect.

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