Jeff Elliott - Investor Relations Fred Vanderberg - Chief Financial Officer Steven Vestergaard - Chairman, President and Chief Executive Officer

Hubert Mak - Cormark Securities

Good afternoon, ladies and gentlemen, and welcome to Destiny Media Technologies Inc. First Quarter Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, January 14, 2016. I would now like to turn the conference over to Mr. Jeff Elliott, Investor Relations. Please go ahead.

Thank you, operator, and hello everyone. Good afternoon and thank you for joining us on the call today. Before we begin, I would like to announce that we will be referring to today’s earnings release which was sent to the newswires earlier this afternoon. I’d also like to remind everyone that this conference call could contain forward-looking statements about Destiny Media Technologies within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon current beliefs and expectations of management and are subject to risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. Such risks are more fully discussed in the company’s filings with the Security Exchange Commission and SEDAR, and the company does not assume any obligation to update information contained in this call. During the call, we’ll discuss certain non-GAAP financial measures. These non-GAAP financial measures are presented in the supplemental disclosures and should not be considered in isolation of or as a substitute for or superior to the financial information prepared in accordance with GAAP and should be read in conjunction with the company’s financial statements filed with the SEC and SEDAR. The non-GAAP financial measures used in the company’s presentation may differ from similarly titled measures presented by other companies. A reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures can be found in the earnings press release. On today’s call, we’ve got Steve Vestergaard, the Chief Executive Officer of Destiny and Fred Vanderberg, Chief Financial Officer. With that, I’d like to turn the call over to Fred.

Thanks, Jeff. Revenue for the quarter fell by a 11% due to the strengthening of the U.S. dollar relative to the euro and the Australian dollar, and a decline in Play MPE revenue from the U.S. majors. USA and Australian independent label revenue continues to increase offsetting these impacts. Absent exchange rate fluctuations, total revenue fell by a 3%. Total expenditures fell by 7%, due entirely to positive impacts of the U.S. dollar also the Canadian dollar. Absent those expense exchange rate fluctuations on expenses, expenditures would have increased by approximately $85,000, due primarily to discretionary advertising for Clipstream, including $53,000 in the Internet advertising one-time costs associated with their move to Amazon Web services and higher amortization related to our investment and patents. Majority of our cash reserves are kept in Canadian dollars for use in our Canadian operations. With the strength in the U.S. dollar, this balance has been adjusted to just over $640,000. We generate approximately $100,000 free cash from Australian notes receivable. Ignoring working capital fluctuations, we’ve used approximately $120,000 in cash to fund the capital purchases and operations during the quarter. With that, I’ll turn it over to Steve.

Hey, thanks, Fred, and thanks all of you for joining the call today. So I feel like I just talked to you, it’s only been seven weeks since our last conference call. But I feel like there have been a lot of progress in the last couple of months, even over the Christmas holidays, we’ve made a lot of stuff happen. But getting [ph] with the backup for new investors, I’d like to remind everyone exactly what our company does. So we have two business lines Play MPE and Clipstream. And Play MPE is a secure automated system that record companies use to move broadcast quality, new music releases securely to trusted recipients, such as radio, Internet radio, bloggers, DJs, media and VIPs. All the major record labels are active customers, as there are large number of independents. There’s a large fixed cost to providing the service, but once that fixed cost is covered, incremental costs are extremely low. So we grow – as we grow in the new markets, their new revenue is high margin. This is more – currently represents the bulk of current revenues. Though the second, our business Clipstream is a new video hosting and playback solution that delivers high-quality streaming video directly to the browser without player plug-ins. So rather than using more traditional approach in proprietary streaming servers and playback with HTML 5 video tag and transcoding into a large number of formats, we’re using alternative approach. We use our own proprietary JavaScript player and standard space web servers to deliver our content. This software-only approach is extremely flexible. They’re allowing us to offer advantages, such as better security and a more consistent user interface. Users can drag and drop their content from any device in almost any original format through their web browsers. Our servers convert the host and then they provide a convenient event code to embed the video into their site. So from an investment approach both businesses have recurring revenues and both will be really steady and predictable over time and customers tend to be really sticky. And I use the word sticky, but it’s true once again our customer lose them. Also because the businesses require limited capital, incremented contribution margins of return should be really attractive over time. So now to the quarter. I’ll try to review each business. So I’ll start with Play MPE. We spent much of 2015 developing or to rewrite of the server infrastructure to move it from our five physical facilities around the world to a cloud system managed by a third-party. Although we’re going to enjoy tremendous cost savings in hardware and hosting, I think we cut the costs somewhere around half. That wasn’t the main motivation for the move. The new boost is going to be way more scalable or must be much higher Play MPE volumes, our performance is on an order of magnitude better. So customers are going to be happier when they click to stream and streams right away when they try to encode even if 20 people are encoding at the same time at high speed and it’s going to be way faster than used to be. So we took advantage of the slow usage period over the Christmas holidays in order able to launch a brand new website, new logos, and transition literarily tens of thousands of users, while keeping the system completely live. Keeping – we kept this services interruption to an absolute minimum. Probably, the system is mission critical to radio and labels [indiscernible], and it absolutely couldn’t go down. So it’s a big huge engineering challenge way through the slow period. But even in this slow period people are using all the time. We had to transition without any interruption in service. Cleanly, the foundation of this new system positions us really well for growth, which keeps me in the second big advancement over the holidays. The Universal Music Group owns dozens of record labels, and in fact, controls over 40% of the major record label business. They’re a largest customer and they’re the thought leader. So we may move into a new territory, for example, A, the other majors are likely to follow their lead. So we’ve got this idea that Universal goes first, then the other majors, and then we get the independents. And so this contract was basically mission critical, it’s one of the highest priorities for last year. So we’re so heavily integrated into the infrastructure and the process is and – working with their staff. We first started working with them in 2004. There’s never been any significant risk that they will remain a customer. So the contract wasn’t about that, it wasn’t about the revenues are keeping them. But we did go from a long-term contract last spring to a monthly agreement and we spent much of the last year negotiating new agreements. We’re going to accept them to expand usage more aggressively than they have in the past. We want to do without putting any repricing or revenues at risk. So it took a long time to get to it. But we’ve got a really good deal that’s really good for both sides, and the good news is, our investors didn’t have to take any kind of hit. So we are pleased that we’re now able to build for some services that we used to provide for free. Every dollar of revenue we received last year is guaranteed as a minimum payment to us next year. So effectively last year’s revenues were guaranteed this year. The targets are hit. That minimum increases, again, possibly a lot in year two. We’re able to close this agreement over the Christmas holidays to tie to the January 1st calendar year. This is an important relationship, and this long-term commitment in our investment and infrastructure was a necessary first and second step for us to grow MPE revenues again. So, over the past conference calls, I’ve talked about other MPE products. A lot of them are kind of being our whole waiting for this migration. This migration was actually a really big deal and probably a lot bigger than people realized. But a number of MPE products being built out to near completion. They’re not being released, as we’ve been waiting for the new cloud service system to be reliable and live. We expect to lease a number of Play MPE development videos to our customers over the next couple of months. So update this quarter has been really encouraging. Certain markets like Scandinavia are showing growth and independent revenues are up an incredible 13%. Many investors have told me they’ve seen our banner ads, as they serve their Internet, both ads are aimed at independents. We’ve been advertising really heavily to the industry and we’re working with new resellers. We’re working on new projects to offer new promotional offers to our customers, which we hope we’re on future revenues. Now, I’ll review Clipstream. With Clipstream, we’ve developed the platform to overcome limitations built into the browser, the traditional way of delivering video. So we pursued seven U.S. patents and many around the world with – where I see many around the world, it’s like dozens around the world with most of them granted now, and now we’re now being flattered by Copycat technologies, which show the clear advantages of our approach. So we have spent a lot of time working with lawyers this quarter to figure out our best strategy to pursue, at least, two dozen big companies that we’ve identified as potential infringers of our patents. Our patents claim priority dating back five years, we’re clearly first. We believe we’re developing extremely valuable IP portfolio. I won’t spend a ton of time dwelling on the advantages of Clipstream. But the headline version is, since we’re in software solution, we aren’t locked in waiting for browser updates. We’re not waiting for new chips. If we want to put a new feature in, we can just want to read away. So we can offer a new feature that instantly reach everyone with our JavaScript software is natively supported by a 100% of HTML 5 browsers, that’s where the seven patents are all about and it’s a really big deal. It’s all about giving control back to the owners of the content, so they can securely and simply provide the exact customer experience they want consistently to every device, operating systems, and browser version. In the last couple of months, we’ve made huge improvements in quality at lower bid rates, allowing us to reach more users without buffering issues, and we’ve launched new features and server intelligence to allow scaling high volume user such as advertisers. So a lot of stuff has been going on behind the scene, so we haven’t bothered press releasing. So we’re also in the final stages of a secret project, I haven’t talked about much, where we have a second codec we’ve been working on from scratch or much of last year. So we have our first codec called generation one that we’ve been improving incrementally and I’ve got great feedback from people on how much the call is improved. So we have a completely second project, where we’ve been working on a different codec right from ground up. And I’m really excited to say that that’s in testing right now, and I’m really pleased with the look and feel. I’m not going to put any timelines to it, but it looks like we’re going to make a nice quantum improvement quality. It should provide the instant significant improvement resolution frame rates over our videos. In December, we launched our second generation of our API. So API application program interface is kind of a weird acronym. But basically, it’s a gateway that has third parties build our entire system into their product as a featuring of their own offering. So, for example, you can imagine real estate site, where they want that real estate agents upload videos of houses. What we can do is give them a little piece of code they put it in their site, and now the whole put stream back in, including the hosting, the reporting, all that stuff just gets seamlessly built in. They don’t have to [talk to you] [ph] as branding, but now they have a brand new feature and they just pay us royalties back. We came up with their first version in November, the second version in December just before Christmas. And we’re already working on a third generation, which we will launch in the next six weeks. We’ve been working with trial customers who are integrating our API and their feedback has been invaluable. So you only first build the API or the gateway. We’re not quite sure exactly what people mean. But based on their feedback would be a real quick turnaround time, and this third generation is going to be something that that’s going to be very effective for them. So, on the bad side, API customers have a longer sales cycle. But on the good side, we expect to be able to drive much of our future revenue and their revenue source will be recurring and reliable and back to that we used [ph] earlier than sticky. And once we close this, I’m going to keep them forever. I use Universal as an example. We’ve been getting recurring revenue from them since 2004, so it’s been 12 years. We’ve already found that the churn rates in the video hosting space are encouraging low – encouragingly low. And so we expect both businesses are going to be like that, big cost to secure customer, but then you keep them forever and the revenues are recurring. And once you cover your fixed costs, then the margin starts to get really crazy good for investors. So we’ve entered into the ad space, where the advantages of our flexible offering are quite compelling. For example, on the iPhone traditional videos have to be full screen. You can imagine what a problem that is if you’re in ad? With Clipstream you can have smaller video ads that are part of the webpage. So all of a sudden as an advertiser, but used to have to block my video ad to all of the iPhone users, all this and I can reach them all, then I can reach them through Clipstream. I’m giving this as one example, but there’s a ton of examples like this, where the software JavaScript approach is just way better. It gives the flexibility and features can be built out – rolled out instantly, and that’s where we have the seven patents. Their first Ad Tech partner is going to be one of our first API partners, and we expect that will drive volumes for them, as we sell through to their own customers. As I examine our lead flow, it seems to be converting best around offerings of new security. So when I look at the traditional offering, that’s where they’re really weak. The traditional approach to video is not great for the security or locking down the content. So besides our current market research customers, we’re finding lot of demand from niches such as training videos and businesses that want to control who sees their video. For example, as a business – as Destiny, for example, I may have a video and I want to show to my staff, including my remote staff, but I don’t want to see widely available in the Internet. So when people think of security, they think of like selling movies or something, and that is a big business. There’s also a secondary business, where the video may not be valuable, but maybe I’m sending video of my kids to grandmother or something and I don’t want whole world to see it. And so I want someway to lock it down. We have the advantage that we can lock stuff down that nobody else can. So Destiny is profitable for many years. We have even bought – I think evenlike seven years or something been profitable, we even bought back 5% of our outstanding stock out of the market, which we then went on to cancel. But we’ve intentionally gone cash flow negative for the last couple of years. And the reason is Clipstream is such a big opportunity, and we’ve made this strategic decision to go in a loss position to finance who wants a Clipstream. We’ve got a lot of negative impact from exchange rate from the last 12 months, actually last 24 months. But as Clipstream starts to really begin paying its fair and paying its way, we have to – we’re able to stop using positive cash flow from MPE to substitute value as Clipstream. We expect to trend back towards profitability over the coming quarters. It’s been a long road, but we’re expecting a Clipstream to payoff in 2016. So, in closing, during the last several months, we have continued to reduce expenses and there are further a progressable MPE and Clipstream by expanding the offerings in meaningful ways, which should lead to more widespread adoption position us well for growth going forward. So on that note, operator, we can turn it over to questions. Thank you.

Thank you. [Operator Instructions]. One moment please for your first question. Your first question comes from Hubert Mak from Cormark Securities. Please go ahead.

Hey, guys. I guess, first question is on the Play MPE, and also you have this renewal, so which is great. Can you just talk about sort of a growth profile you are going forward, because I know you guys always talked about that you need to sort of push out into new regions. So what’s the timeframe do you think that you’ll start to see that happens and how you think that will affect the growth here, as we look out next couple of years?

Sure, sure, I’ll take that one. You’re on the bad side. We’re kind like the phone company charging for long distance, so we’re waiting for people to make phone calls. When I make a phone call, it doesn’t cost the same thing we already paid for the phone exchange. So the phone call is like really super high margin. But we don’t have a lot of control over when people do that or don’t do that. And so that’s been one of the frustrating things about the business is for us to grow. We basically needs the labels to go into more territories to send more songs, to send them to more recipient types, so as an example, it’s better just sending to radio to send to press, it’s 10 times may press as radio and 100 times maybe DJs as radio. We even just get active and do that. We also need them to communicate to internal staff and get internal staff using the system, because we’ve got a lot of challenges that we’ve been trying to work through with the majors. As an example, if I’m some promotions guy within Universal, even if it’s free to me, if it takes me five days to get a song, say, through their content, their asset management department, I may not bother. I may find a different way to get that song, and even spend 30 bucks to send it up like Fedex. But I just want to kind of control my own Destiny. What we’ve – so let’s going to continue that part. But what we’ve realized is, there’s a few things that have been holding us back. One really big one was the contract. And so, I’m embarrassed to say, it took us nine months to figure it out. But the contract was a really big deal, because it got rid of all the internal economics stumbling blocks that they had and we did it without putting any of our own revenue at risk. But there’s secondary things, and that’s like, for example, if they move into a new market, there’s no value to them, let’s say, they’re going to Germany or something, there’s no value to them unless radio uses it. So we have to go out there and help them train radio. In the past, we used to have to do that in our own ticket with a new deal they pay us for that. As we kind of just went through the whole list bottom line is the new contract, it sends Universal to go like really super aggressive in year one. That helps us with the other majors, that helps us with the independents. And I can’t guarantee that that’s going to happen, but the impediments that we’re stopping it from happening have all been removed.

Okay, all right. And then on the Clipstream, it’s great to see that you’re, and I guess the final stage is here. And can you sort of give us the timeframe of when do you think you’ll see monetization here on the Clipstream, at least, you start seeing the revenue comes through there, because also you guys had a number of fall starts here in terms of your launch. So just can you give us an idea?

Yes. So we’ve already started. So the October release was a very stable release, not perfect, but I would say, it’s probably the first commercial release. The problem we have is that, somebody signs up for 29 bucks a month, we get to put 90 bucks in revenue on our 10-Q. It’s – the cloud business, as it looks that way as a volume business, and you need to get hundreds of thousands of customers for to add up to anything significant. But we’re viewing the cloud service as more of a net, and so the net goes out, it catches the high-value customers. So high value customer in my mind would be somebody like an ad – like an agency that sells to advertisers, where it would be somebody that’s going to use our cloud API product, that’s why we bring so much emphasis in the API. But basically an enterprise customer, where all of a sudden, maybe as the Universal is delivering all the music videos through Clipstream, is that big customers is going to get the big hit. And so what I’m saying is in October, we’ve got our net out, and it’s been really effective. We still get some complaints. We’re still get – still getting some quality complaints. We’re still getting some feature complaints. But they’re getting fewer and fewer and fewer. Every quarter we put out a new release and the releases are getting better and better and better. We expect to be best-in-breed within 2016. So an answer to your question, Clipstream is already a commercial product, appear to be a profitable product, that’s going to happen in 2016, but probably not this quarter.

So do you think this is going to – in terms of meaningful revenue, do you think that’s going to be through the API, or is that going to be sort of your cost offering here?

It’s going to be through enterprise clients. So, for example, your own company, as an example could be a customer, where you guys is in place or able to upload videos, in fact, kind of larger customer, where we’re going to make our money. We do make the money like I said 29 bucks a month here and 29 bucks a month there of the individuals, but it takes a real long time for that data unless we get the volume.

And then do you think that the sales and marketing staff to support that initiative at this point?

No, we don’t. We’ve only got a couple of salespeople right now. What we’re trying to do is the we fairly conservative if you want to get the model right. When the model is right, we have access to capital, we can go really fast. And so we’re doing a lot of experimentation. We’re playing with that copy. As I mentioned, I’ve got a lot of feedback from investors that you guys have been seeing our advertising. So we’ve been trying a lot of different things, seeing what works, seeing what doesn’t. I would be very scientific about it, seeing what converts, what doesn’t convert. And once we’re really comfortable with the model, it’s really easy to scale and to scale quickly. As an example, we would be translating the website into different languages and bringing in resellers and that kind of stuff. But it doesn’t make sense for us to scale until we got the model perfect and immediately it’s not perfect yet.

Okay, great. Thanks.

Thank you. Your next question comes from Phillip Michelle [ph] from CM Capital Management. Please go ahead.

Yes, good evening. Congratulations on some of the progress you’ve made this past quarter. You did mention the IP violations with respect to Clipstream, and what is your approach claim to be with those companies? Are you going to try to go to them and see if they’re licensed your product continue to do what they’re doing, but just licensing the technology, or you actually going to try to sell them into your unique Clipstream branded technology?

That’s actually a really good question Phillip and I appreciate your good wishes to us. But it’s going to depend on the infringer. I mean, some infringers are fairly aggressive in which case we may have to sue them. There’s a lot of lawyers that will workout for contingency, where it doesn’t cost us a dime, and we can just kind of go after them and force our patents. But by and large, we have a lot of experience in legal system. It’s a big drain on time, it’s a big drain on money, big drain on management thought, it kind of ties you up where we can. We’re hoping to leverage it into an opportunity to partner with a lot of these companies. So some of the infringers or companies didn’t have tons of customers already. They’re doing what we’re doing in JavaScript, because there’s a big need. But we do a way better. Our solution is hundred times better, and if we can partner, once they’re sewing them, that’s kind of a better approach. So what I’m expecting is, there’s going to be three or four different approaches depending on who it is. But by and large we’re going to do first, call it two dozen people, we’re just going to send out few dozen letters and just put them on orders and see how they respond. But some of the companies, I don’t want to name anybody. But there are some that are financed by some of the biggest funds in the world. And there’s a lot of money that they are investing is something that completely goes against our IP. That’s why I said this on the earlier conversation. But I think the IP that we’ve generated, both based on the date, because it’s so old and we’re so early to figure this out. But also because of the extensiveness, we don’t just have one patent, we have seven in the U.S. We don’t just have the U.S., we have some like two dozen countries that we’d actually take the time individually grow up the countries. I think that patent portfolio is going to be really valuable and something that possibly investors are currently underestimating.

Got it. Thanks. Yes, given the constant sales and particularly for small company, if you could use those companies that are already using the technology, it would just be, I won’t say free money, but it would just be a very nice steady source of revenue. So I hope that hope, at least, to feel them or amenable to working with you guys. So thanks a lot.

Yes, thank you. So by and large, we don’t want to go head to head with an iTunes or something, we’re not in the retail business. By and large we see ourselves with the pluming behind the scenes. And the more we can just be the plum and take the royalty off the top and tap into somebody’s sales force, we provide the better technology and kind of let them run with it. That – the more we do that the faster we’re going to grow. And so strategically that’s what we’re looking to do as a business.

Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.

Yes. So as I mentioned earlier, it’s only been seven weeks since our last conference call and out of the seven weeks one of them was the Christmas, New Year break. I’m pleased with what we’ve got accomplished now, but I kind of just talked to everybody seven weeks ago. As you see there’s a lot of people in the call and probably a lot of people will still have questions, I say this every time. But it’s hard to ask a question in this public format. But we’re really super approachable. So if there’s anything you’re wondering about as an investor, anytime feel free to reach out to either Fred, myself, or the IR company; Three Part Advisors, Jeff Elliott or David Mossberg contact informations and all the press releases, and we’re more than happy to talk to everybody in a more private study. With that said, I appreciate everybody’s time. Thank you for the call, and I look forward to talking to you in a quarter.

Ladies and gentlemen, this concludes your conference call today. We thank you for participating, and ask that you please disconnect your lines.